7/31/2019 fdi repo

1/13

Indias growth prospects will remain strong, even as worldeconomy recovers slowly, says new World Bank reportHowever, developing countries to face higher borrowing costs, reduced credit and capital flows

Contacts:

In Delhi:Sudip Mozumder (91 11) 2461-7241smozumder@worldbank.orgIn Washington:Erik Nora (202) 458 4735enora@worldbank.org

New Delhi, February 1, 2010: India is expected to grow at 7.5 and 8 percent in the financial year 2010-11 and 2011-12 respectively, well above the 6.4 percent average posted during 1995-2005 (FY-basis). Thiscomes at a time when the recovery in the world economy remains fragile and is expected to slow later thisyear as the impact of fiscal stimulus wanes, says a new World Bank report.

Global Economic Prospects 2010, released in New Delhi today, says Indias growth will benefit from afirming in external demand, particularly by the resumption of growth in high-income countries, whichrepresent about two-thirds of India's export markets. Although FDI inflows to India declined considerably in

2009, estimated at $35 billion compared to $41 billion the previous year, the country remains one of the topthree developing country destinations for foreign investors.

FDI flows to India are expected to increase in 2010, as overall investment to developing countries recoversthis year, and as the country continues to improve its FDI policies by simplifying investment procedures andrelaxing investment limits in some sectors.

"India weathered the global crisis relatively well, in part due to the government's quick response in easingmonetary policy and counter-cyclical fiscal-policy measures that supported domestic demand,"said HansTimmer, Director of the World Bank Prospects Group. "India is also less specialized in manufacturing ornatural resources--sectors which have been particularly negatively impacted by the crisis. Looking ahead, akey challenge for the country--as with many countries in the region and abroad--will be to reduce its largefiscal deficit."

The report also shares areas of concern. As private consumption gains momentum (following the markeddeceleration during the crisis), Indias import volumes are likely to expand and are projected to outpace therecovery in exports, translating into a deterioration in the current account balance and negative contribution togrowth of net exports.

Macro-policy is also expected to become much less expansionary. As fiscal consolidation is pursued, theimpetus to growth, stemming from public consumption, is expected to sharply moderate.

While diversification and reforms in the countrys agricultural sector over recent years are likely to helpcushion the negative impact of last year's poor monsoon, the resulting poor harvest is expected to lead to alower contribution to growth of agricultural output and constrain the rebound in household consumption in2010, the report says.

On the global front, the report, however, warns that while the worst of the financial crisis may be over, theglobal recovery is fragile. It predicts that the fallout from the crisis will change the landscape for finance andgrowth over the next 10 years.

Despite the return to positive growth, it will take several years before economies recoup the losses alreadyendured, it says. It estimates that about 64 million more people will be living in extreme poverty (on less than$1.25 a day) by the end of 2010 than would have been the case had the crisis not occurred.

Further, over the next 5 to 10 years, increased risk aversion, a more prudent regulatory stance, and the needto curb some of the riskier lending practices during the boom period that preceded the crisis can be expectedto result in scarcer, more expensive capital for developing countries.

Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent this year and 3.2 percent

in 2011*. Prospects for developing countries are for a relatively robust recovery, growing 5.2 percent this yearand 5.8 percent in 2011 -- up from 1.2 percent in 2009. GDP in rich countries, which declined by 3.3 percent

mailto:smozumder@worldbank.orgmailto:smozumder@worldbank.orgmailto:enora@worldbank.orgmailto:enora@worldbank.orgmailto:enora@worldbank.orgmailto:smozumder@worldbank.org

7/31/2019 fdi repo

2/13

in 2009, is expected to increase much less quicklyby 1.8 and 2.3 percent in 2010 and 2011. World tradevolumes, which fell by a staggering 14.4 percent in 2009, are projected to expand by 4.3 and 6.2 percent thisyear and in 2011.

While this is the most likely scenario, considerable uncertainty continues to cloud the outlook. Depending onconsumer and business confidence in the next few quarters and the timing of fiscal and monetary stimuluswithdrawal, growth in 2011 could be as low as 2.5 percent and as high as 3.4 percent.

Unfortunately, we cannot expect an overnight recovery from this deep and painful crisis, because it will takemany years for economies and jobs to be rebuilt. The toll on the poor will be very real, said Justin Lin,World Bank Chief Economist and Senior Vice President, Development Economics. The poorestcountries, those that rely on grants or subsidized lending, may require an additional $35-50 billion in fundingust to sustain pre-crisis social programs.

In this still weak environment, oil prices are expected to remain broadly stable, averaging about $76 a barrel;and other commodity prices should rise by only 3 percent per year on average during 2010 and 2011.

While all forms of finance are likely to be affected, foreign direct investment (FDI) should be less constrainedthan debt flows. However, parent firms will face higher capital costs, reducing their ability to finance individualproducts. As a result, FDI inflows are projected to decline from recent peaks of 3.9 percent of developing

country GDP in 2007 to around 2.8-3.0 percent over the medium term. The consequences of such a declinecould be serious, as FDI represents as much as 20 percent of total investment in Sub-Saharan Africa, Europeand Central Asia and Latin America.

While developing countries cannot avoid tighter international financial conditions, they can and shouldreduce domestic borrowing costs and promote local capital markets by expanding regional financial centersand improving competition and regulation in local banking sectors,said Hans Timmer. Although likely totake time to bear fruit, such steps could expand access to capital and help put developing countries back onthe higher growth track from which they were derailed by the crisis.

