The Economic challenges in front of India

Topic - The major challenges in sustaining growth of Indian economy

Indian economy is the 3rd largest economy in terms of PPP (World Bank) and done fairly well in terms of Gross Domestic Production (GDP) measures. After the adoption of Liberalization and globalization policy in 1991, India has shown higher GDP growth. In fact at the time of economic slowdown of 2008, India showed double digit growth and was not much affected by the global downturns. According to the government data in past recent years, the growth parameters have been 6.8% (2018), 7.2% (2017), and 8.2% (2016). Even when the global economy is showing the downward trends, the World Bank and IMF have declared India as one of the highest performing Asian economy. In spite of having a somber GDP numeric India faces a number of challenges pertaining to its internal features. The recent outbreak of Covid-19 posed different challenges in front of the world economies and so India as well. The pandemic has shown us the drawbacks in our supply chains and lacunae in the different economic spheres. 

How the economic growth is measured?

To measure the economic growth the real Gross Domestic Product is measured (GDP). GDP is calculated for a basket of fixed number of goods and services after adjusting the inflation rate.

What are the challenges?

Unemployment

The Unemployment rate has been quite high at around 8.75% in March 2020 and reached around its highest level at around 24% due to lockdown of the nation amid Covid-19 spread. The humongous loss of employment amid the pandemic shows the vulnerability for the unorganized sector. The high level of unemployment exist because of lack of required skills, economic inefficiency, strict labour laws, less frequency of job generation and unorganized economy. This poses a great pressure on the country’s available resources and dependency of population on government increases.

Poor Infrastructure

The inefficient infrastructure such as poor rail and road connectivity, ports load, lack of required manufacturing units, outdated technology, lack of maintenance, less innovation and poor R&D facilities reduces the overall economic activities and amounts to less economic growth.

Inefficient tax collection

The collected tax amounts to around 17% of GDP (budget 2020) which is quite high around 40-45% in developed economies. The previous complicated taxation system has been replaced by the Goods and Services tax (GST) and now it is expected to give good results but still the tax to GDP ratio and the collection are dismal.

Inadequate lending

The disturbed twin balance sheet of the banks and the industries creates a paranoid among the lending institutions. The ever rising NPA which is around 9.1% in2019 (RBI) has raised the bar for commercial lending. The government has come up with bankruptcy code and has infused capital in banks to reduce the apprehensions regarding lending.

Ease of doing business

Various constraints exist related with business atmosphere such as Trading infrastructure and rules, labour laws, environment clearance, cumbersome land acquisition process, lacklustre bureaucratic procedures are among different obstacles for doing business in India.

Fiscal deficits

The fiscal deficit of 4.6% of GDP has put pressure on government expenditures up to a considerable level. It poses a difficult situation regarding the selection of priority areas to invest on.

High dependency on imports and lesser exports

Less production capacity, unfavorable business environment, lack of skill and absence of manufacturing base makes India a trade deficit country.

High Inflation rate and inefficient monetary policy regimes

It reduces the lending tendency of banks and banks shows indifference in transmitting the rates cuts to the consumers. This reduces the liquidity in the market which affects the economy.

Reliable data

The trustworthiness of the data is essential for the better policy formulation and result analysis of any decision taken. The forecasts shown by foreign agencies and internal agencies sometimes contradict which eventually reduce the trust the investors and create apprehension among them.

Agriculture dependency

 It comprises around 15% of the economy and around 50% of the population derives their livelihood from this sector. The agriculture sector is far less efficient in terms of income generation. In developed economies this sector comprise only around 2-3% of the economy.

Income inequality and Regional disparities

The skilled and wealthy have benefitted most from the economic growth. The metro cities have drawn most of the investments and it has led to more differences in development. Around 30% of the population is below poverty line. More than 50% of the wealth is in the hands of 1% rich population.

What are the positives?

Availability of cheap labour

High population which creates high demand irrespective of global downturns

A secure investment destination (FDI- 9^th largest in 2019 with $51 billion)

The highly efficient IT sector

The increasing level of money in the hands of middle class

High rate of savings

Higher growth rates

A higher Demographic dividend

Increasing level of literacy

Ways forward

Irrespective of having multiple challenges Indian economy has capacity to survive in the most difficult situation such as slowdown of 2008. Indian economy has an intrinsic capacity of running on a good note as it has performed well in the recent past when the global economies were crippling down. The major requirement is to consider all the challenges in an integrated manner and to dispose of all the hurdles.