Finance Commission Chair Urges States to Prioritize Labour Market Reforms
Arvind Panagariya, the chairman of the 16th Finance Commission, recently shared insights on India’s economic outlook following the submission of the panel’s report. He expressed optimism about the country’s growth prospects, highlighting significant reforms and infrastructure developments. However, he also pointed out critical challenges that need to be addressed to ensure sustainable economic growth and job creation.
Panagariya emphasized that India’s growth prospects in the short to medium term are exceptionally promising. He noted that forecasts often underestimate the country’s growth potential. Recent government initiatives, such as the impressive infrastructure development, the end of the exemption raj in personal income taxation, and the implementation of a two-rate Goods and Services Tax (GST), have laid a solid foundation for economic advancement. The introduction of four new labour codes is seen as a transformative reform. With a growth rate of 7.8% achieved in the first quarter, Panagariya believes that India is on track to exceed current forecasts and surpass the 7% growth mark by 2025-26. He is confident that, with continued reforms at the state level, this growth can be sustained and even accelerated in the coming years.
Challenges in Job Creation
Despite the positive outlook, Panagariya identified a significant challenge: the need to create high-productivity, well-paid jobs for the vast majority of the workforce. Currently, a large portion of India’s labor force is engaged in low-productivity jobs, with many being self-employed. According to the latest Periodic Labor Force Survey, 46% of workers are in agriculture, and half of the agricultural holdings are smaller than half a hectare. Additionally, around 40% of workers are either self-employed or work in small establishments with limited capital. Only about 10% of the workforce is employed in larger enterprises. Panagariya pointed out that despite three decades of economic reforms, the country has struggled to move beyond the industrial framework established during the Nehru era, where capital and skilled labor remain concentrated in a few capital-intensive sectors.
The Role of Foreign Trade
When discussing the potential of foreign trade in India’s growth strategy, Panagariya highlighted the importance of making a strategic choice between relying on domestic markets or enhancing trade. He noted that this decision could significantly impact long-term growth rates, with the possibility of achieving 9-10% growth similar to that of Asian economies during their high-growth periods. The exports-to-GDP ratio has increased from 7% in 1990-91 to a peak of 25% in the mid-2010s, indicating that trade has been a crucial contributor to India’s post-reform growth. However, he acknowledged that the country has not fully capitalized on this potential, resulting in slower growth than what could have been achieved.
Necessary Reforms for Future Growth
Panagariya stressed the need for further reforms to unlock India’s economic potential. He pointed out that while significant progress has been made since 1991, much work remains. The recently implemented labour codes are a positive step, but states must continue to advance labour-market reforms. He also highlighted the need to address distorted urban land markets, rationalize customs duties, and revive the privatization of public-sector enterprises in non-strategic sectors. Additionally, he called for the conclusion of trade agreements with the US and the EU, emphasizing the importance of a regulatory mindset that supports lawful economic activity. By focusing on the 95% of businesses that wish to operate within the law, rather than overly strict regulations that deter compliance, India can foster a more conducive environment for economic growth.
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