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[op-ed snap] Caution from a sobering Survey

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Note4students

Mains Paper 3: Economy | Growth

Once you are done reading this op-ed, you will be able to attempt the below.

Index of industrial production (IIP) shows negative growth, in the recent years. What could be the possible reasons? How it can be improved?

From UPSC perspective, the following things are important:

Prelims level: Corporate debt restructuring, strategic debt restructuring and scheme for sustainable structuring of stressed assets, NPA, GST

Mains level: Current status of the economy, problems, government initiatives


News

The second part of the Survey comes almost six months later, has some additional analytical pieces.

  1. Economic growth for fiscal year 2016-17 was 7.1%.
  2. This was the year when oil prices and inflation were moderate, abundant monsoon, foreign direct investment at peak, the currency was stable and the fiscal deficit was under control.
  3. With such macroeconomic context, the year should have recorded at least one percentage point higher growth than the previous year; demonetisation could be the biggest reason.

Growth forecast

  1. The Survey says that signs of slowdown were evident even before the announcement of demonetisation.
  2. Next year too, the Survey forecasts a growth closer to its lower bound, possibly lower than 7%.

The continuing deflationary trends arise from

  1. Lower investment ratio
  2. Low farm prices especially for non-cereals foods,
  3. The cutting back on development spending by State governments owing to the burden of loan waivers
  4. Twin balance sheet problem

Industrial problems

  1. Latest data on the index of industrial production (IIP) shows negative growth, i.e. contraction of the index, which is the first in the last four years.
  2. The contraction is particularly widespread across manufacturing sectors, with 15 out of 23 industries showing negative growth.

Reason?

  1. De-stocking of warehouses before the launch of the GST
  2. Twin balance sheet problem.
  3. Corporates too are reeling under stretched balance sheets, burdened by excessive borrowing at high interest rates, excess capacity and not-so robust demand for their products.
  4. Their situation is made worse with the flood of imports, which take away their domestic market share. The strong rupee makes imports more attractive.
  5. Under the GST regime, the countervailing duty paid in lieu of excise is now tax deductible. This makes imports that much more attractive
  6. Investment-to-GDP ratio has been steadily falling for five years in a row. Of this the private sector component growth is abysmally low.
  7. The bank credit growth to industry has been consistently negative

Financial sector

  1. Economic survey implicitly blames the high interest policy of the Reserve Bank of India (RBI) for thwarting industrial growth.
  2. Burden of non-performing assets (NPA).
  3. Repeated and innovative proposals from the RBI such as corporate debt restructuring, strategic debt restructuring and scheme for sustainable structuring of stressed assets have not borne fruit
  4. The fiscal situation at the Centre is improving. Exports are finally in positive territory.
  5. The four major reforms: GST, a new insolvency and bankruptcy code to deal with NPAs, a new monetary policy framework, and Aadhaar linkage to government services will help in improving the situation

 

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