What will the Indian Economy look like in 2020? The answer will depend on whether the next Prime Minister (PM) and Finance Minister (FM) understand what has gone wrong in the last 4 years. In particular, it will depend on whether the leader of the house and PM understands the importance of putting the Indian Economy back on the path of sustained fast growth for providing productive Employment and job opportunities for all (particularly the youth). The speed with which India is put back on the fast growth track will also depend on the professional quality and credibility of the person appointed as Finance Minister. A reversal of the governance failures and regressive tax changes during 2010-13 will help recovery in 2014-15. Much more will need to be done to put the economy back on track of Welfare catch up with the World and sustained growth in an a weak un uncertain Global environment.
Closing Welfare Gap
The welfare of the average Indian had increased to about a third (1/3rd) of that of the average World inhabitant by 2010 and has stagnated since then. It is very important to understand that it is this gap between our per capita GDP (at PPP) and the World average, which results in our higher poverty ratios and is the main reason for the gap between our social welfare indicators and those of better-off countries(with a few exceptions). The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the World. The next Indian government should aim to raise the per capita GDP level of India to 45% of global average by 2020. This requires a restoration of per capita growth to 6.5% (8% GDP) and a sustaining of this growth rate till 2020. This will generate economic opportunities and jobs for youth and begin to restore the welfare and dignity of the average Indian to the level of the average World inhabitant.
During 1981 to 1991 the Indian economy grew in real terms at 2.1 per cent points above the average growth of the World economy. The rate of growth of the Indian economy accelerated during 1992 to 2010 to 3.6 per cent points above the average growth of the World economy, because of the 1990s reforms. Since then, the real growth differential has collapsed to 1.2 per cent point. The entire 2.4 per cent point drop in the growth differential can be attributed to domestic causes. There are two broad reasons: One, deteriorating economic governance, including poor macro-economic management and the re-introduction of regressive rules, procedures and administrative practices (a la LPQ raj). Two, failure to introduce policy, regulatory and institutional reforms essential for sustaining growth at the underlying growth potential of 8%.
Reviving Growth: Governance
The next PMs top priority for his first two years in office must therefore be to restore the Indian economy to its long term growth potential of 8%+ (about 6.5% in per capita GDP terms) and to communicate the importance of this objective credibly to voters and the investment community. An important determinant of credibility will be the Finance Minister selected by the PM to restore growth. In a global environment marked by great uncertainty and risk, the FM must have the respect of the investor-investment community. This will ensure that the government’s program to restore growth gains immediate credibility.
An improvement in day to day governance in terms of resolution of interdepartmental differences and speed of decision making within departments will help revive growth. Three legislative mistakes, however, need to be corrected:
(a) Right to Education Act: Research has shown that the private non-profit sector provides education, of average quality equal to that of the public sector, at 1/3rd the cost. By requiring the NPOs to double or triple the salaries of teachers it will drive them out & do incalculable damage to the cause of education. These clauses need to be dropped.
(b) Right to Food Act: By ignoring the corruption in the PDS-FCI while expanding the provision of cereals to 2/3rd of the population, it does great dis-service to the hungry (1-3% of population) and to wasted/ stunted/ “malnourished” children under 5 (7.5% of population). The coverage of FSA should be scaled back to the 22% below poverty line (BPL) population and directed to eliminating hunger by seeking them out in remote areas and identifying those hidden among the poor. Govt. focus should be on eliminating the causes of child stunting-wasting, by improving sewage and sanitation and eliminating open defecation.[i]
(c) Land Acquisition Relief and Rehabilitation Act. The extremely laudable objective of fairness in compulsory acquisition of land has been converted into an expansive ecological and social agenda. Purely private voluntary land transactions must be removed completely from the ambit of this law and the enormous bureaucratization of rules and procedures rolled back.
Reforms for Sustaining Growth
Among the reforms that can restore growth to 8 per cent and sustain it at that level over decades are:
(1) Macro Pivot:[ii] Scale back government consumption expenditures including subsidies and transfers, to bring Revenue and Fiscal deficits to zero in five years. This will reduce government debt, the Current account deficit and foreign indebtedness and raise the national saving rate, allowing RBI to ease monetary policy and stimulate investment and consumer durable demand without fear of increasing Non Performing Assets or inflation.
