Rural welfare, not Walmart

We need retail reform as India's farmers must be connected to its rising cities

Are the new big-bang reforms necessary for India? If yes, why is there so much political opposition? The first is a relatively straightforward economic question, the second requires complex political reasoning.

A general point first. If economic policy in India remains unchanged, there is a real danger that India's investment rate will fall below 30 per cent of the GDP. That will be quite calamitous. It will, quite likely, lead to an annual economic growth rate of less than 6 per cent. With India's youth entering the labour force in ever larger numbers, employment generation will not reach the necessary levels, and with tax revenues decelerating, there will be less available for welfare programmes for education, health and public works. While India cannot easily get to a Chinese-style investment rate, touching 47-50 per cent of the GDP, a systematic attempt is needed to keep the investment rate above 35 per cent. Investment is critical to growth, employment generation and welfare programmes. Viewed from that perspective, the recently announced reforms are a step in the right direction.

Foreign direct investment (FDI) in multi-brand retail has become the centrepiece of the proposed new reforms. There are two ways to think about its implications statistical and conceptual.

Since 1995, Indian agriculture has grown at roughly 2.5 per cent a year, whereas the overall economic growth rate in this period has been close to 7 per cent per annum. Depending on how one estimates the size of the non-agricultural part of the rural sector, the urban sector has grown at roughly 8-9 per cent per year. Thus, compared to the countryside, the growth in urban incomes is likely to have been three to four times higher. One could say that India's cities have boomed at Chinese-style growth rates, whereas rural India is still stuck at the historical annual growth rate of 2.5 per cent.

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