Wef india competitiveness report 2009


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Wef india competitiveness report 2009

  1. 1. The India Competitiveness Review 2009 Thierry Geiger, World Economic Forum Sushant Palakurthi Rao, World Economic Forum In collaboration with Confederation of Indian Industry PricewaterhouseCoopers
  2. 2. The India Competitiveness Review 2009 is published by the World Economic Forum within the framework of the Global Competitiveness Network. At the World Economic Forum Professor Klaus Schwab Founder and Executive Chairman Robert Greenhill Managing Director and Chief Business Officer Editors Thierry Geiger, Associate Director, Economist, Global Competitiveness Network; Global Leadership Fellow Sushant Palakurthi Rao, Director, Head of Asia Global Competitiveness Network Jennifer Blanke, Director, Senior Economist, Head of the Global Competitiveness Network Ciara Browne, Associate Director Margareta Drzeniek Hanouz, Director, Senior Economist Irene Mia, Director, Senior Economist Carissa Sahli, Team Coordinator Pearl Samandari, Community Manager Eva Trujillo Herrera, Research Assistant Asia Regional Agenda Team Fabien Clerc, Community Manager; Global Leadership Fellow Anne-Catherine Gay des Combes, Community Relations Manager Béatrice Laenzlinger, Senior Community Relations Manager Jaeyoung Lee, Community Manager; Global Leadership Fellow Karen Sim, Community Manager; Global Leadership Fellow Christoph S. Sprung, Senior Community Manager The editors would like to extend a special thank you to the following World Economic Forum staff: Janet Hill for her excellent editing work, Kristina Golubic for her graphic design and layout, and Kamal Kimaoui who organized the production of this review. World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: contact@weforum.org www.weforum.org © 2009 World Economic Forum All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise, without the prior permission of the World Economic Forum. REF: 201009
  3. 3. Contents Preface 2 Executive Summary 3 Assessing India’s Competitiveness: Insights from the Global Competitiveness Index Thierry Geiger and Sushant Palakurthi Rao, World Economic Forum 5 An Evaluation of India’s Economic Reforms Bidisha Ganguly and Tanvi Garg, Confederation of Indian Industry 45 India’s Competitiveness: The View from CEOs N. Ramesh Rajan and Jairaj Purandare, PricewaterhouseCoopers, India 57 Acknowledgements 64 The India Competitiveness Review 2009 | 1
  4. 4. Preface The India Competitiveness Review 2009 is being We would like to express our gratitude to the published at an important moment for India’s distinguished experts from the Confederation of economic development. India has experienced two Indian Industry and PricewaterhouseCoopers, who decades of remarkable growth, unleashed by the have contributed excellent papers to the review, implementation of important reforms in the early casting light on different aspects key to enhancing 1990s. This impressive economic performance, India’s competitiveness. We especially wish to thank coupled with a population of 1.2 billion, leaves no the editors of the review, Thierry Geiger and Sushant doubt that India is an important player in the global Palakurthi Rao, for their leadership and commitment. economy. Appreciation also goes to Robert Greenhill, Chief Business Officer at the Forum, and Jennifer Blanke, Despite these clear strengths, India has not been Head of the Global Competitiveness Network, as spared the fallout of the global economic crisis, with well as her team: Ciara Browne, Margareta Drzeniek growth slowing significantly in 2008 and 2009. The Hanouz, Irene Mia, Carissa Sahli, Pearl Samandari slowdown underscores the importance of putting and Eva Trujillo Herrera. In addition, this review into place the factors and policies that will ensure would not have been possible without the hard work sustained economic growth and prosperity for the and enthusiasm of our network of 150 Partner benefit of all Indians. As the world slowly emerges Institutes worldwide who carry out the Executive from the crisis, the time is propitious for India to take Opinion Survey, which provides the basis of this stock of its competitive strengths, as well as those review. areas hindering its development. This year also marks the 25th anniversary of the World Economic Klaus Schwab Forum’s engagement in India, providing an excellent Founder and Executive Chairman opportunity to reflect upon how the country's World Economic Forum competitiveness has progressed over the period and what remains to be achieved. The India Competitiveness Review builds on the methodology and findings of the World Economic Forum’s Global Competitiveness Report 2009-2010, and aims to further the understanding of the main competitiveness challenges ahead for India. The review provides a unique platform for discussion and a valuable tool for policy-makers, business strategists and other stakeholders to use in identifying the main hurdles to growth and designing best policies and practices to foster competitiveness. We hope the review will provide support for any discussion on India’s competitiveness aimed at generating concrete insight and priorities for action. 2 | The India Competitiveness Review 2009
  5. 5. Executive Summary Assessing India’s Competitiveness: Insights is of particular importance to the development of the from the Global Competitiveness Index industry and services sectors. The country boasts a developed financial system (16th) with a particularly In the first chapter, Thierry Geiger and Sushant sound banking sector (25th). Another competitive Palakurthi Rao, both at the World Economic Forum, advantage is the size of its market (4th overall). The use the results of the Global Competitiveness Index Indian goods market is also fairly efficient (48th) (GCI) to carry out an in-depth assessment of India’s thanks to fierce competition and despite the competitiveness landscape. presence of important barriers to entry. On a more negative note, the difficulty of hiring and firing The GCI provides a methodological framework to employees makes the labour market rigid (83rd). The assess “the set of institutions, policies and factors country’s technological readiness (83rd) continues to that determine the level of productivity of a country.” It be held back by low penetration rates for comprises a large number of drivers of competitiveness information and communications technologies. organized in 12 categories – the 12 “Pillars” of Firms, however, are generally adept at adopting and competitiveness. Countries are expected to move using the latest technologies. Finally, higher through a sequence of development steps to build up education in India (66th) is of relatively good quality, their competitiveness, starting with the more basic but access to it remains a privilege of the few. factors (e.g. institutions, infrastructure, health, education) and moving to more complex ones (e.g. Compared with the mixed performance in the other two technological readiness, business sophistication, Subindexes, India’s showing in the two most complex innovation). To mirror this sequence, the GCI classifies areas of competitiveness, Business Sophistication countries into three stages of development (factor- (27th) and Innovation (30th), is truly remarkable. This driven, efficiency-driven and innovation-driven) and reflects, to a large extent, the brisk development of attributes different weights to each Pillar by function of India’s private sector and of a few industries in the stage of development. That is, the more advanced particular. Yet, at present, these two categories a country, the less weight on the basic factors and the account for just 5% of the overall GCI score because more weight on the more complex ones. they are not yet the engine of India’s productivity. India ranks 49th out of 133 economies in the GCI To place India’s performance in context, the authors 2009-2010, up one rank from the previous edition. draw parallels with a number of countries and Given India’s present level of development, its country groups. The analysis reveals that India lags competitiveness is factor-driven. What matters most behind almost all comparators in the areas of health for India are the first four Pillars that form the Basic and primary education, labour markets, Requirements Subindex, which together account for technological readiness and macroeconomic 60% of the overall GCI score. It is precisely in this stability. China ranks ahead of India in 10 out of the Subindex that India presents the greatest shortcomings. 12 Pillars – often by a wide margin. However, India The country very much underperforms in the Health possesses a number of competitive advantages in and Primary Education Pillar (101st). The sanitary several Pillars, namely Institutions, Financial Market situation is particularly alarming, with some indicators Sophistication, Market Size, Business Sophistication comparing unfavourably even with the sub-Saharan and Innovation. Africa region. Both the quality and quantity of education are insufficient. India has been running India has come a long way since 1991 to become cavernous deficits, weighing heavily on its one of the world’s fastest growing economies. This performance in the Macroeconomic Stability Pillar is not only remarkable, but also necessary: India (96th). Energy and transport infrastructures are in a needs to continue growing at this pace and, state of disrepair (76th). In this context, India’s rank of possibly, faster to create enough jobs, prevent social 54th for the quality of institutions is encouraging, unrest and raise the living standards of all Indians. To although corruption and security remain major issues. achieve that, the country will have to address in a prompt and decisive manner the many shortcomings India’s performance in the second Subindex, identified in this analysis. Efficiency Enhancers, is better, albeit uneven. This Subindex accounts for 35% of India’s GCI score and The India Competitiveness Review 2009 | 3
  6. 6. An Evaluation of India’s Economic Reforms Annual Global CEO Survey, conducted in September 2009. The survey reveals that despite the global In the second chapter, Bidisha Ganguly and Tanvi economic crisis, an optimistic sentiment prevails in Garg from the Confederation of Indian Industry, India. Sixty-two chief executive officers (CEOs) of examine some of the sources of strength for the Indian Iarge Indian companies indicated that their economy, as well as the challenges faced by policy- confidence was high, with 97% either very confident makers in addressing the critical needs for fostering or somewhat confident of their revenue growth more inclusive growth and development; this would prospects over the coming 12 months. Underlying reinforce the country’s productivity and competitiveness. this confidence is the CEOs’ belief that the country’s economy is well on its way to recovery, with nearly The Indian economy has gained strength from the two-thirds expecting recovery by the middle of recent period of comparative macroeconomic stability, 2010. South Asia, China and the United States will characterized by acceleration in growth, a surge in be the most important markets outside of India domestic savings and investment, and healthy corporate during the recovery. performance. The structure of the economy has also undergone considerable change in the last decade, as India’s rise in global competitiveness is widely India has been integrating more into the world economy. associated with its services sector, which is forecast to Going forward, there are several factors favouring India’s represent over 90% of economic growth in 2010. Still, competitiveness. These include the relatively inexpensive 42% of CEOs surveyed believe the country’s and skilled labour force – India’s demographic dividend manufacturing sector has improved its global – the availability of key raw materials and a large and competitiveness since the financial crisis began, with fast growing domestic market. many citing cost competitiveness and productivity gains as drivers. This suggests a diversification of Yet, much remains to be done. Policy-makers need to India’s global capabilities is underway, with manufacturing focus on significantly reducing poverty and improving growth complementing India’s vaunted services living standards. One of the key challenges is to industries. It also points to a different set of competitors provide quality employment to the large number of on the global stage: 34% of Indian CEOs expect people entering the workforce, as well as to those manufacturing powerhouse China to be India’s greatest leaving the agriculture sector. So far and despite brisk competitor in global markets during the recovery, while growth, the benefits in terms of job creation have been only 6% of them named the United States. relatively limited. Much also needs to be done to improve the situation in the areas of health and For this diversification to take place, however, CEOs education. Public spending has been increasing in consistently say the country still needs to develop its these areas through several initiatives, but this needs infrastructure. A shift towards manufacturing will only to be amplified. The third area where the government make the deficit, including in transportation needs to focus is infrastructure, in particular power infrastructure, more acute. What is more, CEOs