O C A W: Iding The Ndian Lephant

RIDING THE INDIAN ELEPHANT: OPPORTUNITIES AND CHALLENGES FOR AUSTRALIA AND THE WORLD
AUSTRALIAN CHAMBER OF C O M M E R C E A N D I N D U S T RY
Riding the indian elephant:

OppoRtunities and Challenges
foR
austRalia and the WoRld
Position Paper
August 2006
L E A D IN G A U S T R A L I A N B U S I N E S S
AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY
AUSTRALIAN CHAMBER OF C O M M E R C E A N D I N D U S T RY
ABN 85 008 391 795 Canberra Office 24 Brisbane Avenue BARTON ACT 2600 PO Box 6005 KINGSTON ACT 2604 Telephone: Facsimile: Email: (02) 6273 2311 (02) 6273 3286 info@acci.asn.au
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This document is available for downloading in PDF format from the ACCI Website. Australian Chamber of Commerce and Industry 2006. This work is copyright. Reproduction is permitted, with direct attribution and notification to the Australian Chamber of Commerce and Industry.
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FOREWORD
India is a nation of extraordinary potential - the challenge for its government, its business community and its people is realising that potential. For much of the past 60 years since Independence, Indias trade and economic performance has been lacklustre, held back by poor policy choices: socialism, central planning and autarky. At best, economic liberalisation, both domestic and international, has been undertaken reluctantly, and often under the cloud of pre-empting or responding to some form of economic threat, most notably the severe balance of payments crisis of 1991. Recent healthy economic indicators - such as stronger and less volatile economic growth, lower inflation, improved trade performances and rising foreign reserves - do not relieve pressure for further reforms of the Indian economy. If anything, they should be regarded as creating a window of opportunity. Substantial reform challenges remain in several key areas, including: fiscal policy, where deficits of 9 per cent or more of GDP are simply unsustainable; labour market policy, where restrictive labour laws deter the creation by the private sector of much needed employment; competition and corporate law, to facilitate the bankruptcy and/or restructuring of failed firms; and infrastructure policy, where more efficient spending on priority assets is vitally important to the competitiveness of Indian industry. As this position paper points out, Indias vibrant services sector has been a ray of sunshine for the Indian economy. But, the services sector alone cannot drive Indias medium term economic growth, or meet its employment creation needs of around 100 million people over the next decade or so. A competitive, flexible, and efficient manufacturing sector driven by market forces must be a part of the equation. The Australia - India commercial relationship appears well-placed for further expansion. Mathematic-economic modelling undertaken by the Chamber in the preparation of this report highlights the healthy trade complementarity between the two countries (each appears to buy what the other wants to sell), with anecdotal evidence suggesting the trend is likely to be sustained into the foreseeable future. At the same time, the Trade and Economic Framework (TEF) agreement reached between the two countries earlier this year is a positive outcome that will, hopefully sooner rather than later, transform into a bold and comprehensive Australia - India Free Trade Agreement (AIFTA). I wish to thank Dr Brent Davis and Jennifer Jay for the preparation of this document.
Peter Hendy Chief Executive Australian Chamber of Commerce and Industry
CONTENTS
ACCI - LEADING AUSTRALIAN BUSINESS ExECUTIvE SUMMARY OPPORTUNITIES AND CHALLENGES Introduction Business and Economic Policy after Independence The Reform Program Indias Recent Economic and Sectoral Performance The Main Challenges Fiscal Policy Business and Investment Climate The Dividends of Reform Meeting the Challenges Services - The Silver Lining Chindia The Australia - India Relationship Modeling Trade and Economic Framework Free Trade Agreement SUMMARY AND CONCLUSION BIBLIOGRAHY ACCI MEMBERS 5 7 8 8 8 9 0 2 2 6 8 8 9 2 2 2 2 2 25 27
ACCI LEADING AUSTRALIAN BUSINESS

ACCI has been the peak council of Australian business associations for 105 years and traces its heritage back to Australias first chamber of commerce in 1826. Our motto is Leading Australian Business. We are also the ongoing amalgamation of the nations leading federal business organsiations - Australian Chamber of Commerce, the Associated Chamber of Manufactures of Australia, the Australian Council of Employers Federations and the Confederation of Australian Industry. Membership of ACCI is made up of the State and Territory Chambers of Commerce and Industry together with the major national industry associations. Through our membership, ACCI represents over 350,000 businesses nation-wide, including over 280,000 enterprises employing less than 20 people, over 55,000 enterprises employing between 20-100 people and the top 100 companies. Our employer network employs over 4 million people which makes ACCI the largest and most representative business organisation in Australia. OUR ACTIvITIES ACCI takes a leading role in representing the views of Australian business to government. Our objective is to ensure that the voice of Australian businesses is heard, whether they are one of the top 100 Australian companies or a small sole trader. Our specific activities include: representation and advocacy to governments, parliaments, tribunals and policy makers both domestically and internationally; business representation on a range of statutory and business boards, committees and other fora; representing business in national and international fora including the Australian Industrial Relations Commission, Australian Safety and Compensation Council, International Labour Organisation, International Organisation of Employers, International Chamber of Commerce, the Business and Industry Advisory Committee to the Organisation for Economic Co-operation and Development, the Confederation of Asia-Pacific Chambers of Commerce and Industry and the Confederation of Asia-Pacific Employers; research and policy development on issues concerning Australian business; the publication of leading business surveys and other information products; and providing forums for collective discussion amongst businesses on matters of law and policy affecting commerce and industry.
PUBLICATIONS A range of publications are available from ACCI, with details of our activities and policies including: the ACCI Review a monthly analysis of major policy issues affecting the Australian economy and business; issue papers commenting on business views of contemporary policy issues; Policies of the Australian Chamber of Commerce and Industry the annual bound compendium of ACCIs policy platforms; the Westpac-ACCI Survey of Industrial Trends - the longest, continuous running private sector survey in Australia. A leading barometer of economic activity and the most important survey of manufacturing industry in Australia; the SAI Global-ACCI Survey of Investor Confidence which gives an analysis of the direction of investment by business in Australia; the St.George-ACCI Business Expectations Survey - which aggregates individual surveys by ACCI member organisations and covers firms of all sizes in all States and Territories; the St.George-ACCI Small Business Survey which is a survey of small business derived from the Business Expectations Survey data; workplace relations reports and discussion papers, including the ACCI Modern Workplace: Modern Future 2002-2010 Policy Blueprint and the Functioning Federalism and the Case for a National Workplace Relations System and The Economic Case for Workplace Relations Reform Position Papers; occupational health and safety guides and updates, including the National OHS Strategy and the Modern Workplace: Safer Workplace Policy Blueprint; trade reports and discussion papers including the Riding the Chinese Dragon: Opportunities and Challenges for Australia and the World Position Paper; education and training reports and discussion papers; the ACCI Annual Report providing a summary of major activities and achievements for the previous year; and the ACCI Taxation Reform Blueprint: A Strategy for the Australian Taxation System 20042014. Most of this information, as well as ACCI media releases, parliamentary submissions and reports, is available on our website www.acci.asn.au.
EXECUTIvE SUMMARY
India has the potential to become one of the major economic, political and trade powers of the world economy, if it can make a decisive break from the old thinking which has dominated much of its history since Independence almost 60 years ago. Tentative steps were taken in the 1980s and in the 1990s in response to external pressures and crises. But, crisis driven or externally mandated policy changes, while useful, do not replace the need for unilateral, self-motivated domestic and international liberalisation by governments in India, both at the central and the state levels. The misguided socialist/central planning/nationalist motivations which drove Indian economic and foreign policies appear to be giving away to policy settings which deliver bold and comprehensive domestic liberalisation and deeper integration into the world economy. Such policy settings, which give priority to national wealth creation, rather than its distribution, are essential for delivering the sustained real economic growth rates of around 8 per cent per annum India needs to lift large swathes of its population out of abject poverty and to compete against China as a destination for foreign investment and as a supplier of manufactures and services. The main recommendations of this report are: the Australian Government, and business community, should use Trade and Economic Framework (TEF) agreement, signed earlier this year, as a platform to closer and stronger trade and economic relations between the two countries; the Australian and Indian Governments should hold open the possibility of negotiating a bold and comprehensive Australia India Free Trade Agreement (AIFTA) at an appropriate time in the future; the Australian Government should enhance its program of technical assistance to India to strengthen the capacity of that country to undertake necessary policy and structural reforms, especially in the areas of fiscal consolidation and management, more effective competition policy, broader deregulation of the domestic economy and liberalisation of Indias international trade policies; and enhance the capacities of private and public sector organisations involved in trade facilitation and promotion to assist their business communities to identify and realise bilateral trade opportunities.
OPPORTUNITIES AND CHALLENGES

