A growth story gone wrong

During a panel discussion on India’s current macroeconomic outlook at a prominent B-school, a panel member asked the bright young students: “What is the India of your dreams?”

Almost all them said they wanted India to be an economic superpower, less affected by external shocks (the link between the anticipated tapering of QE 3 and the rupee), and with a proactive leadership at the helm to drive the country to the next level.

Asked if this was possible given India’s energy scarcity and its “ever-growing integration with the global economy”, they responded in unison: Why not? “We have several advantages that others don’t have, such as a favourable demography, high rates of domestic savings and a large domestic market.”

With stories of doom and gloom replacing the hype about India’s growth story, and rightly so, it would be pertinent to examine whether India still has a chance to make it big, at least economically.

The question assumes significance in the post-crisis period when India’s key trading partners are increasingly resorting to protectionism to save local jobs, forcing emerging economies such as India to look within for growth.

Economic growth is a necessary, even if not sufficient, condition for being economically powerful. No one will take seriously a country that has more than one-fifth its population living in absolute poverty.

Productive employment

There is enough evidence in economic literature to suggest that ‘productive employment’ and not ‘doling out freebies’ is the key to eliminating poverty. Besides, slowing growth will impinge upon the availability of financial resources to fund social spending.

Rampant corruption and the resultant leakage further reduce the effectiveness of social welfare programmes.

India’s farm sector already has surplus labour. Thus, the key to providing meaningful employment to India’s millions is to move a substantial number of them to non-farm activities, especially manufacturing. That would require reform of labour laws, skill development, and faster GDP growth, to begin with.

When labour productivity is stagnant, and labour laws a major hurdle, businesses try to minimise labour use to remain competitive.

India’s labour laws tend to protect the interests of workers in the organised sector who comprise less than 10 per cent of the total labour force, while those in the unorganised sectors are left to fend for themselves. Worse, the organised sector too is increasingly resorting to contract labour to get around the labour laws.

Heavy reliance on imported technologies (along with prohibitive labour regulations) promotes the use of ‘more capital’ instead of ‘more labour’ in a predominantly labour-abundant economy like India.

Demographic disaster

The result is jobless growth, threatening to turn our demographic advantage into a demographic disaster. In a supply-constrained economy such as ours, economic growth is dependent on growth of investment, especially in the private sector.

That leaves us with the question: “How attractive is India as an investment destination?” Faulty regulation of land and mineral resources, and poor infrastructure for railways, roads and ports deter private investment.

Despite rail transport being more cost efficient and eco-friendly, India’s network remains largely a British legacy. India could add only 10,000 km to its rail network since Independence. The share of Indian Railways in freight traffic declined to 39 per cent in 2011-12, from 86 per cent in the 1950s. In the case of road transport, the number of checkposts impede the shipment of merchandise and add to logistics cost.

Indian ports suffer from longer turn-around time (the time spent by a container vessel at a dock for unloading and loading) i.e. 24-72 hours versus 7-8 hours in Singapore, for instance.

All these cut into margins and hamper theexpansion capacity of businesses. If all this is not enough, businesses have to deal with the problem of red tape. Poor business facilitation discourages new entrepreneurs and promotes crony capitalism.

Obviously, potential growth rate will depend upon how fast India improves on ease of doing business, and becomes ‘pro-entrepreneurship’, more so ‘pro-new entrepreneurship’.

Foreign investment

Foreign investment will not come when domestic investment is drying up. In such a scenario, increasing FDI caps in specific sectors will not work. Further, free trade pacts aimed at securing improved export market access will lead to more imports than exports when India lags behind its competitors in basic infrastructure.

Another concern is the dearth of skilled workers. According to a recent Boston Consulting Group report, only 17 per cent of those joining India’s workforce are skilled. Within that, only 5 per cent are high-skilled, while 64 per cent are very low-skilled. This can create serious problem for an economy in which the services sector — growth of which is primarily dependent upon the steady supply of skilled workers — accounts for 57 per cent of GDP. Manufacturing, too, is increasingly becoming skill-intensive.

The success of India’s development strategy will depend upon how well India addresses its skills deficit, and not on the number of ill-conceived and badly negotiated trade pacts — many of them have either not included trade in services. Besides, there is a large domestic market for services such as eating out, tourism and retail, with immense potential for job creation that needs policy attention.

Driving growth

With growing protectionism in its key export markets, India will have to depend more on domestic demand to drive growth.

Given the size and complementarities of its regional economies, removing financial and non-financial barriers on inter-State movement of merchandise will raise India’s potential growth rate. Implementation of GST can help unleash India’s animal spirits.

Faster growth of agriculture supports the overall economic performance of an economy by its direct and indirect impact on manufacturing and services. Similarly, slower growth of agriculture leads to food inflation and a subsequent hike in industrial wages. This adversely affects the cost competitiveness of the manufacturing sector.

Poor performance of agriculture and manufacturing ultimately pulls down services. Thus, any development model must ensure some kind of balance among the three sectors.

Empowering the bureaucracy to speed up decision-making will help India grow at much higher rates as a result of faster execution of projects. Even so, India will have to rely on import of energy and other scarce items in the short- to medium-term, given the change in product mix of the economy, and of late, mining related issues.

In the long-run, India’s import dependency can be reduced by augmenting domestic production of crude oil/gas and the introduction of economic pricing for fuels. Developing renewable energy sources economically and ramping up production of avoidable imports such as edible oil, pulses and specific capital goods will help contain CAD on a sustainable basis.

(Singh is group economist in a corporate house. Sharma is a research analyst in a global financial services firm. The views are personal.)

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