Software and ITES Sector: Productivity Improvements Key to Continued ... 7.2 Comparing the ICI with the World Bank's Doing Business Study and the ...
Aurora Ferrari and Inderbir Singh Dhingra
India's investment climate Voices of Indian business
Contents
Foreword xiii Acknowledgments xv Abbreviations xvi 1 Overview 1 The Indian Economy: Robust Growth but Challenges Remain 1 Manufacturing: Investment Climate Obstacles to Productivity Growth and Employment Generation 2 Retail Sector: Facilitating the Emergence of Large Players to Boost Productivity and Employment 5 Software and ITES Sector: Productivity Improvements Key to Continued Growth and Competitiveness 6 Reducing Inequalities between States by Improving the Investment Climate 8 Conclusions 9 2 The Indian Economy: Robust Growth, but Challenges Remain Trends in the Economy 11 Key Growth Drivers in the Economy 12 Challenges in the Way Forward 19 Focus of the Report 23 Notes 27
11
3 Manufacturing: Investment Climate Obstacles to Productivity Growth and Employment Generation 29 The Manufacturing Sector: A Potential Driver of Growth 29 Firms' Perceptions of Investment Climate Constraints: Power, Taxes, and Lack of Skilled Workforce 31 Productivity Analysis of the Investment Climate and Firms' Perceptions of Key Obstacles 35 Impact of Investment Climate Obstacles on Growth Across Groups of States 37 The Investment Climate for Exporting Manufacturing Firms 40 Conclusions 45 Notes 46 Annex 3.A Obstacle Case Study—Power 47 Annex 3.B Obstacle Case Study—Corruption 50
Contents
4 Unorganized Manufacturing: Facilitating Entry to the Formal Sector by Removing Obstacles to Growth and Productivity Importance of Unorganized Manufacturing
53
53
Low Productivity, Low Wages, Weak Skill Levels, and Limited Integration with Large Supply Chains in Unorganized Manufacturing
54
Benefits of Becoming Organized and Why Some Firms Remain Unorganized
56
Access to Finance and Power Supply: Largest Constraints to Higher Productivity and Growth Conclusions Notes
61
65
66
Annex 4.A Obstacle Case Study—Access to Finance
67
5 Retail Sector: Facilitating the Emergence of Large Players to Boost Productivity and Employment
69
Two Sharply Contrasting Segments: Small Stores and Large Chains
69
Sector Performance: Low Productivity and Modest Employment Growth Government Reform Efforts to Improve the Investment Climate Effect of the Investment Climate on Modern-Format Stores
70
73
74
Obstacles to Increased Productivity and Employment Generation for Modern-Format Stores Conclusions Notes
77
79
79
Annex 5.A Obstacle Case Study—Taxes
81
Annex 5.В Obstacle Case Study—Access to Land
83
6 Software and ITES Sector: Productivity Improvements Key to Continued Growth and Competitiveness
87
The Software and ITES Sector: An Indian Success Story
87
Favorable Conditions Underpinning the Software and ITES Success Story The Potential for Greater Productivity
91
The Importance of Productivity Gains as Favorable Conditions Erode Conclusions Notes
93
96
97
Annex 6.A Obstacle Case Study—Skill Shortages
98
7 Reducing Inequalities between States by Improving the Investment Climate
101
Importance of Measuring the Investment Climate at the State Level The ICI: Methodology ICI State Rankings
101
102
102
Identifying the Key Investment Climate Differences between Low-Growth and High-Growth States Conclusions Notes
109
109
107
89
Contents
8 Conclusions Power
111
111
Access to Land
112
Access to Finance Taxes
112
112
Skilled Labor
113
Three Challenges Appendix A
113
Investment Climate Surveys
Manufacturing ICS
Unorganized Manufacturing ICS RetaillCS
117
119
Software/ITES ICS Notes
115
115
121
123
Appendix В
Econometric Analysis of the Effect of Investment Climate on Firm Performance
Manufacturing Sector
