A troubling roadmap for Indian economy

Context:

India GDP growth rate slowed to 5.7% in Q1 of 2017-18 on the back of destocking ahead of GST implementation and the lingering impact of demonetization.

What is the current status of Indian economy?

• According to the latest report of World Bank’s ease of doing business index for the year 2017, India has been ranked at 130^th position among the 190 countries
• India’s economic growth unexpectedly slowed to 5.7% in the June quarter, the slowest pace in three years.
• Manufacturing growth slowed to 1.2% in the June quarter from 5.3% in the preceding quarter while mining activity contracted by 0.7%.
• Construction activity revived marginally from the negative print (-3.7%) in the March quarter to 2% in the June quarter, signs that the impact of demonetisation is receding.
• Trade, hotels, and transportation, impacted by demonetisation in the March quarter (6.5%), rebounded to grow 11.1%
• Growth in government spending held up close to double digits at 9.5%, continuing to support overall economic growth.
• latest Controller General of Accounts data which showed that the government exhausted 92.4% of fiscal deficit target within the first four months (April-July) of the fiscal year 2017-18.
• While private consumption slowed from the March quarter, investment demand turned positive in the June quarter after contracting in the previous quarter.
• The second volume of the Economic Survey released earlier this month said a raft of deflationary impulses is weighing on the economy, which is likely to miss the 7.5% upper band of its forecast growth range this year.
• The first volume of the Economic Survey released in January had projected growth in the range of 6.75-7.5% in 2017-18 against 7.1% in 2016-17.
• The central bank’s annual report released recently reiterated its forecast for gross value added (GVA) to grow at 7.3% in 2017-18, as against 6.3% in 2016-17.

What are the challenges that Indian economy is facing?

• Vulnerability of rupee:

Following reasons are responsible for this:

• Rising crude oil prices after OPEC deal on production cut that will push up import bill.
• Sluggish service export
• US fed hikes that will reduce interest rate gap between India and the US and induce capital outflows from India’s debt market.
• Slowing net FDI inflows.

Macroeconomic stability under pressure:

• Macroeconomic stability will be under pressure in this year because of the following reasons:
• Continued low commodity prices especially of crude oil have helped Indian government contain fiscal deficit and rein in inflation. However, oil prices are hardening again. This is not good for India’s current account balances.

Increasing divergence between consumption and investment:

• Consumption has remained steady (growing at 6 to 7%) till demonetization.
• Investment as measured by gross fixed capital formation has been in the negative zone for the last three quarters.
• The reason for negative zone of investment is due to deleveraging of corporate balance sheets, lower capacity utilization and demand slump in both domestic and in export markets.
• It fell 1.9% in the last quarter of FY 2015-16; further fell 3.1% in first quarter and 5.6% in the second quarter of the current financial year.
• Increased government’s spending on implementation of 7^th Pay Commission award will limit the government’s spending on infrastructure and other productive ventures.

Demonetization :

• Demonetization induced reduction in consumption demand decline in the sales of businesses.

GST conundrum:

• Multiple GST rates mean that there will be unending classification disputes and scope for discretion and inspector raj is not going way anytime soon.
• SMEs and informal sector which have been hit hard by demonetization are also the one to be hit hard by GST.
• This would be a worry factor for policy makers as over 90% of India’s workforce is employed by SMEs.

The problem of Jobless growth:

• The problem of jobless growth will continue to hurt India.
• This has the potential to gradually turn the country’s demographic dividend into demographic disaster with serious long term implications for demand for homes and consumer goods.
• Indian banking system is over-exposed to the real estate sector which is suffering from buyer’s disinterest.
• Higher NPA: The NPAs have been adversely affecting the banking system in the country

Inflation:

• India is failing to meet its target inflation rate every year.

Low level of technology:

• Due to illiteracy, use of advanced or sophisticated technology is rather an exception in India.

Other challenges:

• Sustaining the growth momentum and achieving an annual average growth of 7-8% in the next five years.
• Simplifying procedures and relaxing entry barriers for business activities.
• Checking population growth.
• Boosting agriculture growth through diversification and development of agro processing.
• Expanding industry to integrate surplus labour
• Developing world-class infrastructure for sustaining growth in all the sectors of the economy.
• Allowing foreign investment in more areas
• Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management.
• Empowering the population through universal education and health care, India needs to improve its Human Development Index (HDI) rank,

What measures need to be taken for economic reform in India?

 In order to attain the status of egalitarian society, there is need to step up appropriate measures:

• Public investment revival will give the needed boost.
• There is need for bringing more transparency in the system
• The Indian economy requires a fundamental rebalancing across multiple macroeconomic parameters.
• Need to rebalance savings and investments.
• The share of manufacturing in GDP must be stepped up in accordance with the employment imperative and the need to build an advanced knowledge-intensive.
• India’s financial sector requires modernization and integration with the larger global system.
• There is need to expand India’s global integration in terms of the flow of goods, services, technology and funds must be greatly expanded.
• The government needs to create right conditions of governance, macroeconomic stability, and policy framework for private sector entrepreneurship to flourish.

What were the steps taken by the government for economic reform in India?

• Raising the FDI limits.
• steps taken to introduce a bankruptcy code
• reform the public sector banks
• making auctioning and environmental clearance process transparent,
• pushing forward financial sector reforms and on-going efforts to modernise the monetary policy
• The Government has taken various measures to deal with the issue of Non Performing Assets (NPAs) in Banking Sector especially in case of Public Sector Banks (PSBs).
• The government has been making efforts to further improve the ease of doing business and aims to bring the country in the top 50.

Conclusion:

As India is moving towards an economic superpower, there is need to expedite socio-economic reforms and take appropriate steps for overcoming institutional and infrastructure bottlenecks inherent in the system.  Availability of both physical and social infrastructure is central to sustainable economic growth.