Relevance: GS Paper III (Indian Economy)
Why has this issue cropped up?
The Indian economy is headed for a serious crisis.
Can this crisis lead to collapse of Indian economy?
- Economic crisis can lead to collapse of the economy. However, it is a myth that any or every crisis necessarily means an imminent collapse of the economy. The Indian economy is not near a collapse yet.
- The situation today in the Indian economy is therefore still retrievable and a turnaround can be commenced
Present situation of the Indian economy
- One, the growth rate of the economy with proper index number-based GDP has declined over the last two financial years.
- Two, household savings, which are the bulk of India’s national investment, dropped from a high of 34% of GDP to about 24% of GDP in 2017. Non-household savings are about 5% of GDP.
- Three, non-performing assets of the public sector banks (PSBs) have also risen sharply, in fact at a rate of growth much higher than the rate of new advances of these banks, making many large PSBs financially unviable and likely to collapse. This could cause financial contagion in 2019 in all sectors.
- Four, the Ministry of Finance has brutally cut allocations of the investments in infrastructure despite the urgent need for such infrastructure. The economy needs about $1 trillion investment in infrastructure to render “Make in India” a reality, but the actual investment in sanctioned projects is valued even less in real terms than the amount invested in the pre-2014 years.
- Five, the manufacturing sector, especially MSMEs (micro, small and medium enterprises) which provide the bulk of the employment for the skilled and semi-skilled in the labour force, has been growing at abysmally low rates of between 2% and 5%.
- Six, India’s agricultural products are among the cheapest in the world, and despite a low yield per hectare, we are not able to increase the yield to its potential maximum and at least double the production and export the agricultural products abroad commensurately. Consequently, agriculture, as the sector that is the largest employer of India’s manpower, is grossly under-performing.
- Seven, when crude oil prices had steeply fallen over the four years since 2014, and despite the dollar value of the rupee till mid-2018 having been steady at around Rs.65 per dollar, nevertheless both exports and imports simultaneously declined over 2014-17.
- Now in 2018, the Indian economy is facing an adverse situation: a rise in the rupee-dollar rate to 75, and crude oil prices rising to $85 per barrel, although they are lower now. This is causing a massive crunch for our foreign exchange reserves.
Can India bounce back ?
- In the last 71 years, India has always come out successfully in all crises — once this is acknowledged as such by policy makers, it can then be dealt with squarely with reforms that incentivise the people.
- On each occasion, such as the food crisis of 1965, the foreign exchange crisis of 1990-91, thereafter growth renewed on to a higher accelerating path.
Way forward
- First, the individual has to be persuaded by the government by incentives — for example, by abolishing the income tax — and not by coercion, such as harsh levies and taxes.
- Second, India can make rapid economic progress to become a developed country only through a globally competitive economy, which requires assured access to the markets and technological innovations of the U.S. and some of its allies such as Israel.
- The decline in the level of household savings thus had caused a sharp decline in the GDP growth rate. It is imperative therefore that to accelerate the GDP growth rate, government policy should be to incentivise the saving habit to increase the savings rate to 35% of the GDP.
- To seriously address these priority problems, it is essential to implement a new menu of measures:
- dramatic incentives for the household expectation and sentiment to save; and
- lowering the cost of capital via reducing the prime lending interest rates of banks to 9%, by shifting to a fixed exchange rate regime of Rs.50 per dollar for the financial year 2019 and then gradually lowering the exchange rate for subsequent years.
- The Indian economy, however, needs to grow at 10%-plus per year for the next 10 years to achieve full employment and for India’s GDP to overtake China’s GDP and pave the way to form a global economic triumvirate with the U.S. and China
Conclusion
We can no more be satisfied with 7-9% growth rate if we want to become an economically developed country by 2040.
