Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Can India get rich before growing old?
Note4Students
From UPSC perspective, the following things are important :
Mains level: Demographic dividend in the context of Indian economy;
Why in the News?
Since liberalization opened up new opportunities, there has been a lot of excitement about India’s demographic dividend, which is the advantage of having a large working-age population but there are major challenges like the middle-income trap.
Can India leverage its sustained economic growth?
- Harnessing the Demographic Dividend: With a large working-age population, India has a potential advantage, but it must ensure that this workforce is employed in productive sectors, particularly by shifting labor from low-productivity agriculture to higher-productivity manufacturing and services.
- Strengthening the Manufacturing Sector: The manufacturing sector, especially labor-intensive industries like textiles, has the potential to create millions of jobs. By addressing barriers such as complex regulations, high tariffs, and infrastructure constraints, India can boost manufacturing growth, empower women, and drive economic mobility.
- Reforming Infrastructure and Business Environment: Improving ease of doing business, simplifying trade and labor regulations, and increasing investment in infrastructure are critical for unlocking India’s potential for sustained growth. These reforms will enable large-scale job creation and enhance India’s global competitiveness.
Challenges arising due to the middle-income trap
- Declining Demographic Dividend: The proportion of working-age individuals in India’s population is set to decline in the coming decade, marking the potential end of the demographic dividend. Fertility rates have dropped across various states, which means India may face an aging population sooner than expected.
- Stagnation in Key Sectors: India has struggled to reduce its agricultural workforce in the same way China did after liberalisation, making it harder to transition people to higher-productivity industries. Despite some growth in the services sector, manufacturing has stagnated and failed to generate the necessary number of jobs, especially in labor-intensive industries.
- Limited Economic Mobility: High levels of youth unemployment and the lack of opportunities for individuals to move up the economic ladder have hindered India’s economic progress. The country’s labor force participation rate (LFPR) remains low, particularly among women, and urban job creation has not been sufficient to absorb the growing population.
- Infrastructure and Regulatory Bottlenecks: The business environment is constrained by complex regulations, high tariffs, cumbersome licensing procedures, and a lack of access to land, all of which prevent the manufacturing sector from thriving. India’s slow regulatory reforms have stifled growth in manufacturing, which is essential for absorbing the workforce.
How the Manufacturing sector can help India grow?
- Job Creation: Manufacturing, especially in labour-intensive sectors like textiles and apparel, can create large numbers of jobs. This is vital for absorbing the surplus labour from agriculture and providing employment opportunities for the youth.
- For example, the textile and apparel industry employs 45 million people compared to just 5.5 million in IT-BPM, highlighting its potential for mass employment.
- Women’s Empowerment: Manufacturing, particularly industries like textiles, offers significant employment to women (60-70% of factory workers), helping reduce gender disparities in the labour force.
- Economic Mobility: By creating better job opportunities, manufacturing helps people transition from low-productivity agricultural jobs to higher-wage, more stable positions in the industrial and service sectors. This transition is key to achieving sustained economic growth and avoiding the middle-income trap.
- Global Competitiveness: Reducing barriers to manufacturing — such as simplifying business licensing, lowering tariffs on inputs, improving access to land, and streamlining trade regulations — can help India increase its competitiveness globally. Expanding market access through free trade agreements and making the business environment more conducive to manufacturing can unlock the potential of this sector.
Steps taken by the government:
- “Make in India” Initiative: Launched in 2014, this initiative aims to transform India into a global manufacturing hub by promoting domestic production, reducing regulatory hurdles, and attracting foreign direct investment (FDI) in key manufacturing sectors such as electronics, textiles, and automobiles.
- Atmanirbhar Bharat (Self-reliant India): This program focuses on reducing dependence on imports by boosting local manufacturing, especially in strategic sectors like defense, electronics, and pharmaceuticals.
- It includes initiatives such as the Production-Linked Incentive (PLI) scheme, which offers incentives for manufacturing and exporting specific products like electronics, textiles, and solar panels.
Way forward:
- Enhance Skill Development and Workforce Transition: India must invest in targeted skill development programs to equip its labor force, particularly those transitioning from agriculture, with the necessary skills for higher-productivity manufacturing and services sectors.
- Accelerate Regulatory and Infrastructure Reforms: To unlock the full potential of the manufacturing sector, India should expedite regulatory reforms, simplify land acquisition processes, and enhance infrastructure.
Mains PYQ:
Q Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (UPSC IAS/2019)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s SDG focus and its Human Development issues
Note4Students
From UPSC perspective, the following things are important :
Mains level: Key initiatives to achieve SDG;
Why in the News?
On September 9-10, 2023, New Delhi hosted the G-20 Summit, where participants committed to enhancing the implementation of the UN Agenda 2030 for Sustainable Development.
How effectively is India progressing towards achieving the SDGs by 2030?
- Current Status: India is classified in the “medium human development” category, with an HDI value of 0.644 and a rank of 134 out of 193 countries.
- Improvement Over Time: India saw an increase of 48.4% in HDI value from 1990 (0.434) to 2022 (0.644), indicating positive long-term trends despite recent stagnation and slight declines due to factors such as the COVID-19 pandemic.
- SDG Interconnections: India’s HDI dimensions directly align with several SDGs, including SDG-3 (good health), SDG-4 (quality education), and SDG-5 (gender equality). Progress in these areas is critical for achieving broader SDG targets.
- Rank Improvements: From 2015 to 2022, India improved its HDI ranking by four places, while neighboring countries such as Bangladesh and Bhutan improved their rankings by 12 and 10 places, respectively, highlighting the need for India to enhance its efforts.
What are the key human development challenges that India faces?
- Gender Inequality: India has one of the largest gender gaps in the Labor Force Participation Rate (LFPR), with a stark difference of 47.8 percentage points between women (28.3%) and men (76.1%). The GDI indicates significant disparities in HDI achievements between genders, which undermines development.
- Income Inequality: India experiences high income inequality, with the richest 1% holding 21.7% of total income, significantly higher than many neighboring countries and above global averages. This poses a barrier to sustainable development and equitable growth.
- Education and Health: The impact of the COVID-19 pandemic has negatively affected education and health sectors, leading to increased vulnerabilities among poorer and marginalized populations.
- Urban-Rural Divide: There is a notable disparity in female labour force participation between rural (41.5%) and urban areas (25.4%), suggesting that urban policy initiatives may not adequately support women’s employment.
What strategies can be implemented? (Way forward)
- Strengthening Gender Equality: Implement gender-transformative approaches to enhance women’s participation in the labour force and address systemic barriers. This includes policies promoting work-life balance, flexible work arrangements, and targeted skill development programs.
- Enhancing Education and Skill Development: Invest in quality education, vocational training, and lifelong learning opportunities that cater to both genders, particularly in rural areas.
- Promoting Social Protection: Expand social safety nets and anticipatory social protection programs that target vulnerable populations, particularly women and marginalized groups.
- Reducing Income Inequality: Implement progressive taxation and wealth redistribution policies to address the concentration of income.
- Multi-Stakeholder Engagement: Foster collaboration between government, civil society, and the private sector to implement sustainable development initiatives.
Mains PYQ:
Q National Education Policy 2020 isin conformity with the Sustainable Development Goal-4 (2030). It intends to restructure and reorient education system in India. Critically examine the statement. (UPSC IAS/2020)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Spotlighting the work of the Economics Nobel winners
Note4Students
From UPSC perspective, the following things are important :
Mains level: Inclusive Economy; Inclusive institutions; Nobel Prize;
Why in the News?
- This year’s Nobel Prize in Economics, officially known as the Sveriges Riksbank Prize in Economic Sciences, was awarded to Daron Acemoglu, Simon Johnson, and James Robinson (AJR).
- AJR have highlighted the importance of institutions in development, but critics argue that this approach tends to favour Western liberal models over other institutional frameworks.
Why Do Some Nations Succeed While Others Fail?
- Role of Institutions: The economic success or failure of nations can often be traced back to the nature of their institutions.
- Inclusive institutions encourage economic activity by providing secure property rights, legal frameworks, and political systems that incentivize growth.
- In contrast, extractive institutions concentrate wealth and power in the hands of a few, leading to economic stagnation and social inequality.
- Historical Path Dependence: Countries that experienced inclusive economic institutions early in their development tend to be more prosperous, while those with a history of extractive institutions face significant barriers to growth. Historical events shape the trajectory of institutional development and influence current outcomes.
What Is the Impact of Historical Institutions on Current Economic Outcomes?
- Colonial Legacy: Institutions established during colonialism, especially extractive ones, have long-lasting impacts. Areas with landlord-based land tenure systems or direct colonial rule have struggled with lower agricultural productivity, fewer social services, and weaker infrastructure.
- Natural Experiment Evidence: AJR’s research used historical data, such as differences in settler mortality, to show that regions colonized by Europeans with high mortality rates ended up with extractive institutions that still negatively affect growth today.
- Long-Term Development Patterns: The effects of historical institutions persist, shaping economic development, social structures, and governance even after countries gain independence or transition to new political systems.
Why do critics argue that this approach tends to favour Western liberal models over other institutional frameworks?
- Historical Bias: Critics argue that AJR’s approach overlooks the diverse paths of development, favoring Western institutions while underestimating non-Western experiences and historical complexities.
- Western Norms as Universal: The framework tends to present Western liberal institutions as ideal models, disregarding how other systems might effectively function in different cultural and socio-political contexts.
Why Are Inclusive Institutions Not More Widely Adopted?
- Conflict of Interests: Powerful groups with control over resources have incentives to maintain extractive institutions to protect their wealth and power, resisting changes that would lead to a fairer distribution of economic benefits.
- Collective Action Challenges: Reforming extractive institutions requires solving collective action problems where diverse groups must agree on new rules that may threaten the established elite’s interests.
- Path Dependency: Historical conditions can create institutional inertia, making it challenging to shift from extractive to inclusive frameworks due to deep-rooted social, political, and economic norms.
Way forward:
- Strengthen Inclusive Institutions: Focus on legal and policy reforms that secure property rights, ensure fair governance, and promote transparent decision-making, encouraging broad-based economic participation and growth.
- Empower Marginalized Groups: Implement policies that reduce power concentration by supporting grassroots movements, enhancing education access, and providing economic opportunities to disadvantaged communities to overcome historical inequalities.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A Nobel prize for explaining why nations fail or succeed
Note4Students
From UPSC perspective, the following things are important :
Mains level: Shortcomings of AMRUT;
Why in the News?
U.S. economists Daron Acemoglu, Simon Johnson, and James A. Robinson won the 2024 Economics Nobel for their research on how the formation of institutions influences a nation’s prosperity and economic success.
What are the key factors that explain why some nations are rich while others are poor?
- Quality of Institutions: According to the 2024 Nobel laureates, the primary determinant of economic success is the quality of a country’s institutions. Inclusive institutions, which ensure secure property rights, political freedoms, and economic opportunities, tend to promote growth.
- Rule of Law and Property Rights: When laws protect private property and are enforced impartially, individuals are incentivized to invest and engage in economic activities. Weak or corrupt legal systems can deter investments and slow growth.
- Political Stability and Governance: Countries with stable, democratic governance structures often provide a conducive environment for economic activities. In contrast, political instability and authoritarianism can hinder development.
- Geography and Natural Resources: Some scholars argue that geographic factors, such as access to trade routes and natural resource endowment, play a role in shaping a nation’s wealth. However, resource-rich nations can still struggle if their institutions are weak (resource curse).
- Human Capital and Education: Nations that invest in education and healthcare build a skilled and productive workforce, which can drive long-term economic growth.
- Technological and Industrial Development: The ability to adopt and innovate technologies is crucial for economic advancement, which historically facilitated the “Great Divergence” during the Industrial Revolution.
How do historical contexts and colonial legacies impact current economic outcomes?
- Colonial Institution Setup: Colonizers often set up institutions based on their motivations and local conditions. In places with harsh climates or high disease rates, extractive institutions were established to exploit resources quickly.
- Impact of Extractive Institutions: In countries where extractive institutions were set up, economic policies often focused on resource extraction and wealth concentration, which led to long-term stagnation. For instance, regions in Africa and South Asia that experienced extractive colonial policies face lasting developmental challenges.
- Path Dependence: Colonial institutions created trajectories that persisted even after independence. Post-colonial governments often inherited the same extractive structures, leading to continued corruption, inequality, and weak rule of law.
- Unequal Development: Colonialism exacerbated regional disparities by favouring some areas (urban centres, resource-rich regions) over others, affecting infrastructure development and economic integration.
What criticisms exist regarding the theories proposed by the Nobel laureates?
- Oversimplification of Institutional Role: Critics argue that attributing economic success primarily to institutions might ignore other important factors, such as culture, geography, and international trade dynamics, which also significantly shape economic outcomes.
- Neglect of Global Power Structures: Some scholars believe that focusing on domestic institutions alone overlooks the influence of global economic structures and the power imbalances that exist between countries, which can perpetuate inequality.
- Limited Consideration of Economic Policies: Critics point out that macroeconomic policies, market dynamics, and state-led development strategies also play a crucial role in determining economic trajectories, beyond institutional quality alone.
- Debate Over Inclusiveness of “Inclusive Institutions”: Some argue that even countries with ostensibly inclusive institutions (e.g., Western democracies) can exhibit extractive practices, such as unequal wealth distribution, labor exploitation, and environmental degradation.
Way forward:
- Strengthen Institutions with Reforms: Focus on reforming political and economic institutions to promote inclusiveness, transparency, and rule of law, ensuring secure property rights and equal opportunities for all citizens.
- Address Global Inequities and Support Development: International efforts should aim to reduce global economic disparities by promoting fair trade, debt relief, and development aid.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Can India escape middle-income trap?
Note4Students
From UPSC perspective, the following things are important :
Mains level: Inclusive Growth; Middle-income trap;
Why in the News?
The World Development Report 2024 highlights the “middle-income trap,” where economies stagnate as growth slows. Only 34 middle-income nations advanced to high-income status in 34 years.
How does the World Bank define the threshold for middle-income economies?
- The World Bank defines middle-income economies as those with incomes between $1,136 and $13,845 per capita.
- The middle-income trap refers to a slowdown in growth when an economy reaches a certain income threshold, about 11% of U.S. per capita income.
- Only 34 middle-income countries have transitioned to higher-income status over the last 34 years, indicating the difficulty of escaping the middle-income trap.
Why is state intervention crucial for breaking the middle-income trap?
- State intervention is vital for coordinating development goals, as seen in South Korea and Chile, where governments played an active role in shaping industries and ensuring the private sector’s alignment with national development objectives.
- The state ensures investment, infusion of global technologies, and domestic innovation, which are critical for modern economies. This is known as the 3i approach (Investment, Infusion, Innovation).
- State intervention disciplines local elites, ensuring firms succeed based on performance, not political connections. Underperforming firms are allowed to fail, promoting efficiency and innovation.
What lessons can be drawn from South Korea and Chile?
- South Korea adopted a state-led industrialization strategy with a focus on export-driven manufacturing:
- The state actively directed private sector activities, ensuring businesses were competitive on the global stage.
- Chaebols (large business conglomerates) were supported based on their performance, promoting technological advancement and innovation.
- Chile achieved success by focusing on natural resource exports, like its salmon industry:
- The state’s role was crucial in developing and supporting industries with growth potential, showing how targeted interventions can help small but strategically important sectors thrive.
What challenges does India face in balancing state intervention with democratic values?
- Economic Power Concentration: India faces a growing concentration of wealth among powerful business houses, which are perceived to be closely linked to the state. This risks cronyism rather than performance-based growth, which could hinder innovation and investment.
- Manufacturing Stagnation: Unlike South Korea, India’s manufacturing sector has not experienced significant growth. With global export demand slowing and increased protectionism, manufacturing is less likely to drive India’s growth.
- Wage Stagnation: Real wage growth has been stagnant, as inflation erodes the benefits of nominal wage increases. This limits domestic demand, a critical factor in economic dynamism.
- Premature Deindustrialization: India, like many developing economies, faces premature deindustrialization, meaning that manufacturing’s contribution to GDP is declining at a lower level of income than historically seen in developed economies.
- Balancing State Intervention with Democracy: South Korea and Chile implemented aggressive state interventions under authoritarian regimes. However, India, as the world’s largest democracy, must ensure that growth strategies do not come at the cost of democratic values and labor rights.
World Bank recommendation to escape the middle-income trap:World Development Report 2024: This report outlines a three-pronged approach for middle-income countries to escape the trap:
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Way forward:
- Economic Growth Strategy: Niti Aayog CEO emphasized the need for a comprehensive economic strategy to avoid the middle-income trap, which he described as the “biggest threat” to India’s growth.
- Free Trade and Global Integration: Niti Aayog CEO advocated for increased openness to free trade and alignment with global value chains.
- Urban Development and Infrastructure: The government should focus on transforming urban areas into economic hubs, which is seen as crucial for driving growth.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India slipped on the Academic Freedom Index (AFI)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Academic Freedom Index (AFI)
Why in the News?
India has seen a sharp decline in Academic Freedom Index rankings over the past 10 years.
About the Academic Freedom Index (AFI):
| Details | |
| Released by | Global Public Policy Institute (GPPi) in collaboration with Scholars at Risk (SAR) and V-Dem Institute (Varieties of Democracy)
Published as a part of a global time-series dataset (1900-2019) |
| Purpose | To assess and quantify academic freedom across different countries |
| Score Range |
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| Main Parameters |
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| Usage |
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| Annual Report | Published as part of the “Free to Think” report series by Scholars at Risk |
India’s Performance:
- India’s academic freedom score dropped from 0.6 points in 2013 to just 0.2 points in 2023, marking a significant deterioration.
- The report categorizes India as “completely restricted”, the country’s lowest rank since the mid-1940s.
- This decline is attributed to many factors, including:
- Political Influence on Universities
- Limitations on Student Protests
Significance
- Impact on Democracy: The decline threatens democratic values, as universities, traditionally spaces for free thought and dissent, and are increasingly under political control, limiting student protests and academic expression.
- International Reputation: India’s shrinking academic freedom could harm its global standing, making it less attractive to international students, scholars, and research collaborations.
- Long-Term Effects on Education: The politicization of higher education may weaken innovation and critical thinking, hindering economic growth and the development of future leaders and policymakers.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
An either-or approach won’t help quell food inflation
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Food inflation trend;
Mains level: Impact of food inflation;
Why in the News?
The recently released Consumer Price Index-Combined (CPI-C) data reveals that food inflation, particularly from pulses, vegetables, and cereals, is rising faster than the overall CPI inflation.
- The Consumer Price Index-Combined (CPI-C) is the index used to calculate headline inflation in India. It is calculated and published monthly by the Bureau of Labor Statistics.
Key Highlights of the CPI-C Data:
- On Current Inflation Rates: The general CPI inflation stands at 3.54%, while food inflation is notably higher at 5.06%, driven by increases in prices of pulses, vegetables, and cereals.
- On Inflation Dynamics in the Past: Over the past decade, food inflation has contributed to the overall volatility of prices. In 52 of the 124 months analyzed, food inflation exceeded the general CPI rate, indicating a significant and fluctuating impact on overall inflation.
- Expectations by the report: The RBI has highlighted that food inflation significantly influences inflationary expectations, which remain unanchored, often exceeding actual inflation rates.
(*Note: These data don’t include income taxes or investment items like stocks, bonds, and life insurance.)
Recently impact of good Monsoon on Food Production and Inflation:
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Present Situation of Inflation in the Agri-Food Sector
- Volatility in Food Prices: Food inflation has been volatile, with instances of both high and low inflation. For example, food inflation was above 6% in 52 out of 124 months, while it was below 2% in 20 months, including periods of negative inflation.
- Supply-Side Factors: The disparities between food and retail inflation can be attributed to supply-side issues such as monsoon variability, crop failures, and government policies like minimum support prices (MSPs). Excess demand for specific food categories, such as oils and fats, has also contributed to higher inflation.
- Regional Disparities: Rural CPI inflation is higher (5.43%) compared to urban CPI (4.11%), reflecting the impact of agricultural conditions and market dynamics on rural households.
How Can the Gap Between Farmer and Consumer Be Reduced?
- Market-Driven Pricing: The government should reconsider its intervention in agricultural markets through MSPs, allowing market forces to determine food prices. This could help reduce production distortions and improve price signals for farmers.
- Enhancing Agricultural Productivity: Government expenditure should focus on increasing agricultural productivity through better technology and irrigation practices, which can lead to more stable food supplies and prices.
- Reducing Middlemen: Implementing measures to eliminate middlemen in the supply chain can help narrow the gap between what farmers receive and what consumers pay.
- Infrastructure Development: Improving infrastructure for storage and transportation can help reduce food wastage and ensure that food products reach consumers efficiently, further stabilizing prices.
Conclusion: Need to encourage the adoption of advanced agricultural technologies and sustainable farming practices to boost productivity and reduce the impact of supply-side disruptions, ensuring more consistent food supplies and stable prices.
Mains PYQ:
Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS/2017)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Global Finance Central Banker Report Cards, 2024
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Global Finance Central Banker Report Cards, 2024
Why in the News?
The Reserve Bank of India (RBI) Governor has been awarded an “A+” rating for the second consecutive year in the Global Finance Central Banker Report Cards 2024.
About the Global Finance Central Banker Report Cards
- The Central Banker Report Cards are published annually by Global Finance, a magazine that has been grading central bank governors since 1994.
- The report grades the central bank governors of nearly 100 countries, territories, and districts, including major institutions like the European Union, the Eastern Caribbean Central Bank, the Bank of Central African States, and the Central Bank of West African States.
- Grading Scale:
- The ratings range from “A+” for excellent performance to “F” for outright failure.
- The grades assess success in key areas such as inflation control, economic growth, currency stability, and interest rate management.
Significance
- This recognition highlights his exceptional performance in managing India’s monetary policy, particularly in areas such as inflation control, economic growth, currency stability, and interest rate management.
PYQ:[2016] ‘Global Financial Stability Report’ is released by which organisation? (a) European Central Bank (b) International Monetary Fund (c) International Bank for Reconstruction and Development (d) Organisation for Economic Co-operation and Development |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The path to Viksit Bharat runs through fields
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Viksit Bharat@2047;
Mains level: Economic and Military challenges for India;
Why in the News?
India’s 78th Independence Day is a time to reflect on our significant successes and setbacks. We should learn from both to make quicker progress towards the Prime Minister’s vision of a Viksit Bharat@2047 by 2047.
Key Aspects of Viksit Bharat@2047
- Economic Growth: The vision aims to elevate India to the status of the world’s third-largest economy and strive for a $30 trillion economy by 2047.
- Environmental Sustainability: Viksit Bharat aims to preserve biodiversity and mitigate climate change impacts through restoration and conservation efforts.
- Social Progress: The initiative seeks to build an inclusive society that respects cultural diversity and ensures the dignity and well-being of all citizens.
- Good Governance: Effective governance is a cornerstone of the Viksit Bharat vision, focusing on accountability, transparency, and sound policies that are responsive to the needs of the people.
- Youth Engagement: Recognizing the potential of India’s youth, the government has launched initiatives like the “Voice of Youth” portal to encourage young people to contribute ideas for achieving the goals of Viksit Bharat.
Economic Challenges
- Weak Domestic Demand: Stagnant or declining demand for goods and services due to low-income growth, high inflation, unemployment, and the impact of the Covid-19 pandemic.
- High Unemployment: Despite rapid growth, unemployment remains a serious issue, worsened by the pandemic. The unemployment rate in India rose to 8.1 per cent in April 2024 from 7.4 per cent in March 2024, according to CMIE’s Consumer Pyramids Household Survey.
- Poor Infrastructure: India lacks adequate infrastructure like roads, railways, ports, power, water and sanitation, hampering economic development. The infrastructure gap is estimated at around $1.5 trillion.
- Balance of Payments Deterioration: India runs a persistent current account deficit, with imports exceeding exports. Exports and imports decreased by 6.59% and 3.63% respectively in 2022.
- High Private Debt Levels: India has witnessed a significant rise in debt levels in recent years.
- According to the Reserve Bank of India (RBI), the total non-financial sector debt reached 167% of GDP in March 2020, up from 151% in March 2016.
- Household debt in India rose to 40.10% of GDP in the fourth quarter of 2023, up from 39% in the previous quarter.
Military Challenges
- Securing Borders: Despite conflicts with Pakistan and China, India has reasonably managed border security. However, the rapid rise of China poses economic and military challenges.
- China’s Growing Influence: Almost all of India’s neighbours are moving closer to China, necessitating better policy and diplomacy to secure India’s interests and ensure regional stability.
- Military Modernization and Resource Allocation: India’s dependence on foreign arms imports, despite efforts to promote self-reliance through initiatives like “Make in India,” highlights the need for a robust domestic defense industry.
- The country has been the largest arms importer from 2018 to 2022, indicating ongoing challenges in achieving military self-sufficiency
Suggestive measures: (Way forward)
- Agricultural Reforms: Investment in agricultural research and development, irrigation, and land-lease markets is vital. Building value chains for perishables can enhance food security and adapt to climate challenges.
