Reality bites

BS OPINION

The current euphoria about the Indian economy, sparked off by the monsoon and spurred by reports from global investment banks and the stock market boom, should get tempered by the country's ranking in the World Economic Forum's Global Competitiveness Report for 2003-04.

India has slipped three places to rank 56 in the global league tables. At a time when India is widely tipped to become an economic superpower in the next two or three decades, and when more Indian companies are becoming globally competitive, the report is a timely reminder of how much more needs to be done, and that we should not get carried away by the hype.

One predictable response to the report will be to dismiss it as irrelevant. Isn't India one of the fastest growing economies in the world? Don't we have several companies that are the lowest-cost producers in the world? Isn't our prowess in software services the envy of the world? Do we not have a vast pool of trained manpower?

If all these things are true, the argument will run, then obviously there's something wrong with ranking us far below Botswana, where a third of the population is HIV positive.

And it's not only India that ranks behind countries like Botswana and Jordan, even China does. If China's competitiveness is so poor, how does it manage to attract those massive amounts of foreign direct investment and run up those trade surpluses?

The answer to these questions lies in the way the WEF survey is carried out. The competitiveness ranking focuses on the macroeconomic environment, the quality of a country's institutions, and the state of its infrastructure.

A country's credit rating, for instance, is a major factor and one that pulls down India's rating. Corruption too is a major factor, dragging down most poor countries.

This year there has also been a change in the way the scale is constructed, with less weight to the size of the public sector and more to the perceptions of honesty in government, when considering the quality of public institutions.

That affects India's ranking "" as reflected in India's poor score on the corruption perception index constructed by Transparency International.

Even as a technological powerhouse, India has got a very poor rating from the UNDP. And, of course, the rating agencies are yet to upgrade India to investment grade. The cumulative message from all these ratings is not flattering.

One way to look at the competitiveness rankings is to treat them as reflecting the costs of doing business. Finland, which has beaten the United States to the top slot this year, can hardly be said to be more attractive to investors.

But it's certainly true that the costs of doing business in the US have risen in the past year, considering the additional costs of security, while the larger budget deficit has increased financial risks.

Seen in this fashion, there's little doubt that the costs of doing business in India are high. Despite the dismantling of the inspector raj, there's still plenty of red tape. Legal remedies take years to be enforced.

Government policies are often vacillating, inconsistent and dogged by delay in implementation. High fiscal deficits and subsidies impose large costs on the economy.

In short, while it's true that most Indian companies have become more efficient over the last few years, the larger picture is still clouded.

If we feel there's a disconnect between the optimistic reports about the country's future and the WEF rankings, that's an indication of the gap between our current performance and the potential of the economy.

The message is clear "" the Indian economy is capable of doing much better, provided the country presses ahead with reforms.