India Must Change To Release Its Tiger

On the face of it, the Indian economic situation looks very promising: real GDP growth jumped to 7.9 percent last year from 5.7 percent in 2013. And despite a slight slowdown during the current financial year to 7.2 percent in the first three quarters, this is seen as just a temporary blip, with growth rising again to 7.6 percent due to an improvement in consumption, an increase in public sector spending and a rise in exports.

Inflation is under control, at around 5 percent, there is a narrower current account deficit, foreign reserves are increasing domestic markets are on the up.

And India also has a huge economic advantage over many Asian economies in that the increase in its working age population is not yet peaking. India’s working age numbers will outpace overall population growth for at least two more decades, according to some forecasts. UN figures show India’s working age population rising from 66 percent to 68 percent of its total population between 2015 and 2040.

Crucially for India, it will overtake China, whose working age population share will fall from 73 percent to 62 percent over the same period. But although a growing working age population is critical for growth, it is not enough on its own. Put simply, the country needs to harness this vast sea of people with an enormous job creation program. The country's labor force is highly fragmented and largely working in the unorganized sector. That's bad news for a country which needs to raise taxes to improve the lot of the overall population.

A recent survey of employment carried out by the government found that, incredibly, in 77 percent of Indian households nobody earns a regular wage. India needs to generate tens and hundreds of millions of jobs, and that workforce must be skilled. Another critical factor is labor productivity which has been declining. Lower productivity means lower output and, therefore, income.

An OECD report found that Indian growth was being held back due to one-third of young Indians (aged 15 to 29) being underemployed or poorly trained. The report suggested that the Indian government should invest more in education and vocational training. Given India's sensitivity to competition from China, it is worth noting that the Indian rate is twice the OECD average and almost three times that of China. Growth in India over the past decade or so has been driven by knowledge-intensive services, however they only employ a relatively small number of people.

Another important area is labor reform which has been left to individual state governments to carry out. Change will come about very slowly due to the high levels of bureaucracy and the large number of institutions and official bodies whose approvals are needed.

An overhaul of the sub-continent's taxation structure is also vital if the economy is to grow with bigger revenue generation, a wider tax base, efficient and transparent tax collection and slashing tax evasion and corruption. Taking on corruption and tax evasion, though politically difficult, is vital. Prime Minister Narendra Modi's demonetization's moves in withdrawing large banknotes from circulation were a good step in this direction, forcing many individuals and companies to open bank accounts and become more formalized. Expanding the manufacturing base is clearly important for job creation as is formalizing the economy and encouraging companies to work on the books.

A wider take-up by government bodies, as well as the private sector, of technological solutions and digitalization from banking services to healthcare, education, startups and so on is important.

Complicated labor laws, low literacy and numeracy rates, and the failure to computerize routine managerial roles are all holding the country back. However, it cannot be simply a case of aiming to automate jobs since that would lead to millions of people losing their jobs and create huge social injustice. Labor market reform, retraining and the creation of social safety nets are vital. India has huge potential, but must carry out widespread changes to ensure that it realizes it.