India’s turning point for the economy?

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September 17, 2020 5:20 AM

Covid-19 is still a challenge, but there is no excuse now for the govt not to achieve a turning point for the nation’s economy

India’s “missing middle” in the firm size distribution has been recognised for decades but has yet to be remedied.India’s “missing middle” in the firm size distribution has been recognised for decades but has yet to be remedied.

India’s Turning Point is the title of a new report from McKinsey Global Institute, the think-tank type unit of the massive global consulting company. The subtitle of the report is “An economic agenda to spur growth and jobs”. With over a dozen people having worked directly on the report, along with a host of distinguished advisers, the book-length document deserves serious attention. At the same time, there is nothing completely new in the report for Indian economy researchers or policymakers. One can find the arguments drawn from reports of the government and RBI committees, economic surveys of multiple chief economic advisers, and so on. Nor are the issues and recommendations matters of political ideology, at least in terms of first-order thinking; although any change, good or bad, has distributional consequences, and managing the effects on winners and losers is ultimately a matter of politics.

If nothing is very new in the report, are there some key items that are worthy of note? To begin with, the following three interrelated observations struck me as particularly useful, if one is to begin tackling all the different areas that need policy attention. First, the report highlights the relative paucity of medium-sized firms that can bring more competition to markets dominated by large firms, as well as raising productivity and generating employment. India’s “missing middle” in the firm size distribution has been recognised for decades but has yet to be remedied.

One of the reasons for this failure to grow more firms is the extreme dysfunction of its financial intermediation. India desperately needs to improve capital markets and financial intermediation, to bring down the high cost of finance, and remove credit constraints, especially for smaller firms. Numerous technological and regulatory innovations are needed. The report also reminds us of the need to tap household savings more effectively, and to channel them more into productive investment. References to RBI’s Ramadorai Committee and academic work by Ila Patnaik and Radhika Pandey on this topic are welcome examples of how the McKinsey report builds on a range of previous analyses.

A third noteworthy feature of the report is its emphasis on state-level reforms and regions and clusters within states. Maps of Maharashtra, Uttar Pradesh and Odisha on pages 143-145 of the report are examples of how politicians and policymakers can be helped to visualise the economic geography of their constituencies and begin to develop coordinated plans and prioritisations. Of course, such exercises are just a bare beginning to what needs to done, and state-level policymakers need to have very detailed analyses of how to overcome obstacles and inertia, especially in an environment where there are severe fiscal constraints.

Beyond the three main themes I have highlighted, there are numerous other recommendations, and each of the above three is itself an umbrella for multiple reform possibilities. One can use the McKinsey report’s simple visualisations to more easily identify very specific issues that sometimes get submerged. For example, if one looks at the comparative chart for the components of the very broad and heterogeneous category of “ease of doing business,” on p. 116 of the report, it suggests that delayed contract enforcement is an enormous obstacle. This, of course, leads to an enormous area where reform has completely failed to take hold—the ability of the judicial system to effectively and efficiently deal with economic matters such as property and contract disputes. This has a bearing on many obvious areas such as land use, but it is the root cause of some fundamental problems in small firm finance, where smaller firms do not get paid in time, or at all, by large firms or governments who are their customers. These are enormous hidden costs of a judicial system that is ineffective and unequal in its impacts in the economic sphere.

Readers may find it useful to compare the above discussion with what I provided in my last column. Issues of distribution and inclusiveness are perhaps the area where the McKinsey report is weakest. This is a perennial tension in Indian economic thinking: the possibilities envisioned by those who have been well educated and have succeeded on a global playing field, and what is available to the average Indian. The problem is that visions of aggregate growth and modernisation and global competitiveness are ultimately viewed as adversarial to, or neglectful of, the need for broad inclusion in the fruits of growth. One has seen this debate before, carried out by famous economists on both sides. The perspective of three academic economists that I highlighted, and tried to extend, in my last column, needs to have a firmer place in the McKinsey-type intellectual framework. At the same time, concerns about inclusion cannot come at the cost of the rapid growth that India desperately needs. There has to be common ground. One would have thought that the current government would be well-positioned to find that common ground. I have argued previously that ideological and political goals had pushed that possibility to the background. But, the government seems to have won those battles, whatever one thinks of that victory. Covid-19 is still a challenge, but there is no excuse now for the Indian government not to achieve a turning point for the nation’s economy.

The author is Professor of Economics, University of California. Views are personal

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