The Hindu Business Line : Economic gap has hit manufacturing growth: World Bank

THE competitiveness gap between India and China might be large and looming, but between India's rich and poor States, the hiatus is far more pronounced, thereby weakening the competitive impulses for manufacturing growth. This is happening when manufacturing is the greatest potential and key to provide high-wage employment for India's hefty percentage of the labour force now working in agriculture.

This is the broad conclusion of an updated survey just released, titled `India: Investment Climate Assessment 2004 Improving Manufacturing Competitiveness' of the World Bank, based on firm-level data from the joint World Bank CII Investment Climate Survey (ICS).

Contrasting China's and India's manufacturing competitiveness, the Bank said that though in the first half of the 1990s alone, India's exports grew 30 per cent faster than world trade in manufactures, for the same period, China's exports of manufactures grew 57 per cent faster than India's. Even more telling perhaps is China's share in world exports, which stood at 4 per cent in 2000 against India's 0.7 per cent; inward foreign direct investment (FDI) to India has averaged $3 billion annually over the past few years as opposed to $40 billion annually to China.

Citing the Bank's `Doing Business' database 2005, it said that in China, the average time taken to secure the necessary clearance for a start-up to complete a bankruptcy procedure is much shorter than in India. Also, Indian labour laws allow firms far less latitude with their employees than the labour code does in China, Brazil, Mexico or Russia.

However, all is not doom and gloom, as the Bank notes on the positive side, India's manufacturing firms face fewer taxes and regulatory inspections than firms in China and Brazil and it takes fewer days in India to clear customs, with the average number of days falling from 10.3 in 2000 to 7.3 in 2003.

Stating that various indicators of investment climate reveal substantial improvement in India between 2000 and 2003, the Bank said a comparison of key investment climate indicators shows the reported overstaffing rate in Indian firms decreased from 16.8 per cent to 10.9 per cent over the period, indicating more flexible labour markets.

The number of inspections per year declined from 11.7 in 2000 to 7.4 in 2003; over the same period, senior management time spent on business regulations and inspectors fell from 16 to 14.2, reflecting fewer day-to-day bureaucratic hassles.

The Bank detected some "notable improvements" in critical infrastructure indicators. While 69 per cent of the firms surveyed in 2000 reported using their own generators due to unreliable power purveyed by the public grid, this number had fallen to 61 per cent by 2003. Maharashtra, Delhi, Gujarat, Andhra Pradesh, Karnataka, Punjab, Tamil Nadu and Haryana are identified with better investment climates. The Bank said, "The case for improving the investment climate of low-growth States does not proceed from evidence that their investment climate is bad but rather that improvements are the only way to offset inherent constraints over which they have little control."

It said significant evidence suggests that the Indian industry might be losing productivity owing to capital constraints and inefficient urban land markets, as the latter had driven up business costs in India. Finance also appears to be a bottleneck for the Indian industry, with small businesses lacking the access to the formal sector's finance in comparison with their counterparts in Brazil; only 54 per cent of small businesses in India have active bank credit lines against Brazil's 75 per cent.

Pointing out that two inter-related sets of regulatory and institutional reforms are important in order to improve India's investment milieu, the Bank said the first comprises a set of regulatory reforms, including reducing entry and exit barriers to manufacturing industries, addressing obstacles to the smooth functioning of labour, land and product markets and streamlining the regulation of business start-ups, bankruptcy procedures and industrial and trade routines. The second reform set would address physical infrastructure bottlenecks and weaknesses in financial and other business services.