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Growth in India

Indias economy has grown very rapidly in recent years. Since 1991 it has been among the top 10% of
the worlds countries in terms of economic growth.
The primary challenge for India is to sustain this growth while spreading its benefits more widely. This
requires continuous effort as international experience shows that growth slows down unless reforms are
pushed through when growth is high.
Major obstacles to Indias growth are:
Infrastructure Shortages
Large Fiscal Deficit
Restrictive Labor Regulations
Unreformed Financial Sector
Infrastructure
Crippling infrastructure shortages are the leading constraint to rapid growth as well as in spreading this
growth more widely. These shortages have resulted in a skewed pattern of growth that is not sustainable.
While the high skill services sector that employs the better educated among Indias work force has
flourished, the growth of more labor-intensive manufacturing that generates jobs for low and semi-skilled
workers has remained constrained.
Infrastructure shortages have particularly hindered the growth of export oriented manufacturing and
value-added agriculture that integrate into global supply chains, and need good roads, ports, airports, and
railways as well as reliable power and water to prosper.
Challenges:
India needs to invest 3-4% more of its GDP on infrastructure to sustain 8% growth.
The private sector can play an important role in investing in infrastructure, including through
public private partnerships.


Improving the countrys capacity to implement infrastructure projects will be as important as
increasing the amount of investment available.


Investments should improve the delivery of services, and service providers need to be made
more accountable to consumers.


Emphasis should be placed on maintaining existing assets.


Reforms need to be accelerated in all sectors. Difficult issues such as rationalizing user fees for
services need to be faced.
Fiscal Deficit
The countrys consolidated fiscal deficit has been persistently large for many years. While recent efforts to
tackle the deficit have paid off in substantial progress, it remains a continuing concern.
Challenges:
The existing deficit leaves no fiscal space for new government spending on areas of high social
priority. Initiatives in rural and urban infrastructure, employment, education, and rural health will
have to be financed with some combination of higher taxes or user charges, or by cutting existing
expenditures.
Large deficits and an unreformed banking sector reduce the private sectors ability to obtain bank
financing.
Labor Regulations
Indias existing labor regulations - among the most restrictive and complex in the world - protect only the
insiders, the small number of workers who are already working in the organized sector, while hobbling the
creation of manufacturing jobs for the tens of millions unemployed or working in poor quality jobs.

There are at least four times more unemployed people (around 35 million) than are employed in the
organized private sector. Firms with more than 100 workers consider labor regulations to be as
constraining to their operation and growth as power shortages.
Challenges:
Design labor regulations that attract more labor-intensive investment, especially in the formal
manufacturing sector.
Reforms should protect the interests of all workers by ensuring that workers legitimate interests
are met. The World Bank does not advocate a regime of "automatic hire and fire" - though that is
what the vast majority of workers in the unorganized sector actually face.
Financial Sector
Financial sector reforms have led to a booming stock market that has helped large firms finance their
expansion easily. However, small and medium enterprises - which are an important engine of growth and
productivity - have not been able to access finance as they are too small to be of interest to equity
markets or FDI.
Growth in lending to this sector has been slow due to the closely regulated publicly owned banking sector
which has few incentives for innovation, and a large deficit with the attendant fears of making new loans.