India: Maharashtra's Investment Climate

Talking Points

by  

Michael Carter

Country Director (India), The World Bank

at
Maharashtra Economic Development Council
Inaugural Session of the International Business Conference

on

"Maharashtra: Vision 2010 - Strategies & Action"
in
Mumbai, on June 6, 2006

• The World Bank has had a long and enduring partnership with Maharashtra and we are proud of our association with a state that has significantly improved the wellbeing of its people in recent years.
  
• Maharashtra is not just an important agricultural state and the storehouse of much of India’s financial capital, but has also displayed great enterprise, private initiative and industrial innovation on its path to becoming one of India’s more prosperous states. You do not need me to remind you of the contribution your state makes to either India’s industrial output (14 %) or the national GDP (sustained between 12-13 % over the years); or that it has one of the highest per capita incomes in India.
  
• But what I find more heartening are the improvements in Maharashtra’s social indicators in recent years, especially in the education and health sectors:
              - It has managed to put almost all its children into school;
              - It has managed to reduce infant mortality by one-third over the last decade-and-a-  half (between 1991-2003), which is one of the sharpest declines in the country;
                - It has one of the lowest fertility rates in the country - 3.7 children per woman vs all-India figure of 4.3 children; only Himachal Pradesh, Kerala, Tamil Nadu and Karnataka are better); and one of the highest child immunization rates (78 percent) in the country.
  
  
• Perhaps most of these stem from the fact that Maharashtra has managed to contain absenteeism among teachers and doctors, who are so critical in the delivery of basic public services. Teacher absenteeism in Maharashtra is 15 percent, compared to 35 percent in a comparable state like Punjab and 42 percent for poorer Jharkhand. Similarly for doctors, absenteeism in Maharashtra is less than half the levels in poorer states such as Bihar.

Persisting Challenges:

• However poverty persists. While the state has made impressive strides, more than 25 million of its people still live below the poverty line. In fact, 10 of the 100 poorest districts of India identified by the Planning Commission are in Maharashtra – interestingly, none of the other higher income states is included in this watchlist and the remaining 90 districts are mostly from the much poorer states of UP, Bihar, Jharkhand and Orissa.  This is indeed revealing and often unexpected of a state that is perceived to be leading India’s development.

• I have often spoken of the two-speed India that we live in, an India of high technology, high consumption and high growth and the other India of depressing poverty and widening disparities. This cleavage is particularly sharp in Maharashtra today. Move beyond the vibrant urban conglomerations into the dry rural hinterland and one finds a very different Maharashtra. Here, tribal children die for want of adequate nourishment, clean and safe water or basic medical care; and small farmers are caught so inexorably in the cycle of debt and destitution that often death is the only way out. Unfortunately, the state has not been able to take all sections along on its growth path. Take states like Punjab and Haryana, both of which have comparable levels of per capita income, but Maharashtra’s poverty rate is almost five times that of Punjab and three times that of Haryana.
  

Reforms as the Pathway out of Poverty:

• Clearly then, the challenge before the state is to tap its immense potential and ensure that the benefits of growth reach all its people. The trickledown effect has long been the metaphor for inclusive growth in India. I, on the other hand, believe that a more apt metaphor would be “a rising tide lifts all”. Accelerating reforms, not slowing them down, will help the more backward regions catch up, and will help spread the benefits of development faster to those who have been deprived of them for years.

• Maharashtra has clearly demonstrated its commitment to reforming certain critical sectors – its work in bringing drinking water and sanitation to its villages, and in decentralizing irrigation management has set standards for other Indian states. The challenge is to spread this leadership to other sectors.
  

Business Environment:

• Maharashtra is justly proud of its investor-friendly environment. It has consistently been ranked the best among major Indian states in our own Investment Climate Assessment surveys, especially in terms of having better infrastructure, less corruption and a relatively deregulated business environment.
  
