Mains Paper 4: Economy
Prelims level: Prompt Corrective Action
Mains level: Indian Economy and issues relating to planning, mobilization of
development and employment. Inclusive growth and issues arising from it
- After averaging an annual GDP growth rate of 6.4 per cent (yoy)
during 2012-14, growth in India increased to 7.3 per cent during 2015-17.
- Indeed, the growth rate for the latest available quarter was 8.2
- Simultaneously, the inflation rate has declined from 8.6 per cent
during 2012- 14 to 4.4 per cent during 2015-17.
- Ordinarily, this growth and inflation record “Ease of Doing
Business” end all debate about the health of the economy.
How can all of these be simultaneously true?
- To form a better understanding of the story, world oil prices (WTI
price) fell from $91 to $44 per barrel between July 2014 and July 2017.
- The fall in oil prices did not, however, translate into a
reduction in pump prices for consumers in India.
- Rather, it turned into a gigantic increase in government revenues
3 per cent of GDP annually.
- This increase in revenue could potentially have been used to
reduce the consolidated fiscal deficit average of 6.7 per cent during
- However, the combined fiscal deficit of the Centre and states
during 2014-17 actually increased to 6.9 per cent of GDP.
- In effect, government spending during this period grew by over 3
per cent of GDP annually.
- The growth pick-up in India over the past 3-4 years has come
almost entirely out of this huge increase in government spending. The oil
party unfortunately has now ended.
- Over the past year prices have risen by around $20 per barrel.
Either pump prices have to be raised in order to protect the tax revenues of
the government. But this becomes politically unpalatable quite quickly.
- Alternatively, government spending has to be reduced to absorb the
fall in oil tax revenues. But cutting government spending is problematic
since it has been the main source of growth for the past few years.
- First, two-thirds of the RBI capital base of $145 billion are
actually revaluation funds, which are only accounting entities rather than
reflecting earned income.
- The second option is to get non-governmental agencies like
scheduled commercial banks to open up the spending tap by lending much more.
- This is problematic since a bunch of them are rife with
non-performing assets and whose balance sheets are undergoing significant
restructuring under the direction of the RBI.
- The increasingly shrill demands to weaken the Prompt Corrective
Action (PCA) norms as well as the demand to ease up liquidity for SMEs are
ways of squaring this circle.
- The last option is to somehow convince the RBI to lower real rates
by cutting the policy rate.
- This runs the risk of undoing the gains on inflation that have
been achieved over the past few years.
- The story of the Indian economic turnaround after 1992 was one of
large productivity gains induced by removal of industrial and trade policy
- The country now needs a second generation of reforms wherein
factor markets including land and labour are liberalised.
Q.1) The Perform Achieve Trade (PAT) is an innovative, market-based
trading scheme announced by the Indian Government in 2008. It is under:
A. National Mission on Sustainable Habitat
B. National Mission for a “Green India”
C. National Mission for Sustainable Agriculture
D. National Mission for Enhanced Energy Efficiency
Q.1) Is India doing really well or are we just seeing a sequence of