- Nutritional Security: Transitioning from mere food security to nutritional security is crucial, addressing issues like child malnutrition, which affects 35% of children under five.
- Support for Farmers: Implementing subsidies for pulses and other sustainable crops can encourage healthier diets and environmental benefits. The government should provide financial incentives to farmers to shift from water-intensive crops to pulses.
- Infrastructure Development: Continued investment in infrastructure, including transportation and digital connectivity, is essential for economic growth and improving citizens’ quality of life.
- Education and Skill Development: Reforms in education to prioritize skill development and innovation are necessary to prepare the workforce for emerging industries and ensure inclusive growth.
- Healthcare Initiatives: Expanding access to affordable healthcare services nationwide is critical for enhancing public health and productivity.
Mains PYQ:
Q Foreign Direct Investment (FDI) in the defence sector is now set to be liberalized: What influence this is expected to have on Indian defence and economy in the short and long run? (UPSC IAS/2016)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
An unstated shift in Modi’s economic direction
Note4Students
From UPSC perspective, the following things are important :
Prelims level: About Employment Linked Incentives (ELI)
Why in the news?
The introduction of the new ELI scheme for corporates by the Narendra Modi government acknowledges the disconnect between GDP growth and job creation.
About Employment Linked Incentives (ELI)
- The ELI scheme aims to encourage companies to hire more employees by providing financial incentives for each new hire.
- Target Sectors: The scheme is expected to focus on labour-intensive sectors such as toys, textiles, apparel, furniture, tourism, and logistics, which have significant potential for job creation.
- Incentives Offered: Financial incentives may include tax relief and wage subsidies for new jobs created, along with non-financial incentives like reduced regulatory burdens and support for skill development programs.
Government’s Failure of Initiatives
- Previous Economic Strategies: Over the past decade, the Indian government relied on traditional economic models, such as the trickle-down approach and production-linked incentives (PLI), which did not yield the expected job growth.
- Initiatives like “Make in India” and corporate tax cuts aimed to stimulate investment but failed to translate into significant employment opportunities.
- Jobless Growth: Despite policies designed to boost production, employment growth has been stagnant, with a study indicating a negligible employment growth rate of just 0.01%.
Issue of Job and Ideas Deficit
- Jobs Deficit: The lack of job creation has prompted proposals like reserving jobs for locals, reflecting political pressures in a democracy where job scarcity is prevalent.
- Ideas Deficit: Economists often suggest reforms in labour, education, and business practices as solutions to job creation, but these are complex and difficult to implement.
- Unemployment Trends: The unemployment rate has shown fluctuations, with a reported decline from 6.0% in 2017-18 to 3.2% in 2022-23.
What can be done?
- Policy Shift: The ELI scheme represents a significant policy shift towards prioritizing job creation over mere economic output. By encouraging firms to hire rather than invest solely in automation, it aims to address the capital-labour imbalance in the economy.
- Support for MSMEs: Special focus on micro, small, and medium enterprises (MSMEs) is crucial, as they employ a substantial portion of the workforce.
- Alignment of Goals: Need to Collaborate among various ministries, particularly finance, skill development, and labour, is essential to ensure that skill development aligns with industry needs, enhancing employability and job creation
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Key takeaways from the 2023-24 Economic Survey
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Data trends in economic survey;
Mains level: Major five issues with the Indian Economy;
Why in the News?
The 2023-24 Economic Survey highlights realistic challenges for India’s growth, projecting GDP growth at 6.5%-7% for FY 2024-25 despite 8% growth in FY 2023-24.
What are the major five issues with the Indian Economy?
- Weak Demand: In India, an unfavourable environment for FDI growth is due to high interest rates in developed countries, which increases the cost and opportunity cost of investment in India.
- Dependence on China: Due to over-reliance on China for imports, particularly in key sectors like renewable energy, limits India’s manufacturing capabilities and increases vulnerability to geopolitical tensions.
- Tepid Private Investment: Despite tax cuts aimed at stimulating capital formation, the corporate sector has not significantly increased investment, leading to a lack of job creation and economic dynamism.
- Employment Challenges: The need to generate approximately 78.5 lakh jobs annually in the non-farm sector until 2030 to accommodate the growing workforce, coupled with insufficient data on job creation, complicates labour market analysis.
- Infrastructure Deficiencies: Inadequate infrastructure, such as roads, railways, and sanitation, continues to hinder economic development and efficiency, requiring substantial investment and reform to improve productivity.
What are the suggestions given in the Economic Survey?
- Private Sector’s Role in Job Creation: The corporate sector should take responsibility for creating jobs, as it is in their enlightened self-interest.
- Embracing Healthy Lifestyle: Indian businesses should learn from India’s traditional lifestyle, food, and recipes to live healthily and in harmony with nature.
- Focusing on Agriculture: The farm sector can generate higher value addition, boost farmers’ income, create opportunities for food processing and exports, and make the sector attractive to urban youth.
- Removing Regulatory Bottlenecks: Licensing, inspection, and compliance requirements imposed by various levels of government are an onerous burden on businesses, especially MSMEs.
- Improving Data Quality: The lack of availability of timely data on the absolute number of jobs created in various sectors precludes an objective analysis of the labour market situation.
Way forward:
- Enhance Infrastructure Development: Need to prioritize investments in essential infrastructure such as roads, railways, and sanitation to boost economic efficiency and productivity.
- Strengthen Data Collection and Analysis: The government should develop robust mechanisms for timely and accurate data collection on employment and other key economic indicators.
Mains PYQ:
Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s economy projected to grow at 6.5% to 7% in FY ending March 2025.
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Trends in India's GDP growth rate
Why in the News?
- India’s economy is projected to grow at 6.5% to 7% in the fiscal year ending March 2025.
- The Economic Survey for 2023-24 highlights the need to address inequality and unemployment as policy priorities.
Policy Recommendations by Chief Economic Adviser (CEA)
- Regulatory Burdens: CEA V. Anantha Nageswaran advocates for Central and State governments to reduce regulatory burdens on businesses.
- Corporate Responsibility: He urges the corporate sector to create productive jobs, emphasizing their responsibility in generating employment.
Various Challenges discussed
(1) Challenges in the IT Sector:
- Slowdown in Hiring: The CEA notes a significant slowdown in IT sector hiring over the last two years.
- AI and Labor: He encourages the industry to use AI to augment labor rather than replace workers.
(2) Skilling Initiatives
- Addressing Inequality: The Economic Survey suggests steps to tackle inequality, improve health, and bridge the education-employment gap.
- Skilling Reboot: A reboot of India’s skilling initiatives is proposed to provide the industry with people having the right attitude and skills.
(3) Corporate Sector and Economic Growth
- Demand and Employment: The Survey emphasizes the benefits for corporates from higher demand generated by employment and income growth.
- Warning against Short-Termism: It warns against “short-termism” which can weaken economic linkages.
(4) State Capacity and Consensus Building:
- Enhancing State Capacity: Enhancing state capacity is critical for the strategy to work.
- Need for Consensus: The CEA stresses the need for consensus between governments, businesses, and the social sectors for effective transformation.
(5) Land Acquisition and Investment Concerns:
- Land Use Norms: While the Survey does not mention land acquisition reform, it highlights the need to deregulate land use norms and consolidate farmland holdings.
- Investment Cautions: The Survey cautions about private capital formation being cautious due to fears of cheaper imports, indirectly referencing China.
(6) Foreign Direct Investment (FDI) Challenges:
- Attracting FDI: Attracting FDI will be challenging due to higher interest rates and developed countries encouraging domestic investments through subsidies.
- Addressing Uncertainties: Despite progress, uncertainties related to transfer pricing, taxes, and import duties need to be addressed.
Structural Reforms
- Existing Reforms: Structural reforms such as GST and the Insolvency and Bankruptcy Code are delivering expected results.
- Next-Gen Reforms: The Survey calls for “next-gen reforms” that are bottom-up in nature to achieve sustainable, balanced, and inclusive growth.
Strategic Directions for Growth
- Six-Pronged Strategy: The Survey outlines a six-pronged strategy for growth, emphasizing private sector investments and a fair share of income for workers.
- Focus Areas: Other focus areas include financing the green transition, removing barriers for MSMEs, and implementing intelligent farmer-friendly policies.
Conclusion
- Sustained Growth Potential: The economy can grow at over 7% on a sustained basis in the medium term by building on past reforms.
- Tripartite Compact: Achieving this growth requires a tripartite compact between the Centre, States, and the private sector.
PYQ:[2013] Economic growth in country X will necessarily have to occur if: (a) There is technical progress in the world economy. (b) There is population growth in X. (c) There is capital formation in X. (d) The volume of trade grows in the world economy. |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
What is Greedflation?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Greedflation, Wage-price spiral
Why in the News?
Political campaigns highlight inequality in India. Accusations suggest billionaires amass wealth through monopolistic control, dictating prices and suppressing real wages.
Monopoly Power and Economic Dynamics
- Monopoly Influence: Billionaires often amass wealth through monopolistic control, enabling them to dictate prices and suppress real wages.
- Consumption Conundrum: Higher mark-ups under monopolies lead to reduced real wages and diminished consumption power, hindering economic growth and investment.
- Greedflation Impact: The phenomenon of “Greedflation,” where companies raise prices to bolster profit margins amidst multiple demand-and-supply shocks, exacerbates inflationary pressures, particularly observed in developed economies.
So what is Greedflation?
- Definition: Greedflation, in essence, signifies that corporate greed is driving inflation, rather than the traditional wage-price spiral, leading to a profit-price spiral.
- Corporate Exploitation: Companies exploit inflation by significantly raising prices, surpassing the need to cover increased costs, thereby maximizing profit margins and perpetuating inflation.
- Profit-Price Spiral: Unlike the wage-price spiral, it involves companies exploiting inflation by excessively raising prices to maximize profit margins, triggering a cycle of inflation.
Illustrative Scenario
- Crisis Dynamics: During crises such as natural disasters or pandemics, businesses often raise prices due to increased input costs.
- Exploitative Practices: However, some businesses exploit the situation by engaging in excessive profit-making through significantly inflated price mark-ups.
Impact of Greedflation
- Disproportionate Impact: Greedflation disproportionately affects low-income and middle-class individuals, diminishing their consumption and lowering living standards.
- Wealth Disparities: While benefiting the wealthy by inflating asset values, it widens the wealth gap and exacerbates income inequality.
- Market Instability: Sharp price increases and speculative activities driven by greed can create bubbles and unsustainable market conditions, heightening the risk of financial market crashes and crises.
Global Implications
- Divergent Policies: Inflationary pressures from greedflation may lead to divergent policy responses among nations.
- Trade and Geopolitical Risks: Conflicting strategies to combat inflation can exacerbate global imbalances, trade tensions, and geopolitical conflicts as countries prioritize their interests and competitiveness.
PYQ:[2015] Which reference to inflation in India, which of the following statements is correct? (a) Controlling the inflation in India is the responsibility of the Government of India only. (b) The Reserve Bank of India has no role in controlling the inflation. (c) Decreased money circulation helps in controlling the inflation. (d) Increased money circulation helps in controlling the inflation. |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s GDP growth is impressive, but can it be sustained?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Credit rating agencies
Mains level: How to ensure the benefits of high growth trickle down to the lower income categories?
Why in the news?
The release of India’s GDP data was eagerly anticipated, especially following the recent upgrade in the “sovereign rating outlook” by S&P. It comes just days before the announcement of the union election results.
Back2Basics: Rating Agency
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What does the data say?
- India’s GDP growth for 2023-24 is 8.2%, exceeding market expectations and surpassing the previous year’s growth of 7%.
- Fourth-quarter growth is particularly robust at 7.8%, with upward revisions in previous quarters contributing to overall growth.
- Notable divergence of 1 percentage point between GDP and GVA growth in 2023-24, mainly due to increased net taxes.
- Sectoral analysis reveals mixed performance, with manufacturing and construction showing strong growth, while agriculture remains subdued.
- Expenditure-side breakdown highlights a slower growth rate in private consumption but healthy growth in investment, led mainly by government spending.
Pillars need to be sustained:
- Private Consumption: Ensuring sustained consumer spending, particularly by addressing high inflation and low wage growth, to maintain economic momentum.
- Investment: Continuously stimulating both government and private sector investment to drive economic expansion and foster innovation and productivity.
- Exports: Maintaining competitiveness in global markets and promoting export-oriented growth to leverage external demand and diversify revenue sources.
How to ensure the benefits of high growth trickle down to the lower-income categories?
- Improving Private Consumption: Focus on reviving private consumption, especially among lower-income groups. Address concerns of high inflation and low wage growth affecting consumer confidence.
- Enhancing Employment Opportunities: Prioritize improving the employment scenario, particularly in sectors generating significant employment like IT and the unorganized sector. Recognize the importance of employment in sustaining consumption growth and overall economic stability.
- Investment in Rural Development: Ensure spatial and temporal distribution of rainfall for rural demand recovery. Moderating food inflation and improving employment conditions crucial for rural consumption revival.
- Boosting Private Capex Cycle: Create an environment conducive to private investment, focusing on policy certainty and confidence in economic stability. Encourage private sector investment through favourable policies and supportive regulatory frameworks.
- Policy Focus on Inclusive Growth: Direct policy attention towards ensuring that the benefits of high growth extend to lower-income categories. Implement targeted social welfare programs and initiatives to support vulnerable groups and reduce income inequality.
- Monitoring Global Developments: Stay vigilant of global economic trends and developments that could impact the Indian economy, such as geopolitical tensions and supply shocks. Adapt policies accordingly to mitigate risks and capitalize on opportunities for sustained economic growth.
Conclusion: The Indian government aims to bolster equitable growth through measures such as stimulating private consumption, enhancing employment prospects, and fostering a conducive investment environment, supported by targeted policies and proactive global monitoring.
Mains PYQ:
Q Explain the difference between the computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (UPSC IAS/2021)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Does inequality lead to growth? | Explained
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Inequality and Democratic Governance;
Why in the news?
Studies conducted by researchers from “the Paris School of Economics” indicate that inequality in contemporary India surpasses that of colonial times.
How does Inequality harm Democratic processes?
- Concentration of Power: Inequality can lead to the concentration of monopoly power among a few capitalists relative to the labor force. This concentration allows dominant business groups to set prices, resulting in lower real wages and reduced purchasing power for the majority.
- Impact on Consumption and Welfare: High inequality can negatively impact consumption and welfare due to higher mark-ups and lower real wages.
- Lower real wages mean that workers can afford fewer goods, which reduces overall consumption and welfare.
- Effect on Democratic Processes: Economic inequality can translate into unequal political power, undermining democratic processes.
- Those with significant wealth can have disproportionate influence over political decisions, policies, and elections, leading to governance that favours the wealthy over the general populace.
How Redistribution and Growth Can Work Together
- Wealth Taxes and Redistribution: Taxing wealth and redistributing it can enhance economic growth by increasing incomes and consumption among the lower and middle classes, who have a higher propensity to consume.
- Multiplier Effect: Redistribution can strengthen the multiplier effect, where an initial increase in investment leads to a greater overall increase in income and consumption. Higher incomes among workers and goods-sellers lead to more purchases, driving further economic activity and growth.
- Investment and Profit Expectations: Investment is driven by future profit expectations rather than past wealth. Therefore, taxing wealth does not necessarily reduce investment.
- Creation of New Entrepreneurs: Redistribution can support the emergence of new entrepreneurs by providing financial resources and reducing dependence on wage employment. This can foster innovation and competition, further contributing to economic growth.
- Curtailing Monopolies: Reducing monopolistic power through redistribution and other policy measures can lower prices and increase real wages. Higher real wages boost demand, leading to increased investment and economic expansion.
Conclusion: Addressing inequality through redistribution can promote inclusive growth, empowering marginalized communities and advancing progress towards a more equitable society, essential for fulfilling SDG Goal 10 (Reduced Inequalities).
Mains PYQ:
Q How did land reforms in some parts of the country help to improve the socio-economic conditions of marginal and small farmers? (UPSC IAS/2021)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Sri Lanka cabinet approves new economic law to meet IMF targets
Note4Students
From UPSC perspective, the following things are important :
Prelims level: IMF; Debt-to-GDP ratio;
Mains level: International Market and Economy; Fiscal Issues;
Why in the News?
SRI Lanka’s Cabinet has approved a new economic law to stabilize its debt-to-GDP ratio that will cover key targets set by the International Monetary Fund (IMF).
- The debt-to-GDP ratio measures the proportion of a country’s national debt to its gross domestic product.
- According to the World Bank, the countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth.
What are the IMF Targets?
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- The IMF has various targets and initiatives aimed at achieving sustainable economic growth and prosperity for its member countries.
- It includes promoting financial stability, monetary cooperation, and transparency in economic policies to enhance productivity, job creation, and economic well-being.
- Indian Scenario:
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- India has not taken any financial assistance from the IMF since 1993.
- India’s current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million, making it the 13th largest quota-holding country at IMF and giving it shareholdings of 2.44%.
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- For Sri Lanka:
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- The IMF targets Sri Lanka to reduce its debt to gross domestic product (GDP) ratio to 95% by 2030.
- Another target set by the IMF is to reduce debt servicing costs to 4.5% of GDP. It means Sri Lanka needs to focus on managing the costs associated with servicing it’s debt obligations, aiming to make it more sustainable and manageable in the long term.
How will the debt-to-GDP ratio be reduced?
- Fiscal Discipline: Sri Lanka may need to implement measures to improve fiscal discipline, such as reducing government Expenditure, increasing Tax revenue, and narrowing Budget Deficits.
- Debt Restructuring: Sri Lanka can explore negotiating with creditors to extend debt maturities, reduce interest rates, or reprofile debt payments.
- Revenue Enhancement: The government could focus on enhancing revenue generation through tax reforms, improved tax administration, and efforts to broaden the tax base.
- Economic Growth: Promoting economic growth is essential for reducing the debt-to-GDP ratio over the long term. Sri Lanka could implement policies to stimulate investment, boost productivity, and enhance competitiveness, leading to higher GDP growth rates and a more sustainable debt trajectory.
What does India do presently to reduce its debt-to-GDP ratio?
- Targeted Reduction: According to a research paper by the Reserve Bank of India (RBI), the government aims to lower the general government debt-GDP ratio to 73.4% by 2030-31. This target is approximately 5% points lower than the trajectory projected by the IMF, indicating ambitious yet achievable goals.
- Promotes Fiscal Space: The Indian Central Bank – RBI emphasized reducing debt burdens to free up fiscal space for new investments, particularly in critical areas like the green transition. This suggests a strategic focus on investing in sustainable and environmentally friendly initiatives.
- Aligning with IMF: The IMF projects a positive trend in India’s debt reduction efforts, forecasting a decline in government debt from 81% of GDP in 2022 to 80.5% in 2028. This indicates that India’s debt reduction measures are consistent with international expectations and standards.
Conclusion: Focus on enhancing revenue generation through Comprehensive Tax reforms, improved tax compliance, and efforts to broaden the tax base is needed. Secondly, rationalizing Tax revenues can provide additional resources to finance government expenditures without relying heavily on borrowing, thus reducing the debt-to-GDP ratio.
Mains PYQ:
Q The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandates are distinctly different. Elucidate. (UPSC IAS/2013)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
This is the year to get the Sustainable Development Goals back on track
Note4Students
From UPSC perspective, the following things are important :
Prelims level: SDGs
Mains level: Why the world is not on track to achieve most SDGs by 2030?
Why in the News?
2024 is an election year across the world and newly elected governments need to focus on the all-important sustainability issue. Year 2024 is an election year across the world.
- At least 64 countries, both developed and developing, accounting for 49% of the world population, will go to the polls.
Causes of Global Slow Progress:
- Impact of Global Crises: The outbreak of the COVID-19 pandemic and other global crises virtually halted progress towards the SDGs. These crises have diverted attention and resources away from sustainable development efforts.
- Neglect of Environmental Goals: There has been little to no attention towards goals related to the environment and biodiversity, including responsible consumption and production, climate action, life below water, and life on land.
- Defiance of Integrated Nature of SDGs: The current practice of pursuing SDGs is criticized for defying the integrated and indivisible nature of the goals. This lack of integration hampers efforts to achieve sustainable development outcomes comprehensively.
- Risk of Environmental Degradation: The slow progress and neglect of environmental goals pose a significant risk of accelerated environmental degradation. This threatens the overarching target of balancing human well-being and a healthy environment.
Why the world is not on track to achieve most SDGs by 2030?
- Insufficient Progress: Despite reaffirmations of commitment by world leaders, progress towards achieving the SDGs remains slow. The world is only on track to meet 15% of the 169 targets that comprise the 17 goals.
- Investment Gap: There is a significant gap in investment for SDGs, particularly in developing countries. The estimated investment gap exceeds $4 trillion, with nearly $2 trillion needed for the energy transition alone.
- Lack of Synergistic Action: There is a lack of synergistic action in addressing SDGs, despite the integrated nature of the goals. Few studies and empirical evidence exist on the synergies and trade-offs among SDGs, hindering progress.
- Barriers to Synergies: Various barriers, including knowledge gaps, political and institutional barriers, and economic issues, impede synergistic action.Inadequate data collection, and an inability to attribute co-benefits to specific actions hinder progress.
- Misaligned Policies: Policies may be misaligned, leading to barriers for meeting greater targets. For example, ambitious renewable energy targets may not align with smaller-scale of steps taken to achieve SDG goal.
- Limited Understanding of Cost Estimation: Exploiting resources without considering climate change impacts and synergistic opportunities can be detrimental to national and global efforts.
Way forward:
- Call for Action: There is a call for action to strengthen the environment for synergistic action, transparently identify opportunities and limits to synergies, and develop reporting frameworks to assess the value created from specific SDG interventions.
- Urgent Action Areas Identified: The UN SDG Report, 2023 identified five key areas for urgent action, including commitments of governments, concrete policies to eradicate poverty and reduce inequality, strengthening of national and subnational capacity, recommitment of the international community, and strengthening of the UN development system.
- Global Reaffirmation and Commitment: World leaders acknowledged the situation and reaffirmed their commitments to delivering the SDGs by 2030. However, the effectiveness of these global pronouncements at the ground level remains uncertain.
Mains PYQ
Q National Education Policy 2020 isin conformity with the Sustainable Development Goal-4 (2030). It intends to restructure and reorient education system in India. Critically examine the statement. (2020)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
[PREMIUM] Views on inflation: A matter of interest
Note4Students
From UPSC perspective, the following things are important :
Prelims level: CPI and WPI
Mains level: Challenges and measures related to inflation
Why in the News?
AAZData released showed that Retail Inflation had edged marginally upward last month.
What is Inflation?
- Inflation, as per the definition provided by the International Monetary Fund, represents the pace at which prices rise within a specified timeframe, covering a comprehensive assessment of general price escalations or those about particular goods and services. To measure the inflation there are different types of inflation index.
- An Inflation Index is a statistical measure used to track changes in the overall price level of goods and services in an economy over a specific period. It quantifies the rate of inflation by comparing the current prices of a selected basket of goods and services to their prices in a base period.
In India, there are primarily two types of inflation indices used to measure price changes:
- Consumer Price Index (CPI): The CPI measures changes in the prices paid by urban and rural consumers for a basket of goods and services. It provides insights into inflation experienced by households and is divided into various sub-indices based on categories such as food, fuel, clothing, housing, transportation, medical care, recreation, and education. The Government of India releases multiple CPI indices, including:
- CPI for Industrial Workers (CPI-IW)
- CPI for Agricultural Labourers (CPI-AL)
- CPI for Rural Labourers (CPI-RL)
- CPI for Urban Non-Manual Employees (CPI-UNME)
- CPI for Rural (CPI-R)
- CPI for Urban (CPI-U)
- Wholesale Price Index (WPI): The WPI tracks changes in the prices of goods at the wholesale level. It includes the prices of commodities traded in bulk such as agricultural products, minerals, crude oil, manufactured products, and electricity. The Office of the Economic Adviser, under the Department for Promotion of Industry and Internal Trade (DPIIT), releases the WPI every month.
What is Retail Inflation?
- Retail inflation, also known as Consumer Price Index (CPI) inflation, tracks the change in retail prices of goods and services that households purchase for their daily consumption. CPI is calculated for a fixed basket of goods and services that may or may not be altered by the government from time to time.
- How it is Calculated?
- A representative basket of goods and services is selected to represent the typical consumption patterns of households
- The cost of the basket of goods and services is calculated for a base period.
- The CPI is calculated by dividing the cost of the basket in the current period by the cost of the basket in the base period and multiplying by 100.
- The inflation rate is calculated by comparing the CPI of the current period with the CPI of the base period.
