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The International Monetary Fund's recent downgrading of the growth forecast for India from 6.2 per cent to 4.9 per cent for 2012, which came on the heels of the decline in the actual growth rate to below 5.5 per cent in the first half of 2012, has brought reforms back to the centrestage of the policy discourse. Which reforms are needed and why?
India's growth trajectory has been unique. While most miracle-growth economies, such as South Korea, Taiwan and China, were propelled by super-high manufacturing growth with a concomitant decline in the agricultural share of both GDP and employment, India has achieved its impressive annual growth of 8.2 per cent over the last nine years with a stagnant share of manufacturing in GDP. While the share of agriculture in GDP declined significantly, agricultural employment has fallen at a snail's pace. It is services that have surged in India, growing at double-digit rates. Some sub-sectors such as real estate and business-related services have grown at astonishing rates of 20 per cent or more during some years.
This experience has led some to argue that liberalisation can claim little credit for India's growth success as the most prominent deregulatory reforms have targeted the still sluggish manufacturing sector and further that, in view of the sluggish response of manufacturing, economic reforms to free up the labour market are unnecessary. But neither of these could be farther from the truth.
The economic liberalisation of the 1990s and early 2000s has contributed to the growth in services in at least two ways. First, contrary to the reform critics, direct liberalisation in service sectors such as telecom, banking, and civil aviation has been associated with galloping growth, notwithstanding the recent troubles of the last of these sectors. The claim that liberalisation has been limited to manufacturing is a myth.
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