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23
May 2017
India (The Total Investment & Insurance Solutions)
India has become the fastest-growing economy
in the world. The next logical steps are to make this trend sustainable and to
ensure that the benefits of this growth percolate down to the lowest rungs of
the income hierarchy. The
Total Investment & Insurance Solutions
The
success of these two goals will highly depend on the improvement in the
country's national competitiveness. This is because, to maintain high growth in
the global arena, India needs to retain its competitive advantage in the
industries it excels in, and to ensure universal prosperity it needs to enhance
competitiveness of its factors of production, especially labour.
Considering
the importance that the idea of competitiveness holds for India's future, there
is a need to understand what drives it. Is competitiveness a macro-economic
phenomenon that is dependent on variables such as interest rates, exchange
rates and government deficits? Or is it a function of cheap and abundant labour
and natural resources? Can it be said to be dependent on the quality of a
country's institutions or government policy?
Empirical
evidence seems to offer no clear answers. For instance, Japan and South Korea
have witnessed rising living standards with widening budget deficits; Germany
and Sweden have prospered despite high wages and labour shortages; and Italy
experienced a boom even though governance was highly ineffective.
Such
global experiences fly in the face of the traditional approach in policymaking
towards boosting national competitiveness that give undue importance to factors
like interest rates and labour costs. India needs a focussed approach towards a
singular goal that boosts its competitiveness to the fullest potential.
Michael
Porter, a leading voice in areas of competition and strategy, suggests that
competitiveness depends on the productivity with which a nation uses its human,
capital and natural resources. According to him, a nation's productivity is the
prime determinant of its long-run standard of living since the productivity of
the labour determines its wages and the productivity of capital determines the
return it earns for its holders. Thus, enhancing productivity caters to the
twin goals of ensuring growth sustainability and higher standard of living for
everyone.
The importance of productivity growth is
aptly summarised in noted economist Paul Krugman's words: "Productivity
isn't everything, but in the long run it is almost everything." Porter
concurs when he suggests that a policy focus on interest rates, labour costs,
exchange rates and economies of scale has only short-term appeal and will never
lead to any competitive advantage for nations. The Total Investment & Insurance
Solutions
The recent ongoing distress pangs in the
Indian IT sector vindicate Porter's claims. The sector was highly dependent on
providing low-cost talent to foreign firms. With higher automation and
anti-immigration policies abroad, India has begun to lose the short-lived
competitive advantage it had. Cost arbitrage can never be a long-term industry
growth strategy. On the other hand, productivity growth requires continual
industrial upgradation. To improve productivity, companies must raise product
quality, improve product technology, or boost production efficiency. All of
these factors require consistent innovation, which has been lacking in Indian
IT companies. The Total
Investment & Insurance Solutions
Views
are also divided on the role of government in boosting the competitiveness of
nations. Many believe that government has an essential role to play in framing
policies that directly support industries and boost their competitive
performance. Others support a laissez-faire approach where the invisible hand
guides market operations.
However,
both views have their flaws. The former runs the risk of creating high
dependency on government support for subsidies and incentives that hurts
industry in the long-run. The latter view ignores the crucial role the
government plays in providing vital institutional support to companies that can
nudge them towards becoming more competitive.
The
government's actual role needs to be that of a catalyst, which provides
companies with a conducive environment that helps them move towards higher
levels of competitive performance. Successful government policies are ones that
create an environment that helps companies gain competitive advantage rather
than ones that directly involve the government in the process.
The
Modi government, in the last three years, has attempted to undertake policy
initiatives along similar lines. The consistent efforts to improve
ease-of-doing-business across the country is a case in point. The parameters of
doing business include regulatory and infrastructural indicators that create a
conducive environment for business activities and reduce bureaucratic
interference.
Moving forward, the government needs to consolidate
on the gains it has made until now on improving competitiveness and act upon
areas on which it has missed out. The problem of NPAs, thus, needs to be the
first item on the agenda, which seems to be the case considering the free hand
RBI was recently given to resolve the issue. The issue of bad loans has
severely impacted lending operations to businesses, thus impacting the overall
competitiveness of the economy. The Total Investment & Insurance Solutions
Further,
invigorating the nation's competitiveness in the long run calls for some bold
moves on the part of the government. In the Indian scenario where regional
disparities are widespread, policy on competitiveness cannot be decided at the
national level. The government's role in enhancing Bihar's competitiveness, for
instance, will be in stark contrast to the policy interventions needed in
Maharashtra. Therefore, an apex body (as part of NITI Aayog) devoted to
enhancing the overall competitiveness of each state is necessary to stimulate
productivity and competitiveness across India. It would work as a principal
planning body of competitiveness in India and would be responsible for the
socio-economic development of each state operating in consonance with other
state departments as well as the central government.
Such
a body can understand the nuances of the state and be a facilitator in nudging
industries towards achieving competitive advantage in areas where the state's
strengths lie.
Competitive
regions will beget a competitive economy. The more competitive the economy, the
longer it can sustain its booming growth and bring about universal prosperity.The Total Investment & Insurance Solutions
