The economic reforms — looking back to look ahead (The Hindu, GS-3, Economics)

Context:- The crisis caused by the coronavirus pandemic in the country and at global level has led to a debate about fresh thinking and new approaches to manage the economy and the future of humanity. Globally, it has underscored the need for policies to enable resilience in the economy and ensure a robust health system, together with research and development.

A critical reading of reforms:-

  • The complex economic system of the last 30 years needs an examination. Evidence shows that the economic reforms which were launched in a major way in 1991 and from time to time, subsequent interjections for liberalisation of economy and trade have enabled some credible gains for the country.
  • Over a period of 30 years, burgeoning foreign exchange reserves, sustained manufacturing contribution in GDP, increased share in global exports (from a mere 0.6% in the early 1990s to 1.8%), robust information and communication technology software exports, and sustained economic growth in the range of 6%-­8% are clear hallmarks of success.
  • As a result, quite a few primary drivers of the economy human capital, technology readiness, labour productivity, disposable income, capital expenditure, process innovation in sting up businesses, and institutional capacity have not  got enough recognition
  • The lack of quality education, low skilled manpower and inadequacies in basic health care have resulted in low HRC. 
  • The HRC rank for India stands at 103
    • Sri Lanka is at 70
    • China at 34
    • and South Korea at 27, as brought out by the Global Human Capital Report, 2017
  • As indicated in the World Bank database on GDP for 2019, the low per capita GDP in India, at $2,104 (at $6,997 in PPP terms, ranked 125th globally) against the world average of $11,429.
  • The report by Deloitte (Global Manufacturing Competitiveness Index in 2016) reflects that the hourly wages in India have been $1.7.
  • Low wages have a direct bearing on the disposable income of families and leave little room for the majority of households to have enough disposable income to purchase consumer durables or industrial products, affecting demand.
  • Low research and development expenditure at 0.8% of GDP, vis­àvis higher value for other fast emerging economies such as South Korea (4.5%), China (2.1%) and Taiwan (3.3%), is resulting in lower capacity for innovation in technologies and reduced ‘technology readiness.

Labour productivity:-

    • The lack of HRC and low technology readiness have impacted labour productivity adversely.
    • labour productivity in manufacturing is less than 10% of the advanced economies including Germany and South Korea, and is about 40% of China.
  • The Future of Manufacturing­ Led Development.

    • Low productivity has unfavourable consequences for competitiveness, manufacturing growth, exports and economic growth.
  • In addition, due to a lack of capital expenditure and institutional capacity, and inefficiency in business service processes, there are difficulties in acquiring land for businesses, in efficient utilisation of economic infrastructure, and in providing business services, leading to a long time and more cost in setting up enterprises, resulting in a loss of creative energy of entrepreneur.
  • For years, the economy has been hit internally due to low consumer demand as a result of low household incomes as well as externally on account of lesser competitiveness and inadequacies in integration with global supply chains for trade

Paradigm Shift:- 

  • The new reforms will require a distinct departure. The approach should be systemic and address structural issues HRC, skills, research and development (R&D), land management and institutional capacity. 
  • The focus should be on quality of business services, technology readiness, labour productivity and per capita income. 
  • To attract large investment in manufacturing and advanced services, at a basic level, investment in human capital and technology is a prerequisite. 
  • Raising HRC will add the substance.
  • Outlay to 8% of GDP, from current about 5%, for education, skill development (including for advanced technologies) and public health
  • New technologies such as  robotics, 3­D printing, artificial intelligence (AI), the Internet of things (IoT), etc., which could usher in rapid changes of a higher order up to 10X or more in speed
  • Efforts for technology readiness are very essential to stay competitive. 
  • It demands enhancing public research and development expenditure to 2% of GDP over the  next three years.
  • Here is a need to work on strategies to enhance per capita income by more wages for workers through higher skills and enhancing minimum wages, besides improving the social security net
  • On the issue of increased cost of labour, it can be compensated by higher productivity, some tax benefits in the initial period of wage reforms especially for Micro, Small and Medium Enterprises, besides reducing transaction costs in business and improving infrastructure utilization efficiency.

Way forward:-

  • The role of institutions in advancing the economy in a country, it is necessary to build the capacity of public institutions to create a good environment for business and industry. 
  • Policy reforms should lay an emphasis on  process innovation and promote a business centric approach to  implementing pre­determined service quality levels (SQLs), to create  a friendly ecosystem by having a state-of-the-art plug and play model for new enterprises, and for efficient internal supply chain management to integrate with the global supply chain. 
  • The future of the economy should be particularly viewed in the backdrop of a significant and irreversible shift in terms of a reliance on the global supply chain as a result of the knowledge intensive nature of businesses and exponential effects caused by advanced technologies under Industry 4.0.
  • Systemic approach  encompassing interconnected basic factors of the economic system  for policy reforms for setting  the economic fundamentals right, in order to unlock creativity and innovation in the economic system, raise the total factor productivity (TFP), or a measure of productive efficiency, and to achieve higher growth.

Plutus IAS Daily Current Affairs 08th September 2021