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How India can prepare for China-plus-one

Incremental reforms are better than no reforms, but equally important to recognise the opportunity costs associated with our historically slow pace of progress

November 24, 2022 / 09:28 AM IST
Representative image

Representative image

Favourable demographics, geopolitical events, and past investments in human capital have created a comfortable economic position for India. More so given the pandemic and its strain on existing supply chains. To make matters worse, China’s pursuit of zero COVID-19 policy has only imposed fresh supply shocks to the global economic system.

No surprises that companies are wondering whether it is worthwhile to be too dependent on China, more so considering the allegations of intellectual property theft. But the obvious question is: if not China, then where?

There are many suitable candidates. Small countries in Asia with less stringent labour laws make them an ideal candidate. Certain countries have better rule of law, while others make up by having more extensive tax concessions. Needless to say, there is competition to attract these companies, with ministers often meeting their representatives at their headquarters several times before rolling out the red carpet. Some ensure all permissions are already in place even before companies decide their investments.

Indian policymakers, therefore, face stiff competition — and perhaps chief ministers are better suited to compete with some of these small countries in a bid to generate greater investments in their states. India’s large workforce gives it an unmatched scale as it is the country with the largest English-speaking college graduates. However, the gap in skills poses a constraint on the ability to readily leverage, and deploy this talent.

India also has another advantage as its population is not ageing, unlike China. If projections are to be believed, India will have its first ever decade where it averages a growth rate that is close to twice that of China. A slowdown in China will have consequences for growth elsewhere — not all of which will be positive.

But despite these obvious advantages, there are several other constraints. Our agrarian economy is one of the major such constraints. With a substantial part of workforce continuing to be engaged in agrarian economy with low productivity, incomes are partly constrained. This restricts the pace of expanding India’s middle-class.

Labour is certainly moving towards other areas, more so since several states have started to see the virtues of labour reforms. However, resource constraints due to low productivity in agrarian structure too bind the overall growth potential. Ensuring sustained marketable surplus is a key for the secondary sector to transform these resources into higher value-added products. The farm laws were essential to alleviate this constraint — and many farmers outside of the three northern states were in favour of these reforms.

Perhaps, some state governments can begin by borrowing from these three laws, and implementing them in their states. Some state governments have already liberalised agriculture activity, and their faster growth will convince many other states to follow.

Overall, lower productivity levels in India also add to a comparative cost disadvantage relative to other countries. However, the recently-enacted Production Linked Incentive (PLI) scheme is designed in particular to take care of this issue. So far there is preliminary evidence to suggest that PLIs have worked in some areas. While it is too soon to do a proper evaluation of the scheme, the idea and the design of the policy, with sunset clauses for the benefits to expire make it one of the rare well-designed industrial supply policies. Off late, the scheme has been extended to many sectors — and there are several industries that are demanding similar subsidies. It is perhaps important to restrict them to champion sectors to begin with. Analysing their effects and efficacy for them will be crucial before any further extension.

Another alternative would be to convert the MGNREGA to a wage subsidy programme for the private sector. The government’s own ability to generate work under MGNREGA is often limited. However, the wage subsidy will achieve two things — compensate companies for lower productivity, and at the same time allow unemployed people to get a job in the formal sector. Again, we have to think of any such changes within the context of a general equilibrium framework, but converting MGNREGA into a wage subsidy programme might end up being a pareto superior outcome.

The trickier aspect associated with doing business in India is with respect to enforcement of contracts or implementation of law and order. Both are issues that are not directly in control of the Union government. On the former, there is a need to the justice community to introspect whether their decisions are consistent with sound economics. Then there is the issue of lack of consistency in application of same judicial principle — or even pendency of cases. All of this adds to uncertainty that ends up adding to the cost of doing business in India. India already has a high compliance cost, but there have been efforts by the government to bring them down. Similar efforts are needed from our judiciary.

On law and order, state governments need to recognise the need to invest more on policing, ensuring orderly protests in designated spots and preventing frequent disruptions to economic activity. They must go a step further and start investing in their workforce by providing them with better social and physical infrastructure.

It is evident that much of the attention on policy action and reforms must shift to state governments as their decisions will play a major role in bringing in investments into manufacturing. India’s peninsular states have done rather well on this historically — some of the heartland states are attempting to emulate their model. The states that get their policy mix right will ultimately outperform others, and while this might lead to greater geospatial divergence in living standards, it might also inspire lagging states to rethink their economic model.
Karan Bhasin is a New Delhi-based economist. Views are personal.
first published: Nov 24, 2022 09:28 am