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Ajay Chhibber: Is India exiting the Golden Turnpike of Growth?

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The country’s policymakers cannot complacently assume that India will remain on a high growth path; with the global economy wobbling again, they need to continuously pursue vital reforms.

One of India’s most respected policymakers, Vijay Kelkar, coined the phrase, “India on the Golden Turnpike of Growth”, in 1995 to describe India’s growth prospects for the next 20 years or so. The feeling was that India had somehow entered a phase when growth had become automatic and unstoppable; that whatever happened, India was now coasting at a growth rate that would only accelerate but could not decelerate. But there are worrisome signals that India has not kept the foot on the accelerator and that the Indian economy, while still on the turnpike, is now coasting and will soon slow down.

India handled the better than many others, partly because of its fiscal and monetary stimulus and partly because it was less integrated with the international economy. India was already running an expansionary fiscal regime with farm loan waivers and the hike in pay for government employees when the crisis came, and added to it a quick monetary stimulus. India’s trade to more than doubled, from around 20 per cent in 1993 to 56 per cent by 2008, but was still less than it is in many Asian countries. The GDP growth rate declined in 2008-09 to 6.8 per cent from over 9 per cent experienced in the previous three years.

With growth of 8 per cent in 2009-10 and 8.6 per cent in 2010-11, India's recovery has been fast and strong. But future prospects look more worrisome and growth is projected to decline to 8 per cent in 2011-12 and even further beyond that, unless more serious reforms are undertaken. Inflation has re-emerged as a major concern and is showing a stubborn resistance due to food and energy prices, both at global and domestic levels. The policy reforms needed to maintain investment and growth have not been sustained.

The high cost of doing business is now accumulating and the corruption allegations and policy drift is not instilling confidence. What India needs to stay on the golden turnpike is a new and vigorous set of reforms. High on the list should be labour reforms which are holding back investment in labour-intensive manufacturing. Clarity on land acquisition is also badly needed to avoid every investment decision from becoming a political battle. Deepening the non-bank financial markets is also vital for financing long-term investments at a competitive rate. These three reforms are vital for India to remain on the and keep the employment growth needed to reap the benefits of India's demographic dividend. In addition, power sector pricing reforms are needed to open the sector for more expansion. The rapid introduction of the GST will pave the way for a more stable fiscal picture.

Like many others, India’s growth story so far has been highly unequal. The Gini coefficient, which measures inequalities, has risen sharply over the past two decades — from 32.1 in 1992 to 36.8 in 2005. India would have achieved much higher poverty reduction with the same growth, had inequalities not risen so much. In India the employment-intensity of growth has been low and declining; one per cent of economic growth resulted in only 0.28 per cent of employment growth in the 2000s, which is lower than in previous decades. This happens because firms try and avoid labour regulations by opting for more capital-intensive growth. Moreover, as rapid growth has not been providing enough formal employment opportunities, people are forced to work in low productivity informal jobs. As a result, 40 per cent of the workers in India are considered as ‘working poor’.

Indian business houses are also looking more at investment opportunities overseas, where labour regulations are less onerous and capital can be raised more cheaply. Recent data released by the Reserve Bank of India (RBI) shows that overseas investments by Indian companies jumped 144 per cent in 2010-11 to $43.9 billion, from about $18 billion in 2009-10. In the first four months (April-July) of the current fiscal, outward foreign direct investment (FDI) was $13.26 billion.

India’s subsidy bill is very high, but the subsidies are not necessarily pro-poor. More targeted cash and merit-based subsidies rather than generalised product subsidies are needed. India’s growth story has also been unequal in another dimension — the rural-urban divide. The ratio of urban to rural per capita income was 2.4 in 1970-71 and remained at a low level of 2.3 during the 1980s and early 1990s but went up sharply to 2.8 in 2000s. Given the large number of rural poor in India, an important predictor of poverty decline is agricultural growth. In the last decade, however, this sector has grown much more slowly, and hence the impact of India’s impressive growth rate on poverty decline has been less than in the past.

Many experts argue that the agricultural sector will never provide the momentum for India’s long-term growth. This is arithmetically correct, but with almost 70 per cent of India’s population living in rural areas, neglecting such a large population is also a recipe for huge social problems. More inclusive growth must also include enough investments in rural infrastructure to ensure that this population is not left behind. The NREGA scheme has reached out to this population, but it must now be converted from a cash-for-work dole to a programme which helps create sustainable infrastructure that will revitalise rural areas.

Indian policymakers cannot complacently assume that India will remain on the golden turnpike of growth; continuous and vital reforms must be pursued and we must keep the foot on the pedal of reform to maintain high growth. With the global economy wobbling again and the prospects of a double-dip recession in the West increasing, India cannot expect to remain unaffected without much deeper internal reforms. While India is less affected by global economic prospects, it cannot hope to coast on the golden turnpike of growth without serious reform.

Just as in cricket consistent application is needed to stay on top, so also in the economic sphere, consistent reforms are needed to stay on the golden turnpike of growth.

The author is UN Assistant Secretary General and UNDP’s Regional Director for Asia-Pacific

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