Can India grow faster again?

India’s growth prospects seem gloomy. This article argues that India can grow fast again even in the current global economic climate as it is different from other emerging economies in a number of important aspects. It recommends creating new businesses and jobs, developing internal supply chain networks, and domestic production of affordable consumer goods for reviving the growth rate.

India’s growth has slowed dramatically from the global boom years. What can it do to recover? Was the period before the financial crisis just a temporary, lucky window for India, now gone forever? The rich world is saddled with debt. An emerging market slowdown, partly a result of the industrialised countries’ own slowdown, and partly due to internal structural issues in China and elsewhere, is the latest shadow looming over India’s growth prospects. Is the gloom escapable?

There are possibilities for hope. Much as I dislike the idea of Indian exceptionalism, in this case it may be warranted to some extent. Most importantly, India is by far the poorest of the BRIC1 group, and probably one of the poorest of the more amorphous ‘emerging market’ designation. That means it has more room to grow. It is quite far from having to worry about any so-called ‘middle-income trap’ that might be an issue for China and Brazil. Secondly, India’s demographics give it an opportunity that does not have to be sabotaged by a global slowdown. Thirdly, India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest to me that India can grow at 8% a year, even in the current economic climate. How can this be achieved?

Create new businesses and jobs

The need to create productive employment at a very large scale is obvious. This is more complicated than just giving away money for rural make-work programmes – that is just a transfer scheme for redistribution-cum-income insurance. India needs to create more new businesses and allow existing ones to expand more easily, and in employment-friendly ways. Clearly, labour market reform is needed, and it is not as difficult as it is made out to be. The core problem is political acceptability, and a grandfathering scheme, where existing employees are protected, but new ones in new firms, or certain classes of old ones, are allowed to be employed under more flexible conditions.

Next, the focus of new business creation should be in second and third tier cities and towns. These are best placed to absorb rural labour most efficiently and flexibly. To make this work, strengthening urban infrastructure at this level is critical – this means empowering urban local governments, increasing their capacity and incentives to raise revenues and build and manage new infrastructure. It also needs continued development of rural roads.

Develop internal supply chain networks

Another way in which India is somewhat different is in its geography. This geography actually makes it easier to develop internal supply chain networks, again provided that the internal infrastructure is in place. Currently, a wholesale review of India’s transportation sector is underway – hopefully its recommendations will be the basis for reform, not just in physical infrastructure for internal movement of goods, but also in the institutional infrastructure of regulation and taxation that often inhibits the development of internal production networks.

Domestic production of affordable consumer goods

India also needs to think about patterns of production. Japan certainly grew by becoming an exporting powerhouse after World War II, but it also produced for its domestic market. Durable goods industries making appliances and cars for domestic consumers were crucial to Japan’s inclusive growth. India is poorer, bigger and more heterogeneous than Japan. On the other hand, technology has made it easier to set up new industries (smaller-scale factories, for example), to manage production, and even to innovate inside a technology frontier that has itself been pushed out at an incredible rate. The key to inclusive growth is domestic production of consumer goods that are affordable to large numbers of Indian consumers – not just watches and bicycles, but mobile phones, kitchen appliances, energy generating devices and more.

This last point suggests that the idea of Track 1 and Track 2 reforms, so clearly articulated recently by economists Jagdish Bhagwati and Arvind Paanagariya, may be dominated by a reform agenda that integrates the need for growth with inclusion, and goes beyond mere redistribution or trickle down.

How can policymakers support this growth path?

To support the growth path outlined above, there are three crucial areas where the national government needs to focus, beyond basic health and literacy. First is a large-scale, effective set of vocational training programmes: there has been much talk on this front and little achievement. The private sector probably needs to be incentivised to make something happen quickly. Second, the government needs to fix the mess in electric power generation – this is well-documented as a prime constraint on growth. My earlier calculation suggested over a percentage point of growth is lost each year.

Third, and most difficult, the national government needs to overcome its own corruption and inefficiency by devolving responsibility and authority to the states, and from there down to cities. Old fears of national disintegration are no longer valid. Political power at the centre can be just as well sustained through sustained economic betterment, as opposed to short term handouts. Political parties at the national level need to understand that this is possible. A future Indian spring can be a true blossoming, or it can be like the Arab one so far.

Notes:

BRIC refers to the countries of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development.