Growth Challenges for Viksit Bharat

Source: The post Growth Challenges for Viksit Bharat has been created, based on the article “When dreams of Viksit Bharat stumble over Nehruvian impulses” published in “Indian express” on 6th December 2024

UPSC Syllabus Topic: GS Paper3-Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment.

Context:  India’s aspiration to transform into a “Viksit Bharat” (Developed India) by 2047 hinges on achieving sustained economic growth. However, recent macroeconomic data and policy developments highlight structural challenges and policy missteps that may hinder progress. The article underscores the critical need for reforms in monetary policy, taxation, foreign investment, and institutional frameworks to align with the country’s long-term ambitions.

Why is India’s growth target for 2047 under scrutiny?

1. The Reserve Bank of India (RBI) projected a 7% growth rate for Q2 of FY 2023-24, but actual growth was 5.4%.
2. This discrepancy raises concerns about the reliability of economic projections and their implications for achieving a developed India (Viksit Bharat) by 2047.
3. India’s growth prospects are influenced by policy decisions, not random occurrences.

 How do policies influence growth rates?

1. Macroeconomic policies, such as exchange rates, tariffs, and Minimum Support Prices (MSPs), significantly impact growth.
2. For example, high taxation, declining foreign investment, and tight monetary policies have hampered India’s growth trajectory over the last two years.

What role do real policy rates play in India’s economic growth?

1. Real policy rates in India are higher than in other non-advanced economies:

Core inflation: India’s real repo rate is 2%, compared to a median of 1.2%.

Headline inflation: India’s rate is 1.4%, while the median is 0.9%.

2. Historically, during the high-growth period (2004-2011), India had negative real policy rates (-1%). The current contractionary monetary policies have slowed the economy.

How do tax policies affect India’s competitiveness?

1. India’s total tax revenue-to-GDP ratio is 19%, higher than China (16%) and Vietnam (13%), despite their higher per-capita incomes.
2. High import tariffs in India reduce competitiveness and efficiency, further dampening growth prospects.

What is the significance of foreign investment in India’s growth story?

1. Foreign Direct Investment (FDI) and infrastructure development are critical for achieving Viksit Bharat.
2. India’s withdrawal from Bilateral Investment Treaties (BITs) has deterred foreign investors, increasing their risk exposure without enhancing returns.
3. The decline in FDI signals the need to rebuild trust through enforceable contracts, timely conflict resolution, and predictable judicial actions.

What are the recent policy missteps affecting growth?

1. Retrospective tax changes, such as removing indexation benefits on real estate, continue to create uncertainty.
2. Restrictions on credit card expenditures and the withdrawal from BITs reflect a return to a command-and-control economic approach.
3. These policies undermine the government’s stated aim to limit state intervention.

How does India’s aspiration for high growth conflict with current economic realities?

1. India’s per-capita income remains below $3,000, while its economy is the fifth largest globally.
2. Growth aspirations demand a shift from policies influenced by Nehruvian socialism toward a more market-driven approach.
3. The Prime Minister advocates for minimal state intervention, but bureaucratic inertia often results in statist policies.

What lessons can India learn from global growth patterns?

No country is entitled to sustained high growth rates like 6-7%. Many nations have lost momentum by assuming consistent growth as a right, ignoring the need for institutional and policy reforms.

What needs to change for India to achieve Viksit Bharat by 2047?

1. There is a need to align policies with the ambition of becoming a developed economy.
2. There is also a need to address structural issues such as high taxation, declining FDI, and restrictive trade policies.
3. Reform policy frameworks are also required to enhance competitiveness and attract foreign investment.