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Thierry Geiger, World Economic Forum Sushant Palakurthi Rao, World Economic Forum
In collaboration with Confederation of Indian Industry PricewaterhouseCoopers
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.
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Preface Executive Summary Assessing India’s Competitiveness: Insights from the Global Competitiveness Index Thierry Geiger and Sushant Palakurthi Rao, World Economic Forum An Evaluation of India’s Economic Reforms Bidisha Ganguly and Tanvi Garg, Confederation of Indian Industry India’s Competitiveness: The View from CEOs N. Ramesh Rajan and Jairaj Purandare, PricewaterhouseCoopers, India Acknowledgements
The India Competitiveness Review 2009 | 1
The India Competitiveness Review 2009 is being published at an important moment for India’s economic development. India has experienced two decades of remarkable growth, unleashed by the implementation of important reforms in the early 1990s. This impressive economic performance, coupled with a population of 1.2 billion, leaves no doubt that India is an important player in the global economy. Despite these clear strengths, India has not been spared the fallout of the global economic crisis, with growth slowing significantly in 2008 and 2009. The slowdown underscores the importance of putting into place the factors and policies that will ensure sustained economic growth and prosperity for the benefit of all Indians. As the world slowly emerges from the crisis, the time is propitious for India to take stock of its competitive strengths, as well as those areas hindering its development. This year also marks the 25th anniversary of the World Economic Forum’s engagement in India, providing an excellent opportunity to reflect upon how the country's 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.
We would like to express our gratitude to the distinguished experts from the Confederation of Indian Industry and PricewaterhouseCoopers, who have contributed excellent papers to the review, casting light on different aspects key to enhancing India’s competitiveness. We especially wish to thank the editors of the review, Thierry Geiger and Sushant Palakurthi Rao, for their leadership and commitment. Appreciation also goes to Robert Greenhill, Chief Business Officer at the Forum, and Jennifer Blanke, Head of the Global Competitiveness Network, as well as her team: Ciara Browne, Margareta Drzeniek Hanouz, Irene Mia, Carissa Sahli, Pearl Samandari and Eva Trujillo Herrera. In addition, this review would not have been possible without the hard work and enthusiasm of our network of 150 Partner Institutes worldwide who carry out the Executive Opinion Survey, which provides the basis of this review. Klaus Schwab Founder and Executive Chairman World Economic Forum
2 | The India Competitiveness Review 2009
Assessing India’s Competitiveness: Insights from the Global Competitiveness Index In the first chapter, Thierry Geiger and Sushant Palakurthi Rao, both at the World Economic Forum, use the results of the Global Competitiveness Index (GCI) to carry out an in-depth assessment of India’s competitiveness landscape. The GCI provides a methodological framework to assess “the set of institutions, policies and factors that determine the level of productivity of a country.” It comprises a large number of drivers of competitiveness organized in 12 categories – the 12 “Pillars” of competitiveness. Countries are expected to move through a sequence of development steps to build up their competitiveness, starting with the more basic factors (e.g. institutions, infrastructure, health, education) and moving to more complex ones (e.g. technological readiness, business sophistication, innovation). To mirror this sequence, the GCI classifies countries into three stages of development (factordriven, efficiency-driven and innovation-driven) and attributes different weights to each Pillar by function of the stage of development. That is, the more advanced a country, the less weight on the basic factors and the more weight on the more complex ones. India ranks 49th out of 133 economies in the GCI 2009-2010, up one rank from the previous edition. Given India’s present level of development, its competitiveness is factor-driven. What matters most for India are the first four Pillars that form the Basic Requirements Subindex, which together account for 60% of the overall GCI score. It is precisely in this Subindex that India presents the greatest shortcomings. The country very much underperforms in the Health and Primary Education Pillar (101st). The sanitary situation is particularly alarming, with some indicators comparing unfavourably even with the sub-Saharan Africa region. Both the quality and quantity of education are insufficient. India has been running cavernous deficits, weighing heavily on its performance in the Macroeconomic Stability Pillar (96th). Energy and transport infrastructures are in a state of disrepair (76th). In this context, India’s rank of 54th for the quality of institutions is encouraging, although corruption and security remain major issues. India’s performance in the second Subindex, Efficiency Enhancers, is better, albeit uneven. This Subindex accounts for 35% of India’s GCI score and
is of particular importance to the development of the industry and services sectors. The country boasts a developed financial system (16th) with a particularly sound banking sector (25th). Another competitive advantage is the size of its market (4th overall). The Indian goods market is also fairly efficient (48th) thanks to fierce competition and despite the presence of important barriers to entry. On a more negative note, the difficulty of hiring and firing employees makes the labour market rigid (83rd). The country’s technological readiness (83rd) continues to be held back by low penetration rates for information and communications technologies. 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. Compared with the mixed performance in the other two Subindexes, India’s showing in the two most complex areas of competitiveness, Business Sophistication (27th) and Innovation (30th), is truly remarkable. This reflects, to a large extent, the brisk development of India’s private sector and of a few industries in particular. Yet, at present, these two categories account for just 5% of the overall GCI score because they are not yet the engine of India’s productivity. To place India’s performance in context, the authors draw parallels with a number of countries and country groups. The analysis reveals that India lags behind almost all comparators in the areas of health and primary education, labour markets, technological readiness and macroeconomic stability. China ranks ahead of India in 10 out of the 12 Pillars – often by a wide margin. However, India possesses a number of competitive advantages in several Pillars, namely Institutions, Financial Market Sophistication, Market Size, Business Sophistication and Innovation. India has come a long way since 1991 to become one of the world’s fastest growing economies. This is not only remarkable, but also necessary: India needs to continue growing at this pace and, possibly, faster to create enough jobs, prevent social unrest and raise the living standards of all Indians. To achieve that, the country will have to address in a prompt and decisive manner the many shortcomings identified in this analysis.
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An Evaluation of India’s Economic Reforms In the second chapter, Bidisha Ganguly and Tanvi Garg from the Confederation of Indian Industry, examine some of the sources of strength for the Indian economy, as well as the challenges faced by policymakers in addressing the critical needs for fostering more inclusive growth and development; this would reinforce the country’s productivity and competitiveness. The Indian economy has gained strength from the recent period of comparative macroeconomic stability, characterized by acceleration in growth, a surge in domestic savings and investment, and healthy corporate performance. The structure of the economy has also undergone considerable change in the last decade, as India has been integrating more into the world economy. Going forward, there are several factors favouring India’s competitiveness. These include the relatively inexpensive and skilled labour force – India’s demographic dividend – the availability of key raw materials and a large and fast growing domestic market. Yet, much remains to be done. Policy-makers need to focus on significantly reducing poverty and improving living standards. One of the key challenges is to provide quality employment to the large number of people entering the workforce, as well as to those leaving the agriculture sector. So far and despite brisk growth, the benefits in terms of job creation have been relatively limited. Much also needs to be done to improve the situation in the areas of health and education. Public spending has been increasing in these areas through several initiatives, but this needs to be amplified. The third area where the government needs to focus is infrastructure, in particular power and transport infrastructure, which face major shortages made worse by rapid economic growth. Upgrading infrastructure will require a considerable step-up in private and public investment. Lately, the government has been focusing on urgent measures to soften the impact of the global economic crisis. Now that India’s economy is recovering from the crisis, the authors conclude that it is a good time for policymakers to shift focus back on longer-term imperatives. India’s competitiveness: The View from CEOs In the third chapter, N. Ramesh Rajan and Jairaj Purandare, both at PricewaterhouseCoopers, India, present the findings of PricewaterhouseCoopers’ 13th
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Annual Global CEO Survey, conducted in September 2009. The survey reveals that despite the global economic crisis, an optimistic sentiment prevails in India. Sixty-two chief executive officers (CEOs) of Iarge Indian companies indicated that their confidence was high, with 97% either very confident or somewhat confident of their revenue growth prospects over the coming 12 months. Underlying this confidence is the CEOs’ belief that the country’s economy is well on its way to recovery, with nearly two-thirds expecting recovery by the middle of 2010. South Asia, China and the United States will be the most important markets outside of India during the recovery. India’s rise in global competitiveness is widely associated with its services sector, which is forecast to represent over 90% of economic growth in 2010. Still, 42% of CEOs surveyed believe the country’s manufacturing sector has improved its global competitiveness since the financial crisis began, with many citing cost competitiveness and productivity gains as drivers. This suggests a diversification of India’s global capabilities is underway, with manufacturing growth complementing India’s vaunted services industries. It also points to a different set of competitors on the global stage: 34% of Indian CEOs expect manufacturing powerhouse China to be India’s greatest competitor in global markets during the recovery, while only 6% of them named the United States. For this diversification to take place, however, CEOs consistently say the country still needs to develop its infrastructure. A shift towards manufacturing will only make the deficit, including in transportation infrastructure, more acute. What is more, CEOs believe an educated workforce has been vital to India’s past competitiveness, but the country will need to step up its investment in education – at every level – to sustain growth. The potential for labour shortages remains in all industries. A majority of Indian CEOs expressed concern about 19 of the 20 potential threats to growth that were surveyed, including exchange rate volatility, a protracted global recession, over-regulation, terrorism and energy costs. Accordingly, more CEOs reported they are planning to change their risk management functions than other corporate functions. The desire to avoid or mitigate systemic risks is likely to be an enduring legacy of the global economic crisis.
Assessing India’s Competitiveness: Insights from the Global Competitiveness Index
Thierry Geiger and Sushant Palakurthi Rao, World Economic Forum
The publication of The India Competitiveness Review comes at a critical time for India’s economy. The severity of the global economic crisis – the worst since the Great Depression – has demonstrated the fragility of economic growth among industrialized and developing countries alike. India has not been spared its fallout. Growth slowed from a brisk 9.4% in 2007 to 7.4% in 2008, and is expected to fall to 5.4% in 20091. The recent turmoil underscores the importance of not losing sight of long-term competitiveness fundamentals amid short-term urgencies. Competitive economies are those that have in place factors driving the productivity enhancements on which their present and future prosperity are built. Now that the world appears to be slowly emerging from the crisis, the time is propitious for India to take stock of its competitive strengths, as well as those areas hindering its development. This year marks the 25th anniversary of the World Economic Forum’s engagement in India, providing an excellent opportunity to reflect on how India’s competitiveness has progressed over the period and what remains to be achieved to ensure a prosperous future.
From an economic standpoint, the past two decades have been remarkable for India. In 1991, the Indian government unleashed an unprecedented programme of economic reforms that put India on the path of sustained growth (see Figure 1). GDP grew at an annualized rate of 6.2% between 1991 and 20082. This contrasts sharply with the three decades that followed independence in 1947, which had been characterized by inward-looking policies and a complex system of socialist economic controls – the infamous license raj – heavy state interventionism and central planning. This system resulted in erratic, lacklustre growth rates, on average 4% per year between 1960 and 1991. The 1990s therefore marked a turning point in India’s history. India is now one of the fastest growing economies and, with a population of 1.2 billion, is the world’s second most populous country. There is no doubt India is an increasingly important player in the global economy. However, India is not yet one of the world economy’s engines. Its economy is the smallest among the four emerging market BRIC economies and the world’s 12th largest (see Table 1)3. Further, India systematically lags behind China and many large emerging economies in several measures of economic and social performance. Its GDP per capita is just US$ 1,000, one-third of China’s and
Figure 1: India’s GDP and GDP Per Capita Growth
Real GDP*, $ billion 1,000
Real GDP*/ capita, $ 1,000
800 CAGR +6.3%** 600
400 CAGR +4.0%** 200
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
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Table 1: Selected Indicators for the BRIC Countries GCI 2009-2010 rank (out of 133) GDP (US$ billion)* 2008 GDP per capita (US$), 2008 GDP CAGR (%) 1991-2008** Population (millions) 2008 2050
China India Brazil Russian Federation
29 49 56 63
4,327 1,207 1,573 1,677
3,259 1,017 8,295 11,807
9.8 6.2 2.9 1.9
1,336 1,186 194 142
1,409 1,658 254 108
* Current prices. **1992-2008 for Russian Federation Source: IMF 2009a; UNFPA 2008; World Economic Forum 2009
one-eighth of Brazil’s4. As of 2005, according to the World Bank, some 42% of Indians still lived below the extreme poverty line of US$ 1.25 a day, down from 54% in 1988 (see Figure 2)5. Over the same period, extreme poverty in China dropped from 54% to 16%. India ranks 134th in the latest Human Development Index (HDI) not only far behind China (92nd), but also the Philippines (105th) and Indonesia (111th)6. Life expectancy in India is just 64 years, 8 years less than in China, while the infant mortality rate is three times China’s rate. Trade and investment data also reveal the gap between India and China. In 2007, foreign direct investment (FDI) in India amounted to US$ 23 billion, four times less than into China, while exports of goods and services amounted to US$ 239 compared with US$1,340 billion – a higher figure than India’s overall GDP – for China7.
In sum, India has come a long way, but still has significant room for improvement to ensure strong and inclusive economic growth in the coming years. The country will have to leverage its competitive strengths and overcome obstacles to enhanced competitiveness and productivity. The World Economic Forum’s Global Competitiveness Index (GCI) represents a valuable tool for identifying and measuring the obstacles and drivers of India’s productivity and competitiveness. It also allows for insightful comparative analysis with relevant countries and regions. The next section presents an overview of the GCI methodology and data used to assess the competitiveness of nations. The section that follows provides an overview of India’s performance in the
Figure 2: Poverty Trends in India and Selected Comparators: Percentage of Population Living on Less Than US$ 1.25 a Day (PPP)
% of population 100
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: World Bank 2009a
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GCI as well as an analysis of each Pillar. The final section provides some general conclusions about India’s competitiveness landscape.
Below is a brief description of each Pillar composing the GCI9. Appendix A provides a detailed structure of the Index. 1st Pillar: Institutions – The quality of public and private institutions, including perceived fairness and transparency of public institutions, government efficiency, security level and corporate governance 2nd Pillar: Infrastructure – The quality and extent of general and specific basic infrastructure, including roads, railroads, ports, air transport and fixed telephony 3rd Pillar: Macroeconomic Stability – The soundness of the macroeconomic environment 4th Pillar: Health and Primary Education – The general health level of a country’s population and the quality of and access to basic education 5th Pillar: Higher Education and Training – The quality of and access to secondary and universitylevel education and effectiveness of on-the-job training 6th Pillar: Goods Market Efficiency – The extent of domestic and foreign competition in a given market and the quality of demand conditions
The Global Competitiveness Index Framework
Introduced in 2004, the Global Competitiveness Index has become one of the most respected and broadly used tools to assess competitiveness. Developed by Professor Xavier Sala-i-Martin of Columbia University and the World Economic Forum, the GCI is a highly comprehensive index that captures the microeconomic and macroeconomic foundations of national competitiveness. Competitiveness is defined as “the set of institutions, policies and factors that determine the level of productivity of a country.”8 Taking into account the complex nature of competitiveness, the Index identifies 12 Pillars of Competitiveness (see Figure 3), reflecting the diverse and interrelated factors that have a bearing on national long-term potential for sustained growth.
Figure 3: The 12 Pillars of the Global Competitiveness Index
BASIC REQUIREMENTS 1. Institutions 2. Infrastructure 3. Macroeconomic Stability 4. Health and Primary Education Key for FACTOR-DRIVEN economies
EFFICIENCY ENHANCERS 5. Higher Education and Training 6. Goods Market Efficiency 7. Labor Market Efficiency 8. Financial Market Sophistication 9. Technological Readiness 10. Market Size SOPHISTICATION & INNOVATION FACTORS 11. Business Sophistication 12. Innovation
Source: World Economic Forum 2009a
Key for EFFICIENCY-DRIVEN economies
Key for INNOVATION-DRIVEN economies
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7th Pillar: Labour Market Efficiency – The flexibility of the labour market and the degree to which it ensures the efficient allocation and use of talent 8th Pillar: Financial Market Sophistication – The sophistication and trustworthiness of financial markets 9th Pillar: Technological Readiness – The penetration of information and communication technologies (ICT) and countries’ capacity to leverage technology and knowledge, notably through FDI, and in their production systems 10th Pillar: Market Size – The size of the domestic and foreign markets available for firms operating in a given country 11th Pillar: Business Sophistication – At the firm level, the degree of sophistication of operations and company strategies and the presence and development of clusters 12th Pillar: Innovation – The national potential to generate endogenous innovation Underpinning this methodological framework is the idea that, although all 12 Pillars matter in determining competitiveness, each does so to a varying extent, depending on each country's specific stage of development. Factors that crucially drive national competitiveness evolve as economies move along the development path. In this sense, the GCI builds upon well-known theories of stages of development10 classifying economies into three stages: factor-driven, efficiency-driven and innovation-driven. In the initial factor-driven stage, countries compete based on their factor endowments – primarily unskilled labour and natural resources – and their economies are centred on commodities and/or basic manufactured products. Efficient public and private
institutions (1st Pillar); well-developed infrastructure (2nd Pillar); good macroeconomic fundamentals (3rd Pillar); and a healthy and literate labour force (4th Pillar) are critical for competitiveness at this stage. As countries progress to the efficiency-driven stage, their competitiveness becomes increasingly based upon well-functioning factor markets and efficient production processes and practices at the firm level. Important elements at this stage include quality higher education and training (5th Pillar); efficient markets for goods and services (6th Pillar); flexible and well-functioning labour markets (7th Pillar); sophisticated financial markets (8th Pillar); the ability to leverage existing technologies, notably ICT, in the national production system (9th Pillar); and a large domestic and/or foreign market allowing for economies of scale (10th Pillar). In the most advanced, innovation-driven stage, countries are able to sustain higher wages and the associated standard of living only if their businesses are able to compete with new and unique products. At this stage, companies must compete through innovation (12th Pillar), producing new and different goods using the most sophisticated production processes (11th Pillar). Countries are allocated to the different stages of development according to their level of GDP per capita at market exchange rates, used as a proxy for wages. This criterion is complemented by a second one measuring the extent to which countries are factor driven, using as a proxy the share of exports of mineral products in total exports (goods and services); the assumption is that countries that export more than 70% of mineral products (measured using a five-year average) are, to a large extent, factor driven.
Table 2: Weights and Thresholds of the Three Subindexes per Stage of Development
Weight (%) of Subindex in overall GCI Stage of development GDP per capita (in US$) Basic requirements Efficiency enhancers Sophistication and innovation factors Examples of countries in that stage
Stage 1: Factor driven Transition from stage 1 to 2 Stage 2: Efficiency driven Transition from stage 2 to 3 Stage 3: Innovation driven
Source: World Economic Forum 2009a
< 2,000 2,000-3,000 3,000-9,000 9,000-17,000 > 17,000
60 40-60 40 20-40 20
35 35-50 50 50 50
5 5-10 10 10-30 30
India, Pakistan, Philippines, Vietnam Indonesia Brazil, China, Malaysia Russian Federation Korea Rep., United States
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The concept of stages of development is integrated into the Index by attributing higher relative weights to those Pillars that are more relevant for a country, given its particular stage of development. To take this into account, the Pillars are organized into three Subindexes, each critical to a particular stage of development (see Figure 3). The Basic Requirements Subindex groups those Pillars most critical for countries in the factor-driven stage. The Efficiency Enhancers Subindex includes those Pillars critical for countries in the efficiencydriven stage. And the Innovation and Sophistication Factors Subindex includes the Pillars critical to countries in the innovation-driven stage. The specific weights attributed to each subindex in every stage of development are shown in Table 211. The table shows that India is currently in the factordriven stage of development. Therefore, its competitiveness depends critically on the first through fourth Pillars. These four Pillars account for a full 60% of the overall GCI weight. The score of India on the other two Subindexes, namely Efficiency Enhancers and Innovation and Sophistication Factors, account for 35% and 5%, respectively. The GCI is composed of a combination of hard and survey data capturing both quantitative and qualitative determinants of national competitiveness. Hard data
capture quantitative factors, such as inflation rate, public debt and educational enrolment rates, and are collected by international organizations, including the International Monetary Fund, the World Bank and various United Nations agencies. Internationally collected and validated data ensure its comparability across countries. The survey data gauge dimensions that are more qualitative in nature or for which no hard data are available for a large number of countries, but are nonetheless crucial to national competitiveness. Survey data are derived from the Executive Opinion Survey, a study conducted annually by the World Economic Forum in collaboration with a network of Partner institutes located in each of the economies covered by the study. In 2009, the Survey was administered to over 13,000 business leaders across 133 economies12.
Assessing India’s Competitiveness
India ranks 49th out of 133 economies in the Global Competitiveness Index 2009-2010, up one rank from the previous edition. Looking further back reveals that, in recent years, India’s performance has been very stable, with a slight measurable improvement as shown in Figure 4. In 2005, India ranked 46th out of 114 economies. Taking into account only the 114 economies covered that year, India would rank 44th 13 this year – a small gain of two ranks .