and transport infrastructure, which face major believe an educated workforce has been vital to shortages made worse by rapid economic growth. India’s past competitiveness, but the country will Upgrading infrastructure will require a considerable need to step up its investment in education – at step-up in private and public investment. every level – to sustain growth. The potential for labour shortages remains in all industries. Lately, the government has been focusing on urgent measures to soften the impact of the global economic A majority of Indian CEOs expressed concern about crisis. Now that India’s economy is recovering from the 19 of the 20 potential threats to growth that were crisis, the authors conclude that it is a good time for policy- surveyed, including exchange rate volatility, a makers to shift focus back on longer-term imperatives. protracted global recession, over-regulation, terrorism and energy costs. Accordingly, more CEOs reported India’s competitiveness: The View from CEOs they are planning to change their risk management functions than other corporate functions. The desire to In the third chapter, N. Ramesh Rajan and Jairaj avoid or mitigate systemic risks is likely to be an Purandare, both at PricewaterhouseCoopers, India, enduring legacy of the global economic crisis. present the findings of PricewaterhouseCoopers’ 13th 4 | The India Competitiveness Review 2009
  7. 7. Assessing India’s Competitiveness: Insights from the Global Competitiveness Index Thierry Geiger and Sushant Palakurthi Rao, World Economic Forum From an economic standpoint, the past two decades Introduction have been remarkable for India. In 1991, the Indian government unleashed an unprecedented programme The publication of The India Competitiveness Review of economic reforms that put India on the path of comes at a critical time for India’s economy. The sustained growth (see Figure 1). GDP grew at an severity of the global economic crisis – the worst annualized rate of 6.2% between 1991 and 20082. since the Great Depression – has demonstrated the This contrasts sharply with the three decades that fragility of economic growth among industrialized followed independence in 1947, which had been and developing countries alike. India has not been characterized by inward-looking policies and a spared its fallout. Growth slowed from a brisk 9.4% complex system of socialist economic controls – the in 2007 to 7.4% in 2008, and is expected to fall to infamous license raj – heavy state interventionism 5.4% in 20091. The recent turmoil underscores the and central planning. This system resulted in erratic, importance of not losing sight of long-term lacklustre growth rates, on average 4% per year competitiveness fundamentals amid short-term between 1960 and 1991. The 1990s therefore urgencies. Competitive economies are those that marked a turning point in India’s history. India is now have in place factors driving the productivity one of the fastest growing economies and, with a enhancements on which their present and future population of 1.2 billion, is the world’s second most prosperity are built. populous country. There is no doubt India is an increasingly important player in the global economy. Now that the world appears to be slowly emerging from the crisis, the time is propitious for India to take However, India is not yet one of the world stock of its competitive strengths, as well as those economy’s engines. Its economy is the smallest areas hindering its development. This year marks the among the four emerging market BRIC economies 25th anniversary of the World Economic Forum’s and the world’s 12th largest (see Table 1)3. Further, engagement in India, providing an excellent India systematically lags behind China and many opportunity to reflect on how India’s competitiveness large emerging economies in several measures of has progressed over the period and what remains to economic and social performance. Its GDP per be achieved to ensure a prosperous future. capita is just US$ 1,000, one-third of China’s and Figure 1: India’s GDP and GDP Per Capita Growth Real GDP*, Real GDP*/ $ billion capita, $ 1,000 1,000 800 800 CAGR +6.3%** 600 600 400 400 CAGR +4.0%** 200 200 0 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 *Base year is 2000. **Compound annual growth rate Source: World Bank 2009a The India Competitiveness Review 2009 | 5
  8. 8. Table 1: Selected Indicators for the BRIC Countries GCI 2009-2010 GDP (US$ billion)* GDP per capita GDP CAGR (%) Population (millions) rank (out of 133) 2008 (US$), 2008 1991-2008** 2008 2050 China 29 4,327 3,259 9.8 1,336 1,409 India 49 1,207 1,017 6.2 1,186 1,658 Brazil 56 1,573 8,295 2.9 194 254 Russian Federation 63 1,677 11,807 1.9 142 108 * Current prices. **1992-2008 for Russian Federation Source: IMF 2009a; UNFPA 2008; World Economic Forum 2009 one-eighth of Brazil’s4. As of 2005, according to the In sum, India has come a long way, but still has World Bank, some 42% of Indians still lived below significant room for improvement to ensure strong the extreme poverty line of US$ 1.25 a day, down and inclusive economic growth in the coming years. from 54% in 1988 (see Figure 2)5. Over the same The country will have to leverage its competitive period, extreme poverty in China dropped from 54% strengths and overcome obstacles to enhanced to 16%. India ranks 134th in the latest Human competitiveness and productivity. The World Development Index (HDI) not only far behind China Economic Forum’s Global Competitiveness Index (92nd), but also the Philippines (105th) and Indonesia (GCI) represents a valuable tool for identifying and (111th)6. Life expectancy in India is just 64 years, 8 measuring the obstacles and drivers of India’s years less than in China, while the infant mortality productivity and competitiveness. It also allows for rate is three times China’s rate. Trade and investment insightful comparative analysis with relevant data also reveal the gap between India and China. In countries and regions. 2007, foreign direct investment (FDI) in India amounted to US$ 23 billion, four times less than into The next section presents an overview of the GCI China, while exports of goods and services amounted methodology and data used to assess the to US$ 239 compared with US$1,340 billion – a competitiveness of nations. The section that follows higher figure than India’s overall GDP – for China7. provides an overview of India’s performance in the Figure 2: Poverty Trends in India and Selected Comparators: Percentage of Population Living on Less Than US$ 1.25 a Day (PPP) % of population India China Pakistan Philippines 100 80 60 56 54 49 42 40 20 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: World Bank 2009a 6 | The India Competitiveness Review 2009
  9. 9. GCI as well as an analysis of each Pillar. The final Below is a brief description of each Pillar composing section provides some general conclusions about the GCI9. Appendix A provides a detailed structure India’s competitiveness landscape. of the Index. 1st Pillar: Institutions – The quality of public and The Global Competitiveness Index private institutions, including perceived fairness and Framework transparency of public institutions, government efficiency, security level and corporate governance Introduced in 2004, the Global Competitiveness 2nd Pillar: Infrastructure – The quality and extent Index has become one of the most respected and of general and specific basic infrastructure, including broadly used tools to assess competitiveness. roads, railroads, ports, air transport and fixed telephony Developed by Professor Xavier Sala-i-Martin of 3rd Pillar: Macroeconomic Stability – The Columbia University and the World Economic soundness of the macroeconomic environment Forum, the GCI is a highly comprehensive index that 4th Pillar: Health and Primary Education – The captures the microeconomic and macroeconomic general health level of a country’s population and the foundations of national competitiveness. Competitiveness quality of and access to basic education is defined as “the set of institutions, policies and 5th Pillar: Higher Education and Training – The factors that determine the level of productivity of a quality of and access to secondary and university- country.”8 Taking into account the complex nature of level education and effectiveness of on-the-job training competitiveness, the Index identifies 12 Pillars of 6th Pillar: Goods Market Efficiency – The extent Competitiveness (see Figure 3), reflecting the diverse of domestic and foreign competition in a given and interrelated factors that have a bearing on market and the quality of demand conditions national long-term potential for sustained growth. Figure 3: The 12 Pillars of the Global Competitiveness Index BASIC REQUIREMENTS 1. Institutions Key for 2. Infrastructure FACTOR-DRIVEN 3. Macroeconomic Stability economies 4. Health and Primary Education EFFICIENCY ENHANCERS 5. Higher Education and Training Key for 6. Goods Market Efficiency EFFICIENCY-DRIVEN 7. Labor Market Efficiency 8. Financial Market Sophistication economies 9. Technological Readiness 10. Market Size SOPHISTICATION & INNOVATION FACTORS Key for 11. Business Sophistication INNOVATION-DRIVEN 12. Innovation economies Source: World Economic Forum 2009a The India Competitiveness Review 2009 | 7
  10. 10. 7th Pillar: Labour Market Efficiency – The flexibility institutions (1st Pillar); well-developed infrastructure of the labour market and the degree to which it (2nd Pillar); good macroeconomic fundamentals (3rd ensures the efficient allocation and use of talent Pillar); and a healthy and literate labour force (4th Pillar) 8th Pillar: Financial Market Sophistication – The are critical for competitiveness at this stage. sophistication and trustworthiness of financial markets 9th Pillar: Technological Readiness – The penetration As countries progress to the efficiency-driven stage, of information and communication technologies (ICT) their competitiveness becomes increasingly based and countries’ capacity to leverage technology and upon well-functioning factor markets and efficient knowledge, notably through FDI, and in their production processes and practices at the firm level. production systems Important elements at this stage include quality 10th Pillar: Market Size – The size of the domestic higher education and training (5th Pillar); efficient and foreign markets available for firms operating in a markets for goods and services (6th Pillar); flexible given country and well-functioning labour markets (7th Pillar); 11th Pillar: Business Sophistication – At the firm sophisticated financial markets (8th Pillar); the ability level, the degree of sophistication of operations and to leverage existing technologies, notably ICT, in the company strategies and the presence and national production system (9th Pillar); and a large development of clusters domestic and/or foreign market allowing for 12th Pillar: Innovation – The national potential to economies of scale (10th Pillar). generate endogenous innovation In the most advanced, innovation-driven stage, countries Underpinning this methodological framework is the are able to sustain higher wages and the associated idea that, although all 12 Pillars matter in standard of living only if their businesses are able to determining competitiveness, each does so to a compete with new and unique products. At this stage, varying extent, depending on each country's specific companies must compete through innovation (12th stage of development. Factors that crucially drive Pillar), producing new and different goods using the national competitiveness evolve as economies move most sophisticated production processes (11th Pillar). along the development path. In this sense, the GCI builds upon well-known theories of stages of Countries are allocated to the different stages of development10 classifying economies into three development according to their level of GDP per capita stages: factor-driven, efficiency-driven and at market exchange rates, used as a proxy for wages. innovation-driven. This criterion is complemented by a second one measuring the extent to which countries are factor driven, In the initial factor-driven stage, countries compete using as a proxy the share of exports of mineral products based on their factor endowments – primarily unskilled in total exports (goods and services); the assumption labour and natural resources – and their economies is that countries that export more than 70% of mineral are centred on commodities and/or basic products (measured using a five-year average) are, to manufactured products. Efficient public and private a large extent, factor driven. Table 2: Weights and Thresholds of the Three Subindexes per Stage of Development Weight (%) of Subindex in overall GCI Sophistication Stage of development GDP per capita Basic Efficiency and innovation Examples of countries in that stage (in US$) requirements enhancers factors Stage 1: Factor driven < 2,000 60 35 5 India, Pakistan, Philippines, Vietnam Transition from stage 1 to 2 2,000-3,000 40-60 35-50 5-10 Indonesia Stage 2: Efficiency driven 3,000-9,000 40 50 10 Brazil, China, Malaysia Transition from stage 2 to 3 9,000-17,000 20-40 50 10-30 Russian Federation Stage 3: Innovation driven > 17,000 20 50 30 Korea Rep., United States Source: World Economic Forum 2009a 8 | The India Competitiveness Review 2009
  11. 11. The concept of stages of development is integrated capture quantitative factors, such as inflation rate, into the Index by attributing higher relative weights to public debt and educational enrolment rates, and are those Pillars that are more relevant for a country, collected by international organizations, including the given its particular stage of development. To take International Monetary Fund, the World Bank and various this into account, the Pillars are organized into three United Nations agencies. Internationally collected and Subindexes, each critical to a particular stage of validated data ensure its comparability across countries. development (see Figure 3). The survey data gauge dimensions that are more The Basic Requirements Subindex groups those qualitative in nature or for which no hard data are Pillars most critical for countries in the factor-driven available for a large number of countries, but are stage. The Efficiency Enhancers Subindex includes nonetheless crucial to national competitiveness. those Pillars critical for countries in the efficiency- Survey data are derived from the Executive Opinion driven stage. And the Innovation and Sophistication Survey, a study conducted annually by the World Factors Subindex includes the Pillars critical to Economic Forum in collaboration with a network of countries in the innovation-driven stage. The specific Partner institutes located in each of the economies weights attributed to each subindex in every stage covered by the study. In 2009, the Survey was of development are shown in Table 211. administered to over 13,000 business leaders across 133 economies12. The table shows that India is currently in the factor- driven stage of development. Therefore, its Assessing India’s Competitiveness competitiveness depends critically on the first through fourth Pillars. These four Pillars account for India ranks 49th out of 133 economies in the Global a full 60% of the overall GCI weight. The score of Competitiveness Index 2009-2010, up one rank from India on the other two Subindexes, namely Efficiency the previous edition. Looking further back reveals that, Enhancers and Innovation and Sophistication in recent years, India’s performance has been very Factors, account for 35% and 5%, respectively. stable, with a slight measurable improvement as shown in Figure 4. In 2005, India ranked 46th out of 114 The GCI is composed of a combination of hard and economies. Taking into account only the 114 survey data capturing both quantitative and qualitative economies covered that year, India would rank 44th determinants of national competitiveness. Hard data 13 this year – a small gain of two ranks . Figure 4: India’s Performance in the Earliest and Latest Editions of the GCI Rank Edition 2009-2010 2005-2006 within 2005-06 Score (out of 133) sample (out of 114) 1 2 3 4 5 6 7 49 44 46 2005-2006 Global Competitiveness Index 2009-2010 1 s t P illa r: I n s titu tio n s 54 47 40 2 n d P illa r: I n fra s tru c tu re 76 70 71 3 rd P illa r: Macroeconomic Stability 96 84 93 4th Pillar: Health and Primary Education 101 92 92 5th Pillar: Higher Education and Training 66 61 55 6 th P illa r: Goods Market Efficiency 48 45 33 7 th P illa r: Labour Market Efficiency 83 74 49 8th Pillar: Financial Market Sophistication 16 16 34 9 th P illa r: Technological Readines 83 76 58 1 0 th P illa r: Market Size 4 4 4 11 th P illa r: B u s in e s s So p h is tic a tio n 27 27 26 1 2 th P illa r: I n n o v a tio n 30 30 26 Source: World Economic Forum 2009a The India Competitiveness Review 2009 | 9
  12. 12. Table 3 GCI 2009-2010 Results for India and Selected Comparators Table 3.A Overall GCI and Subindexes Global Competitiveness Basic Efficiency Innovation and Index 2009-2010 requirements enhancers sophistication factors Economy Rank Score Rank Score Rank Score Rank Score Malaysia 24 4.87 33 5.12 25 4.76 24 4.43 China 29 4.74 36 5.09 32 4.56 29 4.23 India 49 4.30 79 4.18 35 4.52 28 4.24 Indonesia 54 4.26 70 4.30 50 4.24 40 4.03 Brazil 56 4.23 91 4.04 42 4.41 38 4.08 Russian Federation 63 4.15 64 4.43 52 4.20 73 3.47 Vietnam 75 4.03 92 4.02 61 4.08 55 3.72 Philippines 87 3.90 95 3.94 78 3.91 74 3.45 Pakistan 101 3.58 114 3.53 92 3.69 84 3.39 BRC 56 4.37 64 4.52 42 4.39 38 3.93 Developing Asia (excl. India) 79 4.02 92 4.20 76 3.89 74 3.54 Lower middle income (excl. India) 92 3.84 89.5 4.06 91.5 3.69 92 3.32 OECD 18.5 4.92 23.5 5.28 18.5 4.91 18.5 4.67 Basic 1. Institutions 2. Infrastructure 3. Macroeconomic 4. Health and Table 3.B Basic Requirements Requirements Stability Primary Education Economy Rank Score Rank Score Rank Score Rank Score Rank Score Malaysia 33 5.12 43 4.53 26 5.05 42 5.00 34 5.90 China 36 5.09 48 4.39 46 4.31 8 5.93 45 5.72 Russian Federation 64 4.43 114 3.23 71 3.62 36 5.24 51 5.65 Indonesia 70 4.30 58 4.00 84 3.20 52 4.82 82 5.20 India 79 4.18 54 4.21 76 3.47 96 4.23 101 4.82 Brazil 91 4.04 93 3.50 74 3.50 109 3.93 79 5.24 Vietnam 92 4.02 63 3.93 94 3.00 112 3.86 76 5.28 Philippines 95 3.94 113 3.24 98 2.91 76 4.54 93 5.07 Pakistan 114 3.53 104 3.31 89 3.06 114 3.81 113 3.95 BRC 64 4.52 93 3.70 71 3.81 36 5.03 51 5.54 Developing Asia (excl. India) 92 4.20 73 3.76 89 3.38 76 4.65 82 5.01 Lower middle income (excl. India) 89.5 4.06 97 3.57 80 3.28 78 4.48 86.5 4.92 OECD 23.5 5.28 22.5 4.93 19.5 5.16 41.5 4.98 22 6.05 Table 3.C Efficiency Efficiency 5. Higher Education 6. Goods Market 7. Labour Market 8. Financial Market 9. Technological 10. Market Enhancers Enhancers and Training Efficiency Efficiency Sophistication Readiness Size Economy Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Rank Score Malaysia 25 4.76 41 4.49 30 4.77 31 4.74 6 5.38 37 4.51 28 4.70 China 32 4.56 61 4.09 42 4.47 32 4.74 81 4.05 79 3.38 2 6.63 India 35 4.52 66 3.96 48 4.42 83 4.23 16 5.10 83 3.33 4 6.07 Brazil 42 4.41 58 4.14 99 3.87 80 4.27 51 4.47 46 4.06 10 5.63 Indonesia 50 4.24 69 3.91 41 4.49 75 4.30 61 4.30 88 3.20 16 5.21 Russian Federation 52 4.20 51 4.30 108 3.75 43 4.67 119 3.27 74 3.45 7 5.78 Vietnam 61 4.08 92 3.54 67 4.20 38 4.70 82 4.05 73 3.45 38 4.55 Philippines 78 3.91 68 3.92 95 3.92 113 3.89 93 3.85 84 3.32 35 4.57 Pakistan 92 3.69 118 2.86 83 4.00 124 3.52 64 4.25 104 2.87 30 4.67 BRC 42 4.39 58 4.17 99 4.03 43 4.56 81 3.93 74 3.63 7 6.01 Developing Asia (excl. India) 76 3.89 69 3.54 83 4.11 75 4.31 71 4.11 85 3.15 38 4.11 Lower middle income (excl. India) 91.5 3.69 94 3.56 85 3.98 97 4.11 94 3.83 93.5 3.09 79 3.57 OECD 18.5 4.91 17.5 5.09 19.5 4.83 28 4.72 27.5 4.75 20.5 5.17 28.5 4.88 Table 3.D Business Sophistication and Innovation and 11. Business 12. Innovation Innovation Factors Sophistication Factors Sophistication Economy Rank Score Rank Score Rank Score Malaysia 24 4.43 24 4.80 24 4.06 India 28 4.24 27 4.76 30 3.73 China 29 4.23 38 4.54 26 3.93 Brazil 38 4.08 32 4.64 43 3.52 Indonesia 40 4.03 40 4.49 39 3.57 Vietnam 55 3.72 70 4.00 44 3.45 Russian Federation 73 3.47 95 3.59 51 3.35 Philippines 74 3.45 65 4.06 99 2.84 Pakistan 84 3.39 81 3.80 79 2.98 BRC 38 3.93 38 4.26 43 3.60 Developing Asia (excl. India) 74 3.54 70 3.96 75 3.12 Lower middle income (excl. India) 92 3.32 88.5 3.75 100 2.90 OECD 18.5 4.67 19 4.99 18.5 4.35 Source: World Economic Forum 2009a 10 | The India Competitiveness Review 2009
  13. 13. Tables 3.A to 3.D report the ranks and scores for Compared with the mixed performance in the other India and a number of comparators in the main two Subindexes, India’s performance in the two components of the GCI 2009-2010, while a detailed most complex areas of competitiveness, Business profile of India's performance is presented in Sophistication and Innovation, is remarkable. The Appendix B. Given its present level of development, country ranks 27th for the sophistication of its India’s performance exhibits an unusual pattern. As businesses and 30th for its innovation capacity. This explained above, countries might be expected to reflects, to a large extent, the brisk development of move through a sequence of development steps to India’s private sector and of a few particular build up their competitiveness, starting with the industries (e.g. automotive, information technology more basic factors and moving to more complex (IT), pharmaceuticals). ones. Currently, what matters most for India are the first four Pillars that form the Basic Requirements This is encouraging for several reasons. First, it Subindex, which together account for 60% of the indicates that economic liberalization is bearing fruit, overall score. Interestingly enough, it is in this as the emergence of competitive Indian general area that India presents the greatest multinationals would have been difficult under the shortcomings. The country underperforms in the previous system. Second, business sophistication areas of health and primary education (101st), and innovation will become increasingly important macroeconomic stability (96th) and physical for India and its competitiveness as it moves to more infrastructure (76th). More positive is India's 54th advanced stages of development. Third, there is no rank for the quality of institutions. Although there is doubt that the success stories represent a source of room for improvement in this area, the fact that the inspiration for Indian entrepreneurs. Yet, at present, country can rely on fairly well-functioning institutions these two categories account for just 5% of the can be taken as an encouraging sign. overall GCI score because they are not yet the engine of India’s economic productivity, unlike for the India’s performance in the second Subindex of the United States, Japan or Switzerland. This is because GCI, Efficiency Enhancers, is better, albeit uneven. India can still significantly enhance its productivity This Subindex accounts for 35% of India’s overall through improvements in the more basic areas score in the GCI and is of particular importance to measured by the Index. the development of the industry and services sectors. The country boasts a developed financial In the analysis that follows, India’s performance is system (16th) with a particularly sound banking reviewed in greater detail. To place it in context, we sector (25th). draw parallels with a number of countries: the three other BRIC economies – China, Brazil and Russia – Another competitive advantage is the size of its as well as Indonesia, Malaysia, Pakistan, the market. India ranks fourth behind the United States, Philippines and Vietnam. These particular countries China and Japan on the Market Size Pillar, which have been chosen for their economic significance, combines measures of the size of the internal and their geographical proximity or similar characteristics exports markets. The Indian goods market is also to India, and/or for their particular achievements in fairly efficient (48th), thanks to fierce competition and certain dimensions of the GCI. Aggregate despite the presence of important barriers to entry. performances also provide interesting points of On a more negative note, the difficulty of hiring and reference. We therefore provide the average scores firing employees makes the labour market rather and median ranks of Brazil, Russia and China (BRC), rigid (83rd). The country’s technological readiness the Developing Asia region and the group of lower (83rd) continues to be held back by low penetration middle income countries14. rates for ICT, a problem that is typical of very large developing economies. Firms, however, are generally adept at adopting and using the latest technologies. Finally, higher education in India (66th) is of relatively good quality but access to it remains a privilege of the few as shown by the low enrolment rates. The India Competitiveness Review 2009 | 11
  14. 14. Table 4: The GCI Heat Map: Comparison between India and Selected Comparators Table 4.A Difference in Scores Macroeconomic Stability Technological Readiness Goods Market Efficiency Business Sophistication Labor Market Efficiency Count of pillars where Higher Education and Health and Primary India scores higher Financial Market Sophistication Infrastructure Market Size Institutions Innovation Education Training GCI India (score 1-7) 4.30 4.21 3.47 4.23 4.82 3.96 4.42 4.23 5.10 3.33 6.07 4.76 3.73 Score difference with Malaysia -0.57 -0.32 -1.58 -0.77 -1.08 -0.53 -0.36 -0.52 -0.28 -1.18 +1.37 -0.04 -0.33 1 China -0.43 -0.18 -0.84 -1.70 -0.90 -0.12 -0.05 -0.51 +1.05 -0.05 - 0 .5 6 +0.22 -0.20 2 BRC* -0.07 +0.51 -0.34 -0.80 -0.71 -0.21 + 0. 3 9 - 0 .3 3 +1.17 -0.30 +0.05 +0.50 +0.13 6 Indonesia +0.04 +0.21 +0.28 -0.58 -0.38 +0.05 -0.08 -0.07 +0.80 +0.12 +0.85 +0.27 +0.16 8 Brazil +0.08 +0.71 -0.03 +0.30 -0.42 -0.18 +0.54 -0.05 +0.63 -0.73 +0.44 +0.12 +0.21 7 Russian Federation +0.15 +0.98 -0.14 -1.01 -0.83 -0.34 +0.67 -0.45 +1.84 -0.12 +0.29 +1.17 +0.38 6 Vietnam +0.28 +0.28 +0.47 +0.37 -0.46 +0.42 +0.22 -0.47 +1.05 -0.13 +1.51 +0.77 +0.28 9 Developing Asia* +0.28 +0.45 +0.09 -0.42 -0.19 +0.42 +0.31 -0.08 +0.99 +0.17 +1.96 +0.80 +0.61 9 Philippines +0.40 +0.98 +0.56 -0.31 -0.25 +0.04 +0.50 +0.33 +1.25 +0.01 +1.49 +0.70 +0.89 10 Lower middle income* +0.46 +0.64 +0.19 -0.25 -0.10 +0.40 +0.43 +0.11 +1.28 +0.24 +2.50 +1.01 +0.83 10 Pakistan +0.72 +0.90 +0.42 +0.42 +0.87 +1.10 +0.41 +0.71 +0.85 +0.45 +1.40 +0.96 +0.75 12 * Average score Score difference: Key >1 >0.5 >0.1 >-0.1 >-0.5 >-1 India scores higher Compartor scores higher Technological Readiness Goods Market Efficiency Table 4.B Difference in Ranks Business Sophistication Count of pillars where Higher Education and Health and Primary India ranks higher Financial