These four pieces have a common theme of how to encourage innovation and entrepreneurship in India
India's Missing Growth Driver
India’s Union Budget has been presented, the Economic Survey has been published and attention has returned to day-to-day governance and politics as usual. Stories about big business, big sums of money and large-scale corruption are the ones that grab headlines. Ultimately, though, key policies that will shape India’s future may be suffering from neglect. Sustained inclusive growth requires innovation and job creation across a broad cross-section of the economy. This includes labour-intensive manufacturing, but, more generally, an industrial dynamism that extends beyond large incumbent firms, foreign entrants, or the relatively few recent domestic success stories.
A few years ago, prominent economist Anne Krueger labelled India’s problem that of a “missing middle” in its distribution of firms—a gap between small firms in the unorganised sector, and the large firms that grab headlines in billionaires’ lists and mega-mergers and acquisitions.
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India in 2011: What's Next?
What’s in store for India in the new year? The short-term economic outlook is good. Growth of 9% seems to be a reasonable forecast. Looking ahead, growth rates in this range seem to be sustainable for awhile, based on the assumption that investment stays at about 35% of GDP, and that the efficiency of this investment doesn’t decline compared to recent years. In one way, this is a remarkable achievement. The government has struggled to implement new structural reforms, and to do its core tasks more efficiently; yet the economy remains robust. Perhaps this is a tribute to what stability and reasonably adequate governance can achieve, when the private sector is in a position to take advantage of such an environment. The accelerating recovery in the US will presumably help India’s growth rate as well.
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Innovation and Taxes
India is continuing with major reforms of its tax system. These reforms began with liberalisation, and included cutting tax rates and rationalising enforcement and administration. Tax reform has been an important contributor to the country’s improved economic performance. The latest effort on indirect taxes is the move towards a unified national goods and services tax (GST). On the direct tax front, the new direct taxes code (DTC) Bill has just been tabled in Parliament.
A major guiding principle for tax reform is the goal of reducing distortions in economic activity that taxes can create. Tax rates that are too high, or taxes that apply to narrow groups, are more distortionary than lower rates and broader tax bases. Reforms of indirect and direct taxes are meant to cut down on distortions and improve economic efficiency. Lower rates applied more broadly and evenly, without overlapping taxes or exemptions, are part of the GST and DTC. Another principle, aligned with the first, is simplicity. Simplicity makes tax administration easier and more transparent. The GST and DTC are both simpler than their predecessors.
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Schumpeter and Three Idiots
Economic headlines in India focus on macroeconomic management. Soaring inflation, a burgeoning fiscal deficit or gyrating exchange rates all affect the economy’s health, but prudent macroeconomic policies only go so far. Long-run growth depends on factors like investment, innovation and trade (a different expansion of the initials IIT!), which do not receive as much attention. Investment is perhaps the most basic driver of growth, since capital accumulation raises labour productivity and per capita output. High rates of investment helped East Asia grow at rates never seen before. India, too, has seen higher growth associated with higher rates of investment.
International trade in goods and services has also helped India grow faster. According to economic theory, liberalising trade in goods should have just a one-time effect on output, rather than a permanent effect on growth, but the one-time effect could be spread over decades. Openness to trade also brings new capital and ideas along with products and services, and these can give boost to long-run growth.
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Sunday, March 27, 2011
Friday, March 25, 2011
India's Food Future
February has finally brought some relief in the rise in India’s food prices. The government has some breathing room in this dimension—just as well when it is beset by multiple corruption scandals. It is easy to get excited about blatant corruption, or even mismanagement of a specific sporting event or allocation of spectrum. And of course it is justified. It is somewhat harder to achieve the same level of concern about governance of an entire sector, food and agriculture—especially when there are so many possible external villains.
Food price inflation can always be blamed on the weather, on globalisation, on evil speculators, and now also on faster growth in poorer countries. Some of these factors do matter, but they divert attention from past policy failures and from what needs to be done going forward. All of the usual suspects may not be guilty, and the others have been in plain view for some time, so policy making should have already taken them into account.
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February has finally brought some relief in the rise in India’s food prices. The government has some breathing room in this dimension—just as well when it is beset by multiple corruption scandals. It is easy to get excited about blatant corruption, or even mismanagement of a specific sporting event or allocation of spectrum. And of course it is justified. It is somewhat harder to achieve the same level of concern about governance of an entire sector, food and agriculture—especially when there are so many possible external villains.
