India’s Economy

WSJ has an article by Arvind Panagariya, the Jagdish Bhagwati Professor of Indian Political Economy at Columbia:

Four months into UPA rule, prospects are less rosy. GDP growth, which had touched 8% in 2003-04, is set to decline to 6% this year. Inflation, at 3.4% in 2002-03 and 5.4% in 2003-04, has edged up to 7.5%. Until April, everyone was betting on the appreciation of the rupee. But it has depreciated more than 6% against the dollar since then, despite the sale of several billion dollars by the central bank. The stock index Sensex has declined 10% from its April peak.

Some of this results from events beyond Dr. Singh’s control: The lower growth-rate projections are largely attributable to the expected decline in agricultural growth due to bad weather; and inflation has been fed by increased world prices of oil and metals, especially steel. But some of the scaling down of expectations is due to UPA policy. Pessimists are justifiably alarmed over two developments. First, having embraced the view that its election success owes much to the neglect of India’s rural poor in the past decade, the UPA plans to increase expenditure substantially in agriculture, education and health. Second, the intensification of India’s economic reforms is in doubt. The UPA has abandoned the privatization program that had finally gained some momentum under the BJP government and has ruled out labor-market reforms.

There remains insufficient recognition of the need for clean-up in other areas if India is to achieve the announced target of 7% to 8% annual growth rate over the next five years. The growth rate in industry needs to improve: Contrary to the experience in other countries, its share in the GDP has failed to grow even as the share of agriculture has declined. Despite an immense pool of unskilled labor and low wages, unskilled-labor-intensive industry has performed relatively poorly in India. India’s export growth has accelerated in response to the opening up during the ’90s but the fastest growing exports have been either capital-intensive (such as auto parts and machinery) or skilled-labor-intensive (pharmaceuticals and software). So industrial expansion has failed to create well-paying jobs for the unskilled and to reduce pressure on the farms.

The policy obstacles behind this sorry situation are widely known. First, a large number of the unskilled-labor-intensive products are reserved for small-scale enterprises. This has handicapped the growth of modern enterprises that can compete effectively abroad. It has also affected the inward flow of direct investment: Tyco will not produce toys in India if toy manufacturing is restricted to small enterprises. Second, under the labor laws, firms with 100-plus workers are not permitted to lay off workers under any circumstances, deterring larger firms from manufacturing even products that are free from the small-scale-industries reservations.

By turning a blind eye to these ills, the UPA invites economic failure. Dr. Singh is too good an economist and too accomplished a reformer not to appreciate the need for caution on expenditure and boldness on reform. The question is whether politics will force him into missteps. India’s friends can only hope he will prevail.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.