Sustaining India’s high growth rates and the Panacea of “Deep Reforms” : Daily Current Affairs

Date: 26/08/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment, Inclusive growth, and issues arising from it.

Key Phrases: Economy of India, Gross Domestic Product (GDP), Growth rates, Challenges to India’s growth, Current account deficit (CAD)

Context:

The International Monetary Fund (IMF) in its latest update of World Economic Outlook, 2022 has projected India’s Gross Domestic Product (GDP) growth rate to be 7.4% which is the highest among the world’s largest economies.

Background:

The current projections of India’s growth are higher than the World’s at 3.2 % and behind a few countries such as Saudi Arabia which is leading the pack on account of higher crude oil demand.
India’s growth is affected largely due to its dependency on strategic imports such as Crude Oil and a widening Current Account Deficit(CAD)
Although India is behind the pandemic and its economy is expected to bounce back quickly but slow recovery of economics across the world casts doubts which are coupled with policy and reform challenges.

Do You Know?

Historically, India was the largest economy in the world for most of the two millennia from the 1st until the 19th century.
Today in 2022, India is the world's fifth-largest economy by nominal GDP($3.53 trillion)
It is the third-largest by purchasing power parity (PPP) with an estimated value of $ 11.75 trillion.
India left protectionist economic policies and implemented Liberalization, Privatization, and Globalization (LPG) reforms in 1991 due to an acute balance of payments crisis.
Since the start of the 21st century, annual average GDP growth has been 6% to 7%.
From 2013 to 2018, India was the world's fastest-growing major economy, surpassing China.
As of July 2022, India is the third-largest unicorn base in the world with over 100 unicorns collectively valued at over $335billion.

India’s GDP growth: Glancing into the numbers

India‘s GDP growth numbers stood roughly at 5.7% in the 1990s, to 6.2% from the turn of the century to the 2008 global financial crisis.
After the global financial crisis it remained at about 6.9% till the Pandemic hit in early 2020.
Now the projections in excess of 7% can rightly be said as the continuation of past trends
This robust growth has been achieved on account of:
- A buoyant tech and service sector.
- Robust agricultural productivity gains.
- Decent manufacturing growth.

How can the Growth rates be sustained?

The growth rates can be sustained by following ways

If there are wholesome changes in economic policies which are essential to sustain the growth rates.
India needs to export a lot more and has to develop itself as an export powerhouse.
India has traditionally been an exporter of services but the outsourcing of back-office and customer-facing services is now poised to slow, as firms ‘friend-shore’ more of their operations.
The government needs to push investing in logistics, and ensure better outcomes for such investment projects.
Rupee depreciation can make merchandise exports more competitive and limit consumption of imports thus the Reserve Bank of India (RBI) should take it into consideration.

Additional Information

Economic Growth Rate:

An economic growth rate is the percentage change in the value of all of the goods and services produced in a nation during a specific period of time, as compared to an earlier period.
Significance:
- The economic growth rate is used to measure the comparative health of an economy over time. The numbers are usually compiled and reported quarterly and annually.

Government Initiatives for Boosting Economy Growth:

National Monetization Pipeline(NMP) and National Infrastructure Pipeline(NIP)
PM Gatishakti and Sagarmala project.
Make in India, Digital India, Skill India, and Startup India
The National Manufacturing Policy and National Policy on Electronics 2019 (NPE 2019)
Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities Mission.
Production-linked Incentive Scheme (PLI) in Various Sectors
Major Telecom Sector Reforms and rationalization of adjusted gross revenue, the rationalization of bank guarantees (BGs).
Deep Ocean Mission to explore rare oceanic resources.
Focus on Renewable Sources and diversification of India’s energy needs through various means.

Current Account Deficit (CAD):

The Current Account
- It measures the flow of goods, services and investments into and out of a country.
- The current account includes net income, including interest and dividends, and transfers, like foreign aid.
What is the Current Account Deficit?
- A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
- The balance of exports and imports of goods is referred to as the trade balance. Trade Balance is a part of ‘Current Account Balance’.
- High Oil Imports and High Gold Imports are the major driving force in India’s widening the CAD.
Significance of CAD:
- A rising CAD of a country shows that it has become uncompetitive, and investors may not be willing to invest there.
- In India, the Current Account Deficit could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.

Challenges and constraints to the growth rates:

It is expected that in near future Indian exporters will face a less favourable external environment.
The slowdown in China’s economy, the recession in Europe and the imminent danger of recession in the USA will hinder demand for Indian exports.
Thus the avenue of expanding the manufacturing sector by scaling up exports may no longer be available to India.
The country can finance its CAD and domestic investment through external borrowing but it has its challenges as
- India is underperforming as a destination for foreign direct investment, which is deterred by bureaucratic obstacles to doing business.
- Foreign Investors who invest in local currency bonds have not been reliable as they fear falling bond prices and falling exchange rates.
The government is unable to finance critical sectors such as infrastructure, health and education using domestic borrowing because:
- General government debt is already around 90% of GDP.
- The primary budget deficit, which excludes interest payments, is 3% of GDP.
- Excess Government borrowing from banks leads to “crowding out” of Private sector players.
A large portion of government revenues goes to pensions, salaries and payment towards borrowing which hampers government expenditure on new initiatives.
India’s private sector savings are low vis-a-vis global standards thus the private sector is not able to spend on capital projects.

Way forward:

The Government of India has taken some significant reforms in labour and product markets due to pushback from pressure groups.
But the structural reforms to boost the growth are not implemented yet.
Given its favourable demography, democratic polity, and its large and diversified economy, India could in principle grow at 7% or higher for years to come.
Such growth can only be sustained for years to come only if large scale structural reforms in economic policies are implemented at the earliest then only we’ll be able to achieve ambitious targets of a $ 5 trillion economy in the upcoming few years.

Source: Live-Mint

Mains Question:

Q. India’s high economic growth needs to be sustained in the post Pandemic times to reap the fruits of India’s demographic dividend and diversified economic potential, Elucidate. Also, suggest ways to sustain the high growth rates in the Indian economy (250 words).