Issues related to Economic growth

[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.

 

 

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