Key points as per AAZData released by the National Statistical Office:
- Retail Inflation Data: The National Statistical Office reported that retail inflation in India increased marginally, rising to 5.69% in December from 5.55% in November, primarily driven by higher food inflation
- Cause of inflation: RBI Governor Shaktikanta Das had anticipated the rise in inflation due to risks in food prices, cautioning about potential second-round effects
- Food Inflation: The Consumer Food Price Index surged to 9.53% in December, up from 8.7% in November, with notable inflation in cereals, vegetables, pulses, sugar, and spices
- Industrial Production: The index of industrial production slowed to 2.4% in November, partly due to the base effect, with a 6.4% increase in industrial output for the first eight months of the year (April-November)
- Monetary Policy Committee (MPC) Actions: The MPC maintained the status quo on rates and stance in the last meeting, focusing on withdrawing accommodation to align inflation with the target of 4%
- Future Monetary Policy: There are discussions within the MPC about the necessity of an interest rate cut to prevent excessive real interest rates, especially as inflation is projected to moderate in the coming quarters
Way Forward
- Monetary Policy Adjustment: The Reserve Bank of India (RBI) could consider implementing a cautious monetary policy stance, possibly by tightening monetary policy through measures such as raising the repo rate. This would help curb inflationary pressures by reducing liquidity in the economy and making borrowing more expensive.
- Supply-Side Interventions: The government could focus on addressing supply-side constraints in the agricultural sector to mitigate food price inflation. This might involve measures such as improving infrastructure, increasing agricultural productivity, reducing post-harvest losses, and enhancing market efficiency through better distribution networks.
- Fiscal Policy Support: The government could also provide fiscal support to sectors facing supply-side disruptions or demand constraints, which could help stabilize prices and support economic growth. Targeted fiscal measures, such as subsidies for essential commodities or infrastructure investments, could be considered to address specific challenges contributing to inflation.
Mains PYQQ Besides the welfare schemes, India needs deft management of inflation and unemployment to serve the poor and the underprivileged sections of the society. Discuss. (UPSC IAS/2022) Q Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS/2019) Prelims PYQConsider the following statements:(UPSC IAS/2020) 1) The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2) The WPI does not capture changes in the prices of services, which CPI does. 3) Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. Which of the statements give above is/are correct? a) 1 and 2 only b) 2 only c) 3 only d) 1, 2 and 3 |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Constitution and the Redistribution of wealth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: FR and DPSP
Mains level: Current debate surrounding economic policies and inequality in India due to shift from Socialistic to Market-Driven Economy
Why in the news?
The debate surrounding the redistribution of wealth has piqued interest during the ongoing election campaigns.
What does the Constitution provide?
- Preamble to the Constitution: It outlines the objectives of the Constitution, including securing social, and economic justice, liberty, and equality for all citizens.
- Part III and IV: These are principles that the central and State governments should follow to achieve social and economic justice in our country. Unlike the fundamental rights in Part III, the DPSP is not enforceable in court.
- Article 39(b) and 39 (c): Article 39(b) emphasizes the distribution of ownership and control of material resources to serve the common good. Article 39(c) aims to prevent the concentration of wealth in a manner detrimental to the common good.
The history of the ‘Right to Property’ in the Indian Constitution:
- Original Guarantee: The Constitution initially guaranteed the right to property as a fundamental right under Article 19(1)(f). It provided that individuals have the right to acquire, hold, and dispose of property.
- Compensation Requirement: Article 31 of the Constitution mandated that the state must provide compensation in case of the acquisition of private property for public purposes.
- Land Reforms and Public Welfare: The government, facing challenges such as land reforms and the need for public infrastructure development, found the original provisions restrictive due to inadequate resources. This led to amendments aimed at providing more flexibility in acquiring land for public welfare.
- Constitutional Amendments: Notable amendments such as Articles 31A, 31B, and 31C were introduced to curtail the right to property and facilitate land acquisition for public welfare projects.
- Judicial Interpretation of Constitution ammendment: The Supreme Court interpreted the relationship between fundamental rights and Directive Principles of State Policy (DPSP) in various cases. In the Golak Nath case (1967), the Court held that fundamental rights cannot be diluted to implement DPSP. However, in the Kesavananda Bharati case (1973), the Court upheld the validity of Article 31C, subject to judicial review.
- Harmonious Balance: In the Minerva Mills case (1980), the Supreme Court emphasized the need for a harmonious balance between fundamental rights and DPSP in the Constitution.
- 44th Amendment Act: In 1978, the property right was removed as a fundamental right through the 44th Amendment Act, making it a constitutional right under Article 300A. This aimed to reduce excessive litigation and protect public welfare projects.
Impacts due to the shift from a Socialistic to a Market-Driven Economy:
- Impact of Economic Policies: The socialistic policies of the early decades after independence focused on land reforms, nationalization of industries, high taxation rates, and regulations on private enterprise. These policies aimed to reduce inequality and redistribute wealth but were criticized for stifling growth and leading to inefficiencies.
- Changes in Taxation: Over the years, there have been significant changes in taxation policies, including the abolition of estate duty in 1985 and wealth tax in 2016. Income tax rates were also reduced considerably, reflecting a shift towards a more business-friendly environment.
- Growing Inequality: Despite economic growth, there has been a growing concern about inequality. Reports, such as the one by the World Inequality Lab, highlight the widening wealth and income gap, with a significant portion of the wealth concentrated among the top 10% of the population.
- Opposition Criticism: The ruling party and its supporters have criticized the Opposition, alleging that their proposed measures, such as the reintroduction of inheritance tax, would burden even the poorer sections of society.
- Legal Interpretation: The Supreme Court’s involvement in the debate is highlighted by its decision to constitute a nine-judge Bench to interpret whether Article 39(b) of the Constitution, which pertains to the distribution of material resources for the common good, includes private resources.
- Central Question of the debate: The central question in the current debate revolves around the balance between economic policies that promote growth and efficiency versus those aimed at reducing inequality and ensuring social justice.
Way forward:
- Inclusive Growth: While promoting innovation and growth, it’s essential to ensure that the benefits are distributed equitably across all sections of society, especially the marginalized. Policies should aim for inclusive growth where the benefits reach those who need them the most.
- Debate and Adaptation: Economic policies should be framed after adequate debate and consideration, taking into account current economic models and global best practices. There should be a continuous process of adaptation and refinement to address emerging challenges and opportunities.
- Empowerment of Marginalized: Special attention should be given to empowering marginalized communities through targeted interventions such as education, skill development, access to resources, and opportunities for economic participation.
Mains PYQ:
Q Critically discuss the objectives of Bhoodan and Gramdan movements initiated by Acharya Vinoba Bhave and their success. (UPSC IAS/2013)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Inequality can no longer be ignored
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Trends related to tax to GDP ratio;
Mains level: Growth and issues with inequality in India
Why in the news?
The Congress’s party’s election manifesto, the Nyay Patra, has triggered a debate on inequality, concentration of wealth and the measures to address these.
The reason behind the inequality in India:
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- Taxation Disparities: India’s tax-GDP ratio is comparatively low, standing at 17% as opposed to 25% in Brazil, indicating room for improvement in revenue generation. The taxation structure in India leans towards indirect taxes, which contribute significantly (about two-thirds) to overall tax revenue collection.
- Regressive Taxation Structure: India’s tax system is described as regressive, indicating that it disproportionately impacts low-income individuals compared to high-income individuals. Indirect taxes, which are a significant component of overall tax revenue, tend to burden lower-income groups more than higher-income groups.
- Lack in Tax Progressivity: There are concerns about the lack of progressivity in India’s direct tax regime, where higher-profit companies enjoy relatively lower effective tax rates compared to lower-profit companies.
Welfare spending is low
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- Low Spending on Welfare and Social Sector: India’s expenditure on welfare and the social sector is significantly lower compared to other countries. Public spending on health remains low, approximately 1.3% of GDP, falling short of the National Health Policy (NHP) target of 2.5% of GDP by 2025.
- Eventual decline Budget Allocations: Major budgetary allocations for programs like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), education, and budgets for children have either declined as a proportion of total expenditure or GDP.
Way forward
- Revenue Mobilization and Spending Priorities: There’s a pressing need to improve revenue mobilization progressively, ensuring that the burden of taxation is distributed fairly and equitably.
- Simultaneously, increasing spending on areas that directly affect the lives of the poor is crucial. This includes healthcare, education, social protection programs, and employment generation schemes like MGNREGA.
- Achieving Policy Targets: Meeting targets set by policies like the NHP requires a concerted effort to ramp up healthcare spending in line with national goals.
Mains PYQ
Q) Despite the consistent experience of high growth, India still goes with the lowest indicators of human development. Examine the issues that make balanced and inclusive development elusive. (UPSC IAS/2019)
Q) Critically discuss the objectives of Bhoodan and Gramdan movements initiated by Acharya Vinoba Bhave and their success. (UPSC IAS/2013)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
What is the outlook on the global economy? | Explained
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Global Financial Stability Report
Mains level: What does it mean for India?
Why in the news?
The International Monetary Fund (IMF) released its latest Global Financial Stability Report warning about the risks to the Global Financial System.
What is the IMF’s worry about Inflation?
- Premature Investor Enthusiasm: The IMF believes that investors may be overly optimistic about the end of high inflation and the subsequent lowering of interest rates by central banks. This enthusiasm could be premature.
- Stalled Inflation: The IMF highlights that inflation may have stalled in some major advanced and emerging economies. Core inflation in the most recent three months has been higher than in the previous three months, indicating a potential slowdown in the decline of inflation.
- Geopolitical Risks: The IMF warns that geopolitical risks, such as ongoing conflicts in West Asia and Ukraine, could disrupt aggregate supply and lead to higher prices. This could counteract efforts to lower inflation and deter central banks from lowering interest rates.
- Potential Impact on Central Bank Action: The IMF suggests that if these risks persist, central banks may delay or refrain from lowering interest rates as expected by investors, which could have consequences for asset prices and investor losses.
How it will impact the Indian Market?
- Strong Fund Flows: Emerging markets like India have experienced strong inflows of foreign capital, driven by optimism surrounding potential interest rate cuts by central banks.
- Vulnerability: If central banks in Western countries signal a prolonged period of high interest rates, investors may withdraw funds from emerging markets like India, putting pressure on their currencies.
- Depreciation of the Indian Rupee: The Indian rupee has already been depreciating, reaching a new low against the U.S. dollar. This trend could continue if capital outflows accelerate.
- In response to currency depreciation and capital outflows, the RBI may intervene by curbing liquidity and raising interest rates. However, this could slow down the economy.
- Potential Effects on Financial System: A severe outflow of capital could have implications for India’s financial system, potentially exacerbating the depreciation of the rupee and causing instability.
Private Credit Market Scenario:
- The private credit market globally grew to $2.1 trillion last year, indicating its significant size and importance in the financial landscape.
- The IMF is concerned about the unregulated private credit market, where non-bank financial institutions lend to corporate borrowers. Troubles in this market could potentially affect the broader financial system.
- India has also witnessed the growth of a small private credit market, particularly with the rise of Alternative Investment Funds (AIFs).
Conclusion: The IMF’s concerns over premature investor optimism on inflation and risks from geopolitical tensions highlight potential challenges for India’s financial stability. Vigilance over capital flows and regulation of the private credit market are essential safeguards.
Mains PYQ:
Q The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
On the fall in Household Savings
Note4Students
From UPSC perspective, the following things are important :
Prelims level: National Income; Household Savings;
Mains level: NA
Why in the news?
The sharp reduction in Household Net Financial Savings and the rise in Household Debt burden are a cause for concern for growth and economic stability.
BACK2BASICS:What are household financial savings?
What is Household Debt?
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What are the present reasons behind the Lower Financial savings?
- Increased borrowing or reduced gross financial savings are the primary drivers of lower net financial savings.
- Lower net financial savings due to increased borrowing for consumption or investment can stimulate aggregate demand and output.
- Higher interest rates can lead to increased interest payments by households, reducing their net financial savings.
Implication of Higher Debt Burden on the Indian Market: The rise in household debt burden has two concerns for the macroeconomy.
- Debt Repayment and Financial Fragility: Household debt sustainability depends on the gap between the interest rate and income growth rate.
- Suppose households fail to meet their debt repayment commitments. In that case, it reduces the income of the financial sector and deteriorates their balance sheets, which in turn can have a cascading effect on the macroeconomy.
- Scheduled Commercial Banks Lending vs. Growth Rate of GNS: The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.
- Impact on Consumption Demand: Reducing household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth by increasing their savings.
- Reduced Higher household debt: Higher household debt can also reduce consumption expenditure in at least two ways.
- If higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce credit disbursement. The consequent reduction in credit disbursement can adversely affect consumption.
- Higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the effect of higher interest rates on consumption expenditure.
- Low household Financial wealth: Recent trends in the Indian economy indicate a decline in household financial wealth relative to GDP, alongside an increase in household leverage (debt to net worth ratio).
- The financial wealth/net worth of the household is the difference between the stock of financial assets and liabilities.
Macroeconomic Implication:
- Implications of the Procyclical Leverage: Given that both the flow indicator of liabilities to disposable income and the debt to net worth show an increasing trend, where households are vulnerable.
- Fall in the Household Savings: The policy mantra of higher interest rates to counter inflation by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap.
- The implications of high-interest rates on debt burden can hurt the consumption of the households and consequently aggregate demand.
Suggestive measures:
- Promote sustainable borrowing: Policymakers need to address the growing vulnerabilities of households by implementing measures to promote sustainable borrowing practices and reduce reliance on debt.
- Prioritizes production and employment: Additionally, the policies aimed at fostering a more balanced economy that prioritizes production and employment alongside financial activities may be necessary to ensure long-term economic stability and growth.
Conclusion: The change in the composition of the asset side of the household balance sheet towards financial assets indicates some degree of financialization of the economy which moves from a production-based economy to a monetary or financial exchange-based economy making the 5 trillion dollar economy both jobless and fragile.
Mains PYQ:
Q The public expenditure management is a challenge to the Government of India in the context of budgetmaking during the post-liberalization period. Clarify it.(UPSC IAS/2019)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Why have private investments dropped? | Explained
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gross Fixed Capital Formation (GFCF)
Mains level: Why has private investment fallen?
Why in the news?
The failure of private investment, as measured by private Gross Fixed Capital Formation (GFCF) as a percentage of gross domestic product (GDP) at current prices, to pick up pace has been one of the major issues plaguing the Indian economy.
What is GFCF?
- GFCF refers to the growth in the size of fixed capital in an economy.
- Fixed capital refers to things such as buildings and machinery, for instance, which require investment to be created.
- So private GFCF can serve as a rough indicator of how much the private sector in an economy is willing to invest.
- Overall GFCF also includes capital formation as a result of investment by the government.
Why does it matter?
- GFCF matters because fixed capital, by helping workers produce a greater amount of goods and services each year, helps to boost economic growth and improve living standards.
- In other words, fixed capital is what largely determines the overall output of an economy.
What is the trend seen in private investment in India?
- Pre-liberalization (1950s to early 1990s): Private investment remained relatively stable, hovering around or slightly above 10% of GDP. Public investment, however, steadily increased during this period.
- Liberalization (early 1990s onwards): Economic reforms in the early 1990s improved private sector confidence, leading to a significant uptick in private investment. Public investment, although still significant, began to decline relative to private investment.
- Post-global financial crisis (late 2000s to present): Private investment continued to grow until the global financial crisis of 2007-08, reaching around 27% of GDP. However, from around 2011-12 onwards, private investment began to decline, hitting a low of 19.6% of GDP in 2020-21.
Why has private investment fallen?
- Low private consumption expenditure: Some economists attribute the decline in private investment to low private consumption expenditure. They argue that businesses need confidence in future demand to invest in fixed capital, and boosting consumption expenditure can help stimulate private investment.
- Structural problems and policy uncertainty: Other economists argue that structural issues and policy uncertainty are core reasons behind the fall in private investment. They point to unfavourable government policies and policy uncertainty as major factors affecting private investment.
Conclusion: To address the decline in private investment, India needs policies promoting consumer confidence and stable, conducive business environments. Balancing pro-growth fiscal measures with structural reforms can stimulate investment, fostering economic growth and prosperity.
Mains PYQ
Q Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and private entity.(UPSC IAS/2020)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India could face ‘Imported Inflation’: Asian Development Bank (ADB)
Note4Students
From UPSC perspective, the following things are important :
Prelims level: International Banking Institutions; Types of Inflation;
Mains level: NA
Why in the News?
The Asian Development Bank recently issued a cautionary note for India’s susceptibility to imported inflation due to potential rupee depreciation amidst escalating interest rates in the West.
What is Imported Inflation?
- Imported inflation refers to the increase in the prices of goods and services within a country caused by a rise in the cost or price of imports.
- This phenomenon occurs when factors such as a depreciating currency, higher import costs, or increased international prices lead to elevated expenses for imported goods and services.
- Consequently, producers may adjust their prices upward to offset these higher costs, resulting in inflationary pressures within the domestic economy.
- This idea connects with the theory of cost-push inflation, which means that when input costs go up, it can cause prices for final products to go up too.
Reason behind the imported inflation:
- Capital Flows: Increased interest rates in Western economies attract foreign investors seeking higher returns, leading to capital outflows from countries like India and potentially depreciating the Indian rupee.
- When a currency depreciates, local consumers require more of their domestic currency to procure foreign goods, consequently elevating import prices.
- Borrowing Costs: Indian businesses and the government may face higher borrowing costs for infrastructure projects and investments if they raise funds in foreign currency-denominated international markets.
- Inflationary Pressures: Capital outflows can pressure the Indian rupee, causing imported inflation as the cost of imported goods rises due to currency depreciation.
- Trade Competitiveness: Exchange rate fluctuations from Western interest rate changes affect India’s trade competitiveness, impacting exports, imports, and domestic consumption.
Back2Basics: Asian Development Bank (ADB)
| Information | |
| Establishment | Established in 1966 as a result of the Conference on Asian Economic Cooperation held by the United Nations Economic Commission for Asia and the Far East. |
| Headquarters | Manila, Philippines |
| Official Status | Official United Nations Observer |
| Objectives |
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| Membership |
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| Funding |
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| Sources |
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PYQ:[2021] With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
Select the correct answer using the code given below. (a) 1, 2 and 4 only (b) 3, 4 and 5 only (c) 1, 2, 3 and 5 only (d) 1, 2, 3, 4 and 5 |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Fertility Levels drop below one in many Asian Nations
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Reasons behind the Fertility levels dropping below one in many Asian nations
Why in the News?
Many countries in East and Southeast Asia are in the middle of a population crisis, with fewer births every year and record-low fertility rates.
- In March this year, several hospitals in China stopped offering newborn delivery services due to declining demand.
What is TFR?Total Fertility Rate is a measure used in demography to represent the average number of children that would be born to a woman over her lifetime. |
TFR of Asian countries and India and Comparison with others:
Reasons behind the Fertility levels dropping below one in many Asian nations:
- Family Planning Measures: Countries like South Korea and Singapore have implemented stringent family planning policies, limiting the number of children couples are encouraged to have. For example, South Korea’s slogan in the 1980s, “Even two children per family are too many for our crowded country,” reflects the emphasis on controlling population growth.
- Career Opportunities for Women: With more opportunities for women to pursue careers, there has been a shift in priorities away from having children.
- Declining Marriage Rates: Dropping marriage rates contribute to lower fertility rates, as marriage traditionally correlates with childbearing. As fewer people get married or delay marriage, the window for childbearing narrows.
- Cost of Raising Children: The rising cost of raising a child is cited as a deterrent to having larger families. Financial considerations such as education, healthcare, and housing expenses may dissuade couples from having more children.
- Ideal fertility rate: The ideal fertility rate for a population to remain stable, assuming no immigration or emigration, is 2.1 children per woman. This rate is known as the replacement rate, and it ensures that each generation will replace itself.
Suggestive Measures to maintain an ideal Fertility Rate:
- Supporting Work-Life Balance: Implement policies that support work-life balance, such as flexible work schedules, parental leave, and affordable childcare, to encourage individuals to have children while pursuing their careers.
- Financial Incentives: Offer financial incentives or subsidies for families to alleviate the financial burden of raising children, making it more feasible for individuals to start families.
- Education and Awareness: Provide education and awareness programs on the benefits of having children at a younger age and the importance of family planning to help individuals make informed decisions about their fertility.
- Healthcare Support: Improve healthcare services related to fertility, pregnancy, and childbirth to ensure a safe and supportive environment for individuals considering starting a family.
Conclusion: Declining fertility rates in Asian nations prompt a population crisis due to stringent family planning, women’s career opportunities, declining marriage rates, and high child-raising costs. Need to take measures include work-life balance policies, financial incentives, education, and healthcare improvements to maintain an ideal fertility rate.
Mains PYQ
Q Critically examine whether growing population is the cause of poverty OR poverty is the mains cause of population increase in India.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
ADB raises India’s GDP growth forecast for FY25 to 7% from 6.7% earlier
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Asian Development Bank (ADB);
Mains level: Developments in Indian Subcontitnent; India's GDP growth projection by ADB;
Why in the News?
The Asian Development Bank (ADB) increased its GDP growth projection for India for the current fiscal year to 7%, up from its previous estimate of 6.7%.
Reason behind the increased India’s GDP growth projection by ADB:
- Manufacturing Sector: The manufacturing sector growth of India in the 2023 fiscal year was robust, with the S&P Global India Manufacturing PMI rebounding to 56.0 in November 2023 from an eight-month low of 55.5 in October 2023.
- Investment and Consumption Demand: Investment and Consumption demand are both expected to drive India’s economic growth in 2024 and FY25. Private Final Consumption Expenditure (PFCE) grew at 3.5% in the December quarter of FY24.
- Inflation Trend: Inflation in India is expected to continue its downward trend in tandem with global trends Inflation in India decreased to 5.09 percent in February 2024 from 5.10 percent in January 2024. India’s inflation rate is projected to trend around 4.30 percent in 2025, according to econometric models.
- Monetary policy: The RBI has kept the repo rate unchanged at 6.5% for 2023-24, focusing on withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth.
Government Initiatives taken for Regional Development:
- Regional Cooperation and Integration (RCI) Conference, 2023:
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- It was organised by the Asian Development Bank (ADB) at Tbilisi, Georgia.
- Theme: ‘Strengthening Regional Cooperation and Integration through Economic Corridor Development (ECD)’.
- Objective: To integrate spatial transformation and area-centric approach with the help of Economic Corridor Development.
- In this Conference, India offered its indigenously developed GIS-based technology though knowledge sharing to ADB and South Asia Sub-Regional Economic Cooperation (SASEC) countries for enhancing socio-economic planning and regional cooperation.
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- PM GatiShakti National Master Plan and Multi-modal Connectivity:
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- Basically, PM Gati Shakti is principled to bring socio-economic area-based development as part of regional connectivity.
- It is being implemented to enhance connectivity with regional partners with the help of GIS-based technology. For Example: Indo-Nepal Haldia Access Controlled Corridor project.
BACK2BASIC:About Asian Development Bank(ADB):
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Conclusion: Indian government’s effort across the robust manufacturing growth, investment, working on consumption demand, decreasing inflation, and supportive monetary policy, aligning with its goal of promoting regional social and economic development are gaining some fruits.
Mains PYQ:
Q China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia’, In the light of this statement, discuss its impact on India as her neighbor.(UPSC IAS/2017)
Q India has recently signed to become founding member of New Development Bank (NDB) and also the Asian Infrastructure Investment Bank (AIIB). How will the role of the two Banks be different? Discuss the strategic significance of these two Banks for India. (UPSC IAS/2014)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
On Unemployment in Indian States
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Important reports in the News; Trends in unemployment
Mains level: Urbanisation and Unemployment;
Why in the news?
A recent report by the International Labour Organization (ILO) and the Institute for Human Development (IHD) revealed that two out of every three unemployed individuals were young graduates.
Unemployment across Indian States:
- Highest Unemployment Rate: At almost 10%, Goa’s unemployment rate is more than three times the national average of 3.17%.
- Four of the top five states with high unemployment rates (Goa, Kerala, Haryana, and Punjab) are comparatively richer states.
- Lower Unemployment Rates: Maharashtra and Gujarat, which are rich states in western India, experience unemployment rates far less than the national average.
- Unemployment in Northern and Southern states: All northern states (Jammu and Kashmir, Punjab, Haryana, Uttarakhand, and Himachal Pradesh) and most southern states have unemployment rates higher than the national average, except Karnataka.
- Unemployment below the National Average: Out of the 27 states considered, 12 states have unemployment rates less than the national average.
- Lower unemployment rates in poorer states: Except for Maharashtra and Gujarat, most states with unemployment rates lower than the national average also have per capita incomes lesser than the national average.
What is the Relationship between Urbanisation and Unemployment? (ILO observations)
- Relationship between Self-employment and Unemployment: The trend line shows a downward slope, indicating a negative relationship between self-employment and unemployment.
- Informal self-employment mainly in Agriculture and Rural Economy: A significant portion of informal self-employment is in agriculture and the rural sector.
