Policy pointers for a robust economy

By 2020, the median age in India will be just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan. India will thus have one of the youngest populations in an ageing world. To forestall any social tension created by unfulfilled aspirations and lack of employment avenues, the country needs higher growth rate and a robust economy to fruitfully engage its young labour force.

The recently released report on the Global Innovation Index 2018 (GII) has several policy pointers for India to achieve these objectives. With respect to the overall index, India ranks 57 out of 126 countries. This has been an improvement from rank 60 in GII 2017. The index has been measured by various parameters which have also been ranked. It is from a few of these parameters that the policy pointers emerge.

For example, take the parameter, ease of starting a business. Our country has gone up from rank 136 in 2012 to 114 in 2018, which implies that there is tremendous room for improvement. Historically, smaller or startup firms are more nimble-footed than established firms.

By making setting up of new businesses easier, India can not only jump up the rankings but also, more importantly, increase employment opportunities for its increasing labour force. In this regard, India can emulate best practices from its next-door neighbour Nepal, which is ranked 17.

This parameter is compiled from the Ease of Doing Business data collected by the World Bank, the improvement in ranking of which was recently showcased by the Union government. Concentrating on this parameter thus seems to be a win-win situation for the government.

In April 2010, India introduced a weighted tax deduction of 200% on company expenditure on in-house research and development. However, in Budget 2016, this was reduced to 150% of research expenditure from 2017 onwards, and will be 100% from 2020 onwards.

This policy seems to have had an impact on India’s ranking for the parameter, percentage of research talent in business enterprise, which fell from rank 31 in 2016 to 45 in 2018. This parameter measured full-time researchers employed in businesses. Thus, one could argue that the removal of incentive led to a reduction in the number of full-time research employees.

The huge incentive of a weighted tax deduction of 200% from 2010, however, did not increase India’s patents as its ranking (patents in relation to GDP level in PPP terms) hovered around 55 from 2011 till 2018. Since the focus and scope of R&D varies across sectors, the government can consider a sector-specific weighted tax deduction for a better outcome.

Knowledge-intensive

Recently, Amitabh Kant, CEO of Niti Aayog, commented that the contribution of women to India’s GDP was at 22% compared to the global average of 44%. His point is reinforced by the parameter, percentage of females employed with advanced degrees, where India ranks at 93.

One of the reasons for females with advanced degrees opting out of the labour market could be the lower share of knowledge-intensive employment of the total employment, where India ranks 91. Thus, we need to focus on policies that will increase the share of knowledge-intensive employment and bring in more women into the labour force.

The heart of the global value chain resides in Southeast Asia and India plays only a small part in that. It has been proved in economic theory that companies use certification to reduce information asymmetries between suppliers and potential buyers. India ranks somewhere in the middle, at 67, for another important parameter which is the number of ISO 9001 quality certificates relative to GDP in PPP terms.

For Indian firms to enter the global value chain it would help if they seriously consider getting themselves ISO 9001 certified. In this parameter, China is ranked at 22, and given that its GDP in PPP terms is almost twice that of India’s, we have quite a bit of catching up to do.

To encourage such certification among SMEs, the Union government can think of incentives that will reduce their cost of certification. This would be in addition to the investment in infrastructure and urban planning the government needs to do in order the increase the share of manufacturing in India’s GDP.

Growth in SMEs can lead to increased demand for labour and services, and thus help in the country’s efforts towards reaping the demographic dividend.

(The writer is Senior Fellow, Pahle India Foundation)