INDIA KEY THEMES FROM THE World Development Report 2005 Investment Climate Assessment 2004 And the Doing Business Indicators 2005 Simon Bell, World Bank Mumbai, November 24, 2004

“Private Investment as a share of GDP nearly doubled in both countries [India and China]. Per capita GDP in China rose tenfold from $440 in 1980 to $4,475 in 2002 (in international prices), and India’s almost quadrupled from $670 in 1980 to $2,570 in Both experienced dramatic reductions in poverty …. – each on distinctive paths, but both sustaining efforts to improve the opportunities and incentives for firms to invest productively”. (“A Better Investment Climate for Everyone – World Development Report 2005”, The World Bank, 2004)

“Chinese textile and garment firms have handily dominated their Indian competitors, and analysts expect China to strengthen its position further with the end of the export- quota restrictions mandated by the World Trade Organization at the end of the year. China’s market share for textiles in Europe has risen from 24% to 45% since 2001 in the sectors where quotas were lifted there.” “In contrast, according to a report by Khandwala Research India, global market share for Indian textiles has been nearly stagnant. Constrained by more stringent labor laws and poor industry regulation, that share has moved from 2.9% in 1995 to just 3.7 percent in 2002”. (“India and China: Clash of the Titans”, The Economist, November 6 th 2004)

Time to double income: Pre-industrial:350 years Britain ( )175 years Britain in 19th century65 years Fast growers since WWII (Japan, China, Thailand, 10 years Botswana, Ireland, Chile….) or less — Catch-up is possible — Fast Economic Growth is now possible – like no other time in HISTORY

1987 Debt to GDP had grown to 117% Fiscal Deficit was 10 % of GDP Growth was stagnant Unemployment was rampant In the period 1991 – 2001 Growth averaged 7% reaching 11% in Achieved full employment Propelled GDP above the EU average Debt dropped to 36.5% of GDP The Irish did it in a Decade THE IRISH STORY: A TOTAL TURNAROUND Doubling p.c. National Income in 10 to 15 years is do-able

Economic Growth depends critically on high levels of Investment CountryAverage GDP Growth (%) Investment/ GDP (%) Saving/ GDP (%) China Singapore Ireland Malaysia India Thailand Indonesia Korea Pakistan

INDIA’s GROWTH While India achieved 8.2 percent growth last FY – it has only sustained a lower 6 percent over the past two decades. And growth forecasts for the current FY have been down graded to between 6.0 and 6.5% India’s Tenth Five Year Plan, calls for 8 percent growth – which is necessary to have a meaningful impact upon poverty reduction. In addition, India’s growth has been very uneven, with some states achieving over 8 percent growth rates – while other populous states have achieved less than half these levels.

INVESTMENT CLIMATE A major determinant of high investment is the conduciveness of the Investment Climate. It is no coincidence that the high growth states in India tend to have the better investment climates.

Source: Calculations based on Hendricks (2002) Institutions are often more important than capital

Investment Climate Assessment 2004 Improving Manufacturing Competitiveness INDIA Finance and Private Sector Development Unit South Asia Region The World Bank November 2004 THE ANALYSIS Investment Climate Doing Business World Development Assessment 2004 in

INDIA Investment Climate Assessment 2004: Improving Manufacturing Competitiveness Finance and Private Sector Development Unit South Asia Region The World Bank November 2004 INVESTMENT CLIMATE ANALYSIS The World Bank has commenced a substantial effort to assess the overall investment climates of our member borrowing countries. To date we have undertaken two ICAs in India – 2000 and Similar assessments have been made in over 53 countries, covering 26,000 firms, employing 4.8 million people. This has permitted benchmarking with other countries and with competitors.

THE RESULTS – THE MAIN CONSTRAINTS TO BUSINESS IN INDIA (ICA 2004)

MAIN MESSAGES FROM ICA 2004 India’s situation is improving. In some aspects it is improving faster than in China – compared to the ICA of two years ago – particularly with respect to regulatory constraints/burdens. Nonetheless, the main constraints continue to be: 1.Regulatory Burdens and Government Red Tape (51%); 2.Major concerns over infrastructure – power, roads, railways, ports, and airports (34%); 3.Access to Finance, remains an issue for many firms (27%); & 4.Labor Regulations continue to adversely impact labor market flexibility and firm’s ability to operate efficiently.

DOING BUSINESS INDICATORS Measures 5 main business indicators and makes comparisons with 145 other countries worldwide: 1. Starting a Business – Entry Regulations 2. Hiring and Firing Workers – Employment Regulations 3. Registering Property – Regulations on Property Transfers 4. Enforcing a Contract – Country Efficiency 5. Business Licensing – Construction Regulations

IN GENERAL INDIA DOES NOT DO WELL ON THESE INDICATORS

……. INDIA DOES NOT DO WELL, cont’d

…. and THERE ARE LARGE VARIATIONS ACROSS STATES

…. LARGE VARIATIONS ACROSS STATES, continued “In India, firms in states with poor investment climates have 40 percent lower productivity than those in states with good investment climates”. WDR 2005

1.1. Obtain pre-approval of name, have documents vetted2. Engross documents 2.3. File for registration4. Make a seal 3.5. Obtain permanent account number (PAN)6. Obtain a tax account number (TAN)* 4.7. File for central sales tax*8. File for Employees Provident Fund (EPF)* 5.9. File for Employees State Insurance Act (ESIC)*10. Register with Shops and Establishment Act* Register for Profession Tax* TIME AND COST OF SETTING UP A BUSINESS IN MUMBAI

The World Bank considered this issue so fundamental to development that the 2005 World Development Report of the Bank is totally devoted to INVESTMENT CLIMATE issues.

Despite this – India does have some outstanding success stories. Infosys Technologies, Reliance Industries, the Tata Group, and Wipro (among others) have all been rated among the world’s most respected and outstanding companies. In addition, India’s successes in ICT industries has bred the feeling that it may well be able to maintain a leading edge over China in this sector. China is thought to lag India by as much as 12 years in ICT – and continues to be hobbled by mediocre English language skills, poor quality control and a dearth of managerial talent. China may have been well placed to excel in years past where the “perspiration industries” are what counted. But now that it is the “inspiration industries” that matter, China is at a disadvantage compared with India. (“India and China: Clash of the Titans”, The Economist, November 6 th 2004)

THE PRECEDENT FOR DYNAMIC GROWTH EXISTS IN INDIA If India can emulate the significant achievements that it has made in the services sector – within the manufacturing sector – then the future would indeed look very bright. Indeed, a major reason why the services sector has performed so well is that it has specifically NOT been hobbled by the same sort of constraints as the manufacturing/industrial sector. India, and its services sector has shown that IT CAN BE DONE.

Thank you Simon Bell THE World Bank November 2004