Tips for India's middle-income journey from top ADB economist Albert Park

Asian Development Bank (ADB) chief economist Albert Park.
Asian Development Bank (ADB) chief economist Albert Park.

Summary

  • Becoming a modern economy producing sophisticated goods and services requires greater focus on education, apart from the ongoing thrust on infrastructure creation, says Albert Park. It also needs to maintain an open economy and increase the ease of doing business.

India's ascent to a middle income-economy hinges on better education and continued focus on infrastructure creation, Asian Development Bank (ADB) chief economist Albert Park said, citing the successful experience of other developed economies.

India should also commit to remain an open economy and review import tariffs that may be making inputs costlier for sectors where it has an advantage, Park said on the sidelines of ADB’s annual meeting in Tbilisi last week.

Park said that if ADB were to do an economic diagnosis of the country, education would be among the priority areas where it should really improve the quality since becoming a middle-income country means moving up the technology ladder. 

Also read: We need an education system that isn’t held hostage by exams

Need for skilled labour

“And you're trying to start producing more and more sophisticated goods. And that's going to require more skilled labour," Park said, adding that it entails training more people to higher levels and raising average attainment levels. That is one thing China did very well, Park said, quoting China’s high score in Organisation of Economic Cooperation and Development’s (OECD) Programme for International Student Assessment or PISA.

Education is a long-term investment as the results of teaching children today will only be seen when they enter the labour market, Park said. “In terms of the ambitions of India to reach these goals by 2047, I still think these are good investments," said Park, adding human capital investment is important because learning outcomes in India are still relatively poor compared to more successful economies.

None of India's higher education institutions made it to the top 100 in the latest QS World University rankings, which was topped by the Massachusetts Institute of Technology. IIT Bombay came in at 149, followed by Delhi University at 407 and Anna University at 427.

Also read: Why US is top choice for Indian students aspiring to study abroad despite affordability, safety concerns

Need for sustainable agriculture

Park also made a strong case for India to make policies, reform subsidies and adopt technology so that farmers are encouraged to shift to more sustainable and less water-dependent farming, which will make India’s farm sector more resilient to climate shocks. That would include reforms in the pricing of inputs like fertilizer, the production and non-optimal use of which could be carbon-intensive.

The economist said that India’s infrastructure investment is on right track, but there are still opportunities for bringing in foreign direct investment into the economy, participating more in global value chains, and boosting manufacturing because those are the areas where catching up to global technologies will deliver fast productivity growth.

India is currently pursuing over 10,000 infrastructure projects at various stages with a total project cost of $1831 billion, to be executed by 2025 as per the national infrastructure pipeline. The central government, which in recent years scaled up its capital expenditure, hopes the economy to benefit from its multiplier effect and expects private sector investments to further pick up.

Also read: Our school infrastructure needs to be revamped to flatten its pyramid

Ease of doing business

According to Park, India needs to focus on improving the ease of doing business and keep tariffs low. “There are many parts where the government should work closely with businesses to understand what the constraints are and improve the ease of doing business. Of course, India made progress on that. After the elections, when there is the political space, tougher reforms could come. The other point is that to enter the global value chain, India really needs to make a commitment to being open, especially on the import tariff side. There is a need to simplify tariffs, reduce them and certainly make sure that the subsectors, where India has the comparative advantage, are not suffering from having to pay higher costs of intermediate inputs because of tariffs."

“I'm familiar with a lot of research using Chinese data where they found that companies that are using more imported inputs tend to have higher productivity growth and are more innovative because they are part of global value chain by importing and exporting," he said.

Park said that India is definitely involved in the global economy, though a lot of the exports are in petroleum products and gold, while exports in manufacturing-intensive sectors such as electronics are not growing as fast as in other more dynamic parts of Asia. “But India is making progress. Investments and manufacturing growth is happening…We are seeing both public and private sector investment at pretty high levels. The Indian government last year (FY24) increased its capital expenditure by 28%. The budget is planning an increase of central government capital expenditure by 17% for FY25. And state governments are also doing their own investments," said Park.

Also read: Why Indian schools continue to fail rural teens

Resilient farming

India exported goods and services worth $776.68 billion in FY24, little changed from a year earlier, while overall imports at $854.80 billion showed an annual contraction of about 4.8%, according to commerce ministry data. Policy makers have been trying to step up exports so that the manufacturing sector receives a boost.

Making agriculture sector resilient to weather shocks is important as climate change impact is quite severe for India, Park said. The ADB chief economist suggested pricing reforms on farm inputs such as fertilizers and water and on farm produce and replacing sensitive subsidies with less distorting social transfers so that farmers are encouraged to shift to less water-consuming and more sustainable produce. India cannot give up on reforms in the sector because it is related to resilience, he said.

“If you are subsidizing irrigation, it is very costly in terms of the water and probably it's not that sustainable because the water tables keep going down. The only way to shift away from that is to price water closer to its real opportunity cost."

Also read: Education calls for a long-haul effort to ensure no child gets left behind

Freeing up resources

India’s farm output is estimated to have grown by 0.7% in FY24, an El Nino year, down from a robust 4.7% growth in FY23. New technology and farming methods could help in getting the same yield  thrust on with less water and less green house gas emissions, Park said.

The input price support in farm sector is very expensive for the Indian government and if it can somehow move away from that, it frees up a lot of resources to do other things and support technological innovations needed to move to a more sustainable farming, he said. For FY25, India has allocated 1.64 trillion of fertilizer subsidy, down from 1.88 trillion spent in FY24 as per the budget documents. Park also said that if the world really aggressively addresses climate change, energy and food prices may go up because one of the important adjustments to reduce carbon emissions is to shift land use away from regular cropping to having more forests and things that are more environmentally friendly. But that is a general statement and each country has many ways to manage prices and its agriculture economy, Park said.

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