Contemporary Issues with Indian Economy

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India is the world’s fourth-largest economy. It produced $9.4 trillion in goods and services in 2017. But it has a long way to go to beat the top three: China, with a production worth $23.2 trillion, the European Union with $20.9 trillion, and the United States with $19.4 trillion.

India had rapid growth despite the Great Recession. It grew 6.8% in 2018, 7.2% in 2017, and 8.2% in 2016. From 2008 through 2014, it grew between 3% and 8.5%. That phenomenal growth rate reduced poverty by nearly 10% in the 2010.

 

India’s Strengths

  • India is an attractive country for outsourcing and a cheap source of imports. Its economy has these five comparative advantages:
  • The cost of living is lower than in the United States. Its gross domestic product per capita is $7,200, half that of China or Brazil.This is an advantage because Indian workers don’t need as much income since everything costs less.
  • India has many well-educated technology workers.
  • English is one of India’s official subsidiary languages. Many Indians speak it. This, combined with the high level of education and the wage differential, attracts U.S. technology and call centers to India.
  • It’s hard to quantify how many jobs have been lost to outsourcing, and estimates range from 104,000 to 700,000.
  • India’s 1.3 billion people come from a wide range of economic and cultural backgrounds.This diversity can be a strength or a challenge. Socioeconomic status is largely determined by geography. India’s three main regions each have distinct class and education divisions. Many people leave the rural areas to live in the cities. Most of them are young and educated. They seek a higher quality of life. The level of urbanization reached 34% in 2018.

 

Challenges

The Indian economy has been experiencing slowdown over the past few quarters with GDP growth falling to 5% in the first quarter of 2019-20, the lowest in 6 years.

Almost every sector of the economy including automobile, core industries, FMCG sector are facing negative growth. The present headwinds in the economy is due to the effect of both cyclic as well as structural problems.

 

The primary economic issues in India are:

  • Low per capita income
  • Huge dependence of population on agriculture
  • Heavy population pressure
  • Low level of technology
  • Lack of access to basic amenities
  • Demographic characteristics
  • Under-utilisation of natural resources
  • Lack of infrastructure.

 

Cyclic and Structural problems in the Economy:

  • Cyclic Problem – Weak Consumer demand.
  • Structural Problem – NPA crisis, GST, Fiscal deficit, Bottlenecks in trade and exports etc.

 

Contemporary Economic Issues

  • The four major engines of the economy – private investment, exports, private consumption and now even public investment – have stalled or are sputtering.
  • GDP growth has been slowing.
  • The crucial automobile sector is hurting.
  • Slow improvement in Rate of Capital Formation. Gross fixed capital formation, which is net investment in fixed assets as a share of the gross domestic product, was 32.3% in 2018-19, compared with 38.7% in 2012-13.
  • Serious concerns around unemployment. According to a leaked NSSO job survey data, unemployment is at a 45 year high, at 6.1%, in 2017-18. A report by Azim Premji University says 50 lakh people lost jobs in 2016-18 due to policy shocks like demonetisation and GST.
  • Inequality in wealth distribution (Oxfam’s report says richest 1% own 82% of the world’s wealth).
  • Poor Quality of Human Capital.
  • Agricultural distress, lack of fiscal manoeuvrability and a stubborn investment drought in the private sector are among a slew of challenges that Indian economy is currently facing.

 

Suggestions

  • While challenges on agriculture and job fronts require a long term, multi-dimensional approach, the government must, as a priority, make an all-out effort to persevere with the banking reforms and do whatever it takes to stoke private sector investment.
  • The government must prioritise and incentivise manufacturing and remove policy bottlenecks while helping them become globally competitive.
  • Reviving consumer demand along with addressing sector specific structural problems in the banking sector, GST, plans and programmes is the need of the hour.
  • Land and labour reforms, hand-holding labour-intensive SMEs, including smoothening of credit schemes like Mudra loans, are all critical. Most importantly, India must prioritise and train its youth for the new jobs that are being created.
  • Government must go beyond the merger of public sector banks (PSBs) and divest its stakes. It will allow banks to take risks.
  • The government should promptly address issue of NBFCs and restore confidence among NBFCs facing a liquidity crunch. NBFC liquidity squeeze has a ripple effect on sectors such as real estate, infrastructure and SMEs.
  • Economic experts says “Government policies must focus on boosting agri workers’ productivity. This will be more sustainable than raising farm income.”

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