Fact or opinion?

The methodology used in the World Economic Forum's (WEF) Global Competitiveness Report (GCR) has evolved over time, and the report remains one of several cross-country surveys.

The problems with such surveys are well-known, especially when subjective responses are used. Not only do different surveys focus on different aspects (thus rankings differ across surveys), there are issues of weighting, aggregation and conversion of ordinal rankings into cardinal values, all of which involve some arbitrariness.

The competitiveness report now has a growth competitiveness index (GCI), based on three heads concerning the macro-economic environment, the state of public institutions and technological readiness; and there is splicing of objective data with subjective responses.

In addition, there is a business competitiveness index (BCI), based on the sophistication of company operations and strategy, and the national business environment. All of this suggests a mixture of fact and opinion to arrive at the rankings, and everyone is therefore free to agree or disagree with them.

The 2005-06 report has just been released. Among 117 countries ranked through the GCI, India has a rank of 50, a relatively sharp increase from the 55 of 2004. Finland is at the top and Chad at the bottom. In the inevitable comparison, China at 49 has slipped three positions since 2004.

More important than ranks, the Chinese score of 4.07 is only marginally ahead of India's 4.04. To quote the authors, "India's improved rank mirrors the country's somewhat higher position in the technology index."

But there are worries about fiscal adjustment, low penetration rates of new technologies and low enrolment rates for higher education, coupled with institutional weaknesses. If you look at the sub-rankings on each parameter, in relative terms technology actually pulls India down, and public institutions pull India up.

Moving on to the BCI, there are 116 countries, with the US at the top of the pecking order and Chad at the bottom. India is ranked 31, compared to China's 57. In two sub-components of the BCI, India has the 30th rank in company operations and strategy and 31st rank in national business environment.

Although there is positive correlation between the GCI and the BCI, India (and several other countries) does better on the BCI than on the GCI. It is tempting to argue that this reflects relatively good corporate performance despite an adverse macro environment. However, given the way the GCI and BCI are constructed, this is incorrect.

Looking beyond this report, what can be done to enhance India's competitiveness, recognising that companies rather than countries compete? The National Manufacturing Competitiveness Council (NMCC) has recently unveiled a strategy paper.

Among the major constraints mentioned there are infrastructure (especially power and ports), indirect taxes (import duty distortions and lack of unified VAT), inspector raj and labour laws (not just the Industrial Disputes Act or the Contract Labour Act).

If these reform issues are addressed, in the next version of the competitiveness report, India's rank will jump significantly. Stated differently, one shouldn't get paranoid about what the report's ranks show, because other surveys may show less flattering ranks.

In all probability, the general international bullishness about India has crept into subjective responses. But that only underlines potential, and the potential will remain unrealised without further reform.