FINANCIAL TIMES FRIDAY SEPTEMBER 7 2001
India urged to cut red
tape to boost growth
By Edward Luce in New Delhi
Economists generally attrib-
ute India’s poor performance
to its high rate of illiteracy
and abysmal infrastructure.
But the country could easily
achieve double-digit annual
economic growth rates with-
out tackling either of these
ills, according to a report
published today by the
McKinsey Global Institute.
By taking three clear steps
– removing distortions to the
country’s labyrinthine prop-
erty markets, privatising
government assets and clear-
ing the thicket of barriers
that stifle investment in
product development – India
could add 4 percentage
points a year to its current
growth rate of 6 per cent, it
said.
The 410-page report, which
was yesterday presented to
Atal Behari Vajpayee, India’s
prime minister, says that as
many as 90 per cent of
India’s land titles are under
legal dispute in one form or
another.
This uncertainty, which
India’s courts would take
more than a century to
resolve at their current rate
of progress, severely hinders
the incentive for land devel-
© THE FINANCIAL TIMES LIMITED 2001
opers to invest in retail or
housing.
As a result, India has by far
the highest property prices
in Asia relative to income.
Just 1 per cent of India’s
workforce is employed in res-
idential construction, com-
pared with 5 or 6 per cent in
more developed economies.
The report recommends
that India’s state govern-
ments replace the high 8-10
per cent stamp duties on title
transfer with a more equi-
table system of property tax.
It also recommends setting
up a suprajudicial agency,
along the lines of Germany’s
Treuhand, which was set up
to resolve ownership dis-
putes in the former east
Germany, to cut through
India’s red tape.
“If you cannot get clear
title to land then you are not
going to make long-term
investments on that land,”
said William Lewis, director
of the McKinsey Institute.
“This acts as a severe con-
straint to growth.”
Second, with almost half of
India’s productive assets
under government control,
the country’s investment
rate is limited to a much
lower level than it could be –
at just 24 per cent of gross
domestic product, compared
with more than 30 per cent if
the government accelerated
privatisation, it says.
For example, India’s state-
owned electricity companies
lose 40 per cent or more of
their power compared with
just 10 per cent for private
As many as 90
per cent of India’s
land titles are
under dispute
distributors. Subsidies to
loss-making electricity
boards cost 1.5 per cent of
GDP – money that could be
freed up for productive
investment, it argues.
Equally, at just 8 per cent
of US levels and about half
that of Russia, India’s labour
productivity is also con-
strained by loss-making and
inefficient state ownership,
says the report. “With the
possible exception of China,
the Indian economy is proba-
bly the most government
controlled of any serious
economy in the world,” said
Mr Lewis.
Third, the report, which
took almost two years to
produce, says that the com-
plex web of regulations and
licences that govern India’s
product markets cut as much
as 2.3 per cent a year from
the country’s GDP growth.
For example, development
of India’s dairy industry,
which, by providing either
full or part-time employment
to 70m households, employs
the largest number of people
of any sector in the world, is
held back by a licensing sys-
tem that stifles private par-
ticipation.
Equally, regulations for
small-scale industries, which
reserve more than 800 prod-
ucts for companies that do
not exceed a certain size,
reward inefficiency and hin-
der employment. As a result,
India’s clothing export sec-
tor, which on average
deploys a tenth of the
machines per factory as
China, will be wiped out
when the global textile
export quota system is
scrapped in five years time,
it predicts. In addition,
restrictions on foreign direct
investment and a discrimina-
tory regulatory system also
act as brakes on growth, the
report argues.
For regional reports,
www.ft.com/asiapacific