INTRODUCTION India stands large on the global stage: it is the worlds largest democracy; the second most populous nation in the world (with one billion people and rising); and, the seventh largest country in the world in terms of land area. And, it holds the distinction of conducting the largest single organised event in human history, modern or ancient. That is, an Indian General Election, when more than 680 million people are mobilised to vote. In economic terms, India is the eleventh largest economy in the world (when measured using market exchange rates) and third largest when using purchasing power parity exchange rates.1 However, its economic performance has fallen well short of its potential.2 Indias economic performance since Independence from the British in 1947 has been lacklustre, reflecting misguided socialist/central planning/nationalist motivations, which paralysed its economy, perpetuated poverty and brought the country to the brink of bankruptcy.3 However, it need not have been that way. At Independence, India had a number of distinct existing and potential competitive advantages: a large domestic market; a relatively diversified natural resource base; a large supply of both skilled and unskilled labour; a culture of domestic entrepreneurship; a tradition of industrial development; a relatively efficient public service; and a well developed financial sector. In particular, it had an established central bank, and one of the largest and oldest stock exchanges in Asia. BUSINESS AND ECONOMIC POLICY AFTER INDEPENDENCE Business and economic policy in India after Independence drew inspiration from a variety sources, most of which
1 2 3 After the United States and China: Kellar (2004) at 2. DFAT (2006); Hordern (2005). Pandit (2005).
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worked to compromise Indias commercial and economic capacity and potential, most notably what elements of the Indian elite saw as the successes of Soviet central planning and nationalists rejection of the laissez faire capitalism model which operated during British colonial rule. Indian commercial and economic policy during the 1950s and 1960s emphasised public sector ownership of the commanding heights of the Indian economy, and an industrialisation policy which encouraged import substitution. The policy framework for this strategy of economic nationalism and autarkic industrialisation, manifested itself in a series of formal Five Year Plans,4 which over time, involved: the nationalisation of the industrial and the financial sectors; the creation of powerful state monopolies; and the reservation of both an expanding and an influential share of the Indian economy for the public sector. This publicisation of the Indian economy also progressed through the introduction and strict enforcement of an expansive system of controls, licences and regulations - the so-called licence raj. These policies and practices promoted the emergence of a constituency of vested interests, both in business and the bureaucracy, whose privileges and status rested on these regulatory systems, with a strong motivation to oppose reform and deregulation. Not surprisingly, India found itself locked into progressively slower rates of economic and industrial growth, with average growth declining for each of three consecutive decades (1950s, 1960s and the 1970s). Indias growth performance also lagged behind those of its Asian counterparts: while per capita income growth in India averaged less than 2 per cent per annum over the 1960s to 1980s, for the dynamic East Asian economies the figures were closer to 5 to 6 per cent. That is around 3 times that of the sub-continent. Trade policy mirrored the inward looking stance of
4 The practice of which continues to this day, although the nature and content of such Plans has changed substantially in recent years.
commercial and economic policy. Following a balance of payments crisis in the late 1950s, India introduced a system of import controls which remained largely in place for another 40 years. A culture of export pessimism also took hold amongst Indian policy makers, and its share of world trade fell from 1.4 per cent in the 1950s to 0.9 per cent in the 1960s and then to 0.5 per cent in the 1970s. Manufactured exports fell from around 3 per cent of Indian GDP in the early 1950s to little more than 2 per cent in the mid 1970s. By the 1980s, India was experiencing very real pressures on its trade account, with the two OPEC oil shocks adding substantially to Indias import bill and worsening terms of trade (the price of exports relative to the price of imports). Indias domestic and external policy settings became unsustainable and reforms became necessary and overdue. THE REFORM PROGRAM India has engaged in two waves of reform, the first (and more modest) during the 1980s and the second (and bolder) during the 1990s, in particular the landmark package of 1991. The reform program of the 1980s was limited in ambition and cautious in implementation involving policies aimed at a moderate winding back of export barriers, some industrial deregulation and marginal taxation reform. Specific measures taken included: the reduction of what were known as canalised imports (imports under monopoly government control); a loosening of controls over the imports of capital goods; the removal of price controls on key heavy industries; and the introduction of (albeit limited) export incentives. The 1980s reforms also involved an attitudinal shift in Indian commercial and economic policy, adopting a more pro-business orientation. However, they were also accompanied by a less conservative, and more expansionist, macro-economic policy position, the tangible form of which were large fiscal deficits averaging more than 8 per cent by the end of the 1980s. These fiscal imbalances fuelled a growing domestic debt burden, expanding current account deficits and rising
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external borrowing (and debt) all of which made India increasingly vulnerable to external shocks. These shocks arrived in a number of forms: the collapse of the Soviet Union, which had been one of Indias major trading partners; the first Gulf War in 1991, which boosted Indias oil import bills and reduced the flow of funds from expatriate Indian workers in that region; and capital flight, driven by speculation of currency devaluation and debt default. Declining foreign reserves to as little as 3 months worth of imports saw the Indian Government approach the International Monetary Fund for balance of payments support during 1991, conditional upon a package of meaningful commercial and economic reforms. The crisis-induced 1991 reforms built on three pillars: macroeconomic stabilisation; liberalising the domestic economy; and opening to the international economy. Macroeconomic stabilisation involved the imposition of greater fiscal discipline (especially on the expenditure side) and debt consolidation, as well as currency devaluation. The fiscal deficit was reduced from 8.1 per cent of GDP in 1990/91 to 5.7 per cent of GDP two years later, while the current account deficit dropped from 3 per cent of GDP in 1990/91 to 0.5 per cent of GDP three years later. Liberalising the domestic economy saw initiatives to reduce government administrative controls on investment, to increase the share of the economy in the private sector domain, deregulation of prices and to deregulate the financial sector (e.g. the removal of interest rate controls and the elimination of the need for banks to obtain central bank approval prior to making major loans).5 The Indian Government also engaged reluctantly in a process of disinvestment,6 selling minority stakes in selected government business enterprises, primarily as a means of raising revenue (rather than withdrawing government from commercial and economic activity). A bolder approach to disinvestment/privatisation would have substantial economic dividends. By one estimate,7 the Indian Government had controlling interests in some 276 public sector companies in 2001/02, of which 47 had negative value added that is, GDP would increase if these
5 6 7 For an expansive discussion of reforming Indias financial sector see Farrell and Lund (2005). Privatisation a taboo term, being too politically inflammatory. Kelkar (2004) at 11.
entities simply ceased to exist. V.L. Kelkar and the Australian National University estimated that given the central position of many of these public sector companies within the Indian economy, especially as service providers to the private sector (e.g. power, water, rail transport and sea ports), each 1 per cent increase in their productivity would add at least 2 per cent to Indias national output.8 International liberalisation opening to the world economy involved the elimination of export subsidies and most quantitative restrictions (QR) on intermediate and capital goods, while the list of imports subject to QRs was cut substantially (those remaining being basically consumption goods). Tariff barriers were also reduced progressively from amongst the highest in the world. Indias maximum tariff was cut from 150 per cent in 1991/92 to just over 30 per cent a decade later, while its average import-weighted tariff dropped from 72 per cent to 39 per cent over the same period. However, Indias tariff regime continues to be one of the highest in the developing world, with its weighted average import tariff still around double those of China and its south-east Asian competitors. While India may have cut its tariffs, so have other developing countries, and at a faster rate.9 Full convertibility of the Indian rupee, for current account activity, was allowed in 1994. Indias foreign direct investment regime was also liberalised following the 1991 crisis, following four decades of what can best be regarded as an ambivalent approach to foreign capital: the cautiousness of the 1950s and 1960s; the restrictiveness of the 1970s and 1980s; and the liberalisation and welcoming of the 1990s and beyond. The 1990s reforms saw India move progressively toward the liberalisation of capital flows: in the early 1990s, relaxing controls on foreign direct investment and portfolio investment; in the mid 1990s, enhancing guarantees against expropriation or nationalisation, and creating a single window clearance facility for certain forms of foreign direct investment; and by the late 1990s, foreign majority or whole ownership was permitted in many industries.
8 9 Kelkar (2004) at 11. Ahluwalia (2002) at 74.
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However, remaining high levels of industry protectionism, including tariffs (when compared with major trading competitors) and the reservation of specific small scale industries has meant much of the increased inflow of foreign direct investment has gone into protected firms and industries in India, with production oriented toward domestic rather than export markets. At the same time, the substantial and seemingly (politically) intractable fiscal deficits limit the capacity for Indian policy makers to fully open its capital account, for fear of capital flight and the risk of consequent external account crisis.10 Indian trade policy, in particular its attitudes to the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO), have generally been defensive and designed to retain the capacity to use policies and practices which favour domestic firms, self-sufficiency and/or other developing countries.11 Its usage of some of the flexibilities contained in the WTO Uruguay Round outcomes were not always compatible with freer world trade.12 More recently, its engagement in the WTO Doha Round has seen it aligned with countries calling for closed, rather than more open, international trade policies, a strategy which has been described as: one of defensiveness seeking the freedom to protect rather than exploiting actual and potential comparative advantage by seeking an open regime internationally.13 INDIAS RECENT ECONOMIC AND SECTORAL PERFORMANCE As noted earlier, India undertook a round of domestic and international liberalisation in the 1980s and the early 1990s in response to a major, and unsustainable, foreign exchange and debt crisis. The bolder reform program, launched in 1991, was intended to open and deregulate the Indian economy, and saw an increased number of sectors opened to private sector activity, capital markets reformed and trade policy and the foreign exchange markets liberalised. However, and to be clear, India was pushed into reform;
10 Rajan (2005). 11 Mattoo and Subramanian (2003) at 327. 12 Mattoo and Subramanian (2003) at 331. 13 Mattoo and Subramanian (2003) at 340.
Figure 1 India's External Account Balance 5 Total Trade 0 Ext Debt
Per cent GDP
25
20
5
0 99 Crisis 2002/0
while there were some key change agents within the central government, the forces of resistance and opposition seemed to ensure any changes were only those necessary, and no more. Indias macroeconomic performance since the 1980s can only be described at mixed, when viewed as a collection of key indicators.14 On the one hand, India has sustained average real economic growth rates of between 5.6 per cent and 6.1 per cent over the past two decades,15 and the volatility of Indias economic growth declined substantially over the same period, pointing to a fundamental improvement in macroeconomic stability.16 At the same time, Indias inflation rate fell from around 8 per cent per annum in the 1980s and into the mid 1990s to below 5 per cent by the latter part of the 1990s. External trade and foreign balances have also improved, with the current account deficit contracting from 2.1 per cent of GDP in the 1980s to 1.4 per cent of GDP in the 1990s, and moving into surplus (around 1 per cent of GDP) in 2002/04 (see Figure 1).
14 World Bank (2003) at 3. 15 According to Goswami (2005) at 13, rates will in excess of the United States and the Euro zone, and most comparable developing countries (except China) over the same period. 16 Kelkar (2004) at 4; Jha (2004) at 1.

