The Road Ahead
The government has done most of the cyclical work and now the economy is likely to bear the fruits. The major risks are that the rupee persists in overvalued territory, the undercapitalised state-owned banks impede the next credit cycle and the world slips into a deflation scare. However, there is still a lot of work to do in the medium term. We list some of the reforms we feel are crucial to make India an economic powerhouse:
Fiscal consolidation and tax reforms: The primary deficit needs to ultimately go away because the government cannot be borrowing to pay interest costs on old debt (this is known as a debt trap). The primary deficit for next year is budgeted at 0.7 percent, materially down from its peak of 3.1 percent in FY2010. The country needs a simplified direct tax code (already promised by the finance minister but we await execution) and the proposed Goods and Services Tax law has to see the light of day. These tax reforms will not only help the government’s balance sheet but also India’s growth. It is imperative that India does not head into its future with high level of indebtedness since that is a sure way of destroying potential growth.
Infrastructure execution: Again, much work has started in the areas of roads and railways but significant more needs to be done. Urban infrastructure needs a major boost. The major challenge here is to repair the deeply sick electricity sector with its losses running at nearly 1 percent of GDP.
Agriculture: Nearly two-thirds of the country’s workforce is engaged in agriculture, producing about one-sixth of India’s output. This is just not tenable. Productivity needs a major boost, but importantly, India needs to evacuate a large number of people from farm land to industry.
Health and education: India’s demographic advantage can turn into a noose around its neck if its future generation is not healthy and educated. Spending in these areas has been abysmal in the past and execution even worse.
Ease of doing business: This is a complicated area because it entails a shift in mindset—for almost everyone in the system: Politicians, bureaucrats, judges, police and even people at large. Although it’s evolving slowly, it appears to be moving in the right direction. Processes to streamline resource allocation and reduce corruption levels in the country will add to the progress on this front.
Labour laws: This is intricately linked to the ease of doing business. The old thinking was that labour needs protection, the new thinking is that labour needs a safety net. Greater flexibility in hiring and lesser regulatory oversight may lead to more jobs—an imperative for India, given how its workforce could grow in the coming years.
Public sector efficiency: The role of the public sector is often debated but the need for it to be more efficient is not. We think that the government and its companies have a role in the economy. However, this role needs to be played with greater focus on return on capital.
Ultimately, it is all about lifting the productive dynamics. If the incremental capital output ratio is one dimension of the productivity, its poor performance in the 2011 to 2014 period explains a lot of India’s growth problems.
India has all the ingredients to become one of the world’s top five economies and stock markets—favourable demographics, low levels of debt and absence of deflationary pressures. What it needs is to productively use factors of production—land, labour and capital—to generate growth to lift the standard of living of her population. The good news is that several of these medium-term reforms are already on the government’s agenda though some of them are tougher to execute because of political and constitutional challenges. Electricity is one such subject where state-level reform is crucial to the sector’s overall health.
We have witnessed, over the past five or six years, a major shift in the electorate’s priorities—it is increasingly voting for development and growth, and this is leading to a flux in the priorities of the country’s political class.
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(This story appears in the 29 May, 2015 issue of Forbes India. To visit our Archives, click here.)
if govt is doing so efficiently then why so much noise over OROP?? and resumed law making opinion is a lieon Aug 14, 2015