This is an archived blog post from The Acorn.
The Problem McKinsey’s study found three main barriers to India’s faster growth: the multiplicity of regulations governing product markets, distortions in the market for land, and widespread government ownership of businesses (Exhibit 1). We calculate that these three barriers together inhibit GDP growth by more than 4 percent a year. Removing them would free India’s economy to grow as fast as China’s, at 10 percent a year. Some 75 million new jobs would be created outside agriculture—enough not only to absorb the rapidly growing workforce but also to reabsorb the majority of workers displaced by productivity improvements…The three main barriers to India’s economic growth—have their depressing effect largely because they protect most Indian companies from competition and thus from pressure to raise productivity.
The Solution The changes include eliminating the practice of reserving products for small-scale manufacturers, rationalizing taxes and excise duties, establishing effective and procompetitive regulation as well as powerful independent regulators, reducing import duties, removing restrictions on foreign investment, reforming property and tenancy laws, and undertaking widespread privatization. If the government carried out these changes over the next two to three years, we believe that the economy would achieve most of the projected 10 percent yearly growth by 2005…
Critics might still argue that the increase in GDP resulting from these policy changes will all flow to the already rich. But after carefully examining the expected effects of the proposed reforms on the Indian economy, we can see that, once again, the opposite is true. By creating a virtuous cycle of broad-based growth in GDP, the changes will benefit every Indian. For example, the real incomes of farming families—the poorest group—will rise by at least 40 percent over ten years. (c) McKinsey Quarterly
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