Economic Survey 2014-15 Part 3

9)An increase in public investment would not crowd out private investments in India under the present circumstances.Public investment should be targeted to the sector where it can generate the maximum spillovers-which could well be the Indian railways.

10)The IMF in the World Economic Outlook has noted that increase in public infra investment,if efficiently implemented, affects the economy in two ways. In the short run,it boosts aggregate demand and crowds in private investment due to the complementary nature of infra services. In the long run, a supply side effect also kicks in, as the infra built feeds into the productive capacity of the economy.The two biggest challenges facing increased public investment in India are financial resources and implementation capacity. As regards the later, the trick is to find sectors with maximum positive spillovers-rural roads and railways.This impetus has the potential to crowd in greater private investments and do so without jeopardizing India’s public debt dynamics.

11)Problems in Indian railways: Safety, modernization, cross-subsidisation and consequently high freight charges, along with inefficiency, stressed capacity and weak financial health.

12)Tradability: Rapid growth has seldom been based on the domestic market.Part of the reason for this might be that trade serves as a mechanism for technology transfer and learning, which may have spillovers on related industries. Perhaps a more important part is that trade and exports in particular provide a source of unconstrained demand for the expanding sector.Construction sector, does not require high education levels  and has grown significantly in its resource use over the last three decades. However, the sector is not tradeable and in any case is low productivity, so that moving labour resources to the sector does not considerably improve overall welfare.

13)Manufacturing has not been a positive factor for India.This is due to four broad categories: distortion in labour markets, distortion in capital markets, distortion in land markets and inappropriate specialization away from India’s natural comparative advantage(low-skilled labour) and toward skill-intensive activities.

14)Most service subsectors have a limited capacity to make use of India’s most abundant resource, unskilled labor.This may explain why the share of employment from services has risen so modestly, even while the share of output from services has grown so spectacularly.

15)It is registered manufacturing,not manufacturing in general,which has the potential for structural transformation. In a low-skilled labor abundant country like India, a sector must make use of this dominant resource in  order to offer the greatest possibilities for expansion and structural transformation. Indeed, the experience of East Asia shows that it is possible for countries to start by specializing in low-skill but dynamic activities and subsequently move to more skill intensive production once the growth process has picked up steam.