Is India a good place to do business? The answer seems to be it is excellent in some areas and difficult in others. No wonder the Indian economy has risen in one global index of competitiveness and gone down in another on business climate.
In times of recession, one can find a bit of cheer in the news that the country has climbed a notch in the competitiveness index compiled by the Davos-based World Economic Forum. But to counter that is the fact that it has fallen in the Doing Business Index of the World Bank and the International Finance Corp.
It has moved up from 50th to 49th position on the World Economic Forum survey but fallen one rung from 132nd to 133rd in the World Bank study. Both surveys merit a close look by the government as the recession is slowly but surely easing and it must be making plans for easing investment norms and regulations.
Reforms have been kept on the backburner for the past year as the focus has been on giving a stimulus to the economy largely through public spending. But the stress being laid on social sectors is not misplaced as the forum survey cites India's poor record in health and education as a factor for its lower placing.
In fact, the forum considers the basic determinants of competitiveness to be health and primary education, macroeconomic stability and infrastructure. While India is 76th in infrastructure and 96th in macroeconomic stability, it remains a lowly 101st for health and primary education, among the 133 countries included in the index.
This clearly indicates that the emphasis being laid by the second edition of the United Progressive Alliance (UPA) government on the social sector is not without reason. There was considerable criticism about the huge outlays being made in these areas and the lack of concessions for the corporate sector in the first budget of the new government.
Clearly, even investor forums like World Economic Forum recognize that economic reforms have to start with ensuring that basic education skills are widespread in the population and that universal health care is made available even to the poorest of the poor. Some years ago, then Singapore prime minister Goh Chok Tong had said unless India carried out a massive drive to provide primary education to the masses, it could never hope to match the other fast-growing Asian economies.
The other areas where India is underperforming, as per the forum index, are penetration rates for mobile telephony, the internet and personal computers which remain among the lowest in the world. It also cites inefficiencies in the labor market which preempt an optimal allocation of human capital.
As far as penetration of mobile phones, internet and computers is concerned, the growth rates are phenomenal so it is only a matter of time before this situation is rectified. What is, of course, of greater concern for those setting up business here is the problem of bandwidth and connectivity. Similarly, in the area of infrastructure, power remains a constraint for any potential investor.
The index also refers to the wide gap between rural India and the urban economic hubs as a factor for the country not rising higher on the list. It notes that even though the country's gross domestic product (GDP) rose 6.6 percent annually since 1991, the per capita income remains just above $1,000 - a third and a tenth, respectively, of China and Russia. Speaking about the dichotomy between rural and urban incomes, the survey describes the country's competitiveness as displaying "reversed development".
This comment once again underscores the need for the government to ensure that greater attention is paid to rural development. Otherwise, economic and technological growth in urban areas would be meaningless as the country would continue to have an unacceptable disparity in standards of living.
Merely providing incentives for industry and services is not going to bring India higher on the competitive indices of the world. Unless there is uniformity in development of rural and urban areas, India will continue to lag behind.
On the plus side, the forum ranks India 28th in the most complex areas measured by the business sophistication and innovation subindex, ahead of several advanced economies. It also rates highly the fairly well-functioning institutions, bustling financial markets and a sound banking sector along with a vast domestic market. But despite these positive indicators, China is still ranked higher at 29th on the overall index, though Brazil is lower at 56th and so is Russia at 63rd. Pakistan is way down at 101st.
These relative ratings are enlightening, especially since India is way behind other South Asian countries in the World Bank-International Monetary Fund (IMF) Doing Business Index for 2010. Pakistan, Bhutan, Nepal, Bangladesh, the Maldives and Sri Lanka are all ranked higher. India's ranking slipped owing to the fall in parameters like starting a business, obtaining credit and investor protection. It has, however, improved on the "closing a business" indicator by taking steps to ease resolution of insolvency cases.
On the parameter of starting a business, India fell three ranks to 169th and on getting credit, it fell by three notches to the 30th rank. Here too, the stress is on credit in rural areas. Citing a recent research report, the survey said poor women in rural areas have difficulty in gaining access to the formal financial system. In other words, the concerns are not just about foreign investors but also about the poor in rural areas in this country.
The one issue that appears paramount in both these indices is that it is not just enough to bring about deregulation and ease investment procedures for either foreign and Indian entrepreneurs. There has to be a simultaneous developmental process in rural areas, especially involving the poorest and the marginalized segments of society.
It is thus clear that unless the dichotomy of uneven growth in this country is eliminated, there is no way it can qualify to be among the most competitive or most attractive business destinations in the world.
(Sushma Ramachandran is an economic and corporate analyst.
She can be reached at firstname.lastname@example.org)