Driving India forward: The govt's role

Not very long ago in India, only the rich and influential could get a telephone connection. And even for those who could afford, the wait was endless. Fast forward to 2006 and you have cell-phone companies chasing customers with flashy phones and affordable services. Many villages without proper road access have cell phone connectivity. This is just one of the many happy fallouts of the economic liberalisation.

Today, the Indian consumer has an unprecedented range of services and goods to choose from. Businesses are booming and long stifled innovation is sprouting. College graduates have job opportunities they never had before. The economic growth over the last few years has virtually transformed the Indian middle class.

We could once only have dreamed of India becoming rich and prosperous. And today we have the opportunity to turn this dream into reality. At Wharton we choose to call it ‘The Indian Dream’. The realisation of this dream is the theme of the Wharton India Economic Forum 2006 (WIEF). This Forum hopes to enable a live debate about what it will take for this dream to come true.

We believe that if this has to happen, India must continue to grow at 8-10% for the next decade and beyond. While there is no doubt about India’s potential to make this happen, the challenges it faces are daunting and the role of the Government is critical. The Government panel of the Wharton India Economic Forum hopes to ignite a debate on these questions and hear from the policy makers about how the Government plans to respond to these challenges. Let us look at some of the bottlenecks the country faces in tracking a high growth trajectory.

While the growth in the last decade has been stupendous, there are concerns that the lack of infrastructure could be a major bottleneck in future. The clogged roads, poorly managed airports, and erratic power supply may force investors to look elsewhere. To further complicate matters, the private sector is not likely to step in to solve this problem because of the huge capital investments, long gestation period and regulatory hurdles. The burden is clearly on the Government’s shoulder and it has to find a way out.

Another obstacle is the insufficiently developed capital markets. These markets fail to capture a big part of domestic savings and even the captured portion is not allocated to the most efficient sectors. There is substantial government interference in capital allocation, some of which might be understandable given its social commitments. However, the Government has to take a hard look at is policies and ensure that market forces predominantly govern capital allocation.

While India has made many strides in the services sector, manufacturing is still seriously lagging. The rigid labor laws, unionized work force and lack of flexibility in retrenching workers increase the cost of doing business and make many investors look elsewhere. While this is not an easy problem to tackle due to absence of political consensus, the government will have to reform labor laws if India has to match China in manufacturing.

For a long time businesses were stifled by government regulation. While much of the red tape is gone, there is still need to do more. India has to create a more predictable regulatory framework. The Government has to become an impartial referee and let the private sector play by the rules. As long as the entrepreneurs and businessmen are at the mercies of bureaucrats, innovation will get stifled. The time is now ripe to remove these barriers and let businesses flourish.

Overarching all these issues is a big question: How strong is the Government’s commitment to economic liberalization? Certain fringes of political spectrum still have serious reservations about it and it can hinder reform. The recent slowdown of disinvestment of the public sector is an instance of this qualified commitment. As a result public money continues to be squandered in uneconomic investments.

One reason for the weak political consensus for reform is that economic growth has not benefited all sections of society and has been skewed in favor of the upper and middle classes, especially in the cities. While one could argue that growth is inevitably skewed in the beginning, this concern cannot be wished away. The Government has to make the case that higher economic activity expands the tax base and also creates jobs and demand for goods and services. Without wealth creation, meaningful social spending will be impossible.

The Government panel in the Wharton India Economic Forum includes distinguished bureaucrats, policy makers and diplomats. The panelists are Dr. Adarsh Kishore, Finance Secretary, Shri Vinod Rai, Secretary Banking, Dr. Rajiv Ratna Shah, Secretary Planning Commission, Ms. Neelam Deo, Consul General of India in US, Ambassador Raminder Singh Jassal, and Dr. Arvind Virmani, Principal Advisor to the Planning Commission.

The panelists are the leading policy makers in the Government and can authoritatively talk about how the Government plans to push India’s economic growth. We are confident that the Wharton India Economic Forum will enable a healthy debate, and will create clarity around how the Indian Dream could become a reality.