The Economic Reforms — Looking Back To Look Ahead

Context: The 1991 economic reforms have been more focused on the technical nature of the economy than the system, process and people. As a result, quite a few primary drivers of the economy have not got enough recognition.

Limitations of India’s economic growth model since 1991

• Poor Human Resource Capital (HRC) formation: Due to lack of quality education, low skilled manpower and inadequacies in basic health care.
• As per Global Human Capital Report, 2017, HRC rank for India stands at 103, Sri Lanka is at 70, China at 34, and South Korea at 27.
• Low per capita GDP: At $6,997 in PPP terms, India is ranked 125th globally.
• Low research and development expenditure and weak technology readiness: At 0.8% of GDP, vis-à-vis higher value for other fast emerging economies like South Korea (4.5%), China (2.1%) and Taiwan (3.3%).
• Low labour productivity: On account of lack of HRC and low technology readiness.
• Low wages: Hourly wages in India have been $1.7. They are $38, $24, $20.7 and $3.3 for United States, Japan, South Korea, and China, respectively.
• In India, labour productivity in manufacturing is less than 10% of advanced economies, including Germany and South Korea, and is 40% of China, as reflected in a World Bank publication of 2018, The Future of Manufacturing-Led Development.
• Inefficient utilisation of economic resources: Difficulties in acquiring land for businesses, efficient utilisation of economic infrastructure, and in providing business services. This increases the time and costs of setting up enterprises.
• Persisting uncertainties: For years, the economy has been hit internally due to low consumer demand as a result of low household incomes and externally on account of lesser competitiveness and inadequacies in integration with global supply chains for trade.
• A Business as Usual (BAU) approach is resulting in diminishing returns.

Way forward: The new reforms should be systemic and address structural issues

• Raising HRC by way of enhanced public sector outlay to 8% of GDP, from current 5%, for education, skill development (including for advanced technologies) and public health.
• Enhancing public research and development expenditure to 2% of GDP over the next three years.
• Leverage Industry 4.0, which will be defined by new technologies such as robotics, 3-D printing, artificial intelligence (AI), the Internet of things (IoT), etc.
• Work on strategies to enhance per capita income by more wages for workers through higher skills and enhancing minimum wages, besides improving the social security net.
• Address issue of the increased cost of labour: To be compensated by higher productivity, tax-benefits in the initial period of wage reforms, besides reducing transaction costs in business and improving infrastructure utilisation efficiency.
• Systemic approach to institutional reforms: Encompassing inter-connected basic factors of the economic system, for policy reforms to unlock creativity and innovation in the economic system, raise total factor productivity (TFP), or a measure of productive efficiency, and to achieve higher growth.
• Policy reforms should lay an emphasis on process innovation and promote a business-centric approach to implementing pre-determined service quality levels (SQLs).