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June 23, 2013

Development Strategy

Towards 2050: Structural Shifts

By Nitin Desai

  

The structure of the Indian economy will change radically by 2050. Projecting the magnitude of this change requires some assumption about growth rates. But the broad picture about the structural shift is more or less invariant for an overall growth rate in the 6-8% range with agricultural GDP growing at 3-4%, industrial GDP at 8-9% and service sector GDP growing at 6-8%. Agriculture's share in GDP declines from 18%  to 4-5% and industry' share goes up from 27.5% to 40-45% between 2010 and 2050. The share of service sector GDP stays more or less the same.

Growth rates obviously matter for the increase in per worker GDP which would be about five times with 6% growth and over eight times with 8% growth. The rate of change in agricultural GDP per worker in agriculture would be more or less the same as the GDP per worker in industry and services because of a massive shift in the occupational structure of the work force.

The rural population and the number of workers in agriculture will continue to rise till the middle of the next decade, after which they will decline in absolute terms. About 100 million workers will shift out of agriculture and will have to be absorbed in manufacturing and services. At the same time the labour force will be larger by about 250 million workers, so that the non-agricultural sectors, which today employ around 200 million workers will have to find productive work for some 350 million more.

These numbers look overly definite. The point is that unless this sort of structural shift takes place the so called demographic dividend will remain a dream. In fact it is difficult to envisage any scenario of social, political and economic stability that does not assume a shift of comparable magnitude to the projections presented above.  Hence the first lesson on preparing for 2050 is that the planning of infrastructure, urbanisation and skill development must aim at increasing substantially the pace of job oriented industrial growth.

The numbers are useful; but the more interesting aspect is the structural reorientation within each sector that will have to be promoted. The industrial sector will expand by a factor of 20-30. This will require major structural changes in the institutional framework for infrastructure and corporate governance.  The greatest challenge is perhaps the restructuring and reorientation of the public sector so that it is driven more by delivering shareholder value than by diktats from corrupt ministers and babus.

We need to deconstruct infrastructure so that we can carve out well defined spaces where multiple suppliers can compete and the space that for technical reasons has to remain a public monopoly or under tight regulatory oversight. This process has begun in telecom and power but needs to go much further, for instance by offering consumers a choice of suppliers for electricity and allowing local mini grids.  The part that has to remain a monopoly, like a transmission line for power or an expressway between cities, can be privatised if there is an effective process for ensuring competition for markets.  The big step here is to get the big public sector entities to start operating as competitive players and hive off the necessary monopoly parts to separate publicly controlled or tightly regulated entities.

The structural changes in the private corporate sector relate essentially to a process of gradual transformation of family owned and managed corporations to professionally managed corporations where the separation of ownership and management is clear and management accountability is to the whole share-holding body. Independent financial intermediaries that will handle the savings of a burgeoning middle class can be the instrument for ensuring this.

This involves a string of connected changes including boards that are truly independent from management, a transparent market for corporate control so that incumbent managements face real threats of takeovers, better accounting and disclosure standards. A market for corporate control that is less concerned about protecting incumbent management will also go a long way towards the consolidation required in organised retail and wholesale trade, capital goods, consumer durables and financial services. A bold move would be to make the public sector entities also potential targets for takeovers. 

We are still a long way from this. More than half the share capital of Indian companies is in the hands of promoter groups who provide family based management leadership. Around a quarter is held by domestic financial institutions and foreign institutional investors. The pressure for governance changes will probably come from these foreign investors who would like nothing better than globally acceptable standards of corporate governance, transparency about performance and accounting standards.  However, domestic financial institutions and the minority shareholders who hold about a fifth of the capital can play a role in holding incumbent managements to account.  SEBI and the Company Law authorities will have to work hard to bring about this very necessary transition.

The non-corporate enterprise sector in India is huge - some 36 million units employing 80 million persons.  They are a crucial part of the industrial sector for two reasons - the jobs that they provide and their role as start-ups that experiment with new products, processes or business methods. The big structural gap here is the capital market barriers that stop them from growing to size.  The orthodox IPO market will not help here and we need better institutions for early stage financing to incubate new ventures and enterprising funds that focus on taking promising ones to scale.

Structural changes will be required even in the agricultural sector. By 2050 the number of persons dependent on agriculture will be less than one per hectare of gross cropped area as against the present worker area ratio of 1.5.  This large reduction in the numbers dependent on agriculture will mean an increase in average farm size and possibly an increase in mechanisation. However the more important change is the shift from foodgrain oriented farms to more complex enterprises that grow a variety of higher value products like fruits and vegetables and animal husbandry products. They will be linked more closely to structured cooperatives and organised retail rather than to local mandis for marketing.

The farmer and the industrial manager of 2050 will be a very different sort of person from what we see today.

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