Is it true that the Indian Economy has headed for a serious crisis or it’s just a myth? Analyse with respect to the Performance of Indian Economy Since 2008. Bring examples to support your points. (250 Words/ 15 Marks)

Source:

https://www.thehindu.com/opinion/lead/getting-the-economy-back-on-track/article25521145.ece?utm_source=pushnotifications&utm_campaign=pushnotifications&utm_medium=ALL_USER

Model Answer:

Introduction:

  • Economic Crisis is a situation in which the economy of a country experiences a sudden downturn. We also call it a real economic crisis. In most cases, country’s GDP typically declines, liquidity dries up, prices of commodity raises due to inflation or deflation, and property and stock market prices plummets.
  • In most cases, a financial crisis is the basic cause of an economic crisis. For example, financial crisis such as low consumer and business borrowing, high and rising unemployment, growing symptoms of inflation, deflation, recession and depression etc lead to rising government borrowing, low investment, low consumer demand and low economic activities etc. which is in real sense Economic Crisis.
  • India’s financial situation currently is the same and can be said that the economy is headed for a serious crisis. However, we understand crisis like an imminent collapse of the economy, but Indian economy is not near a collapse yet and hence it seems to be a myth.

Evidence that Indian economy is heading towards crisis:

  • Growth rate of the economy with proper index number-based GDP has declined over the last two financial years.
  • Household savings, which are the bulk of India’s national investment, dropped from a high of 34% of GDP to about 24% of GDP in 2017. Non-household savings are about 5% of GDP. This decline happened even before demonetisation and the decline continues because of intrusive and sometime obnoxious tax measures.
  • Non-performing assets of the public sector banks (PSBs) have also risen sharply, in fact at a rate of growth much higher than the rate of new advances of these banks, making many large PSBs financially unviable and likely to collapse. This could cause financial contagion in 2019 in all sectors.
  • Drastic cut in allocation of the investments in infrastructure despite the urgent need for such infrastructure. The economy needs about $1 trillion investment in infrastructure to render “Make in India” a reality, but the actual investment in sanctioned projects is valued even less in real terms than the amount invested in the pre-2014 years.
  • The manufacturing sector, especially MSMEs (micro, small and medium enterprises) which provide the bulk of the employment for the skilled and semi-skilled in the labour force, has been growing at abysmally low rates of between 2% and 5%. The situation in their vulnerability is further added with the introduction of Demonetization and GST.
  • India’s agriculture sector which is the largest employer of India’s manpower is grossly underperforming. We are not able to increase the yield to its potential maximum or at least double the production which affects agricultural exports.
  • India’s exports and imports both declined simultaneously over 2014-17 despite stability in dollar value of the rupee for quite a long time. Despite sharp fall in crude oil price we are not able to stabilize the value of rupee in near quarter.
  • The Indian economy is facing a 180-degree adverse situation: a rise in the rupee-dollar rates to 75, and crude oil prices rising to $85 per barrel, although they are lower now. This is causing a massive crunch for our foreign exchange reserves.

2008 Global Crisis and measures taken:

  • Since 1991, LPG India has devised various security measures which led to dramatic changes in economic policy and marked regulation and made India one of the fastest growing economies among emerging markets.
  • The 2008 global crisis has not much impacted India and India was partly affected which correlates to various measures taken post crisis both monetary as well as fiscal measures.
  • RBI cut cash reserve ratio (CRR) several times by 400 basis points from 9 to 5 per cent. With this the RBI infused liquidity of Rs. 1, 60, 000 crores in the banking system.
  • Besides, RBI reduced statutory liquidity ratio (SLR) from 25 to 24 per cent which enabled banks to get Rs. 20, 000 crores from RBI against Government securities for lending to mutual funds.
  • Besides RBI released Rs. 25, 000 crores to the banks in connection with the farm waiver scheme of the Central Government. Besides, unwinding of some market stabilisation scheme was also undertaken to increase liquidity with the banks. In this way about Rs. 2,00,000 crores had been infused into the domestic money market to alleviate the pressures brought on by deterioration in global financial environment.
  • To keep growth momentum and to ensure 7 per cent growth rate in the Indian Government came out with three fiscal stimulus packages which involved increase in Government expenditure and cut in indirect taxes to boost both consumption demand and investment demand.
  • This increase in Government expenditure was meant to help growth of infrastructure, textiles (which is a major employer of labour force) exports, housing, automobiles, and small and medium enterprises.
  • An important measure in the first fiscal stimulus package was all-round cut in excise duty (CENVAT) to raise the demand for goods and services.
  • The measures taken since 2008 are proved to be vital for the growth of Indian financial system which today also continues. However, the changes in recent tax structure, demonetization and other measures have slowed the economic growth.

Though India’s economic situation is not at the verge of collapse and the situation need immediate response.

  • The crying need in India is to bring structural changes in order to experience higher growth rates of 10% plus annually.
  • The present government needs to give an alternative ideological thrust to economic policy either of older times or of new policies.
  • In order to realize the double digit growth, India need to pursue for globally competitive economy, this requires assured access to the markets and technological innovation of the US and some of its allies like Israel.
  • The decline in the level of household savings thus had caused a sharp decline in the GDP growth rate. It is imperative therefore that to accelerate the GDP growth rate, government policy should be to incentivise the saving habit to increase the savings rate to 35% of the GDP.
  • To seriously address these priority problems, it is essential to implement a new menu of measures: (a) dramatic incentives for the household expectation and sentiment to save; and (b) lowering the cost of capital via reducing the prime lending interest rates of banks to 9%, by shifting to a fixed exchange rate regime of Rs.50 per dollar for the financial year 2019 and then gradually lowering the exchange rate for subsequent years.

Conclusion:

  • On a positive note, we should bear in mind that the present situation can be also be dealt like earlier critical crisis situation of 1965 (food crisis), 1990-91 (foreign exchange crisis). The only need is to devise reforms that incentivize the people.
  • The Indian economy however, needs to grow at 10% plus per year for the next 10 yea to achieve full employment and for India’s GDP to overtake China’s GDP and pave the way to form a global economic triumvirate with the US and China.
  • We can no more be satisfied with 7-9% growth rate if we want to become an economically developed country by 2040.
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