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India -- the new frontier?
Saturday, 10 December 2011 01:22

Barry O'Farrell, Premier of New South Wales, Australia, has just returned from a trade and investment mission to India, singing the praises of this emerging economy in a major speech yesterday at the Lowy Institute.

Let's hope that he is also fully aware of the immense difficulties of dealing with this overrated giant.

O'Farrell greatly admires and doesn't doubt the resolve and achievements of the government, business sector and people of India in realizing the IMF forecast that its economic growth will rise from 7.8% in 2011 to 8.1% in 2016.

He is seeking to deepen his state's successful engagement with India based on four elements: (i) be a consistent and trustworthy friend; (ii) be competitive; (ii) deliver real and strategic outcomes for people in NSW and India; and (iv) develop a pathway and targets for a long partnership. In particular, he is seeking to attract Indian investors to Australia (including in resource-related infrastructure) and work on trade opportunities in India.  Most importantly, O"Farrell is looking beyond natural resources to the export of services and manufactures.

His fear is Australian complacency, by which we might imagine that India's economic success will inevitably come our way with no particular effort on our part. He is especially concerned about uncompetitive industrial practices, the high number of strikes, slowing productivity growth, and the national government's carbon tax.

O'Farrell even referred to former Australian Prime Minister Howard's observation that Australia and India have much in common, but do not do much together.  He noted further that both countries are mature democracies with shared values and accountabilities in a robust Westminister system.

While O'Farrell's ethusiasm for doing business with India is commendable, a close reading of the Indian situation suggests that it is not the easiest partner to deal with.

As measured by a democracy index estimated by the Economist Intelligence Unit, Australia has the world's 6th strongest democracy. By contrast, India does not even rate as a full democracy -- it is assessed to be a "flawed democracy".  India comes in at 40th place in the world ranking with particularly low scores for political participation and political culture. In other words, while India may be a democracy, it is a much lower quality democracy than Australia.

It is hardly surprising that India has a flawed democracy. It is still a very poor country. GDP per capita is only US$1340 a year compared with Australia's US$43590. Some 40% of India's population live on less than $1.25 a day. Only 63% of India's adult population is literate. A little more than half has access to satisfactory sanitation facilities. The caste system is still alive and well in the countryside.  And India is still very much governed by a de facto royal family headed up by Sonia Gandhi -- her health problems have contributed to the country's recent political paralysis.

Corruption is one aspect of governance of direct relevance for doing business in India. While Transparency International ranks Australia as the 6th cleanest country in the world, India is way down the list at 95th, well below the non-democratic China which comes in at 75th. In fact, India is in the midst of massive civil unrest as Indian anti-corruption activists call for stronger anti-corruption legislation which the government is resisting. Corruption takes a huge toll on India’s economy, especially for poor people. According to TI's 2010 Global Corruption Barometer, 54 per cent of households paid a bribe in a 12 month period to receive basic services.

The World Bank conducts very interesting analysis of the "ease of doing business" which ranks Australia as the world's 15th easiest country in which to do business. This is certainly not good enough, but it is way ahead of India which comes in at 132nd out of the 183 countries covered by the survey. India scores particularly badly when it comes to criteria like enforcing contracts, and dealing with construction permits, and is well behind China which is ranked at 91.  O'Farrell is thus wise to put a strong emphasis on building trust and relationships. These will be critical for solving any problems.

The difficulties of doing business with India have been highlighted by its recent initiative to open up to foreign retailers like Walmart.  This initiative has now been put on hold following protests by India's massively inefficient and antiquated retail sector.  Australia's inefficient workpractices and industrial relations problems are nothing whatsoever compared with India.

As an aside, you may be wondering why Indian companies would be interested in investing in Australia when, as a developing country, India should have more than ample investment opportunities at home. Local Indian companies are also deterred from investing at home by the corruption, inefficient bureaucracy, and bad governance.

Another take on these issues is provided by the World Economic Forum's Global Competitiveness Index. According to this assessment, India ranks 56th, 5 places lower than last year, compared with China's 26th place and Australia's 20th.

What do the World Economic Forum analysts have to say about India?

"The country’s supply of transport, ICT, and energy infrastructure remains largely insufficient and ill-adapted to the needs of business. Indeed, the Indian business community continues to cite infrastructure as the single biggest hindrance to doing business in the country. ... Despite improvements across the board over the past few years, public health and education quality remain a prime cause of concern. ... discontent in the business community about the lack of reforms and the apparent inability of the government to provide a more conducive environment for business has been growing.

Corruption and burdensome regulation certainly fuel this discontent. ... the macroeconomic environment continues to be characterized by large and repeated public deficits and ... by high inflation, near or above 10 percent. ... Despite these considerable challenges, India does possess a number of remarkable strengths in the more advanced and complex drivers of competitiveness. ... The country boasts a vast domestic market that allows for economies of scale and attracts investors. It can rely on a well-developed and sophisticated financial market that can channel financial resources to good use, and it boasts reasonably sophisticated and innovative businesses."

The Australian economy is currently locked in a passionate embrace with China through our natural resource exports.  But too many of our eggs are in the China basket.  We need to diversify.  For this reason, O'Farrell's India initiative is a good one.  But we should never underestimate the challenges involved.  Notwithstanding China's communist credentials, it has a much more business-friendly policy environment than does democratic India.

Former Prime Minister Howard was right when he said that Australia and India don't do much together.  But in point of fact, India doesn't do much with anyone.  India is only the world 17th largest exporter, whereas China is the world's largest, with exports 6 times the value of India's.  As to foreign direct investment, over the past few years India has only been the world's 18th biggest recipient, while China has been the 3rd with inflows more than 4 times higher than India!

Barry O'Farrell, Premier of New South Wales, Australia. "NSW and India: People and partnerships". Address to the Lowy Institute, 9 December 2011. http://www.lowyinstitute.org/
Economist Intelligence Unit. Democracy Index 2010. Democracy in Retreat.
World Development Indicators
Transparency International. Corruption Perceptions Index 2011.
World Bank. Doing Business. 2011
World Economic Forum. The Global Competitiveness Report 2011-2012.

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