Gross trade flows (exports plus imports) almost tripled from $US 57 billion in 1991/92 to $156 billion a decade later - taking Indias trade-to-GDP ratio from 21 per cent to 33 per cent over the same period largely on the back of surging exports of manufactures (up 145 per cent) and services (up a phenomenal 275 per cent) over the decade.17 Foreign reserves have strengthened from 3 months worth of goods and services imports in the 1980s to 5.6 months in the 1990s, to 11 months in 2002/03. By contrast, the general government fiscal deficit (and by implication, its indebtedness) has increased, from the 7 to 8 per cent of GDP range in the 1980s and into the mid 1990s, to over 9 per cent of GDP by the late 1990s and some 10.4 per cent of GDP by the early 2000s (see Figure 2). With much of the fiscal deficit funding used to sustain current expenditures, funds available for public infrastructure and development spending were constrained, and smaller to medium sized enterprises suffered interest rates higherthan-otherwise. Taken as a whole, poor fiscal policy has kept Indias medium to longer term economic and industrial growth below potential.
17 Kelkar (2004) at 4.
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Figure 2 India's Economic Performance - Selected Macroeconomic Indicators GDP Growth Inflation Fiscal Deficit (% GDP)
0
8 % p.a.
0 980s 990s 2002/0
The period since the early 1980s has also seen profound shifts in Indias economic structure, and in particular its sectoral composition most notably, the contraction of agriculture, and the expansion of services, as shares of the Indian economy. The agricultural sector accounted for 38 per cent of the Indian economy in 1980/81; by 2001/02, it had fallen by around one-third to 25 per cent of GDP. By contrast, services share expanded considerably, from 36 per cent of GDP to 49 per cent of GDP, respectively; manufacturings share remained unchanged at 26 per cent of GDP. The reforms of the 1980s, and especially of the 1990s, appear to have had a positive impact on one of Indias most serious social challenges poverty alleviation. The poor economic performances of much of the 1970s and into the 1980s saw Indias national headcount of those living in absolute poverty remain fairly much unchanged at around 320 million people. Following the 1991 reforms somewhere between 60 and 100 million people have been lifted from their dire situation.18 Not surprisingly, these dividends contributed positively to the political acceptability of economic reform. THE MAIN CHALLENGES While the 1990s and into the early 2000s have seen
18 Kelkar (2004) at 6.
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worthwhile domestic and international liberalisation of the Indian economy, the reforms undertaken were necessary but not sufficient, and much remains to be done. The momentum generated by the 1991 reform package has, a decade on, largely dissipated, and a new round of domestic and international liberalisation is needed to maintain sustained economic growth. As the World Bank observed: macroeconomic vulnerabilities and structural impediments limit Indias ability to accelerate development Meeting these goals (of sustained, strong economic growth) will require a radical departure from current policies.19 Key macroeconomic priority areas include: fiscal policy, with sustained efforts needed to reduce general government fiscal deficits and associated debt; and the business and investment climate, by tackling inefficiencies in product markets and distortions in product markets. The dividends of a bolder reform program would see higher real economic growth, increased private sector investment, and lower government deficits. Fiscal Policy Fiscal policy, both at the central and the State government levels, remains a key weakness for India: fiscal deficits of
19 World Bank (2003) at 9.
more than 9 per cent of GDP, experienced over the late 1990s/early 2000s, are simply unsustainable. The revenue deficit (the gap between current revenues and expenditures) more than doubled from 3 per cent of GDP in the 1980s to more than 6 per cent of GDP in the early 2000s, with spending on subsidies, civil service salaries and pensions, and public administration, crowdingout much needed funding on infrastructure and productive development. Borrowing has generally funded Indias fiscal deficits, with general government debt rising from 58 per cent of GDP in 1986 to 85 per cent of GDP in 2003. The latter figure does not include the debt of government business enterprises (adding another 10 per cent of GDP) or the contingent liabilities of those bodies (a further 12 per cent of GDP) a total of 107 per cent of Indias GDP.20 Unless bold and decisive action is taken, Indias fiscal deficits and its public debt burden will continue to grow, and become increasingly unsustainable potentially leading to a debt trap. While the national government has committed to reducing its share of the public sector deficit (from the current 4.3 per cent of GDP to 3 per cent of GDP by 2009), such discipline has not been matched by the State governments, who appear less committed to fiscal rigour. Of particular concern is that just three areas of expenditure interest payments on government debt, defence spending and subsidies account for nearly 100 per cent of tax revenues, without taking into account highly inflexible expenses such as pensions, public sector salaries and transfers to the States. In short, India has placed itself in a very constricted situation, with little room to move absent some very hard political decisions. Growing interest payments on public debt are crowding out (coming at the cost of) public investment in muchneeded infrastructure and development projects, while higher real interest rates impair equally necessary private sector investment. Key areas where decisive action/fiscal reform are required include subsidies and general public financial
management. Subsidies to the energy sector accounted for a whopping 1.4 per cent of GDP in the early 2000s, yet manifestly failed to deliver on their proclaimed social justice purpose cheaper electricity to poorer Indians in rural and urban areas. Similarly, fertiliser and food subsidies (which also totalled another 1.4 per cent of GDP in the early 2000s) have not benefited the intended recipients, distorting agricultural production decisions and natural resource degradation (a longer term cost to farmers and the rural poor). Reforms to general public financial management must involve, in the first instance, focussed outcomes which reduce revenue deficits at the central and state government levels and imposing (and enforcing) borrowing caps on state governments (especially for off-budget purposes). Other constructive initiatives would include greater linkage of centre-to-state transfers to public financial management performance and spending reform and better targeting of development and assistance programs. Taxation reforms would also assist in improving fiscal management and overall public financial outcomes. The Tenth Plan contains a number of useful proposals to modernise tax administration, such as expanded use of computerisation, as well as winding back the taxation exemptions available to small scale industries and better aligning the taxation of services with that of goods. Further priorities are seen21 to include: enlarging the tax base by rationalising, if not reducing, exemptions and expanding consumption taxes; and the reduction of subsidies along with better targeting of those paid. Indias complex system of subsidies tends to be poorly targeted, with most benefits accruing to the more affluent middle classes than the poor for whom they are intended. In tangible terms, they account for an enormous 12 to 15 per cent of Indias GDP.22 Their abolition would eliminate Indias fiscal deficit problem at a stroke. However, doing so in the short-term would raise major political and equity issues.
21 Kelkar (2004) at 13. 20 World Bank (2003) at iii.

