The economic reforms — looking back to look ahead

Synopsis: Systemic policy reforms are required to unlock creativity and innovation in the economic system, raise the total factor productivity (TFP) and to achieve higher growth.


The crisis caused by the pandemic in the country and at global level has led to a debate about new approaches to manage the economy and the future of humanity.

It has underscored the need for policies to enable resilience in the economy and ensure a robust health system, together with research and development.

What are some positive effects of the reforms?

The reforms led to the following positives:

An increase in foreign exchange reserves

Sustained manufacturing contribution in GDP

Increased share in global exports

Robust information and communication technology software exports

Sustained economic growth in the range of 6%-8%

What are the current challenges to economic growth?

The economic reforms, so far, have been more focused on the technical nature of the economy than the system, process and people.

As a result, primary drivers of the economy, the human capital, technology readiness, labour productivity, disposable income, capital expenditure, process innovation in setting up businesses, and institutional capacity have not got enough recognition.

Human resource capital (HRC) formation: 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.

Low Per capita income: low per capita GDP at $2,104 has direct links to low per capita family income.

Low wages linked with less disposable income of families: Global Manufacturing Competitiveness Index in 2016 reflects that the hourly wages in India have been $1.7; they are $38, $24, $20.7 and $3.3 for the United States, Japan, South Korea, and China, respectively. It is ultimately affecting demand.

Low research and development expenditure: It stands at 0.8% of GDP, which is resulting in lower capacity for innovation in technologies and reduced ‘technology readiness’.

Labour productivity: Low productivity has unfavourable consequences for competitiveness, manufacturing growth, exports and economic growth.

Time and cost overruns: there are difficulties in acquiring land for businesses and inefficient utilisation of economic infrastructure.

What reforms can be implemented to drive the economy?

Address the underlying issues: address structural issues — HRC, skills, research and development (R&D), land management and institutional capacity.

Attract large investment in manufacturing and advanced service: enhanced public sector outlay to 8% of GDP for education, skill development and public health, is another first step.

Technology readiness: The reports (by McKinsey and the World Economic Forum) suggest that Industry 4.0 will be defined by new technologies such as robotics, 3-D printing, artificial intelligence (AI), the Internet of things (IoT).

Build the capacity of public institutions: as per Nobel laureate (1993) Douglass C. North, it is necessary to build the capacity of public institutions. Policy reforms should promote a business-centric approach to create a friendly ecosystem and for efficient internal supply chain management.

Source: This post is based on the article “The economic reforms — looking back to look ahead” published in The Hindu on 8th September 2021.

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