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Growth Prospects of Economy:NEED FOR INVESTMENT OPPORTUNITIES, by Dhurjati Mukherjee, 14 October 2 Print E-mail


New Delhi, 14 October 2005

Growth Prospects of Economy


By Dhurjati Mukherjee

The growth rate of the Indian economy had for long been a matter of concern.  But lately there has been a paradigm change in the situation.  It has grown by more than 7% in the past two years and has averaged more than 6% over the past decade.  This obviously speaks of a dramatic change since the early 1990s.  In the current year also, the National Council for Applied Economic Research (NCEAR), the Reserve Bank of India and some other organizations have projected a growth of around 7%, which has boosted the confidence of planners and economists.  The Planning Commission is now thinking of setting a target of 8% during the 11th Plan period.

While industrial buoyancy has helped in maintaining the growth rate, it is the service sector which has contributed the most and is expected to grow by over 8.5% this year. As is well known, the service sector comprise trade, transport, hotels, communications, business and financial services etc.  Recent years have witnessed increasing growth in most southern States.  For instance, Karnataka, Tamil Nadu and Andhra Pradesh have seen increasing levels of capital investment.  These States account for 21% of overall amount of project investments in the country as of June 2005.

Also, a majority of economic activity in the service sector driven Mumbai gives a lot of economic prominence to the west.  Almost every enterprise has some kind of operation in the Metropolis, which is rightly considered as the financial capital of India.  Even a number of other western cities like Pune, Surat and Ahmedabad have been the centre of a number of service sector enterprises.

It is thus quite obvious that the southern and western zones account for around 50% of the GDP though they have only 32.5% of the population.  The remaining 67.7% contribute the remaining 50% of the country’s GDP.  The eastern, north-eastern and central regions have a lot of dependence on the agricultural sector.  This explains their poor contribution to the GDP as the agricultural sector has been a slow and unreliable performer.  The only really good performing agricultural zone is the northern region and specially the states of Punjab and Haryana.

Infrastructural bottlenecks coupled with problems like inflexible labour laws, incidence of indirect taxes and multiplicity of procedures in starting operations have been holding up India’s attractiveness as a manufacturing base or export platform.  However, for the country to maintain or accelerate the growth rate, the following challenges have to be seriously considered: greater private sector investment; part disinvestment of PSUs for functional efficiency and more accountability; structural reforms in banking and finance after putting in place appropriate laws and appointing regulators, if necessary; changes in labour laws; more foreign direct investment in the oil, gas and other sectors; all-round technological upgradation to meet international standards; and suitable measures to make India an attractive business destination. 

The World Development Report 2005 has again ranked India as the fourth largest economy in terms of purchasing power parity even as it said that the country lagged behind in technology and efficiency.  It said that though in certain areas investment and productivity in industries have improved, the country was held back in technology due to lack of proper exit policy.  It has pointed out that he general trend showed many firms improved their total factor productivity significantly but aggregate number, has been slow to respond.

The Confederation of India Industry (CII) had sometime back floated a 10-point action plan to help the country a double digit growth rate.  The agenda talked of reforms in areas such as infrastructure, agricultural, entrepreneurship/self-employment, value-added tax, manufacturing, governance, fiscal management and exports.  Though physical infrastructure development has received attention in recent years, there is a need to make them world-class. 

Global trade in farm products stands at around $640 billion and there is expectation that the country in the next 3 or 4 year would leapfrog from being a marginal player with a stake of below 1% to at least 2% share of market.  Though prospects appear quite encouraging with more and more regional trade tie-ups, it remains to be seen whether the country would become the “food chain of the world”.  According to North Block officials, “we plan to cut the maize of laws that restrict farm trade and streamline agricultural credit delivery systems”.  However the food subsidy should not be reduced.

Another problem area is the growing unemployment and underemployment which has been a matter of concern, jobless growth in the advanced country has translated into jobless growth in the developing countries.  Further, recent times have also seen the sharp accentuation of economic inequalities.  It is felt that revitalization of the rural areas and revival and growth of the unorganized and informal sector holds the answer to the problem.  Some economists have been of the opinion that industry has the capacity to absorb the cheap labour of the rural areas. 

Moreover, unless the rural economy is strengthened by the joint efforts of agriculture, agro-based industries and export-oriented cottage industries (which have potential and demand), it may not be possible to achieve all-round development though high growth rates may be achieved.  As envisaged in the Tenth Plan, industrial clusters to promote village (and tiny) industries would have to spread at a fast pace covering around 40% of the districts in the next five years.

Any future strategy would have to take into consideration the growth potential of industry, the services sector and also the rural sector.  The services sector has possibly the greatest potential with fast rate of growth and contribution around 51% of the GDP.  Similarly the industrial performance has shown remarkable results in the last few years but in the coming years manufacturing techniques would have to be improved further to match international standards.

Apart from ensuring that growth rate is geared up, it would also be necessary to evolve an integrated strategy of development which would take care of poverty eradication and improve the lives of people all over the country.  The Human Development Report 2005 poses a pertinent question: why has accelerated income growth not moved India into a faster poverty reduction power?  Obviously tackling the problem will require emphasis on the rural sector and also on social infrastructure development.  However, the following may be considered in this connection: ensuring good governance at all levels; effective decentralization; making local self government strong and powerful; stronger public-public partnerships; rethinking or subsidies; tackling corruption; and transparency in Government functioning.

In the coming years, India has possibly to grow at a higher rate to look respectable.  Some believe that we ought to emulate the South-East Asian miracle.  During the thirty-year period (1960-1990), economies such as Singapore, Hong Kong and South Korea grew at phenomenally high rates, often touching as impressive as 10%.  If they grew at such high rates for almost three decades so can we.  Thus a rise in real GDP is important. 

Liberalization, privatization, open economies, research and development are possibly marvelous solutions to the growth dilemma but none of these will make a dent on our welfare unless the rate of growth of population is simultaneously kept under control.  China has succeeded on both fronts.  Of the population growth is kept below say 1.5% (compared to the present level of 2%), as China managed to lower the population growth rate at 1.3% during the last two decades, there would be a quantum jump in India’s per capita GDP in the coming years.---INFA 

 (Copyright, India News and Feature Alliance)


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