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The Economic Times

View: Government needs to put energy and momentum behind recent reform initiatives

Despite its dismal Q1 FY2021 GDP figures, India can grow rapidly again, to gainfully employ the 90 million workers expected to enter the non-farm job market over this decade, write Shirish Sankhe and Anu Madgavkar in The Economic Times.

Despite its dismal Q1 FY2021 GDP figures, India can grow rapidly again, to gainfully employ the 90 million workers expected to enter the non-farm job market over this decade. McKinsey Global Institute's August 2020 report, 'India's Turning Point', finds that India will need 'best of the best' growth - annual jobs growth of 1.5%, similar to the 2000s, and productivity growth of 6.5-7%, similar to the 2010s - to achieve this. This could result in average annual GDP growth of 8-8.5% in the third decade, starting 2023.While Covid-19 has made that target harder to reach, India's GDP growth had dropped to 4.2% even before the pandemic. Yet, if we pursue growth-enhancing reforms with conviction over the next 12-18 months, high growth is possible. The report outlines how India could enable over 40 frontier business opportunities that contribute $2.5 trillion of economic value and create 30% of non-farm jobs needed in 2030.

These frontier business models provide pathways to higher-wage jobs for millions across skill levels. Examples include global manufacturing hubs ($450 billion of economic value in 2030), agricultural hubs ($150 billion), efficient power distribution and logistics models ($80 billion), and modernised retail trade ecosystems ($125 billion).Capturing this potential requires prioritising six areas of targeted reform in the real sector and three reform pillars in the financial sector.

The first reform area focuses on raising productivity through sector-specific policies. To enable global manufacturing hubs, for example, central and state governments could frame policies to remove inverted duty structures, provide select, time-bound and conditional incentives to correct for cost disadvantages vis-à-vis emerging market peers, and construct well-functioning port-proximate manufacturing clusters.Other potential reform areas include unlocking land for real estate and construction, to cut land costs by 20-25%, making labour markets more flexible to help small and mid-size firms scale up, and reforming power distribution to slash commercial and industrial power tariffs by 20-25%. Measured against a set of 20 countries, both emerging and developed, India was the only country in 2016 to charge industrial users higher tariffs than residential users.

Privatisation is also on the agenda, and could yield proceeds of more than $500 billion over this decade. Of India's 1,900 State-owned enterprises, just 30 could generate 80% of this value. Finally, while India has improved the ease of doing business, a lot more can be done (e.g., construction permits) to simplify and streamline regulations and processes to reduce costs to companies.

Achieving this growth would require more investment - about $2.4 trillion capital in 2030, triple the current amount. Deep financial sector reforms may be needed, including measures to channel more household savings to capital market instruments, reduce the cost of credit by 3.5 percentage points, and streamline public finances to generate 1.7% of GDP annually for growth-oriented investment.

Half the reforms can be quite rapidly enacted through a policy or law. Others would require GoI to implement initiatives and projects on the ground. Around 60% of these reforms are in the hands of the state governments, whose role matters immensely.

A set of technocrat-led reform panels could frame policy blueprints within 3-6 months, followed by 12-18 months of focused implementation. Progress could be monitored through a Pragati-style review mechanism. Such panels could frame time-bound reforms across areas like manufacturing, land and labour markets, the financial sector and public finances.

State chief ministers need to frame visions and blueprints too, which reflect local factors and priorities. They could set up 'demonstration clusters', like special manufacturing zones, and use mechanisms such as a CEO-led special purpose vehicle (SPV) for implementation. If 5-6 state governments embrace these opportunities, substantial momentum could be achieved.

Some government measures put in place during Covid-19 are a good starting point - allowing farmers to sell produce more freely, starting to privatise power distribution companies in Union territories, and implementing pro-competition reforms to limit the scope of State-owned enterprises. But a lot more needs to be done.

It is time to act with urgency and boldness. We need to put energy and momentum behind these reforms, even during the pandemic, to meet the aspirations of millions of job-seekers, and remain one of the world's outperforming emerging economies.

This article appeared first in The Economic Times.