India’s economy has grown very rapidly in recent years. Since 1991 it has been among the top 10% of the world’s countries in terms of economic growth.
The primary challenge for India is to sustain this growth while spreading its benefits more widely. This requires continuous effort as international experience shows that growth slows down unless reforms are pushed through when growth is high.
Major obstacles to India’s growth are:
- Infrastructure Shortages
- Large Fiscal Deficit
- Restrictive Labor Regulations
- Unreformed Financial Sector
Crippling infrastructure shortages are the leading constraint to rapid growth as well as in spreading this growth more widely. These shortages have resulted in a skewed pattern of growth that is not sustainable.
While the high skill services sector that employs the better educated among India’s work force has flourished, the growth of more labor-intensive manufacturing that generates jobs for low and semi-skilled workers has remained constrained.
Infrastructure shortages have particularly hindered the growth of export oriented manufacturing and value-added agriculture that integrate into global supply chains, and need good roads, ports, airports, and railways as well as reliable power and water to prosper.
· India needs to invest 3-4% more of its GDP on infrastructure to sustain 8% growth.
· The private sector can play an important role in investing in infrastructure, including through public private partnerships.
· Improving the country’s capacity to implement infrastructure projects will be as important as increasing the amount of investment available.
· Investments should improve the delivery of services, and service providers need to be made more accountable to consumers.
· Emphasis should be placed on maintaining existing assets.
· Reforms need to be accelerated in all sectors. Difficult issues such as rationalizing user fees for services need to be faced.
The country’s consolidated fiscal deficit has been persistently large for many years. While recent efforts to tackle the deficit have paid off in substantial progress, it remains a continuing concern.
· The existing deficit leaves no fiscal space for new government spending on areas of high social priority. Initiatives in rural and urban infrastructure, employment, education, and rural health will have to be financed with some combination of higher taxes or user charges, or by cutting existing expenditures.
- Large deficits and an unreformed banking sector reduce the private sector’s ability to obtain bank financing.
India’s existing labor regulations - among the most restrictive and complex in the world - protect only the insiders, the small number of workers who are already working in the organized sector, while hobbling the creation of manufacturing jobs for the tens of millions unemployed or working in poor quality jobs.
There are at least four times more unemployed people (around 35 million) than are employed in the organized private sector. Firms with more than 100 workers consider labor regulations to be as constraining to their operation and growth as power shortages.
· Design labor regulations that attract more labor-intensive investment, especially in the formal manufacturing sector.
· Reforms should protect the interests of all workers by ensuring that workers’ legitimate interests are met. The World Bank does not advocate a regime of "automatic hire and fire" - though that is what the vast majority of workers in the unorganized sector actually face.
Financial sector reforms have led to a booming stock market that has helped large firms finance their expansion easily. However, small and medium enterprises - which are an important engine of growth and productivity - have not been able to access finance as they are too small to be of interest to equity markets or FDI.
Growth in lending to this sector has been slow due to the closely regulated publicly owned banking sector which has few incentives for innovation, and a large deficit with the attendant fears of making new loans.