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There is no wiggle room for economy now

So how fast or how slow are we likely to grow this year? There is irrefutable evidence that long-term structural issues need to be addressed to restore the growth momentum, writes NK Singh.

india Updated: Oct 25, 2013 07:29 IST

So how fast or how slow are we likely to grow this year? The finance minister in Washington snubbed the International Monetary Fund (IMF) growth projections of 3.8% (4.3% at factor cost) as being unduly pessimistic. He also questioned their methodology — few in the past have done so.

Raghuram Rajan believes that the worst is over and outcomes would get better as the recent reform initiatives begin to show results. Both together have promised more reforms and assured investors that the India opportunity awaits harnessing.

Most estimates, including the World Bank, place the expected growth rate at between 4.5-5%. No one can be definite and trends could change. There are some encouraging signs — a significant reduction in the trade deficit, stability in foreign exchange reserves and moderation in the exchange rate volatility. There is new impetus in implementing large infrastructure projects and Parliament’s recent legislative approvals could augur well.

On the other hand, India continues to score poorly in the World Bank’s Risk Perception Index for 2014. On a scale of 0 to 100, India scores a meagre 31, which is lower than the world average of 55. It trails even the lower middle income countries average of 43 and far behind that of Russia, China, Brazil and South Africa which scored 71, 69, 58 and 45 respectively. Similarly in terms of the Ease of Doing Business Index of the World Bank, India ranks at 132 among 185 countries for 2013.

Beyond the current debate on growth rates, there are many unsettled issues. Is the current slowdown structural or cyclical? More importantly, are the causes endemic or episodic? The IMF in the recent World Economic Outlook has attempted to address the nature of the slowdown in the emerging markets to conclude that some slowdowns are cyclical and others structural. In the case of India there are both.

Cyclical factors alone would be inadequate to explain the current slowdown. Short-term holding operations have gone on for far too long. There is irrefutable evidence that long-term structural issues need to be addressed to restore the growth momentum. And this would be so irrespective of whichever government is in office.

First, while the current harvest may suggest a revival of agricultural growth, some basic issues pertaining to the agricultural sector remain unaddressed. The share of agriculture in the GDP has declined sharply from 30% in 1990-91 to 14.5% in 2011-12. This decrease in agriculture’s contribution to the GDP has not been accompanied by a similar reduction in the share of agriculture in employment.

About 52% of the total workforce is still employed by the farm sector. The average size of operational holdings in India has diminished progressively from 2.28 hectares (ha) in 1970-71 to 1.55 ha in 1990-91 to 1.23 ha in 2005-06. Agricultural productivity has plateaued. Total foodgrain production of China touched 571 million tonne in 2012 as compared to India’s 250 million tonne in 2011-12. China produces far more with a lesser area and lower fertiliser consumption.

Second, enhancing competitiveness of the manufacturing sector. In marked contrast to the great majority of emerging nations, the share of manufacturing in the GDP has stagnated at around 16% for decades in India. This has been a significant contributory factor in the current economic slowdown.

The well known policy impediments relate to unreformed rigidities in the labour market, growing impediments to land acquisition and continuing weaknesses in infrastructure, especially power, roads, railways and ports. Economists have for long pointed out that without large manufacturing hubs employment generation will remain below expectation.

This is the ‘missing middle’ to create medium low intensive skills for competitive production of goods and services. It is undoable without a fresh approach to labour market policies, urbanisation and a renewed focus on small and medium manufacturing.

Third, need for employment initiatives. The years between 2004-05 and 2009-10 saw the highest average rate of GDP growth for India. However, this high growth did not create new jobs. The Planning Commission data suggests that employment elasticity has come down ‘from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during the second half of the decade 2004–05 to 2009–10.’ During the period, there has been some reduction in the number of workers employed in agriculture, a positive development.

But the employment elasticity in the manufacturing sector was negative, at (-) 0.31 compared with 0.76 in the first half of the decade. Encouraging the employment elastic sectors like small and medium enterprises, textiles, gems and jewellery, agro-processing, exports must receive priority as small manufacturing hubs have high employment coefficient.

Fourth, the behavioural pattern of the Investment Gearing Ratio. There is an urgent need to raise the investment gearing ratio that has plummeted in recent years. Financial inclusion must be strengthened to harness household savings to deepen capital formation. India experienced a rapid increase in its gross domestic savings rate — from 24.1% in 1998-99 to a cyclical peak of 36.9% in 2007-08.

According to the Economic Survey this has dipped to 30% in 2012-13. The incremental capital-output ratio (ICOR) for India has also increased suggesting that the economy has become less efficient.

Fifth, structural issues impacting the external sector. In 2011-12, India’s share in the world merchandise exports was a minuscule 1.7% compared to China’s 10.4%. India’s export performance can be improved even in a stagnant world economy by undertaking the necessary internal reforms and making the policy environment friendlier for labour-intensive manufacturing.

The government needs to take an innovative and out of the box approach for creating new incentives to garner market share in countries where growth is still robust and adapt products to suit their market needs. Hopefully, the recent upturn in exports will be durable and not sporadic.

Finally, have we embraced a new form of welfarism far too early in our growth strategy? The moral compulsions are understandable and may be laudable. Guaranteeing employment, education and food by enforceable laws have consequences beyond the fiscal burden. There are limits beyond which the existing administrative apparatus and framework cannot be improved. Before casting new obligations some old obligations must also shrink.

Election cycles in India are now an annual feature. As the country braces for general elections, populist pressures are bound to grow. Managing macro fundamentals and accelerating reforms, both legislative and administrative may prove worrisome. Postponing action is not a feasible option. The uncertain electoral outcomes of 2014 compound the urgency and obligations of the government in office. There is little room for manoeuvre.

NK Singh is a Rajya Sabha member and a former revenue secretary
The views expressed by the author are personal