Market Macroeconomic Labour Market Sophistication Infrastructure Market Size Institutions Innovation Education Efficiency Training Stability GCI India (rank out of 133) 49 54 76 96 101 66 48 83 16 83 4 27 30 Rank difference with Malaysia -25 -11 -50 -54 -67 -25 -18 -52 -10 -46 +24 -3 -6 1 China -20 -6 -30 -88 -56 -5 -6 -51 +65 -4 -2 + 11 -4 2 Indonesia +5 +4 +8 -44 -19 +3 -7 -8 + 45 +5 +1 2 +13 +9 8 B r az i l +7 +39 -2 +13 -22 -8 +51 -3 +35 -37 +6 +5 +13 7 BRC* +7 +39 -5 -60 -50 -8 +51 -40 +65 -9 +3 +1 1 +1 3 6 Russian Federation +14 +60 -5 -60 -50 -15 +60 -40 +103 -9 +3 +68 +21 6 Vietnam +2 6 +9 +18 +16 -25 +26 +1 9 - 45 +66 -10 +34 +4 3 +14 9 Developing Asia* +30 +19 +13 -20 -19 +3 +35 -8 +55 +2 +34 +43 +45 9 Philippines +38 +59 +22 -20 -8 +2 +47 +30 +77 +1 +31 +38 +69 10 Lower middle income* +43 +43 +4 -18 -15 +28 +37 +14 +78 +11 +75 +62 +70 10 Pakistan +52 +50 +13 +18 + 12 +52 +35 +41 +48 +21 +26 +54 +49 12 * Median rank Rank difference: Key >20 >10 >5 >-5 >-10 >-20 India ranks higher Comparator ranks higher Note: see text for details Source: World Economic Forum 2009a The GCI heat map presented in Table 4 complements India’s score (4.3, see first row) in the overall GCI Tables 3.A through 3.D, in that it allows for a reading (first column) is 0.6 lower than that of Malaysia but of India’s performance in the GCI in relative terms. It 0.3 better than the average for Developing Asia. provides a sense of the distance – as measured by Similarly, Table 4.B indicates that India does the difference in scores (Table 4.A) and ranks (Table significantly better in terms of business sophistication 4.B) – that separates India from any given (12th column) than all countries except Malaysia. comparator. Blue-shaded cells and grey-shaded cells indicate that India scores or ranks respectively The heat map mirrors India’s atypical competitiveness higher or lower than the comparator, while no pattern described above. On the right side of both shading means there is no significant divergence. tables, cells are overwhelmingly blue, while the The darker the nuance, the greater the difference in patches of dark grey in the centre of the table reveal performance. Table 4.A shows, for instance, that the areas of relative underperformance, namely 12 | The India Competitiveness Review 2009
  15. 15. macroeconomic stability, health and primary Notably, the protection of property rights, public ethics education, labour market efficiency and technological standards and the efficiency of public administration readiness. The figure shows that China is stronger in are taken into account, together with the security 10 out of the 12 Pillars. On the other hand, India situation in the country. The Private Institutions systematically outperforms its neighbour Pakistan in Subpillar, in turn, measures the quality of corporate all Pillars and by a margin of 20 ranks or more in ethics and accountability displayed by firms. nine of the 12 Pillars. India ranks 54th in the Institutions Pillar, ahead of most 1st Pillar: Institutions of the comparators and clearly standing out within its region and income group. Only Malaysia (43rd), China A transparent, efficient and reliable institutional (48th) and Korea (53rd) – just barely – do better. India’s environment provides the framework within which all performance is similar in each Subpillar, ranking 55th stakeholders of the society – individuals, businesses and 51st for the quality of public institutions and and the government – are able to interact efficiently private institutions, respectively. and create wealth. Economic activity does not take place in a vacuum. The quality of institutions has a The business community is fairly positive with strong bearing on competitiveness and growth. It respect to government efficiency. India ranks above influences investment decisions and the organization most comparators in the rule of law, particularly of production, and plays a central role in the ways thanks to a relatively well-functioning and societies distribute the benefits and bear the costs independent judiciary. On a less positive note, of development strategies and policies. Given this intellectual property protection is perceived as prominent role, the GCI includes the quality of mediocre (61st). This is an area to be strengthened, institutions within the basic requirements of given the importance of the IT and business process competitiveness, crucial for factor-driven economies outsourcing sector in India (see 12th Pillar below). such as India15. Further, reminiscent of the license raj era, government regulation continues to be perceived as The Institutions Pillar has two components, gauging burdensome. India ranks a low 95th on this indicator the quality of public and private institutions, with a score of 2.9, below the regional average of respectively. The Public Institutions Subpillar 3.3. This signals the need for further reforms to assesses different dimensions related to the quality eliminate red tape. and efficiency of the national institutional environment. Figure 5: The Most Problematic Factors for Doing Business in India % of responses 0 5 10 15 20 25 30 Inadequate supply of infrastructure 24.6 Inefficient government bureaucracy 14.0 Corruption 11.0 Restrictive labour regulations 10.6 Access to financing 9.8 Tax regulations 8.0 Policy instability 6.0 Tax rates 4.0 Poor work ethic in national labour force 3.8 Inadequately educated workforce 2.6 Foreign currency regulations 2.3 Inflation 1.0 Government instability/coups 0.9 Poor public health 0.9 Crime and theft 0.4 Source: World Economic Forum’s Executive Opinion Survey 2009 The India Competitiveness Review 2009 | 13
  16. 16. The results also reveal that the business community demonstrate a need for well enforced auditing and has limited trust in its politicians (79th), while accounting standards to better constrain and bureaucratic and administrative corruption, and rent- unmask such behaviour in the future. seeking by a large public sector, continue to restrain its confidence. Indeed, the respondents to the World 2nd Pillar: Infrastructure Economic Forum’s 2009 Executive Opinion Survey selected “bureaucracy” and “corruption”’ as, Well-functioning and extensive infrastructure plays a respectively, the second and third most problematic fundamental role in enhancing the growth prospects of factors for doing business in India after “inadequate an economy. Good infrastructure plays an important infrastructure” (see Figure 5)16. Supporting this role in raising private sector productivity, particularly assessment, Transparency International ranked India the quality of roads, the functioning of roads, 85th out of 180 economies in its 2008 Corruption railroads, ports and air