Issues related to Economic growth

[op-ed snap]The mounting challenges of a two-speed Indian economy

Note4students

Mains Paper 3: Economic Development | Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Nothing as such.

Mains level: The news-card analyses how managing relative price of food in terms of industrial goods will be one of the biggest policy challenges for the govt, in a brief manner.


NEWS

CONTEXT

The dualism of income stagnation in the farm sector and the rapid growth in rest of the private sector is our next big hurdle.

Economic Growth

  • The latest estimates of Indian economic growth released by the government’s statistics office in the last week of February highlight the uncomfortable fact that India now has a two-speed economy.
  • Agriculture is in the slow lane while the rest of the economy is moving ahead at a much quicker pace.
  • The Indian economy lost substantial momentum in the third quarter of the ongoing fiscal year. It grew at 6.6% in those three months.
  • Economic growth in the fourth quarter is likely to be 1.7 percentage points lower than the expansion rate in the first quarter.

Two speed Economy

  • Indian private sector is growing at two speeds right now—one for agriculture and one for the other parts.
  • One important reason why the overall economic momentum has slowed is because of an indifferent rabi season this winter in farms across the country.
  • Farm incomes are now growing at perhaps the slowest pace in the past 15 years.
  • Manufacturing growth has bounced back this year. The Purchasing Managers’ Index for February 2019 shows that factories continue to hum thanks to a combination of strong production and new orders, though business optimism has begun to wane.
  • It is much the same with services in the private sector such as construction, hotels, transport, finance, and communications.
  • The rest of the private sector economy grew nearly six times faster than agriculture in nominal terms in the third quarter.

Effects Of two speed Economy on rural economy

  • new rural occupations continue to have deep links with agriculture and nearly half the Indian labour force continues to be primarily dependent on farming for its income. The poor rabi crop as well as the decline in food prices is bound to hurt.

Global Economic Situation

  • The global economy is weakening, international trade volumes have declined sharply because of the US-China trade war, and there are financial stability concerns in China.
  • Two major consequences of this—lower commodity prices and a slower pace of US monetary policy normalisation—will act like buffers.

Future prospects of Indian Economy

  • The Reserve Bank of India has already cut its policy interest rate while switching its monetary policy stance from calibrated tightening to neutral.
  • India will have three consecutive quarters of lower economic growth this fiscal year. The extent of the cyclical downturn—or growth recession—will depend on a host of factors such as the state of the global economy, the response to domestic policy easing, and the strength of the next monsoon.

Challenges

  • The dualism of income stagnation in the farm sector combined with much more rapid growth in the rest of the Indian economy.
  • The terms of trade between the two continue to be one of the central challenges in Indian political economy. The two-speed economy has implications for Indian politics, as well as economics, in the months ahead.

 

 

 

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