"As the fifth phase of voting kicks in, there is a sense of both anguish and anticipation in the air. The main issues the electorate is voting on are corruption and mal-governance, policy indecision, inflation and slowing growth. But no matter who is voted to the helm, there are a number of economic challenges that the country's next Government has to face.
Inflation: Price rise has been the single most troubling issue for UPA-II, with prices of fuel and essential items skyrocketing and cutting into the budget of the common man. From 2009 to 2014, inflation has remained stubbornly high at 10.3 per cent per annum, compared to 3.8 per cent between 2000 and 2008, when the NDA and UPA-I shared four years each in power. While the impact of global factors on prices of food in India cannot be discounted, two facts weaken the 'external factor' argument. Not only is India's food economy largely dependent on domestic production, but a recent moderation of prices internationally has not been associated with decreasing inflation in India. And even though India maintains one of the highest interest rates in the world, monetary policy solutions haven't quite helped. The problem is structural and the next Government has its task cut out. There is substantial waste of agricultural produce that India encounters. About 40 per cent of the total agricultural produce rots even before it reaches the market. Much of this loss is constituted by fruits and vegetables, the primary driver of the recent bout of food inflation. The call for setting up advanced supply chain logistics including cold storage facilities is loud and clear. In what is a governance issue that the next Union Government (with the support of States) has to tackle, retail inflation is also attributable to the menace of middlemen and artificial price rise through hoarding. Checking corruption and using technology for the delivery of public goods/subsidies, are in order.
Infrastructure: The importance of quality infrastructure for sustained economic growth and development is well-known. India's physical infrastructure is grossly under-supplied, particularly in the transport and power sectors. With 60 per cent of freight and 85 per cent of passenger traffic moving by roads and highways, road connectivity forms a crucial subset of infrastructure. Improved physical connectivity impacts per capita GDP levels. States like Bihar and Odisha which perform badly in infrastructure also have the highest head count ratio of poverty. Improving physical infrastructure is a clear policy imperative. Then there is electricity. In 2012-2013, power shortages accounted for an estimated GDP loss of $68 billion. Although India has an installed power generation capacity of 225 GW against a demand of 135 GW, it faced a nine per cent power deficit in 2013. A large part of this is due to distribution and transmission losses and power theft. While political will and prudent governance will help tackle the latter, performance on the transmission front needs to be boosted so as not to deter investments in the manufacturing sector. Improving infrastructure alone could add 1.1 per cent to India's GDP growth rate.
Unemployment: At a time when 12 million people enter the Indian workforce annually, growth must be accompanied by the creation of jobs. To generate large-scale employment, there is a need to boost the manufacturing sector, not necessarily low-skilled, but certainly labour-intensive. A lasting commitment towards value-added production is essential. Riding the 'cheap labour' bandwagon isn't the best way to employ the labour surplus. An extensive skills programme and vocational education is desirable.
Simultaneously, labour laws must be reformed because no matter how labour-friendly the existing law is in terms of intent, firms bypass the same by employing contractual labour, not overseen by the regulatory architecture. Institutionalising the vast informal sector and providing rights and protection to the same should be a priority. While the UPA2's record looks better if one considers that the unemployment rate fell from 8.4 per cent in 2004-2005 to 5.6 per cent in 2011-2012, jobs that were added were low-quality, indicating both underemployment and hazardous employment. The dominant sector in India in terms of contribution to the GDP, the services sector, is not particularly employment intensive and also has a skill bias. The next Government must create jobs if it wants to avoid a demographic disaster and this will require a boost to manufacturing.
Trade: There is a pressing need to address the trade deficit (which reached $191 billion last fiscal) by dealing with market access issues vis-à-vis China, diversifying export markets, and moving up the value chain. The implementation of the Foreign Trade Policy 2014-2019 will be keenly watched. It needs to focus on job creation and export-led growth. Mr Narendra Modi's speeches have often betrayed aspirations of making India a commercial leader and trumping China. For that, India needs to ramp up its share in global trade.
Finally, economic policies should be amply geared to tackle different forms of existing disparities: Rural-urban, poor-rich, and inequalities along gender, religion and caste lines. No Government can tread the path of a single-minded focus on GDP growth. But wanton populism is no answer either, as the widening fiscal deficit must be trimmed, which, despite the clever accounting tricks adopted by the Finance Minister in the interim Budget presented in February, stood at 4.6 per cent of the GDP. In this context, wasteful spending on doles should be pruned without compromising on the poor. Reviving the economy will command smart thinking and bold decision-making.
(Geethanjali Nataraj is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy: Pioneer, April 18, 2014
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