India: The growth imperative

By Bill Lewis, Neeraj Agrawal, Chandrika Gadi, Deepak Goyal, Jayant Kulkarni, Anish Tawakley, Sanoke Viswanathan, Alkesh Wadhwani, Angelique Augereau, Vivake Bhalla, Amadeo Di Lodovico, Axel Flasbarth, Catherine Thomas, Jaya Banerji, Amrit Dhillon, Shampa Shar-Kamath, Uma Khan, Jeanne Subramaniam, et al.

This study represents MGI's first attempt to scrutinize one of the world's poorest developing economies. It reveals how product market reform, along with privatization, jump-start India's growth.

This study represents MGI's first attempt to scrutinize one of the world's poorest developing economies. It reveals how product market reform, along with privatization, jump-start India's growth.

Objectives & Approach

The purpose of the report is to identify and prioritize the measures that could help accelerate India's economic growth by focusing on a microeconomic understanding of 13 sectors.

Conventional Perspectives

According to the debate, India's fiscal deficit and its capital distortions, restrictive labor laws, and poor infrastructure are the most important barriers to rapid growth. However, research shows that the most important problems are product and land market barriers, and India's ability to absorb the imminent surge of the working age population.

India’s Growth Potential

More efficient processes as well as more product and service innovations are key sources of productivity gains, which, if properly implemented, could reach 10 percent per year.

Synthesis of Sector Findings

India's agricultural and transition sectors, which account for 85 percent of employment, have limited potential for improving productivity. India's modern sectors, however, could increase productivity levels from 15 percent to 63 percent of US levels.

Final Policy Recommendations

The report recommends 13 specific recommendations, among them: Equalizing sales and excise taxes, establishing effective regulatory frameworks, and removing the ban on foreign direct investment in the retail sector.

  • Apparel Sector
    Productivity in Indian apparel plants is low because they are sub-scale, lack basic technology, and are operated inefficiently. While the sector is small, its productivity rates are still two thirds that of China.
  • Automotive Sector
    The continuous liberalization of the automotive sector in India has resulted in impressive growth. To continue the trend and improve it, the government needs to liberalize labor laws, reduce tariffs, and divest its stake in the country's largest car manufacturer.
  • Dairy Farming Sector
    India is the world's largest producer of milk, with diary farming being the single largest contributor to the GDP. Productivity, however, is six times below its potential, with poor yield the caused by inadequate dietary management, poor animal husbandry, and poor animal mix quality.
  • Dairy Processing Sector
    While productivity in India's dairy processing industry is 9 percent of American levels, there is wide variation by category. Private plants and cooperatives perform better than the government-owned operations.
  • Electric Power Sector
    India's power sector suffers from near bankrupt organizations, low tariffs for farmers and domestic consumers, and distribution losses from theft. Privatization and unbundling of state organizations are the key to growth.
  • Housing Construction Sector
    Productivity is one-fifth of its potential because of the artificial scarcity of land created by distortions in the land market and lack of as well as poor enforcement of standards.
  • Retail Banking Sector
    Deregulation in the 1990s has led to the creation aggressive and productive banks, but the sector is still dominated by large public banks.
  • Retail Sector
    With effective reforms, the retail sector could generate 8 million jobs in the next 10 years. Productivity overall is low largely because of poor penetration of modern formats like super- and hypermarkets.
  • Software Sector
    Software services has been one of India's most successful sectors in the past 5 years. The absence of product barriers and government ownership has allowed the sector to thrive. Increased efforts to graduate talent and attract good teachers, as well as upgrade urban infrastructure in software hubs could help push the sector even farther.
  • Steel Sector
    Productivity in India's steel sector is poor because of government ownership of large incumbents, the presence of many unproductive "mini-mills," and lack of competition from imports.
  • Telecommunications Sector
    Despite liberalization efforts in 1994 and 2000, the telecom sector is dominated by unproductive government-owned concerns that have a swollen labor force and poor organization.
  • Wheat Farming Sector
    Indian productivty in wheat farming is 1.3 percent of US levels. Farming remains a labor-intensive sector where low costs keep people from investing in modern machines and technology.
  • Wheat Milling
    Unfair tax burdens and subsidies have conspired to hold modern industrial mills from gaining market share from unproductive small mills.

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