Business Environment and Policy

Dr. V L Rao Professor Dr. Radha Raghuramapatruni Assistant Professor

Rangarajan (plus current information) Economic Growth (Growth of Real GDP) 1950-1980: 3.7% 1981-82 to 1990-91: 5.6% Q. 1990s ? (Appendix Table 1: RBI AR)

Q.

2000-01 to 2009-10

Q. Why called Real GDP?

Recent Years % 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

9.5 9.7 9.0 6.7 8.0 8.5

Q. Why did it fall in 2008-09? Q. Which country has > 10% growth? Q. Indias growth rate expected in 2011-12: _____ %

Current Account Deficit (CAD) (Difference between export and import of goods and invisibles, e.g. tourism, shipping) $ billion As % of GDP* 2008-09 27.9 ? 2009-10 38.4 ? 2010-11 44.3 ? (Source: Appendix Table 1, RBI AR) CAD / GDP of > 3% considered not good. Note: More about this in BoP Section

FX Reserves (Foreign currency assets + gold + SDRs + Reserve Tranche Position in IMF)
End-March 1991 US $ billion 5.8 (FCA in June 1991: $1.1 bn) 1995 25.2 2000 38.0 2004 113.0 2007 199.2 2008 314.6 (end-May, Peak) 2009 252.0 2010 279.1 2011 (7 Oct.) 311.5

Q. Why was there a fall in 2009?

Inflation (WPI) (Appendix Table 1 RBI AR) % 1990-91 to 1999-2000 8.1 2000-01 to 2009-10 5.4 2007-08 4.7 2008-09 8.1 2009-10 3.8 2010-11 9.6 PMs Economic Advisory Council (EAC) Food inflation main problem: May-June 2011 8.4% Non-food manufactured inflation: March 2011 8.5% Apr.-June 2011 7 to 7.3% EAC estimate: WPI July-Oct. 2011 9.0% (More of this in MP Section)

Social Indicators HDI Index Educational component: mean years of schooling and expected years of schooling Life expectancy component: life expectancy rate at birth Wealth component: GNI per capita (GNI = GDP + net income from abroad, e.g. remittances and international aid)

HDI 2010 Rankings (out of 169 nations) Norway 1 Australia 2 New Zealand 3 USA 4 Ireland 5 Singapore 27 UAE 32 Sri Lanka 91 Russian Federation 65 Brazil 73 China 89 India 119

1991 Industrial Policy: Pre-1991 controls abolished Barriers to entry and restrictions on growth of firms removed Trade Policy Tariffs brought down Result: improved competition, efficiency and productivity Role of State Redefined: expanding in some areas and reducing in others More market does not mean less government but different government. (Shift from control to facilitation)

Sectoral Shares and Growth Rates Agriculture, Industry, Services Q. Whose share is highest? (Appendix Table 1 RBI AR) Share in GDP (%) 2008-09 2009-10 2010-11 Agriculture 15.7 14.6 14.4 Industry* 20.1 20.2 20.0 Services 64.2 65.2 65.6 (* Mining, manufacturing and electricity. Current share of manufacturing 16%. National Manufacturing Policy target: 25% by 2020). Too high share of Services is a weak point.

Q. Whose growth rate is lowest? % Change 2008-09 2009-10 -0.1 0.4 4.0 8.3 4.2 8.8 9.5 9.7

Agriculture Industry Mfg Services

2010-11 6.6 7.8 8.3 9.2

Worst performer: agriculture. Only in 2010-11, it has improved.

Poverty Ratio (%)

1993-94

2004-05

Planning Commission* Rural 37.3 28.3 Urban 32.4 25.7 Combined 36.0 27.5 Tendulkar Committee** Rural 50.1 41.8 Urban 31.8 25.7 Combined 45.3 37.2 * Calorie-based ** Based on minimum acceptable level of living Q. Why are the estimates higher for the Tendulkar Committee?

Sustained Growth 9% possible since savings and investment rates are high. Savings rate: Gross domestic savings / GDP Investment rate: Gross domestic investment / GDP Q. What were the rates prior to 2000? (Appendix Table 1 RBI AR) Q. What are the saving and investment rates in China?

