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Ideas From Outside

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So much lungpower has been expended on foreign direct investment in retail; it took so many years for permission to be granted. But that is just one insignificant industry; there are many more. How does India compare overall with other countries? Only three countries — Indonesia, Saudi Arabia and China — have more restrictive FDI regimes. India opened manufacturing to FDI in the 1990s; but services which support growth of manufacturing — transport, communications, banks, insurance, legal services, accounting, etc — remain subject to stringent restrictions.

Tariff reductions began earliest, and have gone furthest; the simple average most-favoured-nation tariff in 2010 was only 12 per cent. But it was 21 per cent on transport equipment, 33 per cent on agricultural goods, and 60 per cent on cars. Cars are not essential to the poor; protection to them is pure favouritism. High import duties make an elaborate duty reimbursement regime necessary, which works as an administrative barrier to value-added exports. India has liberalised trade, but has not used much intelligence in doing so.

The average annual roads built per day were 1-2 km till 2006; then the pace rose rapidly to 8 km per day in 2010. One of the major obstacles in the road programme is the uncertainty of ownership of land the government has sought to acquire; a reliable single land registry would go far in helping road construction. Many of the contracts are public-private partnerships (PPP). As the economy slackens, the financial prospects of PPP roads will worsen, and their builders will be inclined to slow down or abandon projects; the government should keep a lookout for that. It should include footpaths, pedestrian and animal crossings in the road projects to reduce risks, and insist on road safety indicators.

The number of cars per 100 people is only 2, as against 45 in industrial countries. Never mind, for India held the record for the number of deaths in accidents — 1,250 per year per million vehicles, as against less than 100 in most west European countries. Even Albania, Azerbaijan and Armenia can barely reach 1,000. This is the cost of corruption in our driving examiners’ offices. Our taxes on vehicles and their fuel are low, roughly 1 per cent of GDP. Only some Latin American nations tax road transport less. Taxes in Brazil, the Netherlands and Israel yield four times as much. We tax oil products too little; they can be taxed more. The government has been talking of introducing a single goods and services tax covering both the Centre and the states for years; but it simply does not happen.

While ASER has been assessing the performance of Indian school system in recent years, the data gathered in India do not conform to international standards; so it is impossible to compare India with other countries. But the Programme for International Student Assessment  covered Himachal Pradesh and Tamil Nadu in 2009. The performance of their students in reading, mathematics and science was below the level in Brazil and Indonesia, let alone OECD countries. School enrolment in India is now close to 100 per cent, and the average number of years children stay in school is close to 5 years. Now is the time to convert the children’s jails into proper schools, and to teach children something that they can use in their lives.

Unemployment in India is low — close to 2 per cent. But over 80 per cent of the workers are informally employed. Nowhere else is the figure so high; it is close to 30 per cent in Turkey and China, and 50 per cent in Argentina and Mexico. The predominance of informality is due to a single section in the Industrial Disputes Act which makes it impossible for a firm employing 100 or more workers to dismiss a worker without considerable hassle. Most informal businesses escape taxation; bigger businesses bear higher tax rates. The discrimination reinforces small businesses’ advantage and gives them an incentive to stay informal.

The Indian research and development system is extremely closed. It should be opened to competition. Government and other laboratories should be asked to bid for research contracts; unconditional funding should be dispensed with as far as possible. The bidding should be open to foreign research institutions as well; what matters is that the country gets the best deal, not that government scientists get a comfortable livelihood. These are some of the ideas put out by the Organisation for Economic Cooperation and Development in its latest India report. The government has suddenly become keen on reforms; it could do worse than consult OECD.

(This story was published in Businessworld Issue Dated 31-12-2012)


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