Getting the economy back on track

Mains Paper 3: Economic Development
Prelims level: GDP Growth
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context

•  Economics is a technical subject of interdependent variables and parameters, that allows for objective mathematical and statistical analysis.

•  It is no more a single commodity demand-supply subject.

•  Those in responsible positions who are ignorant of this fact end up trying to put a spin and gloss on reality, and thus get exposed soon as ridiculous, as we can see today in media debates.

Is the Indian economy really that strong?

•  Is it true then that the Indian economy is headed for a serious crisis?

•  Yes, that is a reality. It is, however, 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 within three months if the government initiates “real” economic policy changes.

•  As was done in 1991-96 during the tenures of Chandra Shekhar and P.V. Narasimha Rao as Prime Ministers.

•  Hence, no amount of quoting foreign agencies such as the International Monetary Fund, or international events in explanations will help address the crisis that is looming unless we initiate major economic reforms that are credible and incentive-driven for the people.

A few basic facts

•  The reality of today can be assessed from the following facts.

•  The growth rate of the economy with proper index number-based GDP has declined over the last two financial years.

•  The annual rate for 2018-19 is for obvious reason not available, but the trend has not changed.

Is the Indian economy on an upswing now?

•  The 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. This decline happened even before demonetisation and the decline continues because of intrusive and sometime obnoxious tax measures.

•  The Goods and Services Tax (GST) a flop borrowed from the United Progressive Alliance (UPA) government.

•  Despite my protest, it was introduced much as a carnival in Parliament, with gongs reverberating.

•  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.

•  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.

•  It has been growing at abysmally low rates of between 2% and 5%.

•  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.

•  The agricultural sector that is the largest employer of India’s manpower, is grossly under-performing.

•  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.

The current adversity

•  The Indian economy is facing a 180-degree 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.

Risks remain: on GDP growth

•  The Union government also needs to give an alternative ideological thrust to economic policy rather than try to improve on the failed economic policies of the UPA, as is currently being done.

•  In particular, 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.

•  Of course, the state should make no promise to the people without specifying the sacrifice required to be made by them to make it happen.

•  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.

•  This has concomitant political obligations which must be accepted as essential.

•  Since the growth rate in the GDP is calculated as equal to the rate of total investment (investment as a ratio of GDP) divided by the productivity coefficient of capital (called “capital-output” ratio which decreases with increasing productivity and vice versa).

•  A fall in the rate of investment and/or a rise in capital output ratio means a decline in the growth rate in GDP.

•  To seriously address these priority problems, it is essential to implement a new menu of measures:

•  (a) dramatic incentives for the household expectation and sentiment to save; and

•  (b) 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.

Cause for optimism

•  On a positive note, we should bear in mind that 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

•  The Indian economy, however, needs to grow at 10%-plus per year for the next 10 years to achieve full employment.

•  India’s GDP will overtake China’s GDP and pave the way to form a global economic triumvirate with the U.S. and China.

•  We can no more be satisfied with 7-9% growth rate if we want to become an economically developed country by 2040.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which of the following factors show that GDP of a country cannot be taken as a true index of the welfare of the people of the country?
1. Negative Externalities
2. Non-Monetary exchange
3. Non-uniform distribution of GDP among the people
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer: D

Mains Questions:
Q.1) Is the Indian economy on an upswing now?