The Modi 2.0 government has set itself a goal to make India a $5 trillion-sized economy by 2024. This is no mean task, as the economy needs to grow in the range of 8 per cent to 9 per cent every year from now on - a seemingly herculean climb given the present growth figures. Here, I make four propositions that are important to keep in mind on the road to becoming a $5 trillion economy.
Focus on services
Firstly, the Indian growth story will be an organic, consumption-led narrative spurred by the service sector. This should not be tampered with. Services have contributed more than 60 per cent of India's GDP, but employ just 25 per cent of our labour force. Meanwhile, agriculture, which employs 53 per cent of our labour force, barely contributes 15.4 per cent of the GDP.
Manufacturing contributes 23 per cent of the GDP and employs 22 per cent of the labour force. Services can also develop around manufacturing and productive agriculture. Traditional development theory talks of movement of labour and growth forces from the primary (agriculture) to the secondary (manufacturing) sector.
However, the Indian economy is a clear exception as labour and growth drivers shifted directly to services from the primary sector, owing to lack of secondary sector growth and the globalised nature of the service provisions.
Services started being support systems of the industrialised economies of the world. Since productivity per unit labour time is highest in the services sector, the challenge is to enhance labour-value addition from services, reduce employment-dependency on agriculture and boost manufacturing.
This will again boost services through multiplier effect. This long-run strategy will make services the main employment and growth generator of the Indian economy, translating to higher growth. The second point is related to trade, investment and business competitiveness. This requires a reform in business environment. India has been signing a host of freetrade agreements (FTAs) since the start of the millennium.
It is now on the verge of signing the Regional Comprehensive Economic Partnership (RCEP) entailing the Association of Southeast Asian Nations (ASEAN) and six other nations (China, Japan, Korea, Australia, NZ, and India). So far, FTAs with ASEAN and Japan have led to negative balance of trade (exports minus imports) for India, though Indian consumers have benefited immensely from them. However, the impact on value chain - especially primary producers, processors, manufacturing, etc - has not been positive.
It is assumed that RCEP will integrate intermediaries in the Indian supply value chain with producers in ASEAN and other nations. But this can happen only if Indian intermediaries become more productivity and costcompetitive.
These intermediaries suffer from low productivity and high transaction costs. While RCEP or such other mega-trade deals are expected to smoothen the path for foreign investment in India, that can only happen if India turns out to be an attractive destination for investment. This will need rationalisation of laws, taxes (including the goods and services tax) and reduction of overall transaction costs of business, which is possible through reforms in the product market and the factor markets.
Be wary of FTAs
On the ease-of-doing-business index, except Cambodia, Laos, and the Philippines, all other nations in the trade grouping rank higher than India. They can boast of better business conditions to attract investments. Thirdly, the Indian government should concentrate on UN sustainable development goals (SDG) as these are major enablers of business competitiveness, according to recent research by ORF.
This is based on the premise that SDGs address the input and product market conditions by bolstering the potentially available capital classified in four types - physical, natural, social and human capital. These are critical inputs for businesses to thrive.
The SDGs create enabling business conditions by reducing long term risks, bringing transparency in sustainability risks and impacts, creating new business opportunities and bringing business competitiveness. At a policy level, SDGs address the seeming irreconcilable trinity of equity, efficiency, and sustainability.
The SDGs can help in growth and also allow for redistribution of well-being within and across generations. This will help the cause of growth and check the pursuit of $5 trillion economy size for signs of 'growth-fetishism'. Fourthly, I would like to stress on and highlight the need to account for the costs of growth, as we traverse the path to becoming a $5 trillion economy.
The costs will arise from various directions and in various dimensions: Social, economic, political, and environment related. These costs have long-run impacts on human well-being and economic growth. India's 'growthfetishism' points to an inextricable reality (often ignored in policy discourse): The negative impact on the ecosystem (structural and functional) and the services rendered by it. Lack of concern for distributive justice in growth also has its social cost. This has led to conflicts posing a major threat to society.
Our pursuit of the dream of a $5 trillion economy makes it mandatory to emphasise on green accounting and budgeting for the social externality costs of growth.
(Courtesy of Mail Today)