The economic reforms — looking back to look ahead

Note4Students

From UPSC perspective, the following things are important :

Prelims level : HRC

Mains level : Paper 3- Reforms to deal with the issues after 1991 reforms

Context

The economic reforms, so far, have been more focused on the technical nature of the economy than the system, process and people. The fundamentals need to be set right with a focus on human capital, technology readiness and productivity.

Benefits and limits of economic reforms of 1991

  • Economic reforms of 1991 — and from time to time, subsequent interjections for liberalisation of economy and trade — have enabled some credible gains for the country.
  • Benefits: Foreign exchange reserves (over $600 billion), sustained manufacturing contribution in GDP, increased share in global exports (from 0.6% in the 1990s to 1.8%), robust software exports, and sustained economic growth in the range of 6%-8% are clear indicators of its success.
  • Limits: Primary drivers of the economy — human capital, technology readiness, productivity, disposable income, capital expenditure, process innovation in setting up businesses, and institutional capacity — have not got enough recognition.

Issues affecting the Indian economy

1) Lack of Human resource capital formation

  • The human resource capital (HRC) formation, a good determinant of labour productivity, has been missing over the entire period of reforms.
  • The HRC rank for India stands at 103; Sri Lanka is at 70, China at 34, and South Korea at 27, as brought out by the Global Human Capital Report, 2017.
  • Factors responsible for low HRC: The lack of quality education, low skilled manpower, and inadequacies in basic health care have resulted in low HRC.

2) Low disposable income

  • The World Bank database on GDP for 2019 indicates the low per capita GDP in India, at $2,104 (at $6,997 in PPP terms, ranked 125th globally) against the world average of $11,429 (at $17,678 in PPP terms).
  • Low per capita GDP has direct links to low per capita family income.
  • Low wages: The report by Deloitte (Global Manufacturing Competitiveness Index in 2016) reflects that the hourly wages in India have been $1.7; they are $38, $24, $20.7, and $3.3 for the United States, Japan, South Korea, and China, respectively.
  • Low wages have a direct bearing on the disposable income of families, affecting demand.

3) Low R&D expenditure

  • India’s research and development expenditure stand at 0.8% of GDP, for other fast-emerging economies such as South Korea, it is (4.5%), China (2.1%), and Taiwan (3.3%).
  • Reduced technology readiness: This low expenditure is resulting in lower capacity for innovation in technologies and reduced ‘technology readiness’, especially for manufacturing.

4) Low labour productivity: Result of low HRC and lack of technology readiness

  • The lack of HRC and low technology readiness have impacted labour productivity adversely.
  • World Bank publication of 2018 indicates that India’s labour productivity in manufacturing is less than 10% of the advanced economies including Germany and South Korea, and is about 40% of China.
  • Low productivity has unfavourable consequences for competitiveness, manufacturing growth, exports and economic growth.

5) Long time and more cost in setting up a business

  • There are difficulties in acquiring land for businesses, inefficient utilization of economic infrastructure, and in providing business services.
  • This results in a long time and more cost in setting up enterprises, resulting in a loss of creative energy of entrepreneurs.

Way forward

  • Investment in human capital and technology: First, to attract large investment in manufacturing and advanced services, at a basic level, investment in human capital and technology is a prerequisite.
  • Technology readiness: The reports by McKinsey and the World Economic Forum on advanced manufacturing suggest that Industry 4.0 will be defined by new technologies such as robotics, 3-D printing, artificial intelligence (AI), the Internet of things (IoT), etc.
  • Consequently, efforts for technology readiness are very essential to stay competitive.
  • It demands enhancing public research and development expenditure to 2% of GDP over the next three years.
  • Strategies to enhance per capita income: There is a need to work on strategies to enhance per capita income by more wages for workers through higher skills and enhancing minimum wages, besides improving the social security net.
  • Promote business-centric approach: Using insights from the work of Nobel laureate (1993) Douglass C. North, it is necessary to build the capacity of public institutions to create a good environment for business and industry.
  • Policy reforms should lay an emphasis on process innovation and promote a business-centric approach to create a friendly ecosystem and for efficient internal supply chain management to integrate with the global supply chain.
  • Innovative nature in public policymaking: The future of the economy should be particularly viewed in the backdrop of a significant and irreversible shift in terms of reliance on the global supply chain as a result of the knowledge-intensive nature of businesses and exponential effects caused by advanced technologies under Industry 4.0, since the 2010s.
  • Therefore, the strategies adopted since the 1990s till now may not ensure adequate returns and call for innovative approaches in public policymaking.

Consider the question “The economic reforms, so far, have been more focussed on the technical nature of the economy than the system. This resulted in fundamental deficiencies. Suggest the way forward to deal with these deficiencies.”

Conclusion

In sum, it necessitates a systemic approach for policy reforms for setting the economic fundamentals right and to achieve higher growth.

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