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The Editorial 08-12-2022 Pressing Issues of the Indian Economy

INDIAN ECONOMY
08 Dec, 2022

Theme : Indian Economy.

Paper:GS - 3

TABLE OF CONTENT

  1. Context
  2. Growth Estimations
  3. Positive Signs of Indian Economy
  4. Issues in terms of Labour Intensive Growth
  5. The main challenges for Fiscal Health 
  6. Road Ahead

Context : Several agencies, including the IMF and the World Bank have projected lower growth rates for the Indian economy in FY23, than the 7.2 per cent estimated by the RBI in April. 

Growth Estimations : 

  • Economy is likely to grow at 6.5-7.0 per cent: Given the current situation, with the Q2 FY 2023 GDP growth clocking in at 6.3 per cent, the economy is likely to grow at 6.5-7.0 per cent in this fiscal year.
  • Considering economic uncertainties it is difficult to arrive at a precise estimate: It is difficult to arrive at a precise estimate for growth this year with unprecedented economic uncertainty worldwide, including high global inflation, synchronized monetary tightening, and the impact of the Ukraine war.

Positive Signs of Indian Economy : 

  • Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilization has increased, all of which augur well for investment activity.
  • Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
  • On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.

Issues in terms of Labour Intensive Growth : 

  • Employment a biggest concern: Employment, an issue that has persisted over the last two decades. In brief, we have not generated enough good jobs to match the scale at which the economy has grown, especially in the organized sector. As a result, we have very high under-employment and poor-quality employment, which have hampered a much-needed move away from agriculture.
  • Lack of precise data on people living in poverty: We do not have a precise estimate of the current levels of poverty, as there has been no household consumption survey since 2011-12, and the 2017-18 survey was abandoned due to technical issues. But there is reasonable consensus that poverty could be around 10 percent of the country’s population, A low number compared to the past, but as many as 140 million people could still be living in poverty.
  • Lack of non-agricultural jobs: The rising demand for the MGNREGA, and the importance of food distribution schemes and other welfare programmes for the poor are indicators of the lack of non-agriculture jobs being generated.
  • Lowest rate of women participation in labor force: An alarming aspect of the employment problem in India is the low participation rate of women in the labor force, which is among the lowest in the world. This loops back to the importance of labor-intensive manufacturing. For example, much of Bangladesh’s success, and that of Southeast Asian countries, in exports and manufacturing stems from the large number of women working in their factories.
  • Women literacy is rising but an increasing number of educated women are not working: A positive trend in India has been the growing trend in girls attending schools and college in the last 20 years, but this also means that an increasing number of educated women are not working.
  • Despite 1991 reforms still remains an untapped opportunity: With the LPG reforms, the expectation was that, as the economy opened up to global competition, India’s low wage levels would attract private investment into labor-intensive manufacturing, thus generating jobs. This was the path followed by the East Asian economies that experienced high growth and rapid development. But for India this remains an untapped opportunity.
  • Manufacturing is shifting to countries other than India: Even with rising wage levels in China, manufacturing is shifting to countries other than India. The PLI (production-linked incentives) scheme has been rolled out to encourage manufacturing. It may need some tweaking to be biased towards labor-intensive manufacturing as China vacates space in this area. This may seem at odds with the more popular view that it is small and medium enterprises which promote employment.
  • Country’s real exchange rate is not healthy: An overvalued rupee has discouraged the export of labor-intensive manufacturing goods, which are very price-sensitive in global markets. It has also had a dampening effect on domestic production as our currency has depreciated at a lower rate than other emerging economies like China and Indonesia.
  • Depreciated rupee impacting domestic producers by inflow of cheaper imports: Domestic producers of goods that compete with imports into our markets have been impacted by the inflow of cheaper imports. This has disincentivized them from expanding production and generating employment.
  • Micro, small and medium enterprises (MSMEs) are severely hit: Problems that have come to the fore post-pandemic include the health of micro, small and medium enterprises (MSMEs). Accurate information on this is somewhat scarce but anecdotal evidence suggests that they have been more severely hit than the formal sector.

The main challenges for Fiscal Health  : 

  • Populism in Pre-Election year:For instance, a Central Government sponsored loan waiver.
  • Rising Oil Prices: $10 Increase in Crude Oil Barrel Price can lead to 0.2-0.3% increase in FD
  • MSP Hikes for Kharif Crops:Government’s decision to hike Minimum Support Price (MSP) for kharif crops can impact GDP by 0.1-0.2% besides adding to inflationary pressures
  • Less than expected GST Revenues:While the ideal GST monthly revenues to meet the targets of the government is around 1.1 lakh crores, the average collection in FY19 was only around 0.97 lakh crores.
  • Resignation of RBI Governor: Many economists agree that the resignation was mainly due to the difference of opinion between the RBI and the Union Government on various key issues like the Resolution of Non-Performing Assets, Banking Frauds, RBI Surplus Transfer, undermining of the independence of RBI.
  • Winds against Multilateralism:Economic Survey 2017-2018 points out that exports and imports together amount to 42% of India’s Gross Domestic Product (GDP) showing Indian economy’s interdependence on the rest of the world economies. In this light, the much talked about tariff war initiated by the US threatens to impact our exports significantly.
  • Non-Performing Assets (NPA):The Standing Committee on Finance in its recent report had questioned the Reserve Bank of India (RBI) for failing to take pre-emptive action in checking bad loans in the banking system prior to the Asset Quality Review (AQR) undertaken in December 2015.
  • Agrarian Crisis:Agriculture which employs nearly 52% of those who are employed in India continues to be in deep crisis as reflected in the Farmer’s Long March from Nashik to Mumbai and in their agitations in New Delhi in November.
  • Higher Bond Yield and Greater Risk:The yield of India’s benchmark long-term government bond at 7.6%-7.8% remains higher than peers in developing economies and is on an increasing trend showing challenging days ahead.
  • Twin Balance Sheet Problem :While few Indian companies like Airtel and Tata have turned into global giants, companies like Jaypee Infra and Lanco Power are facing existential crisis due to the Twin Balance Sheet problem (stressed balance sheets of banks and over leveraged corporates).

Road Ahead : 

  • Job growth is crucial if we are to reduce the still high levels of poverty in the country
  • Incentivizing the domestic producers so that they can compete with the cheaper inflow of imports and expands their manufacturing thereby generating employment in the economy
  • The continued recovery of the formal sector, as indicated by various metrics, in terms of the improved health of corporates and banks should effectively pull up the MSMEs through supply chain linkages, among others.
  • We still have a negative real interest rate (that is, the difference between the RBI’s policy rate and inflation). Hence, the policy rate needs to rise further, providing a push to financial savings, which are needed to generate higher investment for growth.

FAQs : 

  1. Is Country’s Real Exchange Rate not Healthy ?

ANS. An overvalued rupee has discouraged the export of labor-intensive manufacturing goods, which are very price-sensitive in global markets. It has also had a dampening effect on domestic production as our currency has depreciated at a lower rate than other emerging economies like China and Indonesia.

  1. How is India doing on Inflation ?

ANS.  On the Inflation front, India is doing better than many advanced economies and emerging markets.