Figure 4: India’s Performance in the Earliest and Latest Editions of the GCI
Edition 2009-2010 within 2005-06 sample (out of 133) 49 54 76 96 101 66 48 83 16 83 4 27 30 44 47 70 84 92 61 45 74 16 76 4 27 30 2005-2006
(out of 114) 46 40 71 93 92 55 33 49 34 58 4 26 26
Global Competitiveness Index
1 s t P illa r: I n s titu tio n s 2 n d P illa r: I n fra s tru c tu re 3 rd P illa r: Macroeconomic Stability 4th Pillar: Health and Primary Education 5th Pillar: Higher Education and Training 6 th P illa r: Goods Market Efficiency 7 th P illa r: Labour Market Efficiency 8th Pillar: Financial Market Sophistication 9 th P illa r: Technological Readines 1 0 th P illa r: Market Size 11 th P illa r: B u s in e s s So p h is tic a tio n 1 2 th P illa r: I n n o v a tio n
Source: World Economic Forum 2009a
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Table 3 GCI 2009-2010 Results for India and Selected Comparators
Table 3.A Overall GCI and Subindexes
Economy Malaysia China India Indonesia Brazil Russian Federation Vietnam Philippines Pakistan BRC Developing Asia (excl. India) Lower middle income (excl. India) OECD
Global Competitiveness Index 2009-2010 Rank 24 29 49 54 56 63 75 87 101 56 79 92 18.5 Basic Requirements Rank 33 36 64 70 79 91 92 95 114 64 92 89.5 23.5 Score 5.12 5.09 4.43 4.30 4.18 4.04 4.02 3.94 3.53 4.52 4.20 4.06 5.28 Score 4.87 4.74 4.30 4.26 4.23 4.15 4.03 3.90 3.58 4.37 4.02 3.84 4.92
Basic requirements Rank 33 36 79 70 91 64 92 95 114 64 92 89.5 23.5 Score 5.12 5.09 4.18 4.30 4.04 4.43 4.02 3.94 3.53 4.52 4.20 4.06 5.28
Efficiency enhancers Rank 25 32 35 50 42 52 61 78 92 42 76 91.5 18.5 Score 4.76 4.56 4.52 4.24 4.41 4.20 4.08 3.91 3.69 4.39 3.89 3.69 4.91
Innovation and sophistication factors Rank 24 29 28 40 38 73 55 74 84 38 74 92 18.5 Score 4.43 4.23 4.24 4.03 4.08 3.47 3.72 3.45 3.39 3.93 3.54 3.32 4.67
Table 3.B Basic Requirements
Economy Malaysia China Russian Federation Indonesia India Brazil Vietnam Philippines Pakistan BRC Developing Asia (excl. India) Lower middle income (excl. India) OECD
1. Institutions Rank 43 48 114 58 54 93 63 113 104 93 73 97 22.5 Score 4.53 4.39 3.23 4.00 4.21 3.50 3.93 3.24 3.31 3.70 3.76 3.57 4.93
2. Infrastructure Rank 26 46 71 84 76 74 94 98 89 71 89 80 19.5 Score 5.05 4.31 3.62 3.20 3.47 3.50 3.00 2.91 3.06 3.81 3.38 3.28 5.16
3. Macroeconomic Stability Rank 42 8 36 52 96 109 112 76 114 36 76 78 41.5 Score 5.00 5.93 5.24 4.82 4.23 3.93 3.86 4.54 3.81 5.03 4.65 4.48 4.98
4. Health and Primary Education Rank 34 45 51 82 101 79 76 93 113 51 82 86.5 22 Score 5.90 5.72 5.65 5.20 4.82 5.24 5.28 5.07 3.95 5.54 5.01 4.92 6.05
Table 3.C Efficiency Enhancers
Economy Malaysia China India Brazil Indonesia Russian Federation Vietnam Philippines Pakistan BRC Developing Asia (excl. India) Lower middle income (excl. India) OECD
Efficiency Enhancers Rank Score 25 32 35 42 50 52 61 78 92 42 76 91.5 18.5 4.76 4.56 4.52 4.41 4.24 4.20 4.08 3.91 3.69 4.39 3.89 3.69 4.91
5. Higher Education 6. Goods Market 7. Labour Market 8. Financial Market 9. Technological and Training Efficiency Efficiency Sophistication Readiness Rank 41 61 66 58 69 51 92 68 118 58 69 94 17.5 Score 4.49 4.09 3.96 4.14 3.91 4.30 3.54 3.92 2.86 4.17 3.54 3.56 5.09 Rank 30 42 48 99 41 108 67 95 83 99 83 85 19.5 Score 4.77 4.47 4.42 3.87 4.49 3.75 4.20 3.92 4.00 4.03 4.11 3.98 4.83 Rank Score 31 32 83 80 75 43 38 113 124 43 75 97 28 4.74 4.74 4.23 4.27 4.30 4.67 4.70 3.89 3.52 4.56 4.31 4.11 4.72 Rank 6 81 16 51 61 119 82 93 64 81 71 94 27.5 Score 5.38 4.05 5.10 4.47 4.30 3.27 4.05 3.85 4.25 3.93 4.11 3.83 4.75 Rank 37 79 83 46 88 74 73 84 104 74 85 93.5 20.5 Score 4.51 3.38 3.33 4.06 3.20 3.45 3.45 3.32 2.87 3.63 3.15 3.09 5.17
10. Market Size Rank 28 2 4 10 16 7 38 35 30 7 38 79 28.5 Score 4.70 6.63 6.07 5.63 5.21 5.78 4.55 4.57 4.67 6.01 4.11 3.57 4.88
Table 3.D Business Sophistication and Innovation Factors
Economy Malaysia India China Brazil Indonesia Vietnam Russian Federation Philippines Pakistan BRC Developing Asia (excl. India) Lower middle income (excl. India) OECD Source: World Economic Forum 2009a
Innovation and Sophistication Factors Rank Score 24 28 29 38 40 55 73 74 84 38 74 92 18.5 4.43 4.24 4.23 4.08 4.03 3.72 3.47 3.45 3.39 3.93 3.54 3.32 4.67
11. Business Sophistication Rank Score 24 27 38 32 40 70 95 65 81 38 70 88.5 19 4.80 4.76 4.54 4.64 4.49 4.00 3.59 4.06 3.80 4.26 3.96 3.75 4.99
12. Innovation Rank 24 30 26 43 39 44 51 99 79 43 75 100 18.5 Score 4.06 3.73 3.93 3.52 3.57 3.45 3.35 2.84 2.98 3.60 3.12 2.90 4.35
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Tables 3.A to 3.D report the ranks and scores for India and a number of comparators in the main components of the GCI 2009-2010, while a detailed profile of India's performance is presented in Appendix B. Given its present level of development, India’s performance exhibits an unusual pattern. As explained above, countries might be expected to move through a sequence of development steps to build up their competitiveness, starting with the more basic factors and moving to more complex ones. Currently, what matters most for India are the first four Pillars that form the Basic Requirements Subindex, which together account for 60% of the overall score. Interestingly enough, it is in this general area that India presents the greatest shortcomings. The country underperforms in the areas of health and primary education (101st), macroeconomic stability (96th) and physical infrastructure (76th). More positive is India's 54th rank for the quality of institutions. Although there is room for improvement in this area, the fact that the country can rely on fairly well-functioning institutions can be taken as an encouraging sign. India’s performance in the second Subindex of the GCI, Efficiency Enhancers, is better, albeit uneven. This Subindex accounts for 35% of India’s overall score in the GCI and is of particular importance to the development of the industry and services sectors. The country boasts a developed financial system (16th) with a particularly sound banking sector (25th). Another competitive advantage is the size of its market. India ranks fourth behind the United States, China and Japan on the Market Size Pillar, which combines measures of the size of the internal and exports markets. The Indian goods market is also fairly efficient (48th), thanks to fierce competition and despite the presence of important barriers to entry. On a more negative note, the difficulty of hiring and firing employees makes the labour market rather rigid (83rd). The country’s technological readiness (83rd) continues to be held back by low penetration 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.
Compared with the mixed performance in the other two Subindexes, India’s performance in the two most complex areas of competitiveness, Business Sophistication and Innovation, is remarkable. The country ranks 27th for the sophistication of its businesses and 30th for its innovation capacity. This reflects, to a large extent, the brisk development of India’s private sector and of a few particular industries (e.g. automotive, information technology (IT), pharmaceuticals). This is encouraging for several reasons. First, it indicates that economic liberalization is bearing fruit, as the emergence of competitive Indian multinationals would have been difficult under the previous system. Second, business sophistication and innovation will become increasingly important for India and its competitiveness as it moves to more advanced stages of development. Third, there is no doubt that the success stories represent a source of inspiration for Indian entrepreneurs. Yet, at present, these two categories account for just 5% of the overall GCI score because they are not yet the engine of India’s economic productivity, unlike for the United States, Japan or Switzerland. This is because India can still significantly enhance its productivity through improvements in the more basic areas measured by the Index. In the analysis that follows, India’s performance is reviewed in greater detail. To place it in context, we draw parallels with a number of countries: the three other BRIC economies – China, Brazil and Russia – as well as Indonesia, Malaysia, Pakistan, the Philippines and Vietnam. These particular countries have been chosen for their economic significance, their geographical proximity or similar characteristics to India, and/or for their particular achievements in certain dimensions of the GCI. Aggregate performances also provide interesting points of reference. We therefore provide the average scores and median ranks of Brazil, Russia and China (BRC), the Developing Asia region and the group of lower middle income countries14.
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Table 4: The GCI Heat Map: Comparison between India and Selected Comparators
Macroeconomic Stability Technological Readiness
Goods Market Efficiency
Labor Market Efficiency
Table 4.A Difference in Scores
Financial Market Sophistication
India (score 1-7) Score difference with Malaysia China BRC* Indonesia Brazil Russian Federation Vietnam Developing Asia* Philippines Lower middle income* Pakistan * Average score
4.30 -0.57 -0.43 -0.07 +0.04 +0.08 +0.15 +0.28 +0.28 +0.40 +0.46 +0.72
4.21 -0.32 -0.18 +0.51 +0.21 +0.71 +0.98 +0.28 +0.45 +0.98 +0.64 +0.90
3.47 -1.58 -0.84 -0.34 +0.28 -0.03 -0.14 +0.47 +0.09 +0.56 +0.19 +0.42
4.23 -0.77 -1.70 -0.80 -0.58 +0.30 -1.01 +0.37 -0.42 -0.31 -0.25 +0.42
4.82 -1.08 -0.90 -0.71 -0.38 -0.42 -0.83 -0.46 -0.19 -0.25 -0.10 +0.87
3.96 -0.53 -0.12 -0.21 +0.05 -0.18 -0.34 +0.42 +0.42 +0.04 +0.40 +1.10
4.42 -0.36 -0.05 + 0. 3 9 -0.08 +0.54 +0.67 +0.22 +0.31 +0.50 +0.43 +0.41
4.23 -0.52 -0.51 - 0 .3 3 -0.07 -0.05 -0.45 -0.47 -0.08 +0.33 +0.11 +0.71
5.10 -0.28 +1.05 +1.17 +0.80 +0.63 +1.84 +1.05 +0.99 +1.25 +1.28 +0.85
3.33 -1.18 -0.05 -0.30 +0.12 -0.73 -0.12 -0.13 +0.17 +0.01 +0.24 +0.45
6.07 +1.37 - 0 .5 6 +0.05 +0.85 +0.44 +0.29 +1.51 +1.96 +1.49 +2.50 +1.40
4.76 -0.04 +0.22 +0.50 +0.27 +0.12 +1.17 +0.77 +0.80 +0.70 +1.01 +0.96
3.73 -0.33 -0.20 +0.13 +0.16 +0.21 +0.38 +0.28 +0.61 +0.89 +0.83 +0.75
Key >1 >0.5 >0.1 India scores higher
>-0.1 >-0.5 >-1 Compartor scores higher
Higher Education and Training
Financial Market Sophistication
India (rank out of 133) Rank difference with Malaysia China Indonesia B r az i l BRC* Russian Federation Vietnam Developing Asia* Philippines Lower middle income* Pakistan * Median rank
49 -25 -20 +5 +7 +7 +14 +2 6 +30 +38 +43 +52
54 -11 -6 +4 +39 +39 +60 +9 +19 +59 +43 +50
76 -50 -30 +8 -2 -5 -5 +18 +13 +22 +4 +13
96 -54 -88 -44 +13 -60 -60 +16 -20 -20 -18 +18
101 -67 -56 -19 -22 -50 -50 -25 -19 -8 -15 + 12
66 -25 -5 +3 -8 -8 -15 +26 +3 +2 +28 +52
48 -18 -6 -7 +51 +51 +60 +1 9 +35 +47 +37 +35
83 -52 -51 -8 -3 -40 -40 - 45 -8 +30 +14 +41
16 -10 +65 + 45 +35 +65 +103 +66 +55 +77 +78 +48
83 -46 -4 +5 -37 -9 -9 -10 +2 +1 +11 +21
4 +24 -2 +1 2 +6 +3 +3 +34 +34 +31 +75 +26
27 -3 + 11 +13 +5 +1 1 +68 +4 3 +43 +38 +62 +54
30 -6 -4 +9 +13 +1 3 +21 +14 +45 +69 +70 +49
Rank difference: Key >20 >10 India ranks higher
>-5 >-10 >-20 Comparator ranks higher
Note: see text for details Source: World Economic Forum 2009a
The GCI heat map presented in Table 4 complements Tables 3.A through 3.D, in that it allows for a reading of India’s performance in the GCI in relative terms. It provides a sense of the distance – as measured by the difference in scores (Table 4.A) and ranks (Table 4.B) – that separates India from any given comparator. Blue-shaded cells and grey-shaded cells indicate that India scores or ranks respectively higher or lower than the comparator, while no shading means there is no significant divergence. The darker the nuance, the greater the difference in performance. Table 4.A shows, for instance, that
India’s score (4.3, see first row) in the overall GCI (first column) is 0.6 lower than that of Malaysia but 0.3 better than the average for Developing Asia. Similarly, Table 4.B indicates that India does significantly better in terms of business sophistication (12th column) than all countries except Malaysia. The heat map mirrors India’s atypical competitiveness pattern described above. On the right side of both tables, cells are overwhelmingly blue, while the patches of dark grey in the centre of the table reveal the areas of relative underperformance, namely
12 | The India Competitiveness Review 2009
Count of pillars where India ranks higher
Table 4.B Difference in Ranks
Health and Primary Education
Goods Market Efficiency
Labour Market Efficiency
Count of pillars where India scores higher
Higher Education and Training
Health and Primary Education
1 2 6 8 7 6 9 9 10 10 12
1 2 8 7 6 6 9 9 10 10 12
macroeconomic stability, health and primary education, labour market efficiency and technological readiness. The figure shows that China is stronger in 10 out of the 12 Pillars. On the other hand, India systematically outperforms its neighbour Pakistan in all Pillars and by a margin of 20 ranks or more in nine of the 12 Pillars.
Notably, the protection of property rights, public ethics standards and the efficiency of public administration are taken into account, together with the security situation in the country. The Private Institutions Subpillar, in turn, measures the quality of corporate ethics and accountability displayed by firms. India ranks 54th in the Institutions Pillar, ahead of most of the comparators and clearly standing out within its region and income group. Only Malaysia (43rd), China (48th) and Korea (53rd) – just barely – do better. India’s performance is similar in each Subpillar, ranking 55th and 51st for the quality of public institutions and private institutions, respectively. The business community is fairly positive with respect to government efficiency. India ranks above most comparators in the rule of law, particularly thanks to a relatively well-functioning and independent judiciary. On a less positive note, intellectual property protection is perceived as mediocre (61st). This is an area to be strengthened, given the importance of the IT and business process outsourcing sector in India (see 12th Pillar below). Further, reminiscent of the license raj era, government regulation continues to be perceived as burdensome. India ranks a low 95th on this indicator with a score of 2.9, below the regional average of 3.3. This signals the need for further reforms to eliminate red tape.
1st Pillar: Institutions
A transparent, efficient and reliable institutional environment provides the framework within which all stakeholders of the society – individuals, businesses and the government – are able to interact efficiently and create wealth. Economic activity does not take place in a vacuum. The quality of institutions has a strong bearing on competitiveness and growth. It influences investment decisions and the organization of production, and plays a central role in the ways societies distribute the benefits and bear the costs of development strategies and policies. Given this prominent role, the GCI includes the quality of institutions within the basic requirements of competitiveness, crucial for factor-driven economies such as India15. The Institutions Pillar has two components, gauging the quality of public and private institutions, respectively. The Public Institutions Subpillar assesses different dimensions related to the quality 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 Inefficient government bureaucracy Corruption Restrictive labour regulations Access to financing Tax regulations Policy instability Tax rates Poor work ethic in national labour force Inadequately educated workforce Foreign currency regulations Inflation Government instability/coups Poor public health Crime and theft
24.6 14.0 11.0 10.6 9.8 8.0 6.0 4.0 3.8 2.6 2.3 1.0 0.9 0.9 0.4
Source: World Economic Forum’s Executive Opinion Survey 2009
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The results also reveal that the business community has limited trust in its politicians (79th), while bureaucratic and administrative corruption, and rentseeking by a large public sector, continue to restrain its confidence. Indeed, the respondents to the World Economic Forum’s 2009 Executive Opinion Survey selected “bureaucracy” and “corruption”’ as, respectively, the second and third most problematic factors for doing business in India after “inadequate infrastructure” (see Figure 5)16. Supporting this assessment, Transparency International ranked India 85th out of 180 economies in its 2008 Corruption Perceptions Index17. The government has taken steps to eliminate some major sources of corruption, for instance, by removing import licenses18. In the fight against corruption, India can rely on its vibrant democracy and press freedom, which help to bring many such cases to light. The threat of terrorism is another major concern in that it imposes significant costs on businesses, with India ranked 117th on this measure. Among the comparators, Pakistan (131st, third to last) and the Philippines (124th) appear lower, as do the United States (121st) and Spain (119th). However, India’s score of 4.7 (out of 7) remains well above the score of 2.6 of last ranked Colombia. The attacks on Mumbai in 2008, the rising tensions in the region, as well as frequent reports of foiled terror plots contribute to a general fear of future attacks and maintain a climate of insecurity. In addition, corporate interests, especially Western companies, are seen to represent a prime target. On a more positive note, India does not display particularly high levels of other forms of crime and violence. Its score (5.2) is not too far from that of China and – even more telling – of the OECD average (both 5.4). This performance sharply contrasts with the rest of the region (average of 4.4), most notably Pakistan (3.2, 119th), but also Brazil (3.3, 118th). As mentioned above, the GCI also assesses the quality of private institutions. Although its performance has worsened considerably over the past year, India continues to rank at a reasonable 51st place. It is possible that the weaker assessment is related to recent scandals such as the accounting fraud perpetrated at Satyam, which shook the confidence of the business community in India and around the world. This would seem to
demonstrate a need for well enforced auditing and accounting standards to better constrain and unmask such behaviour in the future.
2nd Pillar: Infrastructure
Well-functioning and extensive infrastructure plays a fundamental role in enhancing the growth prospects of an economy. Good infrastructure plays an important role in raising private sector productivity, particularly the quality of roads, the functioning of roads, railroads, ports and air transport, as well as a reliable electricity supply and developed telecommunication network. Widespread quality infrastructure can also greatly reduce income inequality and poverty, connecting poor communities to important markets, allowing children in remote areas to go to school and improving health standards by providing potable water, among other benefits. India ranks 76th in the Infrastructure Pillar with a score of 3.5 out of 7. China ranks 30 places ahead at 46th, while Malaysia is in a league of its own in 26th place. The entire region suffers from a severe infrastructure deficit, with an average score of 3.4, even lower than that of India. Since 2003, business leaders responding to the Executive Opinion Survey have consistently ranked “inadequate supply of infrastructure” as the most problematic factor for doing business in India (see Figure 5). In fact, in none of the other comparator countries have respondents put infrastructure so high and so often on their list. The poor state of India’s infrastructure, and the lack of it, is among the most serious structural problems holding back the country’s competitiveness and economic development. Without adequate infrastructure, India will find it difficult to sustain – let alone increase – its current pace of development. The situation penalizes local businesses and deters foreign investors. Delays in shipping, power outages, water shortages, commuting times, to only name a few of the adverse consequences, seriously undermine productivity. Looking ahead, infrastructure has also been cited as one of the main obstacles to the transition from an agrarian economy to a manufacturing-based economy, a transition that will be needed to create new jobs for the growing working-age population.
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Even the most basic manufacturing activities at a minimum require a reliable source of electricity and decent roads. Electricity is perhaps the biggest infrastructure challenge. India ranks 106th for the quality of the electricity supply, lower than all comparators. A 2006 survey by the World Bank found that 29% of managers identified electricity as a “major” or “severe” constraint to the growth of their business19. In 2007, demand outstripped supply by almost 15%20. As Figure 6 shows, electricity production per unit of GDP increased until 2000 but has been declining steadily since then. The ratio is now close to one kilowatt hour per unit of GDP. For China, the situation is almost the reverse and appears much more favourable. Not only does India suffer from serious electric under-capacity, but much of its production is lost in transmission and distribution. Figure 6 reveals that, in 2006, a staggering 25% of India’s electricity production was lost before reaching destination. Although improving since 2001 when the figure was 29%, it is four times the amount in China (6.3%). Inevitably, this has a negative impact on profitability; the government estimated that, in 2007, it did not receive any revenue for 34% of the power pumped into the grid because of theft or leakages21, although this is admittedly an improvement from 2000, when an OECD study put this figure at 40%22.
