f o r    m a n a g i n g    t o m o r r o w
JANUARY 14, 2007
 Letter From
 Message From
The Prime Minister
 Editor's Letter
 The Great Indian
M iddle Class
 India'S Poor
 The Next 15 Years

Flying High
The Indian aviation industry is growing at a rapid pace, thanks to air transport deregulation, emergence of new operators, lower fares and large untapped demand for air travel. The numbers tell an interesting story: India will require an estimated 1,100 aircraft. The average annual passenger traffic growth in India through 2025 is estimated at 7.7 per cent, well above the world average of 4.8 per cent and China's 7.2 per cent.

Bars Of Gold
The global gold industry is flourishing, largely fuelled by Asian demand and a weak US dollar. The boom is probably only halfway through since prices bottomed out in 2000. Since 1800, the boom and bust cycles have averaged about 10 years. While production is down, the value of gold purchased today is up 47 per cent from a year ago. The super-cycle of high metal prices is seen to be spurred largely by demand from China and India. An analysis.
More Net Specials
Business Today,  December 31, 2006

The Road Long Travelled, And
The Journey Ahead


The reforms over the next 15 years will be different from the ones ushered in over the last 15

Economic reforms since 1991 have produced some spectacular results, but there's lots more that is required to ensure 'inclusive growth' in the country. The various policy-driven reforms undertaken over the last 15 years have taken our country from 'third world' status to one that plays a part, albeit small, in defining the fate of the global economy. In time to come, this will only get amplified, provided policy moves are carefully crafted in an inclusive manner, involving all the stakeholders. For, the reforms to be undertaken over the next 15 years will be quite different from the ones ushered in over the last 15.

Before one ventures into the challenges that lie before us, a throwback to the past will provide a perspective to the task that lies ahead. Economic reforms in the country started in the trade sector, went on to industrial licensing, and then on to the financial sector, where too it was more rapid in the equity sector rather than in the banking segment.

The Eleventh Plan approach paper prepared by the Planning Commission provides an insight into the trends observed over the last five years. It reveals that for various reasons, we have performed much better in the services sector than anywhere else. The statistics are appalling in the agriculture segment and even the manufacturing sector has been a laggard. The question then is: Is this growth process sustainable? The approach paper says that there is a sustainable path to higher growth but this requires corrections on many aspects that are clearly not desirable. A certain section of the intelligentsia feels that China's advantage lies in manufacturing while India's lies in the services. This is false. This sector will not be able to create adequate jobs and hence is not desirable.

Importantly, the manufacturing sector is best capable of absorbing excess labour from the agriculture sector, where growth has been stagnant. Evidently, we have a problem in the agriculture sector. The situation is bleak. The current growth rate is less than half the growth witnessed in the past and best projections in the future place it at half the growth rate in other sectors. If we cannot double the agricultural growth rate, we have a serious problem on hand. To ensure inclusiveness in our policy initiatives, we must stress agriculture and also recognise that growth in the manufacturing sector is the only solution. We need to move people out of agriculture.

If one accepts that basic framework, then we have to concentrate more resources in agriculture since this is where most people are, but recognise also that what is more important in the long run is to proactively offer initiatives that improve the pace of growth in the manufacturing sector. The future clearly lies in the manufacturing sector. However, currently, there is a peculiar picture in the manufacturing sector, where growth is divided between the small- and large-scale industries. Labour intensity in large-scale industrial units has been either stagnant or on the decline, coupled with a reverse trend on the capital front. In fact, productivity of existing labour has improved massively over the years. In a sense, it is a repeat of the 80s scenario.

Meanwhile, there has been a significant growth of employment in the unorganised sector. While there has been a huge increase in employment in this sector, the capital per person and the output per person have not risen much. In this context, the debate on the need for labour market reforms takes a different shape.

It is only natural to encounter resistance and objections from the unions, on this count. In some sense, it is a given reality. Fact, however, remains that real wages have not risen. In fact, labour (despite the recent crunch) is doing pretty badly and big industry has been able to get around the labour laws. The question then is: If everything is working pretty much in a flexible manner, will change in labours laws help any further?

Also, given the fact that a large number of people are involved in petty manufacturing and retail trade, corporate sector does not compete with them on a level playing field since, on an average, it takes six persons in the small industry to do the job of one person in the corporate (big industry) set up. Hence, increasing jobs in the corporate sector only adds to the issue of unemployment. In other words, the labour law issue is only marginally relevant from the point of view of big industry. Rather, it is more relevant from the point of view of the petty worker-or the blue-collar worker.

Investment reforms is a critical component of any course correction measure that the government ought to undertake

So, what course correction measures are required in this context? Investment reforms is a critical component of any course correction measure that the government ought to undertake. For instance, the prevailing investment policy has increased the capital per person. However, the attractiveness of the investment environment has also improved on account of tax incentives provided by the government-for example, accelerated depreciation.

