The share of manufacturing in India’s GDP can go up to 30% if India does labor reforms and relaxes regulations, according to Nick Bloom, professor, Stanford University. He tells Dilasha Seth that it is good idea that allowing FDI in multi-brand retail is state’s prerogative, since after looking at the benefits of opening the sector, other states could follow.
Q. With India’s economic growth down to 5.3% in Q2, what are the deterring factors according to you? Is it the domestic factors weighing down growth more than the external ones?
A. Domestic issues are India's real problem rather external ones. So my anology is like, India is like a boxer with its hand tied behind its back. The government has tied the hands behind with the labor regulations, permits, licensing etc. Imagine that you are a businessman, and want to open a factory. So, if the second hand is unleashed then India can grow faster. It is really hard with so much of regulation, so you move to Singapore, Hong Kong or US.
Q. Are you saying that if India addresses these domestic hurdles, it can tread a high growth path like China?
A. If the domestic issues are sorted out India’s growth rate could be at least as fast as China's. The govt could increase growth by getting rid of most of these regulations. India’s growth rate is lower than China’s, as China is a freer market. There are lesser labor regulations and the rule of law is very strong. So what can drive India’s growth in the medium rate is going to be how much the government can do to push through the retail FDI, the land acquisition bill. Both have gone through, which is a great positive.
Q. The manufacturing sector has been a drag on the overall economy. Can we sustain a high growth rate with the share of manufacturing being at 15% of the GDP?
A. India has a very small manufacturing sector. Every country around the world, which have achieved a massive growth rate is through manufacturing. No one has really been able to achieve high growth like agriculture to services,.
Q. National Manufacturing Policy aims at increasing the share of manufacturing from 15% to 25% in the next decade. Do you think that is doable?
A. India’s labour is way cheaper than China’s. So people are moving out from southern China to inland parts of Indonesia. They would happily invest in India and India’s share in manufacturing could possibly go up to 30%, if it eases the labour regulations, allows FDI and eases licence procedure.
If I am a big multinational company and thinking where to set up my factory, I think of two options- India and Vietnam. So India as it has cheaper wages than Vietnam, but Vietnam is a lot of relaxed and not stressful. There is some corruption, but I can get my way and run my basic business. But if I go to India, I would sign a partnership with the government and I am worried about the uncertainty. I think there is a huge pool of people who wants to invest over this side. If you see the amount of money pouring over Vietnam and Indonesia and China, a part of that could come to India.
With about a week to go for the fiscal cliff and things are still unclear in US.
The Republicans and Democrats are fighting like King Kong and Godzilla. I think if they go over fiscal cliff, it will be a horrible beginning of 2013. They need to make a permanent resolution than a temporary resolution; but the really big long run problem in US is the healthcare expenditure. There is no long run solution.
Then Europe is really bad. Greece is number 100 in World Bank’s business index. It is terrible. They need a major reformist leader.
Q. Talking about FDI in multi-brand retail in India, how do you look at the fact that it is state’s prerogative to allow FDI?
A. That is good and not bad. I think if some large states like Maharashtra introduces it, and prices fall by 50%, other states will also follow. So you just need one big state to do it.