In addition to low profitability, the sector remains heavily regulated and dominated by public utility companies – a drag for investors. Things could get worse, as the demand for electricity is expected to grow at least as fast as the GDP – and possibly faster if the share in the economy of the energyintensive manufacturing sector increases. Road infrastructure also needs upgrading. India ranks 89th for the quality of roads, far behind China (50th) and Pakistan (65th) but ahead of Indonesia (94th) and the Philippines (104th). Roads are of paramount importance to India’s development: they carry 65% of freight and 85% of passenger traffic23. Yet, the 3.4 million kilometre-long network – the world’s second largest and 50% longer than China’s – is in poor condition, with half of it unpaved24. It is also congested and dangerous. In 2007, 130,000 people perished in car accidents, 60% more than in China where there are four times as many cars25. Without infrastructure improvements, the situation is likely to get worse, as the government projects an annual increase of 12-15% in traffic in the comings years. India’s port infrastructure is also in need of upgrading. According to a report by Ernst & Young (2008), Indian ports are operating at more than 90% capacity. The Indian ports sector has lined up a major capacity overhaul, but low productivity and 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 India kWh per unit of GDP 1.5 China Indonesia % of losses 30% Loses
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
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long, procedures too many and human intervention too frequent. Indeed, India ranks a low 90th on port infrastructure quality, with a score of 3.5 out of 7. None of the comparators performs significantly better, with the notable exception of Malaysia (19th). China comes in at 61st, indicating that its ports also require upgrading. But China has improved much faster and its score increased from 3.6 in 2005 to 4.3 in the latest edition. Over the same period, India has only improved from 3.2 to 3.5. In view of upgrading port infrastructure and adding capacity, the government has stressed the need for more private sector involvement through public-private partnerships (PPP) and wishes to confer more autonomy to India’s major ports26. Air transport is better assessed. At 65th, India is ranked higher than all of the comparators, including China (80th) and Brazil (89th). In terms of capacity, India (10th) lags behind China (2nd) but outperforms the other comparators by a sizeable margin. In 1994, the state monopoly over commercial aviation was brought to an end. Since then, India has witnessed a proliferation of private airlines, including low-cost airlines. Illustrating this dynamism, Kingfisher, founded just four years ago, is India’s largest carrier with a market share of 22.6%27. There is no doubt that this competition has benefited the economy through the increased number of destinations, more frequent services and better value for money. The number of seatkilometres available on flights originating from India has soared by 50% since 2006 to reach 2.65 billion in 200928. India is now the 10th largest market in terms of capacity. Yet, this boom in air traffic is straining the existing airport facilities. The government has initiated a vast programme of modernization of 35 airports, and five of India’s biggest airports – Bangalore, Cochin, Delhi, Hyderabad and Mumbai – were privatized. Besides improving connectivity inside India and partly compensating for the lack of ground transport infrastructure, air transport has a major role to play in the development of tourism, a sector with enormous potential beyond what is presently seen. Railroad is the last of the four major modes of transportation taken into account by the GCI and by far the best assessed in the case of India. The
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country ranks an impressive 20th overall, one notch behind Malaysia and seven places ahead of China. The chasm is the widest with the Philippines, which ranks 92nd. The Indian railway network is one of the world’s largest, carrying 14 million passengers daily. Railroad remains the primary mode for carrying passengers and freight across India’s vast territory. However, the World Bank recognizes that, with tariff policies that overcharge freight to subsidize passenger travel, a shift from railways to roads has been observed, although the country’s high-density rail corridors continue to face severe capacity constraints29. The dire state of electricity and transport infrastructure is in large part attributable to insufficient investment, which in turn has multiple causes: poor planning, lack of coordination, excessive bureaucracy, price controls and crosssubsidy mechanisms, as well as corruption. The problem is accentuated by the pace of economic growth. The World Bank estimates that overall demand for transport infrastructure and services has risen by around 10% a year since 199030. The projected rapid urbanization of India is likely to strain infrastructure even further. Currently, 286 million Indians, or 28% of the population, live in urban areas – a small share by regional standards. This figure is expected to rise to 576 million, or 41% of the population, by 203031. This massive exodus into Indian cities, 10 of which are among the 30 fastestgrowing urban areas in the world32, represents an extraordinary opportunity – dubbed the “urbanization bonus” – because urbanization is generally a force for growth, development and modernization. But, if urbanization is not supported by improved infrastructure and sanitation, it could very well become an urbanization disaster. To upgrade infrastructure and keep up with rising demand, it is estimated that India will need to boost investment in this sector from 4-5% to about 89%33. The government alone does not have the financial resources to meet this need, given the grim fiscal situation. India benefits from the support of the World Bank and other donors in the form of loans, but it will not be nearly enough to provide the necessary resources. Everybody agrees that a significant amount of India’s infrastructure financing needs to come from the private sector through public-private partnerships34.
By the government’s own account, some 75% of the additional investment – 40% in total – will need to come from the private sector. Since the mid1990s, the private sector has been involved to a certain extent. The OECD (2007) estimated that already the value of PPPs amounted to 3.5% of GDP at the end of 2006. The government has put in place a number of incentives to encourage and attract private investment such as special loans, guarantees and risk mitigation instruments, tax cuts, BOT models, and no restriction on FDI in certain sectors. Yet, much remains to be achieved.
Firms cannot operate efficiently when inflation rates are out of hand. In sum, the economy cannot grow in a sustainable manner unless the macro environment is stable. Macroeconomic stability is included among the basic factors of national competitiveness – key for factor-driven countries like India, but also a basic requirement for any economy, regardless of its stage of development. The GCI relies on five indicators to draw a picture of the macroeconomic situation: the government budget balance, public debt, inflation, national savings rate and the interest rate spread. Owing to a very weak fiscal position, India appears in 96th position in the Macroeconomic Stability Pillar, a gap of almost 90 positions with China (8th). Russia (36th), Malaysia (42nd), Indonesia (52nd) and the Philippines (76th) all display better performances. Among comparator countries, only Brazil (109th), Vietnam (112th) and Pakistan (114th) score lower. As Figure 7 shows, India lags behind all comparators in terms of government deficit and debt, which amounted to 4.9% and 75% of GDP in 2008, respectively. In 2003, India adopted a rulesbased fiscal framework, the Fiscal Responsibility and Budget Management Act (FRBMA). The FRBMA set
3rd Pillar: Macroeconomic Stability
The stability of the macroeconomic environment is important for business and, therefore, for the overall competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a nation, it is also recognized that macroeconomic disarray harms the economy. The government cannot provide services efficiently if it has to make high-interest payments on its debt. Running fiscal deficits limits the government’s future ability to react to business cycles.
Figure 7: Public Debt and Budget Balance , 2008
80 70 Public debt (% of GDP) 60 50 40 30 20 10 0 -6
India Pakistan Vietnam Brazil Malaysia Indonesia
China Russian Federation
0 Budget balance (% of GDP)
Source: World Economic Forum 2009a
The India Competitiveness Review 2009 | 17
a plan to gradually reduce the central government deficit through 2009. Although the idea of a balanced budget remains remote, the FRBMA has helped to institute some fiscal discipline35. Further, thanks to the economic boom of recent years, the fiscal situation of the central government had been slightly improving until last year when the crisis hit. Since then, government stimulus measures jeopardized its plans for fiscal adjustment. Government consumption expenditure increased sharply and contributed 32.5% of real GDP growth in 2008-2009, compared with an average contribution of 5.9% in the previous five years. As a result, the government now envisages a deficit of 6.8% of GDP for 2009-201036. India’s consolidated deficit – that is, including states’ deficits – could reach 10%. Although perhaps seen as necessary in the short term to address the crisis, this has negative repercussions for the country’s macroeconomic stability going forward. Repeated fiscal deficits have caused debt levels to swell, as the funding gap has forced the government to issue more and more debt. It is estimated that the government now borrows 34 out of every 100 rupees it spends37. At 75% of GDP, India’s debt ratio is among the highest in the world (17th out of 133 countries). The bulk of India’s public debt is denominated in rupees. On a more positive note,
India’s external debt is low, thus limiting exchange rate risk. But such a large domestic debt ratio hurts the economy. Government regulations require commercial banks to invest in government bonds – precisely to finance the large deficit – and in other “priority investments”, thereby diverting investments from the more productive sectors of the economy (see the Financial Market Sophistication section below). What is more, the issuance of large amounts of debt pushes up India’s interest rates and depresses the price of government bonds, large amounts of which are held by banks, thus exposing them to potential capital losses. The national savings rate has surged since the beginning of the decade to reach 36% of GDP in 2008, after years of erratic movement. This upward trend is to a large extent attributable to India’s demographic transition. The falling dependency ratio increases savings rates simply because the working population saves more than the dependent population38. As Figure 9 illustrates, the savings rate is tightly linked to investment, which is an important driver of growth in India and in all developing economies. To sustain growth of roughly 8%, India must continue to save at a similar rate. To finance the investment required to attain 10% growth, Poddar and Yi (2007) estimate that savings rates would need to rise well above 40% – closer to the rate observed in China.
Figure 8: Savings and Investments
Gross fixed Investment, contribution (%) to real GDP growth*
% of GDP 60 50 40 30 20 10 0 1990 1991 1992 1993 1994
Gross fixed Investment, % of GDP Gross national savings, % of GDP
% of GDP growth 5 4 3 2 1 0 -1
China's savings rate
* Change in gross fixed investment, as a percentage of real GDP in the previous period
Source: Economist Intelligence Unit, CountryData Database
18 | The India Competitiveness Review 2009
However, present regulations force banks to channel a large quantity of savings to sectors where productivity is low, thereby diminishing the potential impact of investment on growth39. Historically, inflation has been relatively well-contained in India due to a strong commitment by the Reserve Bank of India (RBI) and the Ministry of Finance. Between 1999 and 2006, inflation never exceeded 5%40. Later, however, strong global growth and the ensuing global rise in commodity and food prices caused inflation in India to soar. However, peaking at 8.4% in 2008, inflation never got out of control. In the context of the economic crisis, inflation is expected to be close to zero in 2009 before picking up again in 2010. At the height of the crisis, the RBI loosened monetary policy to provide ample rupee and US dollar liquidity and ensure a continued flow of credit, although in July 2009 the RBI announced it had shifted the focus back to inflation targeting41. India’s fiscal situation is alarming and not sustainable in the long run. The government is in a relatively weak position to withstand a further deterioration in global economic conditions. Further, India’s cashstrapped government finds it difficult to make needed investments in education, health and infrastructure, as discussed elsewhere in this chapter. As economic growth picks up again, the government will need to take tough decisions in
terms of raising taxes and curtailing expenditures in order to rein in deficits. This will imply cutting back subsidies and reforming the tax system.
4th Pillar: Health and Primary Education
A healthy workforce is vital to a country’s competitiveness and productivity. Poor health leads to significant costs to businesses, as workers who are not healthy are often absent or operate at lower levels of efficiency, thus constraining productivity. In addition to health, this Pillar takes into account the quantity and quality of basic education received by the population, which is increasingly important in today’s economy. Workers with little formal education can carry out only simple manual work and find it much more difficult to adapt to more advanced production processes and techniques. Lack of basic education can therefore become a constraint on business development, with firms finding it difficult to move up the value chain by producing more sophisticated or value-intensive products. As Gupta (2008) points out, the government has come to realize that, to emerge as a global economic superpower, India must invest in its social fabric, in particular in education and healthcare. This investment is all the more pressing given that India is
Figure 9: Selected Health and Sanitation Resource Indicators, 2006 or Latest Year Available
Lower middle income
100 80 60 40 20 0 28.0 89.0
India's score 6.0 46.6 36.0
Improved sanitation Improved water source facilities (% of population (% of population with with access) access)
Physicians per 10,000 Births attended by skilled Health expenditure, total population health staff (% of total) (‰ of GDP)
Source: Authors’ calculation; World Bank 2009a
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home to one-fifth of the world’s population under 24, which makes it the world’s youngest nation. It is also expected to become the most populous by 2035. This undoubtedly represents a huge opportunity, but could become a liability if India cannot reverse the worrisome trends in sanitation, health and basic education. India ranks 101st for health and primary education, its lowest rank across the 12 Pillars of the GCI and in contrast with its overall GCI rank. As the heat map in Table 4 shows, India trails all comparators except Pakistan (113th). The gap is significant even within the region. The median rank of developing Asian economies is 82, 19 places higher than India. The health component of the Pillar includes basic health indicators, including the incidence of tuberculosis and malaria, HIV/AIDS prevalence, the impact of these diseases on businesses, infant mortality and life expectancy. Taken together, they provide a sense of public health situation prevailing in a country. India ranks 103rd in this component; among comparators, only Pakistan (106th) does worse – and barely. India compares unfavourably within its income group and within the region. India’s precarious situation is, in large part, linked to a lack of infrastructure and skilled staff. Figures 9 and 10 report selected health indicators for India and a number of comparators. More specifically, Figure 9 presents a selection of measures of health resources while Figure 10 illustrates health outputs.
The correlation is obvious between the two sets of indicators. India systematically trails China and Malaysia on all measures, and generally compares unfavourably with Indonesia and the lower middle income average. In particular, a dismally low proportion – 28% – of India’s population has access to improved sanitation facilities. This is half the average of India’s income group (52%), and lower than the sub-Saharan Africa average (31%)42. Further, the incidence of communicable diseases is disturbingly high. There were 168 cases of tuberculosis per 100,000 population in 2007, one of the highest rates outside Africa, while there were 129 malaria cases per 100,000 population in 200843. Equally worrisome, 21% of Indians suffer from malnutrition, 50% more than the lower middle income group average (14%) and more than twice China’s rate (9%). It is perhaps not a surprise, therefore, that life expectancy in India is just 64 years. This is almost eight years shorter than in China, and five years shorter than the average for the lower middle income group. Among the 133 countries included in the GCI, only in a few Asian countries, including Pakistan and Cambodia and in some sub-Saharan African nations is life expectancy shorter. India also exhibits shortfalls in basic education, the second component of the Pillar. The country is at the 100 mark with a score of 4.0, clustering with Brazil (94th) and the Philippines (91st), with China (42nd) and Malaysia (24th) in a different league. India
Figure 10: Selected Health Status Indicators, 2007 or Latest Year Available
Lower middle income
100 80 60 40 20 0 Prevalence of undernourishment (% of population) Incidence of tuberculosis (per 10,000 population) Infant mortality rate (per 1,000 live births) Life expectancy at birth, total (years) 21.0 16.8 54.3
Source: Authors’ calculation; World Bank 2009a
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compares unfavourably with the regional (4.1) and income group (4.0) averages, and surpasses only Pakistan (128th). The net enrolment rate in primary education has almost reached 90% in India. In an historical context, this is a remarkable achievement, given that the rate was just 79% at the beginning of the decade and is now on a par with the regional average. This progress follows government efforts to implement free and compulsory education for children between six and 14 years of age and a ban on child labour44. Yet, because many countries have achieved universal education at the primary level, an enrolment rate of 90% does not compare favourably. While quantity is improving, the quality remains a concern. The business community gives the quality of primary education a mediocre assessment. On a scale from 1 (poor) to 7 (excellent), India scores just 3.2, corresponding to a rank of 89. This is also reflected in a variety of other indicators. The pupilto-teacher ratio is 40 to 1, indicating that students do not receive significant personal attention. The ratio is twice that of China, and 25% higher than the lower middle income group average. In the Philippines and Pakistan, the ratio is around 35 to 145. Adding to the infrastructure problem, some research also highlights the lack of training of teachers, their low level of commitment, and the high rate of absenteeism46. In this context, it is perhaps not surprising that only two-thirds of Indians over 15 are literate47. Despite impressive progress – the ratio was 20% in 1950 and less than 50% in 1990 – this remains low by international, and even regional, standards. Among the comparators, only Pakistan has a lower rate (55%), while China, the Philippines, Indonesia and Vietnam all achieve rates of 90% or higher. But, with literacy running at 90% of pupils aged five to 14, adult illiteracy will continue to drop in the years to come48. Insufficient funding partly explains India’s poor educational outcomes. With total spending on education representing 3.2% of its GDP, India ranks 94th on this indicator. Although it is a bigger share than in China (1.9%, 123rd), Indonesia (1.1%, 127th) and Vietnam (2.8%, 103rd), India is characterized by a larger education deficit. In 2004, the government pledged to increase expenditure to 6% of GDP as part of its National Common Minimum Programme,
but this objective has not yet materialized. Instead, spending shrunk from 4.4% to the current 3.2%. The OECD (2007) reckons that part of the solution resides in more private education at all levels. It estimates that already one-fifth of primary school pupils in rural areas are enrolled in private schools, with better average class performance. The performance of India in the 4th Pillar of the GCI is a reminder that, despite recent achievements, there is still much to be done to ensure that development is inclusive and sustainable. In addition to meeting the infrastructure challenge, reaping the benefits of the demographic dividend will also require addressing health and education challenges.
5th Pillar: Higher Education and Training
Higher Education and Training is the first of the six Pillars that comprise the Efficiency Enhancers Subindex (see Figure 3). Quality higher education and training is crucial for economies that want to move up the value chain beyond simple production processes and products. In particular, today’s globalizing economy requires economies to nurture pools of well-educated workers who are able to adapt rapidly to their changing environment. This Pillar measures secondary and university enrolment rates as well as the quality of education as assessed by the business community. The extent of staff training is also taken into consideration because of the importance of vocational and continuous on-thejob training – which is neglected in many economies – for ensuring a constant upgrading of workers’ skills to the changing needs of an evolving economy. India ranks 66th in this Pillar, closely followed by the Philippines (68th) and Indonesia (69th), and with the distance to China (61st) much narrower than in the previous Pillar. Yet, this proximity with comparators masks differences in the Pillar components: comparators tend to have higher enrolment rates but poorer quality education, while access to higher education in India remains the privilege of a few but the quality is perceived as fairly good. This also contrasts with the situation in basic education in India where, as described above, enrolment is relatively high but the education dispensed is of poor quality. India’s secondary education gross enrolment rate is
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Figure 11: Enrolment Rate by Level of Education, Latest Year Available
% of population in corresponding class age
100 80 60 40 20 0 Russian Federation
* net rate ** gross rate
Lower middle income
Source: UNESCO; national sources
55%, which is low by international standards. It compares unfavourably against top-ranked Brazil, which has almost achieved universal secondary education, but also against the Philippines (83%), Indonesia (73%) and Vietnam (66%), and compared with the lower middle income average (61%). As for tertiary education, only one out of 10 Indians attends college or university. Among the comparators, only Vietnam and Pakistan exhibit lower enrolment rates, while three out of four Russians receive tertiary education – one of the highest rates in the world – as well as one out of four in China (see Figure 11). By contrast, the quality of higher education is fairly good (33rd). In particular, India ranks 37th for the extent to which the educational system meets the needs of a competitive economy, 22nd for the quality of math and science education and an impressive 15th for the quality of its management schools49. Only Malaysia and China boast similar results, with other comparators typically appearing below the 50 mark. Finally, India ranks 33rd in on-the-job training. This dimension is of particular significance in India given the low attainment rate in higher education. Many companies have put in place internal programmes to train or retrain employees. This represents one way for them to address – at least partly – the shortage of graduates and the employability issue. Skill requirements evolve at a rapid pace, especially in IT and the business process outsourcing sector, and the formal educational system strains to keep up with the curriculum, hence the need for on-the-job training to bridge the skills gap50.
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6th Pillar: Goods Market Efficiency
Countries with efficient goods markets are well positioned to produce the right mix of products and services given supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy. Healthy market competition, both domestic and foreign, is important in driving market efficiency, and thus business productivity, by ensuring that the most efficient firms producing goods demanded by the market are those that thrive. The best possible environment for the exchange of goods requires a minimum of impediments to business activity through government intervention. For example, competitiveness is hindered by distortionary or burdensome taxes and by restrictive and discriminatory rules on FDI – limiting foreign ownership – as well as on international trade. Market efficiency also depends on demand conditions such as customer orientation and buyer sophistication. For cultural reasons, customers in some countries may be more demanding than in others. This can create an important competitive advantage, as it forces companies to be more innovative and customer oriented, and thus fosters the discipline necessary for efficiency to be achieved in the market.
With a score of 4.4, India ranks 48th in the Goods Market Efficiency Pillar, in line with its overall rank. As shown by the heat map, India, China and Malaysia are in a league of their own. The other two BRIC economies, Russia and Brazil, lag 50 notches behind them. India owes its relatively strong showing to its competitive market. Intense competition and a growing middle class allow for a situation in which consumers are relatively sophisticated and demanding (40th). These favourable demand conditions encourage companies to constantly improve on product quality and variety. Competition in India would be fiercer, and more employment created, if starting businesses was made easier (see Figure 12). Various indicators reveal how cumbersome, time-consuming and costly it is for entrepreneurs to start a business, despite significant improvements in recent years. According to the World Bank, starting a business still takes 30 days on average, down from 71 days in 2006. This places the country 82nd, well ahead of Brazil (152 days, second longest) and China (40 days). Similarly, starting a business requires 13 procedures in total, placing India at 111th rank51. This is fewer than China (14 procedures) and Brazil (18 procedures), but more than the regional average (10.3). In terms of costs, starting a business in India amounts to a staggering 70% of per capita gross
national income (GNI). This is costly compared to China (8%) and the regional average (27%), Further, the minimum capital required to establish a company represents more than 200% of the GNI, compared with just 27% on average for the South Asia region52. The tax regime in India is a further hurdle on productivity enhancements as it distorts decisions made by entrepreneurs and foreign investors. The World Bank estimates that the total taxes paid by a typical firm represent some 72% of its profits. Only China among the comparators ranks lower, with a rate approaching 80%53. A widening of the tax base would make cutting taxes easier for the government. Competition could also be fostered through a further opening of the domestic market to international competition. India ranks 90th, with a score of 4.0 in the foreign competition component of the Pillar. In particular, India’s trade-weighted import tariff rate remains high at 11% (placing the country 104th) despite recent reductions, while trade barriers and restrictions still exist in a number of service areas. Lowering such barriers would benefit the economy by ushering in further competition54. India should also take measures to encourage existing firms to enter the formal sector. Prevalence of informality is very high in India. Ferrari and Dhingra
Figure 12: Starting a Business
China South Asia*
450 400 350 300 250 200 150 100 50 0 Procedures (number) * Average for 2009 Time (days) Cost (% of GNI per capita) 11 13 89 30 70
Min. capital (% of GNI per capita)
Source: World Bank, Doing Business Database
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(2008) estimate the share of the labour force working in the formal sector at just 6% in 2003, down from 8% in 1990. A survey conducted in 2000 by the Indian Ministry of Statistics found that, out of a total workforce of 397 million, only 28 million workers were employed in the organized sector55. The consequences are dire. Firms in the informal sector typically grow more slowly, have lower productivity and poorer access to credit, and employ fewer workers. In addition, as mentioned above, a large informal sector significantly limits the tax base.
India ranks 83rd in this Pillar. Indeed labor market efficiency historically has been a problematic aspect of India’s competitiveness. Although the situation has been improving slightly, the labour market remains characterized by high costs and restrictions on firing workers, which reduces the incentive for companies to hire permanent workers and grow their businesses. Figure 13 illustrates the uneven performance of India on the World Bank’s Rigidity of Employment Index, which is included in the GCI. In addition to the difficulty of dismissing employees, the associated cost is high, equivalent to 56 weeks of salary (placing India 85th on this indicator). Thus, although hiring workers is very easy in India (with a perfect zero on this dimension), the difficulty of firing them afterwards still creates a significant disincentive. On the positive side, as shown in the Figure 13, employers enjoy significant discretion in setting work hours. In addition, the Executive Opinion Survey finds that businesses have flexibility in setting wages (44th) and that, overall, the relationship between employers and employees is not particularly confrontational (40th). The rigidity of India’s labour market constitutes one of the major obstacles for a swifter transition towards a more manufacturing-based economy, by slowing the shift of the labour force from agriculture
7th Pillar: Labour Market Efficiency
The efficiency and flexibility of the labour market are critical for ensuring that workers are allocated to their most efficient use in the economy and provided with incentives to give their best effort in their jobs. Therefore, labour markets must have the flexibility to shift workers from one economic activity to another rapidly and at low cost, and allow for wage fluctuations without much social disruption. Efficient labour markets must also ensure a clear relationship between worker incentives and their efforts, as well as the best use of available talent – which includes equity in the business environment between women and men.
Figure 13: Hiring, Employing and Dismissing Workers, 2009
80 60 40 20 0 30
20 0 Rigidity of employment index* Difficulty of hiring index Rigidity of hours index Difficulty of redundancy index Redundancy costs (weeks of salary)
* The index and its components are measured on a scale from 0 to 100, with 100 indicating more rigid regulation ** Average
Source: World Bank and IFC 2009b
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to other sectors. Poddar and Yi (2007) estimate that the movement of surplus labour away from lowproductivity agriculture to high-productivity industry and services contributes about one percentage point to annual GDP growth, as productivity in industry and services is more than four times that in agriculture. Accelerating this transition, therefore, would be expected to boost productivity and growth. Excessive rigidity also encourages the development of the informal economy at the expense of the formal sector. Two studies, by the OECD (2007) and Ferrari and Dhingra (2008), show that employment growth has been concentrated mainly in sectors not covered by restrictive labour laws. Another consequence is that large firms in the formal sector are becoming more capital-intensive despite the abundance of cheap labour. Since 1997, the formal sector has experienced negative employment growth. In addition to flexibility, efficiency is also a critical feature for an optimal allocation of human capital. India ranks 88th in this component of the Pillar, owing to the very low proportion of female workers in the labour force. There are only 42 female workers for every 100 male workers. At 122nd, this is one of the lowest ratios among the 133 covered by the GCI. Only Pakistan, with 25 female workers per 100 male workers (131st), and 10 countries in the Middle East and North Africa region display a lower figure. This low level of participation is partly explained by the significant differences in terms of educational attainment. For instance, while 77% of males are literate, the figure is just 55% for women – one of largest differentials in the world. A study by the World Economic Forum (2009b) on the gender gap in economies around the world ranked India in 127th place out of 134 countries for the cavernous gap that exists between men and women in terms of economic participation and opportunity. On a more positive note, the brain drain in India is not as severe as in other countries at a similar level of development. Indeed, at 41st, India is the highest ranked among countries in the first stage of development (i.e. GDP per capita of less than US$ 2,000), trailing China by two notches. Although it may be premature to talk about a “reverse brain
drain” or “brain gain” phenomenon, there is no doubt that India’s good economic fortunes create opportunities, thereby contributing to retaining and attracting talented people.
8th Pillar: Financial Market Sophistication
The recent economic crisis has highlighted the central role of the financial system for economic activity. A sound and efficient financial sector channels national savings as well as the investments from abroad to the most productive uses. It channels resources to those entrepreneurial or investment projects with the highest expected rates of return, rather than to the politically connected. A thorough and proper assessment of risk is, therefore, a key ingredient. Business investment is critical to productivity. Therefore, economies require sophisticated financial markets that can make capital available for privatesector investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, venture capital and other financial products. This has been underscored once again by the liquidity crunch in developing and developed countries in recent times. To fulfil all functions, the banking sector must be trustworthy and transparent, and – as has been made clear recently – financial markets need appropriate regulation to protect investors and the economy at large. Financial market sophistication constitutes a clear strength for India, ranked a high 16th in this Pillar. Although it is ranked behind Malaysia, the heat map (Table 4) highlights the wide gap between India and the other comparators, with the closest contender, Brazil, ranking 35 places lower, and China behind by a full 65 positions. Indeed, this Pillar constitutes one of the two areas, together with Business Sophistication, in which India performs better than China. Despite the financial crisis, India’s performance in the Pillar has improved from the previous edition in both relative and absolute terms (see Figure 14). Indeed, it is this Pillar in which India has improved the most since the first edition of the GCI (see Figure 4).
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Figure 14: Financial Market Sophistication: Performance of India and Selected Comparators
6 5 4 3 2 1 16 6 Rank 34 16 India 9 20 64 51 Brazil 57 61 Indonesia 71 64 Pakistan 78 71 Developing Asia* 109 81 China 80 82 Vietnam 78 93 Philippines 95.5 94 Lower middle income*
* Average score and median rank
Source: World Economic Forum 2009a
India’s equity market has been extremely dynamic in recent years. Between 2005 and 2008, the total market capitalization of companies listed on the Indian stock market jumped from US$ 387 billion to US$ 1,811 billion, which is equivalent to 155% of GDP56. This phenomenal growth has been accompanied by improving financial market sophistication, as witnessed by the jump in India’s score on this indicator – from 4.8 in 2005-2006 to 5.3 in 2009-2010. Obtaining finance through the local equity market has become easier in India than almost anywhere else in the world – India is ranked third in this indicator, behind only Hong Kong and Qatar. Although obtaining a loan has been somewhat more difficult over the past year, India still goes up in the ranking of this indicator (34th, up eight places), as credit conditions in several other countries have become even tighter. Another sign of the financial sector’s vigour and increased depth is the boost in domestic credit from 53% in 2000 to 70% in 2007. Supporting these positive trends, banks in India are generally perceived as being in sound financial health (25th). In fact, only Brazil (10th) receives a better appraisal for its banking sector. Venture capital is also becoming more prevalent, providing an additional growing channel for financing, with India placing 23rd on this indicator. This suggests that, as well as big corporations,
entrepreneurs with good ideas and smaller concerns are increasingly able to get funding for business development. Despite the overall positive and improving picture, areas for improvement remain. One of the major problems relates to the rules and restrictions on international capital flows, as indicated by India’s low rank of 73 in this dimension. Further, while the government’s tight control of the financial system has provided some stability during the financial crisis, it also distorts decisions on allocation of capital. Present regulations on banks and other intermediaries serve to channel funding directly to the government and to its priority investments. This results in the public sector, rather than the business sector, absorbing much of the country’s savings. Banks are forced to hold 25% of their assets in government bonds. Government policies require banks to direct a further 36% of their loans to agriculture, household business and other “priority” sectors57. Starting from a low base, India’s financial sector has grown rapidly in the past decade. This has contributed to improved productivity and competitiveness by effectively channelling savings into investment. As India develops, it will need an increasingly strong financial system – not only a thriving equity market – to sustain rapid growth.
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9th Pillar: Technological Readiness
The agility with which an economy adopts existing technologies to enhance the productivity of its industries is critical for its competitiveness. In today’s globalized world, technology has become an important element for firms to compete and prosper. In particular, ICT have now evolved into “general purpose technology”, given the critical spillovers to the other economic sectors and their role as efficient infrastructure for other industries and transactions. Therefore, ICT access (including the presence of an ICT-friendly regulatory framework) and use are included in the Pillar as essential components of economies’ overall level of technological readiness. Whether the technology used has or has not been developed within national borders is irrelevant for its effect on competitiveness. The central point is that the firms operating in the country have access to advanced products and blueprints, and the ability to use them58. It is important to note that the level of technology available to firms in a country needs to be distinguished from the country’s ability to innovate
and expand the frontiers of knowledge. The latter concept is captured in the Innovation Pillar, which will be discussed below. India ranks a low 83rd in the Technological Readiness Pillar, essentially as a result of low ICT penetration in the country. ICT adoption provides a formidable potential to boost productivity and growth and reduce poverty, especially in developing countries59. A recent study by the World Bank found that a 10 percentage point increase in mobile phone penetration leads to a 0.8% increase in GDP per capita of developing countries, while a similar increase in broadband Internet access has a growth effect of 1.4%60. However, because it is easier and cheaper to deploy, mobile telephony is the technology being adopted most rapidly in developing countries, with spectacular results. As Figure 15 shows, India has experienced exponential growth in this technology over the past decade, with a compound annual growth rate (CAGR) of 65% between 1998 and 2008. Between March 2008 and March 2009, India saw an increase of 125 million new mobile phone subscriptions. There are now three subscriptions for every 10
Figure 15: Telephony Penetration: Trends for India and Selected Comparators
Total (fixed+mobile) penetration
China Indonesia Philippines
60 Total 40 23 20 7 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 9 18 13 32
Source: Authors’ calculations; ITU 2009
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people. At this pace, India will achieve universal coverage by 2011. However, as impressive as these figures may be, the rate of adoption has not allowed India to catch up with the rest of the world. Today, among the 133 countries in the GCI sample, only Bangladesh, Nepal, East Timor and a handful of African nations report lower mobile phone diffusion. Internet use in India is also spreading rapidly, but not as quickly as in some other countries. There are an estimated seven Internet users per 100 population in India, compared with 11 in Pakistan and 22 in China. Broadband access to the Internet remains the privilege of a very few in India, with a mere 5 million subscribers, compared with 83 million subscribers in China. Further, computer use remains scarce, with less than three personal computers per 100 population, half the number of China and onethird that of the Philippines. While these technologies have not yet reached every household in India, Indian firms are aggressive adopters. The country consistently outperforms most comparator countries in this aspect of technological readiness. India ranks 30th for firm-level adoption of new technologies, and 19th for the extent to which firms harness FDI as a means to transfer technology. This will allow India to significantly boost its productivity and competitiveness, especially as it becomes increasingly prevalent throughout the country. Greater ICT diffusion is therefore a clear priority going forward.
India ranks fourth in the Market Size Pillar, behind only the United States, China and Japan. The country’s large population of 1.1 billion is a strong asset for India, representing an enormous pool of workers and potential consumers. Yet, consumption remains constrained by low incomes. According to the World Bank, some 40% of Indians still live in extreme poverty (see Figure 2) constraining their purchasing power. However, the recent years of rapid economic growth have begun to change the consumption landscape. Real average household disposable income doubled between 1985 and 2005. Assuming annual growth of 7.3%, Beinhocker et al. (2007) estimate that income will grow at an annual rate of 5.3% until 2025. They predict that the middle class will represent 41% of the population (583 million) by 2025, up from 5% in 2005, and that private consumption will grow fourfold. An issue that time alone will not resolve is India’s fragmented domestic market. Although the constitution states that trade and commerce throughout the country should be free, significant barriers to interstate trade remain. A sales tax is levied on moveable goods, and rates vary depending upon the type and nature of goods and the state in which a sale takes place, with both the central and state governments potentially imposing such taxes. In addition, a number of regulatory measures such as the Essential Commodities Act impede the free movement of goods61. Reducing such barriers would further enable India to reap the benefits of its vast domestic market. Finally, following a recovery from the current economic crisis, there is potential to increase the export market. In 2007, India was the world’s 26th biggest exporter with a 1% share in total world exports, compared with 9% for China. India’s trade openness (as measured by the ratio of total trade to GDP) is relatively modest at 45%, compared with 71% in China and 60% in Indonesia. This would imply that room for growth in this area remains.
10th Pillar: Market Size
A large domestic market size plays an important role in enhancing national productivity, as it allows companies to benefit from economies of scale in their production processes and strategies. Historically, the market available to firms has been constrained by national borders. In the era of globalization, international markets have become a substitute for domestic markets, especially for small countries. The GCI includes a comprehensive definition of market size by taking into account the size of the domestic and foreign markets, thereby giving credit to economies that are open to foreign trade and compete successfully in international markets.
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11th Pillar: Business Sophistication
Business sophistication is conducive to higher efficiency in the production of goods and services. This leads to increased productivity, thus enhancing a nation’s competitiveness. Business sophistication concerns the quality of a country’s business networks as well as the quality of individual firms’ operations and strategies. This is particularly
Table 5: Global Companies: India’s Presence
important for countries at an advanced stage of development, when the more basic sources of productivity improvements have been exhausted to a large extent. While this is not yet among the most critical areas for India’s competitiveness, as discussed above, it is an area where India performs quite well. The Pillar takes into account the quality of national business networks and supporting industries, which are captured using variables on the quantity and
Fortune Magazine Global 500 Rank* Company 105 Indian Oil 258 Tata Steel 264 Reliance Industries 289 Bharat Petroleum 311 Hindustan Petroleum 363 State Bank of India 402 Oil and Natural Gas Financial Times Global 500 Rank* Company 75 Reliance Industries 120 Oil and Natural Gas 138 National Thermal Power 188 Bharti Airtel 330 Infosys Technologies 345 Bharat Heavy Electricals 362 ITC 372 State Bank of India 483 Tata Consultancy Services 495 Hindustan Unilever
Oil & gas Industrial metals & mining Oil & gas Oil & gas Oil & gas Banks Oil & gas
All figures in US$ millions Revenues 62,993 32,018 31,792 29,989 28,247 24,578 22,725
* Wal-Mart Stores (United States) tops the ranking with revenues of US$ 378,799 million
Oil & gas Oil & gas Electricity Mobile telecommunications Software & computer services Industrial engineering Tobacco Banks Software & computer services Personal goods
47,250 32,870 29,286 23,414 14,950 14,515 13,748 13,346 10,416 10,235
* Exxon Mobil (United States) tops the ranking with value of US$ 336,525 million
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
United States China United Kingdom Japan France Germany Canada Switzerland Hong Kong SAR Spain Australia Brazil Italy Russian Federation India
Number of Global 500 companies
181 27 32 49 23 20 27 10 16 13 14 9 7 6 10
6,154,035 1,367,881 1,160,225 1,110,744 796,714 617,515 526,460 515,636 439,192 359,001 354,540 348,060 223,493 220,227 210,030
Source: Fortune 2009; Financial Times 2009
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quality of local suppliers and the extent of their interaction. When companies and suppliers from a particular sector are interconnected in geographically proximate groups (“clusters”), efficiency is heightened, greater opportunities for innovation are created and barriers to entry for new firms are reduced. Individual firms’ operations and strategies (branding, marketing, the presence of a value chain and the production of unique and sophisticated products) lead to sophisticated and modern business processes. India ranks an impressive 27th in this Pillar, trailing Malaysia by just three positions and outperforming all the other comparators, including China (see Table 4). The country is characterized by well-developed clusters (20th) with a large number of local suppliers (3rd), which are of reasonable quality, given the country’s stage of development (41st). The assessment of the sophistication of firms’ operations and strategies is also good, ranked 35th. Although low-cost labour remains a competitive advantage, Indian firms are nevertheless present across the value chain (26th) and retain some control over the international distribution of their products (44th). Marketing is also becoming more extensive (33rd) and production processes are relatively sophisticated (43rd). India’s strong showing in the Pillar might be attributable to the brisk development of certain key industries. In the area of offshoring – or business processes outsourcing (BPO) – India is arguably the world leader62. Other industries such as IT, telecommunications, retailing, automotive, pharmaceuticals and air transportation are thriving, with several companies becoming corporate giants, and some asserting cross-border leadership in their fields. As Table 5 shows, there are now seven Indian companies, mainly oil and gas producers, on Fortune magazine’s Global 500 list of the world’s biggest corporations as measured by revenue. Similarly, 10 companies are listed on the Financial Times list, which uses market value to establish its ranking. These leaders have undoubtedly contributed to improving the degree of business sophistication in India, and will continue providing examples to other companies of sophisticated business models as India moves up the development path.
12th Pillar: Innovation
The final Pillar of competitiveness captures a country's innovative potential. Although substantial gains can be obtained by improving institutions, building infrastructure, reinforcing macroeconomic stability or improving human capital, these factors eventually seem to run into diminishing rates of return. Innovation is particularly important for economies as they approach the frontiers of knowledge and the possibility of integrating and adapting exogenous technologies tends to disappear. At its present stage of development, India can still improve its productivity by adopting existing technologies or making improvements in other areas. Yet, as the country continues to develop, innovation will become an increasingly important area of focus and will require a conducive environment. In particular, this necessitates sufficient investment in research and development (R&D) especially by the private sector, the presence of high-quality scientific research institutions, extensive collaboration in research between universities and industry, and adequate protection of intellectual property. Although India’s main competitiveness priorities lie elsewhere, it should continue nurturing its innovation potential, especially by further strengthening a supportive environment. India ranks 30th in this Pillar, with a performance similar to that of China (26th) and Malaysia (24th) and considerably better than all other comparators. India does well on most indicators, with the notable exception of the extent to which the government places an emphasis on technological attributes in its procurement process. Scientific research institutions are assessed by the business community as of good quality (25th, score of 4.9). The strong reputation of the 15 Indian Institutes of Technologies (IITs) certainly contributes to this positive assessment. They are considered the best technical schools in India63, with increasing international recognition64.
