This study represents MGI’s first attempt to scrutinize one of the world’s poorest developing economies. It reveals how product market reform, along with privatization, jump-start India’s growth.
Objectives & Approach
The purpose of the report is to identify and prioritize the measures that could help accelerate India’s economic growth by focusing on a microeconomic understanding of 13 sectors.
According to the debate, India’s fiscal deficit and its capital distortions, restrictive labor laws, and poor infrastructure are the most important barriers to rapid growth. However, research shows that the most important problems are product and land market barriers, and India’s ability to absorb the imminent surge of the working age population.
India’s Growth Potential
More efficient processes as well as more product and service innovations are key sources of productivity gains, which, if properly implemented, could reach 10 percent per year.
Synthesis of Sector Findings
India’s agricultural and transition sectors, which account for 85 percent of employment, have limited potential for improving productivity. India’s modern sectors, however, could increase productivity levels from 15 percent to 63 percent of US levels.
Final Policy Recommendations
The report recommends 13 specific recommendations, among them: Equalizing sales and excise taxes, establishing effective regulatory frameworks, and removing the ban on foreign direct investment in the retail sector.
- Apparel Sector
Productivity in Indian apparel plants is low because they are sub-scale, lack basic technology, and are operated inefficiently. While the sector is small, its productivity rates are still two thirds that of China.
- Automotive Sector
The continuous liberalization of the automotive sector in India has resulted in impressive growth. To continue the trend and improve it, the government needs to liberalize labor laws, reduce tariffs, and divest its stake in the country’s largest car manufacturer.
- Dairy Farming Sector
India is the world’s largest producer of milk, with diary farming being the single largest contributor to the GDP. Productivity, however, is six times below its potential, with poor yield the caused by inadequate dietary management, poor animal husbandry, and poor animal mix quality.
- Dairy Processing Sector
While productivity in India’s dairy processing industry is 9 percent of American levels, there is wide variation by category. Private plants and cooperatives perform better than the government-owned operations.
- Electric Power Sector
India’s power sector suffers from near bankrupt organizations, low tariffs for farmers and domestic consumers, and distribution losses from theft. Privatization and unbundling of state organizations are the key to growth.
- Housing Construction Sector
Productivity is one-fifth of its potential because of the artificial scarcity of land created by distortions in the land market and lack of as well as poor enforcement of standards.
- Retail Banking Sector
Deregulation in the 1990s has led to the creation aggressive and productive banks, but the sector is still dominated by large public banks.
- Retail Sector
With effective reforms, the retail sector could generate 8 million jobs in the next 10 years. Productivity overall is low largely because of poor penetration of modern formats like super- and hypermarkets.
- Software Sector
Software services has been one of India’s most successful sectors in the past 5 years. The absence of product barriers and government ownership has allowed the sector to thrive. Increased efforts to graduate talent and attract good teachers, as well as upgrade urban infrastructure in software hubs could help push the sector even farther.
- Steel Sector
Productivity in India’s steel sector is poor because of government ownership of large incumbents, the presence of many unproductive “mini-mills,” and lack of competition from imports.
- Telecommunications Sector
Despite liberalization efforts in 1994 and 2000, the telecom sector is dominated by unproductive government-owned concerns that have a swollen labor force and poor organization.
- Wheat Farming Sector
Indian productivty in wheat farming is 1.3 percent of US levels. Farming remains a labor-intensive sector where low costs keep people from investing in modern machines and technology.
- Wheat Milling
Unfair tax burdens and subsidies have conspired to hold modern industrial mills from gaining market share from unproductive small mills.