Hammering The Wrong Nail

India has several advantages over China and other East Asian countries. Nevertheless, because of the inefficient procedures and consequent bureaucratic delays, India has converted several of its advantages to liabilities. It has a well established and wider banking network compared to China. The Chinese network in terms of number of branches, their geographical distribution and number of accounts, is small compared to India. However, the main Chinese banks are computer-linked. Indian banks, on the other hand, are not. Consequently, outstation cheques take weeks, if not months, to get credited. Given the high interest rates, this pushes up the cost structure, thereby making Indian goods non-competitive.

 

Likewise, India is rich in its entrepreneurial class and well developed stock exchanges. China does not enjoy any of these advantages. Their stock exchange is new and the number of scrips traded is much less than in India. Yet, unlike in India, equities are transferred to the new owners without delay. Rampant delays in transferring equities not only make the Indian stock market inefficient, but also amenable to manipulation. Again, unlike China, India has a secure legal system to deal with commercial and civil cases. Chinese courts are mainly equipped to handle criminal cases and have very little experience in civil and commercial cases. Despite this, India does not enjoy any notable advantage as judicial delays are phenomenal.

The character and the kind of FDI in China and several other East Asian countries also differ from that of India. More than 70 per cent of FDI in China is by medium and small firms. Medium and small firms also dominate FDI in various other East Asian countries. Furthermore, a major portion of these investments also emanate from firms belonging to the Asia-Pacific region. India, on the other hand, has not made a conscious attempt to target these two groups, namely, small and medium firms, and firms belonging to the Asian region. The fast growing role of small and medium firms is mainly due to the advent of information technology and the micro-electronics revolution. By and large, these firms use information technology to network with other such firms in the region and have progressed to be a constituent of the international manufacturing and trading networks. Consequently, many of them have achieved high levels of international orientation in terms of exports and imports. However, lot of them do not export the

whole finished product. Instead, they are a part of an international chain, where they import products, add their own value and export them to the next link in the production chain. Most ventures in Malaysia and Thailand are of this kind.

Unfortunately, India has not been able to participate in the international networking system mainly due to the inefficiency of the customs bureaucracy. To take part in the export-oriented value added international chain, imported products should reach the domestic manufacturing unit within a few hours of landing so that the unit can add its value and despatch it to its next destination. In most East Asian countries the customs officials give top priority to these consignments. For instance, in Malaysia and China it takes less than three hours, from the time of arrival, for the goods to reach the factory. In India, the customs can hold up these consignments for weeks, if not months. Given this abnormally high level of inefficiency and lack of co-operation, India is not attractive for high-tech export-oriented units. In recent times, there have been instances of some Indian computer hardware firms relocating their operations in East Asia. The export-oriented small and medium sector is a growing segment in the

international market. Investment in these areas can also help provide employment. Hence, unless India removes airlines and customs-related bottlenecks, it cannot attract export-oriented FDI.

The second type of foreign investment flows are targeted towards the domestic market. To attract investments of this class, India should evolve a more transparent system of awarding contracts and licenses. Interviews with many Japanese firms that have invested both in China and India in comparable manufacturing sectors show that non-transparency of the Indian officialdom is a major reason for the firms investing less here. More recently, the British prime minister, John Major, in his address to the Confederation of Indian Industries at Calcutta, mentioned non-transparency and bureaucratic delays as the two key reasons for low FDI flows. Foreign and Indian investors have been citing instances where, in several sectors like telecom, power etc.licenses and tenders have been awarded to firms that have a very low capital base compared to the tender sum, with very little previous experience, and without proven technological capabilities. The absence of transparency and guidelines in granting contracts and licenses

has resulted in several scams, inquiries and public interest litigations. This has also prevented leading high-tech firms from investing in India. In explaining low FDI flows into India most officials mainly refer to infrastructural bottlenecks like power, port facilities, railways, roads and telephone facilities. Upgradation of these facilities would demand more resources and would also be time consuming. Foreign investors, while acknowledging the infrastructure deficiencies, cite bureaucratic delays and lack of transparency as vital factors inhibiting investments in India.

These are government created and can be removed in the short run without straining India's scarce resources. On the contrary, transparent systems will enhance resources by preventing corruption and rent seeking. India has liberalised without simultaneously creating a transparent system and reforming the bureaucracy. This is one reason why the common man has started equating liberalisation with corruption.

(The author is a professor at the Institute of Economic Growth, Delhi)