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The 20 National Institutes of Technology (NITs) are also fairly successful, although only a few are considered on a par with IITs65. The 12 Indian Institutes of Information Technology (IIITs), all established in or after 1997, are also building a strong reputation in their field66. Separate from these networks, the Indian Institute of Science (IISc) located in Bangalore is also recognized as a prominent research institution. It ranks first among Indian universities in Shanghai Jiao Tong University’s 2008 Academic Ranking of World Universities. The availability of scientists and engineers is also a clear strength for the country, with India ranking an impressive 4th on this indicator, supporting the success of India’s IT and BPO sectors. But, if India is to maintain its leadership in this sector and eventually become an innovation hub, it will need to improve both the quantity and quality of higher education or risk facing shortfalls in high-quality graduates. NASSCOM, the Indian National Association of Software and Services Companies, has estimated that, of the 350,000 engineering graduates who emerge each year, 25% are unemployable without extensive further training, and half are unemployable67. The business community signals that, generally speaking, companies could increase spending on R&D. Although India does well in relative terms (ranked 36th), its score is mediocre on this indicator
(3.6). India’s total spending on R&D in 2004 was equivalent to 0.7% of GDP in 200768. This is low by international standards: China spent twice as much (1.4%), the United States 2.6%, and champion Japan 3.3%. The share of India in global R&D spending amounts to 2%, compared with 9.5% for China, which is catching up with Japan (13.5%), and 34.3% for the United States69. Equally troublesome for India is the origin of the funding. UNESCO estimates that the bulk of it, 75%, comes from the public sector, while the private sector accounts for 19%70. In China, Malaysia and most of the developed countries, the share of private sector in R&D spending is typically around 70%. Another important driver of innovation is the extent of collaboration between academia and the business sector in R&D. While not yet very strong, this collaboration has improved in India in recent years. India now ranks 46th with a score of 3.8, up from 3.4 in 2005. A strong intellectual property (IP) protection system goes hand in hand with the development of a country’s innovation capacity. IP is of particular importance in India, given the country’s status as a prime offshoring destination. Firms that outsource business processes may be required to provide access to classified data and information to a BPO company. But IP also matters as much in other areas, such as in the growing pharmaceutical industry. Looking at India’s performance in this
Figure 16: Share (%) of Countries in Total PCT Filings
163,178 23.2 4.4 4.3 3.7 5.1 0.8 3.4 France 5 China 6 United Kingdom 7 0.2 India 19 0.7 2008 rank +75% 22.3
United States 1
Korea, Rep. 4
Source: WIPO Statistics Database (September 2009)
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indicator – 61st with a score of 3.6 – the business community assesses that IP protection is not sufficiently stringent and enforced. One way to measure a country’s innovation power is by the number of patents granted to its residents. In 2008, the US Patent and Trademark Office (USPTO) granted a total of 634 utility patents to residents of India. This corresponds to 0.5 patents per million population (58th), on a par with Brazil (59th), but about half China’s rate of 0.9 (50th). Malaysia has a rate of 5.6, the highest among the comparators, but remains far below the rates displayed by innovation hubs like Taiwan (279.3), Japan (263.3) and the United States (250.9), respectively first, second and third. Figure 16 provides another measure of innovation by reporting selected countries’ share in the total of patent filings under the World Intellectual Property Organization (WIPO's) Patent Cooperation Treaty (PCT), for 2000 and 2007, during which time India’s share rose from 0.2% to 0.7%71. During the same period, China’s share jumped from 0.8% to 3.7%, now placing the country on a par with the United Kingdom. Both the USPTO and WIPO statistics confirm that India has made impressive strides but has not yet established itself as an international innovation powerhouse.
Despite 20 years of rapid economic growth, much of its population remains mired in poverty and poor health. Basic education is not yet universal and is of mediocre quality, while access to higher education remains accessible to only a privileged few. As a result, illiteracy is pervasive, particularly among adults. The good news is that most of the indicators are moving in the right direction and the government has articulated its intention to urgently address these weaknesses. Asked about the priorities for India, Prime Minister Manmohan Singh responded that “the first and foremost priority is […] to get rid of chronic poverty, ignorance and disease, which have afflicted millions and millions of our people.”72 Achieving these development priorities will be facilitated through improvements in other aspects of India’s business environment. In particular, India desperately needs to upgrade its transport and electricity infrastructure, the strains on which are made all the more acute by the economy’s rapid growth. In addition, both the central and state governments must urgently address the runaway fiscal situation; repeated deficits leave the government with limited latitude to increase critical social spending. Finally, further reforms are needed in the functioning of government institutions, as pervasive red tape and corruption increase transaction costs and discourage business creation and development. In addition, obstacles to business creation, combined with rigidities and inefficiencies in the labour market, encourage the development of the informal sector at the expense of the formal sector, with all of the negative consequences this entails. On a more positive note, India has many strengths on which to build a prosperous future. In particular, the sheer size of its domestic market and the growing middle class should boost investment and consumption. In addition, India’s strong showing in the Financial Market Sophistication Pillar bodes well as efficient financial intermediation will play a key role in business development. Further, the relatively high degree of business sophistication and a knack for innovation ensure that India is also investing in those aspects of competitiveness that will become increasingly
India’s economic performance over the past two decades has been truly remarkable. Pro-growth, outward-looking reforms have reinforced India’s growth potential. In recent years, India has been one of the world’s fastest growing economies. Yet, the question remains whether India will be able to sustain and, indeed, accelerate its current pace of growth in the years to come. The GCI provides a framework for thinking about this question by benchmarking India’s competitive landscape against that of other economies. In this context, the GCI paints a rather mixed picture of India’s competitiveness. India’s competitiveness is constrained by a number of structural problems. First and foremost, India must strengthen the foundations of competitiveness, on which its long-term growth crucially depends.
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important as the country moves up the value chain. Although there is room for improvement in each of these categories, India generally compares favourably with the comparator countries and, in a few areas, is on par with much more advanced economies. With so many areas for productivity enhancements, India’s potential for efficiency gains is enormous. Coupled with the country’s vibrant democracy and favourable demographic trends, there is much reason for optimism about India’s economic future, as long as the weaknesses underlined in this chapter are efficiently tackled.
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6 7 8
IMF 2009a. Calculated compound annual growth rate (CAGR) based on IMF 2009a. When adjusting for purchasing power differences, India ranks fourth worldwide, behind the United States, China and Japan. Current prices for 2008. Figures from IMF 2009a. The poverty line of US$ 1.25 a day (at purchasing power parity) is the World Bank’s definition of extreme poverty. 2005 is the most recent year available. All figures from World Bank 2009a. UNDP 2009. UNCTAD 2008. As the definition makes clear, the concept of competitiveness underlying the Index includes both static and dynamic components, since productivity not only determines countries’ capacity to sustain a high level of income, but also, through its impact on rates of return to investment, national growth potential. For more information about the GCI methodology, a more detailed description of each Pillar, expanded rankings, country profiles, data tables and technical notes for all the indicators, please refer to World Economic Forum 2009a. For further details, see Sala-i-Martin et al. 2009. The weights have been derived from a maximum likelihood regression. For more information on the Survey, please refer to Browne and Geiger 2009. This “constant sample” approach eliminates the variations in rankings caused by new countries that are included in subsequent editions. The Developing Asia region comprises 26 developing Asian countries, 14 of which are included in the GCI ranking: Bangladesh, Brunei Darussalam, Cambodia, China, India, Indonesia, Malaysia, Nepal, Pakistan, Philippines, Sri Lanka, Thailand, East Timor and Vietnam. The lower middle income group as defined by the World Bank comprises 55, 31 of which are covered by the GCI: Albania, Armenia, Azerbaijan, Bolivia, Cameroon, China, Côte d'Ivoire, Ecuador, Egypt, El Salvador, Georgia, Guatemala, Guyana, Honduras, India, Indonesia, Jordan, Lesotho, Mongolia, Morocco, Nicaragua, Nigeria, Pakistan, Paraguay, Philippines, Sri Lanka, Syria, Thailand, East Timor, Tunisia and Ukraine. For the purpose of the analysis, India is excluded when computing the average score and the median ranks of groups to which it belongs.
18 19 20 21 22 23
24 25 26
31 32 33
In this Pillar-by-Pillar analysis, the discussion of the results is preceded by a short description of the Pillar and its relevance for national competitiveness. For fuller descriptions and a literature review, see Sala-i-Martin et al. 2009. Since 2003, in the context of the Executive Opinion Survey (EOS), the World Economic Forum has asked the business community what they consider to be the most problematic factors for doing business in their country. Respondents are asked to pick from a list of 15 factors the five that are most problematic, and to rank them from 1 (most problematic) to 5. The results are then tabulated and weighted according to the ranking assigned by respondents. For each factor, the final score corresponds to its weighted total divided by the sum of weighted totals of all factors. Note, however, that India's score of 3.2 out of 10 represents a significant improvement from 2004, when India ranked 90th among 145 countries with a score of 2.8. See Zainulbhai 2007. World Bank 2006. The Economist 2008. See Zainulbhai 2007. OECD 2007. Figures from the National Highways Authority of India (NHAI)’s website (accessed on 22 September 2009). World Bank 2009a. The Economist 2008. See Government of India 2009 for more information. Note that the combined share of Jet Airways and its subsidiary Jet Lite is 26.4%. Figures are for August 2009 and from India’s Directorate-General of Civil Aviation. This measure, compiled by the International Air Transport Association, corresponds to an airline’s passenger-carrying capacity. It is the product of the number of seats available on all flights originating from a country during one week and their flight distance in kilometres. See “India’s Transport Sector” available at http://go.worldbank.org/FUE8JM6E40. See “India’s Transport Sector” available at http://go.worldbank.org/FUE8JM6E40. MHUPA and UNDP, 2009. See Poddar and Yi, 2007. Estimates vary. See The Economist 2008 and Zainulbhai 2007.
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36 37 38
39 40 41 42
46 47 48 49
See, for example, OECD 2007 and, for a government opinion, Zainulbhai 2007. For an in-depth analysis of India’s experience with fiscal rules, see IMF 2009b. All cited figures are from RBI 2009. The Economist 2009a. The dependency ratio is equal to the population aged below 15 and above 64 (the dependent part) divided by the population aged 15 to 64. For more information on the link between demographics and savings and the impact on Asia’s growth, see Sanyal and Folkerts-Landau 2005. See McKinsey 2006. All inflation figures from IMF 2009a. EIU 2009. On a much more positive note, access to improved water is nearly universal at 89%. Figures are from the Directorate of National Vector Borne Disease Control Programme (NVBDCP), situation as of April 2009. See OECD 2007. World Bank 2009a. Figures are for 2003, the latest year available for all the comparator countries. See Gandhi Kingdon 2007. See ADB 2008. OECD 2007. Interestingly enough Hyderabad-based Indian School of Business is also ranked in the Financial Times’ Global MBA Rankings 2009. Nowadays, foreign companies not only outsource customer relationship management or sales departments, but also more complex processes such as IT maintenance, software development and accountability. All the Doing Business figures used in the GCI 2009-2010 are from the 2009 edition of Doing Business (see World Bank and IFC 2008). They may, therefore, differ from the 2010 edition recently released (see World Bank and IFC 2009b). Cost estimates for India and China are from World Bank and IFC 2008. Estimates for South Asia are from World Bank and IFC 2009b. The South Asia region covers Afghanistan, Bangladesh, Bhutan, India, Maldives Nepal, Pakistan and Sri Lanka. India is not excluded from the computation of the average, unlike the GCI averages reported elsewhere in the text. The latest Doing Business study reveals the situation has slightly improved. See World Bank and IFC 2009b.
55 56 57
60 61 62 63
67 68 69
For a brief overview of competition conditions in India, see OECD 2007. See World Bank and IFC 2009a. World Bank 2009a. For a comprehensive analysis of India’s financial sector and of its shortcomings, see McKinsey 2006. For an in-depth analysis of the drivers of ICT promotion, diffusion and use, see Mia et al. 2009. For an overview of the benefits of ICT in general on growth, see The Economist 2009b. For a more specific discussion on mobile telephony, see Geiger and Mia 2009. See World Bank 2009b. See Rao 2003. See A.T. Kearney 2009. Dataquest’s 2008 Ranking of India’s Top Technical Schools places IIT Kharagpur in first position, with the next five places also occupied by IITs. In the Times Higher Education’s 2008 Top 100 of Engineering and Innovation Technology Universities, IIT Bombay and IIT Delhi rank 36th and 42nd respectively. NIT Calicut and NIT Warangal both appear in the top 15 of Dataquest’s ranking. The IIIT at Hyderabad ranks 7th – and first institution not to be an IIT – in the Dataquest’s ranking. NASSCOM’s Strategic Review 2008. R&D Magazine 2008. In 2008, in his address to the Indian Science Congress, Prime Minister Manmohan Singh announced that total spending on R&D would be brought to 2% of GDP by the end of the 11th Five-Year Plan, which is in 2012. Figures for 2004 from UNESCO’s Institute for Statistics (accessed on October 4th). The PCT offers inventors and industry a means for obtaining patent protection internationally. By filing one “international” patent application under the PCT, protection of an invention can be sought simultaneously in each of a large number of countries. Gupta 2005.
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ADB (Asian Development Bank). 2008. Key Indicators for Asia and the Pacific 2008. August. Manila, Philippines: Asian Development Bank. A. T. Kearney. 2009. The Shifting Geography of Offshoring. The Global Services Location Index 2009. Chicago, IL: A. T. Kearney. Beinhocker, E. D., D. Farrell, and A. S. Zainulbhai. 2007. “Tracking the Growth of India’s Middle Class”. McKinsey Quarterly Online Edition. August. Browne, C., T. Geiger. 2009. “The Executive Opinion Survey: Capturing the Views of the Business Community”. The Global Competitiveness Report 2009-2010. Geneva: World Economic Forum. 4957. EIU (Economist Intelligence Unit) . 2009. “India”. Country Report. September. London: EIU. The Economic Times. 2006. “Brain Drain on Reverse Gear to India”. 8 March. The Economist. 2008. “A Special Report on India”. 11 December. London: The Economist Newspaper Limited. The Economist 2009a. “Hopes Suspended: India’s Budget”. 9 July. London: The Economist Newspaper Limited. The Economist. 2009b. “A Special Report on Telecoms in Emerging Markets”. 26 September. London: The Economist Newspaper Limited. Ernst & Young. 2008. Transforming Indian Ports into World Class Facilities. April. Ferrari, A. and I. S. Dhingra. 2008. India’s Investment Climate. Washington, D.C.: The World Bank. FT (Financial Times). 2009. The FT 500 Companies Report. 29th May. Fortune Magazine. 2009. 20 July. Gandhi Kingdon, G. 2007. The Progress of School Education in India. Global Poverty Research Group Paper. March.
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Geiger, T. and I. Mia. 2009. “Mobile Telephony: A Critical Enabler of Networked Readiness?” The Global Information Technology Report 2008-2009. Geneva: World Economic Forum. 27-35. Government of India. 2009. Outcome Budget 20092010. Ministry of Shipping. Available at: http://shipping.gov.in/ Gupta, R. 2005. “India’s Economic Agenda: An Interview with Manmohan Singh”. McKinsey Quarterly Online Edition. September. Gupta, R. 2008. “A Healthier Future for India”. McKinsey Quarterly Online Edition. January. IANS (Indo-Asian News Service). 2009. “Shipping Ministry to Boost Port Infrastructure”. 15 September. IMF (International Monetary Fund). 2009a. World Economic Outlook Database. October. IMF (International Monetary Fund). 2009b. “India: Selected issues”. IMF country Report No. 09/186. June. Washington DC: IMF. ITU (International Telecommunication Union). 2009. ITU World Telecommunication/ICT Indicators 2009 (June Update). CD-ROM. June. McKinsey (McKinsey & Company). 2006. Accelerating India’s Growth through Financial System Reform. McKinsey Global Institute. May. MHUPA (Ministry of Housing and Urban Poverty Alleviation) and UNDP (United Nations Development Programme). 2009. India: Urban Poverty Report 2009. Mia, I., S. Dutta, and T. Geiger. 2009. “Gauging the Networked Readiness of Nations: Findings from the Networked Readiness Index 2008-2009.” The Global Information Technology Report 2008-2009. Geneva: World Economic Forum. OECD (Organisation for Economic Co-operation and Development). 2007. 2007 OECD Economic Survey of India. October. Paris: OECD. Pandit, R. V. 2005. “Why Believe in India”. McKinsey Quarterly Online Edition. September.
Poddar, T. and E. Yi. 2007. “India’s Rising Growth Potential”. Global Economics Paper no.152. Goldman Sachs. January. Rao, G. 2003. “Fiscal Decentralization in China and India: A Comparative Perspective”. Asia-Pacific Development Journal. Vol. 10, No. 1, June. R&D Magazine. 2008. 2009 Global R&D Funding Forecast. December. Reserve Bank of India (RBI). 2009. Macroeconomic and Monetary Developments First Quarter Review 2009-10. July. Sala-i-Martin, X., J. Blanke, M. Drzeniek Hanouz, T. Geiger, I. Mia. 2009. “The Global Competitiveness Index 2009-2010: Contributing to Long-Term Prosperity amid the Global Economic Crisis World Economic Forum”. The Global Competitiveness Report 2009-2010. Geneva: World Economic Forum. 3-47. Sanyal, S. and D. Folkerts-Landau. “Demographics, Savings and Hyper-Growth”. Deutsche Bank Global Market Research. 5 July. UNCTAD (United Nations Conference on Trade and Development). 2008. World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge. Geneva: United Nations. UNDP (United Nations Development Programme). 2009. Human Development Report 2009. New York: Palgrave Macmillan. UNFPA (United Nations Population Fund). 2008. State of World Population 2008. New York: United Nations. The World Bank. 2006. The Investment Climate in Brazil, India and South Africa: A Contribution to the IBSA Debate. September. The World Bank. 2009a. World Development Indicators 2009. Washington DC: The World Bank. The World Bank 2009b. Information and Communications for Development 2009: Extending Reach and Increasing Impact.
The World Bank and IFC (International Finance Corporation). 2008. Doing Business 2009. Washington DC: The World Bank. The World Bank and IFC (International Finance Corporation). 2009a. Doing Business in India 2009. Washington DC: The World Bank. The World Bank and IFC (International Finance Corporation). 2009b. Doing Business 2010. Washington DC: The World Bank. World Economic Forum. 2009a. The Global Competitiveness Report 2009-2010. Geneva: World Economic Forum. World Economic Forum. 2009b. The Global Gender Gap Report 2009. Geneva: World Economic Forum. Zainulbhai, A. S. 2007. “Clearing the Way for Robust Growth: An Interview with India’s Chief Economic Planner”. McKinsey Quarterly Online Journal. October.
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Appendix A: Structure of the Global Competitiveness Index 2009-2010
This appendix presents the structure of the Global Competitiveness Index 2009-2010 (GCI). The number preceding the period indicates to which Pillar the variable belongs (e.g. variable 1.01 belongs to the 1st Pillar; variable 12.04 belongs to the 12th Pillar). The hard data indicators used in the GCI are normalized on a 1 to 7 scale to align them with the Executive Opinion Survey’s results.a Those variables that are followed by the symbol 1/2 enter the GCI in two different places. To avoid double counting, we give them a half-weight in each place by dividing their value by 2 when computing the aggregate score for the two categories in which they appear.b The percentage next to each category represents this category’s weight within its immediate parent category. The computation of the GCI is based on successive aggregations of scores, from the variable level (i.e. the lowest level) up to the overall GCI score (i.e. the highest level) using the weights reported below. For example, the score a country achieves in the 9th Pillar accounts for 17% of this country’s score in the Efficiency Enhancers Subindex. Similarly, the score achieved on the Networks and Supporting Industries Subpillar accounts for 50% of the score of the 11th Pillar. Reported percentages are rounded to the nearest integer, but exact figures are used in the calculation of the GCI. Unlike for the lower levels of aggregation, the weight put on each of the three Subindexes (Basic Requirements, Efficiency Enhancers, and Business Sophistication and Innovation Factors) is not fixed. It depends on each country's stage of development, as discussed in the text.c In the case of India, currently in the first stage of development, the score in the Basic Requirements Subindex accounts for 60% of its overall GCI score, while it represents just 20% of the overall GCI score of Australia, a country in the third stage of development.