In this context, the practice adopted by China is noteworthy. China has provided thrust to manufacturing in the exports sector. This way, it has saved its small-scale sector and ensured job security. It has also protected this sector from overseas competitive forces as well. In other words, it has adopted a mercantilist policy-plied on incentives to the exports sector. This takes us to the hotly debated topic of special economic zones (SEZs).

With states rushing in to set up sezs, several problems are being encountered. There are primarily two issues: One, of agricultural land being taken away from peasants for setting up SEZs and, secondly, the fiscal issue of foregoing taxes. However, I believe, the SEZ sector is one area where, if labour laws are made a little more flexible, the state could achieve several objectives without attracting public accusation of land usurping or that of giving huge tax reliefs. There is scope to create space, where the corporate sector competes with everyone else in the world, except the small domestic industries. Otherwise, evidently, there is bound to be a political problem.

Another aspect of the SEZ problem is that the states are competing with each other for investments. As far as industry is concerned, it is good news. However, how does it stack up for the states? While the states' proactive approach is welcome, evidently, this competition is undermining state revenues. There is a degree of concern on this count, although no momentum has yet gathered.

There are other issues that need to be addressed besides the immediate one of handling the SEZ policy. We do not have a coherent strategy to ensure that the small-scale sector grows-if a small shop employs 10 persons, the stimulus from the state to enable him to grow and employ another 40 is sorely missing. In short, scalability is missing. This is because financing instruments to ensure this are missing. Furthermore, several kinds of restrictions inhibit growth. We need to break this barrier and help the small entrepreneurs grow. While financing issues continue to drag down growth at the lower end of society, the financial markets appear to be in the pink of health. India is, for one reason or the other, the darling of the world markets. So long as that continues, the economy will chug along comfortably.

But let me throw in a caveat: Our ability to grow will definitely be blunted if the Pay Commission recommendations are not reasonable. After the last Pay Commission recommendations were implemented in 1997, the growth momentum was badly injured. One must not forget that the world is bullish on India since it believes that the state will spend a lot of money on infrastructure as well as undertake reforms.

There are two other negatives that can alter the growth picture. One, if there is any slowdown in the us economy, the world growth, and India's own exports growth, would suffer. Two, a global recession, compounded by high oil prices, could result in hardening of inflation rates.

Leaving aside external issues, we are indeed set on a growth rate of at least 7.5 per cent and possibly 9 per cent. Importantly, changing governments will not alter this growth rate provided something is done about employment and agriculture. We have a window of the next 20 years to improve our labour productivity massively. If status quo continues, we will not be able to net a 'long run' advantage on the labour front-the existing edge will wear out over the next 10 years. Clearly, the real development task lies in investing in people, i.e., education and health; in helping move people from agriculture to other sectors.

Government's attention needs to be drawn to the irrigation sector, where there is an immediate need to recharge groundwater, undertake conservation techniques, and improve soil quality. While there are land and water issues on the one hand, all climate change models tell us that India is going to get it pretty badly. However, it will be worse if we don't do anything about land and water.

We have a window of 20 years to improve our labour productivity. If the status quo continues, we will not be able to net a long run advantage on this front

On the positive side, the low growth rates in agriculture can also be attributed to the fact that over the last decade, huge food stocks have been built up driving down the global market prices. It is only now that the stocks are depleting, resulting in higher realisation by the farmer. Secondly, investments have hit a rock-bottom, which, hopefully, with state-intervention will rise.

Compounding the sectoral issue is the state's delivery system, which has crumbled. Furthermore, the cooperative system is in disarray-credit, for most part, does not reach the targeted segment. Other aspects of the agriculture sector-for example, seed production-have taken a hit. Here, the government needs to realise that private sector will not step into every economic activity. There are some areas where the government alone can deliver. For instance, private sector does not consider production of non-hybrid variety seeds a viable business. One must not forget that the Green Revolution was entirely the result of government intervention. The magnitude of issues and constraints in resolving agriculture related issues points to the fact that the future lies in honing our abilities in the manufacturing sector.

So, what can we do to ensure that industrial growth is inclusive-that it enables greater employment opportunities? The government needs to study the profile of Indian industry in the post-liberalisation era. What needs to be understood is whether the big corporations are restricting their area of business owing to the comfort that the tax sops provide. In other words, if these are removed, will the corporations move to other areas of operations? The government must also ensure that institutional mechanisms are tightened to ensure wider and effective disbursement of funds to the small and medium industries.

Whether it be the manufacturing sector or the agriculture sector, the key to ensuring results is an effective delivery system. While manufacturing sector can bank on the entrepreneurial spirit of the private sector for most part, agriculture has to contend with the government delivery system. It is here that 'quantum' reforms need to take off. Commerciality and the principles of carrot and stick need to be inculcated in every government scheme and the bureaucracy must be held accountable for its actions. This will prove to be one of the most difficult aspects of the reform journey over the next 15 years.




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