The report finds that very relaxed international financial conditions from 2003 through 2007 contributed to theboom in developing country finance and growth. Much lower borrowing costs caused both internationalcapital flows and domestic bank lending to expand, which contributed to a 30 percent increase in investmentrates in developing countries. The resulting rapid expansion of the capital stock explained more than half of

the 1.5 percentage point increase in the rate of growth of potential output among developing countries.

While very strong developing country growth during the boom period may reflect underlying growth potential,the global financial conditions that fueled it were clearly unsustainable.

* (or -1, 3.5 and 4 percent when aggregated using Purchasing Power Parity weights)

# # #

Remittances money sent home byimmigrant workers abroad are hugelybeneficial to many countries across theworld.India is the worlds top receiver ofremittances. Flows into the country havegrown dramatically in recent years,touching US$ 17.4 billion in 2003, up fromsome US$2 billion a year in the late 1980s.Funds repatriated home by workers exemplifythe principle of self help. But, can these flows be used more productively?

Compiling the contributions of some 20 experts from different disciplines, Remittances: Development

Impact and Future Prospects, edited by Samuel Munzele Maimbo and Dilip Ratha, discusses recenttrends in remittance flows, and examines the key challenges countries face in harnessing these flows

Interview: "Remittances are Beautiful"

Samuel Munzele Maimbo is one of the authors ofRemittances: Development Impact and FutureProspects. Listen to his interview discussing theimportance of remittance money to people in South Asia.

Play the Interview(low, 8:16, realaudio)

Play the Interview (high, 8:16, realaudio)

http://wbwebcast2.worldbank.org:8080/ramgen/media/iview-sam-maimbo-sasfp-07-2005-lo.rmhttp://wbwebcast2.worldbank.org:8080/ramgen/media/iview-sam-maimbo-sasfp-07-2005-lo.rmhttp://wbwebcast2.worldbank.org:8080/ramgen/media/iview-sam-maimbo-sasfp-07-2005.rmhttp://wbwebcast2.worldbank.org:8080/ramgen/media/iview-sam-maimbo-sasfp-07-2005.rmhttp://wbwebcast2.worldbank.org:8080/ramgen/media/iview-sam-maimbo-sasfp-07-2005.rmhttp://wbwebcast2.worldbank.org:8080/ramgen/media/iview-sam-maimbo-sasfp-07-2005-lo.rm

7/31/2019 fdi repo

3/13

for development. Clearly, more needs to be done.>>>get the book

Remittances: An Economic ForceRemittances by international migrants to their home countries have grown dramatically in recentyears. They are now the largest source of external finance for developing nations after foreign direct

investment (FDI), even exceeding FDI in some. In others, they are greater than official developmentaid.In 2004, migrant workers remittanceswere estimated at US$182 billion. Ofthis, developing countries received anestimated US$ 126 billion, up by nearly48.7 percent from 2001.

Although measures to curb moneylaundering and terrorist financing havebrought more transfers into the official

fold, actual amounts remain much largerthan officially recorded figures asinformal remittance systems such as hawalaelude data collection.India is the worlds top receiver of remittances. Growth in money sent home by its migrant workershas been dramatic in recent years, touching US$ 17.4 billion in 2003, up from almost US$14 billion in2002, and over US$ 11 billion in 2001.Remittances are one of the most visible - and beneficial - outcomes of global migration which hasrisen markedly in recent years due to persistent income inequalities between nations. The UnitedNations estimates that about 175 million people, or roughly 3 percent of the worlds population, livedand worked outside the country of their birth in 2000, up from 120 million in 1990.In the oil exporting Persian Gulf states, foreign workers continue to represent more than half the laborforce. In Saudi Arabia, expatriate workers account for 70 percent of the work force.Unlike other capital flows, remittances are stable and directly benefit the poor. In the wake of theAsian financial crisis in the late 1990s, remittances to developing countries continued to rise eventhough FDI and official aid flows declined. Moreover, as migrants repatriate theirsavings, the rural areas of the developingworld, from where much of the worldstransnational labor is drawn, are quietlybeing transformed.

With migration set to rise in the comingyears as a result of globalization,remittances can be expected to growsteadily well into the foreseeable future.Therefore, both remitting and recipientcountries are considering the long-termeconomic implications of these transfers.India andChinacomparedInterestingly, India and China, the two countries with the largest global migrations, report substantialdifferences in remittance figures.While remittances into China were about one-eighth those to India between 1992 and 2001, foreign

Countries receiving the most remittances, 2003(US$ billion)

India 17.4Mexico 14.6Philippines 7.9China 4.6Pakistan 4.0Morocco 3.6Bangladesh 3.2

Top sources of remittances, 2003(US$ billion)

United States 34.1Saudi Arabia 14.9Germany 9.9Switzerland 9.2France 4.7Luxembourg 4.6Italy 4.4

http://www.worldbankinfoshop.org/ecommerce/catalog/product?item_id=2434711http://www.worldbankinfoshop.org/ecommerce/catalog/product?item_id=2434711http://www.worldbankinfoshop.org/ecommerce/catalog/product?item_id=2434711http://www.worldbankinfoshop.org/ecommerce/catalog/product?item_id=2434711

7/31/2019 fdi repo

4/13

direct investment from overseas Chinese communities was ten to twenty times more than FDI fromthe Indian diaspora.However, after combining remittances and FDI, and taking into account assumptions regarding theround tripping of domestic Chinese funds that are brought back to the country legally or illegally,inflows from overseas Chinese were two to four times greater than those from overseas Indian

communities.Building houses or boosting growth?Workers remittances undoubtedly help ease poverty and improve living standards in their homecountries by enabling better health care, nutrition, housing, and education. In many communities,however, the money is often put to unproductive uses such as buying land and building houses.

Citing the example of District Jalandhar in India and District Mirpur across the border inPakistan, both with large numbers of migrants in the United Kingdom, Roger Ballard notes thatremittances contributed to sharp increases in agricultural production a green revolution - in

India by enabling farmers to purchase tractors and machinery.In Mirpur, on the other hand, despite the areas agricultural potential and larger inflows of remittances,these funds spurred a housing construction boom. While most houses were kept locked by theiroverseas owners, agricultural production wasted away, leaving the young with few other options thanto follow suit and migrate too.While remittances are not public funds, and decisions about spending must be left to remitters andrecipients, unproductive expenditures stem mostly from a lack of other investment opportunities.Good policies and public infrastructure in major recipient countries are therefore essential toencourage the proper investment of these funds.The report discusses how such downward spirals might be brought to a halt, and better still, reversed,through a variety of carefully tailored smart aid initiatives that can k ick-start the productive potentialof local economies in areas where high levels of migration have taken place.This applies to all parts of the developing world which are witness to chronic deceleration of growth inrural areas as a result of large-scale migration to urban centers.

Helping families to start small businessesMicro-enterprises have recently been recognized as an important tool for alleviating poverty. Inmost impoverished societies, however, credit for tiny self-owned rural and urban ventures ishard to come by.

As many workers repatriate small amounts to sustain families back home, can these funds be used toprovide micro-credit for productive enterprises?

In one chapter, Abul Kalam Azad, reviews the efforts of several countries in channeling remittanceflows for this purpose. In Mexico, for example, the so-called Home Town Associations and other self-help groups are responsible for almost 20 percent of the capital invested in micro-enterprise in thecountrys urban centers.Using these case studies, the report explores the possibility of using migrants remittances for micro-enterprise development in Bangladesh. It suggests options for pooling and redirecting individualremittances for the development of the country, taking into account the fact that Bangladeshi migrantsare mostly risk-averse semi-skilled or unskilled workers with low earnings, many of whom continue totransfer funds through informal channels despite the governments efforts to facilitate the use ofbanking channels.Striking a balance between transparency and access

7/31/2019 fdi repo

5/13

Despite the growth of formal transfer mechanisms, substantial volumes of global remittances continueto flow through informal, and sometimes underground, channels outside the purview of governmentsupervision and regulation.Using rudimentary technologies, millions of dollars are transferred through informal channels, ridingthe social capital of ethnic groups, and relying on trust. These channels owe their existence to the

inefficiencies in the formal system as informal agents are cheaper, work longer hours, and operate inremote areas.Tighter controls have been imposed on informal transfer systems after September 11, 2001, to checkthe possibility of abuse. However, a balance needs to be struck between curbing money laundering,terrorist financing, and general financial abuse on the one hand, and facilitating the flow of fundsbetween hard working migrants and their families back home on the other. The bulk of remittancesare sent by migrants to support their families, and unreasonable and arbitrary scrutiny may result inhigher costs and delays that could jeopardize the survival of families back home.Investment Climate

ByPraful Patel

Vice President, South Asia RegionThe World Bank Group

Taj Lands-End, Mumbai, India, November 24, 2004

Welcome to this one-day conference to discuss and debate three recent studies, the World Development Report,the India Investment Climate Assessment and the Doing Business Indicators for India. The World Bank ishonored to partner with the Confederation of Indian Industry in bringing you, I hope, a fresh set of ideas - andchallenges - critical to a growing India. We are very pleased to have been able to bring together business leadersand policy makers from around India. And what better place to gather than in Mumbai: the vitality and

entrepreneurial spirit of this great city is energizing. Millions from across India come here in search of theirdreams. Millions more dream of this city. Mumbai has proved a fertile ground, unleashing the creative energiesand talents of many who have made this their home. But one doesn't need to look hard in Mumbai - or elsewherein India - to see that wide disparities exist.

So let me begin with a challenge to our collective imaginations today: imagine if each Indian state could achievea "best practice" investment climate. Our calculations suggest that the economy would grow by an additional 2percentage points and reach the sustained 8 percent growth rates needed for ongoing poverty reduction. TheGovernment of India's own Tenth Five Year Plan recognizes this sharply. It estimates that the Indian economyneeds to grow consistently at around 8 percent a year over the next decade to create 100 million new jobs; toreduce the poverty rate to 11 percent.

What do we need to reach that "best practice"?

The World Bank President, Jim Wolfensohn, was in New Delhi last week where he described India as a countrymoving at two speeds. One India in the global fast lane of entrepreneurial talent and technological creativity. Inthis lane, Indian companies are becoming a global presence. Think Tata, think software giants like Infosys andWIPRO. Think Ranbaxy, now the ninth-largest generic pharmaceuticals company in the world. The World Bank,too, saw this fast-lane India when it opened an Accounting Processing Center in Chennai in 2001 to tap intoworld class accounting skills.

In India's other lane are the country's over 250 million poor people. Most live in villages but many are migrating tourban areas in search of a better life. Unleashing the entrepreneurial talents of these millions of Indians is aformidable challenge. But imagine the India where these additional millions of citizens find an opportunity to livetheir dreams, to reach for economic freedom and contribute to the wealth of their communities. This is thechallenge of reaching 8 percent growth to put a cold number to it. Put differently, it's the challenge of making adifference in millions of lives. It is the challenge that will take India from a great nation to a great global nation.

And when India puts its mind to something, it can achieve it. Just look at the remarkable progress over the pastdecade in increasing incomes and improving living standards. Poverty declined and many social indicators have

7/31/2019 fdi repo

6/13

improved significantly.

Driving these improvements was the ambitious reform program beginning in 1991. Opening the economy,deregulating the economy, marked a new willingness to allow market forces the freedom to work. The scope ofthe program included industrial and trade liberalization; financial deregulation; improvements to supervisory andregulatory systems; and policies more friendly to privatization and foreign direct investment. India achieved anaverage growth rate of nearly 6 percent over the last two decades. Last year it was 8.2 percent.

But how can India sustain a growth rate of 8 percent and more? We would be foolish to take these considerableachievements for granted. Growth during the past decade has not been strong enough to make a deeper attackon poverty reduction. It has not been sufficiently broad-based. The services sector has performed impressively.So much so that the India service hub was a contentious issues in the last American election. But with a fewnotable exceptions like biotech and pharmaceuticals, growth in industry - which still has the greatest potential toprovide high-wage employment for the large and growing labor force - has been less impressive. Organizedmanufacturing provides just 7 million jobs, under 2 percent of total employment. And between fast-lane India andthe over 250 million citizens who live below the off icial poverty line, there are wide disparities in incomes andopportunities, disparities between rural and urban areas, disparities within cities, disparities across regions.

As I said, when India sets its mind to something it can make a real difference. And that collective mind seems tome in widespread agreement that much more needs to be done to achieve the country's economic potential. You

can feel that energy today. That mind seems, too, to recognize that a vibrant private sector is central to leadingthe way. It means firms investing, creating jobs, and improving productivity. It means increased private domesticinvestment coupled with improved productivity. And it means sharp improvements in India's investment climate,nationally and sub-nationally and - don't forget - in comparison with other investment destinations in Asia too.

India has such advantages: today it boasts the third largest reservoir of skilled and technical manpower. It has alocal market among the largest in the world. Raw materials are abundant. Relative macroeconomic stabilityprevails. Private investment should be flocking here to make a major hub for manufacturing and labor-intensiveservices.

But this isn't happening yet. India's record in attracting private investment has not been very impressive. Privateinvestment, largely financed from domestic savings, averaged around 15 percent of GDP in the 1990s - belowthe average for low-income countries. Certainly below where you need to be to accelerate growth to asustainable 8 percent a year. FDI to India has averaged around only US$ 5 billion annually over the recent past.

It has been US$ 40 billion annually to China. Indian manufacturers have become more competitive over the pastdecade and exports have grown. But the share of Indian manufacturing exports in the world stood at a mere 0.7percent in 2000.

Looking around it's easy to imagine an enormous potential still to be tapped. Looking closer, recent World Bankresearch shows that private sector performance in India continues to be constrained by a range of bottlenecks.Today my colleagues will share the results of three recent World Bank reports, helping us take a closer look. Oneis the India Investment Climate Assessment 2004, based on a survey of manufacturing firms which we did inpartnership with CII. The next is the Doing Business Report 2005. The third is the latest World DevelopmentReport 2005.

Let me share a set of headline items coming out of these reports. Let me highlight some of the critical investmentclimate bottlenecks and the costs they have imposed on Indian business.

First, infrastructure. Access to reliable infrastructure is a key constraint facing Indian businesses. Just takepower: nationwide, the power shortfall in 2002/03 was about 11.4 percent for peak demand. Comparing India withfindings of similar analyses, manufacturers here face almost 17 significant power outages each month. InMalaysia it is one, in China, less than five. That translates into about 9 percent of the total value of output of firmslost due to power breakdowns. It is less than a quarter this level in Malaysia and China. As you know all to well Isuspect, generators are standard industrial equipment in India. Some 61 percent of Indian manufacturing firmsown generators compared to 27 percent in China. And all this means that India's cost of power is 74 percenthigher than Malaysia's, 39 percent higher than China's. Indian manufacturing pays a high cost for a low qualitypower supply.

There can be change. In the past three years some power bottlenecks have eased. The percentage of Indianfirms owning generators fell by around 10 percent over this period. This reflects progress with sector reforms.The enactment of the Electricity Act in 2003 is definitely a step in the right direction. But much more needs to be

done to make the enabling legal and structural environment work.

7/31/2019 fdi repo

7/13

Take transport. Capacity and quality constraints in roads and railways also impose costs on firms. India currentlyhas no inter-state expressways linking the major economic centers. It has only about 3,000 kms of four-lanehighways. Look at China which has built 25,000 kms of four-to-six lane, access-controlled expressways in the lastten years. Improving road infrastructure will require a significant increase in investment. In part, this can beaddressed through better cost recovery from users. But it will also require reducing uncertainties arising frompolitical interference and weak contract enforcement which has held private sector participation back. There canalso be short to medium term gains in strengthening the financial performance and accountability of road

agencies and state public works departments. Likewise, Indian Railways is also in urgent need of reform if it is toprovide an efficient means for transporting goods. Ports and airports urgently need to be modernized.

The second set of bottlenecks I am going to call, bureaucracy for a basket of issues ranging from the officialpaper chain to corruption. While the License Raj has been substantially reduced at the center, it survives in manystates, along with a pervasive 'Inspector Raj' that imposes high costs on businesses. The median time to start anew business in India is 89 days. It is 2 days in Australia, 5 days in the US, 18 days in the UK, and 41 days inChina. In India, 14 percent of senior management time is spent in dealing with state government officials forvarious regulatory issues. The figure is 8 percent in China. On average Indian manufacturers face 7.4 visits ayear from government officials. In Malaysia, the average number of visits is less than 3. A key challenge for Indiais to streamline business entry and operation procedures, to reduce delays and opportunities for rent seeking.This will require re-engineering the entire gamut of business regulatory processes, at both the state and locallevels. And to do so based on clear principles of transparency, absence of discretion, and accountability.

Third labor markets. Restrictions in the hiring and firing of workers are identified in the reports presented today asanother key challenge of doing business in India. Employment in India's registered firms is highly protected.Labor rationalization is difficult; it discourages the hiring of labor in the organized sector. This is especiallyburdensome for exporters who have to compete with other exporting countries. Figures show that the typicalIndian firm reported excess labor of 17 percent: the main reason, labor laws and regulations. The literature showsthat flexible labor markets hold out the best chance of creating new jobs in the formal sector. Going forward, keypriorities for the central government include the repeal of legislation blocking layoffs in registered firms, legislationto ease constraints on the hiring of contract labor, and a gradual rationalization of the entire gamut of Labor andWage Laws. But state governments, too, have an important role. They can facilitate labor rationalization, evenwithin the current legal framework. Indeed some states have already shown the way forward on this.

The fourth constraint I see is access to finance. Problems in accessing financing are often cited as a major hurdlefor small and medium sized businesses in India. Only half of small businesses here have active bank credit lines.The efficiency of SME credit markets can be tremendously improved through reforms in the legal framework forloan recovery and bankruptcy. And by improving credit information. At the same time, banks must focus onbuilding the necessary capacity for better credit appraisal and risk management of SME portfolios.

Those are four key road blocks on India's path to greater foreign and domestic investment and the sort ofinvestment climate needed to encourage that. But let's not forget the broader policy landscape. Industrial policystands in the way of doing business in India too. Here it's a case of eliminating remaining preferences, productreservations and investment ceilings for small-scale producers. These all have the unintended consequence ofpreventing smaller firms from growing and competing on world markets. Indeed such policies amount to nothingless than an anti-growth strategy for business. India would also gain from allowing FDI in the retail sector, whichremains closed. There are gains too in further raising FDI limits in sectors where caps exist, such as banking,insurance and airports.

Trade policy reforms also need to be accelerated. Here the challenge is to aggressively reduce import tariffs to a

single low rate. To be ambitious and do this over the next three years, phasing out remaining tariff exemptions,specific tariffs and anti-dumping duties.

One of the biggest barriers to competitiveness is the lack of a unified VAT regime across states. There was ahigh likelihood of VAT being introduced in at least the major states in April 2004. This remains an urgent priorityfor the private sector.

May I depart from my business script for a moment. I want to suggest to India's private sector that there are anadditional set of challenges that might seem on the face of it to be the business of government; not your obviouschallenges. I propose they are the business of all of us. The private sector could make a real contribution byputting two things on your radar screen in the name of good business. One is HIV/AIDS. There is no clear pictureyet of what the economic impact will be of this disease in India. But if our experience in Africa is anything to go by- and for many years of my life Africa has been my focus and indeed the place I call home - al l I can say is trustme, sit up and take note. India now has more HIV-infected people than South Africa. We suspect vast under-

reporting and a conservative number is about 5.5 million infected people in India. There are good practices

7/31/2019 fdi repo

8/13

worldwide where the private sector has been able to make a contribution.

My other "non-business" issue for the radar screen is youth. About 50 percent of India's population is youngerthan 25 years. Creative thinking about the transition these young people must make from school to work willdetermine whether there is a job to go to. And indeed for too many still, notably girls, whether there is a school togo to. I offer these two additional issues because for India to go from great nation to great global nation, thesetwo challenges have the power to subvert many other gains made.

We began by imagining an India in which all states had best practice investment climates. Today's landscapeshows us considerable variations between states. In one of the reports before us today, the India InvestmentClimate Assessment 2004 - as in the previous study four years back - respondents were asked to rate all statesother than their own for their general investment climate. The six states that attracted almost all the FDI wererated to have a better investment climate by the majority of respondents. These "better climate" states areMaharasthra, Delhi, Gujarat, Andhra Pradesh, Karnataka, Punjab, Tamil Nadu and Haryana. The first threestates are also the only ones to have registered growth in per capita incomes greater than 6.5 percent.

Differences in the quality, availability and cost of infrastructure are critical in explaining the differences in investorperception of the investment climate across states. Analysis indicates that the main reason why the "betterclimate" states have been rated more highly - and why these states attract almost all FDI to India - is to be foundin their better physical infrastructure. But what really counts is that these states have been able to make a

difference, to make a change.

My colleagues will take you into the details behind some of the headlines I have flagged here today. There is aformidable reform agenda ahead to improve India's investment climate to the point where India becomes globallycompetitive. And I know too that these headlines are not foreign to you; considerable thinking has already goneinto the details of how to shift the business environment. These are well articulated in the Government of India'sCommon Minimum Program. The challenge now is the aggressive implementation of the program.

For the time has come to make "India Inc." happen across a far broader horizon than the current bright shiningspots. And to make India Inc. happen for many, many more people. This great country has shown before justhow something can be done when you put your minds too it. I sense that mind being made up and we, at theWorld Bank, stand ready to partner with Government and the private sector in this tremendous enterprise ahead.

Without it, growth will lag and the central aim of poverty reduction which is going to take all of 8 percent growthand more, will not be achieved within a reasonable period of time.

Thank you.

ICR Update: Telecommunications Sector Reform TechnicalAssistance Project : Newsletter - Sep.-Oct. 2008

http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101059~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101057~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:22101055~pagePK:141137~piPK:141127~theSitePK:295584,00.htmlhttp://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0,,contentMDK:21997303~pagePK:141137~piPK:141127~theSitePK:295584,00.html

7/31/2019 fdi repo

9/13

When this project was initiated in the year 2000, theperformance of the telecom sector was not up to itspotential. Although the sector had attained a growthrateof around 20percentperannum, itwasnowherenearmeetingtherisingdemandforservices.Therewasa high level of unmet demand for basic telephoneserviceand inadequateavailabilityof services in ruralareas.

A reform process started with the issuance of theNationalTelecomPolicy (NTP) 1994,which called forissuing operator licenses to the private sector andsettingupanindependentregulator.Subsequently,theTelecomRegulatory Authorityof India(TRAI)wassetupin1997.ArevisedNTP,issuedin1999,setoutanambitiousandveryprogressiveprogramforthesector.

Approval Date: 29th August 2000

Closing Date: 31st March 2006

Total Project Cost: US$M 29.88

Bank Financing: US$M 851.85

Implementing Agency: Government of India andthe Department ofTelecommunications(DOT)

Outcome: Satisfactory

Sustainability: Satisfactory

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

Theprojectsmainobjectivewastostrengthenelementsofthepolicyandthe regulatoryenvironmenttopromoteprivateinvestmentandcompetitioninIndiastelecommunicationssector.

i. AssistDOTforfinancingequipment,consultantsservicesandtraining;ii. Assist the Wireless Planning and Coordination Wing (WPC) for equipment and technical

assistancetoWPCinthefieldofspectrummanagementtoenableWPCtomeettheincreaseddemandforspectrumuseinIndia;

iii. AssisttheTelecommunicationsEngineeringCenter(TEC)toenhanceitscapacity.

i. Assistance to TRAI included technical assistance to strengthen TRAIs ability to regulate thesector.Itincludedsupportforconsultativestudiesandtraining.Theconsultativestudiesweretocover priority regulatory issues in regulatory infrastructure, sector liberalization, licensing andinterconnection issues, development network and services, quality of service and customersatisfaction,andfosteringfaircompetition;

ii. Assistance toTDSATsupportedimplementationof aprogramforstrengthening the institutionalcapabilitiesofTDSATintheareasofadjudicationanddisputeresolution.

7/31/2019 fdi repo

10/13

Most of the objectives and performance targets of theproject were met or surpassed. The success in sectorreform cannot be solely attributed to the project.Nevertheless,TRAIdoesrecognizethattheprojectplayedan important role in working towards implementation ofNTP99,specifically thesupport forregulatorypoliciesthat

helpedachieveoutstandingperformanceimprovementsinthe telecommunications sector.Asaresultof theimplementationof reformmeasures, thestructure and performance of Indias telecommunicationssectorhasbeentransformedandithasbecomeoneofthemost competitive in the developing world. Large-scaleprivate investment was made and there was a rapidincreaseintelephonelines,especiallyinmobileservices,during the lifeoftheproject.Forexample,thenumber ofmobile subscribers had increased 34-fold. Teledensityincreasedbetween2003and2004byabout2percent,i.e.,it increased inone year bymore than all the teledensityincrease that occurred between 1948 and 1998.

Someoftheotherkeysectorreformsthatwereimplementedduringtheprojectinclude:

Multiplebasicoperatorswerepermittedinplaceoftheduopolyineachofthe21circles; Bothnationalandinternationallong-distanceservicewasopenedtocompetition; The number of cellularoperatorsin each circle increased from two to four ineach of the 21

circles;

DOTsserviceprovisionfunctionswerecorporatizedintothenewBharatSancharNigamLimited; Increase in private vs. government investment occurred as a result of both competition and

privatization;

Competitionhasopened thesectorto thenewchannelsofinvestmentwhileatthesametimereduced themarketshares of the incumbentoperators,ManhangarTelephoneNigamLimited,BharatSancharNigamLimited,andVideshSancharNigamLimited.Furthermore,asa resultofprivatization, government ownership in Videsh Sanchar Nigam Limited was reduced to 28

percent; Theoriginal license feeschemewhichhinderedinvestmentwas replacedby a combinationof

one-timelicensefeesandrevenue-sharingarrangements;

LegislativeamendmentswereenactedtoclarifyTRAIspowers.

Increaseinforeigndirectinvestment(FDI):ThetotalFDIduring2001to2004wasoverfivetimesthatof1993 to 1996.Pro-competitiveinterconnectionregime:TRAIissuedseveralregulationsanddirectivesduring1999to2003 to establish a pro-competitive interconnection regime.Inter-circle long distance competition:National long-distance (NLD) licenses for new entrantswereawarded.Despiteitsmanyachievementsthephysicalimplementationoftheprojectwasratedmodestbecauseof the persistent delays in procurement and implementation of the National Radio SpectrumManagement and Monitoring System (NRSMMS).TherewassignificantandpositiveprogressintheTRAIandTDSATcomponents.

Technical assistance and capacity building in all agencies, particularly with regard to TRAI and TDSAT (which had been established close to the time of project negotiations) havecontributed to institutional build-up and ability of these agencies is evident from the significantimprovementsintheirperformanceoverthelastfiveyears.Theseagencies(aspreviouslymentioned)arenowwell-establishedandwell-regarded,bothwithingovernment,industry,andat theinternational

7/31/2019 fdi repo

11/13

level.