Food price inflation can always be blamed on the weather, on globalisation, on evil speculators, and now also on faster growth in poorer countries. Some of these factors do matter, but they divert attention from past policy failures and from what needs to be done going forward. All of the usual suspects may not be guilty, and the others have been in plain view for some time, so policy making should have already taken them into account.
More...
Wednesday, March 23, 2011
Thoughts on the G-20 and the BRICs
Reflections last year on the role of the BRIC countries
Bric-à-Brac or More?
The second Bric summit is just under way at the time of this writing. The grouping was the inspired creation of Jim O’Neill, Goldman Sachs’ chief economist, almost a decade ago. Economic size and growth potential were the main criteria for the grouping of Brazil, Russia, India and China. Other dimensions of size—area and population—correlate as well. Three of the four have nuclear weapons capabilities and the same three are also strategic powers by virtue of size and geography.
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Thoughts on the decline of Europe, prompted by Greece's mess
Greece, the G-20 and India
Greece’s fiscal problems have had ripple effects across Europe, bringing back memories of the autumn of 2008, when a global financial meltdown seemed imminent. At that time, countries such as Hungary and Latvia were the poster children for profligacy and bad risk management. Greece was hiding its fiscal woes at the time, apparently by using currency swaps sold by Goldman Sachs. Now its budget deficit is revealed to exceed 13%, and financial concerns have spread to Portugal, Spain and Italy.
Unlike the 2008 problem countries of Eastern Europe, the new fiscal bad boys are all members of the euro zone. This raises the stakes enormously, since they do not have independent currencies that can depreciate, and their pain becomes the entire euro zone’s problem. How did this come about, and what can be done?
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Two more recent pieces on the G-20 and global rebalancing
What the G-20 Should Do
The upcoming G20 summit takes place at a pivotal moment. The halo of the G20’s response to the financial crisis in 2009 has faded, and it is receiving a lot of flak for not getting things done. In my last column (November 1), I argued that the G20 has an important potential role to play as a manager of current and emerging global risks, including those of climate change as well as financial volatility. For the moment, though, the focus is on global imbalances—the large current account surpluses and deficits that major members of the G20 are running. These imbalances were less of an issue (though still a concern) when the world economy was growing rapidly, and the US, in particular, was booming. The change in US circumstances is therefore a major cause of the new frictions.
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A Guide to Global Rebalancing
The financial crisis rejuvenated the International Monetary Fund (IMF) and the G20, giving each new roles to play in managing the economic mess. New rules for financial regulation and new financial safety nets to promote stability are being developed. Presumably, when the world economy next looks like it is falling off a cliff, the response will be strong and coordinated. It is harder to get agreement on non-crisis tasks. There is some consensus that large current account imbalances (mirrored by large international capital flows) prolonged the run-up to the crisis and made it worse when it hit. In any case, large imbalances are not indefinitely sustainable, because they lead to unsustainable debt positions for borrowers and tricky portfolio decisions for lending countries.
more...
Bric-à-Brac or More?
The second Bric summit is just under way at the time of this writing. The grouping was the inspired creation of Jim O’Neill, Goldman Sachs’ chief economist, almost a decade ago. Economic size and growth potential were the main criteria for the grouping of Brazil, Russia, India and China. Other dimensions of size—area and population—correlate as well. Three of the four have nuclear weapons capabilities and the same three are also strategic powers by virtue of size and geography.
more...
Thoughts on the decline of Europe, prompted by Greece's mess
Greece, the G-20 and India
Greece’s fiscal problems have had ripple effects across Europe, bringing back memories of the autumn of 2008, when a global financial meltdown seemed imminent. At that time, countries such as Hungary and Latvia were the poster children for profligacy and bad risk management. Greece was hiding its fiscal woes at the time, apparently by using currency swaps sold by Goldman Sachs. Now its budget deficit is revealed to exceed 13%, and financial concerns have spread to Portugal, Spain and Italy.
Unlike the 2008 problem countries of Eastern Europe, the new fiscal bad boys are all members of the euro zone. This raises the stakes enormously, since they do not have independent currencies that can depreciate, and their pain becomes the entire euro zone’s problem. How did this come about, and what can be done?
more...
