The need for inclusive Growth

While India is growing, its growth model is perhaps not sustainable. Agriculture and manufacturing are struggling. Parts of the service sector, particularly IT-related areas, including the growing number of global capability centres (GCCs), are doing well. However, with so few jobs, more and more people are stuck on the farm and inequality and rural distress continue to rise. India cannot avoid factor-market reforms.

India’s labour laws (as former Prime Minister Atal Bihari Vajpayee once said) are anti-labour as they discourage hiring. To avoid complex labour laws, firms become more capital-intensive or hire more casual (daily wage) labour. India has the higest share of casual labour in the world. Its land zoning, with the lowest floor area ratios in the world, leads to very poor utilisation of its scare land, a lot of land is tied up in uneconomic marginal farms.

Infrastructure has improved, but with very high petrol and diesel prices, expensive electricity for producers, and amongst the highest rail freight costs in the world, the cost of producing and moving goods remains highly uncompetitive.

By bringing fuel into the goods and services tax or GST (even at the highest slab of 28 per cent), petrol and diesel prices will fall. This will allow Indian firms to better compete with China, where fuel prices are 30 per cent lower than in India.

Rationalising electricity prices for producers – Indian prices are again about 30 per cent higher for producers, and freight prices are three times higher than in China – will make India’s manufacturing more competitive.

However, for the vast majority of the population, it also requires a push for competitive labour-intensive manufacturing and manufacturing exports. India needs more blue-collar jobs – to get people off the farm – to complement its success in white-collar jobs.

India still runs the economy and with a colonial 19th-century administrative and legal system. E-services and Aadhaar have helped improve the delivery of some functions and subsidies, but the basic administrative structure remains problematic. It has a very large number of employees at the lower end and large discretionary powers with a very complex set of regulations and procedures that encourage corruption. This must be changed. According to Transparency international, Indian citizens paid the highest number of bribes in Asia in 2021 – even higher than all our neighbours, including Bangladesh, Nepal, and Sri Lanka.

The future depends on what we do now. Some will say such major reforms will not be possible in the next five years with a coalition government. However, India’s past shows, ironically, that we have  only had bold reforms when we have had coalitions.

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