Ranabir Ray Choudhury

Will the imperatives of development of the Knowledge Economy be able to induce better economic governance in the country? On the face of it, it is unrealistic to expect anything like this, which is unfortunate because it will prevent the economy from encashing the competitive advantage it enjoys in the knowledge sector.

THERE is no escaping the fact that without more interaction between the national economy and the international marketplace — both as regards trade in goods and services and investment — the country will continue to notch up growth rates which will not fall into the class of other emerging countries such as China. This is the broad implicit conclusion of a new report published by the World Bank on how the Knowledge Economy can be leveraged to step up the country's secular growth rate.

Setting the canvas, the report points to the fact that, at this point of time, India is poised to take a big leap forward in terms of growth mainly because of the groundwork that has been done over the past two decades. It says that after growing at around 3.5 per cent from the 1950s to the 1970s it attained a growth rate of around 5.5 per cent by the end of the 1980s. In 1991, under Dr Manmohan Singh (who was then the Finance Minister in P. V. Narasimha Rao's Congress-led government), the country embarked on a new development strategy, the salient features of which were opening up more sectors to private investment, encouraging FDI, significantly reducing redtape, further liberalising the trade policy and the exchange rate regime, and reforming the capital market.

What all this led to was rather impressive. As the report says, living standards improved and incomes rose. The poverty incidence decreased from 44.5 per cent in the 1980s to 26 per cent in 2000 and the overall literacy rate rose from 44 per cent to 65 per cent during the same period. As far as FDI was concerned, it rose from virtually zero in the 1990s to $4.26 billion in 2003. From a growth rate of around 5.5 per cent by the end-1980s, the economy witnessed, for the first time, an unprecedented growth run of around 6.7 per cent between 1992-93 and 1996-97. After a dip till 2002-03, when the growth rate hit a low of 4.4 per cent, the pace increased to a whopping 8.2 per cent in 2003-04.

The report says that this pace of growth will have to be sustained to provide opportunities for India's growing population and its even faster-growing workforce. One way in which this stupendous, but not unattainable, task can be achieved is by developing strategies that focus on making more effective use of knowledge to increase the overall productivity of the economy. Knowledge, says the report, can make the difference between poverty and wealth.

So how does one go about it? The report makes it clear that the country has not slept over this fundamental aspect of development. However, it has focused attention on three of the four pillars of the knowledge economy — education, innovation and ICT (information, communication technology) which, clearly, has not been enough to provide the decisive push to growth. According to the report, to get the maximum benefit from investment in these areas, the initiatives must be part of a broader reform agenda. This is because some elements of the country's current economic and institutional regime are obstructing the full realisation of the economy's potential. Thus, the report feels that the country will not reap the full benefit of its investments in the spheres of increasing education facilities, improving ICT and R&D unless its broader institutional and incentive regime encourages the most effective use of resources in these areas, permits their deployment in the most productive uses, and allows entrepreneurial activity to effectively flourish.

What is the situation that obtains today as regards the most elementary requirements for investment in India? This picture is important because only after one sees it can one form an idea of what is required to improve matters. The report provides a rough idea of the existing situation in Annex 8, the subject being sub-divided into seven sections, each using three comparative average figures — those relating to India, the region and the OECD. Thus, as far as starting a business is concerned, the average number of procedures involved (for 2004) is 11 for India, 9 for the region and 6 for the OECD. As regards the number of days taken to start a business, the corresponding figures are 89, 46 and 25. For hiring and firing of workers (the labour laws), the "difficulty of firing" indices (2004) are 90 for India, 53.3 for the region and 26.8 for the OECD.

The corresponding "rigidity of hours" indices are 20, 36.7 and 50. On the "closing a business" front (exit policy), the time taken (number of years) is 10 for India, 5.2 for the region and 1.7 for the OECD. As regards the "recovery rate" (cents per dollar), the corresponding figures are 12.5, 21.4 and 72.1. That the awareness to improve the situation is very much there is indicated by the periodic visits made to the subject by government leaders and official agencies. Beginning with the Prime Minister's 2000 initiative uncovering a vision to develop India as a "knowledge society", there is the Planning Commission's 2001 foray into the subject (India as Knowledge Superpower: Strategy for Transformation) which suggested a four-pronged approach to increase employment in the new economy.

These are: creating structures for biotechnology promotion and application; promoting knowledge-based service industries in which the country has competitive strengths; packaging and marketing traditional knowledge, specially medicine; and improving capacity-building in three mutually supportive areas, namely, human resource development, R&D capabilities, and the application of technologies flowing from innovations.

In 2003 a high-level strategic group was set up to examine the issue of how the country could optimise the emerging opportunities and (in the words of the World Bank report) see how all stakeholders could work together to advance the country's effective transition to the knowledge economy and promote knowledge-based industries. According to the report, this group identified the acceleration of economic growth and employment of skilled youth in the next two decades as the key concerns for what it called "India Inc". Among other things, the group estimated that a workforce shortfall of 32-39 million would hit the developed economies of today by 2020, which would present a sizable opportunity for India to exploit in the realm of remote services.

But, of course, these are the details of sectoral opportunities and targets to be accomplished which, necessarily, form a part of the much larger canvas of economic activity in the country, activity which is by and large governed by the overall policy and implementation climate which obtains in the country. In other words, the Knowledge Economy will be affected as much or as little by the reform policies which the Government of the day draws up and implements.

The World Bank report under study here refers to the Tenth Plan effort to focus on the broader issues relating to the "economic and institutional regime", the four critical areas of transformation being: improving governance by bringing about dramatic improvements in the functioning of the administrative and judicial systems to foster a dynamic and vibrant market economy; dismantling of barriers to inter- and intra-State trade and commerce; reversing a wide range of controls and restrictions on entrepreneurial initiatives that have retarded the emergence of an investor-friendly climate, and creating an environment that welcomes entrepreneurship with open arms; strengthening effective delivery of basic social services by empowering local institutions so that they can become the focal point of democratic decentralisation.

Now this is a tall order, and it remains to be seen whether the imperatives of the development of the Knowledge Economy will alone be able to induce better economic governance in the country. On the face of it, it is unrealistic to expect anything of the sort to happen, which in effect means that the Knowledge Economy will also be held hostage by the forces which are currently impeding reform measures from being implemented. To say the least, this is unfortunate because it will prevent the economy from encashing the competitive advantage it enjoys in the knowledge sector, an attribute which is precious even to the most developed economy today.

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