Two more recent pieces on the G-20 and global rebalancing
What the G-20 Should Do
The upcoming G20 summit takes place at a pivotal moment. The halo of the G20’s response to the financial crisis in 2009 has faded, and it is receiving a lot of flak for not getting things done. In my last column (November 1), I argued that the G20 has an important potential role to play as a manager of current and emerging global risks, including those of climate change as well as financial volatility. For the moment, though, the focus is on global imbalances—the large current account surpluses and deficits that major members of the G20 are running. These imbalances were less of an issue (though still a concern) when the world economy was growing rapidly, and the US, in particular, was booming. The change in US circumstances is therefore a major cause of the new frictions.
more...
A Guide to Global Rebalancing
The financial crisis rejuvenated the International Monetary Fund (IMF) and the G20, giving each new roles to play in managing the economic mess. New rules for financial regulation and new financial safety nets to promote stability are being developed. Presumably, when the world economy next looks like it is falling off a cliff, the response will be strong and coordinated. It is harder to get agreement on non-crisis tasks. There is some consensus that large current account imbalances (mirrored by large international capital flows) prolonged the run-up to the crisis and made it worse when it hit. In any case, large imbalances are not indefinitely sustainable, because they lead to unsustainable debt positions for borrowers and tricky portfolio decisions for lending countries.
more...
The Great Indian Growth Debate
Here are two columns about the Sen-Bhagwati contretemps on India's growth
"It's Growth, Stupid -- Or Is Growth Stupid?"
The debate between two of India’s greatest economists, Jagdish Bhagwati and Amartya Sen, is important for India’s policymakers. Are growth targets diverting policy attention from other important development goals? Chief Economic Advisor Kaushik Basu has said the differences are less substantive than they are made out to be, but what is the common ground? Here is my take on the great growth debate.
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Fighting Malnutrition in India
Growth is good. So are health and education. Malnutrition is bad. As I noted in my last column, everyone, including those involved in India’s growth debate, agrees on these things. But differences emerge in recommendations for how to improve India’s human development status. Malnutrition is a good example. One view is that focusing on growth alone diverts attention from tackling problems like malnutrition. Another view is that accelerating growth is crucial to generate the resources for addressing such problems.
More...
Here are two columns about the Sen-Bhagwati contretemps on India's growth
"It's Growth, Stupid -- Or Is Growth Stupid?"
The debate between two of India’s greatest economists, Jagdish Bhagwati and Amartya Sen, is important for India’s policymakers. Are growth targets diverting policy attention from other important development goals? Chief Economic Advisor Kaushik Basu has said the differences are less substantive than they are made out to be, but what is the common ground? Here is my take on the great growth debate.
More...
Fighting Malnutrition in India
Growth is good. So are health and education. Malnutrition is bad. As I noted in my last column, everyone, including those involved in India’s growth debate, agrees on these things. But differences emerge in recommendations for how to improve India’s human development status. Malnutrition is a good example. One view is that focusing on growth alone diverts attention from tackling problems like malnutrition. Another view is that accelerating growth is crucial to generate the resources for addressing such problems.
More...
Weighing India's Budget
The recent Union Budget elicited the usual range of responses. Various interest groups commented on the lack of what they would ideally have wanted in terms of tax or expenditure policy changes. Many commentators decried the lack of boldness, or lack of economic reforms, or questioned the realism of the Budget’s financial projections, especially given the looming dangers of high-priced oil.
I want to make three points. First, this is a reasonably good Budget, doing what it is meant to do, laying out the broad contours of tax and expenditure policy for the next year. Second, reforms are continuing, not always smoothly, not always ones that get highlighted in the Budget, and perhaps not comprehensively enough, but continuing nonetheless. Third, the fundamental character of Indian economic policymaking has changed, and for the better.
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The recent Union Budget elicited the usual range of responses. Various interest groups commented on the lack of what they would ideally have wanted in terms of tax or expenditure policy changes. Many commentators decried the lack of boldness, or lack of economic reforms, or questioned the realism of the Budget’s financial projections, especially given the looming dangers of high-priced oil.
I want to make three points. First, this is a reasonably good Budget, doing what it is meant to do, laying out the broad contours of tax and expenditure policy for the next year. Second, reforms are continuing, not always smoothly, not always ones that get highlighted in the Budget, and perhaps not comprehensively enough, but continuing nonetheless. Third, the fundamental character of Indian economic policymaking has changed, and for the better.
More...
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