Challenges 1. Agriculture Low productivity of land and labour Lack of transport infrastructure Action required: Better credit delivery Investment in irrigation and rural infrastructure, etc. 2. Infrastructure Once only government. Now competition and cooperation between public and private sectors (More in Infrastructure)

3. Fiscal Consolidation

Fiscal deficit / GDP %* 2008-09 6 2009-10 6.7 2010-11 (BE) 5.5 FRBM target 3.0 (More in FP) 4. Social Infrastructure Emphasis on primary education and basic health: Helps reducing poverty Quality of expenditure as important as quantum

5. Good Governance Efficient management of economic and social resources Across states in India, outcomes different for same mix of policies (because of differences in governance)

Economist, April 23rd, 2011 Q. Good growth rate in 2010-11: How much? See slide 3 Q. Far higher than the low growth (christened Hindu rate) during 1950-1980: how much? See slide 2 But business confidence low: FDI January 2011 y-o-y decline: 48% Businessmen and experts in two recent conferences: got together not to praise the countrys business environment but to bury it in criticism.

Q. This statement is similar to which famous statement ? World Banks Ease of Doing Business Index out of 183 countries, ranked: 134 overall, 165th in starting a business, 182nd in enforcing contracts ( More later) Legatum Institute ranking on Entrepreneurship and Opportunity, India ranked 93 out of 110 countries

Doing Business Report To build a warehouse: Permits required Days to procure Cost as % of per capita national income 2.718 Mumbai 37 200 Kolkata 27 258 2.549

(Reflects Rangarajans statement about differences in governance across states)

Legatum Institute Survey % of entrepreneurs who think the government was doing a very good job: India 11% China 30% The complaints are like the complaints about the weather everyone complains about it, but no one does anything about it. Q. Whose famous statement is this? Two major concerns Whether the demographic dividend can be realized? Corruption

Demographic Dividend Increase in working age population (15 64 years) by 2020 India 136 m China 23 m (Economist, 2 Oct. 2010) Median age in 2020 India 28 China 37 USA 38 Western Europe 45 Japan 49 (Economist, 9 Oct.2010)

Doubts about realization in India: Finding and retaining skilled workers a problem (e.g. garments) - Unemployable youth (knowledge@wharton handout) Economist, January 29th, 2011 Indian capitalism looks oligarchic, but is dynamic and competitive 2009 Paper In 2005 , there were 8864 firms under 20 years old accounting for: 56% of total in number But only 15% of corporate assets, 17% of sales, and 13% of profits

2011 paper More evidence of concentration Share of Sales, % 1989 2008 42 37 41 42 3 10

State-owned enterprises Business Houses Other private firms

But there is evidence of increased competition Distribution of Firms, % 1993 2007 >20% ROA < 1% 23%

 Case Study of Crompton Greaves Maker of electrical appliances and power equipment Blue-chip company But reported a loss of $33 m in March 2000 due to competition Threat of Japanese entry brought best technologies into India by its European and US rivals (Joseph Schumpeter: competition can be a threat, even before it is an actuality. It disciplines before it attacks. The businessman feels himself to be in a competitive situation even if he is alone in the field.)

Economist, July 23rd 2011

Pre-1991 Telephones took years to get Importing a computer took 3 years and 50 trips to Delhi July 1991 High oil prices (Increase -1970: 210%, 1979:135%, 1990:40%) Fiscal profligacy Fiscal deficit / GDP (%) 1990-91 8.4 1991-92 6.2

- FX to last just a fortnight, i.e. enough to finance imports for only 2 weeks (this is called import cover. More in BoP) - 47 tonnes of gold airlifted to Bank of England as collateral for a loan July 1991 reforms (Manmohan Singh as FM) Lasting significance Economy became resilient : so not on the brink of another crisis now Deserves its spot in the annals of economic history 1991 watershed or landmark year (China in December 1978 and Britain in1846 when it repealed Corn Laws. More on Corn Laws next trimester in International Trade paper.)

