The question on everyone’s lips right now, with the budget to be presented in two weeks’ time, is: is the second round of reforms round the corner or is it just a figment of the imagination'
It is well-known that the prime minister, as well as some of his cabinet colleagues, is a votary of liberalization, part two. Still, a full-fledged set of reforms, à la Manmohan Singh, seems unlikely. So, while a default liberalization takes place under the aegis of the World Trade Organization commitments in the next five years, a progressive strategy would be to simultaneously knock off the main bottlenecks to growth. The three most conspicuous barriers to quick growth today are: the multiplicity of regulations governing product markets, distortions in the market for land, and widespread government ownership of businesses. According to a recent McKinsey study, if these barriers are removed, India could well be on a trajectory of 10 per cent growth and generate 75 million additional jobs outside the agricultural sector.
Rules will be rules
Talking of governmental regulations, according to estimates, the rules and policies governing different sectors of the country’s economy impede growth of the gross domestic product by 2.3 per cent a year. India’s liberalized automotive industry shows what can be gained by removing these rules and policies. The government, as a part of its 1991 economic reforms, relaxed licencing requirements for car-makers and restrictions on foreign entrants into the industry. Competition increased dramatically, and the old, pre-reform automobile plants lost substantial market share. But the demand for new, cheaper, and higher-quality Indian-made automobiles soared, so that employment in the industry rose by 11 per cent from 1992-93 to 1999-2000. Also, global manufacturers such as Ford are eyeing India as a cheap base for manufacturing and sourcing car parts. This would skyrocket growth in this industry.
India’s current policies, at the sector level, discourage competition and therefore, the productivity of industries. Some 830 products are currently reserved for manufacture by firms below a certain size. Producers of certain types of textiles face limits on their spending for new plants. This protects clothing-makers who are below efficient scale. As a result, typical Indian clothing plants have only about 50 machines, compared with more than 500 in a typical Chinese plant.
According to estimates, close to 1.3 per cent of lost growth a year results from distortions in the land market. These distortions limit the land available for housing and retailing, which are the largest domestic sectors outside agriculture. Less room to expand in these sectors means less competition among housing developers and retailers. Scarcity has helped make Indian land prices the highest among all Asian nations, relative to average incomes. Revising the laws on land ownership would boost competition in construction, resulting in housing at lower prices.
Government-controlled entities still account for around 43 per cent of India’s capital stock and 15 per cent of employment outside agriculture. Their labour- and capital-productivity levels are well below those of their private competitors. The near-monopoly status of government-owned companies in sectors such as oil, power and telecommunications, for example, ensures that such companies will be profitable, however unproductive they may be.
Take the electricity sector for instance. Government-owned state electricity boards lose 30 to 40 per cent of their power, mostly to theft. By comparison, private power distributors lose only around 10 per cent, mostly for technical reasons. Privatizing the state electricity boards would save government subsidies by almost 1.5 per cent of the GDP.
India could be a very different country in ten years, with a GDP of around $ 1.1 trillion. The average Indian could become more than twice as rich, in the world’s fastest-growing economy. But only if the barriers to the growth of the economy are removed.