An Economist's Quest For Reforms by Arvind Panagariya

Author:Arvind Panagariya
Language: eng
Format: epub
Tags: null
Publisher: HarperBusiness
Published: 2022-03-15T00:00:00+00:00

7

INDIAN GROWTH MIRACLE FACES THREAT

25 February 2010

THE SINGLE-MOST IMPORTANT REASON why India receives as much attention worldwide as it does today is its perceived economic potential. At $1.25 trillion in GDP, the country currently accounts for only 2.2 per cent of the world GDP. It ranks a low twelfth in economic size despite a population of 1.2 billion and comes behind the remaining three BRIC (Brazil, Russia and China) countries. Yet, India cannot be ignored because if it fulfils its promise of near-double-digit growth over the next two decades, it would become the third- or fourth-largest economy in the world.

But nothing is ever carved in stone in the world of economics. In the 1950s, India used to be seen as a rising star while South Korea was viewed as a basket case. But dramatically different policy choices by the two countries led to exactly the opposite outcomes by 1980. Fortunes began to turn for the better for India only after it corrected its policy course, first half-heartedly in the 1980s, and later, beginning in 1991, with greater determination.

Sadly, however, complacency has returned at the top policy levels. The country’s leadership has come to view India’s destiny as a great world power as inevitable. Even those such as Prime Minister Manmohan Singh, Home Minister P. Chidambaram and Planning Commission chief Montek Singh Ahluwalia, who had fought hard for economic reforms in the 1990s, show little keenness for continued pro-market reforms. Indeed, the fear is no longer that the still-incomplete reform process will not move forward under the present government. That is now old hat. It is that there are realistic prospects of the clock being turned back.

At least three recent policy initiatives place a question mark on India’s determination to hold the line on reforms, and therefore, on its emergence as a world-class power.

First, an Empowered Group of Ministers (EgoM) recently decided to forbid the import of foreign equipment for ultra-mega power projects. After three decades of piecemeal but consistent moves towards openness, one would have thought that India had left such blatantly protectionist policies far behind. By all accounts, the decision will make power projects more costly and cause significant delays in implementation. Auditing and consulting firms are reported to estimate that Chinese suppliers offer critical equipment at prices 10–15 per cent below their Indian counterparts and at least ten months faster than the state-run Bharat Heavy Electricals Ltd (BHEL).

The second disconcerting example of muddled-up thinking on policy is the recent proposal by the labour ministry to extend the existing Minimum Wages Act to the entire unorganized sector. The proposal not only raises the fine on violators from ₹500 to ₹5,000, but it also allows for six months in prison. Unlike in the past, the government appears determined to enforce the act through tougher penalties.

There are probably two motivating factors behind the proposal: as many as 93 per cent of the workers are in the unorganized sector and they receive an abysmally low wage—just ₹50, compared with the national minimum wage of ₹100 per day, according to one newspaper report.

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