Economic challenges and necessary reforms in India, China, and the US

Source: The post economic challenges and necessary reforms in India, China, and the US has been created, based on the article “Abandon myopic policies for the common global good” published in “Live mint” on 2nd January 2025

UPSC Syllabus Topic: GS Paper3- Economy- growth and development and Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

Context: The article discusses the economic challenges and necessary reforms in India, China, and the US. It suggests India should focus on labor and land reforms, China needs to reduce government control, and the US should avoid protectionism to ensure sustainable growth and global economic stability.

For detailed information on US protectionist policies read Article 1, Article 2

What are India’s economic challenges and necessary reforms?

1. Excessive Populism and Policy Stagnation: India’s vibrant democracy often sees policies that favor short-term gains over long-term benefits.
2. High Agricultural Employment with Low GDP Contribution: Approximately 44% of India’s labor force is employed in agriculture, which only contributes 17% to the GDP.
3. Need for Labor and Land Reforms: Shifting the workforce from agriculture to manufacturing requires significant land and labor reforms to improve industrial and infrastructural development.
4. Fiscal Discipline and Freebie Rationalization: To achieve sustainable growth, India must focus on fiscal responsibility and reduce dependency on government freebies.
5. Engagement with Stakeholders: Policymakers should work with businesses, civil society, and political opposition to promote necessary reforms for long-term development.

How is China’s economic model affecting its growth?

1. Centralization and Productivity Decline: China’s shift towards greater centralization under President Xi Jinping has coincided with a decline in total factor productivity growth, from 2.8% before the 2008 financial crisis to 0.7% afterwards.
2. Investment and Consumption Issues: Despite heavy investments, China’s consumer spending remains low at 53.4% of GDP, indicating inefficiencies and a lack of domestic demand stimulation.
3. Foreign Investment and Trade: Foreign direct investment in China has fallen for 12 consecutive months up to May 2024, and trade growth is slow, with exports growing only 2.4% and imports by 0.3% in September.
4. Policy Adjustments Needed: To sustain growth, China should reduce government interference, promote market-based reforms, and enhance fiscal transparency to avoid debt issues and stimulate consumer spending.

What challenges does the US face with its protectionist policies?

1. Increased Cost of Goods: US protectionist policies, particularly tariffs, directly raise the cost of domestically produced goods. This increase places a financial burden on both consumers and businesses.
2. Contradiction in Economic Goals: The implementation of tariffs by the US aims to reduce the trade deficit. However, this is at odds with maintaining the US dollar as the world’s reserve currency. Such conflicting goals can undermine the broader economic stability.
3. Impact on Global Positioning: By withdrawing from multilateral engagements and focusing on protectionism, the US risks losing its leadership role in the global economy, weakening alliances and international relations.

Question for practice:

Evaluate the effectiveness of US protectionist policies in achieving economic stability.