The World Bank has stated that India's growth rate in 2010 could surpass China's for the first time in history.
What critical reforms remain to keep growth on track?
Key Points
• India managed to achieve an average of 9% growth over five years before the economic crisis. There is no reason to believe that its economy is not capable of returning to that level of growth.
• To sustain growth at 9% and above, the country must address its skills shortage, especially at the mid-level, if it is to maintain its competitiveness and attract more investment.
• India must focus on how to reform the legal system to make it more efficient through better implementation and enforcement of laws and a swifter judicial process.
• Effective models of public-private partnerships are needed to address critical bottlenecks to higher growth and efficiency such as infrastructure and the delivery of education and skills training, especially in rural areas.
Synopsis
For five years before the global financial crisis, India had averaged 9% growth. In the 2008-2009 fiscal year, the Indian economy grew by 6.7% and is set to achieve 7% growth next year, assuming a good monsoon season. In the medium term, India is likely to once again reach 8-9% growth.
There are, however, inherent constraints on the supply side that India must address to sustain 9%, plus growth over the medium and long term. Infrastructure is one such inhibiting factor. Another is the lack of skilled workers, especially at the mid-level. To address this deficit will require investment in education to widen access especially in rural areas and improve the quality of schools. A lot needs to be done in higher education. The government is taking a broad-based approach to this problem and is working together with industry to ensure that skills development aligns with the needs of business.
If India is able to adequately address its skills shortage, it is likely to attract more foreign direct investment that will drive new growth. Another area in need of reform is the legal system. The perception is that, while India has good laws on its books and globally comparable legal frameworks, it lacks efficient implementation and adequate law enforcement. The judicial process must be streamlined. It is important to increase transparency standards and to improve the quality of public- and private-sector governance.
To adequately address the constraints to growth from deficiencies in infrastructure, education, health care and the legal system, the Indian government will need to work together with the private sector. The right models of public-private partnership have to be adopted to ensure that they work effectively and achieve results.
Education is a particular concern since many young people in rural areas do not have access to schools. Private-sector education is a controversial issue in India, but often these are the only options available. Yet there is no reason that the government should not be able to provide quality public education. Intense discussions are now under way in India to determine what public-private partnership arrangements would be appropriate in the education sector.
Promoting inclusive growth must be the basis of government action. India’s democratic system means that there are often strenuous debates over policies; this should be viewed not as a deficiency but as an advantage. The airing of disagreements ensures that consensus, once reached, is sustainable and policies may then be implemented with the support of all sectors of society.
The dedication to inclusive growth also entails focusing on how to improve the lives of those at the bottom of the pyramid, by providing them with services that would enable them to be more productive and entrepreneurial. While the financial services sector is regarded as a major success story in India, less than 20% of Indians have access to any kind of credit. A large number of citizens do not have bank accounts. It is critical to find ways to bring banking and financial services to these people. To achieve this, new models of banking that employ mobile technology have to be explored.
On the trade front, India is pursuing both a multilateral and regional strategy, working for fair ways to conclude the Doha Round and negotiating regional and bilateral free trade agreements. It is in the midst of implementing a recently signed free trade agreement with ASEAN. Regional trade and cooperation within South Asia, however, remains weak.
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