Growth hinges on local reforms, not protectionism: Indermit Gill

NEW DELHI: India is in a "conditionally great" position to sustain growth, but turning that opportunity into lasting prosperity will depend less on external conditions and more on how quickly it opens its economy, adopts artificial intelligence and uses capital, talent and energy efficiently, said Indermit Gill, distinguished visiting fellow at Stanford University's Hoover Institution.

The country has strong domestic consumption, relatively low private-sector debt and favourable demographics, along with rapidly expanding digital and physical infrastructure. But the growth opportunity is conditional: The transition should be driven by domestic reforms rather than protectionism, Gill, a former chief economist and senior vice president for development economics at the World Bank Group, said in an interview with ET in New Delhi.

The global environment may be uncertain, but "the ball is in India's court", he said, adding that external factors were only one part of India's growth challenge. Gill pointed to "inefficient" allocation of capital, talent and energy as major hurdles within the country.


Also Read: Sharper, bigger RBI moves coming in December? SBI economists put things in perspective

Productive companies need to expand, while unproductive companies need to exit and free up scarce capital, talent and land. India's difficulty in achieving this has contributed to a corporate sector in which too many firms remain small and too few scale up into globally competitive enterprises, he said.

The same problem applies to talent, as India continues to underuse a large pool of female talent in skilled and well-paid occupations, said Gill. Barriers ranging from workplace discrimination to concerns about safety reduce the country's productive capacity, he said. Energy efficiency is another issue. India uses significantly more energy for each unit of economic output than many other economies, according to Gill. Improving efficiency could therefore provide a substantial productivity dividend without requiring a corresponding increase in energy supply.

Also Read: India has a 1% GDP opportunity. It’s hiding in plain sight

Restructuring of global supply chains offers an opportunity that India needs to pursue, he said. As companies diversify production away from China or elsewhere, India could emerge as a major alternative destination. Policymakers need to identify companies considering leaving an economy, say Japanese companies exiting China, and aggressively make the case for locating production in India, Gill said.

Vietnam, for example, has demonstrated how an investment strategy, combined with improvements in the business environment, can help attract global supply chains, he said. Gill was not worried about Indian companies investing abroad instead of at home. He is more concerned with India's inability to attract more foreign direct investment. "I'm perplexed why serious economists add imports to exports while estimating trade openness, but subtract investment outflows from inflows while imputing investment openness," he said.

India's employment structure means the potential productivity gains from AI could be greater than the number of workers whose existing jobs are directly threatened by the technology, said Gill.

For India, the focus should therefore be on deploying AI in areas where it can raise productivity.