For all the right reasons, the World Bank's Doing Business 2018 report was the toast of the country, and the markets reacted with positivity. Now that the initial euphoria has died down, it is appropriate to delve deeper and look for potential learnings in the report.
As a country, we should analyze the World Bank report not only from the ranking perspective but also the DTF scoring point of view. DTF stands for 'distance from the frontier' with scores ranging from 0-100 (where 100 is the strongest or front-runner economy). Also, to gauge the ruling Government's performance since election, it is appropriate to compare the rankings of 2018 and 2014. These three indicators reveal a lot more than what has been discussed so far.
This analysis does not attempt to downplay the progress made by the country and the fact that India has commenced in the direction of the Government's goal to attain a ranking under 50. However, from point of view of serious investors and analysts, it is important to try and figure out how soon India will reach the top 50, and how other countries are faring.
The chart above identifies areas where India has made good progress vis-à-vis areas that still need improvements on the journey of going from the 100th to the 50th ranking nation. From the perspective of real estate, the five indicators in red highlight areas which have a high impact on the sector – registering a property, dealing with construction permits, enforcing contracts, and resolving insolvency.
How World Bank measures these indicators
Dealing with construction permits: All procedures required for a business in the construction industry to construct a building, for instance a warehouse, factoring in the time and cost to complete each procedure as well as the quality of building regulations, the strength of quality control and safety mechanisms, liability and insurance regimes, and professional certification requirements.
While maturing real estate sectors such as the residential, office and retail have been doing well, it is time we look at new sunrise opportunities in sectors such as warehousing. With GST paving the way for cross-border movement of goods across India, the World Bank data on time and cost involved in constructing a warehouse is not encouraging enough. The e-commerce sector is growing rapidly in India, and very soon there will be opportunities for constructing large modern warehouses equipped with state-of-art automation.
Registering a property: The full sequence of procedures necessary for a business (the buyer) to purchase a property from another business (the seller) and to transfer the property title to the buyer's name so that the buyer can use the property for expanding its business, use the property as collateral in taking new loans - or, if necessary, sell the property to another business.
Prior to RERA becoming a market force in 2017, information on projects, land title clearance deeds and developer liability existed somewhere on paper (if existed at all) and buyers had no access to it. Nevertheless, verifying land title clearances and other aspects of due diligence were the responsibility of the buyer, who would have to engage a consultant for such verification.
The full impact of RERA is still not visible in the ranking for property registrations This will only happen when all states have adopted RERA without tampering with the Central guidelines by next year. Also, initiatives such as single-window clearances and online registration facilities should be strengthened in order to make these procedures less time-consuming and cost-intensive.
Online records of titles, title insurance and title search and certification will be the real game-changers which could take India into the World Bank's Top 50 almost immediately. Work has commenced on digital registration, digital records and online search and certification, but adequate controls also need to be added at every stage.
Enforcing contracts: The time and cost involved in resolving a commercial dispute through a local first-instance court, the quality of judicial processes index, and evaluating the economy on how well it has adopted good practices that promote quality and efficiency in the judicial system.
The World Bank's Doing Business report says after establishing debt recovery tribunals in India, non-performing loans have reduced by 28%, thereby resulting in a decrease in overall interest rates. RERA as a body that resolves disputes between developers and buyers is a progressive initiative, which however must be implemented in all markets without dilution. Progress on this will be captured in next year's report and reflect in India's ranking on this parameter. The processes involved in resolving disputes between businesses, land owners, developers and the Government need to be speeded up – a clear action point for the coming year.
Resolving insolvency: The time, cost and outcome of insolvency proceedings involving domestic entities, as well as the strength of the legal framework applicable to judicial liquidation and reorganization proceedings.
As the chart below indicates, India's track record with regards to insolvency has been very poor, resulting in investors' reluctance to involve themselves financially. There is a large concentration of stress in the land-rich textiles and metal manufacturing industries, and it remains to be seen whether the new Insolvency and Bankruptcy Code will help unlock land parcels in Indian cities.
This does not mean that Indian Government has not done anything – these ranks are merely relative performances as seen from a strong correlation between ranks and DTF scores. It does mean that other countries in Asia and Africa are possibly doing far better in terms of reforming their real estate and manufacturing competitiveness when compared to India.
The report has acknowledged India's efforts in terms of:
It also confirms that after establishing debt recovery tribunals in India, non-performing loans have reduced by 28%, leading to a reduction in overall interest rates.
However, it has also highlighted a few persisting challenges – for instance, the World Bank sees inefficient licensing and size restrictions (in FDI, etc.) as continuing to hamper India's total factor productivity (TFP). There could be a whopping 40-60% improvement in TFP if India overcomes these challenges.
The outcomes from the recently modified IBC code will be closely monitored, having a strong bearing on DB rank and DTF score next year.
Clearly, there is a need to train a sharper focus on reforms or initiatives such as 'Make in India', 'Housing for All', land acquisition, insolvency and contract enforcement to overcome the remaining challenges. The good news is that India is the shining star among the 'major investible markets' this year, exhibiting remarkable progress in its DTF scores.
The Doing Business indicators are now the basis for undertaking reforms across many economies, including India, providing ready benchmarks or guidance values. If the PM ensures that each India state is scored on the EODB metric, the index will also help promote competitiveness within the country.
There are still factors which the World Bank could not acknowledge this year, primarily because of timing of the report. These are factors that can be seen as 'low hanging fruit', and a lot can be done this year to improve on them. RERA has to date seen only limited deployment and needs to be implemented across all states with little or no dilution. Altogether, while India's massive improvement on the World Bank's EODB index is a creditable achievement, a lot needs to be done in the future to improve further on it.
(Note: Graphs and tables from World Bank's report are reproduced as published).