(2) Agricultural Reform: [iii] Halt procurement price led inflation and massive overstocking of wheat and rice, repeal Agricultural Produce Marketing Act and Essential Commodities Act. Remove all restrictions on FDI in food retail. Replace the policy of Ad hoc agricultural import-export bans by import-export tariff bands that offer transparent protection within limits. These & related reforms will reduce Indian food inflation to the much lower levels prevailing globally, and thus help control overall inflation.
(3) Infrastructure: Break up government monopoly in coal and infrastructure sectors, namely railway, ports, airports, electricity distribution and transmission (open access), convert into publicly owned Ltd companies and set up a professional independent regulatory structure to oversee free entry & benchmark competition in these sectors. This will set of a cycle of self-sustaining infrastructure growth and productivity improvement.
(4) Sell all Public sector units in industry and finance that are inherently competitive (steel, airlines, power/ railway equipment, hotels, machinery; banks, insurance). [iv] Use the proceeds to reduce national debt. This will stimulate a surge in manufacturing productivity (as in 1990s).
(5) Repeal exit clauses in labor laws with existing employees grand fathered. Allow private competition in Employee State insurance (ESI), Employee Provident Fund (EPF) and other monopoly social schemes for employees.
(6) Empower the poor (including farmers) through a UID linked Multi application smart card containing all entitlements (food, education, health etc).[v]
(7) Focus Plan programs on five basic public goods & services, essential for bringing the entire country into the 21st century.[vi] (a) A quality National Road grid connecting every city and every village. Highways/roads are the most cost effective stimulators of economic development. Roads & footpaths within cities and towns must be of quality expected of a middle income country. (b) A modern drainage, water supply & sewage system with water works, sewage treatment plants and comprehensive system for garbage disposal. In villages & habitations septic tanks and dry disposal devices would need to be implemented. Research shows that this will dramatically reduce disease and “malnutrition”. (c) Basic education (reading, writing & arithmetic) and Job skills (1/4500 recognized/certified) for every youth in this country. This will ensure that the rural & semi-urban youth are empowered to participate in a growing economy. (d) Telecom (internet) connectivity for e-governance, public education, public health, development knowledge (agro/rural) and mobile banking to every habitation. (e) Water & drainage Grid: Water planning, recycling, training and management for sustainable water use.
(8) Initiate fundamental political/electoral, police, judicial, legal and bureaucratic reform to address the issue of pervasive, systemic corruption and start restoring good governance.[vii] Public safety & security is the right of all citizens as is “equality before law.” In the long term, “The rule of law” is critical to sustaining growth in a democratic open society. With good governance, we can even dream of welfare catch up with China!
Such a program of reforms can sustain Indian GDP growth at over 8% (6.5% - 7% per capita growth) for the next two decades creating opportunities for youth and the emerging/new middle class, despite slower growth of World GDP and International Trade. It is not necessary to accomplish all the listed reforms within 2-3 years, though it may be opportune to take the politically sensitive steps within the first two years. It is however essential to outline the broad direction of reforms and to take credible steps to implement them.
A version of this article appeared in the Deccan Chronicle under the heading, "Next PM must have Ear for Reforms", ( http://www.deccanchronicle.
A more detailed policy paper, "Reform Agenda for Growth and Welfare," Policy Paper No. 1/2014, New Delhi, January 2014 is at, https://sites.google.com/site/drarvindvirmani/policy-papers .
[i] Virmani, Arvind, "Undernurishment of Children: Causes of Cross-country Variation," Working paper No.WsWp 4/2012, October 2012. https://sites.google.com/site/drarvindvirmani/working-papers and Virmani, Arvind, “The Sudoku of Growth, Poverty and Malnutrition: Lessons For Lagging States,” Working Paper No. 2/2007-PC, Planning Commission, July 2007. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm .
[iii] See Agriculture reform at https://sites.google.com/site/chintan1997reg/economic-policy-and-regulation/agriculture.
[vi] See Five point Program at, https://sites.google.com/site/chintan1997reg/social-welfare/5pt-program .
[vii] See institutional reforms at, https://sites.google.com/site/chintan1997reg/institutional-reform