Tuesday, November 21, 2006

Obstacles to growth

We have all been hearing about the excellent state of the economy, tremendous progress on reforms front, buoyant growth etc. There was an exclusive event – the ET Awards 2006 – hosted by ET recently wherein every important person having something to do with the reform process right from our beloved Prime Minsiter was there. And each one of them recounted the tremendous progress made by the country post 1991 reforms initiative.

But can you identify a few obstacles to growth in the present euphoric scenario? A very well written article in the ET lists out ten of them. Let us look at them:

1. Fiscal mess: Mounting public debt overhang and state government deficits. With demand picking up in the economy, the fiscal deficit is now pressuring interest rates to go up, inspite of there being an increase in savings rate.

2. Lagging infrastructure: In spite of the scanty progress seen in roads and ports sectors, it is at best marginal when compared with the actual requirements. There is an abject failure on the power front. The envisaged growth is not happening.

3. Downsizing and reform of the public sector stalled.

4. Poor governance: Coupled with poor regulation and corruption, this is leading to high transaction costs (leakages) in public service delivery and in doing business.

5. High tariffs: They have a negative fallout in allocative efficiency, welfare and in harnessing international trade as an engine of growth.

6. Failure in domestic tax reform: In spite of the belated move towards VAT (Value Added Tax), the plethora of taxes being levied by state governments come in the way of creating a common national market. India’s high tax rates are badly in need of aligining with international norms, which emphasize moderate rates and better compliance levels.

7. Lopsided growth: Only the services sector was growing; agriculture and industrial growth rates have lagged behind. The blame on infrastructural and labour market weaknesses cannot be totally ignored.

8. Uneven reform: Agriculture totally remained untouched by reform process. Agriculture crisis is best exemplified by farmers’ suicides in various parts of the country.

9. Financial sector: In spite of the fact that major reform successes have been seen in this sector, government still controls the levers of the financial system through regulated ‘benchmark’ small savings interest rates and majority ownership of banks and insurance companies. A mature market driven financial system, with full capital account convertibility and market-based pension systems, is still some way off.

10. Labour market rigidities: They continue to constrain growth and investment.

Read the full article here.