In line with Prime Minister Narendra Modi’s mantra of ‘Jaan bhi Jahan bhi’, India’s three-stage unlock plan is expected to bring economic activity back on track after four phases of lockdown. The PM has outlined five ‘I’s—Intent, Inclusion, Investment, Infrastructure and Innovation as key pillars for the revival of economic growth.
We ought to have a concrete set of action points for the five I’s Modi has envisioned.
Intent and inclusion
The Modi government’s (Intent) to push long-pending structural reforms to drive growth, in line with its target of making India a $5-trillion economy is evident in the measures announced under the Atmanirbhar package. The PM’s thrust on ‘vocal for local’ is also visible in the revised public procurement order that now gives preference to suppliers that have over 50 per cent or more local content. Earlier, the Modi government had disallowed global tenders for government procurement up to Rs 200 crore to give Make in India a much-needed push.
The labour crisis during the current pandemic has exposed a big fault line in India’s economic growth pattern and forced us to look for a more inclusive model. As per the UN Human Development Report 2019, there has been a significant rise in inequality in India. The income share of the top 1 per cent has grown from around 7 per cent in 1980 to over 20 per cent in 2019. From 2000-2018, the income of the top 1 per cent grew by 213 per cent while of the bottom 40 per cent grew only by 58 per cent.
A plausible explanation for this inequality seems to be the pattern of unbalanced growth across states with wide divergences in economic and well-being indicators. Therefore, it is imperative that states draw a clear roadmap towards industrial development through industrial policies, cluster manufacturing, and skill mapping exercises, in line with the PM’s vision of ‘Sabka Saath Sabka Vishwas’. The Modi government along with NITI Aayog can help states undertake capability assessment in the key sectors they need to focus on.
The labour crisis has also highlighted the need to invest in human capital for ensuring long-term sustainable growth. Some states like Madhya Pradesh, Rajasthan, and Uttar Pradesh have already started a skill-mapping exercise for labourers who have come back to their home states. Economic empowerment of women should be emphasised under the Skill India initiative and realistic targets should be set for training people.
The Economic Survey for FY20 estimates that India needs to spend around Rs 102 lakh crore on infrastructure over the course of the next five years to achieve the $5 trillion nominal GDP target. As per the draft logistic policy, India spends around 14 per cent of its GDP on logistics, primarily because of limited multi-modal infrastructure and over-dependence on road transport (60 per cent).
Waterways are not only greener and faster, but also the cheapest mode of transport. Per tonne freight cost in waterways is almost half of roadways. So, increasing the share of waterways in the modal mix can significantly reduce logistics costs. Given India’s 7,500 km long coastline and 14,500 km of navigable waterway, augmenting port capacity is critical. By developing port infrastructure and locating cluster manufacturing and industrial capacities near the coast under the Sagarmala project, India intends to reduce the logistic cost to less than 10 per cent of the GDP. Various steps have been taken to push projects via FDI and public-private partnership, tax holidays and Build, Operate and Transfer (BOT) models. However, lack of funding and limited private participation have inhibited timely progress. Sagarmala’s timely implementation could be a game-changer for India. We need to look beyond banks for funding infrastructure spending.
On the innovation front, a balanced environment needs to be created between Intellectual Property Rights and competition, to foster a healthy innovation sector. Take the case for active pharmaceutical ingredients (API). India accounts for a fifth of global supplies of generic drugs, but is heavily dependent on China for raw materials (API), which account a staggering 68 per cent of our total imports from the country. In the absence of a self-sufficient API ecosystem, domestic manufacturers are exposed to recurring supply disruptions and pricing volatility.
Recently, the Modi government has committed nearly $1.8 billion for creating a self-sufficient API ecosystem. This is a welcome step. To further the API security and ensure an uninterrupted supply, a National Stockpile of generic medicines for critical illnesses should be built up. Moreover, a new Center of Excellence for API development must be set up in every region with up-grading of the existing centers. Public and private labs in India are spearheading efforts in API creation and this needs to be backed by higher public investments in the overall R&D sector, which should at least target 2 per cent of the GDP. This will augur well, both for our scientific establishments and MSMEs that require cutting-edge technology to prosper in a competitive global environment.
The Aatmnirbhar package amounting to 10 per cent of India’s GDP will help us get economic growth back on track whilst maintaining fiscal discipline. Globally, governments are dealing with an unprecedented economic crisis due to the pandemic and the world economy is likely to be headed into a recession.
In these trying times, governments tend to accommodate and resurrect their domestic industries, which have been severely impacted by drop in demand and disruptions in supply chains. It is very likely that in terms of policymaking, the world will be looking ‘inwards’ for some time to come. In this regard, Modi’s call for self-reliance is critical and some immediate measures need to be taken to revive growth for India’s already struggling manufacturing sector.
Self-reliance doesn’t mean isolationist pitch
A border adjustment tax (BAT) on imports to give the domestic industry a level-playing field vis-a-vis imports could be considered in the short run. Domestic taxes such as electricity duty, fuel duty, clean energy cess, mandi tax, royalties, etc. are non-creditable levies that raise the price for domestic producers, giving imports a price advantage. Undertaking trade remedial measures like imposing anti-dumping duties can counter the threat of subsidised dumped imports. Further, the industry has been demanding the removal of lesser duty rule (LDR) from the anti-dumping law as it has proven to be unfair for domestic players. This voluntary WTO rule allows the final duty on dumped goods to be less than the calculated full dumping margin on imports.
It is imperative to understand that self-reliance should not imply that we embrace isolationist policies or blanket protectionism. The Modi government thus has rightly identified a few champion sectors, where we have inherent scaling-up potential, which can be capitalised in the medium term. Capability building by fast-tracking reforms in these sectors and initial handholding to build domestic value chains can help revive manufacturing growth and also prepare these sectors to be globally competitive in export markets.
At the same time, this must be achieved by integrating more with regional and global value chains. For sectors where the possibility of scaling up is limited, reliance on good quality and price competitive imports is inevitable. Here, the trade policy needs to focus on comprehensive and deep bilateral Free Trade Agreements with maximum trade complementarities and high utilisation ratio.
India has shown in the past that it reforms and performs during a crisis. Now is the time to press the reset button.
V.K Saraswat is member, NITI Aayog. Prachi Priya is a Mumbai-based economist, Aniruddha (Twitter: @ani_econ) is a Phd student at Johns Hopkins University. Views are personal.