[1] The choice of periods for computing the averages takes into consideration the unique economic and political conditions prevailing in the Indian economy in the respective periods. For example, the periods 1976-77 to 1979-80 and 1989-90 to 1991-92 had political and economic disturbances and uncertainties, whereas 1980-81 to 1988-89 and 1992-93 to 1996-97 were periods of reform and more rapid industrial and economic growth. The able shows that the annual average of TFP growth rates exceeded 2% in both the 1980-81 to 1988-89 and 1992-93 to 2000-01 periods, which were reform periods. 

 
The development of the Indian automotive sector over the years is a case in point. Twenty years ago, two monopolistic carmakers - Hindustan Motors and Premier Automobiles Limited (PAL) - dominated the market and offered a handful of outdated models. In 1983, the government allowed Suzuki Motor to take a minority stake in a joint venture with small state-owned automaker, Maruti Udyog. In 1992, nine more foreign automakers were allowed to invest in India. This infusion of new capital and technology created serious competition for the two erstwhile leaders, eventually forcing PAL out. The industry, one of the fastest growing in the world, now produces 13 times more cars than it did 20 years ago. Tata Motors hit a milestone in 2004 by exporting 20,000 cars to the United Kingdom, to be sold under the MG Rover brand. Total Indian automotive exports during the first eight months of the current financial year have already crossed 100,000 (the total number achieved last fiscal). Meanwhile, prices for Indian consumers have fallen by 8-10% annually, unleashing a burst of demand and allowing steady employment despite rapidly rising productivity. Along with the assemblers, successful component manufacturers and suppliers have come into being, enriching the industry even further.

Clearly, productivity is the key. At times, though, it might seem counter-intuitive as it can be argued that productivity would reduce employment. The fact is that the US is the most productive nation, but it does not have substantial unemployment. While unemployment rates in most nations are almost similar and ranges from 4-12%, it is the productivity difference that really makes the difference between national incomes.

Productivity is impacted by policies that distort competition. Why then are such policies so pervasive? For one, most governments favor the social objectives that inspire high minimum wages and lay-off hurdles. They may not be aware of the unintended adverse consequences that create major barriers to growth. Instead of attempting to achieve social objectives by limiting competition, countries should allow fair competition and thereby generate more national income, which can then be redistributed through taxes and government subsidies for the poor. Countries that follow bad competition policies also help the business elite. In developing countries today, every domestic firm is a potential special interest that stands to lose from more competition. These unproductive firms' workers often think, mistakenly, that they too stand to lose in the face of competition. To have healthy economies, countries must allow unsuccessful owners and managers to fail so that more productive ones can take their place. In healthier economies, workers will find a better job market.

Take India's textile mills for example, which were done in by protectionist public policies. The Indian government has directly limited competition by insisting that several hundred consumer goods can be manufactured only in small-scale plants. As a result, Indian consumers pay higher prices than they should, and India, unlike China, hasn't been able to emerge as a global center of low-cost manufacturing. China, in fact, exports to India. Moreover, in housing construction, competition among developers and construction firms is based not on cost and productivity advantages but on gaining control of scarce parcels of land with clear ownership titles.

A decade ago, both India and China were poised on the brink of new prosperity. But while Chinese per capita GDP soared at the end of the 20th century, India stagnated, posting only 40% of China's growth - a clear indication of India's antiquated business policies and inadequate business environment that continue to stifle competition even now. According to a World Bank report on the Business Environment in 2004, it takes an average of 11 procedures and 89 days to start a business in India, compared with the regional average of 9 and 26 and the OECD (Organization for Economic Co-operation and Development) average of 6 and 25. For registering properties in India, it takes 6 procedures and 67 days as against the regional average of 5 and 55 and OECD average of 4 and 34. Enforceability of contracts is another major area of concern. The number of procedures counted from the moment the plaintiff files a lawsuit until actual payment is 40 in India and it takes 425 days for the same. The regional average is only 29 and 349 while the OECD average is even less at 19 and 229.

The 2001 McKinsey report proclaimed that India could grow at 10% if it focused on removing policy barriers to allow adoption of best technologies and processes to allow the increase of TFP and the growth rate. The report recommended removing licensing and quasi-licensing restrictions like reservations for small sectors, eliminating ambiguities in real estate, privatizing government companies and reforming labor laws. Dismantling barriers to economic growth may be difficult, as the short-term effect of transition can be painful, but keeping in mind the long-term benefits, that's a small price to pay.

Kunal Kumar Kundu is a senior economist with a leading bilateral Chamber of Commerce in India. He has a Masters in Economics with specialization in econometrics from the University of Calcutta.

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