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| Sunday, 29 December 2002 |
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India's GDP half that of China A study on productivity improvement in India carried out by McKinsey examined why India's GDP per capita of US$ 440 is only half that of China when ten years ago it was roughly the same. The study has identified three main barriers to faster growth : (a) The multiplicity of regulations governing product markets. (b) Distortions in the land markets. (c) Widespread government ownership of businesses. Surprisingly labour regulations and transport infrastructure are not regarded as the main barriers to faster growth. These are estimated to constrain India's economic performance by less than 0.5% of GDP a year. It is clearly evident that countries such as the USA, Germany, the U.K. and Japan which have the highest GDP per capita are also those with the highest productivity. The study therefore concludes that productivity gains should be the first priority ahead of savings and foreign direct investment for a country to improve its GDP. Productivity is measured by the amount of output per unit of labour and unit of capital invested. The Indian study also shows that productivity in certain sectors will be more difficult to achieve than in others. For instance the agriculture sector is projected to achieve a productivity of only 1.9% of U.S. productivity by 2010 while the automative sector could achieve 84% and the telecom sector could reach 100% of U.S. productivity rate. The productivity improvements already made in the automative sector also indicate what could be gained by removing product market barriers. Until the economic reforms in 1991, the automative industry recorded a low growth and produced basic types of vehicles at a high cost. The waiting time for new cars ran into many months. After foreign investment was allowed and the industry was liberalized, the automative sector productivity surged and quality impoved to world standards. The net result was cheaper and better quality automobiles and a net increase in employment. Agriculture is not expected to have much room for growth in productivity because the scale of farm size and investment required to move from manual harvesting and pest control to the use of combined harvesters or planes for aerial spraying of weedicides, are not found in India. The Indian study has also shown that at the present growth rate of 6% per annum, India's unemployment rate will rise to 16% by 2010. To keep unemployment at current rates the GDP of India has to grow by 10% annually. Sri Lanka's growth rates in the past few years have been way behind India's. To reduce Sri Lanka's unemployment rate and improve other economic and social indicators therefore will need a bigger effort and a greater shift of policies. The Sri Lanka Government is examining a proposal to commission a similar study to identify sectors with the best potential for productivity improvement, the areas in which each industry needs to work on and the macro level policies and action required to create the environment for productivity improvements. The policy changes may include increasing rates payable on properties and reducing stamp duty on property transfers. Such a policy when implemented, will force property owners to either improve the productive use of the properties or sell them to those who can do so and thereby afford to pay the higher rates. In Sri Lanka the policy reforms, unlike India will necessarily have to address itself to major changes of labour legislation, introduction of social safety nets for those who will lose employment (due to shifts in economic activity from low tech to high tech or from one industry to another), and tightening property rights and the enforceability of contracts. Perhaps improvement to ports, highways and railways in Sri Lanka may have a greater impact on GDP growth than the McKinsey study finding in India. A study if commissioned and its recommendations if implemented will without doubt improve Sri Lanka's GDP. Such an initiative is likely to move harmoniously with the financial sector reforms, ie. Sri Lanka project and the competitiveness initiative that have already been launched. Implementation of a strategy to improve productivity will bring about much change to practices and life styles. Change is often resisted by man but change is inevitable to achieve economic growth, create employment and improve the standard of living for the people of Sri Lanka. |
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