- Relationship between Labor Force and Unemployment: Figure 3 illustrates a positive relationship between the urban share of the labor force and the unemployment rate. Highly urbanized states tend to have higher unemployment rates (Positive relationship).
- High Unemployment and Urbanized states: States like Goa and Kerala, which are highly urbanized, experience high unemployment rates. This is attributed to the limited scope for informal jobs in urban settings compared to rural agriculture, which acts as a reserve for absorbing surplus labor.
- Limited Informal Sectors: Although informal sectors exist and thrive in urban settings, they have limited capacity to absorb job-seekers compared to rural agriculture.
- Exceptions states: Gujarat and Maharashtra, despite being highly urbanized, have lower unemployment rates compared to states like Uttar Pradesh and Madhya Pradesh.
Nexus between Education and Employment:
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Conclusion: Addressing youth unemployment necessitates improving education quality to match job market demands, fostering skill development for the modern sector, promoting entrepreneurship, and enhancing rural employment opportunities. Policy interventions should target these areas for inclusive growth and employment generation.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
What is Consumer Confidence Survey?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Consumer Confidence Survey (CCS)
Mains level: NA
Why in the news?
- The latest Consumer Confidence Survey conducted by the Reserve Bank of India in March 2024 reveals a significant boost in consumer confidence, particularly regarding future expectations.
- It says consumer confidence has hit highest level in nearly 5 years.
What is Consumer Confidence Survey (CCS)?
- The RBI conducts a bi-monthly Consumer Confidence Survey to measure consumers’ perceptions of the prevailing economic situation.
- It was started in 2015 with surveys in 13 major cities.
- The survey is conducted across various cities and measures consumer confidence on parameters such as the economy, employment, price, income, and spending.
- The survey consists of questions regarding consumers’ sentiments over various factors in the current situation and future.
Here are a few parameters that help aggregate overall confidence:
- Spending: The consumer is asked about the willingness to spend on major consumer durables, purchasing vehicles, or real estate. This measures the overall spending scenario on necessities as well as luxuries for the next quarter.
- Employment: The consumer is asked about current and future ideas on employment situations, joblessness, job security, which reflects the sentiments of the current or expected employment in the country.
- Inflation: The consumer is asked about interest rates and levels of prices of all goods, tracking the price expected by consumers and their spending on basic necessities.
Components of CCS:
- Current Situation Index (CSI): It measures overall consumer sentiment regarding the present economic situation.
- Future Expectations Index (FEI): It analyses consumer sentiment for the next 12 months.
CSI and FEI are calculated based on people’s views about the economy, their income, spending, job opportunities, and prices compared to the previous year and expectations for the year ahead.
Key Highlights of the recent report
- Future Expectations Index (FEI) has climbed by 2.1 points to reach 125.2, marking its highest level since mid-2019, indicating heightened optimism among consumers for the year ahead.
- Current Situation Index (CSI) has surged by 3.4 points to reach 98.5, marking its highest level since mid-2019.
PYQ:[2018] As per the NSSO 70th Round “Situation Assessment Survey of Agricultural Households”, consider the following statements- 1. Rajasthan has the highest percentage share of agricultural households among its rural households. 2. Out of the total agricultural households in the country, a little over 60 percent belong to OBCs. 3. In Kerala, a little over 60 percent of agricultural households reported to have received maximum income from sources other than agricultural activities. Which of the statements given above is/are correct? (a) 2 and 3 only (b) 2 only (c) 1 and 3 only (d) 1, 2 and 3 |
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World Happiness Report, 2024: Key Highlights
Note4Students
From UPSC perspective, the following things are important :
Prelims level: World Happiness Report , India's ranking
Mains level: Not Much
What is the news-
- India was ranked 126th out of 143 nations in the World Happiness Report 2024, a global happiness index which was released, March 20 to mark the UN’s International Day of Happiness.
About the World Happiness Report
- The WHR is an annual publication of the UN Sustainable Development Solutions Network.
- It is released in partnership by Gallup, the Oxford Wellbeing Research Centre, the UN Sustainable Development Solutions Network (SDSN), and the World Happiness Report’s Editorial Board
- It measures three main well-being indicators: life evaluations, positive emotions, and negative emotions (described in the report as positive and negative affect).
- The report considers six key factors: social support, income, health, freedom, generosity, and the absence of corruption.
- It was adopted by the UN General Assembly based on a resolution tabled by Bhutan.
Key Highlights of the 2024 Report
- Top: For the seventh successive year, Finland topped the list of the happiest countries in the world.
- Runner-ups: The other countries in the top ten were Denmark, Iceland, Sweden, Israel, the Netherlands, Norway, Luxembourg, Switzerland and Australia.
- Bottom: Afghanistan was at the bottom of the list.
Indian Scenario
- Ranking: India maintains its position at 126th in the happiness index. Surprisingly, it is behind Pakistan, Libya, Iraq, Palestine and Niger.
- Neighbourhood: China was ranked 60th, Nepal at 93, Pakistan at 108, Myanmar at 118, Sri Lanka at 128 and Bangladesh at 129th spots.
- Influencing Factors: Marital status, social engagement, physical health, and satisfaction with living arrangements influence life satisfaction among older Indians.
- Gendered Happiness: Older Indian women tend to report higher life satisfaction despite facing more stressors and health challenges.
- Key Predictors: Factors like education level, social caste, social support, perceived discrimination, and self-rated health significantly impact life satisfaction among older Indians.
PYQ:
2018: “Rule of Law Index” is released by which of the following?
- Amnesty International
- International Court of Justice
- The Office of UN Commissioner for Human Rights
- World Justice Project
Practice MCQ:
With reference to the World Happiness Report, 2024, consider the following statements:
- The report is an annual publication of the UN Sustainable Development Solutions Network.
- It was adopted by the UN General Assembly based on a resolution tabled by Bhutan.
- India’s ranking has been consistently improved in this report in last two years.
How many of the given statements is/are correct?
- One
- Two
- Three
- None
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Top 1% Indians’ income share is higher now than under British-rule
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Income and Wealth Inequality in India report
Mains level: Income inequality in India and comparison with developed countries
Why in the news?
- In 2022, 22.6% of the national income went to the top 1% of Indians. Cut to 1951, their share in the income was only 11.5% and even lower in the 1980s just before India opened-up its economy at 6%.
Context: India’s top 1% income and wealth shares (22.6% and 40.1%) are at their highest historical levels in 2022-’23 and the country’s top 1% income share is among the very highest in the world as per World Inequality Lab.
Key findings from the ‘Income and Wealth Inequality in India’ report by the World Inequality Lab
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Income group-wise share in national income, and the adult population in each bracket as of 2022-23
- Distribution Across Income Percentiles: Approximately one crore adults were in the top 1%, ten crore in the top 10%, 36 crore in the middle 40%, and 46 crore were in the bottom 50% of the income pyramid.
- Concentration of Wealth at the Top: The top 0.001% of the income pyramid, comprising about 10,000 richest Indians, earned 2.1% of the national income, highlighting extreme wealth concentration.
- High Shares of National Income: The top 0.01% and top 0.1% of income earners earned disproportionately high shares of the national income, accounting for 4.3% and 9.6%, respectively. This reflects significant income inequality, with a small segment capturing a large portion of the country’s wealth.
The year wise share of national income for the top 10%, bottom 50% and that middle 40% of the population:
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Richest 1% of Indians’ share in the national income
- Pre-Independence (1930s): The top 1% of earners had a significant share of national income, surpassing the 20% mark.
- Post-Independence: After independence and the merger of princely states with Independent India, the share of the top 1% steadily declined, reaching close to 6% in the 1980s.
- Post-liberalization: Following liberalization reforms, the income share of the top 1% surged again, presently hovering around the 22.5% mark.
- Comparison with British Rule: The current income share of the top 1% is much higher than their share under British rule, highlighting a return to historical levels of income concentration.
The income share of India’s top 10% and top 1%, compared with select countries in 2022-23
- India’s Income Growth: India’s income levels are not growing as rapidly as other comparable economies.
- High Share of Top 1%: Despite slower overall income growth, the top 1% of earners in India have a disproportionately high share of national income.
- Comparison with Advanced Countries: In 2022-23, the income shares of India’s top 1% were higher than those recorded in advanced countries like the United States, China, France, the United Kingdom, and Brazil.
China and Vietnam’s average incomes grew at a much faster pace than India’s
- Economic Policies: China and Vietnam implemented economic policies that focused on export-oriented growth, attracting foreign investment, and promoting industrialization. These policies contributed to rapid economic expansion and increased average incomes in both countries.
- Liberalization and Reforms: Both China and Vietnam underwent significant economic liberalization and reforms, allowing for greater market integration, privatization of state-owned enterprises, and relaxation of trade barriers. These reforms stimulated economic growth and led to higher average incomes.
- Investment in Infrastructure: China and Vietnam invested heavily in infrastructure development, including transportation networks, energy systems, and telecommunications. This infrastructure investment facilitated economic development and improved productivity, leading to higher average incomes
Income inequality in India can be attributed to various factors:
- Historical Factors: Historical disparities in wealth distribution, exacerbated by colonial rule and feudal systems, have contributed to persistent income inequality.
- Economic Growth Patterns: India’s economic growth needs to be more inclusive, with benefits disproportionately accruing to certain segments of society, particularly urban and educated populations. This uneven growth exacerbates income inequality.
- Structural Issues: Structural factors such as unequal access to education, healthcare, and employment opportunities perpetuate income disparities. Marginalized groups such as Dalits, Adivasis, and women often face barriers to accessing quality education and formal employment, limiting their income-earning potential.
- Land Ownership and Agriculture: Unequal distribution of land ownership and disparities in agricultural productivity contribute to income inequality, particularly in rural areas where agriculture remains a primary source of livelihood.
- Labor Market Dynamics: Informal employment, low wages, and lack of job security in the informal sector contribute to income inequality. Additionally, skill mismatches and technological advancements may widen the income gap by favoring skilled workers over unskilled laborers.
- Lack of Financial Inclusion: Limited access to formal financial services and lack of asset ownership, such as land or property, among marginalized communities further perpetuate income inequality.
- Corruption and Cronyism: Corruption, crony capitalism, and unequal access to resources and opportunities exacerbate income inequality by favoring vested interests and hindering equitable wealth distribution.
Conclusion: India witnesses unprecedented income inequality with the top 1% accruing a higher share of national income than under British rule. Structural factors, uneven economic growth, and limited access to resources perpetuate income disparities, requiring comprehensive policy interventions for equitable growth.
Mains PYQ
Q. It is argued that the strategy of inclusive growth is intended to meet the objective of inclusiveness and sustainability together. Comment on this statement. ( UPSC IAS/2019)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India ranks 134th in global human development index, says UNDP report
Note4Students
From UPSC perspective, the following things are important :
Prelims level: HDI
Mains level: India's Status as Developing Country
Why in the news?
Recently, India’s progress in the global Human Development Index (HDI), as reported by the United Nations Development Programme (UNDP)
Context-
- India’s ranking on the United Nations Human Development Index (HDI) improved by one position in 2022 to 134 out of 193 countries compared to 135 out of 191 countries in 2021. Switzerland has been ranked number one.
The Human Development Index (HDI)-
About
The Human Development Index (HDI), initially introduced by the UNDP in 1990, is a statistical composite index. It measures a country’s average achievement across three fundamental dimensions:
- Health: This dimension is represented by life expectancy at birth. It reflects the overall health and well-being of the population and their access to healthcare services.
- Education: This dimension includes indicators such as expected years of schooling for children entering school and mean years of schooling for adults. It assesses the level of educational attainment and the availability of educational opportunities within a country.
- Standard of Living: This dimension is measured by Gross National Income (GNI) per capita, adjusted for purchasing power parity (PPP). It reflects the economic prosperity and living standards of the population, including income levels and access to basic necessities.
Background
- The Human Development Index (HDI) was developed by Pakistani economist Mahbub ul Haq and Indian economist Amartya Sen. It is used by the United Nations Development Programme (UNDP) to assess a country’s development as part of the Human Development Report.
- Alongside the Human Development Index (HDI), the United Nations Development Programme (UNDP) also presents the Human Development Report (HDR) which present-
- Multidimensional Poverty Index (MPI),
- Inequality-adjusted Human Development Index (IHDI),
- Gender Inequality Index(GII) since 2010 and
- Gender Development Index (GDI) since 2014
Key Points as per Report-
- India’s Rank on the HDI: India moved up one rank on the Human Development Index (HDI) from 135 in 2021 to 134 in 2022, with slight improvements in life expectancy and Gross National Income (GNI) per capita.
- Comparison with Neighbors: India ranks below its southern neighbour Sri Lanka (ranked 78) and China (ranked 75) in the High Human Development category, and below Bhutan (ranked 125) and Bangladesh (ranked 129) in the Medium Human Development category.
- Reducing inequalities: The report highlights a reverse trend in reducing inequalities between wealthy and poor nations. Despite interconnected global societies, collective action on climate change, digitalization, poverty, and inequality is lacking, leading to a widening human development gap.
- Challenges in Democracy: While nine in 10 people worldwide endorse democracy, over half express support for leaders who may undermine it. Political polarization and limited control over government decisions are prevalent, leading to protectionist or inward-turning policy approaches.
Action Plans as per report-
- Multilateral Cooperation: Strengthen international cooperation and collaboration among governments, NGOs, businesses, and other stakeholders to address global challenges collectively. This could involve fostering dialogue, partnerships, and agreements that promote shared goals and responsibilities.
- Policy Coordination: Enhance coordination and coherence in policymaking at national and international levels to ensure that policies address interconnected challenges comprehensively. This may involve integrating diverse perspectives, aligning strategies across sectors, and leveraging resources efficiently.
- Investment in Sustainable Development: Increase investments in sustainable development initiatives that prioritize environmental conservation, social equity, and economic prosperity. This could include funding for renewable energy, education, healthcare, infrastructure, and poverty alleviation programs.
- Empowering Communities: Empower local communities and grassroots organizations to participate in decision-making processes and contribute to problem-solving efforts. This could involve providing resources, capacity-building support, and platforms for civic engagement.
- Promotion of Dialogue and Understanding: Foster dialogue, empathy, and mutual understanding among diverse communities to mitigate polarization and build social cohesion. This could involve promoting education, cultural exchange programs, media literacy, and initiatives that promote tolerance and respect for human rights.
- Transparency and Accountability: Enhance transparency, accountability, and integrity in governance structures and institutions to rebuild trust and confidence among citizens. This could involve strengthening anti-corruption measures, promoting open government initiatives, and ensuring inclusive and participatory decision-making processes.
- Investment in Education and Awareness: Invest in education, public awareness campaigns, and media literacy programs to increase awareness of global challenges, their interconnections, and the importance of collective action. This could help foster a sense of shared responsibility and mobilize public support for collaborative solutions.
- Promotion of Inclusive Economic Growth: Promote inclusive economic growth that benefits all segments of society, reduces inequality, and creates opportunities for marginalized populations. This could involve implementing policies that support job creation, entrepreneurship, social protection, and access to essential services.
- Resilience Building: Build resilience to global challenges such as climate change, pandemics, and economic crises by investing in preparedness, adaptation, and mitigation strategies. This could involve strengthening healthcare systems, disaster risk reduction measures, and social safety nets.
- Advocacy and Leadership: Advocate for political leadership and commitment at all levels to prioritize collective action and address shared challenges effectively. This could involve mobilizing political will, engaging with policymakers, and holding leaders accountable for their actions.
Conclusion-
Strengthening multilateral cooperation, policy coordination, sustainable development investment, empowering communities, promoting dialogue, transparency, education, inclusive economic growth, resilience building, and advocating for leadership are vital for addressing global challenges collectively and fostering a sustainable future.
Mains PYQ-
Q- Despite the consistent experience of high growth, India still goes with the lowest indicators of human development. Examine the issues that make balanced and inclusive development elusive.(UPSC IAS/2019)
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Analysis of Centre’s Capital Expenditure and Fiscal Deficit
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Fiscal Deficit, Capital Expenditure
Mains level: NA
In the news
- Capital Expenditure Decline: In January, the Centre’s capital expenditure saw a significant decline of 40.5%, totaling ₹47,600 crore compared to ₹80,000 crore in the previous year.
- Fiscal Deficit Widening: By the end of January, the fiscal deficit reached 64% of the revised estimates for 2023-24. Despite challenges in expenditure, the government seems poised to meet the revised deficit target of 5.8% of GDP for the year.
What is Fiscal Deficit?
- Definition: Fiscal deficit is the excess of total disbursements from the Consolidated Fund of India over total receipts, excluding debt repayment, within a financial year.
- Formula: Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts).
Government Income
Government Expenditure
|
Reasons behind Fiscal Deficit
[1] Fall in Income
- Lower tax collection: Economic slowdown, tax evasion, and GST implementation issues.
- Impact of economic sectors shut during the pandemic: Closure of economic activities leading to decreased tax revenues.
- Government’s missed disinvestment targets: Failure to achieve disinvestment targets resulting in lower capital receipts.
[2] Rise in Expenditure
- Factors contributing to high inflation: High inflation rates increasing import and borrowing costs.
- Importance of social infrastructure investment: Emphasis on social infrastructure for inclusive growth and employment.
- External market volatilities affecting Indian expenditure: Dependency on imports exposing India to external market fluctuations.
- Unproductive expenditures like subsidies: Essential but unproductive expenditures adding to fiscal pressure.
[3] Rise in Borrowings
- Need for market borrowing for policy implementations: Borrowing for policy measures such as bank recapitalization, farm loan waivers, and UDAY.
Implications of Fiscal Deficit
- Vicious circle of borrowing and repayment: Continuous borrowing to repay loans leading to a debt trap.
- Inflation: Increased borrowing leading to higher interest rates and inflation.
- Reduced private sector borrowing: Government borrowing reducing borrowing opportunities for the private sector.
- Discouragement of private investment: Inflation and limited financing discouraging private investment.
- Risk of credit rating downgrade: High borrowing increasing the risk of credit rating downgrade.
- Limits Revenue Spending: Rising fiscal deficit affecting government allowances like dearness allowance and dearness relief.
- Foreign Dependence: Borrowing from foreign sources increasing dependence and exposure to external fiscal policies.
Measures for Control: FRBM Act, 2003
- The FRBM Act aims to instil fiscal discipline and ensure inter-generational equity in fiscal management, promoting long-term macro-economic stability.
- Targets:
- Limit fiscal deficit to 3% of GDP by March 31, 2009.
- Completely eliminate revenue deficit.
- Reduce liabilities to 50% of estimated GDP by 2011.
- Prohibit direct borrowing from RBI to monetize the deficit.
- Escape Clause: Section 4(2) of the Act allows the Centre to exceed annual fiscal deficit targets under specific circumstances, such as national security, calamity, agricultural collapse, or structural reforms.
- Review Committee: In May 2016, a committee under NK Singh was formed to review the FRBM Act. Recommendations included targeting a fiscal deficit of 3% of GDP until March 31, 2020, reducing it to 2.8% in 2020-21, and further to 2.5% by 2023.
- Current Targets:
- The latest provisions of the FRBM Act mandate limiting fiscal deficit to 3% of GDP by March 31, 2021.
- Central government debt should not exceed 40% of GDP by 2024-25, among other stipulations.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Key Insights: All India Household Consumption Expenditure Survey
Note4Students
From UPSC perspective, the following things are important :
Prelims level: All India Household Consumption Expenditure Survey (CES)
Mains level: Read the attached story
Why in the News?
- Recently, the government has disclosed the broad findings of the All India Household Consumption Expenditure Survey conducted between August 2022 and July 2023.
About All India Household Consumption Expenditure Survey (CES):
- The CES is a quinquennial (recurring every five years) survey conducted by the National Statistical Office (NSO).
- It is designed to collect information on the consumption spending patterns of households across the country, both urban and rural.
- The data gathered in this exercise reveals the average expenditure on goods (food and non-food) and services.
- It helps generate estimates of household Monthly Per Capita Consumer Expenditure (MPCE) as well as the distribution of households and persons over the MPCE classes.
Key Findings of the recent Survey:
- Rise in Monthly Per Capita Consumption Expenditure:
- Urban: Witnessed a 33.5% increase to ₹3,510.
- Rural: Marked a 40.42% surge to ₹2,008 since 2011-12.
- Shift in Spending Pattern:
- Food Expenditure: Decreased from 52.9% to 46.4% in rural households and from 42.6% to 39.2% in urban households since 2011-12.
- Implications: Potential impact on retail inflation calculations due to reduced weightage of food prices.
- Inclusion of Social Welfare Benefits:
- Separate calculation for items received through schemes like PM Garib Kalyan Ann Yojana.
- Items Included: Computers, mobile phones, bicycles, and clothing.
- Adjusted Monthly Per Capita Expenditure:
- Rural: ₹2,054;
- Urban: ₹3,544 (excluding free education and healthcare sops).
- Socio-Economic Disparities:
- Bottom 5%: Rural – ₹1,373; Urban – ₹2,001.
- Top 5%: Rural – ₹10,501; Urban – ₹20,824.
- State-wise analysis:
- Sikkim: Highest MPCE – Rural: ₹7,731; Urban: ₹12,105.
- Chhattisgarh: Lowest MPCE – Rural: ₹2,466; Urban: ₹4,483.
Major Shifts Includes:
- Broad-based Growth:
- Rural-Urban Dynamics: B.V.R. Subrahmanyam, CEO of Niti Aayog, highlights that India’s growth story is “broad-based,” with rural incomes and expenditures outpacing those in urban areas.
- Narrowing Divide: The urban-rural consumption gap has decreased from 91% in 2004-05 to 71% in 2022-23, indicating diminishing inequality.
- Shifts in Consumption Patterns:
- Food Expenditure: Rural households’ spending on food has fallen below 50% of their total expenditure for the first time. Lower spending on staples like pulses and cereals is accompanied by increased expenditure on consumer durables and services.
- Income Growth: Rising expenditures on items such as TVs, fridges, and mobile phones suggest improved incomes and evolving lifestyles.
- Changing Poverty Metrics:
- Poverty Estimates: Based on MPCE averages, poverty levels are projected to be below 5%, according to Mr. Subrahmanyam. Informal estimates indicate a decline in poverty, with destitution nearly eradicated due to various welfare schemes.
- Inclusive Growth: Government initiatives such as Ayushman Bharat and free education have contributed to lifting millions out of poverty, reflecting a multi-dimensional approach to poverty alleviation.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Changing the growth paradigm
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gross Domestic Product
Mains level: critique of the prevailing GDP-centric approach to economic development
Central Idea:
The central idea of the article is that traditional measures of economic growth, like GDP, are inadequate indicators of a nation’s well-being and development. Instead, the focus should shift towards inclusive and sustainable growth that prioritizes the welfare of citizens, particularly in countries like India where economic progress has not translated into improved living standards for all.
Key Highlights:
- Critique of GDP-centric approach: The article highlights the limitations of relying solely on GDP growth as a measure of economic health, pointing out that it doesn’t necessarily lead to increased income or well-being for citizens.
- Inequality and inequitable growth: Despite impressive GDP growth, India remains one of the most unequal countries in the world, indicating that the benefits of growth are not evenly distributed among its citizens.
- Need for a new paradigm: The article argues for a shift towards inclusive and environmentally sustainable development models, especially in the face of global challenges like climate change.
- Dependency on fossil fuels: The reliance on fossil fuels for essential materials like steel, concrete, plastics, and food production is highlighted, along with the challenges of transitioning away from them.
- Importance of local solutions: Emphasizing the significance of community-driven, local solutions, the article suggests that India should leverage its unique strengths rather than blindly following Western development models.
Key Challenges:
- Overcoming entrenched economic paradigms: Shifting away from GDP-centric models towards more inclusive and sustainable development approaches requires challenging existing economic frameworks and ideologies.
- Addressing inequality: Tackling the deep-rooted inequalities in India’s economy presents a significant challenge, especially given the historical focus on GDP growth.
- Transitioning from fossil fuels: Moving away from fossil fuel dependency poses technological, economic, and social challenges, particularly in sectors like agriculture and transportation.
- Balancing urbanization and rural development: Reconciling the push for urbanization with the need for rural development and sustainable agriculture presents complex policy dilemmas.
- Overcoming resistance to change: Convincing policymakers and society at large to embrace alternative development paradigms may face resistance from entrenched interests and ideologies.
Main Terms:
- GDP: Gross Domestic Product, a measure of the total value of goods and services produced within a country’s borders.
- Inclusive growth: Economic growth that benefits all segments of society, particularly the marginalized and vulnerable.
- Sustainable development: Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
- Fossil fuels: Non-renewable energy sources such as coal, oil, and natural gas, formed from the remains of prehistoric plants and animals.
- Urbanization: The process of population concentration in urban areas, often accompanied by industrialization and economic development.
Important Phrases:
- “Increase the size of the pie before its redistribution”: Reflects the emphasis on GDP growth over equitable distribution of wealth.