Unorganized Manufacturing Sector Retail Sector
125
129 135
137
Software and Information Technology-Enabled Services Sector Notes
Appendix С Note
Investment Climate Index Methodology
147
149
References Index
140
145
151
155
VII
Contents
Boxes 2.1 2.2 4.1 4.2 5.1 6.1 7.1 7.2 C.l
Reforms and TFP during the 1990s 18 International Comparisons of Income Gaps between States 25 What Constitutes Unorganized Manufacturing in India? 54 Understanding the Problem of Access to Finance 61 Effect of Investment Climate on Labor Productivity and Employment Generation for Traditional Retail Stores 74 Comparing Perceived Obstacles for Software and ITES Exporters and Manufacturing Exporters 89 ICI Reliability 103 Comparing the ICI with the World Bank's Doing Business Study and the Government of India's Infrastructure Quality Index 105 Formulas Used to Construct the ICI 149
Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 3.1 3.2 3.3 3.4 3.5 3.6
3.7
Real GDP Growth, by Sector, in India, 1990/91-2007/08 12 Structural Change in India, 1950/51-2005/06 13 Real GDP Composition, 2007/08 13 Savings and Investments, 1950/51-2005/06 14 Savings as a Percentage of GDP, 1965/66-2005/06 15 Trends in Consolidated Fiscal Deficit and Public Debt Stock, 1991/92-2006/07 16 Formal and Informal Labor Force, 1990 and 2003 19 Evolution of the Labor Force Distribution, by Sector, 1983/84-2004/05 20 Productivity Growth and Labor Reallocation in India, 1983-2002 22 States' Growth in Per Capita Income, 1980s and 1990s 23 Decomposition of Differences in Per Capita Income Growth across Groups of States, 1983-2004 24 Relative Sector Productivities and Potential 26 Labor Force Distribution, 2004 26 Proportion of Firms Reporting Each Obstacle as Major or Severe, 2003 and 2006 32 Firms Perception of Investment Climate Variables as the Most Important Obstacle or as a Major or Very Severe Obstacle, 2006 33 Impact of Corruption, by Firm Size, 2006 34 Percentage of Firms Rating Labor Regulations as a Major or Very Severe Obstacle, 2006 35 Proportional Impact of Investment Climate Variables on Firm TFP, Employment, Real Wages, Exports, and FDI, 2006 36 Deviation from the National Average of Percentage of Firms Reporting Each Obstacle as Major or Very Severe in 2006, by Income Level of States, 2006 38 Change in the Percentage of Firms Identifying Factor as a Major or Very Severe Obstacle between 2003 and 2006, by Income Level of States 39
Contents
3.8
Trade Competitiveness: Growth of Indian Exports and Worldwide Exports for the Sectors with the Largest Share of Total Indian Exports, 2001/02-2006/07 42 3.9 Importance of Largest Manufacturing Export Sectors in the Indian Export Basket and Growth of Sectors' Market Share in the World Export Market, 2001/02-2006/07 43 4.1 Per Capita Manufacturing Output, Organized and Unorganized Manufacturing, 2004 55 4.2 Management Qualifications and Experience, by Industry, 2006 57 4.3 Full-Time and Part-Time Workforce, by Industry, 2006 58 4.4 Surveyed Firms Reporting Themselves as Registered, 2006 59 4.5 Enterprises Reporting Employment Growth, by Age, 2006 60 4.6 Major Constraints to Normal Functioning Identified by Unorganized Enterprises 63 4.7 Effect of Power Outages on Unorganized Firms 64 5.1 Growth Rate of Selected Services Sectors, 1990/01 -2006/07 71 5.2 Labor Productivity in Retail Relative to the United States, 2001 71 5.3 Overall Productivity in Selected Segments of the Indian Services Sector Relative to the U.S. Sector, 2001 72 5.4 Olley and Pakes Decomposition of Aggregate Labor Productivity for the Retail Segments and for the Retail Sector, 2006 72 5.5 Perceived Major or Very Severe Investment Climate Obstacles, 2006 75 5.6 Differing Cost Structures for Traditional and Modern-Format Food Retail Stores 76 5.7 Perceived