Clear leadership, willingness to implement reforms at a senior level,andabroadconsensusofprioritiesareprerequisitesforsmoothprojectimplementation;

Investing incapacitybuilding iskey toaddressingsustainability: once expertise isdevelopedinstitutions becomeempoweredto driveand sustain reforms. Implementingimprovedpolicies,processes,andchangesin institutionsandpeoplesincentivesandattitudestofocuson resultsandonoutcomeratherthanprocess;

PIUs need to be empowered with the appropriate staff, resources, and authority over theelementsthatdirectlyaffectimplementation(people,processes,etc.).Addressingthesefromthestart(e.g.,theexistenceoffullcomplementofstaffinplacewithappropriatedelegationpowers)isafundamentalrequirementforthesuccessofthiskindofoperations;

The provision of adequate technical assistance at the very beginning to build good projectmanagement and implementation capacity in the PIU, could have contributed greatly to thesuccessandsustainabilityoftheproject;and

Inthetelecommunicationssectorwheretechnologyadvancementisakeydriverofchange,itisnecessarytobuildflexibilityintotheproject.InIndia,thisallowedforprojectrealignmentwhennecessary,thusfacilitatingtheredefinitionofneeds.

Improving the Investment Climate: Challenges for India

ByMichael F. Carter

Country Director, IndiaThe World Bank Group

Jacaranda, India Habitat Centre, October 19, 2004

Good afternoon. I am happy to be able to join you at this OECD India Investment Roundtable.

India has made good progress in increasing incomes and improving living standards over the past decade. Afterthe setback associated with the 1991 balance of payments crisis, economic growth picked up, the externalposition has strengthened remarkably, poverty has continued to decline, and many social indicators, particularlyliteracy, have continued to improve. The driving force behind these social and economic improvements was theambitious reform program launched in 1991 to open and deregulate the economy. The reform program marked anew willingness to allow market forces the freedom to work. It included: industrial and trade liberalization;financial deregulation; improvements to supervisory and regulatory systems; and policies more conducive toprivatization and foreign direct investment.

We should not underestimate these achievements. But neither should we take them for granted. Acceleratingreforms to achieve broadly-based growth is essential if India is to attain its economic imperative of sustained highgrowth and poverty reduction. The Government of Indias Tenth Five Year Plan estimates that the Indianeconomy needs to grow at around 8% per annum over the next decade to create the required 100 million newjobs and reduce the poverty rate to 11%. This would require an increase in agricultural growth from the trend rateof about 3% per annum in the last decade to 4.5% per annum over the next 10 years. Industrial growth wouldneed to increase from 6% p.a. in the last decade to 8% p.a. in the next decade. And services from 7.5% p.a. inthe last decade to 9% p.a. over the next 10 years.

Fortunately, there is widespread agreement within India that much more needs to be done if the country is toachieve its economic potential. And that a vibrant private sectorwith firms investing, creating jobs, andimproving productivity-is central to promoting growth and expanding opportunities for poor people. Sustainedgrowth and higher employment over the next decade will require a step up in domestic investment, particularlyprivate investment, coupled with improved productivity. This will have much to do with the quality of Indiasinvestment climate, not only at the national and sub-national levels, but also in comparison with other investmentdestinations in Asia.

International comparisons indicate that India has intrinsic advantages, such as macroeconomic stability, a large

7/31/2019 fdi repo

12/13

and rapidly growing local market, a large and relatively low-cost labor force, a critical mass of well-educatedworkers, and abundant raw materials, that should allow it to attract and sustain higher levels of privateinvestment, both domestic and foreign. Capitalizing on these national advantages, Indias private sector hasregistered some important achievements in the past decade and a halffor example, the development of exportsof software and back office services and the emergence of a competitive automotive sector driven largely by thereforms initiated in the early 1990s.

At the same time, the potential still to be tapped is clearly enormous. Private investment averaged around 15% ofGDP in the 1990sbelow the average for low income countries and below the level necessary to accelerategrowth to a sustainable 8% a year. It was largely financed from domestic savings. FDI inflows to India haveaveraged only around US$ 5 billion annually over the past few years, as compared to US$ 40 billion annually toChina. As a share of GDP, FDI in India stood at under 1% in 2002/03, compared with 4% in China and between2% and 3% in many emerging market economies. Indian manufacturers have become more competitive over thepast decade. However, the share of Indias manufacturing exports in world exports stood at 0.7% in 2000, againstChinas share of 4%.

Two recently completed Investment Climate Surveysfor India, conducted jointly by the World Bank and CII in2000 and 2003, and also our cross-country reports on Doing Business, show that the private sector in Indiacontinues to be constrained by a number of bottlenecks. Let me focus on some of these critical investmentclimate bottlenecks.

According to the recent Investment Climate Survey for India, access to reliable powerat reasonable cost is thesingle most significant constraint facing Indian businesses. Nationwide, the shortfall in 2002/03 was estimated at11.4% for peak demand. On average, manufacturers in India face almost 17 significant power outages permonth, versus 1 in Malaysia and less than 5 in China. Approximately 9% of the total value of output of firms islost due to power breakdowns compared to 2.6% in Malaysia and 2.0% in China. The frequency and averageduration of outages is so great that generators are used as routinely as any standard industrial equipment inIndia. Some 61% of Indian manufacturing firms own generator sets, versus 20% in Malaysia, 27% in China and17 % in Brazil. Indias blended real cost of power is 74% higher than Malaysias and 39% higher than Chinas.

It must be noted that power sector bottlenecks appear to have eased somewhat over the past three years. Forinstance, the percentage of Indian firms owning generators declined from over 70% in 2000 to 61% in 2003. Thisreflects progress with sector reforms. The enactment of the Electricity Act in 2003 is definitely a step in the rightdirection. But much more needs to be done to make the enabling legal and structural environment work.