- “One path for all”: Criticizes the uniform approach to development that privileges industrialization and urbanization over other forms of progress.
- “Gandhian solution”: Refers to community-driven, localized approaches to development advocated by Mahatma Gandhi.
- “Rural Bharat”: Signifies the rural heartland of India, highlighting the importance of rural communities in the country’s development.
Quotes:
- “More GDP does not improve the well-being of citizens if it does not put more income in their pockets.”
- “India must find a new paradigm of progress, for itself and for the world, for more inclusive and environmentally sustainable growth.”
- “The time has come to go back to old solutions to go to the future.”
Useful Statements:
- “Critics argue that GDP growth alone does not necessarily lead to improved living standards for citizens, particularly in countries like India where inequality persists.”
- “Transitioning away from fossil fuels presents significant challenges, but it is essential for addressing climate change and ensuring long-term sustainability.”
- “Local, community-driven solutions have the potential to address global challenges like climate change and inequitable economic growth.”
Examples and References:
- The article cites India’s experience of impressive GDP growth alongside persistent inequality as evidence of the limitations of traditional development models.
- Reference is made to the work of Vaclav Smil on the role of fossil fuels in modern economies, providing a scientific basis for understanding the challenges of transitioning to renewable energy sources.
Facts and Data:
- India’s GDP grew at 7.2% per year during both the United Progressive Alliance and National Democratic Alliance governments, yet structural conditions leading to inequitable growth remained unchanged.
- Sixty-four per cent of Indian citizens live in rural areas, highlighting the importance of rural development in India’s economic and social progress.
Critical Analysis:
The article provides a compelling critique of the prevailing GDP-centric approach to economic development, highlighting its failure to address inequality and environmental concerns. By advocating for inclusive and sustainable growth models, the article offers a nuanced perspective on the challenges facing countries like India in the 21st century. However, it could benefit from further exploration of specific policy recommendations and case studies demonstrating successful alternative development strategies.
Way Forward:
- Embrace inclusive and sustainable development models that prioritize the well-being of all citizens.
- Invest in renewable energy sources and sustainable agriculture to reduce dependency on fossil fuels and mitigate climate change.
- Empower local communities to drive development initiatives tailored to their unique needs and challenges.
- Reform economic policies to prioritize equitable distribution of wealth and opportunities.
- Foster international cooperation to address global challenges like climate change and inequality.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Dravidian Model of Governance: 10 Achievements of Tamil Nadu
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Dravidian Model of Governance
Mains level: Fiscal Federalism
Introduction
- Tamil Nadu CM outlined the achievements of the ‘Dravidian Model’ government of the DMK, presenting them as blueprints for other states to follow.
Dravidian Model of Governance
- Contribution to Indian Economy: Tamil Nadu’s contribution of nine percent to the Indian economy showcases the state’s robust economic growth.
- GDP Ranking: Securing the second position in contributing to the Gross Domestic Product (GDP) of the nation, with a growth rate of 8.19 percent, surpassing the national average of 7.24 percent.
- Inflation Control: The state has effectively controlled inflation, with rates falling to 5.97 percent compared to the national figure of 6.65 percent.
- Export Preparedness: Topping the list of the Export Preparedness Index in the country, with a particular focus on leading in the export of electronic goods.
- Industrial Investment Climate: Creating a favorable climate for industrial investment, elevating Tamil Nadu to the third position in the country from its previous rank of 14.
- Education: Achieving the second position in the field of education and securing the first place in innovative industries.
- Empowerment Initiatives: Prioritizing the welfare of women, young people, persons with disabilities, and marginalized communities, leading to significant improvements in their quality of life.
- Scheme Implementations: Extensive distribution of assistance to people amounting to ₹6,569.75 crore, including initiatives like the Kalaignar Magalir Urimai Thittam, free bus travel for women, and healthcare schemes benefiting millions of citizens.
Discussion: Fiscal Federalism in India
Fiscal Federalism: Understanding the Context
- Overview of Fiscal Federalism: Fiscal federalism delineates the financial powers and responsibilities among different levels of government.
- Provisions Related to Centre-State Financial Relations: The Indian Constitution elaborates on tax distribution and grants-in-aid, supplemented by the role of the Finance Commission.
- Part XII of the Constitution: Details provisions regarding the distribution of taxes, non-tax revenues, borrowing powers, and grants-in-aid.
- Article 268 to 293: Specifically address financial relations between the Centre and States.
- Finance Commission (Article 280): Constitutional body responsible for recommending tax revenue distribution and fiscal discipline.
- Challenges with Fiscal Transfers: Despite recommendations to increase devolution, there has been a reduction in financial transfers to states, posing challenges to fiscal autonomy.
Challenges and Concerns
- Centralization of Fiscal Powers: The Union government’s increasing control over fiscal powers challenges state autonomy.
- Erosion of State Tax Autonomy: Implementation of VAT and GST has diminished states’ ability to set tax rates independently.
- Constraints on State Expenditure Flexibility: Conditional grants limit states’ discretion in allocating funds according to local priorities.
- Uniform Fiscal Targets Neglecting State Variations: Uniform fiscal targets fail to address the diverse needs of individual states.
- Impact of GST Implementation: The GST implementation has shifted tax burdens and reconfigured fiscal dynamics among states.
Steps towards Better Devolution of Finances
- Re-examining Tax-sharing Principles: Finance Commissions should review tax-sharing principles to align with changing fiscal dynamics.
- Redesigning Statutory Sharing of Indirect Taxes: Vertical and horizontal devolution mechanisms need re-evaluation to ensure equity and efficiency.
- Calculating and Allocating Collection Costs: Methods for calculating and allocating collection costs should be devised to enhance tax efficiency.
- Redesigning Grant Mechanisms: Existing grant mechanisms should be restructured to address evolving fiscal challenges.
- New Institutional Structures: Establishing formal relationships between the GST Council and Finance Commission can enhance fiscal governance.
Conclusion
- Tamil Nadu’s governance model, exemplified by Chief Minister Stalin’s comprehensive overview, underscores the state’s commitment to economic progress, social welfare, and inclusive development.
- Despite challenges in India’s fiscal federalism, Tamil Nadu’s achievements serve as a beacon of hope, demonstrating the potential for states to thrive under effective governance models.
- Addressing fiscal imbalances and enhancing cooperative federalism are imperative for ensuring equitable distribution of financial resources and fostering sustainable development across the nation.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Tax-to-GDP ratio to hit all-time high of 11.7% of GDP in FY25
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Tax-to-GDP Ratio
Mains level: NA
Introduction
- India’s tax landscape is anticipated to witness significant growth in the coming fiscal year, with the tax-to-GDP ratio expected to reach a historic high of 11.7%.
- Revenue Secretary Sanjay Malhotra highlights the role of direct taxes in driving this uptick and emphasizes the government’s commitment to streamlining the tax regime for enhanced efficiency and reduced disputes.
Why ‘Tax-to-GDP’ Ratio matters?
- The tax-to-GDP ratio measures a nation’s tax revenue relative to the size of its economy.
- This ratio is used with other metrics to determine how well a nation’s government directs its economic resources via taxation.
- Developed nations typically have higher tax-to-GDP ratios than developing nations.
- Higher tax revenues mean a country can spend more on improving infrastructure, health, and education—keys to the long-term prospects for a country’s economy and people.
- According to the World Bank, tax revenues above 15% of a country’s gross domestic product (GDP) are a key ingredient for economic growth and poverty reduction.
Forecasted Rise in Tax-to-GDP Ratio
- Expected Surge: India’s tax-to-GDP ratio is projected to hit 11.7% in 2024-25, showcasing a steady increase from 11.6% in the preceding year and 11.2% in 2022-23.
- Dominance of Direct Taxes: The surge in the tax ratio is primarily attributed to the growth of direct taxes, which are deemed more equitable.
What led to this growth?
[A] Direct Tax Collection
- Optimistic Outlook: Revenue Secretary anticipates a rise in the adoption of the new tax regime, characterized by simplified tax structures and a higher tax-free income threshold.
- Growth in Personal Income Tax: Personal income tax collections have witnessed a substantial 28% growth, with a projected moderation to 20%-22% by the fiscal year-end.
[B] Rationalizing GST Rates
- Ongoing Review: A Group of Ministers (GoM) appointed by the GST Council is reviewing the rate structure, aiming to rationalize GST rates on various items.
- Quarterly Meetings: The GST Council is expected to convene regularly to address rate rationalization, although no fixed date has been announced yet.
[C] Projected Revenue Growth
- Modest Projections: Despite a buoyant revenue growth of 1.4% this year, projections for the following fiscal year aim for a 1.1% buoyancy, aligning with an anticipated nominal GDP growth of 10.5%.
- Corporate Tax Dynamics: The deadline for availing the reduced corporate tax rate ends in March 2023, with a significant proportion of companies already benefitting from it.
- Enforcement Measures: While the Department of Revenue focuses on tax administration, the Enforcement Directorate intervenes in cases related to money laundering, ensuring comprehensive enforcement mechanisms.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Wages of inequality: The income-growth gap
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Debt-to-GDP ratio
Mains level: Balancing fiscal consolidation with the need for increased government expenditure to address developmental challenges
Central Idea:
The article analyzes the recent interim Union budget in India, focusing on its macroeconomic policy objectives and the challenges facing the Indian economy. It discusses the government’s efforts to reduce the debt-to-GDP ratio and stimulate GDP growth, particularly by prioritizing capital expenditure over revenue expenditure. However, it questions the effectiveness of these objectives in addressing India’s developmental challenges, especially regarding employment generation and structural transformation.
Key Highlights:
- The budget presents a fiscally conservative approach with minimal increases in total expenditure, emphasizing capital expenditure over revenue expenditure.
- The government aims to reduce the debt-to-GDP ratio, primarily by limiting expenditure growth rates and increasing capital expenditure.
- The article raises concerns about the adequacy of these objectives in addressing India’s developmental challenges, particularly the need for employment generation and structural transformation.
- It highlights the stagnation in regular wages and the dominance of self-employment, indicating a worsening income distribution and weak improvements in welfare.
Key Challenges:
- Balancing fiscal consolidation with the need for increased government expenditure to address developmental challenges.
- Promoting structural transformation to shift workers from self-employment to modern sectors.
- Achieving inclusive growth that benefits all sections of society, especially marginalized groups.
- Enhancing the effectiveness of government spending to stimulate economic growth and employment generation.
Key Terms:
- Debt-to-GDP ratio: The ratio of a country’s total debt to its gross domestic product, indicating its ability to repay debt.
- Capital expenditure: Spending on acquiring or maintaining physical assets such as infrastructure, machinery, and buildings.
- Revenue expenditure: Day-to-day spending on government operations and services, including salaries, pensions, and subsidies.
- Primary deficit: The fiscal deficit excluding interest payments on government debt.
- Structural transformation: The process of shifting resources, including labor, from traditional sectors like agriculture to modern sectors such as manufacturing and services.
Key Phrases:
- Fiscally conservative approach
- Debt stability
- Structural change
- Employment generation
- Inclusive growth
Key Quotes:
- “The budget reflects a fiscally conservative approach with minimal increases in total expenditure.”
- “The government aims to reduce the debt-to-GDP ratio, primarily by limiting expenditure growth rates and increasing capital expenditure.”
- “The dominance of self-employment indicates a worsening income distribution and weak improvements in welfare.”
Key Examples and References:
- Comparison of expenditure growth rates and GDP growth rates to illustrate the government’s strategy in reducing the debt-to-GDP ratio.
- Analysis of employment data to highlight the challenges of structural transformation and income distribution.
Key Facts and Data:
- Total budgeted expenditure, with minimal increase over the previous year.
- Debt-to-GDP ratio currently at a certain level, targeted to be reduced to another level.
- Stagnation in regular wages and dominance of self-employment in the workforce.
- GDP growth rates and expenditure growth rates used to analyze the effectiveness of fiscal policies.
Critical Analysis:
The article provides a critical assessment of the interim Union budget’s macroeconomic policy objectives, highlighting potential shortcomings in addressing India’s developmental challenges. It questions the effectiveness of targeting a specific debt-to-GDP ratio and emphasizes the need for broader strategies to promote inclusive growth and structural transformation.
Way Forward:
- Reevaluate fiscal policies to ensure a balance between debt reduction and addressing developmental challenges.
- Prioritize investments in infrastructure and human capital to stimulate economic growth and employment generation.
- Implement targeted interventions to support marginalized groups and promote equitable income distribution.
- Enhance monitoring and evaluation mechanisms to assess the impact of government spending on welfare and economic development.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A rising tide lifts all boats
Central Idea:
India has experienced a significant economic transformation, becoming the world’s fastest-growing economy. The Interim Budget reflects this progress, emphasizing preventive healthcare, innovation, and medical value travel. The private sector’s rising role is crucial for economic development and improving the overall quality of life.
Key Highlights:
- India’s rapid economic growth, outpacing the global average.
- Successful space program and adept management of renewable and non-renewable energy.
- Interim Budget aligns with the aspirations of a new India, emphasizing opportunities.
- Focus on preventive healthcare, particularly the promotion of HPV vaccination.
- Maternal and child health prioritized to enhance women’s participation in the workforce.
- Commitment to innovation with a ₹1 lakh crore corpus for research and technology.
- Medical value travel’s rising prominence, making India a global healthcare destination.
- Private sector’s significant role in economic growth and shaping the future.
Key Challenges:
- Ensuring sustained economic growth amidst global uncertainties.
- Scaling up preventive healthcare initiatives to cover various diseases.
- Balancing budget allocations to address healthcare needs adequately.
- Overcoming infrastructure challenges for medical value travel.
- Ensuring inclusive growth and managing disparities in economic development.
Key Terms:
- HPV Vaccination: Human Papillomavirus vaccination to prevent cervical cancer.
- Medical Value Travel: Tourism driven by healthcare services.
- Innovation Revolution: Emphasizing technology and research for development.
- Interim Budget: A temporary budget presented in the middle of a fiscal year.
Key Phrases:
- “Buoyancy of metrics and spirit.”
- “Innovation as a key pillar of development.”
- “Medical value travel transforming the landscape.”
- “Private sector rising beyond expectations.”
Key Quotes:
- “No country can afford it if its citizens fall ill.”
- “Innovation has the potential to create a significant impact at scale.”
- “India will truly be limitless if we continue to work together.”
Anecdotes:
- Reference to Aragonda in Andhra Pradesh, a village where HPV vaccination is being promoted.
- Mention of ‘Heal in India’ transforming the healthcare landscape.
Key Statements:
- “India’s space program has won the admiration of the world.”
- “Preventive health is crucial for the overall well-being of the nation.”
- “The private sector plays a meaningful role not just in the economy but in how we live our lives.”
Key Examples and References:
- India’s success in achieving a 70-year life expectancy with less than 2% budgetary allocation for health.
- The commitment of ₹1 lakh crore for innovation and technology in the Interim Budget.
Key Facts:
- India’s economic growth rate surpassing the global average.
- Increase in life expectancy from 53 to 70 years in the last four decades.
Key Data:
- ₹1 lakh crore corpus for research and technology in the Interim Budget.
- India’s growth rate compared to the global average.
Critical Analysis:
- The article provides an optimistic view of India’s economic growth and achievements.
- Emphasis on preventive healthcare and innovation aligns with global trends.
- Challenges include addressing healthcare needs comprehensively and ensuring inclusive growth.
Way Forward:
- Sustain economic growth through continued emphasis on innovation and technology.
- Strengthen preventive healthcare initiatives for comprehensive disease prevention.
- Address infrastructure challenges for medical value travel to enhance India’s global healthcare appeal.
- Ensure inclusive growth, managing economic disparities effectively.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Can India become a $7 Trillion Economy by 2030?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: $7 Trillion Economy
Mains level: Read the attached story
Introduction
- The Indian government’s recent review of the economy has set an ambitious target of achieving a $7 trillion economy by 2030.
- This article analyzes the feasibility of this goal and explores the factors that contribute to India’s economic outlook.
$7 Trillion Economy: Key Findings
- Robust Growth: The review expects India to sustain a growth rate of 7% or higher in the fiscal years 2023-24 and beyond.
- Economic Strengths: The government highlights significant strengths, including substantial infrastructure investments, a healthy financial sector, strong household finances, comfortable forex reserves, controlled inflation, and a decreasing fiscal deficit.
- $7 Trillion Vision: Based on these factors, the review envisions India reaching a $7 trillion economy by 2030.
India’s Economic Journey
- Historic Growth: India took 60 years to reach a $1 trillion economy (2007-08), achieved $2 trillion in just seven years (2014-15), and surpassed $3 trillion by 2021-22.
- Current Status: India is now the world’s fifth-largest economy, with a GDP estimated to reach $3.7 trillion by the end of 2023-24.
Obstacles to Rapid Growth
- Slower Growth Phase: After a period of rapid growth, India’s economy began to decelerate post-2014, exacerbated by events such as demonetization in 2016 and the pandemic-induced contraction.
- Ambitious Targets: India had set ambitious targets of becoming a $5 trillion economy by 2024-25 and a $10 trillion economy by 2029-30, but achieving them will require overcoming challenges.
- Growth Rate Hurdle: To reach a $7 trillion economy by 2030, India must achieve a compounded annual growth rate (CAGR) of 11.9% from 2023-24 to 2029-30, compared to the expected CAGR of 6.7% from 2013-14 to 2023-24.
Challenges Ahead
- Global Economic Trends: Developed economies are facing declining growth due to inflation and environmental concerns, which could affect India’s export prospects.
- Protectionism: Increasing protectionism in the global trade landscape poses challenges for India’s export-oriented growth.
- Geo-Political Uncertainties: Geo-political tensions can fuel inflation and hinder economic growth, presenting additional hurdles.
Conclusion
- While India’s economic potential remains substantial, achieving a $7 trillion economy by 2030 is a formidable challenge.
- The nation must navigate global economic shifts, tackle protectionist policies, and address geo-political uncertainties to realize this ambitious vision.
- Success will require sustained efforts and innovative strategies to drive economic growth and resilience.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A rising tide lifts all boats
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Human Papillomavirus vaccination
Mains level: India's economic growth and achievements
Central Idea:
India has experienced a significant economic transformation, becoming the world’s fastest-growing economy. The Interim Budget reflects this progress, emphasizing preventive healthcare, innovation, and medical value travel. The private sector’s rising role is crucial for economic development and improving the overall quality of life.
Key Highlights:
- India’s rapid economic growth, outpacing the global average.
- Successful space program and adept management of renewable and non-renewable energy.
- Interim Budget aligns with the aspirations of a new India, emphasizing opportunities.
- Focus on preventive healthcare, particularly the promotion of HPV vaccination.
- Maternal and child health prioritized to enhance women’s participation in the workforce.
- Commitment to innovation with a ₹1 lakh crore corpus for research and technology.
- Medical value travel’s rising prominence, making India a global healthcare destination.
- Private sector’s significant role in economic growth and shaping the future.
Key Challenges:
- Ensuring sustained economic growth amidst global uncertainties.
- Scaling up preventive healthcare initiatives to cover various diseases.
- Balancing budget allocations to address healthcare needs adequately.
- Overcoming infrastructure challenges for medical value travel.
- Ensuring inclusive growth and managing disparities in economic development.
Key Terms:
- HPV Vaccination: Human Papillomavirus vaccination to prevent cervical cancer.
- Medical Value Travel: Tourism driven by healthcare services.
- Innovation Revolution: Emphasizing technology and research for development.
- Interim Budget: A temporary budget presented in the middle of a fiscal year.
Key Phrases:
- “Buoyancy of metrics and spirit.”
- “Innovation as a key pillar of development.”
- “Medical value travel transforming the landscape.”
- “Private sector rising beyond expectations.”
Key Quotes:
- “No country can afford it if its citizens fall ill.”
- “Innovation has the potential to create a significant impact at scale.”
- “India will truly be limitless if we continue to work together.”
Anecdotes:
- Reference to Aragonda in Andhra Pradesh, a village where HPV vaccination is being promoted.
- Mention of ‘Heal in India’ transforming the healthcare landscape.
Key Statements:
- “India’s space program has won the admiration of the world.”
- “Preventive health is crucial for the overall well-being of the nation.”
- “The private sector plays a meaningful role not just in the economy but in how we live our lives.”
Key Examples and References:
- India’s success in achieving a 70-year life expectancy with less than 2% budgetary allocation for health.
- The commitment of ₹1 lakh crore for innovation and technology in the Interim Budget.
Key Facts:
- India’s economic growth rate surpassing the global average.
- Increase in life expectancy from 53 to 70 years in the last four decades.
Key Data:
- ₹1 lakh crore corpus for research and technology in the Interim Budget.
- India’s growth rate compared to the global average.
Critical Analysis:
- The article provides an optimistic view of India’s economic growth and achievements.
- Emphasis on preventive healthcare and innovation aligns with global trends.
- Challenges include addressing healthcare needs comprehensively and ensuring inclusive growth.
Way Forward:
- Sustain economic growth through continued emphasis on innovation and technology.
- Strengthen preventive healthcare initiatives for comprehensive disease prevention.
- Address infrastructure challenges for medical value travel to enhance India’s global healthcare appeal.
- Ensure inclusive growth, managing economic disparities effectively.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A political, feel-good statement
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Disinvestment
Mains level: The Finance Minister's Budget speech
Central Idea:
The Finance Minister’s Budget speech focuses on claiming credit for a decade of economic growth, moderate inflation, and social welfare. However, the analysis reveals a mix of positives and concerns, emphasizing the need for addressing challenges like employment, wage growth, and dependence on China for industrial inputs.
Key Highlights:
- The Budget attributes post-COVID growth revival to public infrastructure investment, proposing an 11% rise in capital expenditure.
- Public infrastructure investments, especially in highways and communications, have contributed to GDP growth in the post-pandemic years.
- The Budget extends a 50-year interest-free loan scheme for States and introduces a similar scheme for private sector innovation and R&D with a ₹1 lakh crore corpus.
- The Budget applauds the scheme to set up rooftop solar in 1 crore households.
- The claim of doubled FDI inflow is challenged, highlighting that much of it has gone into services rather than substantial manufacturing.
Key Challenges:
- Despite positive growth indicators, the employment situation remains grim, with stagnant regular salaried employment and a rise in unpaid family labor.
- Real wages in agriculture have declined, indicating that the benefits of economic growth have not been equitably distributed.
- There is a concern about premature de-industrialization, with a rise in the agriculture workforce and a decline in manufacturing employment share.
- Growing dependence on China for industrial inputs poses a strategic risk, despite initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat Abhiyaan.’
Key Terms:
- Crowding-out: The displacement of private investment due to high levels of public investment.
- Disinvestment: The sale or liquidation of government assets in the public sector.
- Geopolitics: The influence of geographical factors on international relations and politics.
Key Phrases:
- “All is well” – The political message emphasizing optimism about the future.
- “Premature de-industrialization” – A concern that the economy is losing its industrial base too soon.
Key Quotes:
- “The Budget claimed that FDI inflow during 2014-23 doubled to $596 billion compared to the previous 10 years. This is misleading.”
- “The political message in the Budget was ‘all is well’ and the coming days will be better.”
Key Statements:
- “The long term growth of a poor, over-populated economy lies in the structural transformation of its workforce away from rural/agriculture to modern industry and services.”
- “The Budget is an account of the achievements of the last decade of this regime, with a promise to press ahead with the same.”
Key Examples and References:
- The rise in public infrastructure investments contributing to GDP growth.
- The widening trade deficit with China despite ‘Make in India’ initiatives.
Key Facts and Data:
- The FDI inflow ratio to GDP peaked in 2007-08 and has not regained that level.
- India’s industrial output and investment growth rate has decelerated over the last 5-7 years.
Critical Analysis:
The Budget seems complacent about aggregate growth but overlooks concerns such as employment, wage growth, and dependence on China. The focus on claiming credit for past achievements raises questions about addressing existing challenges.
Way Forward:
- Prioritize inclusive growth to ensure benefits reach a larger section of the population.
- Address employment challenges by promoting structural transformation from rural to urban sectors.
- Strategically reduce dependence on China for critical industrial inputs.
- Enhance the effectiveness of schemes like interest-free loans for innovation and R&D to boost long-term economic growth.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
K-Shaped Recovery Debate: A Closer Look at the SBI Research
Note4Students
From UPSC perspective, the following things are important :
Prelims level: K-Shaped Recovery
Mains level: Read the attached story
Introduction
- The Economic Research Department of the State Bank of India (SBI) recently released a study titled “Debunking K-shaped recovery,” addressing the ongoing debate about the post-pandemic recovery in India and its alleged K-shaped nature.
- This debate has significant implications for the country’s widening inequality.
What is K-Shaped Recovery?
- A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
- This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
- A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
- This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”
SBI Challenging Conventional Wisdom
- Controversial Message: The report’s key message suggests a potential “conspiracy” against India’s growth, raising eyebrows about the credibility and intent of the economic evaluation.
