The Hindu Business Line : `Determined' reforms must to sustain growth

With India's gross domestic product (GDP) expanding at above 8 per cent in recent years, fuelled by productivity gains and investment spurt, an IMF working paper has said the medium-term potential estimates suggest risks of volatility in both productivity gains and investment.

The monograph titled "Wild or Tamed?: India's Potential Growth", released in Washington, and authored by the Fund's senior economist Mr Hiroko Oura, however, contends that "determined reforms" could sustain strong productivity growth, noticeable in recent years in the economy.

Citing estimates in World Economic Outlook (2006) to the effect that trade openness and financial sector development significantly explain the labour shift from agriculture, besides the initial employment share of agriculture, the Fund economist said that it also shows that productivity growth correlates with factors such as trade openness, business environment, and institutional quality.

REFORM PUSH

He said the pick-up in productivity growth since 1980 could be related to reforms, which enhanced productivity.

Pointing out that untapped productivity potential remains, Mr Oura said employment in low-productivity agriculture was high (at 57 per cent of total employment, compared to 47 per cent in China and 34 per cent in Asia) and non-agriculture labour productivity is 4-5 times that in agriculture.

Moreover, the pace of labour shifting has been slower in India than in other Asian countries.

LABOUR REFORMS

Between 1980 and 2000, the employment share of the highly-productive services sector has remained nearly flat and lower than the cross country average; and industrial growth has been skewed to the capital-intensive sectors. So, he said, "in order to reap potential benefits fully, further reforms to facilitate labour mobility could be needed".

While potential productivity gains within a sector could be large and improving resource misallocation across plants within an industry could give total factor productivity (TFP) gains of 40-50 per cent in the manufacturing sector, Mr Oura said that this could not be achieved "without additional steam from further reforms".

INVESTMENT EFFICIENCY

Finally, he said, there might also be challenges in maintaining efficiency of investment, which is at an already high level of 35 per cent of GDP over the medium-term. This might call for "pro-active policies vis-…-vis the financial sector".

Issues in this regard, he listed, include the large share of State-owned banks, high statutory liquidity requirements that compel banks to set aside a quarter of their deposits for Government securities, high lending requirements (40 per cent of net lending) for the priority sectors (including agriculture, small-scale industry and education ) and underdeveloped Government and corporate bond markets.

JOBS, SAVINGS

Another challenge is to turn favourable demographics into job creation and increased saving. On the back of a declining dependency ratio, an average of 13 million people is likely to enter India's labour force each year for the next four decades. Increasing saving requires creating quality jobs for these entrants, which appears to be arduous now, given the weak job creation record (in the formal sector) of India's growth story so far.