India: Combating Non-Competitiveness And Demand Deficit In Economy – Analysis

By Sudip Bhattacharyya*

India enjoys the benefits of a growing working-age population and its large, diversified economy limits its vulnerability to external shocks. And while the agricultural sector is the main employer, the services sector accounts for about two-thirds of GDP.

We must, therefore, give immediate attention to these three areas.

First provide adequate skill and training to our youth to make them productively employable.

Secondly, at present, more than 56 per cent of the total labour force depends on agriculture, although this sector contributes only 16 per cent to India’s total GDP. Therefore, a primary step that the Indian government must take is to improve productivity growth in agriculture. This can be done by introducing competition in agricultural produce sales, distribution through Agricultural Produce Market Committees (APMCs) and digital network for information dissemination.

It will also help combat food inflation. The government should further institute policies that provide education and vocational training in order to move people out of agriculture and make use of opportunities in the market economy.

Thirdly, immediate strategy should be to give more thrust to services sector which is more labour-intensive and digital platform-backed.

India has the second fastest growing services sector with its compound annual growth rate at 9 per cent, just below China’s 10.9 per cent, during the last 11-year period from 2001 to 2012, according to the Economic Survey for 2013-14. Within the services sector, the group transport, storage and communications has grown the fastest at 11.8 per cent followed by trade and hotels at 8.5 per cent and other business services at 7.9 per cent. Also, the three services taken together account for more than 56 per cent of the total India jobs.

Digitisation has widened and deepened market network in these areas and further in banking, insurance and capital market so much so that the services sector in India has almost become a single market.

Owing to recession in the external sector, our export has been continuously declining. In other words, Indian goods and services are losing competitiveness. It is, inter alia, because of the fact that rising inflation pushes up cost of goods and services. It is true even in the domestic sector.

Gross fixed capital formation, an indicator of new capacity addition by companies, contracted 1.5 per cent in the three months from January to March this year, for the first time in seven years. At 26.9 per cent of gross domestic product in the January-March quarter, capital formation was the lowest (in base year 2004-2005 and 2011-2012), highlighting the muted trend in private sector investments. Moreover, there is about one-fourth idle capacity in the manufacturing sector. Thus the most crucial objective now should be lowering cost of goods and services and increasing equilibrium demand.

The next thing to address, therefore, is infrastructure bottleneck and unfriendly business climate. Infrastructural bottlenecks are estimated to reduce GDP growth by one to two percentage points per year. Businesses also face hurdles in the form of red tape, corruption and state intervention. Although the government has initiated various measures towards this end, important measures like introduction of GST are still moving slow.

The federal structure of India complicates decision-making and policy implementation, while the political environment remains fragmented, even after the BJP secured a majority in the Lok Sabha. Thus, reform process has been slow and incremental.

Yet, the government was recently able to take some bold measures. In the early months of 2015, it further opened up the insurance sector by allowing up to 49 per cent FDI. It also opened up the coal industry through the passing of the Coal Mines (Special Provisions) Bill of 2015.

In the 2016 budget session of Parliament, it pushed through the Insolvency and Bankruptcy Code. The Code creates time-bound processes for insolvency resolution of companies and individuals. These processes are to be completed within 180 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors. This law has enormously eased the process of doing business, and is considered by many to be the second most important reform in India since 1991 next to the proposed GST which has recently been passed by Parliament. The GST, if properly implemented, is sure to lead to efficiency in trade and reduction in cost of goods and services. It is also expected to check generation of black money and thereby increase tax revenue.

As per an article in Business Standard, India jumped 16 places to the 39th rank on World Economic Forum’s (WEF) Global Competitiveness Index in FY17. This improvement in ranking is for the second year in a row.

The performance has been judged on three parameters — basic requirements, efficiency enhancers, and innovation and sophistication. As far as basic requirements go, improvements were seen in institutions, infrastructure and the macroeconomic environment. On infrastructure specifically, India’s ranking improved to 68. The improvement in institutions has largely come out on efforts taken to curb corruption, and also those by SEBI to enhance corporate governance standards and protect the interest of minority shareholders. Other areas where improvement was seen was relaxation of FDI norms, and labour market efficiency.

Moreover, tax authorities in the last two years have detected undisclosed income of Rs 56,378 crore, while the Income Declaration Scheme 2016 has resulted in over 64,275 people declaring undisclosed income totalling over Rs 65,250 crore. Further, the Reserve Bank of India lowered its repurchase rate by a 25bps to 6.25 percent on October 4, 2016, saying the stance of monetary policy remains accommodative and the decision will help to bring inflation rate back to the central bank’s 4 percent target in the medium-term while supporting growth.

In India, in early 1990s, there were just 2 billionaires — now there are 111. The rich elite are also controlling more wealth, their share increased from 1.8 per cent in 2003 to 53 per cent in 2015. Today, they are at 56 per cent.

Experts suggest that if India could freeze this rising inequality, by 2019 around 90 million people could come out of extreme poverty. Reducing inequality by 10 points in Gini coefficient (equivalent of a 36 per cent reduction) could further lift up another 83 million poor people. This will help redistribution of income in favour of poorer sections and as their marginal propensity to consume would be higher; their consumption demand would go up. This will push up demand for goods and services, a crying need for our economy at this hour.

*Sudip Bhattacharyya is a former banker and a commentator on contemporary issues. Comments and suggestions on this article can be sent on: [email protected]