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Closing the basic infrastructure gap requires a more aggressive push on private investments and public-private partnerships. Photo: Pradeep Gaur/Mint
Closing the basic infrastructure gap requires a more aggressive push on private investments and public-private partnerships. Photo: Pradeep Gaur/Mint

The path to sustainable, long-term growth

India will have to increase the productivity of its economy while ensuring that the benefits and opportunities created by growth are shared by all

When Prime Minister Narendra Modi was elected with a mandate to revive the Indian economy, he brought upon himself and his government a burden of expectation not only to fellow Indians but also to the international community. The world’s largest democracy, as many expected, could be doing more to live up to its enormous potential, and was missing out on an historical opportunity to emerge as a major global economic power player.

One year down the road, the global outlook for India today is optimistic. There has also been considerable improvement in the state of the country’s macroeconomic environment. The nation jumped 16 spots in World Economic Forum’s Competitiveness ranking and also moved up to 130th spot in World Bank’s ease of doing business rankings. It emerged as the top destination for foreign direct investment (FDI) in the first half of 2015, and saw a 32% increase in its brand value in the last year. As IMF chief Christine Lagarde put it at the G-20 finance ministers’ meeting earlier this year, India is among the few bright spots in the global economy.

However, bright spots can fade away, and India is at considerable risk of that happening. Despite India’s relatively strong record in terms of economic growth, there has been a parallel rise in inequality and a growth in urban-rural divide. India continues to have the largest number of poor in the world—approximately 300 million are in extreme poverty—and nearly half of the poor are concentrated in five states with large rural population segments. India’s middle class remains small and getting a job is no guarantee of escaping poverty. Many of the fundamentals underpinning India’s competitiveness remain weak and the needs of many of its citizens remain unmet in terms of access to basic services like heath, sanitation, electricity, and education. Social exclusion has left vast shares of the population behind and resulted in untapped human and economic potential.

To ensure long-term, sustainable growth, India will have to increase the productivity of its economy while ensuring that the benefits and opportunities created by growth are shared by all. While many of the recent policy actions from the government have been towards this direction, a further and faster push is required on five key dimensions:

1. Reform the tax code and expand social protection

India’s social insurance system and its public health system remain limited in coverage and fragmented in character. Out-of-pocket expenses are high, limiting affordability. Insurance coverage (old-age pensions, death and disability insurance, maternity benefits) remain limited. Increasing its narrow tax base can give India the required fiscal space to make these much needed social expenditures, and give its citizens the safety net needed to take risks and participate fully in the economy and society.

2. Improve access to basic infrastructure

A quarter of Indians still do not have access to electricity and almost a third of the urban population lives in slums. Sixty-five per cent of the population does not have access to improved sanitation and access remains unevenly distributed. This is also the case for clean drinking water. In a recent report, the World Bank estimates that India might need up to $1.7 trillion to close its gap in infrastructure development. At the same time, private infrastructure financing totalled only 2.4% of GDP per year on average from 2009-13. Closing the basic infrastructure gap requires a more aggressive push on private investments and public-private partnerships.

3. Make education more equitable and geared towards employment

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