Development: India 4th best, could do better

By siliconindia staff writer   |   Wednesday, 29 September 2004, 07:00 Hrs
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NEW DELHI: The World Development Report (WDR), 2005 seems in sync with Prime Minister Manmohan Singh's speech at the NYSE, though this is probably not an aspect the PM would like to harp on at this point. While praising the sustained improvement in the investment climate in India during the '80s and '90s, the report makes a strong case for significant improvements in governance and relaxing of prevalent regulations to push things along, reports Times of India.

The World Bank document, with the theme "A Better Investment Climate for Everyone", draws on surveys of over 30,000 firms in 53 developing countries, the Bank's "Doing Business" database and country case studies to buttress its conclusions.

India has been lauded for increasing its growth rate from 2.9% in the '70s to 6.7% in the mid-90s and increasing private investment to more than 15% of gross domestic product (GDP) by reducing trade barriers and other distortions. However, says the report, India is being held back in technology and efficiency due to the absence of proper exit policies for inefficient industries. It takes 11 years on an average to close a case involving insolvency of a firm.

The WDR also makes the point that the investment climate in India is now increasingly differentiated across states. The productivity of firms in states with poor investment climates is 40% lower than of those in states with good investment climates. One of the more telling projections made in the report is that if Kolkata's investment climate was similar to Shanghai's, the productivity gap between the two cities would be cut by 80% and wages would rise by 38% in Kolkata.

At the all-India level, protection for the small scale sector regardless of its competitiveness and the excruciatingly slow functioning of the judiciary are seen by the Bank as major barriers to improving the investment climate. Interestingly, the report points out, governments have been found to be largest users of courts and contribute to delays by pursuing trivial matters.

The policy of SSI reservation, by encouraging stagnation and incurring high costs for producers and consumers, has hampered growth in light engineering and food processing, as well as in textiles and leather exports, says the report.

Data from the investment climate surveys also shows that the cost of bribes and irregular power supply are 50% more as a share of sales for smaller firms.

Firm and industry studies that compare performance in the '80s with that in the '90s find that productivity increased for firms exposed to competition. The Indian telecom sector is held out as a case in point. The report also highlights success stories in rural India where micro-financing (Kisan credit cards) and e-governance are models for an all-inclusive development.

Finally, there is passing but significant mention of the important role played by the diaspora. The Indian diaspora, second only to China's, contributed 9% to the country's foreign direct investment (FDI) in 2002. NRIs are funneling funds into startups in India as well as hybrid companies that operate in both India and abroad, particularly in the United States.

Of course, this pales in comparison to the 70% that China's diaspora contributes to its FDI.

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