View: India has to fix structural problems because of the risk of growing old before growing rich


There is a reason for India’s policymakers to get their act together on the economy and reverse the slowdown at the earliest, apart from the electoral jolts the ruling party got in Haryana and Maharashtra, to drive home the point that nationalist slogans are not enough to win votes.

India runs the risk of growing old before it grows rich, and has a 10-year window to grow really fast, put in place the institutions required to sustain growth before the demographic dividend begins to dissipate. Economist Rathin Roy shook things up in May: he said India runs the risk of getting caught in the middleincome trap, of growth losing momentum because of its narrow social base, resulting in capping per-capita incomes at $12,000. That was before the first quarter growth turned out to be a measly 5%.

The economic news since has been uniformly dismal and few analysts now expect growth this fiscal to be even close to 6%. Credit has not been flowing to the commercial sector and investment stubbornly stays well below 30% of GDP. There are layoffs, suspended production at plants and discounts galore.


Demographic transition entails a stage in which the birth rate falls and, even though the death rate also falls, the proportion of the young and the old — who do not produce incomes and depend, directly or through government transfers, on the earnings of the working population — is small in relation to the share of the working population. This bulge in the working-age population will raise overall output, even with stagnant output per worker.

Since workers can afford to save more, because they have to support fewer dependents, the economy would have a larger volume of savings at its disposal to sustain larger rates of investment. This would boost growth further. A third component of this so-called demographic dividend is the addition to the workforce of women, previously inhibited from working.

To Grow Rich Later…

As the years go by, productive workers would turn old and roll out of the workforce, smaller cohorts — birth rates had fallen — would take their place to generate the earnings to feed themselves and the growing dependent population, constituted mostly by the non-working elderly.

The government recently told Parliament that by 2050, there would be 34 crore people over 60 years of age, about a fifth of the population. The population in the age group 20-59 is expected to peak by 2041, reaching 59%. But this does not mean that India can afford to dawdle in the present and pick up pace in a decade or so.

The nature of manufacturing and services is changing. Many traditional low-skilled jobs are disappearing. Many jobs considered skilled, such as in the auto-component industry, would disappear, thanks to technological change, such as displacement of the internal combustion engine by electric motors.

Before this change takes root, India has to equip its young to keep learning throughout their lives and arrange for perpetual retraining. This calls for a huge increase in resources and governance capacity now. The demographic dividend materialises when the economy’s institutions generate jobs for those seeking work.

In the absence of education, people would find it difficult to get skilled. In the absence of skills, young people would not get jobs. Their energies would be wasted and, worse, channelled into drugs, crime, lynch mobs and sectarian strife. Sounds familiar?

India Must Grow Fast Now

The government has come out with some policy measures: tax cuts for business and a financing package for real estate. Aligning India’s tax rates with those of Asian competitors is good policy in general, but will do little to boost investment or demand. And stalled real estate calls for massive buyouts leading to swift completion of the projects, rather than offer of some finance to crippled project developers.

Public sector banks have been merged, banking reform promised and followed up with an order to organise loan melas, presumably to boost demand. These will address short-term factors, not structural ones.

India needs a vibrant market for corporate debt and universal financial inclusion. Agriculture must reconfigure to align crops with the agroclimatic zones most suited for them and attain globally competitive levels of efficiency, tested by global trade. Incentives that misalign crops with suitable regions or induce excess production, as with rice, wheat and sugar, must go.

The power sector must become viable by users paying realistic user charges. This calls for political courage. Industry must make profits from doing efficient business, not diversion of funds from project costs.

This calls for reform of political funding, to make it transparent and accountable, so that politicians no longer dependent on covert funding by industry can regulate their working. India must invest in public health, public education and public housing. And spend at least 2% of GDP on defence, and spend it well, to maintain strategic autonomy. Fiscal capacity has to go up, with diligent tracking of GST audit trails.

And all these must happen now. Time lost in blame games will irredeemably undermine future prosperity.

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