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Last Updated: Monday, 11 October, 2004, 23:02 GMT 00:02 UK
India's struggle to befriend investors
Mark Tully
By Mark Tully
Former BBC India correspondent, in Delhi

An Indian man transports his wares by horse in New Delhi's busy traffic
India is trailing neighbours such as Pakistan in freeing up business

The World Bank's latest World Development Report praises many of the steps India has taken to reform its economy, but is still critical of the bureaucratic delays and corruption which discourage investors. Why does it seem so difficult for India to become more investor friendly?

Making it easier to go bankrupt does not sound, to me, a very sensible way to increase investment.

I would have thought it is better to find ways of avoiding firms going bankrupt, but apparently I am wrong.

According to the latest Development Report of the World Bank, making it easier to go bankrupt increases productivity.

When inefficient firms put up the shutters and leave the market open to those who are efficient, market productivity can rise five times.

Indian bureaucracy

Anyone who has any experience of India's legal system and bureaucracy will not be surprised that the Bank has found it takes an inordinately long time to complete the complicated bankruptcy procedures here.

Indian Prime Minister Manmohan Singh
Bureaucratic hurdles for investors must go, says India's PM

Embarrassingly for Indian bureaucrats and diplomats, who tend to look down their noses at their smaller neighbours, it takes much less time to go bankrupt in Pakistan, Sri Lanka and Bangladesh.

And the matter doesn't end there. When it comes to starting up new companies who are needed, among other things, to replace those going bankrupt and so achieve that increased productivity, India is bottom of the league again.

It only takes 24 days to register a company in Pakistan, while in India it takes 89.

The World Bank identifies corruption as the greatest constraint on investment in all South Asian countries, and in India there is a link between corruption and those delays in bankruptcy proceedings and registering a company.

The delays come about because of red tape.

China's example

Red tape puts bureaucrats and politicians accounts in the black because it can only be cut with their agreement - which comes at a price. So for most politicians the more procedures the merrier, and the longer they take the better.

The Communists, whose support is essential to the government's survival, instead of heeding the World Bank's advice have refused to allow its experts any say in economic planning

India is particularly anxious to emulate China by persuading Indians abroad to invest, but one such potential investor told me: "When I go to China or South East Asia there is corruption, but you get what you pay for. In India the situation is so complicated that there is no guarantee you will get what you pay for."

He described India's corruption as "inefficient".

A few years ago, the government's vigilance commissioner put it differently, regretting the demise of "honest corruption" in India.

The investment climate has improved since the early nineties, when India started to liberalise its economy.

But the World Bank report shows India still has some way to go just to keep up with its neighbours.

Communist objections

The new Prime Minister, Manmohan Singh, a distinguished economist who pioneered economic reforms in India, has said bureaucratic hurdles for investors must go.

The finance minister, an ardent reformer, is trying to do just that, while the industries minister is fighting to retain the hurdles his ministry has set up.

The Communists, whose support is essential to the government's survival, instead of heeding the World Bank's advice have refused to allow its experts any say in economic planning.

So, as the battle goes on, Indians continue to lose the jobs - and their government the tax revenue - the investment which goes to more investor-friendly destinations could bring.

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