Manmohan Singh as PM Economic policy will not regress, but no guarantee of progress Yearly addition to population: 25 m Yearly addition to labour force: 10 m No progress on malnutrition, schooling and hiring 1990s reforms freed markets for outputs, but markets for inputs remain unrepaired 70% of infrastructure projects stalled because of problems in acquiring land

(Examples of land-related issues: At some places, displaced persons for SEZ land did not get adequate compensation, alternative employment and place to stay. Some IT companies which got land on lease in Vizag wanted it to be on sale basis so that it can be used for real-estate speculation. When denied, they backed out.) Labour laws reform Power shortage Central government increased spending on schooling and passed Right to Education Act, but state and local governments need to ensure proper follow-up. Introduction of GST delayed (more in FP)

Overheating Current growth rate < 8 %. For higher growth, interest rates to be reduced, but production (supply) takes time while increased demand is immediate. So higher inflation will result. Q. Which is the other country showing signs of overheating? What are the signs? Indias Chaotic Model of Development Services boomed; stagnant mfg Exports world class IT, but imports fridges Has 15 times more phone subscribers than tax payers Soon to connect to an electronic biometric system than to a sewer

Summary Table

1990 2010 Population, m 839 1,186 GDP, $bn (2010 prices) 433 1,538 One of the trillion-dollar economies GDP per person, $ (2010 prices) 503 1,265 GDP world ranking (current $) 12 10 GDP world ranking (PPP $) 9 4 PPP: purchasing-power parity basis Exports / GDP % 6.9 21.5 Sign of opening up Gross saving / GDP % 21.9 34.7

Adult literacy rate % 48.2 68.3 New official poverty rate, % 45.3 32.2 Q. Estimate of Planning Commission or Tendulkar Committee? Explain your answer. Number of billionaires in Forbes rich list 1 49

Demography IMF paper: demography has added 1.7 percentage points to the growth rate of GDP per person. Q. What is the difference between percent and percentage point? India needs to create 10-13 m jobs a year for which skills, training and growth of manufacturing required.

Achieving 10% Growth Recent growth of 8%: Half to three-quarters of this is explained by more workers and more capital. But reaching double-digits requires more efficient utilization Planning Commission target: 9% for the 12th Plan (2012-17)

Doing Business Report 2011 Executive Summary 183 economies 9 stages of the life cycle of a business (Ease of Doing Business): Starting a business, getting credit, etc. to closing of business

Ranking Does not tell the whole story of business environment. The report does not deal, e.g. with: Quality of infrastructure services Macroeconomic conditions Workforce skills

Regulations All regulations are not bad: e.g. Efficient and transparent regulation gives equal opportunities to all, not just only for those with connections A recent study of company registries in 100 countries over 8 years found that efficient business registration systems have a higher firm entry rate and greater business density. Case Study of Kenyan Garment Producer Spent 18 months to get a trial order for school items from Tesco, the largest retail chain the UK. Everything well planned but goods delayed at Kenyan port and the back-to-school promotion was over.

Post-crisis Legal and Institutional Reforms Rising number of insolvencies and debt disputes Efficient court and bankruptcy procedures ensure that viable firms continue to operate. Earlier, many economies in Eastern Europe and Central Asia insolvent firms were liquidated even if viable. After reforms, average recovery rate in those countries was 33 cents on the dollar (cf. average of 69 cents for the OECD high-income countries) Examples of Positive Impact Korea: Predictable cargo processing times and rapid turnover by ports provide benefit of some $2 bn annually

Singapore: Online business registration system for new firms saves businesses $42 m annually Ease of Doing Business Rankings Both 2010 and 2011: top 5 in that order: Singapore, Hong Kong SAR (China), New Zealand, The UK, the US, Ireland and Australia Q. What does SAR stand for and what is its significance? Indias rank: Marginally improved from 135 in 2010 to 134 in 2011

Regulatory Reform 5 years In 85% of 174 countries, ease of doing business improved Rwanda Case Study For staring a business: 2005: 9 procedures and official fee amounting to 22.3% of per capita income 2010: 3 days and fee 8.9% of per capita income No. of entrepreneurs who took advantage: 3,000 in 2008 (earlier, annual average was 700) 2005 2010 Registering Property 371 days 60 days Transfer fees, % of property value 9.8 0.4

India: implemented 18 business regulation reforms in 7 areas Mexico: simplified registration formalities resulted in: 5% increase in number of registered businesses 2.8% increase in employment Eastern Europe and Central Asia Case Study 6 years of business regulation reform: Prospect of joining EU World financial crisis Result: a 2009 survey in Georgia showed a new start-up centre helped businesses save an average of 3.25% of profits, just from registration services

Collateral Laws encouraging all types of assets as collateral: % of economies Sub-Saharan Africa 35 East Asia and pacific 71 OECD high-income economies 68 Improvements can promote growth of firms and employment