India's rise in global competitiveness vindicates Modi efforts, but continued rise depends on faster reforms

India’s 16-rung leap in terms of global competitiveness rankings, from No 55 in 2015-16 to No 39 in 2016-17, is cause for two cheers, not necessarily three. Reason: while there is no doubt that under the Modi government there has been a sharp focus on improving our competitiveness, through higher investments in infrastructure and institutions, the reason why we really rose so fast is this reality: the rankings are relative. We rise not only because we do better, but because others may have done worse than us. We have risen fast when the world is down because we did some things right after 2014; we were low in rankings earlier because the UPA did little to improve the country’s competitiveness when it got engulfed by scams.

We are playing catch-up for the time we lost in the half-decade before 2014, especially during UPA-2. But a rise this year does not mean the trend will continue, unless we speed up reforms going forward.

The competitiveness report, released yesterday (28 September) by the World Economic Forum, placed Switzerland, Singapore and the US in the top three spots in terms of competitiveness. China comes in at No 28 – just 11 places above India. We will have a shot at crossing China in the next five years, if we continue improving at the rate we did in the last two years.

A file photo of Narendra Modi. PTI

A file photo of Narendra Modi. PTI

The report will give us a lot of vicarious satisfaction, for it shows how India is rising when Pakistan is falling. Says the report: “Since 2007, the gap between the best- and worst-performing economies in the (South Asian) region has increased in some of the drivers of competitiveness, mostly as a result of the deteriorating situation in Pakistan. The quality of infrastructure has improved significantly (although from low levels) in India, Bangladesh, and Sri Lanka, while it stalls in Nepal and deteriorates in Pakistan. Pakistan is also the only economy that fails to improve its macroeconomic environment and health and primary education levels, falling behind other South Asian economies.”

If this does not give a wake-up call to the terror plotters in Pakistan, whom Narendra Modi challenged to a race on who eliminates poverty, unemployment and infant mortality faster, nothing will. It is clear that Pakistan is holding back the rise of South Asia, as the failure of Saarc to integrate its economies shows. It is not surprising that in a field of 138, Pakistan was ranked close to the bottom, at No 122, sandwiched between Bolivia and Gambia. The tail-enders were almost completely made up by the dysfunctional states of Africa. Pakistan is competing with them for low honours.

The WEF’s competitiveness index scores countries in three broad areas – basic requirements, efficiency enhancers, and innovation and sophistication factors. The first parameter has four sub-indices measuring institutional strength, infrastructure, macroeconomic trends, and health and primary education. The efficiency enhancers have six sub-indices - higher education and training, goods market efficiency, labour market efficiency, financial markets, technological readiness, and market size. The last parameter has two sub-indices: business sophistication and innovation.

India improved rankings in most of these parameters, many of them being a post-Modi gain. Institutional improvements largely relate to the reduction in scams post-UPA and putting processes in place to reduce them further (coal auctions, etc). Infrastructure improved due to higher outlays under NDA. Macroeconomically, the fall in oil prices and good management of the fiscal and current account deficits by the government and monetary management of inflation by the RBI helped. The deterioration in health and primary education can probably be traced to lower outlays and the Right to Education Act, which led to thousands of school closures and a lowering of learning outcomes.

Interestingly, India also scores better in higher education and training, apart from labour markets and market size. These are the long-term effects of investments in growth and higher education, and nothing specific to the NDA’s efforts in this direction. The worry is the drop in our ranking on financial markets, which is clearly the result of the bank NPA problem left behind by the bad lending practices under UPA. But the NDA is fixing these issues through higher bank capitalisation and insulating bank managements from politically directed lending. The drop in our goods market rankings will be remedied in the next few years, as the goods and services tax comes into effect. Effectively implementation is the key.

The Modi government will be pleased with the report’s frequent references to improvements after 2014, the year the NDA returned to power after a 10-year hiatus.

On growth, after recognising the high-growth years of the UPA, the report said: “India’s competitiveness score stagnated between 2007 and 2014, and the economy slipped down the GCI rankings. Since the new government took office in 2014, India climbed back up the rankings to 39th in this edition of the Report, from 48th in 2007–08. What has made India so successful in recent years?”

The report also noted that “India’s GDP per capita in PPP terms almost doubled between 2007 and 2016, from US$3,587 to US$6,599. Growth slowed after the 2008 crisis, hitting a decade’s low in 2012–13. This experience triggered India to rethink its policies and engage more firmly in the reforms necessary to improve its competitiveness. Growth rebounded in 2014 and last year surpassed that of China, making it the fastest-growing large emerging market in that year.”

Then again: “India’s competitiveness score stagnated between 2007 and 2014, and the economy slipped down the GCI rankings. Since the new government took office in 2014, India climbed back up the rankings to 39th in this edition of the Report, from 48th in 2007–2008.”

On infrastructure, the report said that the improvement “was small and faltering during most of the period, but picked up after 2014 when the government increased public investment and sped up approval procedures to attract private resources.”

On institutions, the observation should particularly please the government: “The institutional environment deteriorated until 2014, as mounting governance scandals and seemingly unmanageable inefficiencies saw businesses lose trust in government and public administration, but this trend was also reversed after 2014.”

Ditto for macroeconomic management: “Macroeconomic conditions followed a similar path, as India managed only in recent years—thanks also to the drop in commodity prices—to keep inflation below the target of 5 percent while rebalancing its current account and decreasing public deficit.”

The key point to underscore is this: we have done well, but improvement in the competitiveness rankings is a treadmill. If we don’t continue to run harder, we can fall back again. As the UPA did when our rank slipped from 48 in 2007-08 to 60 in 2013-14 and 71 in 2014-15, the transition year from UPA to NDA, before climbing back to 55 in 2015-16 and now 39.

Updated Date: Sep 29, 2016 13:55 PM

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