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India most reformed within emerging markets: Commonwealth Business Council reportnews
17 October 2007
The Commonwealth Business Council''s biennial Business Environment Survey 2007 unveils some very interesting facts and trends in the Commonwealth countries. According to the report, private sector views on key determinants of a better investment climate remained consistent with previous views. However, the availability of free-flowing funds for investment from countries such as India and China means access to finance is no longer a critical issue for developing countries.

Respondents to the CBC''s Business Environment Survey 2007, highlighted five indicators, which have improved, compared to the 2005 survey. These include a better future outlook, corporate governance, human resources, financial architecture and business friendly tax policies.

Respondents expressed sentiments that the business climate has improved due to supportive policies implemented by the authorities. Clause 49 of the Stock Exchange Listing Agreement has improved corporate governance by making it difficult to commit fraud. Friendly tax policies were cited as resulting in better business performance. The business environment has become more competitive as a result of the open market approach.

Speaking about the findings, CBC director Dr Mohan Kaul said, "India''s economic reforms are taking place on various fronts, ranging from privatisation, deepening the financial sector, tax reform and pricing of goods and commodities. The Rangarajan Committee on Pricing and Taxation of Petroleum Products proposed eliminating subsidies on petrol and diesel, and in turn the government reduced customs duty for both commodities from 10 per cent to 7.5 per cent.

>"Reduction is part of an initiative to reduce government spending. Also, more effort is being put into improving the business environment, also by linking it to education reform which will see a better educated labour force. At the same time, poverty reduction will be linked to promotion of agricultural growth for rural populations. These are excellent moves."

On the whole, respondents acknowledged that this is an exciting period for businesses that are competitive. They noted remarkable improvements in telecommunications and the growth in most sectors of industry as positive developments.

The respondents urged for more openness and accountability and indicated that with an efficient judiciary, problems of corruption could be addressed. Many agreed that infrastructure needs including roads, power and underdevelopment in rural areas needs to be looked into. Problems of counterfeiting and complex tax laws were also raised.

Highlights of the report:

Business infrastructure

  • Financial stability has improved since 2002 and the Congress Party-led UPA government has made reform of the financial system one of its leading priorities Initiatives are underway to develop money and government securities markets
  • Stricter monitoring will strengthen regulation of derivatives
  • However, in spite of a decade of reform, the regulation of capital markets needs to be boosted, especially at the interface between the public and private sectors.
  • In June 2007, the country announced its intention to raise $450 billion for infrastructure over a five-year period
  • Envisaged bilateral deals with Japan would result in technological and financial support for the Delhi - Mumbai and the Delhi - Calcutta freight corridors

>The ICT sector and telecommunications are the fastest growing in the region.

  • In 2005, there were 49.75 million fixed telephone lines in use and 69.193 million mobile cellular subscribers
  • Mobile subscribers are now being added at the rate of 8 million per month, the fastest rate in the world
  • The sector is set to improve as India has become a hub for call centres and business outsourced services, particularly for companies from the US and UK
  • The labour force is divided between a small, highly skilled segment of tertiary-educated scientists and technicians and a mass of unskilled, largely illiterate workers The availability of semi-skilled labour is often poor

>Investment trends.

  • India has seen important increases in FDI inflows since 2000, when they reached $2.32 billion; The value of FDI inflows almost doubled to $4.27 billion in 2002 Growth has continued at unprecedented levels, from $4.585 billion in 2003 to $5.474 billion in 2004
  • The highest levels of FDI were reached in 2005 at $6.598 billion, the result of high capital inflows into the technology sector and into privatised former parastatals
  • FDI outflows saw a peak of $1.40 billion in 2001, having increased by $888 million on the previous year, but decreased to $1.3 billion in 2003. In 2004, outflows surged to $2 billion but dropped to $1.3 billion in 2005. This signals a new boom in which Indian companies have begun to acquire foreign companies, such as the takeover of Corus by Tata Steel
  • FDI inward stock increased by $11.88 billion during 1995-2000, and in 2003 reached $30.8 billion
  • Most investment has been in transport, services and manufacturing of electronic equipment.

>Investment Climate Reforms

  • India''s economic reforms are taking place on various fronts from privatisation to tax reforms
  • The Indian corporate sector has itself become more externally focused, acquiring foreign firms themselves. They have been acquiring companies in advanced economies as a way of gaining access into certain markets and also to pursue technology transfer
  • The business environment in India, with its low leverage, enables companies with high profitability to easily acquire the finances necessary for buyouts, unlike in East Asia where leverage is high
  • The favourable factors that make this new boom of overseas acquisitions attainable are: international efficiency of manufacturing companies and low production costs.

>CBC''s recommendations for India

Action points to attract investment and provide a favourable environment for business include:

  • Investing more in poverty alleviation through education and health
  • Improving infrastructure, particularly rehabilitation of roads and access to energy sources
  • Reviewing tax with a view to reducing complexity and ensuring consistent policies; and
  • Fast-tracking privatisation to improve efficiency of services.

>Best practices

In January 2007, a Special Economic Zones (SEZ) initiative was set up, shifting the acquisition of land from state governments to developers. The idea is similar to the Chinese tax-free zones designed to promote trade. Each zone is limited to 5,000 hectares. Permission will be granted for 83 SEZs with the possibility of a further 162 areas. It is hoped that this will encourage industrialisation in rural areas and shift the rural populations from traditional dependence on farming.


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India most reformed within emerging markets: Commonwealth Business Council report