22 The Economist (2005) at 24.
Business and Investment Climate While the package of economic and industry policy reforms initiated in the early 1990s stimulated the Indian manufacturing and services sectors, momentum slowed (specially for manufacturing) by the latter part of the decade. Indias share of world markets for industrial products remained fairly static across much of the 1990s, while its attractiveness to foreign investors (measured by foreign direct investment as a share of GDP) remains below those of other developing countries and its major competitor, China, in particular.23 During the current decade, India will be required to generate more than 100 million new jobs, both to create employment for its growing population and to absorb the 1 million or more people leaving agriculture each year. Much of this employment growth will have to be found in manufacturing (and to a lesser extent, services). This, in turn, will require a step up in private sector investment, most notably by smaller firms in the non-organised sector of the Indian economy. Recent experience does not bode well for realising these employment outcomes: the stronger real economic growth rates experienced during the 1990s were accompanied by a sharp decline in employment growth. Economists24 have attributed this outcome to several factors, such as stronger total factor productivity (averaging around 2 per cent for much of the 1990s), the stagnation of employment in agriculture (which accounts for around 70 per cent of the labour force) and slowdown in public sector employment growth. The casualisation rate the share of the workforce employed on a casual basis also increased over the same period, while only a small fraction of the labour force (around 8 per cent) is now employed in the so-called organised sector. Achieving the necessary real economic growth outcomes - at sustained rates of around 8 per cent per annum - is likely to be constrained by product market distortions, inefficiencies in factor markets and infrastructure bottlenecks.
23 See Luce (2006) for good concise comparison of the growth and development experiences, and strengths and weaknesses of the economic policies pursued by China and India. 24 Jha (2004) at 13.