Most Serious Investment Climate Obstacles for Modern Format Store, 2006 78 5.A. 1 Tax Payments in India and OECD Countries: Number of Payments, Time Needed, and Tax Rates, 2006 82 5.B. 1 Cost and Rent of Land Relative to GDP per Capita, Various Years 84 5.B.2 Cost and Time of Registering Property across India 85 6.1 Distribution of Software and ITES Firms and Contribution to the Overall Sector Revenue, 2006 88 6.2 Labor Productivity Growth across Services Sectors, 1982-90 and 1992-2002 91 6.3 Overall Labor Productivity in Software Sector Indexed to U.S. Average, 1998 92 6.4 Most Important Perceived Obstacle, 2006 94 6.5 Average Number of Weeks to Fill Position, 2006 95 6.6 Average Annual Percentage Change in Average Wages by Type of Skills, 2003-06 95 7.1 ICI Ranking of Business Climate in 16 Indian States, 2006 106 7.2 Relative Effect of Infrastructure Indicators on the Overall ICI and on Low-Investment and Low-Growth States 108 7.3 Relative Impact of Institution Indicators on Overall ICI and on Low-Investment and Low-Growth States 109
Contents
Tables 1.1 2.1 2.2 3.1
x
Main Investment Climate Obstacles, Identified and Ranked by Sector 9 India Total Factor Productivity Estimates 17 Labor Productivity and Employment Shares 21 Contribution of Manufacturing to GDP in Selected Countries and Regions, 2005 30 3.2 Top 15 Manufacturing Exports, 2006/07 41 3.3 Value Added per Unit Labor Cost 44 3.4 Indirect Costs for Exporting and Nonexporting Firms in India and China 44 6.1 Corruption for Exporters and Nonexporters, 2006 96 8.1 Main Investment Climate Obstacles, Identified and Ranked by Sector 112 A.l Allocation of Manufacturing ICS 2006 Sample: Bihar, Jharkhand, Orissa, and Rajasthan 116 A.2 Sample Allocation and Actual Coverage of Manufacturing ICS 2006, by State 117 A.3 Industry Sectors Identified for the Unorganized ICS 2006 Compared with Industry Sectors Covered by National Sample Survey's 56th Round 118 A.4 Sample Allocation and Actual Coverage of Unorganized Manufacturing ICS 2006, by City and Manufacturing Subsectors 120 A.5 Sample Allocation, Actual Coverage, and Distribution of Retail ICS 2006, by Sector 121 A.6 Actual Coverage and Distribution of Software/ITES ICS 2006, by Subsector 122 A.7 Actual Coverage and Distribution of Software/ITES ICS 2006, by City 122 A.8 Actual Coverage and Distribution of Software/ITES ICS 2006, by State 122 B.l Definitions of Firm Performance Variables 126 B.2 Manufacturing Investment Climate Elasticities and Semielasticities with Respect to Productivity, Unrestricted Estimation 127 B.3 Manufacturing Two-Stage Least Squares Estimation of Employment Equation 132 B.4 Manufacturing Two-Stage Least Squares Estimation of Real Wages Equation 133 B.5 Manufacturing Two-Stage Least Squares Estimation of Probability of Exporting Equation 134 B.6 Manufacturing Two-Stage Least Squares Estimation of Probability of Receiving FDI 135 B.7 Unorganized Sector Investment Climate Elasticities with Respect to Log of Labor Productivity 137 B.8 Unorganized Sector Investment Climate Elasticities with Respect to Employment Demand 138 B.9 Retail Investment Climate Elasticities and Semielasticities with Respect to Log of Labor Productivity 139 B.10 Software and ITES Investment Climate Unrestricted Elasticities and Semielasticities with Respect to Productivity 140
Contents
B.11 Software and ITES Two-Stage Least Squares Estimation of Employment Equation 141 B.l2 Software and ITES Two-Stage Least Squares Estimation of Real Wages Equation 142 B. 13 Software and ITES Two-Stage Least Squares Estimation of Probability of Exporting Equation 143 B.14 Software and ITES Two-Stage Least Squares Estimation of Probability of Receiving FDI 144 C.l Variables Used in the Construction of the Composite ICI 148
XI
