The Need of the Hour:
Global Value Chain-Oriented Economic Reforms
“Progress is impossible without change”
This famous quote by George Bernard Shaw highlights the juncture our country is standing on.
India has undergone a paradigm shift owing to its competitive stand in the world. Today, the Indian economy is on a robust growth trajectory and boasts of a stable annual growth rate, rising foreign exchange reserves and booming capital markets. Riding the positive sentiment and the wave of hope that swept through the country on the election of the new government, coupled by the reforms being taken, India’s economy gathered momentum in the last quarter of the previous financial year to expand by 7.5% year-on-year. But all is not as well. Issues like delay in simplifying India’s complex tax system and dispute over land acquisition bill stalling billion dollar projects continue to cripple our country’s ability to move forward and question the stability of the Indian economy in the long run.
The Economics Summit organised by International Management Institute, New Delhi aimed of having a detailed discussion on the various reforms that Indian government need to undertake in order to ensure unabated growth of Indian economy. Experts from industry presented their views on the current situation of Indian economy and how the much needed reforms like Make in India, GST, Foreign Direct Investment, Land acquisition bill and Financial Inclusion and are imperative to develop a sustainable growth model in future. The panellists included:
- Dr. Rajat Kathuria (Director and Chief Executive at Indian council for research and International Economic relations ICRIER)
- Ms. Jyotinder Kaur (Principal Economist, HDFC Bank)
- Dr. Rajesh Chaddha (Senior Fellow and Research Counsellor/ Research Directorat the National Council of Applied Economic Research, NCAER)
- Dr. B N Goldar(Professor at Institute of Economic research)
- Mr M S Sahoo (Member of Competition commission of India)
Below are the excerpts from the discussion
“India is going to urbanize at a rate that is both monumental and frightening” opening with these lines Dr. Rajat Kathuria (moderator) started the discussion first with his own views on the topics and then allowing the panellist to take lead and share their views. He started the discussion on Make in India initiative, highlighting India’s need to develop a manufacturing sector. He stated that India is not a part of global manufacturing process, not as much as its neighbours. Moving on to GST, he laid stress on the point that for India to become a manufacturing hub, the cost of doing business needs to come down, the regulation, green laws etc. add to the cost of doing business. The floor was then opened for discussion inviting panellists to share their views on the reforms.
Dr. B N Goldar started with the point that there is huge growth potential in Global Value chain. There has been a huge growth in world trade and some say India has missed the bus. He explained that competitive advantage in trade lies in delegating tasks, not doing everything ourselves. Starting with Make in India Initiative he explained Stan Shih Smile curve for manufacturing and elaborated on how manufacturing lies at the bottom of the smile curve thereby adding very little value i.e. 5-10% to the overall product. He laid stress on how India should focus more on Research & Development rather than manufacturing and explained the Make in India vs. manufacturing in India in the same line.
Moving on to GST and FDI he explained that Global Value chain is dominated by MNCs and unless we have the required amount of FDI, we cannot enter the global value chain. India receives less FDI because of its poor logistics, tax issues and Land availability. It was mentioned that Global Value Chain is capital intensive, unless we have skilled labour we cannot enter GVC.
Financial Inclusion, he stated that lot of industries can get into manufacturing if they have the right amount of resources. Around 40% of people in manufacturing are families. He told that in Business manufacturing only small amount of people are involved in international marketing. He also laid stress on point that why do we need to sell internationally when there is a huge advantage in national market.
Dr. Rajesh Chadda speaking about Make in India differed in his opinion from Dr. Goldar, he stated that a small commission of 5-10% on manufacturing a component is also very important for India at this stage. Even if it is at bottom of the smile curve, the huge volume of production will work in India’s favour. The bottom of the smile curve worked for China and will work for India as well.
Discussing the Flying geese paradigm he took the example of Japan which became the leading power in technology, and how the Asian nations will catch up with the west when the production of the commoditized goods moved from more advanced to less advanced country. For e.g. the electronic manufacturing shifted from Japan to Korea.
Moving on to FDI, he discussed Abhimanyu’s paradox, highlighting that policies in India are not investor friendly, it’s easier to get in for investors but not that easy to move out. Trade aspects also pose a huge risk and logistic constrains are enormous as a per cent of GDP. India’s logistic cost is about 15%, among developed countries it is less than 10%.
He emphasised that land acquisition should be dealt with sensitivity as farmers in India have a sentimental attachment to their lands, even though the lands may not be productive. Labour Laws reforms are required as only 8% of the total workforce is in organised sector rest 92% is still in unorganised sector. These 92% need protection under labour law.
Mr. M S Sahoo started by emphasising that Global value chain at Global level lets source inputs from the most efficient players, produce efficiently and sells sell efficiently. Discussing Make in India he mentioned that the government policies should not distort the choice of the manufacturer and consumer.
He discussed that for global value chain and competitive neutrality, the four economic agents i.e. is Indian Firm, Foreign Firm, Indian Investor and foreign investor should have equal freedom. He mentioned that World Bank ranked India 184 out of 186 in terms of contract enforcement. All the institutions which contribute to the economy have not improved simultaneously.
Ms. Jyotinder Kaur while presenting her views mentioned that India should focus on the market share in export. She laid stress on the fact that for Make in India to be successful we should first focus on getting the bottom of the pyramid right i.e. to improve the skillset of labour then we should aim at sectors like defence and aerospace.
She mentioned that FDI inflows are important. It should be ensured that every aspect of manufacturing is improved including transfer of technology. The foreign players currently are unwilling to transfer the technology until they are offered a bigger stake.
Coming to GST she pointed out that GST in its current form is diluted. The original bill could be a game changer. Talking about financial inclusion she said that the aim is to mobilize household saving. We need to tap saving which is in form of assets. We need to remove the fear of financial inclusions and encourage people to use these facilities.
She stressed on the point that globalisation offers huge opportunities, but we also need to be prepared for the spill over risk, greater reliance on international banks increases the risk of financial crisis affecting us. Not only should we globalize but also protect ourselves from the risk.
The session was an enriching experience for each student. The session was very intriguing and helped in enhancing our knowledge about the topics discussed by the panelists. Each Panelist presented their views on the pros and cons of each topic and the after discussing and sharing their views on the topics, it was concluded that the reforms like Make in India, FDI, GST, Land acquisition bill etc. are imperative for India to attain the Global position it deserves. The Government has a tough road ahead and will face several barriers in its attempt to introduce these reforms. These reforms once implemented will help India achieve the sustainable growth model which is both desired and required.
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