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Executive Summary
This paper will mainly deal with the steps that have to be taken to
achieve double digit growth in Indian economy. These steps are in the area of
political machinery as well as that of economics. It is argued that very little of
what has worked in other countries can be directly applied in India. The policy
initiatives must be taken with only the Indian economic/political/cultural
scenario in mind. Five key steps are identified in the economic field, which will
make the task of achieving a higher growth rate quite plausible. The
underlying reason for the selection of these steps is that, increase in
productivity will lead to higher GDP per capita.
Roadmap for Double Digit Growth
If India was a company instead of a country, it would have been a very
attractive takeover target. The corporate raiders would only see a firm (in
place of India) that has improved its performance significantly, but still
remains shackled by caution. For instance, the Indian Planning Commission
recently concluded after an extensive research that 8.7%, the rate needed to
double the income per person over the next ten years, is out of their reach,
and instead proposed 8% as the growth target until 2007. There is an old
proverb, “Aim for the sky and you will reach the treetop”. But the Indian
planners have decided not to aim for the sky; instead they are contenting
themselves with easily achievable growth rates. Let us suppose that the
minimum growth rate that the raiders require for the acquisition to make sense
is 10%. Even so, chances are that they will readily acquire India. Why are
they so confident of, not only achieving the minimum target, but also of
making a comfortable profit while doing so?
The corporation will be sure of achieving its target because in a country
like India, the problem is lack of political will and not lack of good policy
choices. The sensible thing to do in a takeover is to benchmark the firm
against other successful firms operating in the same sector, in order to identify
the areas that can be improved upon. However, in the case of India this
strategy is flawed. There are precious few countries that grew at double digit
rates over a long period of time. Even in the cases where they did grow so
rapidly; the economic environment, culture and the political system were
drastically different from that of India. It would be foolhardy to conclude that
whatever measures worked in a country like China or South Korea will work
again, if applied in India.
Having said that there is one factor, which is absolutely essential for
achieving high growth rates. This factor was present without exception, in all
the countries that achieved growth rates higher than 10%. The necessary
variable is of course, the country’s political will and stability. The political ‘will’
is usually present, only when there is political ‘stability’, of a permanent
nature. However, achieving this political stability in a multi-party democratic
country like India is easier said than done. After all, people cannot be forced
to vote in a manner that creates political stability.
Stability in the Government has become a rare commodity in India. The
last time union elections resulted in a party getting even a simple majority was
just after the Indira Gandhi assassination. Yes, that was almost 20 years ago!
Even after the Rajiv Gandhi assassination, the sympathy wave did not provide
his former party with a majority. The matter has been exacerbated by the
emergence of many strong regional parties with widely differing agendas. In
this era of coalition governance, any minor coalition partner can hold the
Central government to ransom.
How can we make sure that the coalition partners will behave
themselves when it comes to making painful decisions that affect the
country’s future? The solution is very simple and has been known for some
time. Hold the state assembly elections and union elections at the same
time. This will mean that states’ whose governments are unable to complete
their term will be put under the President’s rule. This development will force
the political parties to act more responsibly and have an earnest go at
coalition governance. Even more importantly, since the fall of the central
government will automatically dissolve all the state assemblies, the regional
political parties will try their level best to make sure that a government at the
centre completes its term. There will be very little pressure brought upon the
union government by the various regional parties in moments of crisis (unless
of course the concerned party is sure to win the state elections).
Economic Policies
In order to increase the economic performance of India, there are five
distinct policy initiatives that can be implemented by the corporation taking
over India. These steps are specific to the Indian situation alone and may not
be desirable for implementation in other countries.
1. Free market regulations
Before 1991, Indian industry was protected from the competition in the
outside world. This bred inefficiencies in Indian companies. Consequently,
there was little or no productivity increase in India. It is an economical fact that
there is a strong correlation between a country’s GDP per capita and its
labour productivity. If a country has to grow fast, its labour productivity and
capital productivity must grow rapidly. The empirical evidence is shown below.
Source: Economic Intelligence Unit; Organisation
for Economic Co-operation and Development
For instance, as a result of liberalisation, the labour force in the
automobile sector increased by 11% while labour productivity increased by a
whopping 256% (from 1992 to 2000). In 1993 Bajaj had 23,000 workers, who
made 1.1 million vehicles; in 2000 it had 14,000, who produced 1.4 million
vehicles. Although it is 12 years after liberalisation, regulations in Indian
market are still throttling economical growth in a number of ways.
1. Inequitable regulations and uneven enforcement – In many
sectors publicly owned companies have an unfair advantage over
private enterprises, because of regulatory imbalances. Examples are
the telecom and steel industries.
