The Hindu Business Line : India is narrowing growth gap with China: CBC survey

REVIEWING commonwealth countries' performance in mobilising investment over the past two years, the Commonwealth Business Council (CBC), in its Business Environment Survey 2003 (covering 31 countries), has pointed out that India was continuing to grow strongly, and "is narrowing the growth gap with China."

It has, however, pointed out that Indian capital markets are perceived as opaque and risky to enter without `influential friends'.

The key action points for India to attract investment and provide a favourable environment for business, according to the survey, are: a) infrastructure, which requires wholesale upgrading, b) tackling corruption, which requires systemic redress, and c) problems of obstruction need to be addressed regarding direct contact with government agencies and/or personnel.

"India offers private business a number of advantages, at least in certain regional contexts (the West and the South)."

In the area of business infrastructure, it is pointed out that in spite of a decade of reform, the regulation of capital markets remains weak, especially at the interface between the public and private sectors.

"The labour force is divided between a small highly skilled segment of tertiary-educated scientists and technicians and a mass of unskilled, largely illiterate workers. The availability of semi-skilled labour is often poor."

As per the survey analysis, many markets in India are open, the framework of government and financial institutions broadly predictable and labour is both available and responsible. However, there are problems in the provision of infrastructure and implementation of public policy. It is stated that with the possible exception of railways, infrastructure was poor by international standards. There has been some improvement in roads and telecommunications, but electricity, where output growth averaged only 3.5 per cent over the last 10 years, has proved an intractable problem, says the survey.

The survey findings on the economic and social policy front indicate that tax rates in India were relatively high by international standards. It is pointed out that there were innumerable special exemptions and loopholes, which recent attempts to modernise the system have failed to close.

"At 12.8 per cent, India's ratio of revenue receipts to GDP is among the lowest in the world. The States have also played an increasingly independent role in the collection of local taxes."

It is also pointed out that attempts to regulate States' powers under a new VAT system have been stalled owing to political resistance and bureaucratic lethargy. Attempts to cut the level of public subsidies (at 14 per cent of GDP) and promote privatisation have had limited success, says the survey.

According to the survey, not all countries have benefited or been affected equally by fluctuations in investment flows. "While FDI held up comparatively well in smaller markets over the past two years, their share and absolute amounts of investment remain small".

China, says the survey, continues to attract the lion's share of new investment and presents stiff competition to many emerging markets in terms of its attractive domestic market potential and low manufacturing costs.

The survey has concluded that the top three perceived barriers to investment, as ranked by private sector respondents in both developed and developing countries were: corruption, policy instability and inadequate infrastructure.

According to Dr Mohan Kaul, Director General of CBC, the results of the survey clearly demonstrate that for the private sector, these three areas continue to be a cause for concern in a number of Commonwealth countries.

Pointing out that experience and best practice was now emerging in developing countries, the CBC survey says, "there is increasing recognition that business and government are partners in the process of economic development".