Ashima Goyal

Tackle the real growth bottlenecks

ASHIMA GOYAL | Updated on March 12, 2018

As demand for food rises further, the key is to address supply constraints in agriculture.

Creating more productive jobs and raising real minimum wages are important for social equity. But a precondition for all this would be raising agricultural productivity.

Even after many years of high growth in India, there are those who see the signs of dynamism that are visible again in the economy with scepticism.

Our growth puzzles them. One section regards it as a fluke, due to external sources and, therefore, unsustainable without wholesale opening up and reforms. The reforms advocated are about creating more opportunities for industry, whether internal or external.

There are doubters also at the opposite end of the ideological spectrum. They are the ones who want redistribution, even if it kills growth that raises standards of living.

Either way, the current resurgence despite adverse conditions suggests there are some robust growth drivers.

SUCCESSFUL POLICY

The countries, largely in Asia, which sustained growth rates of above 7 per cent for more than 25 years, had policies that were pragmatic, not ideological. Their common characteristics included openness, macroeconomic stability, high savings and investment rates, and market-based allocation of resources.

The governments here were pragmatic, flexible and capable. While willing to intervene in markets to promote exports through industrial policies, and to manage exchange rates (through use of selective capital controls and reserve accumulation), they were flexible enough not to get locked into distorting policies.

They were willing to anticipate and change policies as was required for growth imperatives of the moment.

Resource mobility and urbanisation was supported. Public investment in infrastructure accounted for 5-7 per cent of GDP or more. All these were further enabled by specific contextual interventions and creation of microeconomic incentives.

In our case, too, it is the non-standard elements of our reform path that may be providing the underlying strength for growth.

True, certain weaknesses may have emerged, but pragmatic policy would be responding to specific bottlenecks, rather than continuing with some preset elements of so-called second-generation reforms.

Take, for example, high food inflation that has persisted for more than three years, and contributed to a general rise in wages and inflation. In this case, it is agriculture that has proved to be a critical bottleneck. Yet, while agriculture remains stifled, the government is focusing on a new manufacturing policy and providing social security through a Right to Food legislation.

As demand for food rises further, and the intensified procurement to support the Food Security Act causes disruptions in supply chains, how will this bottleneck be relieved?

Creating more productive jobs and raising the level of real minimum wages is important for inclusion and social equity. But a precondition for all this would be raising agricultural productivity.

COMPARATIVE ADVANTAGE

To create jobs, should we rely on an undervalued currency and labour-intensive exports or on higher wages and vibrant domestic demand? The idea of a labour-intensive manufacturing sector seeks to basically ape China's development strategy.

But it ignores India's own unique growth directions, education mix, and the international climate. As advanced countries compete to depreciate their own currencies, an undervalued rupee may not be feasible. An appreciating currency, on the contrary, can be a precondition for real wages to rise without inflation.

It means that an export strategy that promotes diversification of destinations and aims to utilise and further develop the medium-range skills, in which we have developed a comparative advantage, is more likely to succeed. Diversity in destinations will counter slower growth in the West, while rising real domestic wages would boost the domestic market.

Since demand for most imported intermediate goods is inelastic, a stronger currency will lower costs for domestic firms, including exporters. It will also help the current infrastructure building cycle, which, by reducing transaction costs and related hurdles, is the best way for India to compete even in the low-skill export segment.

Moreover, since primary education was neglected, India does not have the legions of trained factory workers that China could provide. On the other hand, higher education has been more effective in India.

Although the quality here is heterogeneous, in-house training and specialised schools have helped bring the required medium-range skills up to scratch. Better job availability has also led to improvement in universal primary enrolment.

But current entrants will have to be given opportunities to acquire further skills. The industry structure in future should be such as to absorb them.

GOVERNMENT EXPENDITURE

The freedoms resulting from economic reforms helped unleash entrepreneurial dynamism that was able to drive growth without much help from the government.

But now the latter has to contribute much more to remove obvious bottlenecks such as in coal availability, electricity and land acquisition. There is also need to strengthen institutions to constrain unfettered greed.

The good monsoon this time has given some respite from food inflation.

What is required now are longer-term measures that will sustain this, so that inflation and interest rates will come down and give a further fillip to the economy.

One such measure relates to fiscal consolidation. Given its better growth record, containing deficits and reducing debt should be easier in India than in many advanced countries.

The main cause for alarm is the tendency for the government to overspend on consumption and committing to large non-discretionary expenditures that cannot be financed in a non-distortionary manner.

If the forthcoming Union Budget is able to demonstrate credible restraints on populism, which would change the composition of expenditure towards enhancing the supply response, a major drag on the economy would be removed.

(The author is Professor, Indira Gandhi Institute of Development Research, Mumbai. >blfeedback@thehindu.co.in)

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Published on February 08, 2012
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