Important product market distortions requiring decisive action by the Indian Government include tariffs which are substantially higher than in most other comparable developing countries. Customs and related duties on manufactured imports to India stood at 31 per cent in the early 2000s, well above figures for Pakistan (18 per cent), China (16 per cent), Thailand (15 per cent), Indonesia (9 per cent) and more than 2 times developing countries as a whole (13 per cent).25 Other prominent distortions include policy preferences for smaller players, uneven (both in extent and uniformity) implementation of consumption taxes across states and limitations on the destination and extent of foreign direct investment. Action is particularly needed on the burdensome licencing/ inspection system which deters domestic and foreign business investment. Starting a new business in India requires, on average, 10 permits (compared to 6 in China), and obtaining them takes a median time of 90 days in India (30 days in China).26 In addition, for small firms in large Indian cities, it can take almost 14 days to get customs clearances for imported goods. For their competitors in China, it can take less than 6 days.27 The most important inefficiencies in factor markets involve difficulties in hiring and firing of workers and in the weak bankruptcy regime. Under the Indian Industrial Disputes Act of 1947 any registered firm (that is, an enterprise employing more than 300 persons) requires formal permission from the relevant State government before they can retrench labour, which is rarely given. Such laws are a serious impediment to Indian manufacturing seeking to establish and then realise economies of scale (in effect, creating an artificial, regulatory ceiling on firm size), and their capacity to adjust to changes in market conditions or diversify into new commercial opportunities. It is also counter to the interests of those seeking jobs: if a firm cannot dismiss redundant personnel, then it will be
25 World Bank (2003) at xii. 26 World Bank (2003) at xii. 27 World Bank (2004) at 16.
less likely to hire them in the first place. Antiquated bankruptcy laws make industrial restructurings, and in particular closures, almost impossible. India even has legislation entitled the Sick Industries Act to perpetuate this situation. According to the World Bank28, it can take an average of 10 years to complete a bankruptcy/wind-up of a small incorporated medium sized business in India, more than 4 times as long as China (obtaining the necessary approvals and licences to start a business can take 89 days in India, compared to 41 days in China and 58 days in Mexico). The World Banks annual Doing Business In surveys - which assess the ease/difficulty of doing business in some 155 countries around the world - have also ranked India poorly. India ranked 116 of the 155 countries studied, behind not only China, but also Indonesia and the Philippines29 (the latter of which suffer adversely for their reputations for corruption). And, despite the reform program, India still scores 8 out of 10 on the International Monetary Funds index of trade restrictiveness.30 Other shortcomings in India factor markets include land use and transfer laws which render opaque land titles (and thus impede exchange and commercial/industrial development), as well as obsolete tenancy and rent controls which exclude large parts of urban real estate from the market. High taxes (as much as 10 per cent of the value of the land) discourage land transactions and act as an incentive to under-declare the real value of land holdings. This, in turn, diminishes the utility of land as collateral for loans, again a disadvantage for business. Serious infrastructure bottlenecks31 continue to impede the performance and prospects for Indian commerce and industry.
According to economists,32 Indias required investment in key infrastructure roads, rail, sea and air ports, electricity and telecoms over the coming decade will be around $US 420 billion. With the public sector, at best, able to fund only around two-thirds of this amount, the remaining third will have to come from private sector sources, domestic and/or foreign (adding pressure for liberalisation and reform in associated areas of the Indian economy, such as capital markets and foreign investment policy). Access to reliable power supplies at reasonable prices is an important problem for Indian manufacturers, burdened by unreliable and low quality power priced at levels well above the cost of supply (in effect, crosssubsidising householders in rural and urban areas). Low quality and unreliable power supplies are adversely impacting the international competitiveness of Indian manufacturing: a new, small business in India can wait as long as 45 days to be connected to the public grid, more than double the time (21 days) for its Chinese counterpart. Furthermore, Indian manufacturers suffer, on average, 17 significant power outages per month, compared to 5 in China and 1 in Malaysia. These outages cost Indian manufacturers the equivalent of 9 per cent of output in lost production annually, well above the 2 per cent incurred by their Chinese counterparts. To add insult to injury, Indian commerce and industry pay power tariffs around 60 per cent higher than their competitors in south-east Asia.33 Key reform priorities involve the rationalisation of power charges, the de-politicisation of power-tariff setting and the elimination of cross-subsidies that undermine the competitiveness of Indian commerce and industry. Such reforms should also include at least the commercialisation, and then in time the privatisation, of the State-based electricity boards who supply electricity and the movement to an independent regulatory model. An efficient transport system is also vitally important to the competitiveness of Indian commerce and industry. Although India has one of the most extensive transport systems in the world, it suffers from severe capacity and quality constraints.
32 Cited in Goswami (2005) at 15. 33 World Bank (2004) at 19.
5
28 World Bank (2004) at 13. 29 Cited in Hordern (2005). 30 Cited in Rajan (2004). The higher the index score, the more trade restrictive are policy settings and institutional arrangements. 31 Proponents of a new, reformed India point to the telecoms sector as a positive example, highlighting the competition between multiple, private sector telephone companies, and the entry-into-use of more than 2 million new mobiles per month. Kelkar (2004) at 8.
The poor quality of the Indian road system has held back commercial and economic development of Indias interior with a few exceptions, roads between interior towns, and from them to coastal areas, are seriously inadequate. Road transport vehicles are constrained to travel at speeds around half of their capacity (typically as low as 30 kmh), while the rail system suffers from gross over-staffing (as much as 23 per cent34) and severe congestion on main lines resulting in increasing haulage times and greater unreliability. To add insult to injury for industrial producers, Indian railways impose some of the highest rates of crosssubsidisation from freight to passenger traffic in the world. Reforming the Indian rail system is a critical priority, necessitating large-scale financial restructuring and the separation of core and non-core business and operating assets. Cross-subsidies from freight to passengers will need to be wound back, and ultimately eliminated. However, the traditional politicisation of rail spending and usage will make such reforms even more difficult to achieve. Public financial pressures (unsustainable fiscal deficits and public debt levels) have resulted in a serious shortage of funds for modernisation of rail networks (both rolling stock and rail infrastructure) and even for maintenance of essential facilities such as rail tracks. While planned increases in public spending on showcase road projects are expected to relieve some pressures in high-volume corridors, these need to be complemented by a greater role for the private sector in road infrastructure supply which in turn requires better cost-recovery arrangements. A survey of Indian business35 bears out these recommendations: electricity charges are one of the most significant factors in driving investment decisions per se (whether or not to invest), and then location (where to do so), either within India or in other countries. Furthermore, the relatively high regulatory burden is discouraging business activity in India (especially amongst manufacturers) while land access and usage laws are deterring businesses from locating and operating in
34 Ahluwalia (2002) at 81. 35 See World Bank (2004) at iv.
6
metropolitan areas. The dividends from such (microeconomic) reform would potentially be substantial. According to the World Bank: Reliable, affordable energy would increase manufacturing labour productivity (at least in high cost cities) by more than 80 per cent. Tax and customs reforms would raise productivity by more than 60 per cent. If both reforms were to take place simultaneously, while India improved access to land and external formal finance, labour productivity would increase by more than 160 per cent.36 Such dividends would call forth additional private sector investment, employment creation, new product development and export markets a virtuous circle. For many developed, and developing, countries, a bold program of privatisation would be a key feature of any credible reform program. Indian governments have generally been at best ambivalent, and most likely reluctant, privatisers underlined by their use of the term disinvestment rather than the more controversial privatisation. The weak commitment to the underlying principles of privatisation has also been evident in the main motivation for action: to raise revenue to bolster the fiscal accounts (rather than capture the broader efficiency dividends of private sector productivity); and in the tendency for only minority shareholdings in public sector enterprises to be sold (thus retaining dominant public sector management). The Dividends of Reform A broader and deeper program of economic and industry reform is likely to deliver meaningful dividends to India and its people. Looked at another way, absent a reinvigoration of its reform agenda, Indias economic growth rate is likely to slow, its business investment rate decline and fiscal deficit (and hence public sector debt) increase. Figures 3 and 4 report the outcomes of econometric modelling by the World Bank,37 looking at three scenarios: first, the actual outcomes from the Ninth Plan (1997/98 to 2001/02); second, the expected outcomes from the Tenth
36 World Bank (2004) at 7. 37 World Bank (2003) at xviii.
Figure 3 Indian Growth Prospects 9 GDP 8 Manuf Services
7 Per cent real
Ninth Plan Tenth Plan Baseline Tenth Plan Reform
Plan (2002/04 to 2006/07); and third, expected outcomes from a bolder reform agenda over the period of the Tenth Plan. (The Tenth Plan itself sets ambitious targets for Indian policy makers: sustained real economic growth of around 8 per cent per annum; the creation of around 100 million new jobs; and a business investment rate of 30 per cent of GDP, compared to the recent 23 per cent.) This bolder agenda is based on the fiscal, and the business climate, reforms discussed earlier. Figure 3 shows that on a no-policy-change scenario (Ninth Plan vs Tenth Plan Baseline), Indias economic growth rate will slow (down 0.5 per centage points), as will the rate of expansion of its services sector (down 1.7 per centage points), although manufacturing growth will pick up by 0.8 percentage points. However, in all three cases, the outcomes from the nopolicy-change scenario fall well short of what could be achieved from India embracing and implementing a bolder reform agenda. Comparing the baseline scenario to the reform scenario suggests the latter could potentially deliver an additional 1.5 per centage points in economic growth (5.0 per cent, vs 6.5 per cent respectively), and stronger manufacturing (up 1.8 per centage points: 5.3 per cent, and 7.1 per cent respectively) and services sector (up 1.6 per centage points, from 6.4 per cent to 8 per cent respectively) growth.
7
Implementing a bolder reform program would also likely deliver useful dividends, in the forms of higher private sector investment and lower fiscal deficits from the general government. Figure 4 shows that on the no-policy-change scenario would see lower levels of private sector business investment (15.8 per cent and 14.1 per cent of GDP, respectively) and higher general government deficits (9.3 per cent and 11.8 per cent of GDP, respectively). By comparison, the implementation of a bolder reform agenda during the Tenth Plan period would see substantially higher levels of business investment (by a massive 6.3 per cent of GDP: 20.4 per cent of GDP compared to 14.1 per cent of GDP) and lower general government deficits (10.3 per cent of GDP compared to 11.8 per cent of GDP). The imperatives for a reinvigorated reform effort in India have been stressed by agencies such as the World Bank: Indias large fiscal imbalances pose a serious threat to sustained growth and development over the medium term. The persistence of current fiscal trends will, at best, limit growth and job creation. And slower growth would, in turn, speed the deterioration in debt dynamics. If this negative cycle continues, a fully-fledged fiscal crisis cannot be ruled out. And further: While India is still a relatively closed economy, and therefore somewhat protected from global trends, it does suffer from a
Figure 4 Indian Economic Indicators 25 Priv Inv. 20 5 0 5 0 Ninth Plan Tenth Plan Baseline Tenth Plan Reform Fiscal Deficit
loss of market share to its major competitors, especially China, where reform have moved ahead So, it would be risky to gamble that the recent strength in the balance of payments will continue, providing a counterweight to the deteriorating fiscal situation.38 MEETING THE CHALLENGES The Indian General Election of 2004 has clouded the future ambition and direction of liberalisation and reform on the sub-continent. Business and financial markets initially regarded as a serious setback for reform the surprise defeat of the incumbent BJP (and of several key political leaders with strong commitments to the reform program) by a coalition of the Congress Party and left-leaning parties. However, the anointment of Dr Mammohan Singh, a key architect of the 1990s reform program, as Prime Minister of the new coalition, partly assuaged these concerns. Nevertheless, the ambition and momentum of reform will be slowed by the presence of the Communist Party of India (Marxist) (CPI(M)) amongst the coalition of parties forming the national government and the widespread interpretation of the election outcome as a vote against reform. The CPI(M) has, for example, ostensibly vetoed any movement on liberalising the countrys rigid labour laws, and expressed its strident resistance to any progress on disinvestment/privatisation of Indias public sector enterprises and on opening the closeted domestic retailing sector to foreign direct investment.
38 World Bank (2003) at xix.
8
% GDP
