India’s economic development model is unlike most other emerging market countries. The Japanese one was export-driven and was subsequently emulated by the Koreans and Taiwanese, then the other Southeast Asian tigers and finally, China. Unlike these countries, India has yet to emerge as a manufacturing outsourcing destination, although incipient signs do point there. As a result, the Indian economy’s openness to trade is quite poor—our trade as a proportion of GDP is close to 30%, while that for China is closer to double that.
Yet, India is now beginning to generate a growth momentum of its own. The most recent half-year economic growth numbers of 8.1% yet again bear testimony to the fact that we are developing a unique growth model. Fundamentally, our model is not so much externally driven as consumer-centric. In other words, India is following an internally-led, consumer- driven, growth strategy. Borne out by the fact that India’s consumer spending to GDP ratio is close to 60%, whereas the comparable number for China is 42%. Surprisingly, the US, where consumer spending accounts for two-thirds of GDP, is closer to India in this respect.
If more evidence was needed, it is available in the overall sluggish economic activity whenever agricultural growth slows (for example, between 1999 and 2003). And, conversely, the beneficial cascading impact when there is even moderate growth in agriculture (2003 to 2005). Showing that agri-sector growth and rural consumer spending are essential drivers of our economy and cannot be neglected. The government must encourage consumer confidence to boost the economy.
The Prime Minister has said we must now aspire for a growth rate of 10%. At one level, we must not be carried away by a sanguine stock market outlook, coupled with just two years of growth, following a few years of sub-par growth. On the other hand, it is clear that the potential of the Indian economy is structurally improving. Therefore, a 10% growth rate on a sustained basis may not be so unfeasible.
What must the government do to achieve higher growth rates? I am on record as recommending much more focused and targeted state activity. And, a withdrawal from, and freeing of, a host of sectors where private enterprise can lead the way. Let me elaborate. Given our new-found consumer appetite, the government must liberate and unleash consumer demand. How? I have a simple suggestion.
• Our growth model is driven by consumer spending, unlike Southeast Asia
• As seen with telecom and aviation, price and cost cuts fuel huge demand
• By promoting competition, we ensure the benefits also reach end-consumers
We must drive price points lower. This is the best way to bring into the mainstream the pent-up demand in the system. Take the telecom sector: from drivers to massage-wallahs to waiters to paanwallahs, everybody is using cell-phones to make their lives more convenient and, importantly, more productive. The government did this by reducing licence fees, access charges and other regulatory fees. In a fiercely competitive market, this was passed on to consumers by telecom firms. Leading to explosive demand growth, as the lower price points made it affordable for a whole new mass of consumers.
Similarly, the current mini-boom in aviation is due to a reduction in taxes on aviation fuel. Again, in a competitive sector this was passed on to the consumer. In a number of other important sectors— cement, petrol, housing, aviation, power, airports, etc—a host of taxes keep prices high and products out of the common man’s reach. Ultimately, this leads to higher prices for end-products and diminished consumer demand. This then depresses investments and overall economic activity. Given India’s broad middle class and very price-conscious buyers, the price elasticity of demand is very high.
Therefore, the government must consciously reduce and rationalise taxes such as excise, customs and sales. Starting with infrastructure, the most pressing of our problems. In addition, it must foster higher levels of competition, that allow the benefits to be passed on to end-consumers. In this regard, it must allow both domestic and foreign competition, to in-crease the intensity. And, of course, it must regulate appropriately and effectively.
Such a strategy will be a win-win for consumers, lead to quicker economic growth, be suited to India’s more consumer-centric economic model and make India a much more attractive destination for both domestic and foreign investments. Above all, it would be politically very acceptable.
Source: The Financial Express