- Message Summary: It questions the validity of the K-shaped recovery concept, calling it “flawed” and driven by certain vested interests who are uncomfortable with India’s ascendancy on the global stage.
Re-evaluating Economic Well-Being
- Parameters under Scrutiny: The report challenges traditional parameters used to assess economic well-being.
- New Considerations: It highlights patterns in income, savings, consumption, expenditure, and policy measures designed to empower the masses through technology-driven solutions, questioning the reliance on outdated indicators like 2-wheeler sales or land holdings.
Shaping a Narrative
- Polarized Environment: In a time of heightened polarization and India’s emergence as a major economy, the report’s language, including phrases like “fanning interests” and “renaissance of the new global south,” appears to align with current political narratives.
- Narrative Shift: The report introduces a new narrative, emphasizing the reduction of inequality in India.
Claims on Inequality
- Inequality Reduction: The report asserts that income inequality has decreased, citing the Gini coefficient of taxable income, which fell from 0.472 to 0.402 between FY14 and FY22.
- Limited Sample: However, the research relies on “taxable income” from a small fraction (around 5%) of the population, primarily those paying income tax, making it less representative of the informal workforce and the broader economy.
- Food Orders as Proxy: The study also uses Zomato food orders, primarily from semi-urban areas, to challenge claims of economic distress.
Representativeness Concerns
- Focus on Formal Sector: The SBI research primarily centers on the formal sector, which represents a privileged minority within the Indian economy.
- Inequality Debate: This focus mirrors the crux of the inequality debate, where those excluded from economic growth continue to lag behind, while those already well-off experience significant growth.
A Different Perspective
- Contrasting Reports: In 2022, another report, “The State of Inequality in India,” commissioned by the Economic Advisory Council to the Prime Minister, highlighted rising inequality in the country.
- Unimaginable Disparities: It noted that an individual earning a monthly wage of Rs 25,000 was among the top 10% of earners, underscoring the stark income disparities.
Conclusion
- While the SBI research provides a unique perspective on India’s economic recovery and inequality, its focus on a limited sample from the formal sector raises concerns about its representativeness.
- The broader discourse on inequality remains critical, emphasizing the need for a more comprehensive understanding of the diverse economic landscape in India.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Gini Coefficient: A Deeper Dive into the SBI Income Inequality Report
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gini Coefficient
Mains level: Not Much
Introduction
- A recent report by the State Bank of India (SBI) has illuminated a significant decline in income inequality in India over the past decade.
- This report, which analyzes taxpayer data, indicates a substantial reduction in the Gini coefficient, a widely accepted measure of income inequality.
What is the Gini Coefficient?
- The Gini Coefficient, often referred to as the Gini Index or Gini Ratio, is a measure of income or wealth inequality within a specific population, region, or country.
- It assigns a numerical value between 0 and 1.
- 0 represents perfect income or wealth equality (everyone has the same income or wealth), and 1 signifies perfect inequality (one person or household has all the income or wealth, and everyone else has none).
- To calculate the Gini Coefficient, income or wealth data is typically arranged in ascending order, from the poorest to the richest individuals or households.
- A Lorenz curve is plotted, which is a graphical representation of the actual income or wealth distribution. It compares the cumulative income or wealth of the population to the cumulative share of the population.
- The Gini Coefficient is calculated by measuring the area between the Lorenz curve and the line of perfect equality. This area is then divided by the total area under the line of perfect equality.
Gini Coefficient and Income Inequality
- Gini Coefficient: The Gini coefficient measures income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).
- Reported Decline: The Gini coefficient has dropped from 0.472 in 2014-15 to 0.402 in 2022-23, marking a nearly 15% reduction in income inequality.
Examining Income Inequality across Employment Types
- Taxpayer Data Limitation: The SBI report focuses on taxpayer data, potentially excluding a significant portion of income earners.
- Significant Majority below Tax Threshold: Approximately 80% of income earners earn less than ₹2.5 lakh per annum, the minimum taxable amount.
A Closer Look at the Gini Coefficient
- Preliminary Analysis: Data from the 2017-18 and 2022-23 Periodic Labour Force Surveys (PLFS) is analyzed to evaluate changes in income inequality among various employment categories.
- Gini Coefficient Trends: While the Gini coefficient decreases slightly from 0.4297 to 0.4197, the changes are minimal.
- Disaggregated Gini: The Gini coefficient falls for regular wage and casual wage workers but rises for the self-employed, though the shifts are modest.
Uncovering Income Polarization
- Beyond the Gini Coefficient: Income polarization becomes evident when examining the top 10% compared to the bottom 30% of income earners.
- Divergence in Income Growth: The top deciles witnesses’ faster income growth (around 7.23%) compared to the bottom 20% and even the third decile. In contrast, the bottom decile experiences the slowest growth (approximately 1.67%).
- The 90/10 Ratio: The ratio of incomes between the 90th percentile (top 10%) and the 10th percentile (bottom 10%) rises from 6.7 in 2017-18 to 6.9 in 2022-23, indicating increased income disparity.
- Variation among Employment Types: The 90/10 ratio falls for wage earners but significantly increases for the self-employed, particularly among top earners.
Analyzing the Changes
- Preliminary Assessment: While this analysis offers initial insights, further research is needed to comprehensively understand these trends.
- Impact of Women’s Participation: The rise in women’s labor force participation, primarily in low-paid self-employed roles, may explain the increased polarization among income earners.
- Tax Data Limitations: Taxpayer data might not capture the pace of inequality reduction among the broader population.
- Complex Inequality Dynamics: Reduction in the Gini coefficient conceals income divergence, and future growth may either mitigate or exacerbate this disparity.
Conclusion
- The SBI report’s revelation of declining income inequality in India is a positive development.
- However, a deeper examination of income distribution across employment types and deciles unveils a more complex picture.
- Income polarization, particularly among the self-employed, challenges the overarching narrative of reduced inequality.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
States are spending. The economy is waiting
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Capital Expenditure
Mains level: States should continue prioritizing capital expenditure for sustained economic growth
Central Idea:
State governments in India have navigated fiscal challenges caused by the Covid-19 pandemic, with a focus on fiscal consolidation. Despite borrowing flexibility granted by the Union government, states kept their fiscal deficits under control in 2021-22 and 2022-23. However, there has been a notable shift in spending priorities in 2023-24, with an emphasis on capital expenditure, reflecting positive economic growth prospects.
Key Highlights:
- States, accounting for over three-fifths of total government spending, traditionally focused on revenue expenditure but increased capital expenditure significantly in 2023-24.
- The ratio of capital outlay to total expenditure reached an eight-year high at 14.1%, indicating a growth-enhancing strategy.
- A 45.7% increase in capital outlay, fueled by timely disbursements from the Union government and buoyant state revenues, contributed to this shift.
- The Union government’s proactive release of tax devolution and approval of capital assistance schemes played a crucial role.
- Despite the healthy growth in state revenues, a 29.2% decline in grants from the Union government led to a reliance on market borrowings.
- Record-high gross market borrowings during the first nine months of the year were primarily directed towards capital expenditure.
Key Challenges:
- A shortfall in grants from the Union government led to tepid overall revenue growth, necessitating increased market borrowings by the states.
- Achieving the aggregate fiscal deficit target of 3.1% of GDP may be challenging due to the reliance on market borrowings and a potential slippage.
Key Terms and Phrases:
- Fiscal Deficit: The difference between government expenditure and revenue.
- Capital Expenditure: Money spent on creating or acquiring assets with long-term benefits.
- Revenue Expenditure: Regular spending on operational costs like salaries, pensions, and subsidies.
- Tax Devolution: Allocation of tax revenues from the Union government to states.
- Market Borrowings: Funds raised by states through the issuance of bonds in the financial market.
Key Quotes and Statements:
- “States’ capital expenditure is being fueled by an interplay of two forces…”
- “The quality of their expenditure — ratio of capital outlay to total expenditure — stands at 14.1%, an eight-year high…”
- “The Union government has been proactive in releasing the advance instalments of tax devolution…”
- “Despite this healthy growth in states own revenues, their overall revenue receipts have grown at an average pace of 5.5%…”
Key Examples and References:
- The advance release of monthly tax devolution and timely disbursements of funds for the special scheme on capital assistance.
- Approval of capital expenditure worth and released under the special assistance scheme till November 2023.
- Record-high gross market borrowings during the first nine months of the year.
Key Facts and Data:
- Aggregate fiscal deficit target for states: 3.1% of GDP.
- Ratio of capital outlay to total expenditure: 14.1%, an eight-year high.
- Gross market borrowings by states during the first nine months of the year.
Critical Analysis:
- The shift towards capital expenditure indicates a positive economic outlook and potential for growth.
- The reliance on market borrowings due to a decline in grants poses a fiscal challenge.
- Achieving the fiscal deficit target might be challenging, with a potential slippage.
Way Forward:
- States should continue prioritizing capital expenditure for sustained economic growth.
- Improving efficiency in tax administration and formalizing the economy can enhance revenue.
- Collaboration between Union and state governments for stable fiscal management is crucial.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
First Advance Estimates of India’s GDP out
Note4Students
From UPSC perspective, the following things are important :
Prelims level: First Advance Estimates of GDP
Mains level: Read the attached story
Introduction
- Growth Projection: India’s GDP is projected to grow by 7.3% in the financial year 2023-24, as per the First Advance Estimates (FAEs) released by the government.
- Comparison with Previous Year: This rate is slightly higher than the 7.2% growth recorded in 2022-23.
What is Gross Domestic Product (GDP)?
- Definition: GDP quantifies the total monetary value of all goods and services produced within a country’s borders in a specific time frame, typically annually.
- Difference from GNP: GDP is distinct from Gross National Product (GNP), which measures the value of goods and services produced by a country’s nationals, regardless of the production location.
First Advance Estimates of GDP
- Introduction and Timing: First introduced in the financial year 2016-17, the First Advance Estimates (FAE) are released at the beginning of January.
- Nature of Estimates: They represent the initial official projections of GDP growth for the financial year, published before the year concludes.
- Data Exclusion: Notably, the FAE do not include formal GDP data for the third quarter (October to December), which is released with the Second Advance Estimates (SAE) at the end of February.
Significance of FAE
- Election Year Context: With Lok Sabha elections due in April-May, the FAEs gain additional significance, although a full-fledged Union Budget will not be presented this year.
- Budgetary Relevance: The FAE are crucial for the Union Finance Ministry’s budgetary planning for the next financial year, as the SAE are published after the budget is finalized.
- Focus on Nominal GDP: For budget-making, the emphasis is on nominal GDP (the observed variable), including both its absolute level and growth rate.
- Real vs. Nominal GDP: Real GDP, adjusted for inflation, is a derived metric, whereas all budget calculations commence with nominal GDP.
GDP Growth Analysis
- Real GDP Growth: The real GDP (adjusted for inflation) is expected to reach nearly Rs 172 lakh crore by March 2024.
- Comparison with Modi’s Tenure: The GDP has grown from Rs 98 lakh crore at the start of Prime Minister Modi’s first term to almost Rs 140 lakh crore at the beginning of his second term.
- Growth Rate Trends: The estimated 7.3% growth for 2023-24 is higher than most forecasts, indicating a strong economic recovery. However, there’s a noticeable deceleration in growth during Modi’s second term compared to the first.
Factors Driving India’s Growth
- Private Final Consumption Expenditure (PFCE): Accounting for almost 60% of GDP, PFCE is expected to grow by 4.4% in the current year.
- Gross Fixed Capital Formation (GFCF): Investment spending, the second-largest growth engine, has grown by 9.3% this year.
- Government Final Consumption Expenditure (GFCE): Government spending growth has been slower, at 3.9% in the current year.
- Net Exports: The negative growth in net exports indicates a higher import-than-export rate, which has increased by 144% this year.
Concerns and Challenges
- Private Consumption: Muted private consumption, especially in rural India, remains a concern.
- Investment Spending: A significant portion of investment spending is still driven by the government, with private consumption remaining subdued.
- Government Spending: Government spending growth has been relatively low in the second term of Modi’s government.
- Net Exports: The negative growth in net exports, though a mild improvement over the two terms, still indicates an imbalance in trade.
Conclusion
- Economic Recovery: The 7.3% growth rate suggests a robust economic recovery post-pandemic.
- Balanced Growth: The need for balanced growth across all sectors, especially in boosting private consumption and investment, is critical for sustainable development.
- Future Prospects: The ongoing economic policies and reforms will play a crucial role in shaping India’s growth trajectory in the coming years.
https://indianexpress.com/article/explained/explained-economics/gdp-data-advance-estimates-9099092/
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The dispute on India’s debt burden
Note4Students
From UPSC perspective, the following things are important :
Prelims level: FRBMA
Mains level: adhering to fiscal correction paths
Central Idea:
The article discusses concerns raised by the International Monetary Fund (IMF) regarding India’s long-term debt sustainability and the reclassification of its exchange rate regime. It emphasizes the need for prudent debt management, considering potential adverse circumstances, and explores challenges India faces in credit ratings and fiscal responsibility.
Key Highlights:
- IMF expresses concerns about India’s long-term debt sustainability, projecting government debt to be 100% of GDP by 2028 under adverse circumstances.
- The reclassification of India’s exchange rate regime by the IMF raises questions about the country’s currency management.
- Challenges in managing public debt, maintaining credit ratings, and potential fiscal slippage in the face of increased subsidies and expenditure.
Key Challenges:
- Long-term risks associated with India’s considerable investment needs for climate change mitigation and resilience to natural disasters, as highlighted by the IMF.
- India faces challenges in enhancing credit ratings despite being the fastest-growing major economy, attributed to weak fiscal performance and burdensome debt stock.
- The possibility of fiscal slippage in FY24 due to increased expenditure on employment guarantee schemes and subsidies, posing a challenge to fiscal correction.
Key Terms:
- Article IV consultation report
- Debt sustainability
- Exchange rate regime
- Fiscal Responsibility and Budget Management Act (FRBMA)
- Credit ratings
Key Phrases:
- “Long-term risks are high due to considerable investment needs for climate change mitigation and resilience.”
- “Challenges in enhancing credit ratings despite being the fastest-growing major economy.”
- “Fiscal slippage attributed to higher expenditure on employment guarantee schemes and subsidies.”
Key Quotes:
- “IMF’s worst-case scenario projections for India need to be viewed in the context of the persistent debt conundrum in developing nations.”
- “India’s stronger fundamentals are undermined by the government’s weak fiscal performance and burdensome debt stock, according to rating agencies.”
Key Statements:
- “The Finance Ministry refutes IMF projections as a worst-case scenario and not fait accompli.”
- “India’s public debt-to-GDP ratio has barely increased, but it remains higher than levels specified by the FRBMA.”
Key Examples and References:
- The IMF’s projections on India’s government debt and exchange rate regime from the annual Article IV consultation report.
- India’s credit rating remaining unchanged at ‘BBB-‘ since 2006, indicating the lowest investment grade.
- India Ratings and Research’s report on the possibility of fiscal slippage in FY24.
Key Facts:
- Global public debt reached a record USD 92 trillion in 2022, with developing countries, including India, contributing almost 30%.
- Despite being the fastest-growing major economy, India’s sovereign investment ratings have remained unchanged since August 2006.
- India’s public debt-to-GDP ratio is higher than levels specified by the Fiscal Responsibility and Budget Management Act.
Critical Analysis:
The article critically examines the IMF’s concerns and India’s challenges in debt management, credit ratings, and fiscal responsibility. It discusses the potential impact of increased subsidies on fiscal slippage and the need for short-term fiscal correction.
Way Forward:
- Prudent debt management to address long-term sustainability concerns raised by the IMF.
- Enhance credit ratings by improving fiscal performance and addressing burdensome debt stock.
- Navigate short-term challenges, such as fiscal slippage, by adhering to fiscal correction paths and avoiding worst-case scenarios.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A new economics for inclusive growth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: na
Mains level: inclusive growth
Central idea
The central idea urges a reevaluation of India’s economic strategy, emphasizing the necessity to shift from an exclusive focus on high-end skills to inclusive growth. It underscores the mismatch between skills, jobs, and incomes and advocates prioritizing the small-scale manufacturing sector to foster sustainable and locally enriched economic development. The article suggests seizing the opportunity to attract producers and meet unmet needs for India’s growth.
Key Highlights:
- The book “Breaking the Mould: Reimagining India’s Economic Future” suggests a shift from manufacturing to exporting high-end services, challenging traditional economic strategies.
- The mismatch between skills, jobs, and incomes is identified as a major obstacle to India’s growth, reflecting in social and political demands for better wages and security.
- The growth pattern focusing on high-end skills has not generated sufficient decent jobs for the majority of India’s population.
Key Challenges:
- The Achilles heel of India’s economy is insufficient jobs and incomes, evident in demands from various sectors for fair wages and social security.
- A critical mismatch between skills, jobs, and incomes poses a significant challenge to India’s growth and economic well-being.
- The reliance on high-end skills has not translated into enough decent jobs for the majority, hindering inclusive growth.
Key Terms and Phrases:
- Leapfrogging manufacturing in favor of exporting high-end services.
- Mismatch between skills, jobs, and incomes.
- “India was Shining” era and its economic implications.
- Inclusive and sustainable economic growth.
- Small-scale and informal manufacturing sector.
- The importance of richness of economic activity within local webs.
Key Quotes:
- “India cannot afford to neglect its small-scale and informal manufacturing sector any longer.”
- “Investing in education and skills for ‘high end’ manufacturing and services will not benefit the masses if they cannot be employed.”
- “There are no shortcuts to inclusive economic growth.”
Key Statements:
- The book’s recommendation challenges India’s traditional approach to economic development.
- The focus on high-end skills has not translated into inclusive growth or sufficient employment opportunities.
- Policymakers must reimagine the path for India’s growth and prioritize inclusive economic growth.
Key Examples and References:
- Reference to the book “Breaking the Mould: Reimagining India’s Economic Future” by Raghuram Rajan and Rohit Lamba.
- Examples of social and political demands for better wages and security in various sectors.
- Mention of the mismatch between India’s skills development and job creation.
Key Facts and Data:
- 60% of Indians are classified as “economically weaker sections” entitled to job reservations.
- India invested in world-class institutions of science and engineering 70 years ago.
- The growth pattern focusing on high-end skills has not generated sufficient decent jobs for India’s masses.
Critical Analysis:
- The article critiques the existing economic growth pattern for its failure to generate inclusive and sustainable development.
- Emphasis on the importance of inclusive economic growth and challenges posed by the mismatch between skills and jobs.
Way Forward:
- Policymakers need to reimagine India’s growth path with a focus on inclusive economic growth.
- There are no shortcuts, and investments in the small-scale and informal manufacturing sector are crucial for sustainable development.
- India should leverage its unmet needs to attract producers and make more for India in India, thereby growing jobs and incomes.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Century of Change in Indian Villages: Insights from Longitudinal Studies
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Longitudinal Studies
Mains level: Read the attached story
Central Idea
- Historical Surveys: Starting in 1916-17, Gilbert Slater initiated a series of surveys in five Tamil Nadu villages, marking the beginning of a century-long study of rural India.
- Unique Village Studies: Palakurichi and Palanpur stand out as unique Indian villages extensively studied over a century and decades, respectively.
Methodology and Evolution of Village Studies
- Initial Approach: Slater’s students, natives of the surveyed villages, used questionnaires to understand the socioeconomic conditions of rural households.
- Subsequent Surveys: These villages were revisited for studies in subsequent years, including 1936-37, 1964, 1983, 2004, and 2019, providing a longitudinal perspective.
Significance of Longitudinal Studies
- Contrast with Cross-Sectional Surveys: Unlike the National Sample Survey Office’s cross-sectional surveys, village studies are longitudinal, focusing on in-depth analysis over time.
- Objective: The aim is to trace changes in the specific village over time, providing micro-level insights that complement macro-level data.
Key Findings from Recent Surveys
- Economic Shifts: The 2019 survey of Palakurichi revealed a decline in agriculture’s dominance, with only 43.3% of the workforce engaged in farming, down from 85% in 1983.
- Diversification of Workforce: Similar trends were observed in Palanpur, with a significant shift from agriculture to non-farm jobs over the decades.
Changing Social Dynamics
- Diminished Dominance of Traditional Landholders: In both Palakurichi and Palanpur, traditional upper caste landholders’ power has declined, with middle castes and Dalits gaining more land ownership.
- Economic and Social Mobility: These changes reflect broader social and economic mobility within these rural communities.
Policy Implications and Challenges
- Land Leasing Practices: As some communities move away from agriculture, land leasing becomes common, often based on oral agreements to avoid legal complications.
- Need for Policy Reforms: There’s a need for policies that balance the interests of landowners and tenant farmers, encouraging investment in land improvement.
- Sustaining Agricultural Productivity: With rural India becoming less dependent on agriculture, ensuring continued or improved farming practices on existing agricultural lands is crucial.
Conclusion
- Insights from Micro-Level Studies: Longitudinal village studies offer valuable insights into the patterns of change in rural India, informing policy and understanding of rural dynamics.
- Balancing Agricultural and Non-Agricultural Growth: These studies highlight the need for balanced development policies that support both agricultural sustainability and non-farm employment opportunities.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
RBI reports reduced risk of Stagflation in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Stagflation
Mains level: Read the attached story
Central Idea
- The Reserve Bank of India (RBI) officials have reported a decreased risk of stagflation in India, now estimated at 1%, down from 3% in August
What is Stagflation?
| Details | |
| Definition | An economic condition characterized by stagnant growth, high unemployment, and high inflation. |
| Indian context | Fluctuating growth rates; periods of slowdown have raised concerns about stagnation. |
| Inflation Dynamics in India | Historically high at times, often driven by rising food and fuel prices. |
| Supply Shocks | Vulnerable to global oil price fluctuations and agricultural supply shocks (e.g., monsoon variability). |
| Past Episodes | Elevated stagflation risks were noted during the Asian Crisis, Global Financial Crisis, taper tantrum, and COVID-19 pandemic. |
Methodology for Assessing Stagflation
- Two-Pronged Approach: RBI assessment utilized two methods: analyzing periods of low economic growth with high inflation, and employing ‘at-risk’ frameworks, namely “Inflation at Risk” (IaR) and “Growth at Risk” (GaR), using quantile regression.
- Determinants of Stagflation: Key factors identified include supply-side shocks, commodity price spikes, tighter financial conditions, and currency depreciation.
Key Risk Factors for India
- Financial Conditions and Rupee Depreciation: Financial conditions and the depreciation of the rupee against the U.S. dollar are significant risk factors for stagflation in India.
- Empirical Evidence: The integrated IaR and GaR frameworks corroborate these findings, although the impact of crude oil prices on domestic fuel prices has limited predictive power for stagflation.
- Global Concerns: Post-pandemic, higher commodity prices and the U.S. dollar’s appreciation raised global stagflation concerns.
Back2Basics: Economic Conditions: Definitions and Concepts
| Explanation | |
| Depression | A sustained, long-term downturn in economic activity.
Characterized by significant decline in GDP, high unemployment, low spending, and reduced industrial output. |
| Deflation | A general fall in the price level of goods and services over some time, indicating negative inflation rates. |
| Disinflation | A decrease in the rate of inflation, i.e., a slowdown in the rate at which prices increase.
Example: Inflation rate falling from 8% to 6%. |
| Reflation | Economic measures, such as increasing money supply or reducing taxes, aimed at stimulating the economy to reach its long-term growth trend after a downturn. |
| Skewflation | A situation where the price of some items rises significantly while others remain stable.
Example: Seasonal rise in the price of onions while other prices are stable. |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s jobs crisis, the macroeconomic reasons
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Kaldor-Verdoorn
Mains level: addressing the skills gap and improving the quality of the workforce
![Burning Issue] Jobless growth in India - Civilsdaily](https://d18x2uyjeekruj.cloudfront.net/wp-content/uploads/2018/10/word-image-13.png)
Central idea
The article discusses the challenge of “jobless growth” in India, where the employment growth rate remains unresponsive despite increased GDP and value-added growth rates. It emphasizes the unique characteristics of India’s jobless growth regime, involving a high Kaldor-Verdoorn coefficient, and calls for a distinct policy focus on employment in addition to the traditional emphasis on GDP growth.
Key Highlights:
- The article discusses the distinction between wage employment and self-employment, emphasizing the challenge of inadequate labor demand, particularly for regular wage work in the formal sector.
- India’s historical employment scenario includes open unemployment, high levels of informal employment, and a stagnant growth rate of salaried workers in the non-agricultural sector.
- The lack of employment opportunities in the formal sector is attributed to factors such as output growth, labor productivity, and the introduction of labor-saving technologies.
Key Challenges:
- India faces the challenge of “jobless growth,” where the employment growth rate remains unresponsive despite a rise in GDP growth and value-added growth rates.
- The article highlights the connection between labor productivity growth rate and output growth rate, contributing to the phenomenon of jobless growth in India.
