Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth
From UPSC perspective, the following things are important:
Prelims level:Not much
Mains level: Investment slowdown, specific sectors affected by the slowdown, the divide and what should be done, etc.
What is the issue?
- It is now well recognised that there is an investment slowdown in India, which is delaying a thorough recovery in the economy
- The slowdown started five years ago, and is, as Economic Survey 2018 notes, the most severe in India’s history
The Investment slowdown in various sector
(1) Informal Sector
- The private investments slowdown is statistically visible chiefly in the informal segment of the economy
(2) Corporate Sector
- The corporate sector is not the source of the decline
- Corporate investments have been on the upswing, rising through the five-year slowdown
(3) Public and Private finance companies
- There is negligible change in the investment behaviour of public and private finance corporations
- Public non-financial corporations reduced investments marginally. The government stepped up its investments, but its share the benefit is small
(4) Household Sector
- The sharpest pullback has been by the household sector, its investments are down 6.6 percentage points since the start of the slowdown
- Economy-wide investments are down 5.8 percentage points
- The slowdown is mainly because of the household sector’s troubles
What is the household sector?
- Households can be producing or non-producing, in which case they are consuming households
- The 73rd round of the survey by the National Sample Survey Office had found about 6.34 crore unincorporated non-agricultural enterprises in the country
- A chunk of private investments is undertaken by these firms that often operate out of homes, with, typically, less than 10 workers
The formal and informal divide
- The investments estimates (Gross Fixed Capital Formation) cover physical investments in plants, machinery and equipment, and dwellings and buildings, but not land
- The two largest investing segments in the economy, households and private non-financial corporations, correspond roughly to the informal and formal economies
- The formal-informal divide shows up also in savings
- Corporate savings are rising consistently, while those of the household sector are slowing.
What has made the informal sector more vulnerable than the rest of the economy?
- Corporates can access capital in difficult times, but the unincorporated are left without recourse
- Corporates can borrow overseas and raised funds from the capital markets
- But he informal sector has not had the sophistication or resources required
The way forward
- Given the anatomy of the private investments slowdown, a macroeconomic stimulus may not be the best policy choice
- Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments