Originally Published 2012-12-18 00:00:00 Published on Dec 18, 2012
To become a major industrial nation by 2030, as predicted by a Washington think-tank recently, India will require many changes in the economic structure of the country in which efficient and viable small and medium enterprises coexist with the big factory-based organised sector and with a middle class bigger than that in the US and Europe combined, to support it with their demand.
Need to change economic structure to sustain high industrial growth
The good news is that industrial growth is picking up - it was at 8.2 per cent in October 2012. But it has to be sustained and should not be just a blip or a ’one off’ phenomenon. Meanwhile, exports have been shrinking and registering only 4.1 per cent growth which is a cause for concern, especially when the current account deficit is at 3.8 per cent, higher than it was at the time of the economic crisis of 1991. Imports have been rising at a faster rate than exports and that is why higher export growth would be important to pay for the rising imports. In oil imports - India has to import 80 per cent of its needs. Besides this, huge amounts of gold are also being imported. Some of the demand is because of the enormous amount of black money circulating in the economy, but even an average middle class person is thinking of investing in gold these days because of high inflation.

Higher industrial growth will create more jobs no doubt, especially if it is being fuelled by domestic demand. The Indian economy, comprising 1.2 billion people, is big enough to promote industrial and services growth. Both China and India are the biggest economies in Asia, and on their growth are dependent all the smaller economies in the region. If India is not doing well, other neighbouring countries will also be pulled down. Obviously, the domestic demand is being fuelled by income generation from the public and private sectors in the country and domestic consumption accounts for 60 per cent of the demand.

India is thus big enough to be self-sufficient but we need foreign exchange for technology and infrastructure even though China has more or less officially declared that it will no longer be an export-driven economy. India is less dependent on exports than China as they comprise around 30 per cent of the GDP. Unfortunately, both export growth and consumption growth have slowed down in recent times. Unless the domestic demand picks up, high industrial growth cannot be sustained.

China has done a lot to raise and sustain its industrial growth. Its network of infrastructure - roads, power stations, water availability, etc - has been revamped.

In India we need to spend $1.3 trillion on infrastructure. We are unable to compete with China in manufactured goods on two accounts - availability of cheap power and cheap credit. No country can compete with China because of these two reasons and also the availability of skilled and disciplined labour force. But the Chinese have learnt that one big jolt to the industrialised countries’ demand due to an economic downturn can lead to serious problems. So, now they are concentrating on increasing the domestic demand more which basically comes from increasing the purchasing power and disposable incomes of the people. This in turn comes from creating more jobs, especially in the construction and social sectors like medical services.

For India to have sustained high industrial growth may take some time because it would mean completely taming inflation. The middle class no doubt is growing and has power to spend on goods and services, but only if they feel secure about the future inflationary trends. If inflation can be brought down, many people would want more manufactured goods. But, unfortunately, inflation has been high, specially food inflation, which leaves very little disposable income for other goods. Also 30 per cent of the population below the poverty line has to be brought out of poverty.

For the manufacturing sector to get a boost, lower interest rates would be important. The lower interest rate will also raise the demand for consumer durables. If the manufacturing sector can grow fast it would provide jobs to the youth. Most industrialists, however, complain today of the shortage of trained labour and lack of a steady policy framework that is predictable and transparent. More technical and science training has to be given to job-seekers. Corruption also plays an important negative role because much money goes towards bribing officials and other functionaries for permission and certificates. Delays are expensive and increase costs. It should be noted that recently Transparency International has rated India at the 94th position among 174 countries.

India can, however, become a manufacturing giant in the future because the diverse talents of Indians which are no less than those of the Chinese but the physical infrastructural constraints stand in the way in India, especially for small and medium-scale enterprises. The SMEs have to be encouraged by making credit, power and water easily available to them as they comprise 45 per cent of India’s manufacturing output.

Manufacturing growth promoting policies, however, have to be environment-friendly, otherwise it might lead to pollution problems like in China. No matter how hard it is trying, the pollution problem is still around. Thus, the emphasis on ’green growth’ is vital, and more recyclable natural materials should be used as well as environment-friendly technology.

Connectivity between villages and towns would improve the incomes of the rural population and the demand for industrial goods. This has already been achieved in China which has spent a lot on rural infrastructure which has helped rural areas to urbanise. One village is being lost every day in China due to the rapid pace of urbanisation. We shall also face the same problem in the future when most of India will be urbanised, but if it leads to higher incomes for the rural population, it should be encouraged.

Gandhiji, however, did not visualise rapid urbanisation but rural industrialisation in which rural industries that do not require much investment would employ the surplus rural population. But to succeed, India would need to bridge the power deficit of 13.5 per cent and electrify the 80,000 villages that are without power. Regular availability of power will create the incomes for home-based industries in rural areas. Most people in the villages work in small enterprises and the use of motorised tools would enhance their productivity. But without power, they are rendered uncompetitive because of the high cost of production.

To become a major industrial nation by 2030, as predicted by a Washington think-tank recently, India will require many changes in the economic structure of the country in which efficient and viable small and medium enterprises coexist with the big factory-based organised sector and with a middle class bigger than that in the US and Europe combined, to support it with their demand. Our population will be among the youngest in the world by 2030 with the median age increasing from 26 to 32 whereas other big countries will have to deal with an ageing population which is less productive.

(The writer is a Senior Fellow at Observer Research Foundation)

Courtesy: The Tribune, December 18, 2012

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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