Charting the economic journey ahead

Source– The post is based on the article “Charting the economic journey ahead” published in The Hindu on 20th November 2022.

Syllabus: GS3- Indian economy and growth

Relevance: Boosting the growth of economy

News- The article explains the trends of economic growth in India. It also explains the steps that are needed to be taken for high growth.

What is the trend of economic growth in the Pre-independence period?

India’s economic progress in the first half of the 20th century under British rule was dismal. According to one estimate, during the five decades, India’s annual growth rate was just 0.89%. Per capita income grew at 0.06%.

What is the trend in Post independence India?

Till 1970s- In the early period, India’s strategy of development comprised four elements. These elements are raising the savings and investment rate; dominance of state intervention; import substitution, and domestic manufacture of capital goods.

India’s average growth till the end of the 1970s remained modest. It was 3.6%. The per capita income growth rate was 1.4%.

However, on certain health and social parameters, such as the literacy rate and life expectancy, there were noticeable improvements. Initially, India had to rely on the heavy imports of foodgrains. But, there was a breakthrough in agriculture after the Green Revolution.

The industrial base also widened. India became capable of producing a wide variety of goods including steel and machinery.

1970s to liberalisation reforms-The Indian economy did grow at 5.6% in the 1980s. But it was accompanied by a sharp deterioration in the fiscal and current account deficits. The Indian economy faced its worst crisis in 1991-92.

After liberalisation– Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%. Between 2001-02 and 2012-13, it grew by 7.4%.

The best performance was between 2005-06 and 2010-11 when GDP grew by 8.8%. This is the highest growth experienced by India over a sustained period of five to six years.

During this period, the investment rate reached a peak of 39.1% 2007-08. There was a corresponding increase in the savings rate. The current account deficit remained low at an average of 1.9%.

The growth story suffered a setback after 2011-12. The growth rate fell to 4.5% in 2012-13. The growth rate since then has seen ups and downs. It touched the 3.7% level in 2019-20.

India today is the fifth largest economy. However, in relation to per capita income, it is a different story. In 2020, India’s rank was 142 out of 197 countries.

What is the way forward to economic growth?

Increasing growth rate– There is a need to raise the growth rate. Calculations show that if India achieves a 7% rate of growth continuously over the next two decades and more, it will make a substantial change to the level of the economy. India may almost touch the status of a developed economy.

India needs to raise the Gross Fixed Capital Formation rate from the current level of 28% of GDP to 33% of GDP for 7% growth rate.India maintains the incremental capital output ratio at 4. It is a reflection of the efficiency of capital. India can comfortably achieve a 7% rate of growth.

Raising the investment rate depends on a number of factors. A proper investment climate must be created and sustained. While public investment should also rise. The major component of investment is private investment. It depends on a stable financial and fiscal system. The importance of price stability in this context cannot be ignored.

Other areas– India’s development strategy must be multidimensional. It needs a strong export sector. A strong manufacturing sector should be promoted. The organised segment of this sector must also increase.

India must also strengthen the system of social safety nets. Growth without equity is not sustainable.

An open economy with some limitations is still the best route to follow.

What factors need to be considered?

The rapid pace of globalisation will slow down for a variety of reasons. Some countries which were champions of globalisation are making a retreat. The Russia-Ukraine war has exposed the problems related to the supply chain.

The external environment is not going to be conducive. The Organisation for Economic Co-operation and Development reports a secular decline in growth in developed countries. Environmental considerations may also act as a damper on growth.