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[op-ed snap] Six steps to job creation

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Note4students

Mains Paper 3: Economy | Development & employment

From UPSC perspective, the following things are important:

Prelims level: AMRUT Scheme, inverted duty structures

Mains level: National health policy, National manufacturing policy and other initiatives related to industrial growth


Context

  1. India is indeed the fastest growing large economy in the world
  2. Yet with investment low, credit offtake low, capacity utilisation in industry low, agricultural growth low, plant load factor low, it is hardly surprising that job growth is low as well

Groups in need of jobs

  1. In India’s highly segmented labour market, there are at least three demographic groups that are in urgent need of jobs
  2. These are: A growing number of better-educated youth; uneducated agricultural workers who wish to leave agricultural distress behind; and young women, who too are better educated than ever before

Reason(s) for low job growth

  1. Among many dimensions of this problem is the fact that in the quarter-century since economic reforms began, it is not manufacturing that has been the leading sector driving growth
  2. Manufacturing should drive productivity in the whole economy
  3. Services cannot, as services by definition ‘service’ the distribution of produced goods

What can policy-makers do to revive job growth?

  1. Industrial, trade policy
  • An industrial and trade policy is needed
  • For 20 years after economic reforms began in 1991 there was no National Manufacturing Policy, and the Policy, when it came in 2011, was not even implemented
  • The Department of Industrial Policy and Promotion (DIPP) is finally preparing an industrial policy
  • It is essential that trade policy is consistent with such an industrial policy
  • Otherwise, the two may work at cross purposes and undermine each other’s objectives
  • Manufacturing has been badly affected by inverted duty structures

    2. Special packages needed for labour-intensive industries

  • There are a number of labour intensive manufacturing sectors in India such as food processing, leather and footwear, wood manufacturers and furniture, textiles and apparel and garments
  • The nature of the package will need to be individually designed for each sector defined as quickly as possible

   3. Cluster development

  • There should be cluster development to support job creation in micro, small and medium enterprises (MSMEs)
  • Most of the unorganized sector employment is in MSMEs, which tend to be concentrated in specific geographic locations
  • There is a cluster development programme of the Ministry of MSMEs, which is poorly funded and could be better designed as well

   4. Align urban development with manufacturing clusters

  • Infrastructure investment by the government always creates many jobs
  • The Ministry of Urban Development (MoUD) has a programme called AMRUT (Atal Mission for Rejuvenation and Urban Transformation) aimed at improving infrastructure for small towns
  • An engagement between the Urban Development and MSME Ministries is necessary to ensure that the infrastructure investment under it is taking place in towns which have clusters of unorganised sector economic activities
  • It will attract more investment to industrial clusters, which is where most non-agricultural jobs are

   5. Focus on women

  • Girls are losing out in jobs, or those with increasing education can’t find them, despite having gotten higher levels of education in the last 10 years
  • The problem with skilling programmes has been low placement after skilling is complete
  • Skilling close to clusters (rather than standalone vocational training providers), which is where the jobs are, is likely to be more successful
  • The availability of jobs close to where the skilling is conducted will also enhance the demand for skilling

   6. Public investments in health, education, police, and judiciary 

This can create many government jobs

Health

  • Public investment in the health sector has remained even in the last three years at 1.15% of GDP, despite the creation of the National health policy at the beginning of 2017
  • Given the state of health and nutrition of the population, it is critical that public expenditure on health is increased faster
  • More government expenditure in health means more jobs in government and better health outcomes
  • Preventive and public health has always been in all countries the responsibility of government

Education

  • Government schools have poor quality and parents are voting with their feet by spending money on private schools, whether or not the poor parents can afford it
  • The number of teachers required, at secondary and higher secondary levels, is very high, particularly in science and mathematics
  • Many new government jobs can be provided if more young people could be trained specially to become teachers for science and mathematics at the secondary and higher secondary levels