Weight (%) within immediate parent category v
Basic Requirements 1st Pillar: Institutions A. Public Institutions 1. Property Rights 1.01 Property Rights 1.02 Intellectual Property Protection1/2 2. Ethics and Corruption 1.03 Diversion of Public Funds 1.04 Public Trust of Politicians 3. Undue influence 1.05 Judicial Independence 1.06 Favouritism in Decisions of Government Officials 4. Government Inefficiency 1.08 Burden of Government Regulation 1.09 Efficiency of Legal Framework in Settling Disputes 1.10 Efficiency of Legal Framework in Challenging Regulation 1.11 Transparency of Government Policymaking 5. Security 1.12 Business Costs of Terrorism 1.13 Business Costs of Crime and Violence 1.14 Organized Crime 1.15 Reliability of Police Services B. Private Institutions 1. Corporate Ethics 1.16 Ethical Behaviour of Firms 2. Accountability 1.17 Strength of Auditing and Reporting Standards 1.18 Efficacy of Corporate Boards 1.19 Protection of Minority Shareholders’ Interests 50% 25% 50% 20% 20% 1.07 Wastefulness of Government Spending 20% 20% 25% 75% 20%
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2nd Pillar: Infrastructure A. General infrastructure 2.01 Quality of overall infrastructure B. Specific Infrastructure 2.02 Quality of Roads 2.03 Quality of Railroad Infrastructure 2.04 Quality of Port Infrastructure
25% 50% 50%
B. Quality of Education 5.03 Quality of the Educational System
5.04 Quality of Math and Science Education 5.05 Quality of Management Schools 5.06 Internet Access in Schools C. On-the-job Training 33% 5.07 Local Availability of Specialized Research and Training Services 5.08 Extent of Staff Training 6th Pillar: Goods market efficiency A. Competition 1. Domestic Competition 6.01 Intensity of Local Competition 6.02 Extent of Market Dominance 6.03 Effectiveness of Anti-Monopoly Policy 6.04 Extent and Effect of Taxation1/2 6.05 Total Tax Rate (Hard Data)1/2 6.06 Number of Procedures Required to Start a Business (Hard Data)g 6.07 Time Required to Start a Business (Hard Data)g 6.08 Agricultural Policy Costs 2. Foreign Competition 6.09 Prevalence of Trade Barriers 6.10 Trade-Weighted Tariff Rate (Hard Data) 6.11 Prevalence of Foreign Ownership 6.12 Business Impact of Rules on FDI 6.13 Burden of Customs Procedures 50% 10.04Imports as a Percentage of GDP (Hard Data) B. Quality of Demand Conditions 6.14 Degree of Customer Orientation 6.15 Buyer Sophistication 7th Pillar: Labour Market Efficiency A. Flexibility 7.02 Flexibility of Wage Determination 7.03 Rigidity of Employment (Hard Data) 7.04 Hiring and Firing Practices 6.04 Extent and Effect of Taxation1/2 33% 17% 50% 33% variablef 17% 67% variablef
2.05 Quality of Air Transport Infrastructure 2.06 Available Seat Kilometres (Hard Data) 2.07 Quality of Electricity Supply 2.08 Telephone Lines (Hard Data) 3rd Pillar: Macroeconomic Stability 3.02 National Savings Rate (Hard Data) 3.03 Inflation (Hard Data)d 3.04 Interest Rate Spread (Hard Data) 3.05 Government Debt (Hard Data) 4th Pillar: Health and Primary Education 25% A. Health 4.01 Business Impact of Malariae 4.02 Malaria Incidence (hard data)e 4.03 Business Impact of Tuberculosise 4.04 Tuberculosis Incidence (Hard Data)e 4.05 Business Impact of HIV/AIDSe 4.06 HIV Prevalence (Hard Data) 4.07 Infant Mortality (Hard Data) 4.08 Life expectancy (Hard Data) B. Primary Education 4.09 Quality of Primary Education 4.10 Primary Enrolment (Hard Data) 4.11 Education Expenditure (Hard Data)1/2 Efficiency Enhancers 5th Pillar: Higher Education and Training 17% A. Quantity of Education 5.01 Secondary Enrolment (Hard Data) 5.02 Tertiary Enrolment (Hard Data) 4.11 Education Expenditure (Hard Data)1/2 50% 25%
3.01 Government Budget Balance (Hard Data)
7.01 Cooperation in Labour-Employer Relations
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6.05 Total Tax Rate (Hard Data)1/2 7.05 Firing Costs (Hard Data) B. Efficient Use of Talent 7.06 Pay and Productivity 7.07 Reliance on Professional Management 7.08 Brain Drain 7.09 Female Participation in Labour Force (Hard Data) 8th Pillar: Financial Market Sophistication17% A. Efficiency 50% 8.01 Financial Market Sophistication 8.02 Financing through Local Equity Market 8.03 Ease of Access to Loans 8.04 Venture Capital Availability 8.05 Restriction on Capital Flows 8.06 Strength of Investor Protection (Hard Data) B. Trustworthiness and Confidence 8.07 Soundness of Banks 8.08 Regulation of Securities Exchanges 8.09 Legal Rights Index (Hard Data) 9th Pillar: Technological Readiness 9.01 Availability of Latest Technologies 9.02 Firm-level Technology Absorption 9.03 Laws Relating to ICT 9.04 FDI and Technology Transfer 9.05 Mobile Telephone Subscriptions (Hard Data) 9.06 Internet Users (Hard Data) 9.07 Personal Computers (Hard Data) 9.08 Broadband Internet Subscribers (Hard Data) 10th Pillar: Market Size A. Domestic Market Size B. Foreign Market Size 10.02 17% 75% 25% 17% 50%
Innovation and Sophistication Factors 11th Pillar: Business Sophistication 50% 11.01 Local Supplier Quantity 11.02 Local Supplier Quality 11.03 State of Cluster Development B. Sophistication of Firms' Operations and Strategy 50% 11.04 Nature of Competitive Advantage 11.05 Value Chain Breadth 11.06 Control of International Distribution 11.07 Production Process Sophistication 11.08 Extent of Marketing 11.09 Willingness to Delegate Authority 7.08 Reliance on Professional Management1/2 50% 50% A. Networks and Supporting Industries 50%
12th Pillar: Innovation 12.01 Capacity for Innovation
12.02 Quality of Scientific Research Institutions 12.03 Company Spending on R&D 12.04 University-Industry Research Collaboration 12.05 Government Procurement of Advanced Technology Products 12.06 Availability of Scientists and Engineers 12.07 Utility Patents (Hard Data) 1.02 Intellectual Property Protection1/2
a The standard formula for converting hard data is the following:
6x (country score - sample minimum) +1 (sample maximum - sample minimum)
10.01Domestic Market Size Index (Hard Data)h Foreign Market Size Index (Hard Data)i
The sample minimum and sample maximum are, respectively, the lowest and highest country scores in the sample of countries covered by the GCI. In some instances, adjustments were made to account for extreme outliers. For those hard data variables for which a higher value indicates a worse outcome (e.g. disease incidence, government debt), we rely on a normalization formula that, in addition to converting the series to a 1 to 7 scale, reverses it, so that 1 and 7 still
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corresponds to the worst and best possible outcomes, respectively:
-6x (country score - sample minimum) +7 (sample maximum - sample minimum)
b For those groups of variables that contain one or several half-weight variables, country scores for those groups are computed as follows:
(sum of scores on full - weight variables) + 1 x (sum of scores on half - weight variables) 2 (count of full - weight variables) + 1 x (count of half - weight variables) 2
c As described in the chapter, the weights are the following:
Weights Factor-driven EfficiencyInnovationstage (%) driven stage (%) driven stage (%)
indication of the extent to which competition is distorted. The relative importance of these distortions depends on the relative size of domestic versus foreign competition. This interaction between the domestic market and the foreign market is captured by the way we determine the weights of the two components. Domestic competition is the sum of consumption (C), investment (I), government spending (G), and exports (X), while foreign competition is equal to imports (M). Thus we assign a weight of (C+I+G+X)/(C+I+G+X+M) to Domestic competition and a weight of M/(C+I+G+X+M) to Foreign competition. g Variables 6.06 and 6.07 combine to form one single variable. h The size of the domestic market is constructed by taking the natural log of the sum of the gross domestic product valued at PPP plus the total value (PPP estimates) of imports of goods and services, minus the total value (PPP estimates) of exports of goods and services. Data are then normalized on a 1 to 7 scale. PPP estimates of imports and exports are obtained by taking the product of exports as a percentage of GDP and GDP valued at PPP. The underlying data are reported in the Data Tables section (see tables 10.03, 10.04 and 10.05). i The size of the foreign market is estimated as the natural log of the total value (PPP estimates) of exports of goods and services, normalized on a 1 to 7 scale. PPP estimates of exports are obtained by taking the product of exports as a percentage of GDP and GDP valued at PPP. The underlying data are reported in the Data Tables.
Basic requirements Efficiency enhancers Innovation factors
60 35 5
40 50 10
20 50 30
d In order to capture the idea that both high inflation and deflation are detrimental, inflation enters the model in a U-shaped manner as follows: for values of inflation between 0.5% and 2.9%, a country receives the highest possible score of 7. Outside this range, scores decrease linearly as they move away from these values. e The impact of malaria, tuberculosis and HIV/AIDS on competitiveness depends not only on their respective incidence rates, but also on how costly they are for business. Therefore, in order to estimate the impact of each of the three diseases, we combine its incidence rate with the Survey question on its perceived cost to businesses. To combine these data we first take the ratio of each country's disease incidence rate relative to the highest incidence rate in the whole sample. The inverse of this ratio is then multiplied by each country's score on the related Survey question. This product is then normalized to a 1 to 7 scale. Note that countries with zero reported incidence receive a 7, regardless their scores on the related Survey question. f The Competition Subpillar is the weighted average of two components: Domestic competition and Foreign competition. In both components, the included variables provide an
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Appendix B: India’s performance on the Global Competitiveness Index 2009–2010
The next two pages provide the details of India’s performance on the Global Competitiveness Index (GCI) 2009-2010. This column contains the title of each component and each indicator. Hard data indicators are identified by an asterisk. This column reports India’s position among the 133 economies covered by the GCI. Next to the rank, a coloured square indicates whether an indicator constitutes an advantage () or a disadvantage () for the country. For India, as for all economies ranked between rank 11 and 50 in the overall GCI, any individual variables on which India ranks higher than its overall GCI rank (i.e. 49) are considered advantages. Any variables ranked lower are considered disadvantages.
SCORE This column reports India’s score. For Executive Opinion Survey data, scores range from 1 (lowest) to 7 (highest). For hard data indicators, identified by an asterisk, the units of measure are indicated in parentheses. RANK INDICATOR
East Timor, Ecuador, Egypt, El Salvador, Georgia, Guatemala, Guyana, Honduras, India, Indonesia, Jordan, Lesotho, Mongolia, Morocco, Nicaragua, Nigeria, Pakistan, Paraguay, Philippines, Sri Lanka, Syria, Thailand, Tunisia and Ukraine. For the purpose of the analysis, India is excluded when computing the average scores of these two groups. The two columns under this heading report the score and the name of the best performing country. When several countries share the first rank, the number of countries is reported in the second column.
This column shows India’s evolution in the score of each component and indicator. The first symbol indicates whether India’s score in the GCI 2009-2010 has improved (), worsened () or remained unchanged (=) compared with the 20082009 edition. The second symbol indicates whether India’s score in the 2008-2009 edition has improved (), worsened () or remained unchanged (=) compared to the 2007-2008 edition. For the sake of comparison, we report scores of China, as well as average scores of the developing Asia region (DEV ASIA), and lower middle income group (LOW MID INC). The developing Asia region comprises 26 developing Asian nations, 14 of which are included in the GCI: Bangladesh, Brunei Darussalam, Cambodia, China, India, Indonesia, Malaysia, Nepal, Pakistan, Philippines, Sri Lanka, Thailand, East Timor and Vietnam. The lower middle income group as defined by the World Bank comprises 55, 31 of which are covered by the GCI: Albania, Armenia, Azerbaijan, Bolivia, Cameroon, China, Côte d'Ivoire,
CHINA DEV ASIA LOW MID INC
42 | The India Competitiveness Review 2009
The Global Competitiveness Index in detail
INDICATOR Basic requirements RANK 49 79 35 28
A Competitive advantage D Competitive disadvantage SCORE 4.3 4.2 4.5 4.2 EVOLUTION CHINA 4.7 5.1 4.6 4.2
improve/worsen between 2009-2010 and 2008-2009 improve/worsen between 2008-2009 and 2007-2008 DEV ASIA LOW MID INC 4.0 4.2 3.9 3.5 3.8 4.1 3.7 3.3 BEST PERFORMER 5.6 6.0 5.7 5.7 Switzerland Finland United States United States
Global Competitiveness Index
Efficiency enhancers In n o v a t io n a n d s o ph is t ic a t i on f a c t o r s 1st pillar: Institutions 1.01 Property rights 1.02 Intellectual property protection 1.03 Diversion of public funds 1.04 Public trust of politicians 1.05 Judicial independence 1.06 Favouritism in decisions of government officials 1.07 Wastefulness of government spending 1.08 Burden of government regulation 1.09 Efficiency of legal framework in settling disputes 1.10 Efficiency of legal framework in challenging regulations 1.11 Transparency of government policy-making 1.12 Business costs of terrorism 1.13 Business costs of crime and violence 1.14 Organized crime 1.15 Reliability of police services 1.16 Ethical behaviour of firms 1.17 Strength of auditing and reporting standards 1.18 Efficacy of corporate boards 1.19 Protection of minority shareholders’ interests 2nd pillar: Infrastructure 2.01 Quality of overall infrastructure 2.02 Quality of roads 2.03 Quality of railroad infrastructure 2.04 Quality of port infrastructure 2.05 Quality of air transport infrastructure 2.06 Available seat kilometres (mio per week) * 2.07 Quality of electricity supply 2.08 Telephone lines (per 100 pop.)* 3rd pillar: Macroeconomic stability 3.01 Government budget balance (% of GDP)* 3.02 National savings rate (% of GDP)* 3.03 Inflation (%)* 3.04 Interest rate spread (% points)* 3.05 Government debt (% of GDP)* 4th pillar: Health and primary education 4.01 Business impact of malaria 4.02 Malaria incidence (cases per 100,000 pop.)* 4.03 Business impact of tuberculosis 4.04 Tuberculosis incidence (cases per 100,000 pop.)* 4.05 Business impact of HIV/AIDS 4.06 HIV prevalence (% of adult pop.)* 4.07 Infant mortality (deaths per 1,000 live births)* 4.08 Life expectancy (years)* 4.09 Quality of primary education 4.10 Primary enrolment (net rate, %)* 4.11 Education expenditure (% of GDP)* 5th pillar: Higher education and training 5.01 Secondary enrolment (gross rate, %)* 5.02 Tertiary enrolment (gross rate, %)* 5.03 Quality of the educational system 5.04 Quality of math and science education 5.05 Quality of management schools 5.06 Internet access in schools 5.07 Local availability of specialized research and training services 5.08 Extent of staff training 6th pillar: Goods market efficiency 6.01 Intensity of local competition 6.02 Extent of market dominance 6.03 Effectiveness of anti-monopoly policy 6.04 Extent and effect of taxation 6.05 Total tax rate (% of profits)* 6.06 Number of procedures required to start a business* 6.07 Time required to start a business (days)* 6.08 Agricultural policy costs 6.09 Prevalence of trade barriers 6.10 Tariff barriers* 6.11 Prevalence of foreign ownership 6.12 Business impact of rules on FDI 6.13 Burden of customs procedures 6.14 Degree of customer orientation 6.15 Buyer sophistication
54 61 58 79 37 54 55 95 37 21 43 117 50 63 52 57 27 63 36 89 89 20 90 65 10 106 103 115 20 67 85 116 100 103 87 99 92 69 108 100 89 96 94 107 100 37 22 15 67 32 34 12 22 25 29 118 111 82 82 79 104 65 45 71 57 33
D D D D A D D D A A A D D D D D A D A D D A D D A D D D A D D D D D D D D D D D D D D D D A A A D A A A A A A D D D D D D D A D D A
4.8 3.6 3.6 2.4 5.0 3.2 3.4 2.9 4.4 4.7 4.6 4.7 5.2 5.5 4.5 4.1 5.5 4.6 4.9 3.2 3.1 4.5 3.5 4.7 2'645.3 3.2 3.2 -4.9 35.6 8.3 7.3 75.2 5.1 951.3 5.1 168.0 4.7 0.3 57.0 64.0 3.2 88.7 3.2 54.6 11.8 4.4 5.0 5.4 3.6 4.7 4.5 5.8 5.0 4.9 4.2 71.5 13.0 30.0 3.7 4.4 0.1 5.0 5.3 3.9 4.8 4.0 = = = n/a n/a n/a n/a
5.2 4.0 3.7 4.0 3.9 3.8 3.9 3.9 4.1 3.9 4.8 5.7 5.4 5.3 4.7 4.3 4.7 4.4 4.3 4.0 4.2 4.1 4.3 4.3 8'056.0 5.0 27.5 -0.7 51.5 5.9 3.1 15.9 6.0 7.6 5.8 98.0 5.8 0.1 20.0 74.0 4.7 99.5 1.8 77.3 22.9 3.8 4.8 4.0 5.4 4.4 4.2 5.8 4.9 4.2 4.1 79.9 14.0 40.0 5.1 4.6 0.1 4.4 5.6 4.6 4.5 4.7
4.1 3.2 3.3 2.9 3.7 3.1 3.5 3.3 3.6 3.5 4.0 4.6 4.4 4.8 3.8 3.8 4.4 4.4 4.3 3.5 3.6 2.8 3.8 4.4 1099.4 3.6 11.4 29.0 29.1 10.7 6.1 38.7 5.1 4586.8 4.9 195.8 4.8 0.5 31.5 68.2 3.6 88.1 3.3 65.8 17.5 3.6 3.8 3.8 3.6 3.7 3.8 4.8 3.7 3.8 3.9 41.1 10.3 54.9 4.1 4.3 0.1 4.5 5.0 3.7 4.6 3.6
3.9 3.0 3.1 2.5 3.2 2.8 3.1 3.4 3.3 3.2 4.0 5.2 4.3 4.7 3.7 3.7 4.2 4.4 4.1 3.5 3.3 2.4 3.7 4.3 487.9 3.9 10.6 12.0 24.6 11.4 7.4 38.7 5.0 5912.2 5.2 141.8 4.9 2.0 38.0 66.9 3.3 88.0 4.0 70.4 24.4 3.3 3.6 3.8 3.1 3.6 3.7 4.6 3.5 3.5 3.6 44.2 9.1 31.1 3.8 4.2 0.1 4.7 4.6 3.6 4.4 3.3
6.5 6.2 6.6 6.4 6.7 5.8 6.1 5.6 6.3 5.8 6.3 6.8 6.7 6.8 6.6 6.7 6.3 5.9 6.0 6.8 6.7 6.8 6.8 6.9 30919.9 6.9 64.2 384.0 61.3 1.4 0.3 0.0 n/a 0.0 7.0 4.0 6.7 0.1 1.8 83.0 6.7 101.7 11.0 148.6 94.7 6.2 6.4 6.1 6.6 6.3 5.7 6.2 6.0 5.9 6.3 11.3 1.0 1.0 6.1 6.5 0.0 6.6 6.7 6.4 6.3 5.3
Switzerland Singapore New Zealand Singapore New Zealand Sweden Singapore Singapore Singapore Sweden Singapore Austria Qatar Luxembourg Finland New Zealand New Zealand Sweden New Zealand Switzerland Singapore Switzerland Singapore Singapore United States Denmark Switzerland East Timor Azerbaijan Japan Hungary East Timor n/a Multiple (67) Finland Multiple (3) Norway Multiple (24) Hong Kong SAR Japan Finland Costa Rica East Timor Australia Korea, Rep. Singapore Singapore Switzerland Iceland Switzerland Sweden Germany Germany Netherlands Bahrain Qatar Multiple (2) New Zealand New Zealand Hong Kong SAR Multiple (2) Hong Kong SAR Singapore Singapore Japan Japan
The India Competitiveness Review 2009 | 43
A Competitive advantage
improve/worsen between 2009-2010 and 2008-2009 improve/worsen between 2008-2009 and 2007-2008 CHINA DEV ASIA LOW MID INC BEST PERFORMER
continued The Global Competitiveness Index in detail
INDICATOR 7th pillar: Labour market efficiency 7.01 Cooperation in labour-employer relations 7.02 Flexibility of wage determination 7.03 Rigidity of employment [0-100 (worst)]* 7.04 Hiring and firing practices 7.05 Firing costs (in weeks of salary)* 7.06 Pay and productivity 7.07 Reliance on professional management 7.08 Brain drain 7.09 Female-male participation ratio in labour force* 8th pillar: Financial market sophistication 8.01 Financial market sophistication 8.02 Financing through local equity market 8.03 Ease of access to loans 8.04 Venture capital availability 8.05 Restriction on capital flows 8.06 Strength of investor protection [0-10 (best)]* 8.07 Soundness of banks 8.08 Regulation of securities exchanges 8.09 Legal rights index [0-10 (best)]* 9th pillar: Technological readiness 9.01 Availability of latest technologies 9.02 Firm-level technology absorption 9.03 Laws relating to ICT 9.04 FDI and technology transfer 9.05 Mobile telephone subscriptions (per 100 pop.)* 9.06 Internet users (per 100 pop.)* 9.07 Personal computers (per 100 pop.)* 9.08 Broadband Internet subscribers (per 100 pop.)* 10th pillar: Market size 10.01 Domestic market size index* 10.02 Foreign market size index* 11th pillar: Business sophistication 11.01 Local supplier quantity 11.02 Local supplier quality 11.03 State of cluster development 11.04 Nature of competitive advantage 11.05 Value chain breadth 11.06 Control of international distribution 11.07 Production process sophistication 11.08 Extent of marketing 11.09 Willingness to delegate authority 12th pillar: Innovation 12.01 Capacity for innovation 12.02 Quality of scientific research institutions 12.03 Company spending on R&D 12.04 University-industry collaboration in R&D 12.05 Government procurement of advanced technology products 12.06 Availability of scientists and engineers 12.07 Utility patents (per mio pop.)* 32 3 34 23 73 31 25 11 18 39 30 39 19 116 104 96 91 4 4 3 41 20 67 26 44 43 33 36 35 25 36 46 68 4 58 40 44 54 103 85 46 30 41 122 RANK
D Competitive disadvantage SCORE EVOLUTION
A A D D D A A A D A A A A D A A A A A A A A D D D D A A A A A D A A A A A A A A A D A D
4.7 5.3 30.0 3.2 56.0 4.2 5.3 4.2 0.4 5.3 5.0 3.6 3.6 4.4 6.0 5.9 5.6 8.0 5.5 5.5 4.5 5.4 29.2 6.9 3.2 0.4 6.0 6.2 5.9 5.0 4.6 3.4 4.4 4.3 4.3 4.9 4.3 3.6 4.9 3.6 3.8 3.6 5.6 0.5 = = = =
4.5 5.3 27.0 3.8 91.0 4.9 4.9 4.2 0.9 4.0 3.9 2.7 3.2 3.1 5.0 5.2 4.0 6.0 4.3 5.1 4.2 4.7 47.4 22.3 5.6 6.2 6.5 7.0 5.6 4.8 4.7 3.5 3.9 4.3 3.9 4.6 3.9 4.2 4.4 4.2 4.6 4.4 4.6 0.9
4.4 4.9 29.8 4.0 78.4 4.2 4.3 3.5 0.7 3.8 4.0 3.1 2.9 4.2 5.5 5.0 4.1 5.6 4.5 4.6 3.5 4.6 58.5 16.2 5.9 1.4 3.9 4.7 4.7 4.2 3.9 3.4 3.5 3.9 3.3 3.9 3.7 3.1 3.5 3.2 3.4 3.6 3.9 0.6
4.3 5.0 34.5 4.1 62.8 3.9 4.0 3.1 0.6 3.7 3.4 2.7 2.6 4.2 4.9 5.0 3.9 4.7 4.4 4.5 3.3 4.5 66.8 12.5 5.2 1.0 3.3 4.3 4.5 4.1 3.2 3.2 3.4 3.9 3.3 3.8 3.5 2.9 3.2 2.8 3.0 3.4 3.9 0.1
6.3 6.3 0.0 5.9 0.0 5.7 6.5 6.0 1.2 6.7 5.3 5.0 4.6 6.5 9.7 6.7 5.9 10.0 6.8 6.5 6.0 6.3 207.8 86.8 94.6 37.3 7.0 7.0 6.3 6.3 5.5 6.4 6.2 5.5 6.4 6.4 6.2 5.9 6.2 6.0 5.9 5.5 6.0 279.3
Singapore Hong Kong SAR Multiple (3) Singapore Multiple (4) Singapore Sweden United States Mozambique Luxembourg Hong Kong SAR Luxembourg Hong Kong SAR Hong Kong SAR New Zealand Canada Sweden Multiple (4) Iceland Iceland Singapore Ireland United Arab Emirates Netherlands Canada Sweden United States China Japan Austria Japan Germany Germany Germany Japan United States Sweden Japan Switzerland Switzerland United States Singapore Finland Taiwan, China
44 | The India Competitiveness Review 2009
An Evaluation of India’s Economic Reforms
Bidisha Ganguly and Tanvi Garg, Confederation of Indian Industry
India has been on the path of slow and steady reforms since the mid-1980s. Initially, the reforms aimed to undo the layers of controls on business activity imposed in the post-independence period. This led to an increase in competitive forces and a burst in economic activity, especially in the private sector. Major economic reforms were undertaken during the 1990s. The rupee was devalued in 1991 and was made convertible on the current account in 1994. Meanwhile, industry deregulation was completed, while public sector monopoly was restricted to a few sectors. Foreign direct investment was permitted under automatic approval in many sectors. Financial markets were liberalized with the entry of foreign institutional investors into India’s equity markets. The most visible progress has been made in opening various sectors to competition, and a choice of products is now available to the consumer. Success stories can be seen in areas as diverse as automobiles, telecommunications, aviation, banking and other financial services, such as mutual funds and insurance. However, significant challenges remain, with India ranked 49th out of 133 countries in the World Economic Forum’s Global Competitiveness Index, behind such comparators as Malaysia (ranked 24th) and China (ranked 29th). Millions of Indians continue to earn livelihoods that are not adequate for a decent living standard. According to the World Bank, the number of Indians living below the
Figure 1: India's Income Growth*
% 10 8 6 4 2 0 First Plan 1951-56 Third Plan 1961-66 Fourth Plan 1969-74
Gross National Product (at factor cost)
international poverty line actually increased from 407 million to 456 million between 1983 and 20051, and India’s social indicators on health and literacy do not compare well with many other countries. In this article, some of the sources of strength for the Indian economy are examined, as well as the challenges faced by policy-makers in addressing the critical need for fostering more inclusive growth and development, which would reinforce the country’s productivity and competitiveness potential. India’s strong growth and competitiveness in key sectors are a source of strength. However, there are several areas where much remains to be done, especially to lift the living standards of a vast majority of the people. Policy-makers need to focus on three key areas: creating employment, improving social development and improving infrastructure.
