Focus on Wealth Creation, Not Just its distribution
Efficiency brought in by an open economy, top class entrepreneurs, high savings rate and young population will collectively deliver 8-9 per cent growth over the next decade.
In the next 10 years, India will be the third-largest contributor to the world GDP growth, according to an Economist Intelligence Unit projection. Making the realistic assumption of 2 per cent annual growth, the world GDP will increase from approximately $61 trillion in 2008 to $76 trillion by 2020 in 2008 dollars.
A conservative guess is that India and China together will grow 8 per cent per year in real dollars over this period (despite the major crisis recently, each is already back to growing this rate), which will raise their combined GDP share in the global economy from 9.5 per cent in 2008 to nearly 18 per cent. Shares of the United States and Japan (23.7 and 8.1 per cent, respectively, in 2008) will decline. The coming decade is, therefore, going to be pivotal in terms of a shift in the centre of gravity of the world economy to Asia.
Conditions for India to grow at 8 to 9 per cent over the next decade are excellent for at least four reasons. First, except in agriculture, we are now highly open in trade in goods and services, inward investment by foreign multinationals and outward investment and acquisitions of firms by Indian multinationals. Domestic product markets are also relatively free of controls.
This means India must compete with the best and the brightest in the world, which forces efficiency of the highest order. Second, India has plentiful top-class entrepreneurs of its own. Moreover, given its rapidly growing market, many of the super-competitive foreign entrepreneurs want a presence here as well (just look at the auto industry, for example). Third, our savings rate is now 38 to 39 per cent, which ensures the availability of vast investment resources. Finally, we have a young population that is growing younger.
Can we do better? You bet, we can! Among the outstanding reforms, I would include wholesale clean up of labour laws, laws governing land transactions in both rural and urban areas, a proper exit policy for firms, a wholesale reform of higher education policy, improvements in the quality of primary education and an overhaul of medical and health sector.
One point, which I have now made for almost a decade but cannot repeat enough number of times, is that due to difficulties posed by stringent labour laws and antiquated land acquisition laws, industry— especially labour-intensive sectors—in India has failed to grow rapidly. This has meant that poverty alleviation from growth has been less than what it could have been.
Although the share of agriculture in the GDP has declined quite dramatically, its share in labour force has not declined as much. This is different from the experience of countries such as South Korea, Taiwan and even China, which saw a much larger decline in the share of agriculture in employment alongside that in the GDP. In these latter cases, labour-intensive manufacturing expanded far more rapidly than in India.
Will the needed reforms happen? Sadly, the present government has more or less committed itself to concentrating nearly exclusively on re-distributive policies to the neglect of wealth creation policies. The status quo on economic policies can take us only so far. If we are going to successfully meet the challenge China poses to us, we have no option but to give up exclusive reliance on the politics of redistribution and turn our attention to policies that will help accelerate wealth creation.
Unlike the Chinese, the capability of our government to deliver is far more limited. Therefore, we need to relinquish control to private agents much more than the Chinese. And that means further and faster economic reforms.
— The writer is a Professor at Columbia University