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Friday, September 07, 2001



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McKinsey report pegs 13-point reforms plan

Our Bureau

NEW DELHI, Sept. 6

AT a time when the Union Government is virtually at its wit's end to devise ways to halt the industrial slowdown and accelerate economic growth, any reforms package assuring a 10 per cent annual GDP growth must be music to the ears of policy-makers.

Music it was that was played here late this afternoon at 7, Race Course Road, the Prime Minister's residence. The musician ushering in good cheer was McKinsey & Company which made a detailed presentation on its report entitled `India: The growth imperati ve - Understanding the barriers to rapid growth and employment creation'.

And all ears, apart from the Prime Minister, Mr Atal Bihari Vajpayee, were the Finance Minister, Mr Yashwant Sinha, the Home Minister, Mr L.K. Advani, the Deputy Chairman of the Planning Commission, Mr K.C. Pant, the RBI Deputy Governor, Dr Bimal Jalan, as also about a dozen Secretaries of economic Ministries.

Adopting a bottom-up approach, the project involved studying 13 sectors in detail - two in agriculture, five in manufacturing and six in services. Together, according to Mr Shirish Sankhe, Partner, McKinsey and Company, they accounted for 26 per cent of India's GDP and 24 per cent of employment.

What must have been to the delight of the audience, Mr Sankhe said: ``What holds India back today is not the scarcity of resources, either human or capital, but barriers that prevent these resources from being utilised efficiently, i.e., barriers that co nstrain productivity growth.''

Unveiling a focused 13-point reforms programme while elaborating on the key findings of the project, Mr Sankhe emphasised that India can achieve a growth rate of 10 per cent annually which is not only possible but also imperative if the country is to avo id an unemployment crisis.

The three main categories of these barriers, he said, are product market barriers. These are factors that distort the prices and quantities of goods and services produced. To correct this which will benefit a host of sectors like manufacturing, power, te lecom, retail trade, dairy processing and petroleum marketing, the report says that the Government should abolish reservation for the 836 SSI items, starting with 68 sectors accounting for 80 per cent of the output. Sales tax and excise should be equalis ed for all players in each sector and enforcement should be strengthened while all licensing restrictions should be removed.

This apart, import duties on all goods should be reduced to 10 per cent, as in South-East Asian nations, over a period of five years and, more importantly, the ban on foreign direct investment (FDI) in retail trade should be removed.

The other barriers are land market barriers which distort the price of land and government ownership in sectors such as power. These three barriers alone constrain GDP growth by four percentage points. Among the recommendations are repeal of ULCRA, raisi ng property taxes and reducing stamp duties, reform in tenancy laws and privatisation of the power sector.

Dismantling these barriers, Mr Sankhe explained, will unleash productivity growth in construction, retail trade, food processing, telecom and power, especially when it is in these sectors the gap between current productivity and their potential is the la rgest. It will also allow India to mobilise more capital and its investment rate can go up from 24.5 per cent to 30 per cent of GDP.

Thus, by growing at 10 per cent over the next ten years, India will be able to create 75 million jobs outside the farm sector. While the Centre must take the lead, the states will have a crucial role to play as a third of the reforms are in their hands.

To reach the 10 per cent growth target by 2005, rapid implementation of the 13-point programme over the next 2-3 years, the report says, is critical.

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