Recent Key Drivers of India’s Rapid Growth
The Indian economy has gained strength from the recent period of comparative macroeconomic stability, but this remains an area for further improvement, with India ranked 96th out of 133 countries in this area. There has been a significant acceleration in growth since the turn of the century. While GDP growth in the 1980s and the 1990s averaged 5.9% and 5.8%,
Per capita Net National Product
Sixth Plan 1980-85
Eighth Plan 1992-97
Tenth Plan 2002-07
Source: Ministry of Finance
The India Competitiveness Review 2009 | 45
Figure 2: Increasing Investments and Savings
% of GDP
Gross Domestic Savings Gross Capital Formation
Source: Ministry of Finance
respectively, the average growth during the past five years has been 8.5% (see Figure 1). This has been accompanied by advances in social indicators as well. A notable feature of the recent acceleration in growth is the rising trend in domestic investments and savings. Gross capital formation (GCF), which was 25.2% of the GDP in 2002-2003, increased to 39.1% in 2007-2008. The rise in the rate of investment is due to various factors, especially the improvement in the investment climate coupled with an optimistic outlook for the growth prospects for the Indian economy.
The growth in capital formation in recent years has been amply supported by a rise in the savings rate (see Figure 2). The gross domestic savings as a percentage of GDP at current market prices stood at 37.7% in 2007-2008, as compared to 29.8% in 2003-2004. This improvement has been driven by an increase in all categories – household, corporate and public sector savings.
Robust Corporate Performance
Corporate sector performance has contributed immensely to Indian’s growth performance (see Figure 3). Sustained growth in profits and a gradual
Figure 3: Performance of Corporate Sector: Net Sales Growth (%)
% 40 28 30 20 10 0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
27 16 20 22
Services other than financial services
46 | The India Competitiveness Review 2009
Figure 4: Performance of Corporate Sector: Net Profit Margin (%)
20 15 10 5 0
March/07 June/07 Sept./07 Dec./07 March/08 June/08 Sept./08 Dec./08 March/09 Juin/09
yoy change, %
increase in productivity and capital efficiency have enabled the Indian corporate sector to cut costs and be globally competitive. Analysis of the financial results of a large sample of companies drawn from the CMIE Prowess database shows that their top line has been growing at a robust rate of more than 20% over the last five years2. Recently, corporate India witnessed extremely challenging times during the worst financial and economic crisis since the Great Depression. However, many Indian companies have shown great resilience by not only surviving the downturn, but also by taking the challenges as significant opportunities to innovate, consolidate and move towards a more efficient corporate structure. The quarterly results available for a smaller sample of 515 companies (307 manufacturing companies and 208 from the service sector) reveal that, as a result of a decline in the cost of raw materials, power and fuel, and a moderation in the growth of interest expenses, their net profit recovered in the quarter ending June 2009. As a result, their net profit margin improved from 3.8% in the quarter ending December 2008 to 11.2% in the June 2009 quarter (see Figure 4). The challenge for corporate India is to sustain plans for capacity expansion even in the aftermath of the financial crisis, which has led to some postponement
of investment. If robust corporate performance and consistent bottom-line growth continues, it will support the continued trend of investment-led growth.
Globalization of the Indian Economy
The structure of the Indian economy has undergone considerable change in the last decade, during which India's integration into the world economy has been remarkably rapid. Based on the common measure of globalization, the share of trade to GDP increased to 60.5% in 20082009 from 37.6% in 2003-2004 (see Figure 5). With an enabling policy framework and concerted efforts by the government to facilitate a favourable environment for international trade, exports have more than tripled between 2001-2002 and 20082009. The rapid growth of the economy also made India an attractive destination for foreign capital inflows. In a recent UNCTAD study, Assessing the Impact of the Current Financial and Economic Crisis on Global FDI Flows, it was found that India achieved a growth rate of 85.1% in foreign direct investment flows in 2008, the highest increase across all countries (see Box 1).
The India Competitiveness Review 2009 | 47
Figure 5: Trade (% of GDP)
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1990-91
Exports Imports Total
Invisible earnings (gross) Invisible payments (gross)
Box 1: Foreign Direct Investment According to a study by UNCTAD, India achieved a growth rate of 85.1% in foreign direct investment (FDI) inflows in 2008 – the highest globally. Total flows increased from US$ 25.1 billion in 2007 to US$ 46.5 billion in 2008. This is despite a 14.5% decline in global FDI inflows from US$ 1,940.9 billion in 2007 to US$ 1,658.5 billion in 2008. India also ranked ninth in global FDI inflows in 2008. Rank in 2008 Countries
1 2 3 4 5 6 7 8 9 10 11 United States France United Kingdom Belgium China Russian Federation Spain Hong Kong SAR India Brazil Sweden World
232.8 158.0 196.4 70.0 83.5 52.5 68.8 59.9 25.1 34.6 22.1 1,940.9
320.9 126.1 96.8 94.2 92.4 70.3 65.5 63.0 46.5 45.1 40.4 1,658.5
Growth Rate (%)
37.8 -20.2 -50.7 34.6 10.6 34.0 -4.8 5.2 85.1 30.3 83.1 -14.5
Source: UNCTAD 2009
According to UNCTAD’s World Investment Prospects Survey 2008-2010, China is perceived to be the top investment destination, followed by India, the United States, Russia and Brazil. Similarly, AT Kearney’s 2007 FDI Confidence Index shows China, India and the United States as the most preferred locations, in that order. For long-term prospects, the Japan Bank of International Cooperation (JBIC) survey of Japanese manufacturing transnational corporations (TNCs) shows India replacing China as the most promising country for business operations of Japanese TNCs. Robust economic growth, an improved investment environment and opening of critical sectors (e.g. telecommunications, civil aviation, refineries, construction) facilitated FDI inflows into India.
48 | The India Competitiveness Review 2009
Factors Favouring India’s Productivity
Cost-effective and Skilled Manpower
India's labour cost advantage is well understood. Wage levels in India are among the lowest in the world. India has one of the largest pools of English speaking, high-quality and skilled manpower. Indian universities churn out engineers, MBAs, PhDs, among others, in large numbers, although, given the large population, university enrolment rates remain very low by international standards. India produces 400,000 engineers a year, nearly 16 times Thailand’s 25,000. This skilled workforce has helped reduce process and redesign costs. For example, in the pharmaceutical sector, the cost of producing bulk drugs has declined by 60%, and a KPMG study in 2005 estimated that India’s drug producing costs are one-twentieth that of US companies.
This availability provides a significant advantage to any producer seeking to convert these materials into higher value-added products to serve adjacent markets.
Huge Domestic Market
India’s market size is a competitive advantage. Domestic consumption has played a significant role in India’s economic growth. The share of consumption in India’s GDP is much higher than in other emerging economies. Rising incomes in India result in increased consumption, which in turn provides a boost to demand and creates further employment opportunities, thus stimulating the GDP and income growth. According to a study by the McKinsey Global Institute in 2007, the size of the Indian consumer market was estimated at US$ 370 billion in 2005. The study concludes that, as incomes and population grow, the market could quadruple in size by 2025, becoming the fifth-largest consumer market in the world. Under this scenario, 291 million people will escape poverty, and the middle class will comprise 583 million at the end of two decades.
Availability of Raw Materials
India has a significant advantage in some industries due to its natural resources and raw materials. For example, India has one of the richest sources of iron ore, which is a key ingredient for Indian steel companies. In addition, India has advantages upstream (e.g. bauxite), which lead to increased competitiveness in alumina. In sectors such as textiles, India has a significant raw material advantage.
Figure 6: % of Population Aged 65 and Older
% of total population 30
According to a CII study, India accounts for 16% of the world’s population and is expected to become the world’s most populous country by 20503. About
Source: United Nations 2008
The India Competitiveness Review 2009 | 49
265 million people will enter the working-age cohort in the next 20 years. By 2020, the average age in India will be 29 years, compared to 37 in China and 48 in Japan. India’s age-dependency ratio will have declined from 0.6 to 0.4 (see Figure 6). India’s demographic dividend will have several implications for the global economy: • Greater demand for goods and services produced overseas • Shift in labour-intensive value addition as the workforces in other countries decrease • Bigger contribution from India in research and development and innovation
Increase Employment Opportunities
Generating greater employment and moving towards better-quality employment stand among India’s greatest challenges today. The manufacturing and services sectors need to absorb the large number of new entrants into the labour force, as well as the surplus labour from agriculture (see Figure 7). These sectors need to create a sufficient volume of highquality jobs to achieve the objective of inclusive growth. India’s economic policy-makers need to reorient themselves to evaluate their performance by key parameters in job creation. Although a large upswing in the economy’s growth rate has taken place, the benefits in terms of employment generation have been relatively limited. In India, the shift of labour from agriculture to manufacturing and services, and from the unorganized to the organized sector, has been painfully slow. Agriculture – where productivity is low – continues to employ about 50% of the labour force. Employment opportunities in non-agriculture sectors, which enjoy higher productivity, are not able to adequately absorb the surplus labour from agriculture. The manufacturing sector is a key to providing largescale employment to a labour force being displaced by a shrinking agricultural sector, given that the skill sets of this segment of the population are likely to be relatively limited. The share of manufacturing in India’s GDP, at 16.3%, compares poorly with other
Towards More Inclusive Growth
The sections above describe the positive aspects of India’s economic prospects. Yet, challenges remain to ensure that this growth is sustainable and living standards of India’s large population rapidly improve. The current government has often stated that its priority is to foster inclusive growth and has instituted many programmes to that end. Key among the programmes aimed at fostering more inclusive growth is the National Rural Employment Guarantee Scheme (see Box 2), aimed at guaranteeing employment at a minimum wage to rural labourers. While the programme has been successful in keeping people out of poverty, more sustainable drivers of employment need to be generated.
Figure 7: Employment in Rural and Urban India (Financial Year 2004-2005)
Million population 500 400 300 200 100 0 Total
Source: Planning Commission 2008
35 25 385 278
50 | The India Competitiveness Review 2009
Table 1: India’s Performance on the UNDP’s Human Development Index 2009
Country Poland Brazil Russian Federation Turkey Thailand China Sri Lanka Indonesia Vietnam Egypt India
Human Development Index (Value) 0.880 (41) 0.813 (75) 0.817 (71) 0.806 (79) 0.783 (87) 0.772 (92) 0.759 (102) 0.734 (111) 0.725 (116) 0.703 (123) 0.612 (134)
Life Expectancy at Birth (Years) 75.5 (45) 72.2 (81) 66.2 (118) 71.7 (86) 68.7 (107) 72.9 (72) 74.0 (59) 70.5 (99) 74.3 (54) 69.9 (102) 63.4 (128)
Adult Literacy Rate (% age 15 and above) 99.3 (15) 90.0 (71) 99.5 (11) 88.7 (77) 94.1 (52) 93.3 (56) 90.8 (66) 92.0 (61) 90.3 (69) 66.4 (119) 66.0 (120)
Combined Gross Enrolment Ratio in Education (%) 87.7 (39) 87.2 (40) 81.9 (51) 71.1 (105) 78.0 (68) 68.7 (112) 68.7 (113) 68.2 (115) 62.3 (126) 76.4 (79) 61.0 (134)
GDP Per Capita (PPP US$) 15,987 (53) 9,567 (79) 14,690 (55) 12,955 (63) 8,135 (82) 5,383 (102) 4,243 (116) 3,712 (121) 2,600 (129) 5,349 (103) 2,753 (128)
Figures in parentheses indicate ranking among 182 countries Source: UNDP 2009
Asian countries such as China (43.1%), Korea (24.7%), Indonesia (28.0%), Malaysia (29.8%) and Thailand (35.1%)4.
Improve Social Development
Human development indicators demonstrate the need for significant improvement. According to the most recent Human Development Index calculated by UNDP, India ranks 134 out of 182 countries. An improvement in health and literacy standards would also greatly improve the productivity of the workforce (see Table 1). In consonance with the commitment to ensure faster social development and achieve an inclusive pattern of growth, the government continues to focus on several initiatives and programmes towards that end. Recent trends show that government spending on social services is consistently increasing.
The India Competitiveness Review 2009 | 51
Box 2: Major Government Initiatives in the Social Sector Recent government initiatives to achieve inclusive growth and faster social sector development and remove economic and social disparities include: National Rural Employment Guarantee Scheme (NREGS) Launched in 2006 in 200 of the most backward districts in the first phase, NREGS has expanded to 330 districts in the second phase. Under NREGS, over 40 million households were provided employment in 20082009. This is a significant jump over the 33.9 million households covered under the scheme during 20072008. Bharat Nirman Launched in 2005-2006 to build infrastructure and basic amenities in rural areas, this programme has six components: rural housing, irrigation potential, drinking water, rural roads, electrification and rural telephony. Midday Meal Scheme Launched in 1995, this scheme aims to boost universalization of primary education by increasing enrolment, retention and attendance while contributing to the nutrition of students in primary classes. Rajiv Gandhi National Drinking Water Mission Renamed in 1991, this mission was introduced as one of five Societal Missions in 1986 and originally called the National Drinking Water Mission. It aims to provide an adequate and safe supply of drinking water. National Rural Health Mission Launched in 2005, the mission provides accessible, affordable and accountable quality health services to the poorest households in the remotest rural regions. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) For a seven-year period starting from 2005-2006, JNNURM has two main components – the Basic Services to the Urban Poor (BSUP) Programme and Integrated Housing and Slum Development Programme (IHSDP). BSUP was launched to assist cities and towns in taking up housing and infrastructural facilities for the urban poor in 63 selected cities in the country.
Invest in Infrastructure
With the rapid growth of the economy in recent years, the importance and urgency of removing infrastructure constraints have increased. Government spending on infrastructure has lagged behind other economies, such as China, and the economy has consistently faced shortages in critical areas, such as power and transport infrastructure. It is also apparent that the lack of adequate infrastructure has hurt the poor the most, as the available infrastructure has been rationed in favour of those who are able to pay. It is a matter of concern that over 50% of rural households have no electricity.
The Indian government recognizes this imperative. The 11th Five-Year Plan (2007-2012) has detailed plans for raising the level of investment in infrastructure (see Table 2). The Plan measures the amount of investment needed if India’s investment in infrastructure were to rise from 5% of GDP currently to 9% by the terminal year of the Plan. Assuming that GDP growth is maintained at 9% every year, this translates to an investment of 20,000 billion rupees, or about US$ 500 billion over the entire five-year period.
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Table 2: Investment Estimate for Infrastructure Sector (US$ billion)
Sector Energy Roads and Bridges Telecommunication Railways Irrigation Water Supply and Sanitation Ports Storage and Gas Airports Total
Source: Planning Commission 2008
10th Plan (2002-2007) 70.5 31.7 22.5 20.3 32.1 15.6 1.3 4.4 2.1 200.5
11th Plan (2007-2012) 150.4 76.1 65.1 62.2 53.1 48.6 18.0 10.5 8.5 492.4
support. The inflow of foreign direct investment to the infrastructure sector increased more than fivefold in 2007-2008, compared with the previous year, and was maintained during 2008-2009 (see Table 3).
Combating the Impact of the Global Financial Crisis
The global financial meltdown and the economic recession that ensued were not without consequences to the Indian economy. According to the Economic Survey, economic growth decelerated in 2008-2009 to 6.7%. This represents a decline of 2.1% from the average growth rate of 8.8% in the previous five years (2003-2004 to 2007-2008). The slowdown in GDP growth is more clearly visible from the growth rates over successive quarters of 2008-2009 (see Figure 8). In the first two quarters of 2008-2009, the growth in GDP was 7.8% and 7.7%, respectively. The growth rate fell to 5.8% in the third and fourth quarters of 2008-2009 (compared to 9.3% and 8.6% in the third and fourth quarters of 2007-2008, respectively). The fallout of the global financial crisis on the Indian economy has been palpable in the industry and trade sectors, and has also permeated the services sector. Although economic growth clearly became more moderate, the Indian economy – with more than 6.0% growth in 2008-2009, according to the
The government has made an effort to facilitate the entry of private enterprise into this sector through changes in the legal framework. A role for private sector participation has also been facilitated by technological change that allows unbundling of infrastructure, so the public and private sectors can take up the components most suited to their capacities. Government continues to invest significant sums in areas where private participation is minimal or not forthcoming. Public-private partnerships (PPPs) are gaining in importance and benefiting from government
Table 3: FDI Flows to Infrastructure (US$ million)
Sector Power Non-conventional Energy Petroleum and Natural Gas Telecommunications Information and Broadcasting Air Transport Sea Transport Ports Railway-related Components Total
Source: Ministry of Finance 2009
2005-2006 87.1 0.1 14.2 623.6 56.0 10.3 53.6 0.5 14.7 859.9
2006-2007 157.5 2.1 89.4 477.7 43.6 92.1 72.5 0.0 25.8 960.7
2007-2008 968.0 43.2 1,426.8 1,261.5 321.5 99.1 128.4 918.2 12.4 5,178.8
2008-2009 984.8 85.3 412.3 2,558.4 762.3 35.2 50.2 493.2 18.0 5,399.6
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Figure 8: Quarterly Estimates of GDP Growth
year on year change, % 10
4 Q1 2007-08 Q2 2007-08 Q3 2007-08 Q4 2007-08 Q1 2008-09 Q2 2008-09 Q3 2008-09 Q4 2008-09 Q1 2009-10
Source: Ministry of Finance 2009
Economic Survey – remained one of the best performing economies. India’s financially sound and well-capitalized banking system, comfortable foreign exchange reserves position and robust domestic demand, led by the rural economy, have acted as shock absorbers amid the crisis.
