US advice: double output growth

India would have to double productivity growth to attain a higher growth path of about 7-8 per cent. This would require a set of policies to encourage capital investments, exchange rate flexibility, education, deregulation and liberalisation in critical sectors, US Under Secretary for International Affairs John B Taylor said today.

Productivity growth in India had been static at 3.5 per cent over the past decade and "to get economic growth to 8 per cent on a sustainable basis will require productivity growth of about 6 per cent because employment growth can be expected to be about 2 per cent," Taylor said at the India Economic Summit.

"Countries with low productivity have low per capita incomes and high rates of poverty. To eradicate poverty, there is no alternative to increasing productivity," he said, adding that if there were no impediments to the flow and accumulation of capital and technology, countries lagging in technology could have higher productivity growth and catch up with more advanced economies.

Taylor's speech, however, underlined that the government was on the right track and doing what was required to raise productivity and therefore growth in the long run.

For raising productivity, he advocated policies which encouraged capital investments to grow rapidly, like the recent elimination of the long-term capital gains tax.

Education would have to be a focus area, Taylor said, as it was for the government to ensure that Indians moved into high productivity sectors. In addition, deregulation and liberalisation, as was done in case of the IT sector, would generate more success stories.

However, there was a need to move forward with other reforms like tax reforms, trade liberalisation and elimination of subsidies "to ensure that the government is not forced to confront the unenviable policy choice of whether to invest in its people or pursue fiscal discipline", he said.

"Fortunately, if the agenda outlined by Prime Minister Manmohan Singh and his government is implemented as planned, both goals should be achievable," he added.

On the international economic scenario, he said sustaining world economic growth would require a focus on avoiding policy mistakes. Reacting in time to keep inflation low was essential because "many expansions in the past were cut off by inflationary booms and the inevitable busts", he said.