The new year has dawned with the country facing uncertainties triggered by the combination of a weak global economy and an indifferently performing domestic economy. Events unfolding during the past few months have shown that the major economies are quite a distance from finding a sustainable solution to their ills. The enormity of the problem that these countries face has been captured by International Monetary Fund (IMF) chief Christine Lagarde’s recent quip that the “world economy is in a dangerous situation”. Policymakers in India would, therefore, have to fairly and squarely rely on the domestic economy to provide the much-needed momentum. Focus has to shift to the neglected area of domestic reforms that can help harness the country’s growth potential.
It must be recognized, however, that the immediate challenge of slowing growth in some sectors, coupled with the yawning fiscal and trade deficits, should be the priorities for the government as they threaten to sour India’s growth story. But policymakers will do well to recognize that these troublesome numbers are manifestations of a larger structural malaise resulting from inadequate attention given to some of the more critical areas. Unless these are paid heed to, the situation can worsen.
Take, for instance, the cost of doing business in India. According to an annual survey conducted by the World Bank, a number of business regulations and infrastructural inadequacies have made doing business in the country a daunting proposition. In its latest survey on “ease of doing business”, the World Bank has ranked India at 132 out of 183 countries. Although the current year’s ranking is seven places higher than that for the previous year, improvements have taken place in only three of the 10 indicators that are included in the survey.
Among the indicators that have worsened since the last year’s survey is trading across borders. The World Bank reported that the cost of exports and imports incurred by businesses in India is relatively high—in fact it is more than double as compared with some of the countries in South-East Asia and China. This issue demands serious attention since the country’s export performance has witnessed considerable decline since August. Between August and October, exports declined consistently—the level of exports in October was almost one-third less than what was recorded in July. What should make the government sit up and look at these numbers more seriously is that the decline has come during a phase when the rupee had depreciated by more than 11% vis-à-vis the dollar.
Addressing the bottlenecks alluded to by the World Bank will help create a more investor-friendly environment for business and, no doubt, spur growth. What holds the key is to focus on the sectors that have considerable growth potential locked in and have not received adequate incentives. It is in this context that the government must recognize the significance of the informal and the unorganized sector—the sector that provides employment to no fewer than 93% of India’s total workforce. Most of the initiatives taken in the first generation reforms have bypassed this sector and, as a result, the enterprises belonging to this have long suffered the pangs of inefficiency and decline.
It is, therefore, imperative that the government turn its attention to provide the necessary economic impetus for the growth of the informal and the unorganized sector as it prepares to launch the 12th Five-Year Plan. The infirmities that this sector suffers from arise primarily from a plethora of infrastructural and institutional shortcomings and these have to be addressed over a medium term, something best provided by the plan framework. Besides providing the necessary support to improve the production efficiency of the informal and the unorganized sector, by improving infrastructure among other things, the government will have to initiate a process of institutional reforms that are targeted to the needs of this sector.
Towards this end, the government will have to play a critical role in reforming the markets that will enable the producers in this sector to overcome the exploitative relationships they currently face. The inability of small farmers to realize the economic value of their produce eloquently describe the problems that the producers in the informal and unorganized sector face in the marketplace. It is quite evident that the travails of these producers lie in the fact that they do not have access to the market; a long line of middlemen crowd them out from the consumers of their products.
Five years ago, the 11th Five-Year Plan underlined inclusive growth as a desirable objective for the Indian economy. But five years later, inclusive growth has become an imperative that the economy cannot do without. Policymakers would have to recognize that a strong and resilient India can no longer be built by relying on a few leading sectors. The lagging sectors will have to join the party and only then can the India growth story remain intact.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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