Archive for February 25th, 2014

Why Does India’s Economic Growth Process Falter?

February 25, 2014

M H Bala Subrahmanya of IISc Bangalore in this article says the problem for Indian economy lies in missing the industrial bus. This keeps putting pressure on Indian economy leading to falter in growth process:

It is imperative that the Indian economy strives to achieve a structural transformation of industry by building up the capital goods industry base and acquiring the technological competence to boost the share of high-tech goods in merchandise exports. In the long run, this is the only sustainable way of achieving a trade surplus. This alone will lend strength and stability to the rupee.

The author looks at the performance of Indian industry. first before 1991:

Indian economic policymakers intended to pursue this path of development when they launched the Industrial Policy Resolution of 1948 and the Industrial Policy Resolution of 1956, followed by a series of industrial controls and regulations, supplemented by five-year economic plans. In the process, agriculture developed in certain pockets, if not across the country, organised industrial development progressed with a shift from consumer goods to the capital goods, intermediate goods, and basic goods industries, which also led to the development of an organised service sector. The share of consumer goods industries in MVA decreased from 49% in 1960-61 to 27% by 1991, whereas the share of capital goods industries in MVA increased from about 12% to almost 22% during the same period (Bala Subrahmanya 2009). Organised sector employment grew from 20.63 million in 1977 to 26.73 million in 1991, an annual average growth rate of about 1.9% (Ministry of Finance 1992, 1998). But the organised sector employed only about 8% of the total workforce in 1991. The export basket shifted from agro and processed goods towards manufactured goods, particularly light manufactured goods. Agro and allied products, which accounted for about 44% of the total exports in 1960-61, contributed 19.40% in 1990-91. The contribution of manufactured products, which was about 45% in 1960-61, increased to more than 79% in 1990-91 (Ministry of Finance 1998). Of course, manufactured exports primarily comprised light manufactured goods. However, the overall progress and the shift from the early 1950s to the late 1980s were on the desired path of economic development.

Post 1991:

The launching of broad-based economic reforms in 1991 had the objective of making the Indian economy (in general and industry in particular) achieve international competitiveness. In the process, several key policy reforms were introduced to enable the integration of the economy with the global economy at large. The expectations were high. Freer trade and freer investment laws were expected to accelerate achieving the desired path of economic development. How far have we come on the path of economic development since 1991?

The figures are dismal and disappointing. Organised sector employment increased from 26.73 million in 1991 to 28.99 million in 2011, or at the rate of 0.41 million per annum. During the same period, public sector employment declined absolutely from 19.05 million to 17.54 million. Given the “much sought-after” “opening up” and “gradual withdrawal” of the public sector from various economic and industrial spheres, this development may be natural and therefore justifiable. However, the growth of organised private sector employment (from 7.67 million in 1991 to 11.42 million in 2011, or at the rate of 2% per annum) cannot be considered significant. The organised sector, which employed about 8% of the total workforce in 1991, employed less than 7% of the total workforce in 2011. This brings out clearly that a large chunk of the growing workforce has been absorbed by the unorganised sector and the growth of the organised sector has failed to make any “dent” on the unorganised sector. The composition of the GDP has changed – agriculture’s contribution declined from 33% in 1990-91 to 16.17% in 2011-12 and industrial contribution hardly improved (from 24.15% to 25.45% during the same period), implying that the fall in agriculture’s share has been compensated for by the growth of the service sector (Ministry of Finance 2013).

What is more alarming has been the change that has occurred in the composition of MVA as well as the export basket. In the industrial sector, the relative share of consumer goods industries is growing, with non-durable consumer goods industries acquiring a dominant share and the base of the “much-needed” capital goods industries shrinking. The share of consumer goods industries in MVA increased from about 27% in 1991 to about 32% in 2007, whereas the share of capital goods industries declined from about 22% to about 19% during the same period (Singh 2013). The disturbing change in the structure of MVA is also reflected in the changing weights of sectors in the use-based classification of Indian industry (Ministry of Statistics and Programme Implementation 2013).

Similarly, diversification in the export basket has not taken place at all. The share of agro and allied products increased from 19.40% in 1990-91 to about 24% in 1996-97 but declined to about 15% in 2011-12. On the other hand, the share of manufactured goods in total exports declined from 79% in 1990-91 to about 74% in 1996-97 and further to about 61% in 2011-12 (Ministry of Finance 

The more things change/reformed, more they remain the same/or get worse..

What explains this decline? The space was vacated by public sector but not filled by private sector..

These macroeconomic indicators bring out that India’s economic growth experience since 1991 defies established economic growth theories. Why? The reasons for this development are not far to seek. The space vacated by the public sector (which spearheaded the role of transforming the Indian economy on the desired path of economic development till 1991) was expected to be filled by the organised private sector (domestic and foreign) when we launched broad-based economic reforms in 1991. The New Industrial Policy in July 1991 claimed, among others, that “Indian private entrepreneurship has come of age” (Ministry of Industry 1991). It was anticipated to give a fillip to industrial growth of the country and thereby transform the economy at an accelerated pace (than during 1951-91).

However, that did not happen. This can be attributed to two factors. One, FDI and multinational corporations (MNCs) have entered the service sector much more than the industrial sector, thanks to the favourable climate in the country for knowledge-intensive industries, housing and real estate, and consultancy and financial services (DIPP 2013). And two, the domestic private sector also entered the service sector, covering wholesale and retail trade, and communications and personal services, among others. This is reflected in that organised private sector employment grew by a meagre 0.93% per annum in the manufacturing sector during 1991-2011, whereas it grew by 4.15% per annum in the service sector during the same period (Ministry of Finance 2013).

India’s private sector should gear up and fill the gaps:

It is high time the captains of Indian private industry take the responsibility for driving industrial growth of the country towards maturity, with a renewed growth of capital goods industries to ensure that industry acquires its own technological competence. The apex chambers of industry should take the lead in the interests of both industrial growth and national economic growth. This should result in tilting the country’s export basket towards medium-tech and subsequently high-tech products, and favourably balance the trade and current accounts to offset the ever-growing import bill and strengthen the currency. (In this context, it is important to emphasise that fiscal incentives and monetary policy actions will only provide short-term relief but not long-term solutions.)

To conclude, it is imperative that the Indian economy strives to achieve a structural transformation of (manufacturing) industry by building up the capital goods industry base and acquiring the technological competence to lead to a growing share of high-tech goods in the composition of exports. In the long run, this can be the most sustainable way to achieve a trade surplus and thereby a current account surplus. This alone will lend strength and stability to our currency in the international market. Unless and until we achieve this, our economy will continue to experience a trade deficit leading to a current account deficit and remain vulnerable to even “minor external vibrations” turning into “shocks” more often than we can afford.

Till some time India skipping the industry bus was celebrated and did not cause much of a concern. The pains had to be seen overtime..A country with such a large population cannot afford to miss the industry bus…Lots of work needs to be done..

How brilliant blunders lead to progress in science..

February 25, 2014

It is nice to have such articles in Project Syndicate.

Mario Livio an astrophysicist at the Space Telescope Science Institute in Baltimore says some blunders turn out to be brilliant as they lead to real progress in science.

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if finance continues to take a disproportionate number of the best and the brightest…

February 25, 2014

Howard Davies (Prof at Sciences Po in Paris) reflects on the continued growth in jobs at finance sector in UK.

Despite the crisis, policymakers continue to expect London to grow as a financial centre and absorb more jobs:

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