Growth will follow efficient resource allocation: World Bank

The PMEAC had said that investment rate in 2012-13 stood at 35% in India, while economic growth crashed to a decade-low of 5%

If resource allocation in India is made as effective as that in the US, the country’s economic growth could rise 60 per cent through higher factor productivity, according to the World Bank’s Development Report 2014 released on Sunday.

However, that would require developing institutions and a coherent business environment, which, according to the World Bank, is “not an easy task”.

In its latest report, the Prime Minister's Economic Advisory Council (PMEAC) had shown the investment rate in 2012-13 stood at 35 per cent in India, while the economic growth crashed to a decade-low of five per cent. The World Bank report laid focus on easy exit and entry norms for companies to fuel growth.  It said the enterprise sector, when fuelled by competition, can promote innovation by adopting new technologies and reallocating resources. “In some instances, it may require exit and entry of enterprises in the economy.”

Quoting the renowned theory of “creative destruction” by Joseph Schumpeter, the World Bank said this process of renovation can generate substantial adjustment costs, but may be the only way an economy remains resilient and prosperous in the face of constantly changing conditions.

In his book ‘Capitalism, Socialism and Democracy’, Schumpeter used the term ‘creative destruction’ to describe the disruptive process of transformation that accompanies such innovation.

The World Bank wanted India to make changes not only in allocation of capital but in its stringent labour laws as well.

It said India needs to reduce and simplify the number of labour laws. “This is to create some labour flexibility that directly impacts formalisation. Although no single blueprint exists for how to design and implement effective labour market reforms, several developing countries offer examples of policy changes that increase labour market flexibility,” said the report.  According to the report, the focus of labour reforms should be on making labour employable and not protecting their jobs. “The overall principle guiding reform efforts should be protecting workers - through such means as social assistance, skill building, and help finding jobs - rather than protecting jobs.”

The report was particularly appreciative of the United Progressive Alliance’s (UPA) flagship programme Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The report mentioned that MGNREGA illustrates how good governance and social mobilisation can go hand-in-hand.

This encourages the collective action of job seekers to hold authorities accountable for supplying employment “instead of siphoning off the allocated funds”.