Jayanta Roy: No quick fixes for high growth

The Indian economy suffers deep structural flaws that piecemeal measures in the Budget are unlikely to solve

The recent dip in the gross domestic product growth to five per cent has created a stir. The myth of the high growth trajectory is being challenged. It has even resulted in policy makers questioning the statistical basis for estimating this growth, and making assurances that the economy will immediately rebound to the growth turnpike. This announcement is without any basis since mathematical modelling and forecasting tools have long been abandoned by the Government of India. Policy makers believe that the new Hindu rate of growth is eight per cent-plus, when in reality, this has only been achieved on a consistent basis during the short 2003-2007 period. Some blame the decline to a slowdown in the world economy. But 2012 has seen robust growth in some of the other large Asian emerging economies like Indonesia (6.3 per cent) and Philippines (6.2 per cent), despite the difficulties in the advanced economies.

There is a perception among the top policy makers that the recent slowdown can be instantaneously corrected through a few key policy reforms — some of which is to be announced in the coming Budget. Unfortunately, this premise is based on a shaky foundation. As will be argued here, there are no quick fixes since the problems are structural in nature. The Budget will hopefully unblock some long-standing reforms, tinker with fiscal consolidation, and attempt to roll out a long overdue Goods and Services Tax (GST), turning India into a common market. But it is unlikely to revive the economy at least in the short run. Nor will the reduction in interest rates alone, a difficult proposition with continuing high inflation and fiscal deficits, help revive industrial growth.

The slowdown in the Indian economy is caused by structural factors related to high transaction costs that substantially impact all economic activity in the country, and which have not been addressed in the past decade. The Indian economy cannot tread on a sustained high growth path with such massive costs. These include the high costs of doing business in India, as well as trading across borders. In some sense, these costs are associated with the overall challenges of governance and efficacy of implementation. As shown in the table, India continues to perform poorly in global indicators of business environment and governance. (RANK HOLDERS)

India is ranked near the bottom relative to other major emerging countries in terms of summary indicators of trading across borders and starting a business. The country also fares poorly in terms of quality of its bureaucracy, which is a good indicator of the efficacy of overall governance. Such a poor institutional and business environment will not encourage entrepreneurship — local or through foreign direct investment. The huge market opportunity owing to India’s large and growing middle class ensures that investment continues to take place despite such constraints, but this can hardly be a recipe for sustained growth and ensuring economic success in an increasingly competitive global economy.

Despite the author’s continued efforts to introduce trade-facilitation reforms, the problems of trading across borders continue to daunt India. The problems and their solutions were emphasised in the Kelkar Task Force on Indirect Taxes, and in the follow-up Report of the Working Group on Trade Facilitation under the author’s chairmanship. Some of its key recommendations were soon implemented. But these were not systematically followed up. Hence, the approval process is still time-consuming, and the cargo dwell-time is in weeks against hours in successful emerging countries. Nor have we succeeded in having a fully automated clearance process with minimal face-to-face contacts and, therefore, encouraging corruption.

The problems related to dealing with several layers of bureaucracy and procedures for trading across borders, getting several types of approvals and licences for starting and running a business, paying taxes, and getting access to critical infrastructure like energy and water need to be addressed on an urgent basis. But it is clear that the solutions to such problems will have a significant gestation lag. The solutions will require serious engagement with micro-level issues, and they will need policy makers to continuously monitor the interface between regulators and businesses and entrepreneurs on the ground.

Another big challenge for policy makers is that the Central laws and guidelines that govern agriculture, industry and trade, and essentially define the business environment in the country, are subject to implementation by states. The state-level agriculture produce and marketing-related Acts, local procedures governing warehouses and retail establishments, procedures governing the running of factories, and state-level labour-related laws are good examples. Without substantive harmonisation, reform and monitoring of the ground-level implementation of such legislations to ensure that they are business-friendly, the transaction costs of doing business in India would continue to remain high. There needs to be a mechanism for monitoring of such micro-level issues related to business environment at the highest level of government and a comprehensive move to improve governance through the use of technology and through integrating private sector stakeholders in the oversight process related to the implementation of regulation.

The other big-ticket reform would be the implementation of a full-fledged GST, which would rationalise the complicated indirect taxes regime that businesses in India have to face, by subsuming all indirect taxes within GST and having a single rate across the country.

The debate should not be about splitting hairs on whether growth is five or 5.5 per cent, or if the next year would see a marginal improvement in growth rates and other macroeconomic conditions. Instead, policy discussions should focus on the road map for serious economic and institutional reforms to put India on a sustained high growth trajectory like the Chinese economy. The time is ripe to focus on the structural issues, and not just on the short-term movement of some indicators.

The author was economic advisor to the commerce ministry between 1988 and 1993