Reclaiming the growth agenda

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Reclaiming the growth agenda

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• Healthy debate: Indians and others are debating the pace of recovery from the 2020 pandemic, the nature of permanent damage and the kind of policy response given (by various countries). Now the only question is 'what will drive growth from here on'. Governments are saddled with debt, and exports seem to face protectionist headwinds. 
• India's 7% target: India needs to raise its GDP growth rate back to the 7% level. The growth trajetory chosen will decide the reforms needed, and not other way round. 
• The road for India: Dr Arvind Panagariya provides many insights.

1. To imagine that merely the size of India will allow for import substitution is wrong. It always ends in poor local competitiveness. Hence, export-led growth must be the priority. If India wants 8% GDP growth year after year, then exports and investments are the way.
2. Should India worry about protectionism and automation harming exports? The 2017 exports globally were $18 trillion (6X India GDP) and India's share was 1.7% (China's 12.8%). So if global exports shrink to $15 trillion, even then India can double exports by taking share to just 4%. And automation hasn't replaced everything yet. Only 1 million of Adidas' 360 m shoes are made by robots!
3. The big opportunity for India remains labour-intensive manufacturing. With rising wages and shrinking workforce, China is becoming less competitive in it. 
4. Once India becomes export-oriented, the internal pressure that will come over Indian industry will transform it. Today, 60% of Indian mfg. workers are in micro firms (< 5 employees) and 75% in small firms (< 50 employees). So productivity suffers and wages are low. All this hurts export potential of India. The apparel exports opportunity passed India by due to this problem! So let firms grow, and compete.

• History's lesson: The 2002-2010 GDP growth boom of India was driven by exports, that grew 18% year on year for 8 years (twice GDP rate!). That was the golden era of globalisation. Today, India has to work harder, and must adopt these measures -

1. Avoid import-substitution trap (and accept that import tariff = export tax)
2. Ensure that rupee remains competitive (more appreciation harms exports)
3. Boost free trade agreements and trade facilitation
4. Build AEZs where factors of production are less distored [AEZ - Autonomous Employment Zones]
5. Factor market reforms are useful for long-term but in short-term, India needs AEZs

• Emptying out agriculture: As exports rise, more jobs in labour-intensive manufacturing will take workers away from agriculture (Lewisian transformation). At the present rate, if this movement doesn't happen, the gulf between per capita incomes across agri, industry and services will widen. 
• The magic formula: Irrespective of the 2020 pandemic and the technological disruptions worldwide, the magic formula for India remains - exploit comparative advantage, boost productivity by structural change, improve allocative efficiency.

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