  
• However, its position as the preferred destination for new private investments in India is in jeopardy from other fast-reforming states like Tamil Nadu and Karnataka. For instance, the Doing Business Report 2006 shows, surprisingly that it takes almost half a month longer to set up a business in Mumbai as it does in either Chennai or Bangalore. You can start a business venture in less than two months in either of these cities (57 days for Bangalore and 58 for Chennai) while it takes 71 days in Mumbai. Much of this prolonged start-up time is due to delays in tax registrations in Mumbai, and this, I am told, has improved in the past year. (Due to a computerization initiative of the tax department and the outsourcing of the Permanent Account Number (PAN) issuance to a private company). But the fact remains that even an entrepreneur in Pakistan can set up his business in less than a month (24 days to be precise).
  
  
• Other telling indicators:

                  - A typical firm in Maharashtra has to deal with 28 different legislations pertaining only to labor
                  - Senior management in firms here spend about 18 percent of their time dealing with regulations – compared with about 11 percent in Karnataka
                  - More than one-fourth of firms here have to make arrangements for their own power supply.

• If Maharashtra wishes to retain its edge with private investors, it needs to build on its inherent strengths and advantages. It needs to raise the bar for itself by looking beyond the Indian horizon – to East Asia perhaps - for comparison and inspiration. For instance, to return to an earlier example, it only takes 30 days at the most to start a business in the East Asian countries.

Threefold Development Challenge:

• It seems to me, then, that the development challenge before Maharashtra is three-fold. It needs to improve the investment climate for doing business; it needs to focus on urban development which is clearly driving much of the state’s overall growth; and it needs to make special efforts to shore up infrastructure and deliver basic services in rural areas.

Mumbai as Driver of Growth:

• Obviously, urban development will be crucial to Maharashtra’s growth prospects and for ensuring that people’s income-levels rise in an even handed manner. We have the shining case of Mumbai before us. There is evidence to show that the Mumbai region can propel Maharashtra to greater growth. It has all the necessary locational and historical advantages -- it has world-class financial and trading capabilities developed over almost two centuries as India’s commercial heart; and it can call on a huge, skilled labor force with a commendable work ethic.
   
• It is almost stating the obvious to say that if the Mumbai region grows so will Maharashtra because its growth will create jobs and opportunities for large numbers of people from the hinterland. This, coupled with a special focus on rural development, will help spread the benefits of growth equitably.

• But, Mumbai – and consequently Maharashtra – is constrained by poor infrastructure and restrictive land use policies which severely raise the cost of doing business here. It needs to bring in land and housing reforms, to build transport infrastructure that over the years has stretched the city’s suburban rail and bus network to crisis levels. And, at the same time, it needs to ensure that the millions of poor migrants who pour into it each year are housed, fed, schooled and employed in a way that preserves their human dignity.
  

Urban Infrastructure Expansion and Resettlement:

• However, substantial expansion of infrastructure in living cities often involves the displacement and resettlement of people. This is happening before us in the case of the Mumbai Urban Transport Project which the Bank is supporting. But if the government can ensure that people’s lives and livelihoods are not impaired, but rather improved, the state would be well on the way to equitable development.
  
  
• In fact, this is what the MUTP set out to do; circumstances unfortunately have led to a suspension of some funds but I remain deeply convinced that the Government of Maharashtra will be able to set yet another precedent for the rest of the country – this time in fair and equitable urban resettlement.

• Standing here among all of you who are fired with the vision of creating a resurgent Maharashtra, what strikes me is that your problem is not finding money to realize your vision. The problem lies in creating an environment that will allow money to pour in – money much in excess of what the World Bank can offer. But where the World Bank stands ready to help is by bringing in international expertise for the creation of this environment.
  
  
• The vision you are forging here calls for enlightened leadership and a sustained, unrelenting focus on reforms. And I am convinced that Maharashtra, with its proven enterprise and energy, will be able to realize that vision of a state that has secured the wellbeing of all sections of its people.

Thank you.