While the License Raj has been substantially reduced at the center, it survives at the level of states, along with apervasive Inspector Rajthat imposes significant costs on bus inesses. According to the World Banks DoingBusiness Indicators, the median time to start a new business in India is 89 days, compared to 2 days in Australia,5 days in the US, 18 days in the UK, 36 days in the Russian Federation and 41 days in China. In India, 14.2% ofsenior management time is spent in dealing with state government officials for various regulatory issues (versus8.1% in China or 7.8% in Brazil). Indian manufacturers face, on average, 7.4 visits a year from governmentofficials. Although this has decreased from 11.7 visits in 2000, the fact is that it still compares poorly with acountry like Malaysia, where the average number of visits is just 2.8 per year. A key challenge for India is tostreamline business entry and operation procedures, so as to reduce delays and opportunities for rent seeking.This may require re-engineering the entire gamut of business regulatory processes, at both the state and locallevels, on the basis of clear principles of transparency, absence of discretion, and accountability.

Restrictions on the hiring and firing of workersare identified as another key challenge of doing business in

India. Employment in Indias registered firms (those with more than 100 employees) is highly protected, makinglabor rationalization difficult, and discouraging the hiring of labor in the organized sector. This is especiallyburdensome for exporters who have to compete with producers in other exporting countries. The World Bank-CIISurveys found that the typical Indian firm reported excess labor of 17% in 2000 and that the labor laws andregulations were the main reason why it could not adjust to the preferred level. These numbers improved sharplyto 11% in 2003, reflecting improvements in labor market flexibility in some states. Going forward, key priorities forthe central government include the repeal of legislation blocking layoffs in registered firms, and legislation to easeconstraints on the hiring of contract labor. But state governments, too, can facilitate labor rationalization, evenwithin the current legal framework.

Problems in accessing financingare often cited as another major impediment to the performance of small andmedium sized businesses in India. Only 54 % of small businesses in India have active bank credit lines againstBrazils 75 %. Addressing this problem requires improving the efficiency of SME credit markets through reformsin the legal framework for loan recovery and bankruptcy and improving credit information. At the same time,

banks and other financial institutions need to focus on building the necessary capacity for better credit appraisal

7/31/2019 fdi repo

13/13

and risk management.

Industrial policycontinue to present obstacles to doing business in India. Some of the key industrial policyreforms required include: eliminating preferences, product reservations and investment ceilings for small-scaleproducers, all of which have the unintended consequence of preventing smaller firms from growing, reapingeconomies of scale, and competing on world markets, easing constraints on FDI, and revamping bankruptcylegislation. Trade policyreforms also need to be accelerated. In particular, the government needs to moveaggressively to reduce import tariffs to a single rate (say, 10%) over the next three to four years and phase outremaining tariff exemptions, specific tariffs and anti-dumping duties.

One of the biggest barriers to competitiveness is the lack of a unified VAT regimeacross states. Successivestudies have conclusively demonstrated the high degree of un-competitiveness arising out of non-VATable statelevel indirect taxes and levies, and the need to implement a unified VAT regime as quickly as possible. Therewas a high likelihood of VAT being introduced in at least the major states in April 2004. This remains an urgentpriority for state governments.

All these issues, and more, will need to be addressed to achieve the GoIs ambitious investment, growth, jobcreation and poverty reduction targets. It should be noted, of course, that the investment climate variesconsiderably across the states, and not all of these problems are equally severe in all states.

The World Bank-CII Surveys indicate significant inter-state variations in the investment climate, and also onhow investors perceive the investment climate across states. In the 2003 Survey, as in the previous one,respondents were asked to rate all states other than their own for their general investment climate. The outcomewas a rating pattern where the six states that attracted almost all the FDI were rated to have a better investmentclimate by the majority of respondents. These better climate states are Maharasthra, Delhi, Gujarat, AndhraPradesh, Karnataka, Punjab, Tamil Nadu and Haryana. The first three states are also the only ones to haveregistered growth in per capita incomes greater than 6.5 %. Although these rankings are broadly consistent withthe earlier rankings in 2000, there are some important changes. While there has been a decline in the scores ofGujarat and Tamil Nadu, Delhi has moved up the rankings.

Differences in the quality, availability and cost of infrastructure are critical in explaining the differences in investorperception of the investment climate across states. Our analysis indicates that the main reason why the betterclimate states have been rated thus, and more important, why these states attract almost all FDI to India, is to befound in their better physical infrastructureand particularly, power supply.

The measures I have just outlined for improving Indias investment climate constitute a formidable reformagenda. Fortunately, considerable thinking has already gone into the details of how many aspects of thebusiness environment can be improved.

While some of the challenges I have highlighted would require reforms by the central government, manyrepresent areas for state-level actionfor example, doing away with the Inspector Raj, implementation of theVAT, and power sector reforms.

The political economy of implementing these reforms presents a daunting challenge for policymakers. In manycases, reforms could challenge the interests of privileged groups, and involve painful adjustments. But the long-term benefits far outweigh the short-term costs, and delay will only increase the costs further. Our calculationssuggest that, if each Indian state could attain the best practice in India in terms of investment climate, the

economy would grow about 2 percentage points faster. The gains would be particularly large in states that havepoorer investment climates. But even in states that have better investment climates, there is significant room forimprovement. And if India could achieve Chinese or Thai levels in distinct investment climate areas where it lagsbehind those countries, its overall growth acceleration and success with poverty reduction would be even moredramatic.

The role of central government and state governments in all of this is of course vital. But the private sector canalso play a critical role in partnering with Government to help India realize its investment and growth potential.

Thank you.