[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

REIMAGINING INDIA
centralised oversight bodies is that they
promote a consistent and systematic
method of reform across the entire administration.
Ideally, its objectives
should be outlined as part of an explicit
regulatory policy which generally
helps countries make greater reform
progress. 2
States That Have Liberalised
More Than Others Are Reaping
The Benefits
16. With state governments having control
over certain aspects of regulatory
policy and responsibility for enforcement,
there are significant differences
in the business environment across
states as shown by our indicators. These
differences have an important bearing
on economic performance. Labour productivity
is higher in states with a regulatory
environment that is more supportive
of competition (Figure 3). There
are a number of reasons for this. First,
virtually all of India’s foreign direct investment
flows to the relatively more
liberal states and domestic investment
also appears to be higher, boosting state
productivity. Second, in states with excessively
restrictive administrative burdens
firms are more likely to remain
informal so as to avoid government administrative
requirements. However,
informal sector firms are usually much
smaller with lower capital intensity and
much less productive than formal sector
enterprises.
A Further Rationalisation And
Reduction Of Restrictions On
Foreign Is Trade Needed
17. As recently as the beginning of this
decade, India’s tariffs were the highest
There is a considerable gap between the standard tariff
rates and the actual revenue raised from tariffs. Such gaps
are indicative of special concessions to certain products or
industries and distort the allocation of resources
in the world and among the most discriminatory.
Significant reforms to liberalise
foreign trade have been undertaking
since then and average tariffs
are scheduled to reach the average
level in ASEAN countries in the near
future. Despite the fears of domestic
producers, the manufacturing sector
has profited from this policy shift and
has been growing as fast as the service
sector since 2003. Manufacturing exports
have also started to grow rapidly,
outpacing most other Asian countries
in the first half of this decade. However,
more could be done to liberalise
foreign trade. Tariffs in ASEAN countries
are still high in relation to those
in developed countries. Moreover,
there is a considerable gap in India between
the standard tariff rates and the
actual revenue raised from tariffs. Such
gaps are indicative of special concessions
granted to favour certain products
or industries and distort the allocation
of resources and lower
productivity. Cross-country evidence
has found that openness to global markets
acts as an important stimulus to
growth and ongoing reductions and rationalisation
of the tariff structure in
India would pay dividends.
Labour Market Regulation Is
Also Excessively Restrictive
18. The dichotomy between formal and
informal businesses is in part caused by
labour market regulation, which is another
key area in which restrictive government
intervention imposes high
economic costs. The strictness of employment
regulation varies across different
segments of the Indian labour
market according to the size of firms
and the type of employment contract.
According to the OECD’s indicators of
employment protection legislation
(EPL), larger firms employing workers
on regular contracts are subject to EPL
that is more restrictive than in all but
two OECD countries. For smaller
firms, the extent of employment protection
is similar to that in the OECD
144 THE IIPM THINK TANK