Tuesday, November 18, 2003
McKinsey Quarterly on India
Rajesh sent me this old-ish (2001) McKinsey Quarterly report on India. It serves as excellent background reading and it also serves as a point of comparison (vis-a-vis reforms) in the 2-year period since this report was published. The report identifies 3 main problems that are holding the Indian economy back and then examines each of these problems in great detail.
Regulations governing product markets, land market distortions, and government-owned businesses—the three main barriers to India’s economic growth—have their depressing effect largely because they protect most Indian companies from competition and thus from pressure to raise productivity.
The report also makes some key recommendations on policies that need to be in place to achieve the 10% growth rate that has long been the dream of Indian planners.
Thirteen policy changes would dismantle most of these critical barriers to higher productivity and growth. The changes include eliminating the practice of reserving products for small-scale manufacturers, rationalizing taxes and excise duties, establishing effective and procompetitive regulation as well as powerful independent regulators, reducing import duties, removing restrictions on foreign investment, reforming property and tenancy laws, and undertaking widespread privatization.
Such profound changes would certainly prompt resistance in the name of social objectives, especially from those protected by the current regulatory regime. But the fact is that the current policies have not achieved their social purposes, however worthy: many have been counterproductive. Reserving products for small companies, for example, has cost India manufacturing jobs by preventing companies from becoming productive enough to compete in export markets. Similarly, tenancy laws designed to protect tenants have driven up nonprotected rents and real-estate prices, thus making ordinary decent housing unaffordable to many Indians.
Critics might still argue that the increase in GDP resulting from these policy changes will all flow to the already rich. But after carefully examining the expected effects of the proposed reforms on the Indian economy, we can see that, once again, the opposite is true. By creating a virtuous cycle of broad-based growth in GDP, the changes will benefit every Indian. For example, the real incomes of farming families—the poorest group—will rise by at least 40 percent over ten years.
Regulations governing product markets, land market distortions, and government-owned businesses—the three main barriers to India’s economic growth—have their depressing effect largely because they protect most Indian companies from competition and thus from pressure to raise productivity.
The report also makes some key recommendations on policies that need to be in place to achieve the 10% growth rate that has long been the dream of Indian planners.
Thirteen policy changes would dismantle most of these critical barriers to higher productivity and growth. The changes include eliminating the practice of reserving products for small-scale manufacturers, rationalizing taxes and excise duties, establishing effective and procompetitive regulation as well as powerful independent regulators, reducing import duties, removing restrictions on foreign investment, reforming property and tenancy laws, and undertaking widespread privatization.
Such profound changes would certainly prompt resistance in the name of social objectives, especially from those protected by the current regulatory regime. But the fact is that the current policies have not achieved their social purposes, however worthy: many have been counterproductive. Reserving products for small companies, for example, has cost India manufacturing jobs by preventing companies from becoming productive enough to compete in export markets. Similarly, tenancy laws designed to protect tenants have driven up nonprotected rents and real-estate prices, thus making ordinary decent housing unaffordable to many Indians.
Critics might still argue that the increase in GDP resulting from these policy changes will all flow to the already rich. But after carefully examining the expected effects of the proposed reforms on the Indian economy, we can see that, once again, the opposite is true. By creating a virtuous cycle of broad-based growth in GDP, the changes will benefit every Indian. For example, the real incomes of farming families—the poorest group—will rise by at least 40 percent over ten years.
