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The Rediff Business Special/Jeffrey D. Sachs, Nirupam Bajpai

India's Decade of Development

Part I: India's decade of development

Part II: Ten crucial initiatives

Export promotion: The government needs to promote exports through greater emphasis on export processing zones, the elimination of product reservation for small-scale industry, the encouragement of the infotech sector, the elimination of administrative barriers to foreign direct investment, and the elimination of tax and tariff structures that are anti-export biased. India could have achieved what China has achieved in export growth, but India failed in basic policy strategy.

At the centre of China's export strategy were the special economic zones or SEZs in which favourable export conditions were assured. These SEZs, along China's coastline, were designed to give foreign investors and domestic enterprises favourable conditions for rapid export promotion. All key aspects of the export environment were secured.

Exporters, for example, were allowed to import intermediate products and capital goods duty free. They were given generous tax holidays. The exporters were assured decent physical infrastructure, often through the provision of land, power, physical security, and transport to the ports, within specially created industrial parks.

India too has experimented with export processing zones or EPZs, but India's approach to export zones has been one of relative neglect rather than support. While China's five main special economic zones have been very successful in exports, attracting foreign direct investment, and creating large-scale employment opportunities, by contrast, India's main export processing zones have not succeeded in any of these areas.

India's EPZs have not performed as well as China's SEZs for many reasons, including: limited scale and over-crowding of the EPZs; insufficient logistical links with ports; poor infrastructure in areas surrounding the zones (e.g. unpaved roads and poor physical security); government ambivalence and red-tape regarding inward foreign direct investment; unclear incentive packages governing inward investment, and lack of interest and authority of state and local governments, and the private sector, compared with the central government, in the design, set-up, and functioning of the zones.

In China, the major responsibility for the SEZs rests with local and provincial governments, whereas in India, the responsibilities remain heavily with Delhi. Under these circumstances, many state governments have actually been averse to the idea of locating EPZs in their state. Here, we would like to point out that some of the initiatives announced by the government recently in the Exim Policy for 2000/01, such as establishing, as in China, SEZs, in different parts of the country, and fully involving the state governments in the export efforts are welcome steps. We are of the view that while these measures will undoubtedly provide great impetus to India's export efforts, it is critical for India to abolish product reservation for the small scale industry and to liberalise labour laws if India is to attain and sustain high rates of export growth.

India's labour laws make it very costly to fire workers in enterprises of more than 100 workers. The result is that formal-sector firms (those that are registered and that pay their taxes) are loath to take on new employment, and the vast majority of India's employment is informal, in small, tax-evading, inefficient enterprises.

Equally remarkably, India's legislation continues to restrict the entry of large firms, or the growth of small firms into large firms, in several areas of potential comparative advantage. Thus, garments, toys, shoes and leather products continue to be reserved, to a varying extent, for small-scale producers.

India's high overall tariff rates, especially tariffs on intermediate products that are used by exporters, impose a heavy indirect tax on export competitiveness. Furthermore, the Union Budget for 2000/01 proposes to phase out exemptions from income tax for export earnings. (The budget proposes to phase out these concessions over a five-year period. Twenty per cent from the financial year 2000/01, and by 20 per cent each subsequent year till they reach a zero level.) Finally, the regulatory attitude to foreign direct investors, who could be the fuel for India's export drive, continues to be ambivalent. The government promotes FDI on the one hand, but then maintains regulations against full foreign ownership, or insists on lengthy approval processes, on the other hand.

Information technology

Service-sector exports based on information technology is another area where the government's policy could do much more to spur export growth. India is becoming one of the most important players of the world in the IT sector and it is the fastest growing foreign exchange earner for India.

We believe that the government could do more for this industry, not through direct subsidies necessarily, but actually through liberalisation of telecom, allowing for lower priced telecommunication services, by allowing new entry of major international players in telecom. These companies could lay down a tremendous fibre optic network in India and increase the bandwidth available for Indian business and put India even more closely to the international scene.

We would like to see the government find some resources to support basic science and R&D in this sector to some extent because India has world-class engineers and scientists that have already brought India up in an important way in this sector and could keep India in the very forefront of this new technology.

The continuing state monopoly of VSNL in international telephony as well as in Internet provision within the Indian market seriously raises the costs of telephone and IT services in India, and is doing considerable damage in India's international competitiveness in the IT sector.

India's telephone density is abysmally low, at around 1.3 per hundred in 1995, compared with around 62.6 per hundred in the United States. International telephone calls originating in India are among the highest in the world, largely due to lack of competition. Physical infrastructure for data transmission within India (e.g. fibre optic cables) remains under-developed despite some recent progress.

Restrictive policies on foreign direct investment or FDI have kept international chip-makers out of India, and have indirectly raised the prices of PCs in the Indian market. The lack of enforcement of intellectual property laws most likely inhibits inward investments in IT sectors. All of these problems are remediable through further deregulation of telecommunications and FDI, as well as effective law enforcement in a more liberalised and competitive environment.

The engine of growth of the booming Indian IT sector is the software industry which has grown at an average annual rate of 60 per cent between 1992 and 1999. The Indian software industry, which today employs 160,000 professionals, has zoomed from a mere US$20 million ten years ago to US$4 billion in 1998-99, of which US$2.6 billion was exported.

This industry has clearly emerged as a major export earner for the country, contributing to 8 per cent of total merchandise exports. It has also achieved worldwide reputation for providing excellent quality: many local software firms have earned ISO 9000 as well as SEI-CMM certification, with five of them having reached Level 5 (only nine firms worldwide have reached this level).

India has achieved this feat by leveraging its most valuable resource: highly skilled manpower. The country today boasts of the second-largest English-speaking pool of scientific manpower in the world and graduates 70,000 computer professionals every year, in addition to the graduates from the prestigious IITs.

Improvements in infrastructure through liberalisation combined with regulation, especially in telecommunications (where privatisation and competition are crucial), power (where the reform of state electricity boards is crucial), and other sectors is extremely crucial.

Through liberalisation of telecommunivations, allowing for lower priced telecommunication services, and by allowing new entry of major international players in telecommunications, the government could give a strong boost to the IT sector.

The unmet social agenda

Economic reforms by themselves are not sufficient to achieve India's development goals. A growing body of economic evidence suggests that social progress -- such as increased life expectancy, reduced disease burdens, lower fertility rates, and improved educational attainments -- are at least as important as the narrower economic policies in meeting economic goals of higher economic growth and rising living standards. Thus, social goals are crucial not only in and of themselves, but also for what they contribute to economic dynamism.

India's circumstances at the start of the new century are unenviable. Life expectancy is around 63 years, compared with 78 years in the high-income countries. Literacy of adult women is notoriously low, at some 40 per cent. Under-five mortality rates of children remain above 100 per 1,000 births. The AIDS epidemic is gathering force, and could gravely undermine many of the social and economic gains of recent years unless it is decisively curbed through aggressive health policies, including much greater education of the population regarding the risks of HIV/AIDS transmission.

We will address these issues in another essay, since they deserve detailed consideration, as well as a regional disaggregation in light of the growing differences in social indicators in different parts of the country. We stress, however, that the vital social goals cannot be met unless they are elevated to the highest priority in government policy.

Nirupam Bajpai and Navi Radjou on India's fiscal consolidation

Nirupam Bajpai and Jeffrey D Sachs on 21st century India

An interview with Jeffrey D Sachs on the Indian economy and world trends

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