Policy decisions need to be productivity-enhancing. Policies, which protect the weak, prolong the inefficient, discourage the competitive and efficient, lead to productivity reducing and consequently depressing the GDP growth.
The economic growth of a country achieves several distributional objectives. More income in the hands of people allows them to consume more goods and services. This raises the level of nutrition, health and living standard of people. They can spend more money to live in better houses, have transport means to take care of mobility and spend more on education and health of their children. Larger economy size yields higher tax revenues for the national and sub-national governments, which help them to build better infrastructure and provide quality governance services.
While several such beneficial impacts and effects take place by the sheer fact of richer economy, it is also true that India has severe challenges of multi-dimensional poverty which a large number of people in India still suffer from (estimated to be still one-third of the population). Likewise, basic minimum services like electricity, safe fuel to cook, availability of safe drinking water in the homes, access to an all-weather road, even basic health need like a toilet are not available to every household. The government has done enormous work to deliver some of these services to almost every family (electricity, fuel and toilet). However, the work is not finished yet. India would need to take conscious policy and pro-active public measures to ensure that every household has a 24x7 electricity connection, a safe and efficient fuel medium for cooking food, health services, including access to hospitalisation in the vicinity, sanitation services, including toilets and open defecation-free village, cities and nation, safe and quality water supply in the home and such other services. More equitable distribution of incomes supports growth in consumption and also in societal welfare. Therefore, it is essential to set national goals in terms of quality of life for every citizen of the country. Every Indian must be able to live a life of good quality assisted by the government in availing the minimum needs of life.
Quick-fix solutions don’t boost growth
GDP is flow. Production of thousands of goods and services by hundreds of millions of workers in millions of enterprises -- individual, small, big, public or private -- which are consumed by over a billion people in India is a complex flux or maelstrom. This flux is also affected by several controllable and uncontrollable factors -- monsoon, foreign countries’ monetary and trade policies, evolution of new technologies, changes in preferences of consumers, change in the basic policy stance of parties in power and so on. These changes can affect demand (consumption of goods and services) or supply (production of goods and services) or both. It is not easy to pinpoint what exactly is changing and what impact it has on the factors of production, demand and supply of goods and services and which specific goods and services.
Underlying change factors can work in one direction or these can be in opposing direction. When these factors work in unison, the impact on GDP growth rate can be quite material. GDP growth rate has become a public concern thanks to widespread media attention. Slow down from 7-8 percent rate of growth in the last five years to 6 percent or so this year has become a national concern and has made the national mood quite downbeat.
When growth slows down, there is a widespread concern and angst aimed mostly at the government with the expectation that the government would bail out the economy from the situation. The pressure becomes intense when the slowdown is sharper. There is also pressure on the government to relieve the economy of the slowdown quickly. This leads many times for the government to look for quick fixes – ‘paracetamols’ for taking care of feverish conditions and steroids for ‘jump-starting’ growth. These quick fixes, more often than not, do not work. Might provide temporary relief but the medicine administered in the form of these quick-fixes generally do more harm in the long run or at least prove to be disproportionately costly. It is advisable to avoid the temptation to go for temporary solutions.
Long-range policies for boosting productivity
Generating high growth requires large investments. As investments are lumpy requiring a lot of capital, both equity and debt, these need to be supported with long term policy framework which nudges these to be competitive but at the same time profitable. Any investments which do not have long term profit visibility will not be taken by the private industry. If such investments are taken in the public sector, it is the loss of the collective savings of the people. Policies that provide excessive returns or too quick returns do not take care of the interest of consumers. Excessive guaranteed or expected returns in some infrastructure sector have led to the collapse of the business sooner than later. The policies to promote investment in infrastructure and manufacturing of basic goods need to be developed with this perspective in mind.
Long-term policy decisions may also turn out to produce sub-optimal results.
The policy decision to have commanding heights of the economy and reserve basic industry for the public sector taken as part of the Industrial Policy Resolution of 1956 is having its ripple effect even now. This decision was motivated by fundamental beliefs that the socialistic pattern of society is better for the country and means of production should mostly be in the hands of the public sector instead of with the private sector. This basic policy decision led to the development of basic industries -- steel, metals, power plants, heavy engineering and so on -- in the public sector only. Private-sector industries simply did not come up in these areas. The logic of the public sector got extended to the financial sector which led to nationalisation and exclusive reservation of insurance and banking business for the public sector for many decades. In retrospect, it is easier to conclude that these policy decisions held back India’s growth and resulted in India’s industry growth getting not only non-competitive but also stunted. It is therefore very necessary that policy decisions taken for the long term perspective are also very well thought through.
Likewise, policy decisions need to be productivity-enhancing. Policies, which protect the weak, prolong the inefficient, discourage the competitive and efficient, lead to productivity reducing and consequently depressing the GDP growth. Automation of industry is productivity-enhancing. Use of digital technologies in services is productivity-enhancing. Holding excessive labour in agriculture is growth depressing and poverty enhancing. The policy of reservation of several hundred products for small scale industry under the mistaken belief that this would provide larger employment proved highly counter-productive.
Subhash Chandra Garg served as Economic Affairs Secretary and Finance Secretary of India. Garg, a 1983-batch IAS officer, demitted office on October 31, 2019. The former senior bureaucrat, who also served as an Executive Director in the World Bank, had prepared a note that listed major economic, financial and governance policy reforms India needs to adopt to build a $10 trillion economy by early 2030. CNBC-TV18 is publishing a series of articles based on this note. This is the third article in the series.
Follow the series here.
First Published: IST