India - on the growth turnpike
2004oration.pdf (application/pdf Object)
Flexibility of the labour market - Factor mobility is a fundamental element of the process of equalising differences. As of today, roughly 90% of India's labour force is in the unorganised sector, which is a classical labour market, undistorted by labour law. In addition, unlike China, India has no government restrictions on inter-state or rural-to-urban migration. [Similarity with US]
Policy innovations in keeping with historical patterns-
1) The first is the move towards smaller states. It is widely conjectured that smaller states are more effective at catering to local variation in preferences and technology, and at ensuring greater accountability for public goods outcomes. Uttaranchal, Bihar, Jharkhand and Chattisgarh are important experiments in this regard. It is, as yet, too early to tell whether the outcomes play out in line with the conjecture. If governance does prove to be superior in smaller states, then (a) it will generate convergence, given that these four states are all below the national average, and (b) it suggests one policy avenue for improving governance in other large states in the future.
2) The second innovation is the devolution to local governments, as a consequence of the 73rd and 74th constitutional amendment. The underlying premise of Panchayati Raj is that when local citizens control public expenditures, there will be a greater likelihood of obtaining good outcomes in terms of producing public goods. There are three key elements of local autonomy: (a) Transfer of functions and schemes, (b) Transfer of staff and (c) Transfer of funds, and autonomous financial decision making.
On the growth turnpike - steps
o There is a near inevitability that there will be a bulge in the working population, particularly till 2020. This effect will be further multiplied due to enhanced levels of skills i.e. accumulation of human capital.
o It is likely that this demographic dividend, coupled with strong GDP growth, will fuel an increase in the savings rate.
o Thus India is likely to fare better than it did over the 1980-2000 period, in terms of putting factor inputs into the growth process.
o The policies of the recent years - particularly in infrastructure, reductions of protectionism, and building modern securities markets - will continue to fuel TFP growth.
o Being a ‘willing globaliser’ will attract greater flow of FDI and technology.
o In addition, India has already shown a track record for obtaining TFP growth over the 1980-2000 period. TFP growth will show further acceleration thanks to the impact of information and communication technologies upon the speed of knowledge diffusion and to the network externalities.
o These elements add up to a scenario where GDP growth in India over 2004-2024 will be much higher than that seen over 1980-2004. In the coming decade or two, growth rate in India may surpass the ‘miracle growth’ rates achieved by other Asian countries. This is not surprising as India, compared to Japan, China and other high growth economies of Asia, will have advantage of an access to productivity enhancing IT, which was not available in earlier decades. This way, we will be cashing in on the ‘late comer’s advantage’.
Key growth drivers -
Thus, India - riding the wave of growth fundamentals such as demographic transition, human capital accumulation, improved incentive structures, diffusion of new technologies such as IT, total factor productivity accelerators through ‘network industries’, and an improved security environment - will be growing at growth rates which can be above 10% per annum i.e. double digit growth rates.
Flexibility of the labour market - Factor mobility is a fundamental element of the process of equalising differences. As of today, roughly 90% of India's labour force is in the unorganised sector, which is a classical labour market, undistorted by labour law. In addition, unlike China, India has no government restrictions on inter-state or rural-to-urban migration. [Similarity with US]
Policy innovations in keeping with historical patterns-
1) The first is the move towards smaller states. It is widely conjectured that smaller states are more effective at catering to local variation in preferences and technology, and at ensuring greater accountability for public goods outcomes. Uttaranchal, Bihar, Jharkhand and Chattisgarh are important experiments in this regard. It is, as yet, too early to tell whether the outcomes play out in line with the conjecture. If governance does prove to be superior in smaller states, then (a) it will generate convergence, given that these four states are all below the national average, and (b) it suggests one policy avenue for improving governance in other large states in the future.
2) The second innovation is the devolution to local governments, as a consequence of the 73rd and 74th constitutional amendment. The underlying premise of Panchayati Raj is that when local citizens control public expenditures, there will be a greater likelihood of obtaining good outcomes in terms of producing public goods. There are three key elements of local autonomy: (a) Transfer of functions and schemes, (b) Transfer of staff and (c) Transfer of funds, and autonomous financial decision making.
On the growth turnpike - steps
o There is a near inevitability that there will be a bulge in the working population, particularly till 2020. This effect will be further multiplied due to enhanced levels of skills i.e. accumulation of human capital.
o It is likely that this demographic dividend, coupled with strong GDP growth, will fuel an increase in the savings rate.
o Thus India is likely to fare better than it did over the 1980-2000 period, in terms of putting factor inputs into the growth process.
o The policies of the recent years - particularly in infrastructure, reductions of protectionism, and building modern securities markets - will continue to fuel TFP growth.
o Being a ‘willing globaliser’ will attract greater flow of FDI and technology.
o In addition, India has already shown a track record for obtaining TFP growth over the 1980-2000 period. TFP growth will show further acceleration thanks to the impact of information and communication technologies upon the speed of knowledge diffusion and to the network externalities.
o These elements add up to a scenario where GDP growth in India over 2004-2024 will be much higher than that seen over 1980-2004. In the coming decade or two, growth rate in India may surpass the ‘miracle growth’ rates achieved by other Asian countries. This is not surprising as India, compared to Japan, China and other high growth economies of Asia, will have advantage of an access to productivity enhancing IT, which was not available in earlier decades. This way, we will be cashing in on the ‘late comer’s advantage’.
Key growth drivers -
Thus, India - riding the wave of growth fundamentals such as demographic transition, human capital accumulation, improved incentive structures, diffusion of new technologies such as IT, total factor productivity accelerators through ‘network industries’, and an improved security environment - will be growing at growth rates which can be above 10% per annum i.e. double digit growth rates.
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