From UPSC perspective, the following things are important :
Prelims level : Nothing Much
Mains level : Economic growth should be top agenda of new government.
Accelerating economic growth must be on top of the agenda of the new government. It is only a fast-growing economy that will generate the surpluses which are necessary to address many of our socio-economic problems and to provide social safety nets.
The decline in the investment rate
- In current prices, the ratio of Gross Fixed Capital Formation to Gross Domestic Product has stayed low at 28.5% between 2015-16 and 2017-18. In 2018-19 it is estimated at 28.9%. In 2007-08, it was as high as 35.8%. In constant prices, the ratio, has, however, shown a smaller decline from the peak.
- The bulk of public investment comes from public sector enterprises, including the Railways.
- What is needed is for the government to interact with all public sector units and prepare a programme of public investment for 2019-20.
Long term view of Public Sector –
Public sector units can take a longer-term view than the private sector. A strong public investment programme can be a catalyst of private investment. In a situation such as the present one, it can crowd in private investment.
Industry government participation –
Second, there have to be sector- or industry-wise discussions between the government and industrialists to understand the bottlenecks that each industry faces in making investment and take actions to remove them.
- Banks are under stress and the ratio of non-performing assets (NPAs) has risen.
- We need to resolve this issue as early as possible so that banks can get back to lending at a significant pace. In the absence of term lending financial institutions, banks provide both working capital and long-term loans.
- That is why resolving the issue of NPAs is critically important for larger flow of long-term funds.
Jobs and growth
- The answer to the problem of jobs is only growth. It is faster growth and faster investment which will generate employment.
- Sectors such as IT and the financial system, which provided attractive employment to young educated entrants to the labour market in the past, have their own problems.
- But an improvement in the financial system may trigger some new jobs. Ultimately, it is overall growth which is key to more employment.
Rural Demand –
- The main concern is the slowdown in rural demand, which can affect the off-take of consumer goods.
- Agrarian distress, which is the cause of the slowdown in demand, needs to be tackled on a priority.
- Where distress is due to a fall in prices, the best course of action is to resort to limited procurement so that the excess over normal is procured by the government.
Increase in agricultural output –
- As far as increase in agricultural output in the short run is concerned, the monsoon is a big question mark.
- Nothing can be done about it except changing the cropping pattern depending on rainfall.
- Over the medium term, more attention must be paid to increasing agricultural productivity through consolidation of land holdings and spreading better techniques of cultivation.
Goods and services act
- The government should get tax authorities, industrialists, traders and, particularly, exporters to sort out the issues together.
- The Insolvency and Bankruptcy Code was another significant step taken in the last few years.
- Even here there are some bottlenecks and the government must address them.
Land Reforms –
Compulsory acquisition of land is the antithesis of competition and should be resorted to only in limited cases where the public interest is involved.
Labour Reforms –
- Labour reforms should wait until the economy has picked up steam and moved to a higher growth path.
- Only in these circumstances will there be less resistance.
To conclude, besides economic factors, non-economic factors are also critically important to revive what are often described as ‘animal spirits’. Investment today is based on expectations of future earnings. Thus it is an act of faith in the future. For this to happen, there must be social and political tranquillity.