Police and Judiciary

  • While the number of paramilitary personnel continues to grow, State governments are not filling even sanctioned posts in the policy and in the judiciary (at all levels there are vacancies)
  • More police and a larger judiciary can both reduce crime as well as speed up the process of justice for the ordinary citizen

Back2Basics

Inverted duty structures

  1. An inverted duty structure has the following features: higher duty on intermediate goods compared to final finished goods, with the latter often enjoying concessional customs duty
  2. As a result, domestic manufacturers face high tariffs, leading to higher raw material cost at home
  3. This has prevented many manufacturing sectors from growing since economic reforms began

[op-ed snap] Why the economic slowdown, and how to fix it?

Note4students

Mains Paper 3: Government Budgeting, Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.

From UPSC perspective, the following things are important:

Prelims level: Fiscal stimulus, expansionary policy

Mains level: How to revive the economy

 


News

Context-

  1. The article puts forward a case for increased spending by the government and lowering of interest rates by the RBI. The author argues that fiscal stimulus is the only logical way to pull the economy out of slowdown.

 

Current state of the economy-

  1. Data from 107 companies from the organised sector (excluding IT & financial services) indicate that number of persons employed by them has decreased by 2% between Mar-2016 and Mar-2017.
  2. The latest RBI Consumer Confidence Survey concludes that there is significant dip in the consumer confidence and business sentiment in manufacturing.

 

Background of the slowdown-

  1. The period 2003/04-2007/08 witnessed the most rapid sustained GDP growth in India at 8% per annum, riding on the boom in the world economy.
  2. Then came the bust, as growth dropped to 3.9% in 2008-09.
  3. Surprisingly, GDP growth rose to 5% per annum during 2009/10-2010/11. This recovery was attributable to counter-cyclical macroeconomic policies among other things.
  4. But the resilience did not last long. Growth slowed to 4% per annum during 2011/12-2013/14, as fiscal imbalances mounted, inflation quickened, and the current account deficit in the balance of payments widened.
  5. In 2015-16 and 2016-17 the GDP growth rate averaged 7.5% owing to one thing only- sharp drop in world oil prices, from more than $110 per barrel to less than $50 per barrel. This led to decrease in current account deficit and fall in inflation.

 

Reasons for slowdown-

Demonetisation and introduction of GST have led to decrease in output in mainly unorganised sectors. But these are not the real reasons for the current slowdown in the economy.

The real reasons for slowdown are structural-

  1. Rural distress: GDP per capita in the agricultural sector has been less than one-tenth GDP per capita in the non-agricultural sector for 25 years. Employment creation is negligible. The outcome is rural distress.
  2. Low share of manufacturing: The share of manufacturing in GDP and employment is lower than it was 25 years ago. India’s share in industrial production and manufactured exports in the world economy has declined steadily.
  3. Thus, GDP growth is supported largely by the services sector, while employment growth in the economy has been sustained essentially by construction activities and the informal services sector both of which have been hurt by demonetization.
  4. RBI’s reluctance to cut interest rates: Between 2013-14 and 2015-16, the RBI repo rate, which sets interest rates in the economy, was reduced by a mere 1.25 percentage points although inflation came down by almost 5 percentage points in terms of the consumer price index. The opportunity to stimulate investment by dropping interest rates sharply was missed out altogether
  5. Appreciation of rupee leading to erosion of export competitiveness: Between January 2014 and June 2017, the rupee appreciated by 10% in nominal terms and 15% in real terms.

 

Solution-

  1. Government should undertake fiscal stimulus by increasing spending and reviving demand. The government need to break free from the 3.5% fiscal deficit target and increase it to 4.0%. It is to be noted that borrowing is bad for the economy only when it is used for paying debts. But if it is used for creation of infrastructure and investment then it is actually god for the economy.
  2. RBI should lower the interest rates by 2 percentage points: It has to be noted that the inflation in economy was controlled not due to lowering of interest rates but because of the fall in global crude oil prices.

 


 Back2basics

  1. Fiscal Deficit: A Fiscal Deficit occurs when government’s total expenditures exceed its total revenues (excluding borrowings).
  2. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment, increase money supply in the market and increase demand in the economy.
  3. Expansionary monetary policy: This refers to  a monetary policy by a central bank in which interest rates are cut in order to ease money supply in the economy.

Mr PM: It’s time for bold economic thinking

Note4Students

Mains Paper 3 | Indian Economy

 

Prelims: GDP, Real Interest Rate

Mains level:  This article highlights the reasons for the paradoxical situation of the Indian economy and also gives a five step action plan to bring the economy back to high growth path.


News

Context

Present State of Indian Economy

The Indian economy is currently in a paradoxical situation

Reasons for high Economic growth

  1. The rapid economic growth, inflation is down, forex reserves are more than $400 billion, fiscal deficit is on target and current account deficit until recently has been less than 1% of GDP and comfortably financed by capital inflows.
  2. India’s oil imports in FY13 was $164 billion and by FY17 it was only $83 billion, thereby lowering the current account deficit as a percentage of GDP.
  3. The stock market is at an all-time high in anticipation of a surge in earnings which is yet to materialise.
  4. However, the state of the economy has been called to be ‘sinking’.

 

But economy is facing challenges like lack of investment and unemployment.

The RBI, in its latest monetary policy report, lowered the projected growth rate for FY18 from 7.3% to 6.7% .

 

Reasons for slow economic growth

  • The demonitisation and the introduction of GST.
  1. But on a positive note,  the culture as well as the regime for direct and indirect tax compliance in India is undergoing a fundamental shift for the better in a way that has not happened before.
  2. This will expand production in the near future. However, there is uncertainity how fast this is going to happen.
  3. For reforms to yield results necessary follow up policy actions by the government is needed.
  • The lack of speedy resolution of the stress in PSU banks and corporate balance sheets.
  1. This has eroded business confidence leading to lower investment and poor job creation.
  2. The announcement of stimulus package by the government may deal with the problem cosmetically rather than address its root.
  3. Mission Indra-Dhanush has also failed to resolve this problem.
  4. The recent RBI move to refer large stressed accounts to the National Company Law Tribunal so that they could be dealt with under the Insolvency and Bankruptcy Code but it will take a long time to resolve and recoveries will be much lower than what would have been possible by way of one-time payments negotiated with delinquent borrowers for full and final settlement of dues.
  5. The aim to question boards and executive of PSU banks from probes by the three Cs, CBI, CVC and CAG, will delay resolution of distressed loans and causing more losses to PSU banks.
  6. Due to this the high savings in India are currently not directed to productive, long-term investments as corporates have still not been able to repair their balance sheets.
  • The intangible thing called “confidence”, be it consumer or business, has been faltering.
  • The real interest rate which is calculated as the difference between the yield on the 90-day Treasury Bill and consumer price inflation is hovering around 4% therefore the investment might not pick up fast.

Five step plan to bring India back on the high growth track

  1. To counter the effects of demonetiation was politically successful but an economic failure.
  • Introduce an amnesty scheme, a laIndonesia, to allow tax payers to voluntarily disclose hitherto undisclosed income kept domestically and abroad.
  • Indonesia — a nation of 250 million people, with 32 million registered tax payers but only 8.9 million actual tax payers — had close to 1 million people disclose approximately 40% of GDP of undisclosed income this year, the bulk of which was held domestically and a portion abroad, notably in Singapore.
  1. The Indian government should announce a one-time programme valid till December 31, by when anyone can disclose previously undisclosed income held within the country and abroad, for which they will pay a small, one-time fine of 4%, while 50% of the domestic holdings will need to be invested in two large government funds — one for infrastructure and the other for bank recapitalization.
  • The amounts thus invested will be locked for seven years with a compound interest of 4% per annum. Post redemption, the amounts and the interest thereon can be used freely for any lawful purposes in India.
  • From January 1, criminal prosecution should be instituted against Indian residents holding large sums of undisclosed income.
  • By highlighting the automatic exchange of financial account data with nations such as Singapore and Switzerland, it can ensure that the scheme is taken seriously.
  • The work done so far by the SIT on money stashed abroad and the information obtained through Panama leaks can be used as a input to test and start the scheme.
  1. To ensure that the full extent of the NPA problem is recognised latest by December 31 and that banks make necessary provisions in this regard. The consequent shortfall in equity capital adequacy for PSU banks should be met through recapitalisation by March 31.
  • The boards of PSU banks should be recast by bringing in persons with demonstrated professional experience and achievement.
  • The selection of CEOs of PSU banks and determination of their tenure and compensation package should henceforth be the exclusive domain of their boards.
  • Boards should be fully empowered decide on loan resolution by way of real restructuring, with or without haircut, and one-time payment.
  • All cases of suspected wrongdoing involving collusion between borrowers and banks in loan resolution should be screened and vetted first by a high-level committee of former bankers drawn from public and private sectors before being taken up by the 3 Cs.
  • Clear guidelines should be established for such screening and vetting.
  1. Accelerate infrastructure investments, especially in agricultural storage/ support infrastructure, in post-harvest processing, water efficiency technologies, extension services etc. to make agriculture more productive.
  2. Facilitate new export engines — ‘Make in India’ and ‘Serve in India’ — with emphasis on defense exports and medical tourism.
  • An ambitious target of $100 billion over the next 10 years can be set for these two segments as the world is becoming an increasingly dangerous place and global population less healthy with chronic diseases for which India can offer holistic cures.
  1. The PM must take a leaf from the book of former Prime Minister, Narasimha Rao who brought a technocrat to lead the economic reforms that time.

 

 

 

 

 

 

 

 

Inflation set to pick up in H2FY18: RBI

Note4Students:

Mains Paper 3| Indian Economy

Prelims: Inflation- WPI and CPI, GST

Mains level: Not much


News

Context

  1. Consumer price inflation is likely to pick up in the second half of 2017-18 with food prices set to rise.
  2. There has been a broad-based increase in CPI inflation excluding food and fuel.
  3. The RBI has kept the repo rate unchanged at 6 per cent in the bi-monthly monetary policy
  4. Inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre.

Why RBI feels that inflation will pick up?

  1. Early indicators show that prices of pulses which had declined significantly to undershoot trend levels in recent months, have now begun to stabilise.
  2. Some price revisions pending the goods and services tax (GST) implementation have been taking place.
  3. International crude prices, which had started rising from early July, have firmed up further in September.
  4. Implementation of farm loan waivers by states and salary and allowances

Back2basics

  • Consumer Price Index:CPI is used to monitor changes in the cost of living over time, it reflects the price of goods and services bought by the final consumers. The CPI compares the price of a fixed basket of goods and services to the price of the basket in the base year that is 2011-12. India has adopted CPI to measure inflation. CPI is calculated by Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation (MOSPI).
  • Whole sale Price Index: WPI is used to monitor the cost of goods and services bought by producer and firms rather than final consumers. WPI basket does not cover services. In IndiaOffice of Economic Advisor (OEA), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry calculates the WPI. The new base year for WPI is 2011-12

 

 

 

[Op-ed snap] In need of a psycho-economic boost

Note4students:

Mains Paper 3: Indian Economy: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment,Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: Concepts: Fiscal and monetary stimulus, economic cycle
Schemes: SEIS & MEIS

Mains level: Steps to revive the economy


News

Context

  1. The article talks about how fiscal and monetary stimulus can help in reviving the economy
  2. The central idea of the article is follows: in a slumping economy, in addition to fiscal and monetary stimulus, a psychological boost is also required in to boost the “animal spirits”

 Current scenario in the economy-
 Investor enthusiasm from the private sector is lacking. Added to their lack of demand is the reluctance of supply of investible funds.

  1. GDP growth is continuously declining six quarters in a row (from 9.2% to 5.7%)
  2. Investment share of GDP is falling for last 5 years
  3. The value of stalled projects is record high at ₹13.2 lakh crore
  4. Newly announced projects are at 4 years low at ₹84,000 crores
  5. Cautious banks: In spite of healthy deposits, the banks are reluctant to extend new credit because the ratio of NPAs have been growing for 5 years in row now.
  6. The new Insolvency and Bankruptcy code could be good but has yet not been tested.

 

Way forward-

On the spending side government should focus on four areas-

  • Provide fresh capital either to existing banks or the new ‘bad bank’.
  • Provide wage subsidy as incentive to labour intensive sectors like textiles etc.
  • Provide big boost to affordable housing by funding land acquisition for the builder and interest rate subvention for the home buyer
  • Promote export oriented labour intensive sectors by enabling weaker exchange rate, quicker refund of GST credit and expanding the scope of the Merchandise Export from India Scheme and Service Exports from India Scheme.

Conclusion-
These short-term measures will try to lift the psychological atmosphere in the economy and hence boost private investment.

For Prelims:

Merchandise Export from India Scheme (MEIS)

  • Under the Ministry of Commerce and Industry
  • Launched under Foreign Trade Policy of India (FTP) 2015-20.
  • Aim: To offset infrastructural inefficiencies and associated costs involved in export of goods and products, which are produced and manufactured in India
  • It seeks to enhance India’s export competitiveness of these goods and products having high export intensity, employment potential

Service Export from India Scheme (SEIS)

  • Under the Ministry of Commerce and Industry
  • Launched under Foreign Trade Policy of India (FTP) 2015-20.
  • It provides for incentives to all service providers of notified services who are providing services from India

Back2basics

  1. Meaning of Investment Share of GDP: This is the quantum of investment which is responsible for creation of new capital in terms of factories and other infrastructure which will give returns in the future.
  2. Keynesianism: M. Keynes was a British economist who suggested (during the Great Depression of 1930s) that in order to pull an economy out of a slump (recession/depression) increased government expenditure and cutting taxes is the way out. This is in short called as Keynesianism.
  3. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment and increase money supply in the market.
  4. Monetary Stimulus: Cutting interest rates by the central bank of an economy in order to enable availability of cheaper credit in the market, consequently encouraging more people to spend and increase money supply.
  5. Bad Bank: There is a suggestion to collect all the bad loans from the various banks and move them to a freshly capitalised bank, the so-called “bad bank”. The bad bank would focus solely on liquidating the collateral, bringing in fresh owners and managers to run distressed companies. Once freed from NPAs, the existing banks can resume lending to the healthy sectors.
  6. NPA: When loan payment has not been done for the past 90 days then such an asset is termed as a Non- Performing Asset.
  7. The Insolvency and Bankruptcy Code, 2016: Read in detail here.

 

 

[op-ed snap] Pause before you leap

Image result for economic slowdown

Image source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Fiscal stimulus, Current account deficit (CAD)

Mains level: Reasons behind the economic slowdown in India and what needs to be done in order to re-stoke growth


News

Context

  1. The slowing of GDP growth to below 6 per cent has created anxiety and concern.
  2. One suggestion is to go for a fiscal stimulus to re-stoke growth
  3. To assess the efficacy of any intervention, it’s crucial to first correctly diagnose the problem

What are reasons behind the slowdown? 

  1. Growth has now been slowing for five quarters. The slowdown has been accentuated in 2017, because of demonetisation and GST 
  2. Despite this slowdown, manufacturing imports have accelerated sharply, widening the current account deficit (CAD)
    • CAD has quadrupled from 0.6 per cent to 2.4 per cent of GDP
    • Seventy per cent of this is on account of increased manufacturing imports
  3. The growth slowdown before demonetisation was a natural consequence of
    • The oil windfall rolling off
    • Economy embarking on de-leveraging.
  4. This has been compounded by a negative supply shock after demonetisation, as supply chains have been disrupted inducing more imports.
    • Since demonetisation, imports have been growing at 13 per cent.
  5. Domestic supply chains have been disrupted in the manufacturing sector post-demonetisation — likely involving SMEs and that activity has been replaced by imports

Possible implications of a fiscal stimulus?

  1. Expansionary fiscal is unlikely to rehabilitate disrupted supply chains.
  2. Instead, a fiscal stimulus — in the wake of an adverse supply shock — will stoke more imports and result in a larger current account deficit. 

Way forward?

  1. Supply-side shocks need supply-side solutions.
  2. Improve the regulatory and business environment for SMEs
    • Improve their access to credit
    • Resolve teething GST problems and
    • Simplify the burdens of firms competing in the formal sector.
  3. Keep pushing hard on the stressed-asset resolution, so that the twin-balance sheet problem does not remain a binding constraint for larger firms.

Back2basics

[op-ed snap] India’s economy: Dark clouds and Silver linings

Note4Students:

Mains Paper 3: Indian Economy growth and development; Investment Models

The following things are important from UPSC perspective:

Prelims: GDP, Current Account deficit, Capital Account Deficit, Functions of RBI

Mains level: What are the structural and cyclical reasons for declining growth rate and its impact on the economy. Also give solutions to reverse declining economic growth.


News:

Context

  1. Economic growth has declined for six quarters in a row.
  2. Inflation has more than doubled in the three months since June.
  3. The current account deficit (CAD) in the first quarter of the current fiscal year was at its highest level in four years as a proportion of gross domestic product (GDP).
  4. Is it time to hit the panic button?

 

Some of the worries are overdone because-

  1. Inflation was expected jump back from an absurdly low level in June.
  2. The current account deficit is still being comfortably financed by strong capital flows.

 

  1. The increased CAD may be because of dominance of debt investments and spurt in electronics and gold imports.
  2. Decline in economic growth in the three months to June can be explained by inventory destocking by companies ahead of the launch of the goods and services tax (GST), so a cyclical bounce back is quite likely over the next two quarters.
  3. The government was facing a comfortable growth trajectory till now because-
  4. The collapse of global crude oil prices and it used it prudently to strengthen its finances rather than immediately pass the benefits to the consumers.
  5. Monetary tightening by the Reserve Bank of India also helped secure macroeconomic stability after nearly five years.
  6. That hard-earned stability does not seem to be at risk—despite the latest numbers on inflation and the current account deficit.

 

 So,  What is the more serious problem-

  • It is the Declining Economic Growth.
  • It may be due to two reasons- Structural or Cyclical.
  • But, at this point of time it is difficult to figure out how much of the decline can be attributed to structural reasons or the cyclical ones.
  • It is also because of the two consecutive exogenous shocks given to the economy—first demonetization and then the transition to GST.
  • Economic growth is expected to claw back once the effects of the above mentioned shocks abate, especially if there is no hysteresis.
  • An important structural element to the economic slowdown is that the Indian economy began started losing momentum well before the demonetization decision was announced in November.
  • In other words, we may expect pleasant surprises in the next two GDP’s.

What can be done to arrest this economic decline ?

  • The key to a sustainable recovery is the investment cycle.
  • The private sector is still struggling with excess leverage and the banks are struggling with bad debts
  • So, the macroeconomic strategy will thus have to delicately balance between the need to push public investment on the one hand and keep the fiscal deficit under check on the other.

Money for investment can come from

  • The extra taxes that the GST is expected to send into the treasury should hopefully create fiscal space for higher public investment.
  • The government should push ahead with a privatization programme that should be used as a way to switch assets—from airplanes to roads, for example.

Conclusion

India may see a small cyclical recovery in the months ahead. However, a sustainable recovery will depend on investment activity. Public investment will have to hold the fort till the private sector deleverages, banks are cleaned up and excess capacity is worked out of the system.

 



:( We are working on most probable questions. Do check back this section.







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