Analysis on India
Baljit Dhaka
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Analysis on India

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Analysis of India’s current economic slowdown and way outs

Current issues with the Indian Economy:

India’s economy is passing through a phase of the slowdown as well as a structural crisis.

The national GDP has declined to 5.0%.

The Construction sector, one of the fastest-growing sectors so far, is growing at 3.3% this year and agriculture is growing at 2.1%.

The Micro, Small, and Medium Enterprises (MSME) sector has declined, in turn raising the burden of nonperforming assets(NPA) of the banking sector as well as non-banking financial institutions.

Exports have been declining in recent years, raising the crisis of the current account deficit.

Credit from banking and nonbanking sectors has been declining in the last few years.

The Financial Stability Report of the Reserve Bank of India (2019) says that it is unlikely to increase in the next nine months.

Absolute poverty has increased to 30% (4% jump).

Human Development Report (2019) has shown, more than 44% of the Indian population is under the multidimensional poverty line.

50% population at present owns only 4.1% of the national wealth, while the richest 10% of people own 73% of the total wealth in India.

India has a 15.2% population malnourished and 50% of the malnourished children in the world are in India.

India’s global hunger rank has gone up to 112 while Brazil is 18, China is 25 and South Africa is 59.

In the field of education as per a UN report (2015), overall literacy in India is 74.04% (more than 25% are totally illiterate) against 94.3% in South Africa, 96.6% in China, and 92.6% in Brazil. 

Almost 40-45% population is either illiterate or has studied up to standard 4. Given the quality of education in India, the overall population is very poorly educated, with the share of ‘educated unemployment rising by leaps and bounds.

When exports are declining, the economy will have to depend on domestic demand for growth. 

It is no more feasible for the top 20-25% population to continue contributing to growth without depending on the demand from the bottom 40-45% population. 

They do not get a fair share of economic growth and are more or less deprived of productive employment with a decent income.

Demand for this bottom 40-45% population is required for the growth which will enable the economy to reach $5trillion by 2024.

The government spends just 1.4% of GDP on health (against the norm of 46%of GDP) and 3% of GDP on education (against the norm of 68% of GDP). 

 The bottom 40%-45% are incapable of acquiring any meaningful skills or participating actively in the growth process without Govt. support. They become unemployable by the industries which need skillful and trained resources.

This suboptimal use of the labor force in the economy is not likely to enable India to achieve optimal growth with proper use of the national resources. 

Action required for recovery 

A.Inclusive Growth:

A major solution to the present crisis is to go in for inclusive growth, which not only means including all sections of the population in the growth process as producers and beneficiaries but also means “shared prosperity”. The main requirements of inclusive growth are as follows:

1. Improvement of the capabilities of the masses as well as their wellbeing by expanding productive employment opportunities for them.

The main steps to expand productive employment for all in the economy should be made up of:

a) Creating scope for industries

b) Ensuring quality education to all, which will by itself generate large scale employment in the government.

2. Having a well educated and skillful labor force will ensure high employability; such people will be able to participate actively in the development process.

3. Having a well-educated Labor force will help startups and MSMEs, in turn triggering a cycle of more productive employment in the economy.

4.This will also improve the global competitiveness of our production units.

5. Employment guarantee schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) will also increase productive employment if implemented properly.

6.Assets generated under MGNREGA will expand capital formation in the economy, thereby raising the labor absorbing capacity of the mainstream economy.

Such a strategy has multiple advantages:

1. It will raise incomes and the wellbeing of those who need it most urgently.

2. It will raise effective demand rapidly.

3. Growth will be equitable and sustainable.

B.Targeting important sectors, making Budget provision, and raising sector-specific investments:

To raise expenditure on health to at least 5% of GDP and expenditure on education to at least 6% of GDP.

To push up infrastructural development.

To enhance capabilities and opportunities of the masses and not just to promote  corporate units

To promote agriculture by rising investment in agriculture and not just cash transfer (cash transfer provides relief to them no doubt but does not raise the productivity of agriculture which needs large public investment)

To facilitate credit flow particularly continuous working capital to labor-intensive sectors. 

C.Resource Generation and Public investments:

One of the major issues is raising resources to increase new public investments in the selected sectors like education and health when public revenue is declining and the claims on public resources are rising

One major strategy should be raising direct taxes, both capital tax, and wealth tax. Our experience in the past has shown by following crony capitalism, i.e. providing tax cuts and extra incentives and concessions to the corporate sector, exports increased, and also our national GDP no doubt. But this growth does not percolate to the poor.

Taxing the rich can be another major strategy to raise government revenue