Clipped from: https://economictimes.indiatimes.com
In the absence of American leadership, India and other developing countries need to champion the cause of WTO and global trade.
Readers of a certain age will remember the Bombay Club. No, the Bombay Club wasn’t an exclusive social venue in Colaba, but a reference to a group of industrialists opposed to the economic reforms of 1991. These industrialists were worried about foreign competition and lobbied with the government to keep imports and foreign firms away. Foreign competition came anyway. In response, the domestic industry became more efficient, consumption and exports grew, and members of the Bombay Club benefitted from access to foreign capital and global markets.
The global pandemic is being blamed on capitalism and globalization, accompanied by the usual crowd of mercantilists and isolationists calling for protectionism. The tragedy for many poor countries is that they still have a long way to go in realizing the income and productivity benefits of global economic integration. Globalization has not yet reached its full potential.
In the absence of American leadership, India and other developing countries need to champion the cause of WTO and global trade. By integrating with the global economy, India has helped move 300 million people moving out of abject poverty. Not to mention the added advantage of getting rid of clunky Ambassador cars.
The persistent failures of India’s import substitution policy are well documented. Just look at the anemic GDP growth from 1960 to 1990 highlighted by an inefficient domestic industry and shoddy consumer products. Some of our policy makers and business leaders seem to like exports and hate imports, but you can’t have one without the other. China, the world’s largest exporter, exported $2.5 trillion of goods and services in 2019. But, the country also imported $2.1 trillion worth of goods and $500 billion worth of services. Integration into global supply chains implies both imports and exports.
Globalization does not just trade of goods and services – the second pillar of globalization is cross border investment. India does not have the domestic savings pool to support the massive investment needed for physical and social (i.e, health and education) infrastructure. While India needs stable long term investment, North America and Europe want decent investment returns to support their aging populations. In a zero interest rate world, minimum investment returns needed to keep pension plans solvent are not available in the western markets. India’s need for capital and the west’s need for long term returns are aligned. A stable and predictable policy regime will go a long away in facilitating stable and long term capital flows into India.
In light of the Covid-19 pandemic, the government has the obligation and the opportunity to take some bold steps to get the economy back on track and implemented much awaited structural reforms. As global manufacturers are exploring new locations outside of China, India needs to act fast.
Let’s start with India’s outdated and dysfunctional labor laws that discourage formal employment and makes compliance difficult. More than 80% of India’s workforce is informal. Flexible labor laws will encourage ‘on the payroll’ employment and increased investment. A few states in India have already announced relaxations of many restrictive labor laws. These changes need to be thoughtful and permanent. But as several experts have pointed out, changes to labor law alone will not bring in a flood of investments. What the government also needs to tackle is land availability and enforcements of contracts.
Reforming agriculture is the other key to poverty alleviation. As part of her Covid -19 response, the Finance Minister talked about the removal of the Essential Commodities Act, an antiquated regulation from the old days when Indian didn’t produce enough food grain to feed its population. Today, India produces plenty of food grain, but Indian famers remain poor and lag behind their global peers in terms of productivity.
The proposed changes in the agricultural sector can have a huge impact on rural populations. In most states across India, farmers are a captive of their local mandis. The dismantling of the Essential Commodities Act will allow the farmer to engage with customers anywhere in the country, not just in their own districts or states. Farmers will have access to local and international markets via Food processors, organized retailers, and exporters. The improved access will help farmers’ incomes and improve the productivity of this sector, that has been stagnating for decades.
The Covid-19 pandemic has uprooted millions of lives and is threatening to undo decades of progress in poverty reduction. India can turn back this tide by decisive actions and improve employment and income opportunities for its young population.
(The writer is Managing Partner at Zephyr Peacock India)