Infrastructure and manufacturing led growth in India

Source-Live Mint

Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context- India needs to create 90 million non-farm jobs by 2030 to avoid economic stagnation.

What is the importance of these two sectors?

• Construction- 24 million non-farm jobs could come from construction alone by 2030, 16 million from real estate and 8 million from infrastructure.
• Manufacturing- Thus sector could generate one-fifth of the incremental annual GDP (about $750 billion) and close to 11 million new non-farm jobs by 2030.

How India can trigger construction growth and what are the reforms needed?

To generate its share of employment, the construction sector needs to grow at about 8.5%, nearly double its 4.4% growth rate over financial years 2012-13 to 2018-19. The following steps can trigger this growth-

1. Spend about 8% of GDP on infrastructure annually for the next 10 years.
2. Build 25 million affordable homes over the decade.

Reforms required-

1. Real estate reforms-

• India could include generously increasing incentives for home-ownership and creating rental stock.
• Tax incentives– At the central level, substantially raising tax deductions limits on mortgages and rental incomes, as well as introducing tax incentives for investments in rental housing stock could be considered.

For example- The US, which offers tax-deductible interest of up to $750,000 on mortgage loans and an effective low-income housing tax credit incentive.

• Rationalizing stamp duties and registration fees, introducing regulatory amendments in rent-control policies, launching digitally-enabled, single-window clearances to reduce time delays in affordable housing construction.
• Bringing the goods and services tax on modern construction methods in line with in-situ buildings.

2. High land-price-to- average-income ratio– In terms of per square-meter price to per-capita GDP, it is about 6.0 in Mumbai and 3.8 in Bengaluru versus 0.5 in Bangkok and 0.2 in Beijing. To narrow this gap, India could do two things.

• Release 20 to 25% of underused but buildable public-sector land.
• Reform zoning regulations in the top 300 cities by population.

What are the proposed ways to turbocharge Manufacturing

1. Structural reforms– India could introduce targeted, time-bound and conditional incentives to reduce the cost disadvantage that Indian manufacturers face while competing with companies from China and Vietnam, among other countries.
2. Free trade warehousing zones– Indian states could also create powerful demonstration effects by establishing port-proximate manufacturing clusters that contain free-trade warehousing zones.

• They could provide land at lower costs, plug-and-play infrastructure, and common utilities, apart from expedited approvals.

3. Reduction in costs– India also needs to consider reducing its factor costs of power and logistics. Both these costs could be reduced 20–25% by enabling franchised and privatized distribution company models, reducing cross-subsidy surcharges, and establishing multi-modal freight ecosystems.

Way forward-

• If adequately set up for success, manufacturing and construction could be pivotal in driving India’s growth over the next decade.
• The government has to introduce sector-specific policies to raise productivity in manufacturing and real estate sectors.