India needs to accelerate economic growth to 10 percent annually to stave off poverty and looming unemployment, the US-based consultancy firm McKinsey said in a report issued Friday.
"Indian policy-makers believe that six percent growth is adequate. Yet India's working-age population is expanding ever faster," warned the report.
"Unless the gross domestic product (GDP) grows at closer to 10 percent a year, India could face unemployment as high as 16 percent by 2010."
The findings of the McKinsey report were presented Friday to Prime Minister Atal Behari Vajpayee who is struggling to accelerate growth which slumped to 5.2 percent in 2000-01 from 6.4 percent a year earlier.
India's economy has been driven slightly off-track by a global oil shock and lower agricultural output.
The report, however, pointed out that India could enjoy the kind of growth logged by China if macroeconomic policies were tightened and structural reforms initiated.
"Encouragingly, our study has shown that, with the right new policies, GDP growth of 10 percent a year is within India's reach," said the report.
McKinsey suggested 13 policy changes that could dismantle the bulk of critical barriers to India's growth.
"They include rationalising taxes; establishing effective, pro-competition regulation and powerful, independent regulators; removing restrictions on foreign investment; reforming property and tenancy laws, and widespread privatisation."
The report said that if the government carried out these policy changes over the next two to three years, the economy would achieve most of the projected 10-percent yearly growth by 2004.
"Our analysis shows that the resulting increases in labour and capital productivity (would) boost growth in overall GDP to 10 percent a year," said the report.
"They will release capital for investment worth 5.7 percent of GDP and they will generate 75 million new jobs outside agriculture in modern as well as transitional sectors."
The report said the three main barriers to faster growth were the "multiplicity of regulations governing products and markets, distortions in the land markets and widespread government ownership of businesses."
"We calculated that, together, these inhibit GDP growth by around four percent a year."
The report added that India needed to step up productivity.
"Productivity -- the amount of output per unit of labour and unit of capital invested -- is the most powerful engine of GDP growth," said the report.
"The three main barriers to growth have a depressing effect because they protect most Indian companies from competition and thus from incentives to improve productivity. Dismantling them would increase productivity."
The report said the Indian government was doing more harm than good in shielding the country's small-scale sector from competition.
"Small-scale reservation has cost India manufacturing jobs by preventing companies from becoming productive enough to compete in export markets," said the report.
"Similarly, tenancy laws designed to protect tenants have driven up non-protected rents and real estate prices, making ordinary, decent housing unaffordable to many Indians."
Three days ago, Vajpayee called a meeting of ministers from the power, petroleum, finance, labour, privatisation and law ministries to discuss measures to revive the economy.
He promised to step up investment expenditure, reform labour laws and give another push to the country's stop-start privatisation programme.
India has more than 240 state-run firms, most burdened by a bloated workforce and inefficient operations.
At least 30 state firms have been earmarked for privatisation, but India's attempts to sell off state companies have made slow progress because of opposition from labour unions fearing job losses and ministries unwilling to cede control of major firms. |