The Common Minimum Program, the policy framework agreed amongst the parties making up the new United Progressive Alliance government, is a clear step down from the liberalisation program of its predecessor, National Democratic Alliance, administration to the extent that some informed observers39 regard the reform program as in real danger of stalling. SERvICES THE SILvER LINING If every cloud has a silver lining, then for India it is their dynamic services sector most notably, information technology and business processing outsourcing. During the 1990s, Indias services sector grew at an average rate of 9 per cent per annum, accounting for almost 60 per cent of the overall growth in the Indian economy over that period. At the same time, Indias exports of services grew at an annual average rate of almost 17 per cent, one of the fastest rates in the world, and more than 2 times that of the domestically focused services sector. Other figures tell a similar story of strong performance: India currently accounts for around 1.4 per cent of the world exports of services, double its share (0.7 per cent) of world exports of goods. In the four years to 2000, Indias revealed comparative advantage for services jumped by 74 per cent, compared to the fall of 15 per cent for goods.40 Within the services sector, the strongest improvements in comparative advantage occurred in the traded services (such as computer software, finance, management and
39 Hordern (2005); The Economist (2005 at 23. 40 World Bank (2004a) at 10.
consultancy up a phenomenal 330 per cent between 1996 and 2000) while the cosseted (non-traded) transport sector saw its comparative advantage fall by almost one-third (32 per cent) over the same period. A tangible indicator of this improved comparative advantage is the sizeable increase in Indias share of the global software development market which rose from 12 per cent in 1991 to 18.5 per cent within just seven years (by 1998). And, almost one third of the top 500 companies in the United States in 1998 outsourced their software requirements to India.41 Business process outsourcing (an important source of services export income) in India such as data entry, insurance claims, call centres and database services, grew at an extraordinary 100 per cent per annum in the five years to 2004! According to private sector forecasts, greater utilisation of information technology as a platform for the export of services will see export income from such activity surge from around $US 8 billion in 2001/02 to $US 57 billion in 2008/09 an annual average growth rate of 38 per cent.42 This dynamism in the Indian trade in services can be attributed to a number of factors, notably improved access to external markets (especially as part of the World Trade Organisations General Agreement on the Trade in Services, or GATS), domestic reform, technological progress (such as the rapid take-up of the internet) and changing business approaches by globalised business to the organisation and distribution of commercial activity (in particular, the greater usage of business process outsourcing). However, the same cannot be said for the non-traded services sub-sector in India. Those sub-sectors, such as retail trade and some professional services sectors that remain protected from effective domestic, let alone substantive foreign competition and subject to onerous regulatory frameworks, have performed poorly and have not made worthwhile contributions in employment or income to the Indian economy. Strengthening the services sector within the Indian economy, both by liberalising further the non-traded (domestic) services sub-sector and by progressing international services trade reform to advantage the traded (exported
41 Chandha (2003) at 73. 42 From a study by McKinsey and Co, a consultancy, cited in World Bank (2004a) at 12.
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and imported) services sub-sector is needed. However, it should be said these two sub-sectors are not mutually exclusive and have input-output linkages between them (the outputs of one can be the inputs of the other). Additionally, policy reforms targeted at one sub-sector can also impact the other. Priorities for the liberalisation of the domestic services sub-sector include improving the wider investment climate for domestic and foreign investors, in particular by targeting excessive regulation, the burdensome administration of licences and permits and corruption in public administration. Other important measures would include the elimination of restrictions imposed on domestic firms such as antiquated laws on road transport (limiting competition with rail transport), quantitative restrictions on the supply of financial and accountancy services and oppressive labour laws, all of which which impair the capacity of Indian nontraded service firms to realise economies of scope and size. According to the World Bank,43 non-traded services subsectors operating under moderately liberal regulatory regimes in India and likely to benefit from deregulation and similar reform initiatives include banking, insurance, construction and relating engineering and health, whilst those subject to more onerous interventions (and where reform is greatly needed) include retail distribution, road and rail transport, and professional services such as accountancy and the law. India can also improve the international competitiveness of its traded services by more active and effective engagement in the GATS negotiations currently underway within the WTO Doha Round. Productive approaches which India could take to the WTO Doha Round/GATS stream include improving its offers, and making stronger requests of its trading partners for the liberalisation of the trade in services and making more legally binding commitments with trading partners to lockin access to foreign (and its own) markets. CHINDIA India and China both loom large to corporate strategists and economic policy makers.
43 World Bank (2004a) at 4.
Indeed, it is not uncommon to hear corporate leaders talk about their Chindia strategies where do China and India fit into the opportunities and challenges confronting their enterprises and industries. China and India share important similarities, and major differences. Most obviously, one (China) operates an authoritarian political system; the other (India) a robust, often rambling, democracy. As noted earlier, an Indian General Election is the largest organised event in human history. In terms of similarities, both have embraced, to varying degrees, market forces and globalisation (China in 1978, and India in 1991; although China can be said to have done so voluntarily, while India did so under pressure and with some reluctance). Both countries have also enjoyed strong economic growth rates, which have been reflected in improvements in living standards for their populaces: China experienced an average real economic growth rate of around 9 to 10 per cent per annum since 1978; for India, the figure is around 6 per cent, in part reflecting the more modest reform agenda pursued. For both countries, these strong economic growth rates have been reflected in higher per capita income for their populaces: for China, from $US 1071 in 1978 to $US 4726 in 2003; for India, the figures were $US 1255 to $US 2732 over the same period.44 However, the paths taken by China and India in achieving these impressive economic growth rates have differed quite noticeably. While Chinas economic expansion has been driven by manufacturing (leading to descriptions of the country as the worlds factory), for India the driving force has been services (largely because of its existence outside of the oppressive licence and regulatory raj). Both are becoming powerhouses in their respective areas in international trade: China exported more than $US 1.4 trillion of manufactures in 2004, a phenomenal five-fold increase on a decade earlier; Indias exports of technology topped $US 10 billion in 2002, not accounting for the difficult to measure trade in information technology services.45
44 Sharma (2006) at 170. 45 Sharma (2006) at 170.
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Foreign direct investment also played a markedly different role in the economic take-off of China and India. Chinas economic transformation and trajectory were ostensibly fuelled by foreign direct investment, which flooded into its export-oriented firms and industries. In the 25 years following economic liberalisation in 1978, some $US 500 billion of foreign direct investment flowed into China, accounting for more than one-quarter of its output of manufactured goods. In one year alone (2004), China absorbed an astonishing $US 61 billion in foreign direct investment. By contrast, India, which has a long tradition of antipathy, even hostility, to foreign direct investment for a long time it practiced a swadeshi, or self-reliance policy - has received a relative trickle of foreign direct investment: just over $US 5 billion in 2004, or around one-twelfth of what China welcomed in the same year. Although many of the conventional macroeconomic indicators economic growth, attraction of foreign direct investment may be seen to favour China over India, it would be a mistake to say India is losing the competitive race. If anything, China may well be lagging India in the race up the value-chain. Chinas strong economic performance is being driven by capacity expansion (fuelled by extraordinary levels of foreign direct investment), rather than productivity growth, and research and development, both of which are the engines of sustainable economic growth (and for Chinas leaders, the essential political and social stability). By contrast, India appears to have leap-frogged the standard industrialisation approach to economic growth for developing countries, and ignored the conventional wisdom services are not an engine for economic performance and a source of export income. Even so, manufacturing is likely to be better placed for China, than will be services for India, in absorbing their reserve and surplus labour forces, of around 400 million people each. In short, while there may be much to distinguish China and India, they both face common challenges.
THE AUSTRALIA INDIA RELATIONSHIP The Australia India trade and economic relationship has improved over recent years, as India progressively liberalises its domestic economy and moves towards a more internationalist orientation. Bilateral trade in goods and services amounted to some $A 7.2 billion in 2004/05, with India surpassing Indonesia as our 12th largest merchandise trading partner. Australias merchandise exports to India topped $A6 billion in 2004/05, accounting for just under 5 per cent of our total merchandise exports in that year and making it our 6th largest merchandise export market (overtaking both Britain and Taiwan). Non-monetary gold was far and away the bulk, by value, of Australias merchandise exports to India, worth some $A 2,870 million in 2004/05, followed by copper ores ($A 410 million) and wool ($A 155 million). By contrast, Australias main merchandise imports from India in 2004/05 were pearls and gems ($A 83 million), other manufactured textiles ($A 54 million) and floor coverings ($A 40 million). Australia and India also have a healthy trade in services, with Australian exports of services to India valued at $A 852 million (an increase of 43 per cent on the previous financial year), with $A 276 million in services imports coming in the other direction. Australia also has a credible presence in India through foreign direct investment, with some $A 1 billion invested across around 140 joint ventures in activities ranging across manufacturing, telecommunications, tourism, food processing and the automotive sectors. Indian foreign direct investment in Australia is at comparable levels (around $A 1 billion), ranking us the 9th most important destination for Indian investment abroad, with much of this capital committed to a single project ($A 630 million in the worlds largest ammonia plant, located in Western Australia). Modeling The Australia India trade relationship is both deepening and strengthening, as evidenced by mathematical-economic modeling undertaken by the Chamber using three key measures of trade engagement trade intensity; country
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bias; and trade complementarity. Australias relative share of the Indian import market, which benchmarks our export performance in India against those of our competitors, has strengthened substantially over the past decade or so, reflecting a healthy growth in the realisation of Australias export potential in the Indian marketplace. Our trade complementarity with India, which measures the market match between our two countries (we are selling what they want to buy), has also improved substantially over the past decade or so, with anecdotal evidence suggesting this trend has been maintained in recent times and is likely to be sustained into the foreseeable future. The Relative Degree of Trade Intensity (RDTI) is a measure of Australias relative share of Indias import market. Importantly, it implicitly benchmarks Australias export performance in India, against those of our trade competitors. In quantitative terms, the RDTI is the share of Australian exports destined for India, compared with that countrys importance as a global import market. An index number for the RDTI of 1.0 indicates Australia is doing relatively better than its trade competitors in the Indian market whereas an index number below 1.0 suggests our trade competitors are outperforming us in the Indian market. Figure 5 points to a fairly flat performance in the relative intensity of Australia India trade from the late 1980s and into the mid 1990s, before showing a step upward in the late 1990s and then a sharp spike in the early 2000s. Across the 1989-2003 period as a whole, Australias RDTI (our market share performance relative to our trade competitors) rose by an average of just over 7 per cent per annum in trend terms. Even without the spike in performance in 2003, the trend rate of increase was some 5 per cent per annum over the period. The Relative Country Bias (RCB) of Australian exports to India measures how well actual Australian exports to India realise Australian export potential in India, as indicated by the complementarity of Australian exports and Indian imports. In quantitative terms, it is a weighted average of Australian market shares in India across a range of products and
Figure 5 Australia-India Relative Trade Intensity (RDTI) .5
.0
Index
2.5
2.0
.5
.0 989 99 99 995 997 999 200 200 2005
sectors to a similarly weighted average of Australias global market shares. An index number for the RCB of more than 1.0 indicates Australian exporters are performing relatively better in the Indian markets, for a given export profile, than they are in other export markets for a similar profile whereas an index number of less than 1.0 suggests a relatively inferior performance in the Indian market, compared to other export markets. Figure 6 shows a steady upward growth pattern in Australias RCB with India, suggesting our exporters are doing relatively better in penetrating the Indian market than they are doing in other export markets. While the chart shows a short-term dip in the upward movement in the RCB after 1997, this may well be a
(temporary) effect of the so-called Asian financial turmoil. Nevertheless, Australias RCB with India resumed its healthy growth after 1999, with an average growth rate of 11.3 per cent per annum over the 1989-2003 period. The Relative Degree of Trade Complementarity (RDTC) is, in effect, a measure of market match between the Australian and the Indian economies we are selling what they want to buy. The RDTC compares the composition of Australian exports with the composition of Indias imports and measures Australian patterns of comparative advantage in export products/sectors to the shares of each product/ sector in Indias total imports. An index number for the RDTC of more than 1.0 indicates a good market match (Australia is selling what India wants
Figure 6 Relative Country Bias of Australian Exports to India (RCB) .5 .0 2.5 Ratio 2.0 .5 .0 0.5 0.0 989 99 99 995 997
22
999
200
200
2005
.0 0.9 0.8 Ratio 0.7 0.6 0.5 0. 989
Figure 7 Relative Degree of Trade Complementarity Between Australia and India (RDTC)
99
99
995
997
999
200
200
2005
