The Legatum Institute's 'Economics of Prosperity
' programme is pleased to launch a new study of the India
n economy focusing on market distortions that exist inside the border, as well as more conventional trade barriers and lack of property rights protection.
India has long been considered a potential economic giant. However, periods of impressive growth have been bookended with underwhelming economic gains and stagnation. India holds a key place in the global economy, and given the current global economic slowdown, its future has powerful implications for the future of the world.
India has also long been seen as a place mired in burdensome regulations, excessive bureaucracy, and market distortions. Despite roughly three decades of reform efforts, the Indian economy still suffers from costly, inefficient regulatory regimes. To be clear, we use the term “regulatory regime” to mean the legal, economic, and governance structure that applies in the country as a whole. This document seeks to identify these problematic policies and attempts to quantify their impact on the Indian economy. By quantifying the impact of distortionary policies on the economy, we also estimate the potential gains available to India, were it to replace these policies with pro-competitive regulations.
We view the regulatory environment in India through the lens of anti-competitive market distortions (ACMDs) and begin with an explanation of ACMDs and their theoretical underpinnings. ACMDs are policies or regulations which provide a competitive advantage to some players or a player in the market to the detriment of others. These distortions come in a variety of forms and can sometimes be difficult to identify. ACMDs may cause similar inefficiencies and losses to welfare as the state-owned monopolies which India has favoured for most of its history since independence.
The paper develops a competitiveness diagnostic for the Indian economy specifically. The diagnostic identifies the economic constraints that are suffered by the Indian economy. We do this by identifying ACMDs in a number of sectors. The ACMDs we identify broadly cover each sector of the economy and fall into three categories: property rights protection, domestic competition, and international competition. The number of distortions is large and the implications for the competitive environment range in severity from somewhat mild to highly damaging. This study identifies the solutions to these distortions and constraints, and then evaluates the economic gains that can be derived from the removal of distortions.
We apply our Productivity Simulator in order to determine these potential gains. The Productivity Simulator is a proprietary tool we have developed to measure ACMDs. The results show that if all ACMDs in India were replaced with truly pro-competitive policies, then the productivity of the Indian economy could improve by as much as a factor of 19. Assuming an average domestic capture rate of 20%, domestic GDP would rise by a factor of 4, making India the fourth-biggest economy in the world behind only the EU, US, and China. Growth on this scale depends on India adopting the most pro-competitive policies in every possible instance. The further from this ideal India is, the further it will be from reaching the ideal amount of growth. The purpose of this study is not to predict what growth is likely to arise in India, but rather to illustrate the ceiling which represents India’s growth potential and to show how much wealth is being lost to the Indian economy by the ACMDs that prevail.
Overall, ACMDs are widely prevalent in India, and many of them result from an effort to protect particular industries or firms, as is confirmed by the industry studies. For the reforms undertaken in India to unleash the country’s true potential, the government should focus on many of these distortions and seek to eliminate them.
This report was launched by Lord Bilimoria at the Legatum Institute on 23 May 2016.
About the Economics of Prosperity
The Economics of Prosperity programme looks at how policy-makers can develop legal, economic and governance environments that deliver increased economic activity, generate jobs and lift their peoples out of poverty. Led by Shanker Singham, the programme produces papers, panels and seminars, including country studies that identify the constraints to economic growth and wealth creation.