Many have pondered heavily over, written brutally about and even creatively sketched an end to India’s best years, prophesising a return to its mystical past of snake charmers and 3% ‘Hindu rate of growth’. So is a return to the ‘wonder years’ of 8% growth really possible? And what would it take to get there?
The growth experience since 2000-01 is a useful benchmark of what we can realistically achieve, as it averages out periods of high growth led by a series of market friendly reforms and global liquidity, and periods of low growth led by domestic issues and the global financial crisis, giving us an average of just over 7%. While getting to this 7% is in itself a challenge, the journey from the 5% today to 7% is the more manageable part of the challenge: the ‘technical filters’ that economists use suggest that ‘potential growth’ of the economy is 7% and we can get back to this as the business cycle turns upwards.
The harder part of the growth challenge is how to get from 7% to 8% over the next five years. To understand the task at hand, it is useful to look at the ingredients of growth. Looking through a ‘production function’ lens, GDP is produced by combining (physical) capital and (skilled) labour at the economy’s level of productivity. Physical capital increases through investments. Labour has both a quantity and a quality dimension – the large pool of labour in India is an advantage only if it is suitably skilled to be employable. Finally, productivity is an indicator of both technical progress and the ability of the economy to utilise capital and labour efficiently.
Using this framework, it can be shown that there can be several paths to 8% growth. There could be a series of ‘extreme’ paths, which depend heavily on one particular input. For instance, 8% growth could in theory happen through very high growth in physical capital (an investment rate as high as 43%), with no real change in the skills of workers or in the economy’s productivity. But these extreme paths are not feasible: they expect too much from one particular input, to an extent that is impossible.
So, is there a more ‘balanced’ path that requires all ingredients of growth to ramp up in ambitious but realistic proportions? Indeed there is. For example, if every year, capital grows by 8.8%, labour force by 4.2 million, mean years of schooling by 0.1 percentage point and productivity by 3%, we can reach the 8% goal. Such balanced growth is not only practical and feasible, but is also likely to be more sustainable.
This was the math. What would it take to achieve this scenario in terms of policies? While there is a long laundry list of ‘to dos’ with which readers are familiar, I mention three new ideas – one each under ‘productivity’, ‘labour’ and ‘capital’, which can be game-changers.
First, how do we increase the ‘productivity’ of the economy? One promising way is to make it easier for firms to start up and grow rapidly, as Cafe Coffee Day, or Fabindia or Sona Steering Systems have done. Unfortunately we only have a handful of success stories like these. Firms in India find hurdles at every stage of their lifecycle – entry, growth and exit. We need to streamline excessive regulations which haunt businesses, forcing them to either hire ‘consultants’ for navigating through the system, thereby escalating costs; or remain small, unregistered, informal, or in the unorganised sector. Fortunately, there are several examples of streamlining regulation effectively, strewn across the states of India. If we could develop a comprehensive national framework taking the best from each state, and encourage all to adopt these, we could make India a much easier place to do business in.
In the current environment when India’s educational system is overburdened by sheer demand for quality education, company-led formal apprenticeship programmes that place employers at the heart of education, can play a powerful role in imparting job-relevant skills to the thousands entering the workforce. India has a very rigid and burdensome Apprenticeship Act which has stifled the growth of formal apprentices. There are strict norms on permissions, trades permitted, training duration, stipend levels, apprentice/employee ratio and training facilities. It is onerous to create new apprenticeship positions, and there are several vacancies even in positions that have already been created. These rules and regulations can be easily simplified so that employers are incentivised to hire. To provide a flavour of the potential reach apprenticeships can have, in Germany, more than 75% below the age of 22 have attended an apprenticeship programme.
Finally, in order to grow the ‘physical capital’, the importance of having adequate and uninterrupted power supply and therefore cleaning up the political economy of coal is well known. Given the inadequacies and delays that plague Coal India’s monopoly over the natural resource, coal mines need to be auctioned out to professional miners. The success of co-opting private miners will depend heavily on how the auction contracts are designed. By employing a transparent dual system of payments comprising of an upfront payment and some revenue sharing over the years, private miners can be incentivised to start mining immediately, and also get some cushion against fluctuating global prices. Auction theory is now an advanced science and we should use it to solve our coal crisis.
Achieving 8% growth over the next five years will not be easy. But through concerted efforts to unlock the elements of the production function - labour, capital, and productivity; and plucking some low hanging fruits, the wonder years can indeed be regained.
The author was an economist at the Planning Commission, and is headed to the Harvard Kennedy School as a Mason Fellow
