Q. Discuss the various impediments that our GDP is witnessing in its path of the growth.
A: Broader Structure:
– Some context, a few data points to highlight if the growth has indeed slowed down or not
– Factors that affect GDP growth
– Impediments in the case of India
– Impact of certain steps
– Way Forward
India’s GDP grew at 5.8% in the January-March 2019 quarter, dragging down the full year growth to a five-year low of 6.8%.
Growth in gross value added (GVA), which is GDP minus taxes and subsidies, fell to 6.6% in 2018-19, pointing to a serious slowdown.
The growth in core-sector output — a set of eight major industrial sectors — fell to 2.6% in April, compared to 4.7% in the same month last year.
GDP Growth depends on a lot of factors, such as
– Macroeconomic and political stability
– Physical infrastructure
– Digital Infrastructure
– Availability of financial capital
– Availability of human resources
– Institutional, policy, and regulatory architecture
– The transparent, stable and predictable investment climate
– Rule of Law: Proper contract enforcement and respect for property rights, embedded in sound macroeconomic policies and institutions
– Free and Fair competition
– Corruption Perception
– Global Economic Environment
Consequently, the business regulatory environment, taxation laws, and governance/institutional capacity often influence the ease and cost of starting a business as well as normal day-to-day operations.
– Depreciating rupee
– Rising bank bad loans and /or non-performing assets (NPAs) – Leading to lack of availability of Financial Capital
– The trade deficit that has shot up to a five-year high
– Retail fuel prices, embargo on buying fuel from Iran
– India’s GDP growth continues to be powered by consumption, not investments.
The economy is beset by a consumption slowdown as reflected in the falling sales of everything from automobiles to consumer durables, even fast-moving consumer goods.
– Private investment is not taking off
– Government spending was cut back in the last quarter of 2018-19 to meet the fiscal deficit target of 3.4%.
– The unemployment rate in the country rose to a 45-year high of 6.1% in 2017-18, as per official data released, leading to possible loss of consumption as well.
– The overall slowdown in global growth – The UN World Economic Situation and Prospects as of mid-2019 report said that the global economy is experiencing a broad-based growth slowdown led by slowing industrial production coupled with the weakening of international trade activity due in large part to the unresolved trade disputes between the U.S. and China.
(You can quote data, ranks from the following as well to make your answer more convincing:
Quantitative and qualitative determinants of the investment climate have been captured in the form of a single index that helps identify the relative rank of a country, such as the ease of doing business index of the World Bank, Competitiveness index (WEF), Policy Uncertainty Index, Corruption Index (Transparency International) and the like.
Impact of Certain Steps
Also, India has been making certain structural changes in the Economy, that are believed to cause a short-term drop in GDP growth rate but might prove useful in the long-term, such as:
– GST implementation
– Digitalisation of Monetary Transactions
– Digitalisation of Transactions with the Government using various portals and Apps
– Stringent laws on Black Money impacting sectors like Real Estate
– Amendment of DTAA with Mauritius and Singapore impacting investment inflows in India.
What else could be done: Way Forward
– Boost to consumption, which means putting more money in the hands of people. That, in turn, means cutting taxes, which is not easy given the commitment to rein in the fiscal deficit.
Proceeds of disinvestments can be roped in for meeting fiscal obligations.
– Measures to boost private investment.
These call for major reforms, starting with:
o Land acquisition.
o Labour reforms.
o Corporate taxes reduction and exemptions.
o Developing an alternate channel of capital like Corporate Bond Markets.
o Nursing banks back to health using options such as further recapitalisation of the ailing banks, and bank
– Increasing the competitiveness of exports using various short term and long term measures.
– Continuing with the focus on ‘Ease of Doing Business’ to facilitate Make in India and attract FDI.
– Focusing on regional trade pacts like RCEP to promote bilateral and multilateral trade.
– Focusing on select markets and select products for export promotion.
– Putting in practice the recommendations of the Baba Kalyani committee on SEZ to make SEZs drivers of India’s
– Investments in MSMEs and Start-Ups to be encouraged while avoiding disincentives like Angel Tax on Start-Ups.
The focus on growth shall also ensure that it is not only the quantitative growth in an economy that takes place but also the qualitative growth as well. Leading to the inclusive growth of various parts and sections of society.