[op-ed snap] Is the Indian economy really that strong?

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Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Basic terms like trade balances, current account deficit, etc.

Mains level: The newscard comprehensively discusses the present condition of the Indian Economy.


News

Context

  1. There have been improvements in the Indian economy in recent years
  2. However, the current published growth rate exaggerates underlying strength

The Indian economy’s foundations have been strengthened in the last few years

  1. India’s growth is projected to grow over 7% this year
  2. That is faster than China’s growth rate and makes India effectively the fastest-growing economy in the world
  3. Inflation has come down to the 4-5% range
  4. Trade balances with the rest of the world have improved, and the current account deficit has come down to about 1.5% of GDP
  5. India has also systematically built up its foreign exchange reserves — now a comfortable $420 billion

But deeper analysis indicates that growth may be overstated and the economy prone to significant vulnerabilities
Weakness in investment

  1. In order for growth to be both high and sustainable, investment has to be strong
  2. Investment is the act of adding to our productive capacity — building infrastructure, factories, and enhancing the skill of the workforce
  3. However, the striking fact about India is the weakness in investment, reflected in the sharp decline in the rate of investment in recent years
  4. The rate of investment has come down from 34% of GDP in 2014 to about 30% currently
  5. A decline in investment of this magnitude is difficult to reconcile with a 7% growth rate

Weakness in industrial production

  1. Industrial production was growing at around 6% in 2016, but came down to 2% by mid-2017 following demonetisation
  2. It is again difficult to reconcile strong overall growth of the economy with weak industrial performance

Slow down in bank lending

  1. Bank financing is important for growth in India
  2. This is particularly true of small and medium-sized enterprises and parts of the agricultural sector where the bulk of the labour force is employed
  3. The pace of bank lending has been coming down sharply in the last five years
  4. During 2014-16, bank lending grew at a 10% pace
  5. It is now growing at about 6% following demonetisation
  6. The main reason for the slowdown is the rise in non-performing loans
  7. Consequently, banks are now more hesitant to lend
  8. This sharp decline in the growth of bank lending is again not compatible with an economy growing at 7%

Government should be cautious of inflation(in future)

  1. Food and energy prices are important components of the consumer price index and the decline in commodity prices has had a large role in bringing inflation down
  2. Should food and energy prices revert to an increase in the future, it would be difficult for the RBI through its monetary policy actions to bring inflation under control

Trade Balances

  1. Oil, gold and coal constitute almost 50% of total imports in India
  2. Over the past few years, India’s trade has gained significantly from steep declines in the prices of these commodities
  3. Rather than strong exports, India’s trade improvement reflects the extraneous factor of declining commodity prices
  4. The trade balances would come under renewed pressure once commodity prices turn higher

The issue of India’s debt

  1.  India’s debt is a relatively high 70% of GDP and, unlike in a number of emerging market economies, it has not really come down in the last five years
  2. The fiscal position in India constitutes a hidden vulnerability
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