to buy; or they are buying what we want to sell) whereas an index number below 1.0 points to the converse. Figure 7 clearly shows a strong market match between Australia and India we are selling what they want to buy and they are buying what we can sell. The market match is also generally strengthening. After remaining fairly flat in the late 1980s and into the early 1990s, the RDTC took-off after 1993, sustaining healthy growth rates for the following decade. Looked at over the 1989-2003 period as a whole, Australias RDTC (degree of market match) grew by around 2.6 per cent per annum in trend terms, although this figure accelerated by another 1 percentage point (to 3.6 per cent per annum) in the decade to 2003. Trade and Economic Framework Australia India trade and economic relations are expected to strengthen further with the bilateral Trade and Economic Framework (TEF) agreement, which was signed earlier this year. The TEF will facilitate bilateral trade and strategic co-operation in areas ranging across energy and mining, infrastructure development, information and communication technology, services, agriculture and biotechnology. More broadly, it will expand formal processes for dialogue on multilateral and regional trade and economic policy
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issues, such as the World Trade Organisation, and the ASEAN and Asian Economic Summit processes (the latter of which, both countries are targeting in their foreign economic policy agenda46). The TEF will build on a number of other positive developments which will fuel stronger bilateral trade and investment relations, such as economic growth and domestic and international liberalisation in both countries (especially in India). Opportunity sectors for Australian exporters to India, existing and potential, range across: agribusiness (reflecting increasing demand in India for imported food products, and awareness of Australias reputation as a supplier of high quality products); entertainment (providing services such as software production, post-production, distribution and exhibition facilitation to the burgeoning Indian film industry); healthcare (in the form of the export of advanced medical equipment for diagnostic and patient monitoring and services such as higher level medical training); information technology (for example, software for vertically integrated industries such as transportation, finance and insurance and engineering, as well as for activities such as banking services like EFTPOS and internet banking services); and
46 Most evidently for India in its formal Look East policy: DFAT (2006).
mining (in particular, new technologies and services focused around safety, environment, communications and training, as well as manufacturing and processing of value-added mineral products).
abject poverty, when alternative policy settings could have given them better quality (and longer) lives. When it has taken place, India has been a reluctant reformer: what was done being crisis-driven, externally imposed and by and large no more than was necessary in the circumstances. More recent (external) pressure, most notably the benchmarking of India against China, has kept the liberalisation program moving forward, albeit modestly and in the face of domestic resistance both from vested interests and political opponents of reform. Substantial, and urgent, reforms are required in areas such as fiscal consolidation and management, infrastructure provision and the deregulation of factor (particularly labour) and product markets (e.g. retailing). While Indias vibrant traded services sector has been a ray of sunshine for the Indian economy, it cannot alone drive Indias economic growth or meet its employment creation needs. And, its competitiveness is impaired by shortcomings elsewhere in the Indian economy, such as the over-regulated labour markets. The Australia India relationship, which originated from our common colonial heritages, contains the seeds for optimism. Each is growing in trade and investment importance to the other, with Australia having the capacity to provide India with useful technical assistance on policy design, sequencing and implementation, building on our own experiences over the past two or so decades with domestic and international liberalisation. The Trade and Economic Framework (TEF) between the two countries is a further positive contribution, which could eventually transform into a robust Australia - India Free Trade Agreement (AIFTA) - and a relationship that is much more than just cricket.
While extensive, this list is not exhaustive of all of the existing and potential opportunities available to Australian firms looking to India, especially smaller firms operating in micro-niche areas willing to create new openings at their own initiative. FREE TRADE AGREEMENT The TEF should also be seen as a platform for closer commercial, economic and trade relations between the two countries. That is, although a useful document of itself, the TEF is only the first step in a process which should, over time, lead to a bold and comprehensive Australia - India Free Trade Agreement (AIFTA). While there is no one size fits all approach to negotiating FTAs, there are a number of common features which underpin high quality Agreements. These include: they should be WTO-plus (that is, deliver outcomes beyond those available to the parties from their core WTO commitments); and, cover substantially all trade between the two nations (that is, with minimal, if any, exclusions). They should also have broad, sectoral reach covering the trade in agriculture, goods and services, as well as addressing important issues such as investment, government procurement and intellectual property. Based on Australias experience with Singapore and Thailand, and prospectively with Malaysia, high-achieving developing countries can realise quality FTAs where there is the necessary political will. SUMMARY AND CONCLUSION Indias economic and trade performance since Independence has been lacklustre and held back by poor policy choices: socialism, central planning and excessive economic nationalism. Policy settings (erroneously) focused on wealth distribution ahead of wealth creation. Economic growth fell well short of potential, as did Indias share of world trade. Too many of its citizens languished in
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Trade, Canberra. Farrell, D., and Lund, S., (2005), Reforming Indias Financial System, McKinsey Quarterly, September. Goswami, O., (2005), Humility, Not Hubris, Will Make India Great, Far Eastern Economic Review, December: 12 - 17. Gupta, R.K., (2005), Indias Economic Agenda: An Interview with Manmohan Singh, McKinsey Quarterly, September. Hordern, N., (2005), Asias Other Giant, Australian Financial Review, 30 November: 60. International Monetary Fund, (2005), IMF Executive Board Concludes 2004 Article VI Consultation with India, Public Information Notice 05/12, International Monetary Fund, Washington DC. Jain, A.P., Manson, N.A.S., and Sankha, S., (2005), The Right Passage to India, McKinsey Quarterly, September. Jha, R., (2004), The Political Economy of Recent Economic Growth in India, Australia South Asia Research Centre, Australian National University, Canberra. Kelkar, V.L., (2004), India: On the Growth Turnpike, Australia South Asia Research Centre, Australian National University, Canberra. Luce, E., (2006), Same Country, Different Planet, Australian Financial Review, 3 February. Mattoo, A., and Subramanian, A., (2003), India and the Multilateral Trading System Post Doha: Defence or Proactive?, in Mattoo, A., and Stern, R.M. (eds), India and the WTO, Oxford University Press and the World Bank, Washington DC. Mitra, B.S., (2005), What India Can Learn From Hong Kong, Far Eastern Economic Review, December: 24 - 28.
Pandit, R., (2005), Why Believe in India?, McKinsey Quarterly, September. Rajan, R.G., (2005), Making India a Global Hub, McKinsey Quarterly, September. Rangnekar, S.D., and Sharma, M., (2006), Indias Split Personality, Far Eastern Economic Review, February. Sharma, S.D., (2006), Asias Challenged Giants, Current History, April. Sinha, J., (2005), Checking Indias Vital Signs, McKinsey Quarterly, September. Srinivasan, T.N., and Tendulkar, S.D., (2003), Reintegrating India with the World Economy, Institute for International Economics, Washington DC. The Economist, (2005), Special Report Reform in India, 29 October: 23 - 25. Thirwell, M P (2004), India: The Next Economic Giant, Lowy Institute for International Policy, Sydney. World Bank, (2003), India: Sustaining Reform, Reducing Poverty, Oxford University Press, New Delhi. World Bank, (2004), India: Investment Climate and Manufacturing Industry, Oxford University Press, New Delhi. World Bank, (2004a), Sustaining Indias Services Revolution: Access to Foreign Markets, Domestic Reform and International Negotiations, World Bank, Washington DC. World Bank, (2005), The World Bank in India, Country Brief, World Bank, Washington DC. World Trade Organisation, (2002), Trade Policy Review Body: Review of India , World Trade Organisation, Geneva.
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ACT and Region Chamber of Commerce & Industry 12A Thesiger Court DEAKIN ACT 2600 Telephone: 02 6283 5200 Facsimile: 02 6282 5045 Email: chamber@actchamber.com.au Website: www.actchamber.com.au Australian Business Limited 140 Arthur Street NORTH SYDNEY NSW 2060 Telephone: 02 9927 7500 Facsimile: 02 9923 1166 Email: member.service@australianbusiness.com.au Website: www.australianbusiness.com.au Business SA Enterprise House 136 Greenhill Road UNLEY SA 5061 Telephone: 08 8300 0000 Facsimile: 08 8300 0001 Email: enquiries@business-sa.com Website: www.business-sa.com Chamber of Commerce & Industry Western Australia (Inc) PO Box 6209 EAST PERTH WA 6892 Telephone: 08 9365 7555 Facsimile: 08 9365 7550 Email: info@cciwa.com Website: www.cciwa.com Chamber of Commerce Northern Territory Confederation House 1/2 Shepherd Street DARWIN NT 0800 Telephone: 08 8936 3100 Facsimile: 08 8981 1405 Email: darwin@chambernt.com.au Website: www.chambernt.com.au Commerce Queensland Industry House 375 Wickham Terrace BRISBANE QLD 4000 Telephone: 07 3842 2244 Facsimile: 07 3832 3195 Email: info@commerceqld.com.au Website: www.commerceqld.com.au Employers First PO Box A233 SYDNEY SOUTH NSW 1235 Telephone: 02 9264 2000 Facsimile: 02 9261 1968 Email: empfirst@employersfirst.org.au Website: www.employersfirst.org.au State Chamber of Commerce (NSW) GPO Box 4280 SYDNEY NSW 2000 Telephone: 02 9350 8100 Facsimile: 02 9350 8199 Email: enquiries@thechamber.com.au Website: www.thechamber.com.au Tasmanian Chamber of Commerce and Industry Ltd GPO Box 793 HOBART TAS 7001 Telephone: 03 6236 3600 Facsimile: 03 6231 1278 Email: admin@tcci.com.au Website: www.tcci.com.au victorian Employers Chamber of Commerce & Industry GPO Box 4352QQ MELBOURNE VIC 3001 Telephone: 03 8662 5333 Facsimile: 03 8662 5367 Email: vecci@vecci.org.au Website: www.vecci.org.au
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ACCORD Dalgety Square Suite C7, 99 Jones Street ULTIMO NSW 2007 Telephone: 02 9281 2322 Facsimile: 02 9281 0366 Email: bcapanna@acspa.asn.au Website: www.acspa.asn.au Agribusiness Employers Federation GPO Box 2883 ADELAIDE SA 5001 Telephone: 08 8212 0585 Facsimile: 08 8212 0311 Email: aef@aef.net.au Website: www.aef.net.au Air Conditioning and Mechanical Contractors Association 30 Cromwell Street BURWOOD VIC 3125 Telephone: 03 9888 8266 Facsimile: 03 9888 8459 Email: deynon@amca.com.au Website: www.amca.com.au/vic Association of Consulting Engineers Australia (The) 75 Miller Street NORTH SYDNEY NSW 2060 Telephone: 02 9922 4711 Facsimile: 02 9957 2484 Email: acea@acea.com.au Website: www.acea.com.au Australian Beverages Council Ltd Suite 4, Level 1 6-8 Crewe Place ROSEBERRY NSW 2018 Telephone: 02 9662 2844 Facsimile: 02 9662 2899 Email: info@australianbeverages.org Website: www. australianbeverages.org Australian Entertainment Industry Association Level 1 15-17 Queen Street MELBOURNE VIC 3000 Telephone: 03 9614 1111 Facsimile: 03 9614 1166 Email: aeia@aeia.org.au Website: www.aeia.org.au Australian Hotels Association Level 1, Commerce House 24 Brisbane Avenue BARTON ACT 2600 Telephone: 02 6273 4007 Facsimile: 02 6273 4011 Email: aha@aha.org.au Website: www.aha.org.au Australian International Airlines Operations Group c/- QANTAS Airways QANTAS Centre QCA4, 203 Coward Street MASCOT NSW 2020 Telephone: 02 9691 3636 Australian Made Campaign Limited 486 Albert Street EAST MELBOURNE VIC 3002 Telephone: 03 8662 5390 Facsimile: 03 8662 5201 Email: ausmade@australianmade.com.au Website: www.australianmade.com.au Australian Mines and Metals Association Level 10 607 Bourke Street MELBOURNE VIC 3000 Telephone: 03 9614 4777 Facsimile: 03 9614 3970 Email: vicamma@amma.org.au Website: www.amma.org.au
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Australian Paint Manufacturers Federation Inc Suite 1201, Level 12 275 Alfred Street NORTH SYDNEY NSW 2060 Telephone: 02 9922 3955 Facsimile: 02 9929 9743 Email: office@apmf.asn.au Website: www.apmf.asn.au Australian Retailers Association Level 2 104 Franklin Street MELBOURNE VIC 3000 Telephone: 03 9321 5000 Facsimile: 03 9321 5001 Email: vivienne.atkinson@vic.ara.com.au Website: www.ara.com.au Housing Industry Association 79 Constitution Avenue CANBERRA ACT 2612 Telephone: 02 6249 6366 Facsimile: 02 6257 5658 Email: enquiry@hia.asn.au Website: www.buildingonline.com.au Insurance Council of Australia Level 3 56 Pitt Street SYDNEY NSW 2000 Telephone: 02 9253 5100 Facsimile: 02 9253 5111 Email: ica@ica.com.au Website: www.ica.com.au Investment and Financial Services Association Ltd Level 24 44 Market Street SYDNEY NSW 2000 Telephone: 02 9299 3022 Facsimile: 02 9299 3198 Email: ifsa@ifsa.com.au Website: www.ifsa.com.au Master Builders Australia Inc. 16 Bentham Street YARRALUMLA ACT 2600 Telephone: 02 6202 8888 Facsimile: 02 6202 8877 Email: enquiries@masterbuilders.com.au Website: www.masterbuilders.com.au
29
Master Plumbers and Mechanical Services Association Australia (The) 525 King Street WEST MELBOURNE VIC 3003 Telephone: 03 9329 9622 Facsimile: 03 9329 5060 Email: info@mpmsaa.org.au Website: www.plumber.com.au National Electrical and Communications Association Level 3 100 Dorcas Street SOUTH MELBOURNE VIC 3205 Telephone: 03 9645 5566 Facsimile: 03 9645 5577 Email: necanat@neca.asn.au Website: www.neca.asn.au National Retail Association Ltd PO Box 91 FORTITUDE VALLEY QLD 4006 Telephone: 07 3251 3000 Facsimile: 07 3251 3030 Email: info@nationalretailassociation.com.au Website: www.nationalretailassociation.com.au NSW Farmers Industrial Association Level 10 255 Elizabeth Street SYDNEY NSW 2000 Telephone: 02 8251 1700 Facsimile: 02 8251 1750 Email: industrial@nswfarmers.org.au Website: www.iressentials.com Oil Industry Industrial Association c/- Shell Australia GPO Box 872K MELBOURNE VIC 3001 Telephone: 03 9666 5444 Facsimile: 03 9666 5008 Pharmacy Guild of Australia PO Box 7036 CANBERRA BC ACT 2610 Telephone: 02 6270 1888 Facsimile: 02 6270 1800 Email: guild.nat@guild.org.au Website: www.guild.org.au
Plastics and Chemicals Industries Association Inc Level 2 263 Mary Street RICHMOND VIC 3121 Telephone: 03 9429 0670 Facsimile: 03 9429 0690 Email: info@pacia.org.au Website: www.pacia.org.au Printing Industries Association of Australia 25 South Parade AUBURN NSW 2144 Telephone: 02 8789 7300 Facsimile: 02 8789 7387 Email: info@printnet.com.au Website: www.printnet.com.au Restaurant & Catering Australia Suite 32 401 Pacific Highway ARTARMON NSW 2604 Telephone: 02 9966 0055 Facsimile: 02 9966 9915 Email: restncat@restaurantcater.asn.au Website: www.restaurantcater.asn.au Standards Australia Limited 286 Sussex Street SYDNEY NSW 2000 Telephone: 1300 65 46 46 Facsimile: 1300 65 49 49 Email: mail@standards.org.au Website: www.standards.org.au victorian Automobile Chamber of Commerce 7th Floor 464 St Kilda Road MELBOURNE VIC 3000 Telephone: 03 9829 1111 Facsimile: 03 9820 3401 Email: vacc@vacc.asn.au Website: www.vacc.motor.net.au
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O C A W: Iding The Ndian Lephant

