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Why India’s policymakers need to fire on all cylinders



Authors: Shekhar Shah and Rajesh Chadha, NCAER

India, the world’s third largest economy measured in purchasing-power parity terms, became a middle income country in 2007. It has one of the world’s youngest populations, with some 260 million people below the age of 25, and its economy is once again growing fast, at 7 per cent growth one of the world’s fastest-growing economies as of August 2015. But will it grow rich before it grows old?

India’s economic growth in the years before the global financial crisis was also spectacular and substantially reduced poverty. But India is likely to remain a lower middle-income country for the next 15 years at least. India has one of the world’s largest concentrations of poor people, with more than 723 million people in 2011 living on less than US$2 a day.

Part of the problem facing policymakers is India’s astonishing diversity. Some of the states in the Union are solidly middle income, like Haryana and Tamil Nadu. Others, like Bihar and Uttar Pradesh, would be among the world’s poorest countries, were they independent. This means that as India confronts problems that are typically thought of as characterising low income countries, it may also be forced to consider the kinds of policy challenges that bedevil middle-income countries.

India will need to start thinking about how it will compete in a rapidly changing landscape of manufacturing, global commerce and skillsets shaped by global supply chains, distributed sourcing and processing, and disruptive technologies not yet invented. Its low female labour force participation rate — around 33 per cent in 2012, compared to an East Asian average of 63 per cent — must be addressed. Its innovation and education supply chains will require large strategic investments, and its intellectual property regime rethought.

But as important as these long-term challenges are to India escaping the middle income trap — the tendency of once fast growing countries to falter and remain stuck in middle income territory — the necessity of escaping its low-income traps is, if anything, even more pressing.

Manufacturing has traditionally been the sector that contributes most strongly to economic growth in developing countries like India. But there are some disturbing headwinds that will make progress in this area very difficult without concerted policy action.

Even though India ought to have a comparative advantage in low-skilled labour-intensive manufacturing, currently the formal, registered manufacturing sector in India uses skilled labour more intensively. Either the sector will have to change in order to absorb a vast, informal labour force, or manufacturing will struggle to provide the productive employment opportunities India sorely needs. And growth in registered manufacturing as a share of output seems to have stalled well before much of India has fully industrialised. Some recent estimates put out by the government in its 2014–15 Annual Economic Survey show that only in Gujarat and in Himachal Pradesh is registered manufacturing’s share of value added increasing.

Why has growth in this sector remained so sluggish in a country that is so labour abundant? The failure to liberalise factor markets — and in particular labour and land markets — is often blamed.

There are more than 140 overlapping labour laws in India: 44 at the federal and about 100 at the state level. States with overly restrictive laws have experienced weaker industrial growth and have benefited less from investment delicencing. This burdensome regulatory environment is part of the reason for India’s huge informal labour market.

Rational and fair land acquisition is a precondition for largescale investment in growth-supporting, public infrastructure. The law that governed this area of the economy was until 2013 a relic of British imperial legislation, one that provided very few protections for landowners. The new Land Acquisition, Rehabilitation and Resettlement Act introduced by the last government, however, tipped the scales dramatically in favour of landowners, making land acquisition for public purposes extremely difficult. The Modi Government has struggled with the parliamentary passage of a new land bill, and while it has had a temporary ordinance in place, this is now being allowed to lapse, and fair, settled, long-term land acquisition will remain difficult until its legal basis is settled.

The political economy of reform in both areas is difficult, given the regulatory overlap with different levels of government. The Modi Government’s plan of decentralising policymaking, which feed off the recommendations of the 14th Finance Commission and has been backed by a large increase in the states’ share of tax revenue, should provide substantial incentives for states to implement reforms themselves in order to compete for investment.

More broadly, the task facing Indian reformers will be made more difficult by three factors that were not faced by other rapid industrialisers in the region. One is the political economy of a large but underdeveloped country. India’s democracy is a vibrant one, but the sheer size of the poor population means that there is a constant temptation for policymakers to focus their attention on spending tax revenues on handouts rather than on stoking economic growth in order to create jobs that lift people out of poverty.

Another is the disorderly, fragmented global trading environment, with the kind of open multilateralism that facilitated growth in East Asia rapidly giving way to a thicket of preferential deals and trading blocs. And India must also industrialise at the same time as the world is trying to wean itself off greenhouse gas-emitting energy sources and technologies. This is a constraint that did not face countries such as Japan and South Korea during their development. India must use its late-comer advantage to turn challenge into opportunity.

In all, India’s policymakers face a formidable set of challenges that span the gamut of economic development. The new Modi Government has shown that it understands better than any government before it the scale and breadth of the task at hand. But, like its predecessors, it runs the risk of getting submerged in the many pressing day-to-day issues that confront it. And allowing its rhetoric to run ahead of its results.

What is needed is a small, tightly organised, but empowered group of policymakers, policy researchers and even younger politicians who are charged with thinking about India’s future and the policy strategies required to secure prosperity and productivity. Such a group should not seek to put out the daily fires that beset every government, but apply its strategic reasoning to all current policies and programs under review, and to new ones that no one is yet thinking about.

Dr Shekhar Shah is Director-General of the National Council of Applied Economic Research (NCAER), New Delhi. Dr Rajesh Chadha is the Senior Research Counsellor at NCAER.

This article summarises a paper prepared for the 37th Pacific Trade and Development Conference.

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Why India’s policymakers need to fire on all cylinders


ASEAN weathering the COVID-19 typhoon



Vietnam's Prime Minister Nguyen Xuan Phuc addresses a special video conference with leaders of the Association of Southeast Asian Nations (ASEAN), on the coronavirus disease (COVID-19), in Hanoi 14 April, 2020 (Photo:Reuters/Manan Vatsyayana).

Author: Sandra Seno-Alday, Sydney University

The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.


Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.

Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.

Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.

A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.

Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.

Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.

ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.

In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.

This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.

What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.

It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.

Over the longer term, ASEAN is faced with the question of whether it should seriously look…

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Can Asia maintain growth with an ever ageing population ?

To boost productivity in the future, Asian governments will have to implement well-targeted structural reforms today.



Asia has been the world champion of economic growth for decades, and this year will be no exception. According to the latest International Monetary Fund Regional Economic Outlook(REO), the Asia-Pacific region’s GDP is projected to increase by 5.5% in 2017 and 5.4% in 2018. (more…)

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