To counter the negative fallout of the global economic slowdown on the domestic economy, the government provided a substantial tax relief as well as increased expenditure on public projects to create employment and public assets. Box 3 provides more details on the government’s response.
Box 3: Policy Response to the Financial Crisis • The Reserve Bank of India (RBI) aggressively lowered policy rates between October 2008 and April 2009. The reverse-repo and repo rates were reduced from 6.0% and 9.0% to 3.25% and 4.75%, respectively, in successive policy announcements. The cash reserve ratio was reduced from 9.0% to 5.0%. These reductions have helped improve liquidity in the system. • Other measures have been taken to improve liquidity and provide refinancing to sectors such as housing, SMEs and exports. • Overall fiscal stimulus of nearly 3.5% of GDP, including: - Expenditure of 200 billion rupees on critical rural infrastructure and social security schemes, e.g. road building, employment guarantees, housing - Reduction in ad valorem CENVAT rate by 6% for top bracket and 4% for others - Reduction of 2% in service tax rate - Greater access to finance for non-banking financial companies (NBFCs) through provision of special line of credit - Increase in guarantee cover for micro and small enterprises - Special monthly meetings of state-level bankers’ committees to oversee the resolution of credit issues of micro, small and medium enterprises by banks
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Although there are indications that the economy may have weathered the worst of the downturn due, in part, to the resilience of the economy and various monetary and fiscal measures taken by the government, the recovery process remains fragile. Further, the stimulus package, while arguably necessary in the short run, has aggravated the deficit and debt positions of the country, making government investments in many areas more difficult going forward. Policy measures that evenly address the short- and long-term challenges would help achieve tangible progress and ensure that the outlook for the Indian economy remains firmly positive.
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The poverty line of US$ 1.25 a day (at purchasing power parity) is the World Bank’s definition of extreme poverty. The year 2005 is the most recent available. Figures are from World Bank 2009. Sample size is determined by the number of companies whose results are available in the database for the latest year; in this case, the sample consists of over 3,000 companies. CII (2008) Country at a Glance tables, World Bank, available online at www.worldbank.org; data shown refers to 2006.
Confederation of Indian Industry (CII). 2008. National Conference and Annual Session theme paper: Building People, Building India. Confederation of Indian Industry (CII). 2009. State of the Economy. July. CII and Boston Consulting Group. 2005. Advantage – The India Manufacturing Opportunity. CMIE (Centre for Monitoring Indian Economy). Prowess. Database of large and medium Indian firms. KPMG. 2005. Destination ... India. McKinsey Global Institute. 2007. Tapping into the Indian Consumer Market. Ministry of Finance, Government of India. 2008. Economic Survey 2007-2008. Ministry of Finance, Government of India. 2009. Economic Survey 2008-2009. United Nations. 2008. World Population Prospects – 2008 revision. The World Bank. 2009. World Development Indicators 2009. Planning Commission, Government of India, 2008. Eleventh Five-Year Plan (2007-2012). UNCTAD (United Nations Conference on Trade and Development). 2009. Assessing the Impact of the Current Financial and Economic Crisis on Global FDI Flows. April. UNCTAD (United Nations Conference on Trade and Development). 2008. World Investment Prospects Survey (2008-2010) UNDP (United Nations Development Programme). 2009. Human Development Report 2009.
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India’s Competitiveness: The View from CEOs
N. Ramesh Rajan and Jairaj Purandare, PricewaterhouseCoopers, India
Over the past two decades, India’s economic reforms have bolstered its leading companies into global powerhouses, giving the world a glimpse of the nation’s economic potential. But it is one thing to have achieved success when the global economy is stable and steadily growing. It is quite another when the global economy turns sharply downwards and volatility emerges in every market. The PricewaterhouseCoopers 13th Annual Global CEO Survey assessed the perspectives of India’s chief executive officers (CEOs) at this distinctive point in time, during the worst global economic conditions in 75 years, to provide a new window into India’s competitiveness in a globalized world. India's business leaders have a unique outlook on the nation's past and future competitiveness. And their view points towards a resilient economy that is poised to diversify its base and continue its past successes, despite the risks both at home and abroad.
regulated banking industry, conservative capital requirements and an economy less dependent on exports than many others in the developing world. That hope gave way to reality in late 2008 as the broader effects of the slump hit home and growth slowed. Still, a more optimistic sentiment prevails in India as it joins other Asian countries in recovery. In PricewaterhouseCoopers’ survey of 62 chief executive officers of Iarge Indian companies, conducted in September 2009, confidence was high: 63% were very confident of their revenue growth prospects over the next 12 months and 34% were somewhat confident. To be sure, these figures suggest a moderate fall in confidence compared with past years: In 2008, 70% of CEOs were very confident in their 12-month prospects, and 90% were very confident in 2007 (see Figure 1). Indian CEOs’ optimism extends to the country’s broader economy as well, with nearly two-thirds expecting recovery, defined as stable and steady growth, by the middle of 2010. Indeed, more than one-third of CEOs believe their industry and the country’s economy have already recovered or will have by the end of this year (see Figure 2).
Confidence in Recovery
When the world tumbled into economic crisis, there was initially a sense in India that the country was decoupled from the global malaise, thanks to a
Figure 1: Indian CEOs remain confident, though their confidence is now more measured
Survey question: How would you assess your level of confidence in prospects for the revenue growth of your company over the next 12 months? Are you…?
Not very confident
2009 3% (n=62)
Somewhat confident Very confident Note: 0% responded “Not confident at all” in each survey year
2007 3% 7% (n=30)
50 % of Indian CEO Survey respondents
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2009
The India Competitiveness Review 2009 | 57
Figure 2: Almost two-thirds of CEOs believe India's economy will have recovered by July 2010
Survey question: When do you expect recovery to set in for your industry/economy?* 40% 37% % of Indian CEO Survey respondents 30 34% 31% 31% 23% India’s Industry economy 10 19% 11% 5% 0 Already recovered or recovery expected before the end of 2009
In the first half of 2010
In the second half of 2010
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey (2009)
Nurturing Green Shoots
Government policies are likely to support this confident outlook, despite concerns about India’s growing fiscal deficit and the prospect of higher inflation. Ensuring an economic recovery is more important now than checking inflation, India's Planning Commission said at a press conference in October 20091. "We need to ensure economic recovery that provides jobs. It's more important to provide jobs than trying to lower inflation," Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, told reporters. “General inflation is not a big problem yet. It is well below the comfort level,” Ahluwalia added. The Reserve Bank of India expects the country's inflation rate (based on the wholesale price index) to be around 5% by the end of March 2010. With the downside risks to the economy from scanty monsoon rainfall reduced, interest rates likely to remain low and expectations for consistent economic policy-making – including the continuation of tax cuts and lower interest rates – economic growth is forecast at 5.4% this year and 6.4% in 2010, according to IMF estimates2. In that environment, Indian companies will grow primarily from better penetration of existing markets, according to the CEOs surveyed, with 58% seeing that as the main opportunity to grow their businesses in the next 12 months. Leaders also saw
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new product development, at 19%, and new geographic markets, at 10%, as significant prospects for growth. But Indian companies are committed to going it alone; only 8% named mergers and acquisitions as growth opportunities, and just 3% saw growth coming from new joint ventures or strategic alliances. Seventy-seven per cent of respondents expected to finance the coming year’s growth through internally generated cash flow. But 26% said they would tap the rebounding equity markets for their capital needs, and an equivalent number would rely on bank lending, while 24% planned to access the debt markets and 21% said they would look to private equity or venture capital. Just 2% said they would seek investment from sovereign wealth funds. Indian government officials have said that further reforms to lift restrictions on foreign investment in key industries would be considered only in the context of the global slump and the subsequent protectionist rhetoric and tariff proposals in various countries around the world. When the economic recovery arrives, Indian chief executives expect their most important markets outside of India to be South Asia, at 18%, and China, 16%, equal to the United States (see Figure 3). Over the past 10 years, the shares of Indian exports going to South Asia, China and the Middle East have grown, while the United States and Europe shares have shrunk. In that same period,
Figure 3: South Asia and China are important markets for Indian companies, while Europe is a lower priority
Survey question: Which of these will be your most important market outside of India when economic recovery arrives?*
Figure 4: India's global competition is coming from China and Europe
Survey question: Where do you expect your greatest international (non-Indian-based) competition in global markets to come from, whenever economic recovery arrives?*
Don’t know/ Refused 10% None 11%
South Asia 18%
Don’t know/ Refused 15% China 34% None 15%
Other 8% Russian Federation 3% European Union 6% Middle East 11%
Other 2% Middle East 3% Japan 5%
United States 16%
United States 6%
South Asia 6%
European Union 15%
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2009
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2009
India’s share of total world exports has grown from just over 0.6% in 1998 to nearly 1.5% through the first five months of 20093.
Indian chief executives expect their greatest international competition in global markets during the recovery to come from China, 34%, and the European Union, 15%. None of the executives in the survey named either of their other two cohorts among the BRIC countries as their main competition, perhaps due to Russia’s heavy identification with oil and gas and Brazil’s geographic distance. And the United States, headquarters for 140 of the Fortune Global 500, was only named by 6% of Indian CEOs as their greatest international competitor (see Figure 4). India’s remarkable economic rise has famously been driven by its services sector, which represented over 60% of economic growth in 2007 and is forecast to represent over 90% of economic growth in 2009 and 2010 (see Figure 5). Still, since the financial crisis began, 42% of Indian chief executives surveyed believe the country’s manufacturing sector
has improved its global competitiveness (see Figure 6). Confidence in the manufacturing sector could explain why China, the world’s leading manufacturer, is seen as India’s largest global competitor. And, it suggests that India’s economy is evolving away from the services-led growth that fuelled its past successes, a path that could take advantage of a broader spectrum of India’s diverse potential labour force. Many CEOs cited cost competitiveness and productivity gains as current drivers for manufacturing improvement. Several manufacturing industries hold promise. Despite longstanding worries about the country’s inadequate infrastructure, some experts expect India to play a major role in automobile manufacturing, particularly for small cars, prompted in part by the response to Tata Motor's Nano, a fuel-efficient fourpassenger city car that sells for as little as 100,000 rupees (US$ 2,050) plus tax. Nanos first started to appear on India’s roads in July, and Tata says it will ship the first 100,000 by the end of 2010. Small cars comprised nearly three-fourths of the 1.22 million cars sold in India in the year ended 31 March 2009, according to the Indian edition of the Wall Street Journal, which has led Toyota, Ford, General Motors, Nissan, Volkswagen and other global
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Figure 5: India's services sector is forecast to deliver 90% of the country's economic growth in 2009 and 2010
6.2% Contribution to GDP growth 6 5.7% Services 5.7% 5.4%
4 2.9% Industry 1.5% 0.8% Agriculture 0 2006 2007 0.8% 0.3% 2008 0.3% 0.1% 2009F 0.6% 0.0% 2010F 2.5%
Source: Indian Central Statistical Organisation; Indian Office of the Economic Adviser; PricewaterhouseCoopers forecasts (July 2009)
automakers to either make small cars in India or announce plans to do so to tap this growing market4. The manufacture of pharmaceuticals is another industry that experts believe could be a future growth sector. On the other hand, only 27% of Indian CEOs said the country’s services sector had improved its global competitiveness during the crisis, with another 47% saying the sector’s competitiveness remained the same. Twenty-one per cent said it had declined.
The global economic downturn slowed the growth of India’s technology and business services industry but, beyond the crisis, the industry faces a changing environment, including increased competition from other countries, and talent and infrastructure constraints that will likely reduce the country’s dominant 50% market share. The revenues of India’s business and technology services companies soared to US$ 58 billion at the end of 2008 (including about US$ 46 billion in exports), from US$ 4 billion in 19985. In 2005, India’s National Association of Software and Services Companies (NASSCOM)
Figure 6: CEOs are optimistic about the manufacturing sector's competitiveness
Survey question: Do you think that India's manufacturing/services sector has declined, stayed the same or improved in terms of global competitiveness since the financial crisis began?*
50 % of Indian CEO Survey respondents
Declined Stayed the same Improved
*(n=62) Note: Responses of Don't know/Refused excluded
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2009
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Figure 7: Talent and technology factors have contributed to India's competitiveness; infrastructure needs remain unmet
Survey questions: Which characteristics have contributed the most to make the Indian economy competitive over the past 10 years? In which areas will India most need to improve in order to remain competitive over the coming 10 years?* Strong infrastructure Stable and deep domestic capital markets Efficient markets for goods Innovation Sophistication of business leadership and organizations Stable economic policy-making and institutions Technological readiness Entrepreneurial base Adequate supply of educated and healthy workers 0
2% 16% 19% 21% 26% 37% 48% 47% 56% 74% 25 50 % of Indian CEO Survey respondents 75 31% 29% 45% Need to improve in the coming 10 years Contributed over the past 10 years
18% 5% 6%
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2009
suggested that export revenues could reach US$ 60 billion a year by 2010, but the global downturn will probably delay the achievement of this goal6. According to the CEOs surveyed, credit for India’s past competitiveness goes to its supply of educated workers, a strong entrepreneurial base and its technological readiness (see Figure 7). But educational achievement and technology adoption are hardly uniform throughout India, with many areas lagging the leaders in both. While the Indian Institutes of Technology and other top universities produce thousands of engineering and science graduates each year, many of the best and brightest emigrate, and relatively few of India’s millions qualify to attend. India’s leading companies, many of whose CEOs were interviewed for this survey, have adopted information technology as aggressively as their Western counterparts, but smaller firms risk falling behind the curve. The workforce depth and technology access situations may hinder the transition away from an agrarian economy – agriculture represents 16% of India's economy but still over half of employment – and may very soon constrain thriving sectors like IT and heavy industry.
Many Risks Remain
Among risks associated with the economic crisis, Indian CEOs are most concerned by exchange rate volatility, not surprising in a period when the rupee has see-sawed from 48 to the US dollar to 39 and back again. A protracted global recession and overregulation are serious risk factors that were named by most of those surveyed, but chief executives also cited other worries, including the lack of stability in capital markets, protectionist tendencies of national governments and inflation (see Figure 8). The attacks in Mumbai last November are vivid memories that will keep security high on the agenda of business leaders. Among risks not directly related to the economic crisis, terrorism was highest at 76%. As to be expected, the inadequacy of basic infrastructure and energy costs, named by 74% and 73% of CEOs, respectively, also remained high on the list of potential threats. Given the solid majorities who indicated concern over the risks surveyed, it is no surprise that more CEOs are planning to change their risk management
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Figure 8: CEOs named exchange rate volatility and a protracted global recession as the biggest risks related to the economic crisis
Survey question: From the list of potential threats to your growth prospects related to or emerging from the current economic crisis, how concerned you are, if at all, about…* Permanent shift in consumer spending and behaviours Inability to finance growth Macroeconomic imbalances (e.g. trade or fiscal) Financially stressed suppliers Inflation Protectionist tendencies of national governments Lack of stability in capital markets Over-regulation Protracted global recession Exchange rate volatility 40
56% 63% 63% 66% 66% 68% 69% 74% 79% 82% 50 60 70 % of Indian CEO Survey respondents answering somewhat or extremely concerned 80%
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey (2009)
functions, as compared with other corporate functions (see Figure 9). In this process, CEOs reported that they are reassessing their risk tolerance; preparing for systemic risks and lowprobability, high-impact events; and integrating risk management capabilities into business units. Chief executives consistently say that India still needs to develop its infrastructure and foster stable economic institutions and domestic capital markets, areas in which the government would be expected
to play a role. Further, Indian chief executives want their government to drive the convergence of global tax and regulatory frameworks. They believe the government has been effective in helping to create a skilled workforce in the past, but the country will need to step up its investment in education to sustain heady growth. The Economic Times cheered an August report of 10.4% growth for the Index of Industrial Production – which measures manufacturing, mining and
Figure 9: CEOs are planning major changes to their risk management function
Survey question: Thinking about [issue or function], do you anticipate making changes?* Managing risk Investment decisions Strategies for managing talent Organizational structure (including M&A) Capital structure Corporate reputation and rebuilding trust Engagement with your board of directors 0
6% 8% 11% 13% 23% 19%
40% 63% 68% 68% 61% 66%
53% 27% 21% 18% 16% 13%
No change Some change Major change
73% 25 50 % of Indian CEO Survey respondents 75
Source: PricewaterhouseCoopers 13th Annual Global CEO Survey (2009)
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electricity – as the strongest proof yet that a robust recovery is underway7. But, on a cautionary note, the paper also pointed out that eight out of 17 subgroups in the index reported negative or low growth. The drought and subsequent floods in the southern states could erode the buying power of a significant portion of the population, and sectors such as construction and automobiles are still, to a large extent, driven by low interest rates. As India grows more innovative, and more competitive up and down the value chain, the country’s CEOs have good reason to be optimistic in their outlooks. But they are also realistic about India’s deep needs and look to the government to support the development of a more robust infrastructure, provide broader and deeper education, and write more liberal policies to foster access to capital. There are choppy waters to navigate, CEOs say, but India remains on a course to sustainable growth.
Survey Methodology This chapter was written by PricewaterhouseCoopers based on the results of the PricewaterhouseCoopers 13th Annual Global CEO Survey. For the survey, over 1,000 interviews with CEOs were conducted in 52 countries beginning in early September 2009. In India, 62 interviews were conducted, from a range of different industries. The majority of interviews were conducted by telephone. The research was coordinated by the PricewaterhouseCoopers International Survey Unit, Belfast, Northern Ireland, in cooperation with project managers and a global advisory board of PricewaterhouseCoopers partners.
1 2 3
WSJI 2009b. IMF 2009. Trade figures are from IMF Direction of Trade Statistics website, accessed 6 October 2009.
4 5 6 7
WSJ 2009. WSJI 2009a. NASSCOM and McKinsey 2005. The Economic Times 2009.
The Economic Times. 2009. "Industrial Output Cheers". 13 October. IMF (International Monetary Fund). 2009. World Economic Outlook. October. NASSCOM (National Association of Software and Services Companies) and McKinsey & Co. (McKinsey). 2005. Extending India's Leadership of the Global IT and BPO Industries. Wall Street Journal. 2009. "Toyota to Make Engines in India". 5 October. Wall Street Journal India. 2009a. "Indian Tech Outsourcers Aim to Widen Contracts". 6 October. Wall Street Journal India. 2009b. 7 October.
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The World Economic Forum would like to thank the Confederation of Indian Industry and PricewaterhouseCoopers for their support and contribution to this review.
The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the growth of industry in India, partnering industry and government alike through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry managed organization, playing a proactive role in India's development process. Founded 114 years ago, it is India's premier business association, with a direct membership of over 7,500 organizations from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 83,000 companies from around 380 national and regional sectoral associations. CII catalyses change by working closely with government on policy issues, enhancing efficiency, competitiveness and expanding business opportunities for industry through a range of specialized services and global linkages. It also provides a platform for sectoral consensus building and networking. Major emphasis is laid on projecting a positive image of business, assisting industry to identify and execute corporate citizenship programmes. Partnerships with over 120 NGOs across the country carry forward its initiatives in integrated and inclusive development, which include health, education, livelihood, diversity management, skill development and water, to name a few.
PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 163,000 people in 151 countries across its network share their thinking, experience and solutions to develop fresh perspectives and practical advice. PricewaterhouseCoopers pushes itself – and its clients – to think harder, to understand the consequences of every action and to consider new perspectives. Its goal is to deliver a distinctive experience to its clients and people around the world. PricewaterhouseCoopers is committed to serving as a force for integrity, good sense and wise solutions to the problems facing businesses and the capital markets. Transparency and good standards of corporate governance – both in its clients' businesses and its own – are central to its ability to achieve those objectives. PricewaterhouseCoopers is also dedicated to the pursuit of responsible leadership. In today's business environment, this means taking an active role in building a sustainable business – one that creates long-term value for clients, people and the stakeholder community within which it operates. Its member firm in India – PricewaterhouseCoopers Pvt. Ltd – has offices in Ahmedabad, Bangalore, Bhubaneshwar, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. Complementing its depth of industry expertise and breadth of skills is its sound knowledge of the local business environment in India. PricewaterhouseCoopers is committed to working with its clients in India and beyond to deliver the solutions that help them take on the challenges of the ever-changing business environment.
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The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)