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RIDING THE INDIAN ELEPHANT: OPPORTUNITIES AND CHALLENGES FOR AUSTRALIA AND THE WORLD

Riding the indian elephant:

austRalia and the WoRld

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

Peter Hendy Chief Executive Australian Chamber of Commerce and Industry

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

ACCI LEADING AUSTRALIAN BUSINESS

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

OPPORTUNITIES AND CHALLENGES

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

Figure 1 India's External Account Balance 5 Total Trade 0 Ext Debt

Per cent GDP

0 99 Crisis 2002/0

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

0 980s 990s 2002/0

21 Kelkar (2004) at 13. 20 World Bank (2003) at iii.

22 The Economist (2005) at 24.

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

Figure 3 Indian Growth Prospects 9 GDP 8 Manuf Services

7 Per cent real

 Ninth Plan Tenth Plan Baseline Tenth Plan Reform

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

Figure 5 Australia-India Relative Trade Intensity (RDTI) .5

.0 0.9 0.8 Ratio 0.7 0.6 0.5 0. 989

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

ACCI MEMBERS CHAMBERS OF COMMERCE AND INDUSTRY

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

ACCI MEMBERS NATIONAL INDUSTRY ASSOCIATIONS

AUSTRALIAN CHAMBER OF COMMERCE AND INDUSTRY

Das könnte Ihnen auch gefallen

Figure 1 India's External Account Balance 5 Total Trade 0 Ext Debt

0 99 Crisis 2002/0

0 980s 990s 2002/0

Ninth Plan Tenth Plan Baseline Tenth Plan Reform

Figure 5 Australia-India Relative Trade Intensity (RDTI) .5

.0 0.9 0.8 Ratio 0.7 0.6 0.5 0. 989