Fundamentals need to be fine-tuned with focus on human capital, technology readiness and productivity
The crisis caused by the novel coronavirus pandemic at home and globally has sparked debate about new thinking and new approaches to managing the economy and the future of humanity. Globally, this has underscored the need for policies to enable resilience in the economy and ensure a strong health system with research and development. In India, various efforts are being made to enhance economic development.
A Critical Reading of Reforms
History matters in a complex economic system. Therefore, it is important to briefly look at the economic reforms of the last 30 years. Evidence shows that the large-scale economic reforms initiated in 1991 – and at times, subsequent interventions to liberalize the economy and trade – have yielded some credible benefits for the country. Over a period of 30 years, growth in foreign exchange reserves, a sustained manufacturing contribution to GDP, an increase in the share of global exports (from only 0.6% in the early 1990s to 1.8%), strong information and communication technology software exports, and Sustained economic growth in the 6%-8% range shows clear signs of success.
Economic reform, so far, has focused more on the technical nature of the economy than on the system, process and people. As a result, some of the primary drivers of the economy – human capital, technology readiness, labor productivity, disposable income, capital expenditure, process innovation in setting up a business, and institutional capacity – have not received adequate recognition. In the context of the global competitive environment, some fundamental issues should be considered closely.
Human resource capital (HRC) formation, a good determinant of labor productivity, has been found to be lacking throughout the period of reforms. Lack of quality education, less skilled manpower and inadequacies in basic health care have reduced HRC. The HRC rank for India is 103; According to the Global Human Capital Report 2017, Sri Lanka is ranked 70th, China 34th and South Korea at 27th.
As indicated in the World Bank’s database on GDP for 2019, India has a low per capita GDP of $2,104 (at $6,997 in PPP terms, ranked 125th globally), while the world There is a direct correlation of the average at $11,429 (at $17,678 in PPP terms). Low per capita family income. Closely linked, the Deloitte (Global Manufacturing Competitiveness Index in 2016) report shows that the hourly wage in India has been $1.7; They are $38, $24, $20.7 and $3.3 for the United States, Japan, South Korea, and China, respectively. Low wages have a direct impact on households’ disposable incomes and most households have little room for enough disposable income to buy consumer durables or industrial products, thereby impacting demand.
low research and development expenditure at 0.8% of GDP, face to face Higher value to other fast-emerging economies such as South Korea (4.5%), China (2.1%) and Taiwan (3.3%) has resulted in reduced innovation potential in technologies and ‘technology readiness’ for manufacturing in particular. has decreased.
Labour productivity
Lack of HRC and low technology readiness have adversely affected labor productivity. In India, labor productivity in manufacturing is less than 10% of that of advanced economies, including Germany and South Korea, and about 40% that of China, according to a 2018 World Bank publication. The future of manufacturing-led development. Low productivity has adverse effects on competitiveness, manufacturing growth, exports and economic growth.
In addition, capital expenditures and lack of institutional capacity, and inefficiencies in business service processes, lead to difficulties in acquiring land for businesses, in efficient use of economic infrastructure, and in providing business services, leading to long-term and Cost in setting up more enterprises, resulting in loss of creative energy of entrepreneurs.
Fundamental shortcomings, as mentioned above, are at the core of the problem. The economy has been affected internally over the years due to low consumer demand due to low household incomes as well as low competition and inadequacies in integration with global supply chains to trade externally. Business as usual (BAU) approach is resulting in diminishing returns.
paradigm shift
To drive the economy, new thinking is needed to address the underlying issues in a comprehensively integrated manner. New reforms will require a separate departure. The approach should be systemic and address structural issues – HRC, skills, research and development (R&D), land management and institutional capacity. The focus should be on the quality of business services, technology readiness, labor productivity and per capita income.
First, investment in human capital and technology is a prerequisite for attracting large investments in infrastructure manufacturing and advanced services. Another first step is to increase public sector outlays for education, skill development (including advanced technologies) and public health to 8% of GDP, from the current nearly 5%. The report on Advanced Manufacturing (by McKinsey and the World Economic Forum) states that Industry 4.0 will be defined by new technologies such as robotics, 3-D printing, Artificial Intelligence (AI), Internet of Things (IoT), etc. that can produce rapid changes in speed, scale, and scope to a higher order of up to 10X or more; Technology obsolescence will be faster than ever. As a result, technology preparation efforts are very necessary to remain competitive. It calls for raising public research and development expenditure to 2% of GDP over the next three years.
In addition to improving the social safety net, strategies need to be worked out to increase per capita income for workers through higher skills and increasing minimum wages. It calls for a concerted calibrated approach through the collaborative efforts of the government, industry and trade unions. On the issue of increased cost of labor, this can be compensated by higher productivity, some tax-advantages especially in the initial period of wage reforms for micro, small and medium enterprises, reducing transaction costs in business and basic In addition to improving the efficiency of using the framework.
systems approach
Nobel laureate (1993) Douglas C. on the role of institutions in driving the economy in a country. Building the capacity of public institutions is essential to creating a good environment for business and industry, using insights from North’s work. The process of reforms is as important as the content. Policy reforms should emphasize process innovation and promote a business-centric approach to implement pre-determined service quality levels (SQL), so that a conducive ecosystem with a state-of-the-art plug-and-play model can be made. For efficient internal supply chain management for new enterprises, and to integrate with the global supply chain.
Finally, largely absent in the 1990s, apart from rapid globalization and rising aspirations, the future of the economy must be viewed against the backdrop of a significant and irreversible shift, particularly in the context of global supply chain dependence as a result of knowledge . The intensive nature and exponential impact of businesses due to advanced technologies under Industry 4.0 since 2010. Therefore, the strategy adopted since the 1990s may not ensure adequate returns, and may call for innovative approaches in public policy making.
In short, it requires a systemic approach – involving the inter-connected fundamentals of the economic system – for policy reforms to heal the economic fundamentals, to unlock creativity and innovation in the economic system, total To increase factor productivity (TFP). , or a measure of productive efficiency, and to achieve high growth.
DN Gupta is a former IAS officer. Views expressed are personal
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