2. Promotion of small scale enterprises – Hundreds of products are
reserved, exclusively, for production by small enterprises, in the false
hope that this leads to creation of more employment. As a result,
typical Indian clothing plants have only about 50 machines, compared
with more than 500 in a typical Chinese plant. The capacity of Indian
firms to compete in many of these product categories was destroyed.
3. Curtailing of FDI – Quite a few sectors, including the retail sector is
not open to FDI. This delays the spread of best practices in such
sectors. While FDI in retail segment in countries like Brazil, Poland,
China and Thailand has worked wonders in raising the living standards
of the populace, India still lags behind.
4. Licensing – Licensing still exists in many industries. A prominent
example would be the dairy industry where enterprises require a
license to compete. This restricts the competition and as a result, the
productivity of companies is not as high as it should have been.
2. Government Ownership of Businesses
The labour and capital productivity of government owned companies
lag far behind its private competitors in the same industry. The managers in
government owned public enterprises face little pressure for bettering their
performance. As an example, state electricity boards lose a staggering 30
to 40 percent of their power, mostly to theft. By comparison, private power
distributors lose only around 10 percent. Privatizing the state electricity boards
would save their government subsidies, amounting to almost 1.5 percent of
GDP, besides increasing the productivity levels of the companies. Many
segments are little more than government monopolies (Airlines and mining);
the true potential of such sectors cannot be realised.
3. Expensive Real Estate
The largest sectors in the Indian economy after agriculture are retail
and housing. These huge industries are not able to produce their true growth
rates because of tremendous costs involved in the land market. Indian real
estate is more expensive than any other developing country’s real estate
when compared with the average income level of those countries.
1. Inefficient taxation - Stamp duty is as high as 8-10% while
property tax is quite low. This will naturally lead to few transactions
involving land. At the same time, the government coffers will hardly be
filled by the low taxing of property.
2. Who is the owner? – The ownership of the vast majority of real
estate is in dispute (some estimates say 90%). It might take the better
part of a hundred years to sort it all out in our present judicial system.
As a result of this, the land available for developmental activities goes
down, driving up the real estate price. We need a fast track judicial
system as well as clear cut laws.
3. Rigid tenancy laws - Protected tenants cannot be evicted and will
never voluntarily surrender their cheap tenancies, so their ancient ,
crumbling buildings can never be sold or rebuilt. In Chennai, where the
laws are not so rigid, retail market has taken off in a big way;
supermarkets account for as much as 20% of food sales while it is just
1% in cities with higher average income like Delhi and Mumbai.
4. Transportation Infrastructure
China invested billions of dollars in infrastructure development for
many years in order to drive their rapid economic growth. Something similar
can be attempted in India. Infrastructure creates a multiplier effect in the
economy and good infrastructure will boost growth tremendously. In India,
there are huge bottlenecks in sectors like airports, ports and roads that have
to be taken care off. Private players can be invited to build the required
facilities on the BOT (Build, Operate and Transfer) basis.
5. Labour Laws
Presently, there is a great amount of restriction in the labour laws
followed in India. These laws must be changed so that companies must be
able to use ‘contract labour’ when they want to and the retrenchment of
workers must be standardised in some way. The Industrial Disputes Act has
to be modified to some extent or repealed completely.
Effects of the Suggested Reforms
According to a McKinsey study, Indian economy has three sectors.
Modern sectors provide 24 percent of employment and 47 percent of output.
Transitional sectors provide 16 percent of employment and 27 percent of
output. Agricultural sectors make up the rest. Transitional businesses typically
require elementary skills and very little capital and therefore tend to absorb
workers moving out of agriculture.
Eliminating all the productivity barriers should double India’s rate of
growth in labor productivity, to almost 8 percent a year, over the next few
years. The modern sectors would account for around 90 percent of the
growth. The massive improvement in agricultural productivity isn’t likely to
occur in India for at least a decade, while there is still a surplus of low-cost
rural labor to deter farmers from investing in advanced machines. In the
transitional sectors, enterprises have inherently low labor productivity because
they use labor-intensive low-tech materials, technologies, or business
formats. So although these sectors will grow to meet rising demand, their
labor productivity will stay about the same.
Investment – The investment needed to achieve double digit growth has
been calculated as 35% of GDP, an almost unachievable figure. But if the
above reforms are properly implemented, the investment required will be
lower, at around 30%. Presently, the investment in India is at 25% of GDP.
The increase in revenue from better tax collection and cutting down of
subsidies can be utilised for this purpose.
Reforming India is somewhat like restructuring a business: one can do
a lot, and still be at the beginning. However, the important thing to realise is
that India is capable of growing at more than 10% (for that matter any
developing country can), if proper steps are taken to foster such growth.