Forbes: Restore The Indian Economic Miracle By Attracting Foreign Investment
Restore The Indian Economic Miracle By Attracting Foreign Investment
May 30, 2014
By Stephen Ezell —Stephen Ezell is a Senior Analyst with the Information Technology and Innovation Foundation.
In his 2005 best-selling novel, The World is Flat, Thomas Friedman wrote about the rapid rise of India, recalling an evening in which he sat on a hotel balcony in Bangalore and found inspiration for the book. At the time, India had captured the minds of entrepreneurs and Fortune 500 CEOs alike, a beacon of globalization and new commercial opportunity. It was only a matter of time before the subcontinent would emerge as a major economic force akin to its neighbor to the north, China. That was then.
Today, less than a decade after Friedman trumpeted India’s rise and promise, the country has become a case study in missed opportunity. Two decades of robust economic growth that gave rise to the so-called “Indian Economic Miracle” have been replaced by stagnant economic growth: in 2013, Indian labor productivity growth (2.4 percent) and GDP growth (4.4 percent) sank to their lowest levels in over a decade. And while it’s no surprise that faltering productivity growth goes hand-in-hand with anemic economic growth, the trend is only worsening, as the productivity of India’s economy continues to lag against virtually all competitors. For example, in 1970, China’s economy barely reached one-third of India’s productivity levels; four decades later, Chinese productivity exceeded India’s by 67 percent. Part of the problem has been that Indian policymakers have eschewed productivity-enhancing policies (such as spurring more investment in capital equipment) because of the misguided notion that productivity growth costs jobs. This has left India saddled with inefficient enterprises and industries that have difficulty competing in global markets.
The Indian economy has also been hamstrung by a maze of byzantine regulations that make it one of the world’s most difficult places to do business—for domestic and foreign enterprises alike. India ranks 119th on the Heritage Foundation’s Index of Economic Freedom and 132nd on the World Bank’sDoing Business index. And out of 40 nations assessed by the OECD, India has the 33rd most complex regulatory environment, 37th most restrictive foreign direct investment policies, and most restrictive tariffs on trade. Moreover, businesses in India must obtain as many as 70 certifications to operate. As Gurcharan Das, author of the book India Grows at Night, which argues that most Indian economic growth occurs at night (when government offices are closed), laments, “The ‘license raj’ may be gone, but an ‘inspector raj’ is alive in India.” And while India has made dramatic and laudable strides in advancing access to basic education and lifting several hundred million out of poverty, India’s population still remains one of the world’s poorest.
It needn’t be this way. As the Information Technology and Innovation Foundation writes in a new report, The Indian Economy at a Crossroads, if India embraces a modern economy path that emphasizes across-the-board productivity growth in all sectors (not just in manufacturing) based on competitive markets, liberalized trade, streamlined regulations, robust innovation policies, and infrastructure investment, India will be able to generate all the economic and employment growth it needs. This includes addressing the daunting “demographic dividend” that will see over 100 million Indians enter the workforce in the coming decade.
Unfortunately, Indian policymakers have increasingly reacted to slowing economic growth by embracing “innovation mercantilist” policies—such as Preferential Market Access rules for government procurement of information technology products, local content requirements for solar energy installations, compulsory licensing of foreign biopharmaceutical intellectual property, and limits on foreign investment in retail—designed to promote domestic industries at the expense of global trade partners. Yet while these policies may appear beneficial by boosting domestic production in the short-run, ultimately they are likely to prove counterproductive, by hampering investment by companies in India, lessening India’s attractiveness as a location for foreign direct investment, and engendering retaliatory measures by other nations. A far better play would be to adopt an attraction—not a compulsion—strategy in trying to bring globally mobile investment and production to India’s shores, while at the same time ensuring robust domestic competitive markets.
India’s courageous decision to embrace robust economic and trade liberalization reforms in the early 1990s led to India’s economy growing 40 percent faster per year in the ensuing two decades than it had in the two decades before. If India is ever going to realize the hope of overtaking China, the leaders who come to power with the conclusion of national elections to choose a new Lok Sabha and Prime Minister on May 16 must start anew when it comes to economic policy. This means not just tackling difficult issues of corruption, labor market reform, and regulatory over-reach but also focusing economic policy on facilitating, not hindering, productivity- and innovation-based economic growth in all sectors, not a select few picked by Delhi officials.