transport, as well as a reliable Perceptions Index17. The government has taken electricity supply and developed telecommunication steps to eliminate some major sources of corruption, network. Widespread quality infrastructure can also for instance, by removing import licenses18. In the greatly reduce income inequality and poverty, fight against corruption, India can rely on its vibrant connecting poor communities to important markets, democracy and press freedom, which help to bring allowing children in remote areas to go to school many such cases to light. and improving health standards by providing potable water, among other benefits. The threat of terrorism is another major concern in that it imposes significant costs on businesses, with India ranks 76th in the Infrastructure Pillar with a India ranked 117th on this measure. Among the score of 3.5 out of 7. China ranks 30 places ahead comparators, Pakistan (131st, third to last) and the at 46th, while Malaysia is in a league of its own in Philippines (124th) appear lower, as do the United 26th place. The entire region suffers from a severe States (121st) and Spain (119th). However, India’s infrastructure deficit, with an average score of 3.4, score of 4.7 (out of 7) remains well above the score even lower than that of India. Since 2003, business of 2.6 of last ranked Colombia. The attacks on leaders responding to the Executive Opinion Survey Mumbai in 2008, the rising tensions in the region, as have consistently ranked “inadequate supply of well as frequent reports of foiled terror plots infrastructure” as the most problematic factor for contribute to a general fear of future attacks and doing business in India (see Figure 5). In fact, in maintain a climate of insecurity. In addition, none of the other comparator countries have corporate interests, especially Western companies, respondents put infrastructure so high and so often are seen to represent a prime target. On a more on their list. positive note, India does not display particularly high levels of other forms of crime and violence. Its score The poor state of India’s infrastructure, and the lack (5.2) is not too far from that of China and – even of it, is among the most serious structural problems more telling – of the OECD average (both 5.4). This holding back the country’s competitiveness and performance sharply contrasts with the rest of the economic development. Without adequate infrastructure, region (average of 4.4), most notably Pakistan (3.2, India will find it difficult to sustain – let alone increase – 119th), but also Brazil (3.3, 118th). its current pace of development. The situation penalizes local businesses and deters foreign investors. Delays As mentioned above, the GCI also assesses the in shipping, power outages, water shortages, quality of private institutions. Although its commuting times, to only name a few of the adverse performance has worsened considerably over the consequences, seriously undermine productivity. past year, India continues to rank at a reasonable 51st place. It is possible that the weaker Looking ahead, infrastructure has also been cited as assessment is related to recent scandals such as one of the main obstacles to the transition from an the accounting fraud perpetrated at Satyam, which agrarian economy to a manufacturing-based shook the confidence of the business community in economy, a transition that will be needed to create India and around the world. This would seem to new jobs for the growing working-age population. 14 | The India Competitiveness Review 2009
  17. 17. Even the most basic manufacturing activities at a In addition to low profitability, the sector remains minimum require a reliable source of electricity and heavily regulated and dominated by public utility decent roads. companies – a drag for investors. Things could get worse, as the demand for electricity is expected to Electricity is perhaps the biggest infrastructure challenge. grow at least as fast as the GDP – and possibly India ranks 106th for the quality of the electricity faster if the share in the economy of the energy- supply, lower than all comparators. A 2006 survey by intensive manufacturing sector increases. the World Bank found that 29% of managers identified electricity as a “major” or “severe” constraint to the Road infrastructure also needs upgrading. India growth of their business19. In 2007, demand ranks 89th for the quality of roads, far behind China outstripped supply by almost 15%20. As Figure 6 (50th) and Pakistan (65th) but ahead of Indonesia shows, electricity production per unit of GDP (94th) and the Philippines (104th). Roads are of increased until 2000 but has been declining steadily paramount importance to India’s development: they since then. The ratio is now close to one kilowatt hour carry 65% of freight and 85% of passenger traffic23. per unit of GDP. For China, the situation is almost the Yet, the 3.4 million kilometre-long network – the reverse and appears much more favourable. world’s second largest and 50% longer than China’s – is in poor condition, with half of it unpaved24. It is also Not only does India suffer from serious electric congested and dangerous. In 2007, 130,000 people under-capacity, but much of its production is lost in perished in car accidents, 60% more than in China transmission and distribution. Figure 6 reveals that, where there are four times as many cars25. Without in 2006, a staggering 25% of India’s electricity infrastructure improvements, the situation is likely to production was lost before reaching destination. get worse, as the government projects an annual Although improving since 2001 when the figure was increase of 12-15% in traffic in the comings years. 29%, it is four times the amount in China (6.3%). Inevitably, this has a negative impact on profitability; India’s port infrastructure is also in need of the government estimated that, in 2007, it did not upgrading. According to a report by Ernst & Young receive any revenue for 34% of the power pumped (2008), Indian ports are operating at more than 90% into the grid because of theft or leakages21, although capacity. The Indian ports sector has lined up a this is admittedly an improvement from 2000, when major capacity overhaul, but low productivity and an OECD study put this figure at 40%22. infrastructure bottlenecks continue to stifle the performance of the country's major ports. Handling capacity is insufficient, turnaround times are too Figure 6: Electricity Production and Losses Production Loses India China kWh per unit of GDP % of losses Indonesia 1.5 30% 1 20% 0.5 10% 0 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Authors’ analysis based on World Bank 2009a The India Competitiveness Review 2009 | 15