Monday, 27 May 2013

UPA model has slowed down both growth and inclusiveness

In his speech at the 46th annual meeting of the Asian Development Bank (ADB) at Greater Noida, Finance Minister P Chidambaram declared, “India’s potential growth rate is 8 percent plus and we cannot afford to become complacent and sit back”.
Sure, one can’t. But will the solution he offers – ‘focus on inclusive growth’ – get India back to the 8 percent plus levels that it once reached (and crossed briefly)?
This is not to argue that India must pursue an economic model that benefits only a small elite (as it had been doing in the years before 1991). Growth needs to be, as he puts it in the same speech, ‘broad-based’.
Unfortunately, the ‘inclusive growth’ model that the United Progressive Alliance (UPA) has been following has all the potential of depressing growth and, only the most fanatical leftist will argue that inclusion can be achieved without growth. Employment guarantee and food security legislations may be inclusive in the short run but have the potential of harming growth in the long run.
If Chidambaram is looking for clues to solve the growth-inclusion challenge, he should perhaps go through a background paper that ADB prepared for the annual meeting – Beyond Factory Asia: Fuelling Growth in a Changing World.
Factory Asia is a model that ADB describes as one of “regional production networks connecting factories in different Asian economies, producing parts and components that are then assembled, with the final product shipped largely to advanced economies”. This model, adopted by China and the southeast Asian countries, helped put these economies on a high growth path.
There’s an Asian Century on the horizon, the monograph says, based on the rapid rise of its manufacturing sector. India isn’t a part of Factory Asia – since its manufacturing is more focused on the domestic market – but is on its periphery and would perhaps do well to follow that path, the paper suggests.
Circumstances, however, have changed. The Factory Asia model faces new challenges: the weak outlook for the advanced economies which provided much of the markets for the Factory Asia countries; growing protectionism in these markets; rising production costs (supply chain disruptions, wage increases, volatile exchange rates, skill shortages) are eating into the price advantage Asian manufacturing enjoyed.
But these issues and challenges can be addressed and India (which the paper puts among the developing Asian economies) could adopt and be part of a New Factory Asia model.
With consumer demand shifting from developed to emerging markets, developing Asian economies should tap into their own domestic demand as well as regional markets, fostering free trade and pulling in manufacturing investment by improving the investment climate. They need to build strong, competitive brands by ensuring globally compatible labour and safety standards. The private sector should be encouraged and helped to move up the manufacturing value chain, to make up for the narrowing wage differential.
Focusing on skill development is also important and necessary, given the increasing sophistication of manufacturing processes and the shrinking of the labour pool in some countries. Moreover, it is also important to encourage small and medium enterprises, which can help produce intermediate goods and provide supporting services.
Chidambaram’s speech had the usual laundry list of steps the government is taking to put the economy on track – the focus on infrastructure, investments in manufacturing, fiscal consolidation, the Cabinet Committee on Investment, easing foreign direct investment in hitherto taboo sectors, skill development programme, among a host of other things which we all know are happening only on paper.
There will be some who argue that the prescriptions in the monograph may not be entirely suitable to India. Sure, there is no cookie cutter model for development.
Recent census reports have shown that the number of farmers has declined in 10 years, while that of agricultural labour has increased. But with pressure on land growing, there won’t be enough employment for all of them. The service sector will require skills that farm labourers may not have. NREGA is not the solution. The answer, then, is to give manufacturing a huge fillip.
That’s why it would be good for this government and for any other government in the future to take these recommendations seriously.

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