India's high growth reform agenda: lessons for Pakistan

India’s High Growth Reform Agenda and Lessons for Pakistan

In addition to the health and human toll, the COVID-19 pandemic is likely to represent the largest economic shock that the world has experienced in decades. To provide an idea of the extent of economic devastation, developed economies shrank an unprecedented 9.8% between April to June 2020, compared to a mere 2.3% even in the worst quarter of the 2008/09 financial crisis. According to OECD, it is likely that the global economy will not return to pre-pandemic levels for years. On the other hand, World Bank estimates predict that over the longer horizon, the deep recessions triggered by the pandemic will leave lasting scars through lower investment, an erosion of human capital, and fragmentation of global trade and supply linkages.

For developing economies, the brunt and disadvantage accruing to this phenomenon may be higher as it is likely to reverse several years, if not decades, of progress on their development curve. For a conglomerate like South Asia, this can mean that economies like India that are well on a path to economic growth can face years of economic stagnation and those like Pakistan that are struggling to maintain modest growth, may further be pushed into the abyss. But with a common ultimate aim of fostering economic growth, can the countries not learn anything from each other’s experiences?

India’s economy is more than 10 times that of Pakistan and has 6 times more population. It encompasses a range of sectors and industries, from traditional village farming and modern agriculture to a multitude of digital and IT services. Services are the major source of economic growth, accounting for nearly two-thirds of India's output but employing less than one-third of its labor force. A recent report by the McKinsey Global Institute highlights the opportunity for India amidst the given circumstances – if used to spur reforms, the pandemic could actually put the country back on a high-growth track. But how? Three ‘growth boosters’, namely, (i) global hubs serving the country (ii) efficiency engines for competitiveness and (iii) new ways of living and working can add as much as $2.5 trillion to the economy by 2030. Pakistan has much to learn from the complementing set of activities under each.

To serve global markets, globally competitive manufacturing hubs are a prerequisite. Countries like India and Pakistan cannot dream of higher economic growth without raising competitiveness in high-potential sectors such as textiles and apparel, capital goods, pharmaceuticals and medical devices etc. This includes introducing sector specific policies that benefit large and small firms alike, putting in place a stable but declining tariff regime, creating well-functioning manufacturing clusters and reducing the cost disadvantage that they face in comparison to outperforming economies. Both Pakistan and India relatedly need to increase ease of doing business, removing obstacles like delayed payments and slow processes for obtaining permits through improvements like e-governance at local levels.

To progress towards competitive economies, inefficiencies in growth driving engines need to shrink: power, logistics, financial services, automation, and government services. Value based market models are a promising solution, where India is currently making progress. Working smartly and embedding technological advancement can lift productivity in plants and factories. Other opportunities including efficient power distribution, cutting T&D losses which could reduce power tariffs to commercial and industrial customers. For example, India is pushed to reduce commercial and industrial (C&I) power tariffs through new business models in power distribution. Various reform measures are required to reduce tariffs by 20 to 25 percent - a shift to franchising models or privatization of power distribution companies. For a country like Pakistan, there are important learning lessons here.

A case in point is the high-potential textile industry of Pakistan, which is the only sector of the country with an exportable surplus, and thus requires special attention and facilitation to double its exports in the next four years. Despite its potential, it remains burdened with the highest energy tariffs in the region - electricity at 13.3 cents/kwh and gas at $6.5 / MMBTU - significantly higher than other regional players such as India and Bangladesh (comparable values at 7.2 cents/kwh and 7 cents/kwh, and $3.2/ MMBTU respectively). India has focused on further lowering these prices from current levels which are already well below Pakistan's, they paradoxically continue to rise in Pakistan. Not surprisingly, this will render Pakistani goods highly uncompetitive. Furthermore, the government's reliance on taxing imports has been detrimental to the export-oriented industries which rely on internationally-sourced inputs, and yet are unable to acquire them at world prices. These hindrances, along with a plethora of others, have been highlighted at length in the Textile Policy of Pakistan, along with detailed strategies to address them. However, we are yet to see any action from the government's side when it comes to their implementation.

But amidst all the focus on manufacturing and industry, the 'human' element must not be forgotten. An emerging services sector is a reality that both India and Pakistan have, or will have, to contend with, alongside increasing aspirations of millions to possess a higher standard of living. Robust planning approaches for top cities including safer, higher quality urban environments, cleaner air and water, more convenience-based services and more independent work ideas in the new ideas-based economy are all opportunities to create millions of productive jobs in the services sector. The notion of cities as engines of growth is not new to economic debates in Pakistan but becomes a non-starter due to an eternal struggle with poor and partial decentralization, further resulting in weak local government structures.

Given the rapidly rising unemployment, Pakistan's leadership will be hard pressed to implement economic reforms, promote further development of the energy sector, and attract foreign investment to support sufficient economic growth necessary to employ its growing and rapidly urbanizing population. To this end, promoting the economy's traditional strengths like manufacturing (textile) and construction sectors which can create employment and boost GDP growth seems like a promising start.

Table 1: Comparison of macroeconomic indicators

Year/Indicator

GDP ($ Trillion)

Unemployment (%)

Exports

($ Billions)

Imports

Debt-External

($ Billions)

India

Pakistan

India

Pakistan

India

Pakistan

India

Pakistan

India

Pakistan

2015

2.10

0.27

5.57

3.57

264.9

22.09

390.7

43.99

474.7

66.71

2016

2.29

0.28

5.51

3.79

260.5

20.53

356.7

46.99

484.8

73.09

2017

2.65

0.30

5.42

3.95

294.2

21.88

444.0

57.44

471.0

83.48

2018

2.72

0.31

5.33

4.08

322.8

23.63

617.9

60.16

529.3

95.34

2019

3.20

0.28

5.36

4.45

324.2

23.76

480.0

50.05

563.9

104.17

 

Link: India's high growth reform agenda: lessons for Pakistan