INDIA

KEY THEMES FROM THE

World Development Report 2005Investment Climate Assessment 2004

And the Doing Business Indicators 2005

Simon Bell, World BankMumbai, 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 2002. 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 6th 2004)

Time to double income:

Pre-industrial: 350 yearsBritain (1780-1830) 175 yearsBritain in 19th century 65 yearsFast 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 2000.• 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

Country Average GDP

Growth (%)

Investment/

GDP (%)

Saving/

GDP (%)

China 10.7 40 42

Singapore 8.0 33 52

Ireland 7.9 20 37

Malaysia 6.3 32 45

India 6.1 24 20

Thailand 5.7 27 34

Indonesia 4.7 21 32

Korea 4.7 14 24

Pakistan 4.0 15 11

INDIA’s GROWTHWhile 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.

23

22

100 55

Output perimmigrantworker in

US

Output perworker in

homecountry

Difference inoutput dueto higherphysical

capital in US

Difference inoutput due

toinstitutionalenvironment

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 UnitSouth Asia RegionThe World Bank

November 2004

THE ANALYSIS

Investment Climate Doing Business World Development Assessment 2004 in 2005 2005

INDIA

Investment Climate

Assessment 2004:Improving Manufacturing

Competitiveness

Finance and Private Sector Development UnitSouth Asia RegionThe 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 2003.

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)

INDIA: Percent of firms identifying factor as a major or severe obstacle to growth

9.5

12.5

26.8

27.3

28.2

31.1

33.9

51.3

0 10 20 30 40 50 60 70

Access to Land

Skill Shortage

Macro & Policy Instability

External Finance

High Taxes

Tax & Customs Admin.

Infrastructure

Regulations & Corruption

India

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

Time to Start a Business (Days)

2

2124

3035

4147

50

89

0

10

20

30

40

50

60

70

80

90

100

Australia Nepal Pakistan Malaysia Bangladesh China S. A.Average

Sri Lanka India

Shortest Time - Global

IN GENERAL INDIA DOES NOT DO WELL ON THESE INDICATORS

……. INDIA DOES NOT DO WELL, cont’d

Rigidity of Employment Index

03

24

30

4042 44

4948

0

10

20

30

40

50

60

70

80

90

100

Hong Kong,China

Malaysia Bangladesh China Sri Lanka South AsiaAverage

Nepal India Pakistan

Least Rigid - Global

Time to Start a Business (Days)

57 57 58 59 61

68

7983

89

0

10

20

30

40

50

60

70

80

90

100

Punjab(Chandigarh)

Karnataka(Bangalore)

Tamil Nadu(Chennai)

Rajasthan(Jaipur)

Uttar Pradesh(Lucknow)

Andhra Pradesh(Hyderabad)

Orissa(Bhubaneshawar)

West Bengal(Calcutta)

Maharashtra(Mumbai)

Shortest Time - Region

…. and THERE ARE LARGE VARIATIONS ACROSS STATES

Time to Enforce a Contract (Days)

425

683 709 712765

875934 942

1165

0

200

400

600

800

1000

1200

1400

Maharashtra(Mumbai)

Tamil Nadu(Chennai)

Karnataka(Bangalore)

Andhra Pradesh(Hyderabad)

Orissa(Bhubaneshwar)

Rajasthan(Jaipur)

Punjab(Chandigarh)

West Bengal(Calcutta)

Uttar Pradesh(Lucknow)

Shortest Time - Region

…. 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 vetted 2.      Engross documents2. 3.      File for registration 4.      Make a seal3. 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*6. 11.  Register for Profession Tax*

TIME AND COST OF SETTING UP A BUSINESS IN MUMBAI

India - Mumbai

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11

Procedure

Tim

e, d

ay

s

0

10

20

30

40

50

60

Co

st,

% o

f in

co

me

pe

r c

ap

ita

Time(left axis)

Cost(right axis)

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 6th 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

THEWorld Bank

November 2004