7 PM | The slow climb to the trillion economy peak | 17th September, 2019

Context:To be a $5 trillion economy, the real reasons of economic slowdown needs to be addressed.

More in News:

• On Independence Day, the Prime Minister expressed confidence that India would be a $5-trillion economy in 2024.
• The latest annual report of the RBI for the fiscal year 2018-19 (or FY19) confirmed that the Indian economy has indeed hit a rough patch. The GDP growth rate of the economy has slipped to 5 per cent in the first quarter of FY20, the lowest in over six years.
  

Concerns about reaching the aim of $5 trillion economy:

1. The economic growth experience in India in recent decades has shown that growth has had an adverse impact on developmental goals – Improvement in education, health and overall human development/human capital formation, expansion in productive employment for all and environmentally sustainable development, all depends on the nature and composition of growth.

Share in wealth:

• Credit Suisse (a leading financial services company) has shown recently that 1% of the wealthiest in India increased their share in wealth from 40% in 2010 to more than 60% in the last five years.
• The richest 10% in India own more than four times wealth than the remaining 90%.

Gaps in Education:

• According to UN, the literacy rate has grown very slowly.
• According to the Annual Status of Education Report (ASER) 2018, about 70-74 % children (in the age group 6-14 years) go to school regularly; far fewer go to secondary school.
• The government spend is around 4% of GDP on education as against the norms of 6%.

Gaps in Health:

• The government spends around 1.5% of GDP on health as against the requirement of 3%.
• The issues of malnutrition are not being tackled at a good pace.

Rising unemployment: The Periodic Labour Force Survey (PLFS) of the National Sample Survey Office (NSSO) released in June 2019 showed the unemployment rate in the country in FY18 was at 5.3% in rural India and 7.8% in urban India, resulting in overall unemployment rate of 6.1%.

Environmental degradation: A recent Intergovernmental Panel on Climate Change report has warned India of the seriousness of climate change and its severe adverse impact on the environment and the livelihood of masses.

• Economic Slowdown: At present the economy is experiencing a severe slowdown.
  • Economic slowdown is a situation in which GDP growth slows but doesn’t decline. For example, if GDP goes from 5% growth to 3% growth, an economy is experiencing a slowdown. Most analysts do not consider a slowdown to be a recession, but unemployment may rise and productivity may decline.
  • NITI Aayog has observed recently the rate of economic growth, at 5%, is the lowest in the last few years.
  • Also, the rates of savings and investment in the Indian economy have declined.

• Crisis is agriculture:
  • Agriculture in India is in crisis on account of rising costs of inputs and low prices of produces, and low public investments in this sector.
  • Agricultural real wages are in decline and non-farm wages are constant
  • Urban wages are also declining in recent years.

• Decline in major industries:
  • The automobile industry is experiencing continuous decline, which has led to the retrenchment of 3.5 lakh workers so far.
  • Apart from the ancillaries of the automobile industry, many other industries are declining fairly rapidly too — examples are diamond cutting and polishing, textiles and garments, and several Micro, Small and Medium Enterprises (MSME).

Measures taken by the government to improve the slowdown: (Supply side measures)

• Tax Incentives: The Central Board of Direct Taxes (the CBDT) has provided in a recently issued notification, that an investment fund set up by a Category-I or Category-II Foreign Portfolio Investor (FPI) registered with the Securities and Exchange Board of India (the SEBI) need not satisfy the investor diversification conditions stated in the ITL to qualify as an EIF.
• Additionally, the CBDT has specified the list of countries in which the investment fund should be established, incorporated or registered to be eligible for benefits under the safe harbor regime.
• Recapitalization:The government on Friday announced a fresh capital infusion of about $10 billion (Rs. 70,000crore) into debt-burdened state banks and credit guarantees to support shadow lenders in a bid to boost lending and revive the economy.
• SME payments: SME payments are to be streamlined with a one-time settlement plan in place and the government is to ensure that it makes its payments on time for projects (over Rs 40,000crore is stuck in the pipeline).
• Sectoral measures: The auto sector is to get some relief on depreciation on vehicles and the government has clarified on the validity of registration on Bharat IV vehicles, the government will now be buying new vehicles, which was barred earlier.
• FDI measures: The FDI rules now give single brand more breathing space in terms of local procurement and setting up of physical structures. Also, 100 per cent FDI through the automatic route in coal mining and related activities has been permitted.
• As has 26 per cent FDI under the government route for uploading/ streaming of news and current affairs in digital media. However, these rules take time to work out and one does not expect to see a flurry of capital flows.
• Mergers: in the biggest consolidation exercise in the banking space, the government announced four major mergers of public sector banks, bringing down their total number from 27 to 12, a move aimed at making state-owned lenders global sized banks
• The merger of PSBs will unlock new potential. Big banks with their national presence and global reach will have larger credit appetite and ability to measure risk.

Urgent steps to be taken by government: (generating demand)

• Public employment: It should raise public employment by filling all vacant sanctioned posts in the Central and State governments, which would be around 2.5 million jobs.
• Regularize other employments: The government should also regularize contract, casual and “honorary” jobs and make them regular jobs. 
• Human capital formation: improving on skill development will give a big push to start-ups and MSMEs.
• Focus on labour intensive sectors: The government should also focus on promoting labour intensive sectors such as gems and jewellery, textiles and garments and leather goods.
• Increase public expenditure in agriculture: government should increase investments in infrastructure, inputs, extension, marketing and storage and training and in providing profitable prices to farmers. 
• Government should also raise funds for the Mahatma Gandhi National Rural Employment Guarantee Act to push up demand by following a Keynesian approach.

Conclusion:

Since, the real problem is a crash in the aggregate demand, steps such as rolling back some budgeted tax proposals, providing a stimulus package to industries, raising foreign direct investment flows, reducing Goods and Services Tax to help industries are not likely to increase much aggregate demand in the economy. There has to be a focus on human capital formation and in addressing the real reasons for the economic slowdown to be a $5 trillion economy in future.

Source: https://www.thehindu.com/opinion/lead/the-slow-climb-to-the-trillion-economy-peak/article29433451.ece