- The distinct form of jobless growth in India, characterized by a higher than average Kaldor-Verdoorn coefficient, poses a qualitative challenge for macroeconomic policies.
Key Terms:
- Kaldor-Verdoorn coefficient: A measure reflecting the responsiveness of labor productivity growth rate to output growth rate.
- Dual economy structure: An economic structure characterized by the coexistence of a modern and traditional sector, often seen in developing countries.
- Mahalanobis strategy: A development strategy that prioritizes heavy industrialization to overcome the constraints on output and employment.
Key Phrases:
- “Jobs generally refer to relatively better-paid regular wage or salaried employment.”
- “The lack of opportunities is reflected by a more or less stagnant employment growth rate of salaried workers in the non-agricultural sector.”
- “The positive effect of output growth rate on employment fails to counteract the adverse effect of labor-saving technologies in the Indian jobless growth regime.”
Key Quotes for value addition:
- “The Indian economy has historically been characterized by the presence of both open unemployment as well as high levels of informal employment.”
- “Jobless growth in India makes the macroeconomic policy challenge qualitatively different from other countries.”
Key Examples and References:
- Reference to the Mahalanobis strategy focusing on heavy industrialization as a policy for overcoming constraints on output and employment.
- Mention of the higher than average Kaldor-Verdoorn coefficient in India’s non-agricultural sector as a distinctive feature of jobless growth.
Key Facts:
- India’s employment growth rate in the formal non-agricultural sector has remained unresponsive despite significant increases in GDP and value-added growth rates.
- Jobless growth in India is associated with a high Kaldor-Verdoorn coefficient, indicating a strong connection between labor productivity growth rate and output growth rate.
Critical Analysis:
- The article critically examines the traditional presumption that increasing the output growth rate would be a sufficient condition for increasing the employment growth rate in the formal sector.
- It highlights the need for a separate policy focus on employment, including both demand and supply side components, in addition to the focus on GDP growth.
Way Forward:
- Advocate for policies addressing the skills gap and improving the quality of the workforce to make automation less attractive for firms.
- Propose direct public job creation as a demand-side component of employment policies.
- Suggest reorienting the macroeconomic framework to finance employment-related expenditures, including increasing the direct tax to GDP ratio and improving compliance.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Call for Reform in Sovereign Credit Rating Process
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Sovereign Credit Ratings
Mains level: Not Much
Central Idea
- India’s Chief Economic Adviser, V Anantha Nageswaran, emphasizes the need for reform in the sovereign credit rating process.
- The aim is to accurately reflect the default risk of developing economies and reduce their funding costs.
What are Sovereign Credit Ratings?
- A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
- It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
- The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.
- S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest possible investment grade, but with a stable outlook.
India’s Pursuit of a Credit Rating Upgrade
- Current Rating: India is at the lowest possible investment grade but is seeking an upgrade due to improved economic metrics post-pandemic.
- Government Engagement: Continuous efforts are being made to engage with global credit rating agencies for an improved rating.
Challenges in the Current Rating Methodology
- Opacity and Impact: CEA points out the opaqueness in rating methodologies and the difficulty in quantifying the impact of qualitative factors.
- Bandwagon Effects and Biases: The significant presence of qualitative factors leads to cognitive biases and concerns about the credibility of ratings.
India’s Engagement with Rating Agencies
- Meetings with Top Agencies: Finance ministry officials have met with representatives from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings.
- Current Ratings: While S&P and Fitch rate India at BBB, Moody’s rates it at Baa3 with a stable outlook.
Parameters and Issues in Sovereign Rating
- Typical Parameters: Agencies consider factors like growth rate, inflation, government debt, and political stability.
- Qualitative Component: Over half the ratings are determined by qualitative factors, often non-transparent and perception-based.
- Dominance in Ratings: Institutional Quality, often measured by World Bank’s Worldwide Governance Indicators (WGIs), is a significant determinant for developing economies.
- Issues with WGIs: These metrics are non-transparent, perception-based, and may not represent a sovereign’s willingness to pay.
CEA’s Recommendations
- Need for Transparency: Sovereigns are expected to be transparent; similarly, rating agencies should make their processes clear and avoid untenable judgments.
- Potential Benefits: Enhanced transparency could lead to more reliance on hard data and possible credit rating upgrades for many sovereigns.
- Access to Private Capital: Improved ratings can help developing countries access private capital crucial for addressing global challenges like climate change.
- India’s Export Targets: With initiatives like production-linked incentives and Make in India, India aims for a $2 trillion export target by 2030.
Conclusion
- Advocacy for Change: Nageswaran’s comments highlight the need for a more equitable and transparent sovereign credit rating process.
- Broader Implications: Such reforms could not only benefit developing economies like India by reducing funding costs but also contribute to a more accurate and fair global financial system.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Private: India’s Economic Outlook for 2024: Challenges and Opportunities
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not Much
Mains level: Read the attached story
Central Idea
- The past three years have been marked by extraordinary events, including a pandemic, wars, and economic upheavals, impacting global and Indian economies.
- The year 2024 is crucial with elections in 40 countries, including India’s Lok Sabha elections, which are expected to influence economic policies.
Indian Economy: Prospects amidst Challenges
- Pre-Election Stimulus Impact: Anticipated government spending before the elections could temporarily boost consumption, influencing the debate on economic models and potentially reinvigorating growth.
- Persistent Concerns: Issues like food inflation, rural sector sluggishness, and leveraging the demographic dividend in the technology era remain challenging.
Economic Forecasts and Government Expenditure
- Growth Predictions: Goldman Sachs forecasts a growth spurt in early 2024, driven by pre-election spending, with private investment expected to pick up later in the year.
- Capex and Rural Growth: Economists warn of a potential slowdown in government capital expenditure as elections approach, which could impact rural growth and consumption.
India’s Economic Performance and Key Indicators
- GDP Trends: The FY24 Q2 GDP data showed positive trends, with construction growth, double-digit expansion in mining and electricity, and a surge in the investment rate to 30%.
- Market Confidence: The confidence of domestic investors in listed companies and new listings highlights a robust market, though limited to formal sector firms.
Structural Economic Issues and Unemployment
- Narrow Growth Base: The Indian economy faces challenges like a small consuming class, low bank credit-to-GDP ratio, and a lack of skilled workers.
- Unemployment Rates: The Centre for Monitoring Indian Economy (CMIE) reported a high unemployment rate of 9.2% in November 2023, reflecting persistent job market issues.
Policy and Reform Outlook
- Pending Reforms: Key areas for post-election reforms include labor, land, agriculture, and a shift in electricity policy towards thermal/nuclear energy.
- CEA’s Views on Growth: Chief Economic Adviser V Anantha Nageswaran emphasizes the role of private capital formation in driving economic growth and sustainable consumption.
Global Economic Context and India’s Position
- Resilience Amidst Volatility: Despite global challenges, India’s economy shows resilience with strong fundamentals and healthy corporate and bank balance sheets.
- External Factors: Concerns include volatile food inflation, high global sugar prices, and the impact of US fiscal policies on emerging markets like India.
- FPIs and Economic Stability: Foreign Portfolio Investors (FPIs) have shown renewed interest in India, indicating confidence in the country’s economic stability.
Conclusion
- Strategic Economic Management: India faces the challenge of balancing immediate economic needs with long-term structural reforms.
- Navigating Uncertainties: The country must navigate global economic shifts and domestic policy changes while preparing for potential unforeseen events.
- Opportunities Ahead: Despite uncertainties, India’s strong economic fundamentals provide a basis for optimism and growth in the coming year.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India Tops Global Remittance Inflows in 2023: World Bank Report
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Remittance inflows data
Mains level: Read the attached story
Central Idea
- In 2023, India witnessed the highest remittance inflows globally, amounting to USD 125 billion.
- The surge was influenced by various factors, including India’s currency agreement with the UAE.
World Bank’s Analysis on Remittance Growth
- Report Findings: The World Bank’s report indicates a slowdown in remittance growth in India to 12.4% in 2023, down from 24.4% in 2022.
- Increased Share in South Asia: India’s share in South Asian remittances is expected to rise to 66% in 2023 from 63% in 2022.
Global Remittance Scenario
- Other Leading Countries: Following India, the top remittance-receiving countries are Mexico (USD 67 billion), China (USD 50 billion), the Philippines (USD 40 billion), and Egypt (USD 24 billion).
- Significance in GDP: In economies like Tajikistan, Tonga, Samoa, Lebanon, and Nicaragua, remittances form a substantial part of the GDP, highlighting their critical economic role.
Contributing Factors for India
- Key Drivers: Declining inflation and robust labor markets in high-income countries contributed to increased remittances.
- Major Sources: Significant remittance flows came from the US, the UK, and Singapore, as well as from the GCC, particularly the UAE.
- UAE’s Role: The UAE is the second-largest source of remittances to India, accounting for 18% of the total.
India-UAE Currency Agreement Impact
- February 2023 Agreement: The agreement to promote local currency use in cross-border transactions and interlink payment systems has boosted remittances.
- Dirhams and Rupees Usage: The use of dirhams and rupees in transactions is expected to channel more remittances through formal channels.
Global Remittance Trends
- Growth in Low- and Middle-Income Countries: Remittances to these countries grew by an estimated 3.8% in 2023.
- Future Concerns: There is a risk of real income decline for migrants in 2024 due to global inflation and low growth prospects.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Hindutva Rate of Growth: Debates and Comparisons in the Indian Economy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hindutva Rate of Growth
Mains level: Read the attached story
Central Idea
- A popular orator and a Parliamentarian, introduced the term “Hindutva rate of GDP growth” during the discussion.
- This term is distinct from the ‘Hindu rate of growth’, a phrase coined by economist Raj Krishna in 1982 to describe India’s modest growth rate of 3.5%.
Understanding the ‘Hindutva Rate of Growth’
- Argument: The MP attributed India’s recent economic growth, including a 6.3% GDP growth rate, to the policies of Prime Minister Narendra Modi, aligning spending with ‘Dharma (the order)’.
- Historical and Religious Context: He linked economic transformations to key events in India’s history, including the Ram Temple movement and the Supreme Court’s Babri Masjid judgment.
Comparative Analysis of Growth Rates
- Per Capita Income Disparity: Despite high GDP growth rates, India’s per capita income remains low compared to developed countries.
- Post-Covid Growth Calculation: 7.8% ‘Hindutva rate of growth’ refers to the average GDP growth post-Covid, excluding the year of the pandemic.
- Comparison with ‘Hindu Rate of Growth’: Including the Covid year in calculations, the growth rate closely resembles the criticized ‘Hindu rate of growth’.
Economic Growth during Different Governments
- Growth under Modi vs. UPA: The average GDP growth rate under PM Modi is 5.8%, compared to 6.8% under the Congress-led UPA.
- Impact of Global Crises: Both governments faced major global crises, with the UPA dealing with the Global Financial Crisis and the Modi government facing the Covid-19 pandemic.
- Historical Growth Trends: Comparing growth rates across different eras, including PM Vajpayee’s and PM Narasimha Rao’s tenures, provides a broader perspective on India’s economic trajectory.
Conclusion
- Similarity to Historical Growth Rates: The ‘Hindutva rate of growth’ closely aligns with historical growth rates, challenging its portrayal as a significant departure from the past.
- Electoral Implications: The discussion raises questions about the role of economic performance in India’s electoral politics, especially in the context of the BJP’s focus on ‘Hindutva’.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Calibrating a strategy for India’s future growth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Key Facts and Data, Incremental Capital-Output Ratio (ICOR)
Mains level: India's growth prospects amidst global challenges
Central idea
The passage discusses India’s growth prospects amidst global challenges, emphasizing the need for a recalibrated growth strategy due to deglobalization trends. It highlights the shift from an export-led approach, focusing on domestic drivers and the importance of sustaining domestic savings and investment rates for a 7% plus real growth.
Key Highlights:
- Growth Projections: India’s growth for 2023-24 projected by RBI at 7%, IMF and World Bank at 6.3%. Strong performance in the first two quarters supports the likelihood of meeting the RBI’s projection.
- Deglobalization Impact: Geopolitical conflicts and deglobalization trends pose challenges, affecting supply chains, international settlements, and global demand for exports.
- Export-led Growth Shift: India’s export-led growth strategy faces challenges as the share of GDP from exports fluctuates, prompting a need for a recalibrated growth strategy.
Key Challenges:
- Dependence on Global Exports: Challenges arise from reduced global demand, disruptions in supply chains, and geopolitical conflicts impacting international settlements.
- Domestic Savings Concerns: A decline in household sector savings poses a risk to India’s growth potential, potentially affecting resources available for government and corporate investment.
Key Terms and Phrases:
- Deglobalization: Movement away from global interconnectedness.
- Incremental Capital-Output Ratio (ICOR): The amount of capital required for an additional unit of output, influencing achievable growth.
- Periodic Labour Force Survey (PLFS): Source of data on employment trends and ratios.
Key Quotes:
- “Many ongoing geopolitical conflicts… have created a climate of sanctions.”
- “India will have to rely relatively more on domestic growth drivers.”
- “Facilitating absorption of productivity-enhancing technologies… would add to overall growth.”
Key Examples and References:
- Export Growth: Fluctuations in export share from 2003-04 to 2022-23 highlight the challenges of sustaining an export-led growth strategy.
- Labour Force Trends: PLFS data indicates an increase in the worker population ratio but emphasizes the need for high non-agricultural growth to absorb released labor from agriculture.
Key Facts and Data:
- Nominal Saving Rate: Estimated at 29% in 2022-23, highlighting the critical role of domestic savings.
- Nominal Investment Rate: Around 29% in 2022-23, with a need to increase to 35% for sustained growth.
Critical Analysis:
- Dependency on Global Conditions: The passage stresses the impact of changing global conditions on India’s growth strategy, urging a shift towards domestic drivers.
- Savings and Investment Link: Emphasizes the importance of domestic savings in supporting a 7% plus real growth, highlighting concerns about a fall in household sector savings.
Way Forward:
- Enhanced Employment Strategies: Allocation of resources for training and skilling India’s growing working-age population is crucial.
- Climate-Friendly Growth: Mitigate adverse impacts on potential growth by emphasizing service sector growth, known for being relatively climate-friendly.
- Fiscal Responsibility: Adherence to fiscal responsibility targets is critical for sustaining growth, reducing the fiscal deficit, and managing debt-to-GDP ratios.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The GDP surprise: India on the up and up
Note4Students
From UPSC perspective, the following things are important :
Prelims level: PLI Scheme
Mains level: sustained economic recovery
Central idea
The Indian growth story remains a beacon of hope. The economy is unlikely to slow down in line with other major economies of the world as the government continues to undertake reforms.
Key Highlights:
- Economic Growth: The Indian economy expands by 7.6% in Q2, challenging doubts on post-pandemic macroeconomic resilience.
- Manufacturing Surge: The manufacturing sector grows robustly at 13.9%, indicating positive outcomes from policy initiatives and credit stabilization.
- Corporate Health: Corporate books show impressive bottom-line growth, reflecting broad-based economic recovery.
- Capex Intentions: Historic capex intentions with new investment announcements reaching Rs 37 lakh crore in 2022-23, signifying increased private sector participation.
- Agricultural Transformation: Agriculture grows by 1.2%, with a shift towards allied activities reducing dependence on traditional farm income.
- Banking Support: Banks increasingly finance the entire agri value chain, with agri loans growing by 15.4% in 2022-23.
- Services Sector Moderation: Services sector growth moderates to 5.8%, influenced by low growth in trade, hotels, transport, and communication.
- Consumption Patterns: Private consumption decelerates to 3.1%, possibly impacted by higher inflation, expected to pick up in the third quarter.
- Government Investments: Government consumption and investments register healthy growth, with gross fixed capital formation increasing by 11%.
Key Challenges:
- Global Growth Risk: Risk of softer global growth, especially in the US and Euro region, may impact India’s exports and economic momentum.
- Consumer Sentiment Woes: Consumer sentiments in major economies worsen amid growing uncertainty, potentially affecting global trade.
Key Terms and Phrases:
- Macro-economic Resilience: India’s ability to withstand and recover from economic shocks.
- PLI Scheme: Production-Linked Incentive scheme aimed at boosting manufacturing in specific sectors.
- Corporate Balance Sheets: Financial health and performance of businesses.
- Capex Intentions: Plans and commitments for capital expenditures.
- Allied Activities in Agriculture: Diversification into areas like dairy and fisheries within the agriculture sector.
- Gross Fixed Capital Formation: Investment in fixed assets contributing to economic growth.
- Consumer Sentiments: Public attitudes and feelings regarding economic conditions and spending.
- Global Trade Headwinds: Challenges and obstacles affecting international trade.
Key Quotes:
- “The Indian growth story remains a beacon of hope.”
- “The economy is unlikely to slow down in line with other major economies of the world.”
Key Statements:
- Manufacturing sector growth indicates an uptick triggered by government expenditure, policy initiatives, and credit stabilization.
- Agriculture’s increased focus on allied activities reduces dependence on traditional farm income.
- Historic capex intentions and private sector participation signal a strong economic recovery.
Key Examples and References:
- New investment announcements hitting a high of Rs 37 lakh crore in 2022-23, showcasing increased private sector participation.
- Agriculture loans by banks increase by 15.4% in 2022-23, indicating growing support for the agri value chain.
Key Facts and Data:
- Indian economy grows by 7.6% in Q2, marking two consecutive quarters of 7% plus growth.
- Manufacturing sector grows at a robust 13.9%, reaching a nine-quarter high.
- New investment announcements hit Rs 37 lakh crore in 2022-23, compared to Rs 20 lakh crore in 2021-22.
- Agriculture grows by 1.2% in Q2, with allied activities contributing significantly.
Critical Analysis:
- The robust economic growth raises questions about the accuracy of forecasts doubting India’s resilience.
- The manufacturing sector’s strong performance indicates positive outcomes from government initiatives and policies.
- Private sector participation in capex reflects confidence in the economic recovery.
- Increased focus on allied activities in agriculture showcases a shift in the sector’s dynamics.
- The potential risk of softer global growth highlights external factors influencing India’s economic trajectory.
Way Forward:
- Continued government reforms and support for economic growth.
- Monitoring and addressing potential risks from softer global growth.
- Sustaining the positive momentum in manufacturing and capex through policy measures.
- Emphasizing the role of allied activities in agriculture for a diversified income base.
- Nurturing consumer sentiments and encouraging private consumption for sustained economic recovery.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Dollarization and Economic Policy: The Case of Javier Milei’s Argentina
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Dollarization
Mains level: NA
Central Idea
- Argentina faces over 100% inflation and widespread poverty, prompting public support for Milei’s unique economic policies.
- This has prompted the newly elected Javier Milei replacing the peso with the dollar, abolishing the Central Bank, and cutting government spending.
Concept of Dollarization
- Dollarization is the process by which a country adopts a foreign currency in addition to or instead of its national currency.
- Here are 2 types of dollarization:
- Full Dollarization: This occurs when a country adopts a foreign currency (such as the US dollar) as its sole legal tender. In this scenario, the foreign currency completely replaces the domestic currency for all financial transactions.
- Partial Dollarization: In this case, the foreign currency is used alongside the national currency. It often happens unofficially, where residents hold a significant portion of their assets or conduct a large number of their transactions in the foreign currency.
Motive behind Argentine move
- Hyperinflation Solution: Dollarization could break the cycle of rising prices and money supply, as the dollar is not easily manipulated for political gains.
- Growth Potential: By using dollars, economies might focus on exports and attract foreign investment, benefiting from the dollar’s stability.
Potential Challenges
- Loss of Monetary Policy Control: Adopting the dollar means losing the ability to control the money supply through domestic monetary policy.
- Dependence on Export Promotion: Economies must rely solely on export promotion for economic stability, as currency depreciation is no longer an option.
Ecuador’s Experience
- Economic Turnaround: Ecuador, after adopting the dollar, saw significant improvements in GDP growth, poverty reduction, and inflation control.
- Oil and Gas Reserves: Ecuador’s success was partly due to its natural resources, which helped maintain a steady dollar inflow.
- Beyond Dollarization: Ecuador’s economic prosperity was also due to effective fiscal policies and government interventions in the oil sector.
- Social Spending: Increased social spending played a crucial role in translating economic gains into societal benefits.
Comparative Analysis: Greece and the Euro
- Euro Adoption in Greece: Greece’s adoption of the euro initially spurred growth but later limited its fiscal and monetary policy options.
- Austerity Measures: The Eurozone crisis forced Greece into austerity, highlighting the risks of adopting an external currency without policy autonomy.
Conclusion
- Not a Panacea: Dollarization, while potentially stabilizing, is not a standalone solution and requires complementary domestic policies.
- Argentina’s Uncertain Future: With Milei’s intent to slash government spending and abolish the Central Bank, Argentina’s economic future under his administration remains uncertain.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A $5 trillion economy, but for whom?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Pradhan Mantri Garib Kalyan Ann Yojna.
Mains level: India's ambitious pursuit of a $5 trillion GDP by 2028
Central idea
The article critically examines India’s ambitious pursuit of a $5 trillion GDP by 2028, juxtaposing it with Japan’s economic trajectory. It highlights concerns about wealth disparity, inclusivity in high-tech sectors, and questions the impact on marginalized citizens.
Key Highlights:
- Extension of Welfare Scheme: Prime Minister Modi’s announcement to extend the Pradhan Mantri Garib Kalyan Ann Yojna by five years.
- Concerns about Hunger: Raised concerns about persistent hunger despite the ambitious target of achieving a $5 trillion GDP by 2028.
- Japan’s Economic Challenges: Comparison with Japan’s economic growth and the social challenges faced, including suicide rates and social withdrawal.
- Reliance on GDP Growth: Emphasis on India’s economic growth relying on capital, productivity, and labor.
- Wealth Disparity: Identification of significant wealth disparity, with 1% of the population owning a substantial portion of the nation’s wealth.
- Government’s Economic Tools: Government’s identification of sectors and tools, such as the digital economy, fintech, and climate change initiatives.
Key Challenges:
- Impact on Marginalized Citizens: Expressing concerns about the potential adverse impact on marginalized citizens in the race towards a $5 trillion economy.
- Wealth Inequality: Highlighting the wealth disparity issue, with 1% of the population owning a significant portion of the nation’s wealth.
- Inclusivity in High-Tech Sectors: Concerns about the ability of a large segment of the population to participate in cutting-edge sectors such as AI, data science, and fintech.
- Lack of Per Capita Income Estimates: Criticism regarding the absence of estimates on India’s per capita income at the $5 trillion GDP mark.
Key Terms and Phrases:
- Pradhan Mantri Garib Kalyan Ann Yojna: Specific welfare scheme providing free foodgrains.
- Hikikomori: Term referring to severe social withdrawal in Japan.
- Kodokushi: Japanese term for lonely deaths.
- GST (Goods and Services Tax): Mention of the significant contribution from the bottom 50% of the population.
- Inclusive Growth: Government’s emphasis on growth that includes all segments of society.
- Insolvency and Bankruptcy Code: Part of the identified tools for achieving the $5 trillion goal.
- Make in India: Mention of one of the identified sectors for economic growth.
- Start-Up India: Highlighting a sector emphasized for achieving economic targets.
- Production Linked Incentives: Part of the government’s strategy for economic growth.
Key Examples and References:
- Japan’s Societal Challenges: Referring to suicide rates, social withdrawal, and lonely deaths in Japan as examples.
- Wealth Distribution Statistics: Citing wealth distribution statistics from Oxfam.
- Minister Chaudhri’s Identification: Referring to the government’s identification of tools and sectors for achieving the $5 trillion goal.
- Per Capita Income Comparison: Comparing per capita income between Japan, China, and India.
Key Facts and Data:
- Welfare Scheme Extension: Mentioning the extension of the Pradhan Mantri Garib Kalyan Ann Yojna.
- Japan’s Economic History: Referring to Japan’s economic history and challenges post-2008.
- Wealth Distribution Data: Citing wealth distribution data from Oxfam.
- GST Contribution: Highlighting the significant contribution of different income groups to GST.
Critical Analysis:
- Societal and Economic Impact: Analyzing the potential impact of the $5 trillion goal on marginalized citizens and society.
- Wealth Disparity and Inclusive Growth: Critical evaluation of wealth distribution and the need for inclusive economic policies.
- Capability Mismatch: Examining the mismatch between targeted sectors/tools and the capabilities of a significant population segment.
- Per Capita Income Concerns: Critically assessing the absence of estimates on per capita income and concerns about the inequality index.
Way Forward:
- Addressing Wealth Disparity: Emphasizing the need to address wealth disparity through inclusive economic policies.
- Ensuring Inclusive Growth: Focusing on ensuring that economic growth benefits all segments of the population.
- Skill Development and Education: Highlighting the importance of skill development and education to enable participation in emerging sectors.
