Need for a structural push

A 10-notch slip in India's competitiveness calls for wider reforms

The global economy is slowing in a synchronised way and, according to the International Monetary Fund, as much as 90 per cent of the world is expected to witness lower growth this year. The Indian economy has also slowed sharply in recent quarters with growth slipping to a six-year low of 5 per cent in the April-June period of the current fiscal year. Recovery is not expected to be swift at a time when the global economy is losing steam. That would require significant policy intervention. The need for deeper policy intervention in India is also underlined by the latest global competitiveness index of the World Economic Forum (WEF).

 
In the competitiveness rankings, India slipped 10 notches to 68th position among 141 countries. China was 28th, while Singapore replaced the US at the top slot. Although India’s overall score declined only marginally in absolute terms, improvement by other countries pushed India’s ranking down. This underscores an extremely important point that an economy like India needs to keep improving its competitiveness to maintain its position. Capital flows are extremely mobile in today’s world and tend to move to markets where they are likely to get the best risk-adjusted returns.
 
The WEF rankings are based on 103 individual indicators, which have been put under 12 “pillars”, such as institutions, macroeconomic stability, market size, and innovation capability. India managed to secure a place in the top 50 in just four categories. However, there are risks in these indicators too. For instance, India ranks better in macroeconomic stability and the depth of the financial sector. Stress in government finances and renewed risks in the financial system could affect India’s growth prospects and competitiveness in the near to medium term. Although India has gained in the adoption of information and communication technology, it still has a fair distance to cover. India ranks poorly in product market efficiency, largely because of a lack of trade openness. The government has increased tariffs in recent years, which will affect India’s competitiveness. Further, India slipped from 75th to 103rd position in labour market competitiveness. The government is in the process of reforming labour laws, but other countries are moving at a much faster pace. It is important to note that in a globalised economy, where countries are competing for markets and capital, changes on the margin may not help. Slow and inadequate reforms in the labour market, among other things, will not allow India to attract firms looking to relocate from China. Besides, India is lagging behind in health and skill development.

 

The need for deeper structural reforms, both in governance systems and markets, cannot be overstated in India. The fall in India’s ranking not only highlights the need for reforms but also underscores their urgency. India needs to move faster than its peers to improve its attractiveness as an investment destination. Although structural reforms may not immediately push economic growth, they will help increase potential growth in the medium term. What can work in India’s favour at the moment is that it has a strong and stable government, which is not averse to taking swift decisions. A sharp reduction in the rate of corporation tax last month is a case in point. However, it remains to be seen whether the government intends to back it up with wider reforms.