How sweet is India’s spot? – on economic policies of India

Source: The post is based on the article “How sweet is India’s spot? – The economy has a lot going for it, but a closer examination suggests some urgent policy priorities” published in “Business standard” on 10th August 2023.

Syllabus: GS 3 – Indian economy

News: In this article, the author discusses India’s strong economic recovery and growth prospects. He emphasized the need for fiscal reforms, improved trade policies, better education, and increased private investment. The article also highlights India’s geopolitical position, benefiting from US-China tensions, but warns against over-reliance on such advantages.

About India’s Economic growth

Recovery Rate: Bounced back from a 6.6% GDP slump in FY21 to 9.1% and 7.2% in the subsequent years.

Exports: Goods exports rose in 2021 and 2022, while service exports remain strong despite recent slowdowns.

Digital Boom: Expanding digital infrastructure facilitates smoother nationwide transactions. It has facilitated low-cost transactions nationwide, which aids in the delivery of expanded government direct benefit programs.

Government Initiatives: Increased spending on roads and infrastructure, aiding growth.

Monetary Policy: RBI’s restrictive stance for 15 months has lowered inflation below 6%.  Correction in commodity prices (but not tomatoes), also contributed.

Growth projections: The government and RBI project 6.5% growth in FY24.

A recent RBI paper stated India needs 7.6%-9.1% growth to be considered a developed country by 2047.

Where does India stand Geopolitically?

India has strengthened ties with the US and its allies, remaining neutral in the Russo-Ukraine war.

India benefits from US-China tensions but should be cautious about relying on it.

How has government spending affected the Indian economy?

Infrastructure Boost: There is a noticeable strengthening of physical infrastructure, especially roads. This has been a result of increased government capex (capital expenditure).

Banking Stability: Banks and companies’ balance sheets have improved significantly, permitting more lending and borrowing.

What challenges is the Indian economy facing?

Fiscal Concerns: Fiscal deficits and government debt levels are high. Debt/GDP ratio stands at 80%, surpassing the recommended (by the N K Singh report on fiscal responsibility) 60% target.

Despite resolving the “twin balance sheet problem”, a resurgence in private investment is still awaited.

Export Slump: Despite a surge in 2021 and 2022, goods exports experienced a recent decline.

International Trade Policies: Recent trade decisions, like increased tariffs since 2016, have been counterproductive. India’s late-stage withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2019 was a setback.

Resurgence of import licensing restrictions, evident in sectors like laptops are not good for industrial growth.

Social issues: Low learning outcomes in government schools require urgent attention. Improvement needed to cater to a skill-intensive global economy.

Concerning stats like female labor participation rates and youth unemployment compared to East Asian countries.

What actions should be taken to address them?

Fiscal Reforms: Reduce fiscal deficits and target a debt/GDP ratio closer to the recommended 60%.

Trade Policy Revamp: Roll back the recent increase in customs tariffs. Consider re-engaging with at least one of the two Asian mega regional free trade agreements (FTAs). Remove unnecessary import licensing restrictions.

Educational Improvements: Leverage digital infrastructure to boost learning outcomes in government schools.

Boosting Exports: Enhance participation in global value chains by joining regional free trade agreements.

Investment Climate: Ensure policy stability and transparency to attract more domestic and foreign investments.

Social Harmony: Prioritize justice, law and order to encourage a conducive business environment.