Developed country by 2047: The structural reforms needed

Increasing the levels of savings and investment is critical to accelerating the growth to achieve developed country status with inclusiveness. Besides the fiscal reforms to create sufficient borrowing space for the private sector and generate ‘crowding in’ effect through productive public spending, structural reforms to protect property rights, enforce contracts and create an enabling environment are necessary through governance, legal and judicial reforms. More importantly, structural reforms are imperative to impart flexibility to factor and product markets to ensure their efficient functioning. 

Some of the structural reforms required to achieve the goal are discussed below:

(i) Effective implementation of amended labour codes: The growth in the country has been driven predominantly by the services sector. However, according to the OECD, two-thirds of the people in the age group 23-34 have an education level below upper secondary and are not able to access high-paying jobs in modern services. Except in trade, travel and hospitality, the services sector cannot absorb the addition to the workforce and therefore, “walking on two legs” -- focusing on both labour-intensive manufacturing in addition to providing skills to those aspiring to access jobs in the services sector -- is imperative. 

The small informal sector firms which employ over 75% of the manufacturing workforce cannot compete in world markets. In contrast, China’s manufacturing employment is concentrated in 1000+ worker firms and has much higher productivity. This means that it is necessary to create conditions for small-scale units to evolve into medium and large-scale industries with much higher productivity and wages.  

The most important deterrents for the evolution of small firms into medium and large firms are the labour laws. The reforms initiated by the Union government to impart flexibility to the labour market by merging 24 laws into four codes should help in the medium and long term. The new Industrial Relations Code allows manufacturing units up to 300 workers to hire and fire without the government’s approval.  However, the issues relating to labour welfare and trade unions are in the Concurrent List and actual implementation of the amended codes by the states is the key to ensuring flexibility. 

(ii) Manufacturing enclaves for scale and scope: Economist Arvind Panagariya, recently named to be the Chairman of the Sixteenth Finance Commission, has been arguing for the creation of 5-6 large autonomous enclaves spread over 500 sq km in coastal regions to ease many administrative and regulatory hurdles, including restrictive labour laws, and to provide
vastly improved infrastructure and marketing facilities.  

China created large-sized enclaves which proved to be a great facilitator for manufacturing and exports. Shenzhen, one of China’s special economic zones (SEZ), for example, is spread over 1,950 sq km. India started almost 250 SEZs to provide such an enabling environment, but the advantage is lost as they are of small size, with an average of 0.3 sq km. The largest SEZ in India is the Mundra SEZ in Gujarat, spread over 396 sq km.  

(iii) Thrust on exports and avoiding protectionism: International experience shows that opening up the economy for trade and investment is important to accelerate growth and create employment. Exports have been strong engines in every country that has shown high growth performance such as South Korea, Taiwan and, more recently, China. India has 17% of the world’s population but accounts for just about 2.5% of global exports. 

Despite our contrarian experience, there has been a steadily increasing protectionism since 2017, and this has led to
a fall in the share of exports as a percentage of GDP. 

It is difficult to fathom how accelerating the growth above 9% can be achieved unless this trend is reversed. Thus, India’s refusal to join the RCEP was disappointing.  

The recent signing of Free Trade Agreements (FTA) with Australia and the UAE are important and hopefully, negotiations for similar agreements with the UK and the EU will result in the signing of the agreements soon.  

(iv) Other structural reforms: The Insolvency and Bankruptcy Code (IBC) is a landmark reform, but there have been implementation problems. The two important problems plaguing the system are the enormous delays in resolution, and the huge haircuts the lenders have to take.
It is important to ensure that the insolvency resolution process is timely, effective and reasonable. 

Another unsuccessful reform is the set of three new legislations enacted in the farm sector to provide flexibility to farmers to sell their products anywhere, which had to be withdrawn in the face of farmers’ protests. The amended Essential Commodities Act deregulated the production, storage, supply and distribution of cereals, pulses, potatoes, onion and oilseeds and enabled the private sector to play an important role in these activities. The Farmers’ (empowerment and protection) Agreement of Price Assurance and Farm Services Act, allowed small farmers to agree with corporates for contract farming.  What was required was strong regulation to prevent the misuse of the provisions. India’s trade policy regarding agricultural commodities is consumer-oriented and biased against the producers. It is also important to avoid the bias and uncertainty faced by the farmers. 

Given the shortage of resources and administrative capacity, the time is opportune to rethink the role of the State. It should complement the market rather than compete with it. Budget 2022-23 had promised to privatise several public sector companies including Air India, Container Corporation of India, Shipping Corporation of India, Bharat Earth Movers Limited, Bharat Petroleum and Chemicals Corporation, and IDBI Bank. However, only Air India has been privatised so far. The government had also said two more public sector banks were to be privatised. Implementation of these will hold the key to freeing the government from the shackles of activities that are truly in the domain of the private sector.  

(The writer is a former Director, National Institute of Public Finance and Policy and Member, Fourteenth Finance Commission. This is the last of a three-part series)