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Column : Neither America nor Anna ...

Aug 23 2011, 00:35 IST
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SummaryThe slow momentum of the US recovery and the instability in the global markets have now added to the worries about the prospects of the Indian economy.

The slow momentum of the US recovery and the instability in the global markets have now added to the worries about the prospects of the Indian economy. With the threat of a double-dip looming larger, even as India’s quarterly growth rates continue to slip in response to the efforts to nip inflation by raising interest rates, the GDP growth estimates have already been lowered closer to 8%. The new worry is that a global slowdown will not only hit exports but also foreign investments—which are important props that boost overall growth—and further delay any recovery.

Such pessimism may look justified, given that the external sector has been one of the major areas where India has registered outstanding success, with buoyant growth of trade in goods and services and larger investments adding to overall growth in demand and output. But such an approach ignores the substantial potential of the domestic economy where there is still a sizeable leeway for boosting productivity and accelerating growth.

This has been pointed out by many studies, including that by the McKinsey Global Institute, which showed a decade ago (in 2001) that India could step up GDP growth to 10% if it can nibble away at the three major barriers to growth, namely the multiplicity of regulations that govern prices and output in product markets, the distortions in the land markets, and the government ownership of business.

The McKinsey study had, in fact, even estimated that these three barriers together pull down GDP growth by as much as 4%, which is much more substantial than the restraints imposed by other structural barriers like inflexible labour market and poor transport infrastructure which together pulls down GDP growth by half a percentage point. So, an innovative reforms agenda that further accelerates growth can help neutralise at least some of the impact of a dip in growth in the developed economies and global markets.

Top on the list of regulatory barriers identified by the study as damaging to competition and productivity growth is the inequitable regulation. Examples of such regulations are the tilted rules that favour incumbents in the power sector, civil aviation, oil, fertiliser and coal industries. Currently, power sector reforms, which incentivised large private sector sector investments in generation, are in danger of being stymied by the slow reforms in the distribution sector, especially the failure to allow open access to new entrants. The result is that consumers continue to be

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