This article was first published by the Global Association for Risk Professionals on November 11, 2016;
China is 29th, India 39th in the World Economic Forum’s annual index, which is led by Switzerland, Singapore and the U.S.
India ranked 39th in the 2016-’17 Global Competitiveness Report, recently published by the World Economic Forum. The South Asian nation is 16 places higher than it was the previous year, and 32 above its 2014-’15 rank, and now most of those ahead of India are developed countries in terms of income or other parameters. (See illustration below for factors that go into the WEF analysis.)
In the competitiveness ranking topped by Switzerland, Singapore and the United States (unchanged in that order from a year earlier), followed by the Netherlands and Germany (switching places 4 and 5), China was 28th, unchanged since 2014-’15. Brazil has slipped to 81st (from 75 in 2015’-16 and 57 in 2014’-15). Russia improved to 43 from 45, and South Africa to 47 from 49.
In its region, India was best-performing in areas such as infrastructure, goods market efficiency, financial market development, market size, business sophistication and innovation. India still has a long way to go in health, primary education and labor markets — despite significant improvements health and education over the last decade.
What is behind the rise of India in the world competitiveness ranking?
Market size — India’s huge domestic market worked in its favor. Johan C. Aurik, chairman and global managing partner of strategy consulting firm A.T. Kearney, in an interview with Livemint, said that India, with an economy trailing only those of the U.S. and China, “is lucky that it is so big that it does not need the world.”
Financial market development — After being marred by scams in the 1990s and early 2000s, India’s stock markets have advanced in terms of modernization and technology, with the regulator (Securities and Exchange Board of India) backing efforts to bring them up to international standards.
Source: World Economic Forum
Similarly, the Reserve Bank of India (RBI) has taken steps to improve the bond markets, bring transparency to non-performing assets and bring inflation under control. The image of the central bank went up many notches under its 23rd governor, Raghuram Govind Rajan, who was succeeded in September by Urjit Patel.
Institutions — Policy paralysis, misuse of public money and infrastructure were among the reasons that people lost trust in public institutions and administration in the last few years of the United Progressive Alliance (UPA) government. In 2014, when the National Democratic Alliance (NDA) came to power, the Narendra Modi-led government has lifted public confidence.
Goods market efficiency — Although India is the best-performing country in South Asia in goods market efficiency, it has actually declined in this measure over the last decade. With passage of the goods and services tax (GST) by the parliament earlier this year, and efforts ongoing for an April 1 implementation, there may be significant improvement in overall market efficiency. “GST was a miracle, I thought it would never happen,” Aurik said.
Infrastructure — The key infrastructure ministries are seen as having done their job well over the past couple of years. The government has designated infrastructure as a top priority, and there has been significant, perceptible progress in power, roads and shipping, and railways. Besides planning to spend billions of dollars on infrastructure, the government has relaxed regulations to attract foreign direct investments (FDI) in the sector.
Labor market efficiency — India ranks lowest in this pillar (112th out of 138 countries). The current labor laws are outmoded and rigid. Although labor law reform is on the government’s agenda, it is a politically sensitive issue, and small steps meets with resistance. The proposed reforms would make hiring and firing easier for the large public sector undertakings.
Macroeconomic environment — The Indian economy is poised for further growth. Per capita income has almost doubled in the last six to seven years. The foreign exchange reserves of more than $360 billion help in maintaining confidence in monetary and exchange rate policies and enhance the capacity of the central bank to intervene in forex markets. The economy is well placed for meeting external obligations, and maintaining investor confidence helps to attract much-needed FDI.
Although fund managers are parking money in India due to the advantage they get from the positive interest rate differential, a lot of these funds, just as in other Asian economies, are seeking a more permanent destination. India is now the top FDI destination for the world. Prime Minister Modi sends out the right signals about the commitment of the government to providing the right environment for development.
Technology readiness — India has not done well in technology readiness despite its success in IT outsourcing. Regulators must keep up with the sophistication in market technology and new market structure. Enforcement cases will become more complicated as market manipulation and other misconduct are now also conducted on the Internet, where they are difficult to detect.
Cybercrime surveillance should be updated periodically. Also, whether a demutualized exchange should be regulated as any other listed company, or as a utility, will be a challenge for the regulators.
Health and primary education — Jim O'Neill, the British economist and former chairman of Goldman Sachs Asset Management credited with coining the term BRICs (Brazil, Russia, India and China), wrote on Bloomberg View about 10 things that India must do to achieve its potential. Two of those 10 were related to education — primary and secondary as well as colleges and universities. (Liberalizing financial markets and building more infrastructure were among the others.) Education is essential if the population of India is to be a true asset for development.
On the health front, the average growth in total health care spending is lower than the average GDP growth rate and lower, as a percentage of GDP, than that of even low-income countries, as classified by the World Bank. (India is classified as low-middle income.) It is estimated that nearly one million Indians die every year due to inadequate health care facilities, and close to 700 million have no access to specialist care.
Higher education and training — The country is home to the Indian Institute of Technology and the Indian Institute of Management, yet many graduates in India are unemployable. The quality of faculty and infrastructure and the number of institutions of higher education need beefing up.
Business sophistication and Innovation — There has been significant improvement in both business sophistication and innovation owing to increased research and development activities and the ecosystem for promoting start-ups.
Although many indicators are favorable, Prime Minister Lee Hsien Loong of Singapore, on a recent visit to India, said the country remains a difficult place to do business. Gaps in the regulatory framework and other crucial areas need to be addressed. India’s competitiveness ranking is an endorsement of the steps that have been taken and a reminder that there are still “miles to go.”