India’s moment of strong macroeconomic performance has to be translated into measures that can address some of the problems nagging the economy for long. The list of such problems would indeed be long, and would vary depending on perspectives. For some, it is sustainability or environment, and for others, it is equity, inequality and efficiency. But more can be done to reduce some of these persistent problems whilst economic growth is strong. The satisfactory macroeconomic performance should also not take away attention from some of the economy?s structural weaknesses.
Take the case of a satisfactory measure of macroeconomic performance in our external balances. The current account deficit in 2006-07 was just about $10 billion. The deficit on merchandise trade was $40 billion, according to DGCIS data, and much larger according to the RBI?s balance of payments data. The latter reflects actual receipts and payments. This merchandise trade deficit is huge relative to GDP. If the current account deficit is about 1% of GDP, the trade deficit would be 4-5% of GDP. Even a 20% growth in merchandise exports for five years in a row could not help keep the deficit any lower. High oil prices have not helped either.
Should we worry less about the trade deficit in the context of a rising surplus from invisibles? The rising export earnings from software, BPO and KPO, as well as remittances, have helped offset the deficit in trade in goods. Indeed, it would not make sense to think of a trade deficit in pulses and surplus in steel. Why, then, distinguish between software and petroleum? After all, oil rich countries of West Asia earn most of their export earnings from a single sector, oil.
One of the concerns on the emerging pattern of trade would be the vulnerability that specialisation entails in an unstable world. The greater reliance on services such as software for export earnings may not necessarily mean more vulnerability or volatility. In the modern economy, software is as essential as petroleum or energy. The financial and government sectors are dependent on IT and ITeS in developed countries and beginning to be so in developing countries. Therefore, even in an uncertain world, demand for software services is likely to remain undiminished or at least not as volatile as, say, vanilla or tourism.
A more important concern is the set of reasons which is inducing this pattern of trade. If the trade composition we see is a result of true comparative advantage, which admittedly is unlikely, then it implies that we are becoming increasingly competitive in highly skilled services and less globally competitive in less-skilled markets. The rising exports of services would then be attracting more and more scarce resources away from the production of other commodities. If markets were perfect or efficient, again, this would only be a passing problem. But is it? Is this emerging pattern of trade and growth leaving some behind so badly that they are unable to enter this virtuous circle of growth? Growth passing certain sectors by would leave them as islands of low productivity, low skills and low income. At this moment, there is significant growth in nearly every sector of the economy, barring perhaps agriculture, which is failing to attract resources. We should also be concerned if resources are shying away even from the input sectors of agriculture.
Overall, one reason that makes the scarcity of financial resources less acute than in the past is the access to foreign capital. Foreign capital, as any other private capital, is more likely to flow into the sectors that are likely to give better and faster returns. Emerging markets provide many such opportunities. And there is a large amount of global private capital that is seeking investment opportunities. The problem, then, is not of the sectors that are growing and are competitive, but of the need to focus on sectors that are lagging and the implications of this. An implication of the non-competitive sectors is that mobile resources will move out of these sectors, hastening their decline. These end up as islands of low income.
There is perhaps no simple or easy solution to these problems. The window of opportunity provided by India?s good macroeconomic performance should be used to make a dent on structural weaknesses. Some of the policy choices open to addressing these lie in improving the opportunities for mobility of resources. It is not merely movement of resources into a declining sector that policies should enable, but also the exit of resources from a sector. After all, more foreign capital came into the country once fears on the exit of capital were mollified. Of course, mobility alone may not lead to infusion of capital or technology. In the case of infrastructure, relaxing entry norms has not been enough to attract investments. Returns would have to be seen to be remunerative to attract resources. There is a need for greater effort to attract productive resources into the lagging sectors and regions whilst resources are available.
?Shashanka Bhide is senior Research Counsellor, NCAER. These are his personal views