The economies world-wide are showing sluggish growth and they are yet to come out of the shocks of global economic meltdown. The U.S. economy, the largest economy of the world, is showing signs of revival but the pace is slow. Though Chinese economy is the fastest growing economy in the world, yet it is far behind its old glory of double-digit growth rate. The Japanese economy has slipped into another recession even after reform-oriented economic policies touted as ‘Abenomics’. The Eurozone still remains vulnerable and needs a cautious approach to bring their economies out of crisis.
In this global context, the Indian economy is no exception and it too has felt the shocks of the global financial crisis. In the era of globalization when world economies are more integrated and hugely dependent on each other than ever, it is bound to occur. Indian economy has also faced a downturn in the face of this global context and the economic growth rate has fallen and has come to sub-5% level from all time high of ~10% in 2008-10 period. Though the Indian economy has proved resilient to these global economic shocks to certain extent (due to strong internal demand and domestic market), the sub-5% growth rate is not enough to pull its huge poor population out of poverty and to cash the demographic dividend.
This fall in rate of economic growth is not an outcome of sole external factors. This can be attributed to a number of domestic factors also. Thus, some structural deficiencies of Indian economy are also responsible for this downturn.
Weak global demand in face of global slowdown has adversely affected the manufacturing sector and the exports from the country have declined. It has brought down overall industrial production. Especially, slowdown in economies of key trading partner countries, like the U.S. and the Eurozone, has contributed to reduced external demand. Partly, the same can be attributed to reduced foreign portfolio investment in the country. The foreign direct investment (FDI) has remained below expectations due to some internal factors like unfavourable policy and investment climate and external factors like slowdown. Increased fuel demand (oil import) and excessive import of gold has adversely affected the economy on two counts: (i) the increased current account deficit (CAD) [which is also due to reduced export]; and, (ii) swelling foreign exchange rate, which in turn has increased the CAD. Tapering of the massive bond purchase programme of U.S. Federal Reserve named ‘Quantitative Easing’ may also have an adverse impact on the foreign institutional investment (FII) in India.
At the internal front persistent high inflation, both wholesale and consumer, has adversely impacted the country’s economy. It has resulted in reduced domestic savings and thus has reduced the investment. It should be noted that one of the factors behind high growth rate during 2008-2010 period was an increased domestic savings and investments, when the economy observed double digit growth. High inflation is largely due to supply-side bottlenecks rather than production mismatch. Many mega infrastructure and industry projects are stalled for years due to lack of environmental clearances, problems in land acquisition and popular protests (which are at times misplaced and misjudged). POSCO steel plant project of Odisha and ArcelorMittal are to name a few in this regard.
Huge gross domestic product (GDP) contribution-employment mismatch across different sectors of the economy has resulted in economic inequality especially after post-liberalization period which has limited the growth of human resource and our efforts to cash-in much talked ‘demographic dividend’. For instance, the agriculture sector, on which ~70% of the population directly or indirectly depends, is contributing only ~18% to the GDP. Thus, the agriculture sector is hugely overburdened. The service sector, which contributes ~60% to the GDP, employs only a small percentage of people. These figures point to a huge inequality in the distribution of income which exists across the different sectors of the economy. Industry and manufacturing sectors are affected by diminishing external (due to slowdown) and internal (due to inflation) demand and still await rationalization of tax structure and policy reforms. At the policy front, overall weak policy climate has severely affected investments, both external and domestic. Tax disputes and other pertaining legal suits such as Vodafone retrospective taxation dispute are demoralizing investors’ sentiments. Rising fiscal and revenue deficit also raise concerns on the state of the economy and call for fiscal consolidation.
In the face of above challenges, proactive steps have to be taken in right time. India will have to work closely with the other countries so that overall state of global economy can be improved through collective efforts and broad policy framework should be articulated for this purpose. At the same time, it should be ensured that the growth-oriented policies of any other country do not contradict the Indian growth prospects. Policy relook is required in a manner that they encourage foreign investment, both direct and institutional, while also keep the India’s interests safeguarded. Fall in global oil prices and reduced gold import are certainly in India’s favour, which will contribute positively in achieving India’s budgetary CAD target.
The inflation has to be contained in order to bring ease in the economy and to raise domestic savings. Increased domestic savings will create demand, which will result in enhanced production. The Reserve Bank of India’s new policy of inflationary targeting (on recommendation of U. Patel committee) is certainly going to contribute positively to tame inflation. The supply-side bottleneck’s has to be removed through policy interventions and key reforms like market reforms should be brought in at the earliest. Legislations such as APMC Act should be amended so as to minimize their impact on inflation.
New reforms such as second generation reforms, single window clearance, easy terms of land acquisition and speedy environmental clearances should be introduced to revive the investment ecology in the country. But at the same time we must pay heed to the fact that there has to be a balance between the growth and environment so that the resulting growth is sustainable. To prevent popular sentiments from erupting, there should a proper policy/legislative framework in place to ensure convenient relocation and rehabilitation and ensuring alternative means of livelihood for those whose land has been acquired for the developmental purpose.
Suitable policy and fiscal environment such as speedy clearances to projects, low interest rate, labour reforms, etc., and tax reforms such as introducing goods and service tax (GST) and to do away with retrospective taxation should be introduced to boost manufacturing in the country. To contain fiscal deficit, measures for fiscal consolidation should be adopted. These measures include rationalizing fuel prices, phasing out/properly targeting food, fuel and fertilizer subsidies and austerity measures to name a few. Technological up-gradation, scientific know-how and skilled human resource are vital to bring in efficiency in the economy and for optimal utilization of national resources. Therefore, the expenditure in research and development sector (R & D), education and health has to be increased.
It is important that the benefit of development reaches to everyone so as to minimize the inequality gap. Therefore, the development has to be inclusive. One way to promote inclusive development is to create more jobs to employ large youth population in the county. For this purpose, labour-intensive industries such as MSME sector should be promoted. The 12th plan document itself, titled ‘faster, more inclusive and sustainable development’ envisages ‘inclusive development’ as national economic goal. It has to be implemented in true spirit to reduce income-gaps across the sectors.
Finally, The new government at Centre, which is known for its ‘pro-business’ outlook, with the clear majority of its own after long time, is expected to spur positive business sentiments by putting in place decisive, coherent and stable policy regime. Some of its initiatives have been hailed as boost for the business in the country.
To attract the foreign direct investment (FDI), new initiative has been taken. The FDI caps in key sectors such as defence and insurance have been raised. The Insurance (Amendment) Bill has been tabled in the Parliament for its consideration. The new FDI regime is expected to bring capital, technology and efficiency in the respective sectors. It will also create more avenues of employment. The new government has launched a new initiative ‘Make in India’ to boost manufacturing sector which calls domestic and foreign investors to invest and manufacture in India.
To conclude, the global economic scenario somehow presents a bleak picture owing to the slow pace of recovery of global economy, yet India can put itself on rapid growth trajectory as it has a vast domestic market and emerging middle-class. By ushering in important economic reforms and by putting appropriate policies in place to revive foreign and domestic investment, India can realize a higher economic growth rate, which is important for the country to raise its social, political and economic standards.
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