The Indian Economy at a Crossroads
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THE INDIAN ECONOMY AT A CROSSROADS Stephen Ezell Robert Atkinson I T IF The Information Technology APRIL 2014 & Innovation Foundation TABLE OF CONTENTS Table of Contents ..................................................................................................... 2 Executive Summary.................................................................................................. 5 The Modern Economy Path .......................................................................... 7 Policy Recommendations ............................................................................. 8 Vision of the Future ................................................................................... 10 Introduction .......................................................................................................... 11 The Evolution of India’s Post-Independence Economic Policies ................................. 13 A Heavily Statist Approach .............................................................................................. 13 Adoption of an Import Substitution Industrialization Strategy ........................................ 14 Embrace of a “Small is Beautiful” Mindset and the “Lump of Labor Fallacy” .................. 15 Toward the Economic Reforms of the 1990s ................................................................... 16 Two Paths Forward for India ................................................................................... 18 Embracing Innovation Mercantilist Policies or a Modern Economy Path ........................ 18 India’s Increasing Embrace of Innovation Mercantilist Policies ........................................ 18 Information and Communications Technology .................................................. 20 Local Content Requirements ................................................................. 20 Restrictive Regulatory Certification Requirements ................................. 22 Restrictions on Foreign Competitors ..................................................... 23 High Tariffs on ICT Products ............................................................... 23 Digital Content Piracy .......................................................................... 24 Manufacturing ................................................................................................... 25 Life Sciences ....................................................................................................... 26 Renewable Energy .............................................................................................. 28 Retail .................................................................................................................. 29 Why India Increasingly appears to Be Embracing Innovation Mercantilist Policies ....... 30 Responding to Other Countries’ Innovation Mercantilist Policies ................................... 30 Fear That Productivity Growth Threatens, Not Increases, Employment .......................... 35 Policymakers Do Not Believe that Supply Will Create its Own Demand ........................ 42 Focusing More on Productivity Growth from the “Shift” Rather Than “Growth” Effect . 45 Persistence in Favoring a Manufacturing-Dominant Growth Strategy ............................. 50 Why Using Innovation Mercantilist Policies is a Flawed Model ................................... 56 Raise the Cost of Key Inputs, Including for ICTs and Other Capital Goods .................... 56 Damage Countries’ Participation in Global Value Chains ............................................... 60 Lead to Broad Economic Inefficiencies ............................................................................ 62 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | APRIL 2014 PAGE 2 Damage National Reputations ......................................................................................... 62 Fail to Achieve Their Intended Objectives ....................................................................... 64 Innovation Mercantilist Policies are Fundamentally Unsustainable .................................. 65 Innovation Mercantilist Policies Engender Self-Defeating Responses ....................... 66 Innovation Mercantilist Policies Are Unsustainable for the Global Economy ........... 67 Innovation Mercantilist Policies are Unsustainable for Countries Themselves .......... 68 A Distraction From Policies India Should Be Pursuing .................................................... 70 The Modern Economy Path ..................................................................................... 70 Key Framework Conditions ............................................................................................. 71 Starting a Business ................................................................................................... 71 Enforcing Contracts ................................................................................................ 72 Registering Property ................................................................................................ 73 Closing a Business ................................................................................................... 74 Flexible Labor Markets ............................................................................................ 74 Competitive Domestic Markets ............................................................................... 76 Product Market Regulation ..................................................................................... 78 Rates of Entrepreneurship ....................................................................................... 79 Corruption-Free Business Environment ................................................................... 81 Robust Intellectual Property Rights Protection ........................................................ 82 Values Toward Science and Technology .................................................................. 85 Effective Tax, Trade, and Investment Environment ......................................................... 86 Tax Environment .................................................................................................... 87 Trade Environment ................................................................................................. 88 Investment Environment ......................................................................................... 92 Supporting Investment in Key Factor Inputs ................................................................... 94 Investing in Physical Infrastructure .......................................................................... 94 Deploying Digital Infrastructure .............................................................................. 96 Cultivating an Educated and Skilled Workforce ...................................................... 98 Spurring Investment in Scientific Research .............................................................. 99 Innovation and Productivity Policies ............................................................................. 101 Developing a National Innovation and Productivity Strategy ................................ 101 Tax Incentives to Spur Investment in R&D and Innovation .................................. 102 Helping SMEs Become More Productive and Innovative ...................................... 102 Spurring Technology Transfer and Commercialization .......................................... 103 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | APRIL 2014 PAGE 3 Policy Recommendations ...................................................................................... 104 Overarching Domestic................................................................................................... 104 Specific Domestic .......................................................................................................... 104 International .................................................................................................................. 105 Overarching Domestic................................................................................................... 105 Improve Interagency Collaboration and Coordination in Rulemaking Processes .... 105 Bring Increased Clarity and Certainty to India’s Regulatory Environment ............. 105 Establish a National Productivity Council ............................................................. 106 Bring Best Economic Growth Policies From the State to National Level ............... 106 Specific Domestic .......................................................................................................... 107 Fully Repeal the Preferential Market Access (PMA) Mandate ................................ 107 Rescind Compulsory Registration Requirements and Accept International Lab Reports .................................................................................................................. 107 Ameliorate India’s Inverted Duty Structure for ICT Inputs and Components ....... 107 Implement the Goods and Services Tax (GST) ...................................................... 108 Implement Significant Labor Market Reforms ....................................................... 108 Implement Single Window Clearance for Investors ............................................... 108 Reform Business Registration Procedures to Allow Businesses to Register in One Day .............................................................................................................................