Amir Ullah Khan and Ramachandra Raju Bhupathiraju
The Indian economy has been sliding since 2016, immediately after demonetisation. GST made life even more difficult for small and medium enterprises and job losses started mounting. By December 2019, the economy was in poor shape. Growth had declined to its worst in two decades and unemployment was at its highest in the last five decades. This year, the Corona pandemic hit India really hard, soon after a draconian lockdown was implemented without preparation, notice and a roadmap. Since then the economy has been in a tailspin and is reported to have contracted by nearly 24%. The question everyone is asking now is if the worst is over and if the economy now would bounce back.
In August 2020, Mc Kinsey India came out with its Turning-Point report where it shows that India will take at least two years to even get back to its pre Covid levels. For this, it is iterative that India should have an “economic agenda to spur growth and jobs”. The report point out six broad areas:
- A) India needs rapid GDP growth to create at least 90 million nonfarm jobs by 2030.
- B) Three ‘growth boosters’ can spur $2.5 trillion of economic value and 30 per cent of nonfarm jobs.
- C) To capture frontier opportunities, India needs to triple its number of large firms.
- D) Targeted reform can raise productivity and competitiveness.
- E) Financial-sector reforms can help India meet its $2.4 trillion capital requirement.
- F) The central government, states, and business sector will need to act together.
1) India needs rapid GDP growth to create at least 90 million nonfarm jobs by 2030:
With the new 60 million new workers entering the workforce by 2030, India will need to have these jobs ready to take advantage of the period of the demographic dividend that it entered in 2018. The difference of the 30 million jobs would be to accommodate the farm workers that would move to-non-farm work. To accommodate this creation of new jobs they say that the economy would need to grow sustainably between 8-8.5% annually.
2) Three ‘growth boosters’ can spur $2.5 trillion of economic value and 30 percent of nonfarm jobs:
Growth booster 1: Global hubs serving India and the world. It suggests that efforts be made to make supply chains more resilient. Growth booster 2: Efficiency engines for India’s competitiveness.
The way to achieve this, the report says, is to reduce “inefficiency in areas that underpin a competitive economy: power, logistics, financial services, automation, and government services. In each case, opportunities for value-creating market-based models could emerge, generating about $865 billion in economic value by 2030.”
New ways of living and working. Exploring “Safer, higher-quality urban environments, cleaner air and water, more convenience-based services, and more independent work in the new ideas-based economy are all opportunities to create millions of productive jobs in service sectors”.
3) To capture frontier opportunities, India needs to triple its number of large firms:
More number of middle and large size businesses are suggested by the report to rapidly increase business volumes. Aiding the progression of SMEs to their next steps of business growth is one way the report says Indian could achieve this.
4) Six areas of targeted reform can raise productivity and competitiveness that the report speaks of are:
- A) Introduce sector-specific policies to raise productivity in manufacturing, real estate, agriculture and food processing, retail, and healthcare.
- B) Unlock land supply to reduce the cost of residential and industrial land use.
- C) Create flexible labour markets with stronger social safety nets and more portable benefits.
- D) Reduce commercial and industrial (C&I) power tariffs through new business models in power distribution.
- E) Monetize government-owned assets and increase efficiency through privatization of more than 30 state-owned enterprises (SOEs).
- F) Improve the ease and reduce the cost of doing business.
5) Financial-sector reforms can help India meet its $2.4 trillion capital requirement:
The report estimates the total capital requirement for this reform agenda at about $2.4 trillion in 2030, compared with about $865 billion in fiscal year 2020; and that small and midsize companies will need access to more than $800 billion in capital in 2030. To achieve the reforms the report calls for A) Channeling more household savings to capital markets, B) Reducing credit intermediation costs, C) Streamlining public finances to allocate capital more efficiently.
6) The central government, states, and business sector will need to act together.
Reforms of legal and policy nature are what the report calls are key enablers to the suggested means of growth. 60% of the reforms suggested in the report are to be done by the state governments. 40% of the reforms are to be done by the central government. A third of the 60% of the reforms that are to be done by the states involve working with the central government.
The impact of COVID19 on the economy has been noted to have inflected setbacks of probably taking until 2023 to get back to the same levels of financial activity to pre-pandemic levels. This report is yet another reminder of India’s precarious economic situation. The falling production levels, stagnation in consumption and a farm sector that cannot bear the burden of unemployment anymore, all stand in the way of a growing economy. The worst is not over yet for India clearly and if the numbers of those testing positive continues to go up, the possibility of production levels returning to normal will continue to recede.
On top of all this, the government is obstinately pushing agricultural reforms without taking either the farmer or the opposition in confidence. Even if the amendments proposed are progressive, as some analysts point out, pushing these changes through brutally, in times of crisis is never a good idea. The central government is coming across as a big bully, acting in pure self-interest, impoverishing state governments and centralising all aspects of governance, even those like education and agriculture that are best managed by at the state and by the local governments
Amir Ullah Khan and Ramachandra Raju Bhupathiraju are researchers at the CRIDP
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