Modi, In­dia’s $10 Tril­lion Bet

With firm re­solve, sec­ond gen­er­a­tion re­forms can trans­form In­dia

The Economic Times - - Breaking Ideas - Ajay Ch­hib­ber

The world's largest ex­er­cise in elec­toral democ­racy has de­liv­ered a clear man­date for faster growth and low in­fla­tion. The 800 mil­lion plus vot­ers have pinned their hopes on Modi to deliver them real jobs, an end to in­fla­tion and ef­fi­cient and clean de­liv­ery of ser­vices. They want bet­ter gov­er­nance not big­ger govern­ment, a hand up not a handout. They want In­dia to be­come a 10 tril­lion dol­lar global pow­er­house.

The UPA was given such a man­date in 2009 - but mis­read the mes­sage and blew away five years into more hand­outs, large fis­cal deficits, rag­ing in­fla­tion and even­tu­ally a slump­ing econ­omy. In­stead of cre­at­ing real jobs it fo­cused on make work through badly run schemes like MGNREGA which have cost the coun­try over Rs 200,000 crore so far. It saw ex­panded sub­sidy pro­grammes cost­ing al­most 4%of GDP, but with not much of it go­ing to the poor.

Needed, Se­ri­ous Re­form

Re­vers­ing the dam­age will not be easy. But the new govern­ment must try to re­store the econ­omy: dou­ble the growth and halve the in­fla­tion. Quicker de­ci­sion mak­ing, im­proved in­ter-min­is­te­rial co­or­di­na­tion will re­verse some of the dam­age. In­dia could quickly see 6% plus GDP growth and 6% quar­terly in­fla­tion by the end of 2014-15. But se­ri­ous re­forms will be needed, even to sus­tain a 6%plus growth rate over the medium terms.

In­dia's first gen­er­a­tion re­forms in 1991, which freed In­dia's prod­uct mar­kets, by re­mov­ing the li­cense raj and trade lib­er­al­iza­tion, boosted the econ­omy hugely. This helped In­dia more than quadru­ple it's econ­omy, with very rapid ac­cel­er­a­tion com­ing af­ter 2000. But later, many of the ben­e­fits of lib­er­al­iza­tion were eroded by hap­haz­ard and un­pre­dictable reg­u­la­tory struc­tures, bring­ing back a new li­cense raj which has hurt in­vest­ment and growth and al­lowed op­por­tu­ni­ties for brazen cor­rup­tion. In­dia's com­pet­i­tive­ness dropped, the trade deficit soared and man­u­fac­tur­ing suf­fered. In­dia has in fact pre­ma­turely de-in­dus­tri­al­ized in the last decade and job cre­ation slowed down to a crawl.

Fac­tor Mar­kets Must Work

If In­dia can get back to 8% plus GDP growth, In­dia's $2 tril­lion econ­omy can grow to $4 tril­lion by 2020 and $10 tril­lion around 2030, mak­ing it the world's third largest econ­omy ahead of Ja­pan. If In­dia re­mains at 4-5% growth, it will only be at best a $4-5 tril­lion econ­omy by 2030 and be stuck in a mid­dle in­come trap, with low job growth and still large num­bers still poor— a sure-fire recipe for so­cial and com­mu­nal prob­lems.

To get the econ­omy back to plus 8%, In­dia des­per­ately needs sec­ond gen­er­a­tion fac­tor mar­ket (land, labour, cap­i­tal) re­forms and bet­ter in­fra­struc­ture. These re­forms are also cen­tral to restor­ing In­dia's com­pet­i­tive­ness. Re­forms in land ac­qui­si­tion, labour laws and trans­par­ent com­pet­i­tive al­lo­ca­tion of nat­u­ral re­sources com­bined with good in­fra­struc­ture will at­tract the in­vest­ment and tech­nol­ogy In­dia needs to be more com­pet­i­tive and cre­ate 10 mil­lion plus new jobs ev­ery year.

These fre­forms can­not be driven by the Cen­tre alone but re­quire the ac­tive in­volve­ment of state gov­ern­ments. What makes this elec­toral

More com­ments on eco­nomic­ global pow­er­house with a $10 tril­lion econ­omy is pos­si­ble, if not in one sit­ting then two. But the new govern­ment must re­store eco­nomic growth to dou­ble dig­its with con­trolled in­fla­tion. Vikash Ke­dia (Phoenix) To be able to deliver, the drive has to trickle down to the babus. Pro­mo­tions should be based on achieve­ments. In a nut­shell, the go- man­date ex­cit­ing is that the BJP's vic­tory spreads across many states and its strong man­date should en­cour­age federal co­op­er­a­tion, vi­tal for the next stage of re­forms in­clud­ing adop­tion of the GST.

Fix The Fi­nan­cial Sec­tor

Fix­ing the re­cently legislated land ac­qui­si­tion law or re­form­ing ar­cane labour laws will not be easy. One op­tion here is to al­low states to ex­per­i­ment with land and labour re­forms, to gen­er­ate more in­no­va­tive so­lu­tions. On in­fra­struc­ture, In­dia will nences­sar­ily need cen­tral level in­volve­ment. A na­tional mas­ter plan for trans­port, en­ergy and com­mu­ni­ca­tions— a Rosen­stein Ro­dan style big push is needed like we saw in the pre­vi­ous BJP govern­ment— but on an even big­ger scale.

We need bank­ing and cap­i­tal mar­ket re­forms, too. In­dia has for long prided it­self on its safe and con­ser­va­tive largely state-owned bank­ing sys­tem. But with ris­ing NPAs and ev­i­dence of con­nected lend­ing, the bank­ing sys­tem looks badly trou­bled and hugely ex­posed to strug­gling in­fra­struc­ture projects, which should have been fi­nanced by long term fi­nance not de­posit tak­ing banks. Ac­cess to fi­nance for em­ploy- ment gen­er­at­ing SMEs re­mains hugely re­stricted while large cor­po­rates with cap­i­tal in­ten­sive projects take up the bulk of bank lend­ing.

Mmore in­no­va­tive ap­proaches to leas­ing , tribal eq­uity own­er­ship in min­ing and en­vi­ron­men­tal stew­ard­ship with ded­i­cated de­vel­op­ment trust funds are needed to ac­cel­er­ate use of our nat­u­ral re­sources while pro­tect­ing the in­ter­ests of tribal and lo­cal com­mu­ni­ties. Any other way is fraught with seeds of con­flict and de­lays that no de­vel­op­ing coun­try has been able to avoid. We have seen such prob­lems in our tribal belt with a Maoist in­sur­gency that has per­sisted de­spite the govern­ment's ef­forts to con­tain it.

A sta­ble govern­ment should now be able to tackle dif­fi­cult sec­ond gen­er­a­tion re­forms. The 2014 man­date is a bet by an as­pi­ra­tional In­dia for a $10 tril­lion econ­omy by 2030 and In­dia's emer­gence as an eco­nomic pow­er­house. In­dia's elec­tion called ‘the un­doc­u­mented won­der’ has given the people of In­dia the chance for bet­ter gov­er­nance with which to shape their des­tiny. It's a bet In­dia can and must win.


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