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TOPIC: General Studies 3
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
India’s economic growth fell to 6.1% in the fourth quarter of 2016-17, primarily because of demonetisation adversely affecting economic activity and the worst affected sectors being construction and financial services. Without indirect taxes (GST will be introduced), growth figures are expected to be more dismal. GVA added to the difference between GDP and Net indirect taxes grew by only 5.6% in Q4. The effect of demonetisation was evident in the figures with growth being pushed more by agriculture and government spending. Excluding these, GVA merely grew 3.8% from 8.4% in Q1.
Q3 numbers were much better than Q4 performance. This means that the real effect of demonetisation was felt after some months. However, demonetisation is not the real reason why the Indian economy is slowing down. The GDP numbers show that the Indian economy was slowing down from the first quarter of last fiscal. It was a slowdown which was not getting captured for a while but now it has shown. Demonetisation figures are part of a larger trend. Demonetisation has definitely accentuated the unemployment problem, especially in construction and real estate sector as they are cash rich sector. But one thing these numbers have cleared the misconception of lot of authorities who without having data had unnecessarily castigated the GDP makers for having fudged data. The Indian Statistical System is robust and gives a clearer real picture.
What bothers high economic growth?
Though agricultural growth has been high, it may not be as high as witnessed in previous quarter despite the monsoon. On other positive side, the exports have started moving up. But it is now becoming clearer that economy is dependent on expenditure to push it.
The high growth between 2004-2010 was due to
Can these be counted upon now?
Given the rise in protectionist measures, less growth in global trade, India needs to analyse its strengths pertaining to macroeconomic and microeconomic conditions- The focus areas should be
For this, government expenditure can be increased in three sectors
Role of RBI
The MPC has taken a consistent position that demonetisation effect is transient. But they are not yet convinced about the inflation trajectory because of which they want to keep it below 4%. The inflation trajectory has come off the pressures of being high. This is the critical point. MPC has taken a hawkish position that inflation risks are still high because of follow through of pay commission, impact of several structural problems and constantly fluctuating oil prices. This is when they would be considering whether there is a need to cut back on rates. The problem is that even if there is rate cut, would it encourage investors to borrow extra money from bank? Right now the banks are flushed with credit and willing to lend at less rates. But the question is if the borrowers are willing to take up the available money? So it is not necessary that less rate of interest would spur the economy for higher growth rate.
Creating a climate for investment is important because the demand has gone down in several sectors of economy and the industry is not pouring new money into manufacturing and operations. So government has to do things on several fronts. Government should concentrate on infrastructure projects which will be generating good deal of demand in future. The real estate has the maximum forward and backward linkages and here is where government should focus the most. Construction, employment orientation, employment intensive, addressing issue of land availability, affordable housing- making it feasible should help the economy.
Conclusion
World Band in its recent report ‘Globalisation Backlash’ has mentioned that may be private sector will be interested in investing more in next quarter. This is because investment in infrastructure by government has gone up high and public expenditure has also gone high. This may result into further incentive and market may pick up a little.
Also, Growth rate of 8-10% shouldn’t be expected in the near future. It was possible when world trade was booming. A consistent 7% growth is a good sign of economic growth. The per capita incomes will quadrupole in a generation.
Thus, India’s macroeconomic front is reasonably sound. It is possible to take risk to economic boost. Growth has to come from private sector. If the government tries to expand and tries to spend out of its way, it will hit the macroeconomic situation. Fiscal deficit ceiling cannot be breached. The private sector in India depends on government to give signal which is problematic. GST, IBBI enactment, fiscal ceiling are the solid measures to put the growth trajectory on sound footing.
Key Remark- Some major points from WB report are
Connecting the dots: