From UPSC perspective, the following things are important :
Prelims level : Fundamentals as mentioned in the newscard
Mains level : Fundamentals of Indian Economy
PM Modi highlighted the strong absorbent capacity of the Indian economy while referring to certain fundamentals. He emphasized the strength of these basic fundamentals in absorbing the shocks of ongoing economic slowdown.
What are the ‘fundamentals of an economy’?
- The PM has reiterated a phrase of reassurance — underscoring the strong fundamentals of the Indian economy — that has been often used by policymakers in the past when the economy is seen to be faltering.
- When one talks about the fundamentals of an economy, one wants to look at economy-wide variables such as the overall GDP growth, the overall unemployment rate, the level of fiscal deficit, the valuation of a country’s currency against the US dollar, the savings and investment rates in an economy, the rate of inflation, the current account balance, the trade balance etc.
- There is intuitive wisdom in looking at these “fundamentals” of an economy when it goes through a tough phase.
- Such an analysis, when done honestly, can give a sense of how deep the strain in an economy run.
- It can answer the question whether the current crisis just an exaggerated response to a sectoral problem or is there something more “fundamentally” wrong with the economy that needs urgent attention and “structural” reform.
- To be sure about the broader health of the economy, one looks at the broader variables. That way, one reduces the chances of getting the diagnosis wrong.
- The first advance estimates of national income for the current financial year, released earlier in the week, found that nominal GDP was expected to grow at just 7.5% in 2019-20.
- This is the lowest since 1978. Real GDP is calculated after deducting the rate of inflation from the nominal GDP growth rate.
- So, if for argument sake, the inflation for this financial year is 4%, then the real GDP growth would be just 3.5%.
- Just for perspective, the Union Budget presented in July 2019 expected a real GDP growth of 8% to 8.5% and a nominal GDP growth of 12% to 12.5%, with a 4% inflation level.
So, what is the current state of the fundamentals?
The data on most variables that one may call as fundamentals of the Indian economy are struggling.
- Growth rate — both nominal and real — has decelerated sharply; now trending at multi-decade lows. Gross Value Added, which maps economic growth by looking at the incomes-generated is even lower; and its weakness in across most of the sectors that traditionally generated high levels of employment.
- Inflation is up but the consolation is that the spike is largely due to transient factors.
- However, a US-Iran type of conflagration could result is a sharp hike in oil prices and, as such, domestic inflation may rise in the medium term.
- Unemployment is also at the highest in several decades.According to some calculations, between 2012 and 2018, India witnessed a decline in the absolute number of employed people — the first instance in India’s history.
- Fiscal deficit, which is proxy for the health of government finances, is on paper within reasonable bounds but over the years, the credibility of this number has come into question. Many, including the CAG, has opined that the actual fiscal deficit is much higher than what is officially accepted.
- Bucking the trend, the current account deficit, is in a much better state but trade weakness continues as do the weakness of the rupee against the dollar; although on the rupee-dollar issue, a case can be made that the rupee is still overvalued and thus hurting India’s exports.
- Similarly, while the benchmark stock indices have run up, and grabbed all attention, the broader stock indices like the BSE500 have struggled.