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THE
NEW ECONOMY: GUEST COLUMN
Miles
To Go
Past reforms have been successful, but the future must build on them
By
Jeffrey Sachs and Nirupam Bajpai
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Jeffrey
Sachs is the director of Center for International Development (CID)
at Harvard University. Nirupam Bajpai is director of the Harvard
India Program at CID.
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In growth
competitiveness, India is ranked 49 out of 59 countries graded in the
Global Competitiveness Report (GCR) 2000, up three places from 52 in GCR
1999. The concept behind both reports is the same-to measure growth potential.
Similarly, in the area of current competitiveness, India is placed at
37 in GCR 2000 out of 58 countries. This is up five places from 1999 when
India trailed at 42.
If one were
to break down the areas of growth competitiveness where India has competitive
advantages they are export promotion, investment rate, financial risk
rating, stock market and the national saving rate. It is interesting to
note that the national saving rate shows up as an area of competitive
advantage despite the fact that India's public savings are extremely low.
In our earlier research, econometric estimates suggested that each 1 per
cent of government saving raises the country's growth rate by 0.1 per
cent. Areas of competitive disadvantages are lack of intellectual-property
protection, capital account restrictions, high average tariff rate, lack
of access to foreign-capital markets, small private share of banking system,
and interest rate controls, among others.
In the area
of current competitiveness, India's competitive advantages according to
GCR 2000 are licensing of technology, large availability of suppliers,
median income tax rate, top marginal tax rate, math and science education,
and an independent judiciary among others. Competitive disadvantages,
on the other hand are high fiscal deficit, rampant tax evasion, low government
saving, inadequate supply of power, lack of proper roads and port facilities,
lack of telephone connections and Internet access, restrictive labour
laws, lack of exit policy, low-quality healthcare and public-funded schools,
large-scale hidden economic activity, and pay and productivity among several
others.
The Government
has set a target of doubling India's per capita income by the year 2010.
This is an ambitious target but one that we think is certainly achievable.
In order to achieve it, India needs growth in GDP per capita of the order
of 7 per cent a year over the next 10 years. And in order to achieve this
growth rate on a sustained basis, India needs a well-focused growth strategy
with two broad areas of focus-economic and social. The economic pillar
should focus on export-led growth, which among other things requires greater
emphasis on special economic zones, and openness of the economy, liberalisation
in India's labour laws, de-reservation of products for the small-scale
industry and other measures for deregulation of the private sector. The
social pillar should focus on primary health and primary education.
The engine
of growth of the booming Indian it sector is the software industry that
has grown at an average annual rate of 60 per cent between 1992 and 1999.
The Indian software industry, which today employs 1.6 lakh professionals,
has zoomed from a mere $20 million 10 years ago to $5.6 billion in 1999-2000,
of which exports comprised $3.9 billion. Technical excellence explains
why India was identified by 82 per cent of US companies as their top destination
for software outsourcing, according to a World Bank survey.
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Ninan
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Realising
the strategic importance of it for the country, the government has set
itself an ambitious target of making India a global it power and a key
contributor to the world it industry by 2008. In 1998, a National it Task
Force was set up and a National it Policy formulated. The policy calls
for raising the software industry's turnover to $87 billion by 2008, $50
billion of this coming from exports. In order to quickly climb up the
value chain, the Indian it industry should aggressively pursue two hot
segments: Electronic commerce and it-enabled services.
Export-led
growth in services is one of the most interesting developments, and export-led
growth in manufactures, the more traditional textiles and apparel, in
electronics and other labour-intensive operations remains an area where
India could do a lot more. It is a place where one could find tens of
millions of jobs over the next few years in real, significant foreign
exchange earning private sector activity.
While rapid
growth is certainly possible, it could flounder for several reasons. First,
large and persistent fiscal deficits can endanger sustainability of growth
over time. Second, despite India's excellence in high technology, much
of the country remains mired in illiteracy. Unless India truly prioritises
improvements in the access of all Indians to education and health services,
hundreds of millions of Indians will have little practical prospect of
improvement in living conditions in the coming years. Third, India must
not rest on the laurels of a successful decade of reforms. Much was accomplished
in the 1990s. But much remains to be done, improved infrastructure, liberalisation
of labour laws, fiscal reform and consolidation, and finally meeting the
great social challenge to uplift India's poor and excluded groups.
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