- Regular Assessment and Recalibration: Emphasizing the need for regular assessment and recalibration of economic goals to align with societal well-being.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
In a world beset by economic uncertainty, India is a beacon of hope
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Indian Inflation
Mains level: Economic Resilience and Stability
Central idea
The article discusses positive economic indicators in India, including potential GDP growth, easing inflation, and successful festive season trading. It emphasizes the need for careful monitoring of oil prices, external demand, political developments, and continued policy coordination to sustain economic resilience and growth.
Key Highlights:
- Macroeconomic Positivity: November brings positive trends in India’s macroeconomic perspective, with optimism about second-quarter GDP growth.
- Geopolitical Developments: Ceasefire agreement between Israel and Hamas and a summit between U.S. President Joe Biden and China’s President Xi Jinping signal positive global geopolitical shifts.
- Inflation Trends: Global inflation rates, particularly in the U.S. and the European Union, ease, contributing to reduced bond yields and increased equity market performance.
- Indian Economic Signals: India experiences a decline in retail inflation and wholesale price index, with encouraging signals from festive season trading.
Key Challenges:
- Continued Monitoring: Factors such as oil prices, external demand, and political developments require continued monitoring for potential impacts on India’s economic trajectory.
- Global Trade Weakness: The global trade environment remains weak, with projections indicating a decline in world trade growth.
- Political Influences: Focus on general elections after state election results may influence government and private sector activities.
- Policy Coordination: Maintaining monetary and fiscal policy coordination is crucial, considering global risks and persistent inflation threats.
Key Terms:
- GDP (Gross Domestic Product)
- Inflation
- Bond Yields
- Geopolitics
- Macro and Financial Stability
- GST (Goods and Services Tax)
- Fiscal Deficit
- OPEC+ (Organization of the Petroleum Exporting Countries and allies)
Key Phrases:
- “Economic Resilience and Stability.”
- “Sequential Changes for Meaningful Analysis.”
- “Crucial Policy Coordination in a Shock-Prone World.”
Key Examples and References:
- Geopolitical Shifts: Ceasefire agreement between Israel and Hamas, U.S.-China summit.
- Global Inflation Trends: Positive trends in global inflation rates.
- Indian Economic Signals: Decline in retail inflation, wholesale price index, and record festive season retail trading.
Key Facts and Data:
- U.S. Inflation: Consumer price index at 3.2% in October.
- EU Inflation: Drops to 2.9% from 4.3%.
- Indian Inflation: Retail inflation at a four-month low of 4.9%.
- Expected GDP Growth: India’s GDP growth for Q2 expected to exceed 6.5%.
Critical Analysis:
- Emphasis on Fundamentals: Need for sound macroeconomic fundamentals and close monitoring of economic indicators.
- Identification of Challenges: Recognition of potential challenges such as oil price fluctuations, weak external demand, and political uncertainties.
- Policy Coordination: Importance of monetary and fiscal policy coordination in navigating a complex economic environment.
Way Forward:
- Economic Resilience: Continued focus on maintaining economic resilience and stability.
- Monitoring and Response: Continuous monitoring and responsive measures for global and domestic economic challenges.
- Policy Emphasis: Continued emphasis on policy coordination for sustained growth.
- Preserving Global Standing: Importance of prudent economic management for preserving India’s relative global standing.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Listen to the people, not the numbers
Note4Students
From UPSC perspective, the following things are important :
Prelims level: GDP growth
Mains level: non-monetized contributions within families and communities.
Central idea
India faces an income stagnation crisis despite overall GDP growth, with inadequate job quality. The global economic landscape calls for a paradigm shift towards sustainability and localized enterprises. Recognizing and valuing informal caregiving is crucial for a more equitable and economically inclusive future.
Key Highlights:
- Indian Economic Landscape: In the Indian economic landscape, the primary issue lies in the stagnation of incomes, not a lack of growth. Despite favorable GDP figures, there is a growing demand for job reservations, transcending caste and religion.
- Debates and Doubts in Economic Discourse: Economists are embroiled in a debate over job creation, casting doubts on the authenticity of government data. The discourse extends to attributing the current job challenges to the policies of the present government.
- U.S. Economic Discontent: The U.S. economy, despite positive headline numbers, faces widespread dissatisfaction among citizens. This discontent takes center stage in the lead-up to the presidential elections, with concerns about fair wages and executive compensation.
- Call for a Paradigm Shift: A paradigm shift is urged, emphasizing a departure from conventional growth metrics to address environmental and social concerns. The call for local, green, and organic initiatives signals a quest for a sustainable economic future.
- Recognition of Caregiving: There is a notable plea to recognize the economic and societal value of caregiving, challenging the prevailing economic paradigm that overlooks the contributions of informal work, particularly by women.
Key Challenges:
- Quality Jobs in India: The transition from agriculture to manufacturing in India lacks the creation of quality jobs. The prevalent scenario involves insecure, temporary employment with insufficient pay across various sectors.
- Global Economic Landscape at a Crossroads: The global economic landscape is at a crucial juncture, necessitating innovative economic ideas. The preference for local economic webs over extensive global supply chains is indicative of a shift towards sustainability.
- Undervaluation of Caregivers: Caregivers, predominantly women, continue to be undervalued economically. The informal caregiving sector lacks acknowledgment, perpetuating societal disparities.
- Distortion in Economic Measurements: The distortion of economic measurements rooted in 20th-century concepts poses a challenge. The fixation on GDP growth eclipses the diminishing value of human care, leading to a skewed representation of economic health.
Key Terms and Phrases:
- “Economies of Scope”: Emphasizes a shift towards determining enterprise viability based on diversity rather than scale, promoting local businesses’ adaptability.
- “Social Enterprises”: Underscore businesses contributing to social value alongside economic efficiency, reflecting a desire for a more holistic approach to economic success.
- “Informal Work Undervaluation”: Critique highlights economists’ oversight of the economic significance of informal caregiving, emphasizing the need for a broader perspective.
- “Paradigm Shift in Policy”: Advocates for inclusive policymaking, centering on the voices of marginalized communities to address systemic issues.
Key points:
- Indian Workforce Transition: Concerns about the quality of jobs in India are substantiated by a significant workforce transition from agriculture to labor-intensive sectors, marked by temporary and insecure employment.
- U.S. Economic Dissatisfaction: In the U.S., despite positive economic indicators, dissatisfaction among citizens remains a pressing issue. Presidential engagement with autoworkers underscores concerns about fair wages and wealth distribution.
Critical Analysis:
- Economic Paradigm Distortion: The economic paradigm distortion reveals a prioritization of GDP growth over the diminishing societal value of caregiving. This recognition sets the stage for a necessary reevaluation of economic priorities.
- Reforming Economic Measurements: The call for reforms in economic measurements underscores the urgency of adapting metrics to reflect the desired forms of work and enterprises for the future.
- Neglect of Informal Caregiving: Neglecting the economic value of informal caregiving underscores the need for a paradigm shift in acknowledging the non-monetized contributions within families and communities.
Way Forward:
- Transition to Local Economic Webs: The emphasis on transitioning from global supply chains to local economic webs signals a shift towards sustainability, environmental responsibility, and community-focused practices.
- Reforming Economic Measurements: Reforming economic measurements is essential to align with a broader understanding of valuable work, moving beyond GDP as the sole indicator of economic health.
- Recognition of Caregivers: Advocating for the recognition and valuation of caregivers indicates a need for societal and economic perspectives to evolve, appreciating the importance of caregiving.
- Inclusive Policymaking: Inclusive policymaking, with a focus on marginalized voices, is pivotal for addressing systemic issues and fostering a more equitable economic landscape. Listening to the diverse experiences of workers, farmers, entrepreneurs, and women should guide future policy formulations.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
State of the economy — temper the euphoria
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Projected GDP Growth
Mains level: economic success after the COVID-19 pandemic
Central idea
The article highlights India’s economic challenges, including concerns about post-COVID recovery sustainability, vulnerabilities to geopolitical shifts, a growing dependency on Chinese imports, and a decline in industrial growth rates. The central idea revolves around acknowledging these challenges and the imperative for strategic interventions to ensure long-term economic resilience and growth
Key Highlights
- GDP Growth and Recovery: India’s GDP projected to grow by 6.3% in 2023-24, showcasing post-COVID recovery. Positive signs of resilience, but concerns persist about employment quality and inflation.
- Geopolitical Shifts and Vulnerabilities: Globalization ended in 2022-23, exposing India to geopolitical vulnerabilities. Calls for a reevaluation of economic strategies to navigate changing global dynamics.
- Trade Deficit with China: India grapples with a soaring trade deficit with China. Strategic threat due to dependency on Chinese imports; calls for diversification.
- Industrial Woes and Growth Rates: Industrial growth rates, especially in capital goods, have regressed. Decline in key sectors signals a threat to overall economic stability.
- Public Sector Investment: Public sector investment appears stagnant despite reported growth. Doubts about credibility underscore the need for transparent reporting.
- Social Development Challenges: India’s Human Development Index (HDI) ranking has slipped. Recognition of challenges in social development, prompting a need for improved strategies.
Challenges
- Sustainability Concerns Post-COVID Recovery: Quality and sustainability of post-COVID recovery raise concerns, necessitating comprehensive strategies.
- Vulnerabilities to Geopolitical Shifts: Geopolitical vulnerabilities impact India’s economic stability, demanding adaptation of economic policies.
- Dependency on Chinese Imports: Rising trade deficit with China poses economic frailty, urging the urgent need to diversify imports.
- Decline in Industrial Growth: Regression in industrial growth rates, especially in capital goods, requiring targeted interventions for revitalization.
Key Phrases and Terms for making mains answer value added
- Post-COVID Resilience: Short-term economic success after the COVID-19 pandemic.
- Geopolitical Realignment: Recognition of shifts in global dynamics impacting India’s economic strategies.
- Trade Deficit Dynamics: China’s influence on India’s economic vulnerabilities due to a soaring trade deficit.
- Industrial Regression: Decline in growth rates, especially in capital goods, signaling industrial challenges.
- Credibility of Public Sector Investment: Doubts raised about the accuracy of reported public sector investment growth..
Analysis of the article in balanced way for mains score improvement
- Short-Term Success vs. Long-Term Resilience: Balancing short-term GDP growth with the need for sustainable and inclusive recovery.
- Adapting to Geopolitical Realities: Necessity to adapt economic policies to navigate geopolitical shifts and ensure stability.
- Diversification for Economic Stability: Addressing the trade deficit challenge by diversifying imports and promoting self-reliance.
- Revitalizing Key Sectors for Growth: Targeted interventions required to revitalize industrial growth, especially in crucial sectors.
Key Data and Facts
- Projected GDP Growth (2023-24):3%
- Trade Deficit with China: Strategic Threat
- Industrial Growth Decline: Capital Goods
- HDI Ranking (2021): Decline
The Way Forward
- Sustainable and Inclusive Growth: Develop comprehensive strategies for sustained and inclusive growth post-COVID.
- Adaptive Economic Policies: Adapt economic policies to navigate evolving global dynamics and ensure stability.
- Diversification and Self-Reliance: Diversify imports and boost domestic production for economic self-reliance.
- Targeted Interventions for Industrial Revitalization: Implement targeted interventions to revitalize key industrial sectors and stimulate overall economic growth.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Centre-State Disputes: Implications on India’s Economy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Centre-State Financial Relations
Mains level: Read the attached story
Central Idea
- In India, disputes between the Central and State governments regarding economic policies have a long history, but in recent years, they have escalated in both frequency and intensity, taking on the character of ‘persistent frictions’ within the federal system.
- These disputes have significant implications for India’s economy and its federal structure.
Current Context
- Impact of Economic Reforms: Economic reforms since 1991 have relaxed many controls on investments, granting some autonomy to States. However, States still rely on the Centre for revenue receipts.
- Shift from ‘Give and Take’ to Hardened Stance: Recent State resistance has transformed the cooperative Centre-State relationship into a more rigid and confrontational dynamic.
Emerging Conflict Areas
- Homogenization of Social Sector Policies: Conflicts arise over the homogenization of social sector policies, where States seek greater discretion, but central agencies push for uniformity.
- Functioning of Regulatory Institutions: Differences emerge regarding the functioning of regulatory institutions, leading to conflicts over jurisdiction.
- Powers of Central Agencies: Central agencies attempt to increase their influence, often imposing their preferences on States.
Economic Consequences of Interference
- Crowding Out State Investments: Centralization of planning and implementation limits States’ flexibility in infrastructure development. This has resulted in reduced State investments, particularly in projects like roads and bridges.
- Fiscal Competition: Frictions with the Centre have spurred fiscal competition between States and the Centre. States compete with each other and with the Centre, leading to complexities in welfare provisioning.
- Inefficiencies Due to Parallel Policies: Frictions have resulted in parallel policies, where either the Centre or States duplicate each other’s efforts. For example, some States have rolled back from the National Pension System (NPS) due to fiscal concerns.
Inevitable Interdependence
- Article 258A: The Centre relies on States for the implementation of many laws and policies, particularly in concurrent spheres.
- Preserving Interdependence: In a large, diverse, developing society like India, interdependence between the Centre and States is inevitable and needs to be maintained.
Conclusion
- The growing Centre-State disputes in India’s federal system have far-reaching economic implications.
- Balancing autonomy and cooperation between the Centre and States is essential for the nation’s economic growth and effective governance.
Back2Basics:
Centre-State Financial Relations
| Article 268 to 281 | Distribution of taxes between the Central Government and States, specifying various taxes and their sharing. |
| Article 282 | Allows the Central Government to provide grants-in-aid to States for specific purposes, including welfare programs. |
| Article 293 | Regulates borrowing powers of States, requiring Presidential consent for external borrowing to ensure fiscal discipline. |
| Article 280 | Establishes the Finance Commission, which recommends tax revenue and grants distribution between the Centre and States. |
| Goods and Services Tax (GST) | Governed by the Constitution (One Hundred and First Amendment) Act, 2016, and associated laws, transforming taxation in India. |
| Fiscal Responsibility and Budget Management (FRBM) Act | Guides fiscal discipline and management by setting fiscal targets for both Central and State Governments. |
| Inter-State Council | Established under Article 263
Acts as a forum for dialogue between the Central Government and States on various issues. |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Acknowledge India’s economic successes too
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Statistical data
Mains level: Growth sectors
Central idea
India’s robust economic growth faces challenges in digital inclusion, governance equity, and managing post-COVID-19 effects. Government initiatives, encompassing reforms, infrastructure focus, and poverty alleviation, drive progress. Recognizing successes and addressing shortcomings is vital for informed public discourse and sustained development momentum.
Key Highlights:
- Impressive Economic Growth: India’s post-COVID-19 economic growth is remarkable, with FY2023 showing a YoY growth of 7.2%, the fastest among major economies.
- Policy Reforms Driving Growth: Government initiatives, including economic liberalization, Insolvency and Bankruptcy Code (IBC), demonetization, GST, and corporate tax reduction, have propelled India’s economic trajectory.
- Inclusive Growth Focus: The government’s commitment to “Sabka Saath Sabka Vikas” reflects in poverty alleviation, rural welfare, and inclusive growth measures, leading to improved living standards.
- Multidimensional Poverty Reduction: NITI Aayog’s report indicates a significant reduction in multidimensional poverty, with 13.5 crore Indians escaping poverty between 2015-16 and 2019-21.
- Agricultural Success: Support for agriculture has resulted in unprecedented growth in fruits, vegetables, dairy, livestock, and fishery, enhancing the nutritional value of the food basket.
Challenges:
- Critique of Growth Metrics: Some critics argue for using compound annual growth rates post-COVID-19, questioning the validity of YoY growth rates as a true measure of economic progress.
- Long Road to High-Income Status: Acknowledging the challenges, India recognizes the need for sustained efforts to achieve high-income status and a high quality of life for its citizens.
Key Phrases for mains value addition:
- “Fastest-growing major economy”: The tagline emphasizes India’s rapid economic growth in the global context, driven by its large size and robust domestic demand.
- “Sabka Saath Sabka Vikas”: The government’s inclusive growth mantra focusing on uplifting people above the poverty line through various support initiatives.
- “Multidimensional Poverty”: NITI Aayog’s report highlights a significant decline in multidimensional poverty, reflecting comprehensive progress.
Analysis:
The article underscores the importance of considering YoY growth rates as a measure of post-pandemic progress and highlights the success of government reforms in driving economic growth and inclusive development.
Key Facts/Data for value addition:
- India is the fifth largest economy globally and projected to become the third largest by 2027.
- The Capex budget of the central government has risen from 1.6% of GDP in FY19 to 2.7% in FY23, further budgeted to increase to 3.3% in FY24.
Government Measures Since 2014:
- Government initiatives post-2014 aim to boost the economy, including liberalization, the Insolvency and Bankruptcy Code, demonetization, GST rollout, and corporate tax reduction.
- In FY22, a substantial Capex program and state-level resource support aimed to bridge infrastructure gaps and attract private corporate investment.
Poverty Alleviation and Rural Welfare:
- Government commitment to ‘Sabka Saath Sabka Vikas’ reflects a focus on inclusive growth, poverty reduction, skill development, and infrastructure enhancement.
- NITI Aayog’s report highlights a significant reduction in multidimensional poverty, particularly in rural areas, with improved living standards and health indicators.
Innovative Way Forward:
- Digital Inclusion for Economic Growth: Accelerate digital inclusion strategies to empower citizens, enhance education, and facilitate online business, fostering economic growth.
- Green Infrastructure Development: Prioritize sustainable and green infrastructure projects, aligning with global environmental goals, to ensure long-term economic resilience.
- Blockchain for Financial Inclusion: Leverage blockchain technology to enhance financial inclusion, enabling secure and transparent transactions, especially in rural and underserved areas.
- AI-driven Skill Development: Implement artificial intelligence (AI) in skill development programs, customizing learning paths and enhancing employability in emerging sectors.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The household debt challenge
Central idea
The article discusses the surge in household debt in India, emphasizing the need to assess its sustainability through the Debt Service Ratio (DSR). Despite the high DSR, comparisons with global trends reveal both challenges and potential adjustments. The analysis suggests extending the maturity period as a key strategy and calls for collaborative efforts between regulators and lenders to manage the impact of rapid debt growth.
Key Highlights:
- Surge in Household Debt: Household debt in India reached 5.8% of GDP in FY23, the second-highest annual increase since Independence.
- Debt Service Ratio (DSR): The sustainability of debt is questioned by examining the Debt Service Ratio (DSR), measuring the proportion of income used to repay debt-related obligations.
- Indian Household DSR: India’s household DSR was approximately 12% in FY23, consistently increasing over the past two decades and higher than most advanced economies.
- Comparison with Advanced Economies: India’s DSR is higher than that of advanced economies like China, France, the UK, and the US, indicating higher household leverage.
- Long-Term Trends: Despite the high DSR, Indian households have experienced improved borrowing terms over the past decade, with longer maturity periods and falling interest rates.
Challenges:
- Rapid Debt Growth: The rapid growth in household debt, especially non-housing loans, raises concerns about sustainability and potential future challenges.
- Threshold Level: The article raises questions about the threshold level of household debt in India and the time frame before reaching a critical point.
| Prelims focus
The Debt Service Ratio (DSR) is like a measure of how much of your money goes into repaying debts. It looks at the portion of your income used to pay off things like loans and interest. A lower DSR is better because it means you have more money left for other things after handling your debts. So, it’s a way to see if people can comfortably manage their debt payments based on their income. |
Analysis:
- Effective Interest Rates: The combination of higher interest rates and shorter debt tenure contributes to India’s higher DSR compared to advanced economies.
- Global Comparison: India’s household DSR is compared with Nordic countries and other nations, indicating both challenges and potential room for adjustment.
Key Data:
- Household Debt-to-Income Ratio: Jumped to 48.1% in FY23 from 42.2% in FY19, suggesting a significant increase in a short period.
- DSR Trends: India’s DSR has consistently increased over the past three years, reflecting a rising burden on households.
Key Terms:
- Debt Service Ratio (DSR): Measures the proportion of income used to repay debt-related obligations.
- Residual Maturity: The remaining time until a debt obligation is due to be paid.
- Household Leverage: The ratio of household debt to income, indicating the financial burden on households.
Way Forward:
- Increase Residual Maturity: Extending the maturity period for borrowers is suggested as an effective way to reduce the debt burden on Indian households.
- Collaboration between Regulators and Lenders: Urges regulators and lenders to collaborate to distribute the impact of debt growth over time, avoiding sudden hindrances to economic growth.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Why the Lewis Model has worked in China, not in India?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Lewis Model
Mains level: Read the attached story
Central Idea
- In 1954, the renowned Saint Lucian economist, Sir William Arthur Lewis, presented a groundbreaking theory that suggested developing countries with a surplus labor force could achieve significant industrialization.
- He envisioned a shift of labor from subsistence agriculture to the expanding manufacturing sector.
- However, the Indian experience over the years has shown that this model has not unfolded exactly as Lewis had anticipated.
What is the Lewis Model?
- Lewis’s Theory: Sir William Arthur Lewis’s influential essay, ‘Economic Development with Unlimited Supplies of Labor,’ proposed that countries with surplus labor could industrialize by paying wages just high enough to attract workers away from family farms.
- Key Assumptions: The model assumed that higher wages in the manufacturing sector would match the additional output produced, leading to the creation and expansion of industries without limits.
- Bottlenecks: The primary constraints to this labor transfer were the availability of capital and natural resources, which these countries often lacked relative to their population.
India’s Deviation from the Model
- Historical Perspective: In the early 1990s, agriculture employed about two-thirds of India’s workforce.
- Limited Impact of Manufacturing: While the share of agriculture in employment declined to 48.9% by 2011-12, manufacturing’s share only marginally increased from 10.4% to 12.6% during the same period.
- Recent Trends: The farm sector’s share increased temporarily due to the Covid-19 pandemic, reaching 46.5% in 2022-23.
- Manufacturing’s Decline: Conversely, manufacturing’s share dropped to 11.4% in 2022-23.
- Shift within Subsistence Sectors: Labor movement primarily occurs within subsistence sectors, such as low-paid services and construction, rather than towards manufacturing or high-productivity services.
State-Level Variations
- Gujarat’s Exception: Gujarat stands out with nearly 24% of its workforce employed in manufacturing, mirroring Lewis’s model.
- Industry and Agriculture: Gujarat’s workforce in agriculture remains relatively high compared to other states.
China’s Model vs. India’s Reality
- China’s Success: China leveraged surplus rural labor to become “the world’s factory” during the late 20th century.
- India’s Challenges: India still has surplus labor working in subsistence sectors, but the path to conventional employment opportunities is narrowing.
- Technological Disruption: Manufacturing is increasingly capital-intensive, incorporating labor-saving and labor-displacing technologies.
- New Economic Development Model: NITI Aayog is exploring alternative avenues for job creation, emphasizing activities related to agriculture, such as aggregation, processing, transportation, and bio-based industries.
- Bio-Based Opportunities: Crop residues, bio-fuels, bio-based products, and supply chain services offer potential employment options linked to agriculture.
Conclusion
- India’s journey towards economic transformation has deviated from the classic Lewis model.
- The changing nature of manufacturing and the need for a reimagined labour transition call for innovative approaches that recognize the country’s unique circumstances and opportunities in sectors beyond traditional agriculture.
- NITI Aayog’s exploration of alternative development models signifies a shift toward addressing contemporary challenges and fostering sustainable economic growth.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Bidenomics and Global Economic Landscape in 2024
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Bidenomics
Mains level: NA
Central Idea
- The year 2024 is poised to be a momentous one for the global economy, marked by significant elections in some of the world’s largest economies, including India, Russia, the UK, the EU, and the US.
- “Bidenomics” is the nickname for the economic vision of President Joe Biden. It’s used to convey his administration’s economic gains, policies and plans.
Bidenomics and its Relevance
- Policy Shifts: The potential election outcome in the US could have far-reaching consequences, especially concerning ‘Bidenomics’—President Biden’s distinctive economic policy approach.
- Radical Departures: Trump’s policies diverged significantly from established US and global norms, with actions like withdrawing from the Paris Climate Agreement and adopting protectionist trade policies against nations like China.
- Bidenomics: President Biden introduced a policy shift aimed at reversing decades of economic trends, emphasizing income equality and reducing the influence of big corporations.
- 3 major aspects of Bidenomics:
- Public Investments: Focus on smart investments in infrastructure and clean energy.
- Empowering Workers: Prioritizing workers’ rights and education to strengthen the middle class.
- Promoting Competition: Encouraging competition to reduce costs and foster small business growth.
Performance of Bidenomics
- Macro Indicators: On a macroeconomic level, Bidenomics has shown positive results, as indicated by GDP growth, unemployment rates, and inflation trends.
- GDP Growth: The US has outperformed major developed nations in terms of GDP growth, with a rapid post-pandemic recovery.
- Unemployment: Unemployment rates have decreased significantly under Biden’s leadership, with job creation outpacing the number of job seekers.
- Inflation: However, inflation spiked due to external factors but has since moderated.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
What’s the link between GDP growth and employment in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: SWI report and its findings
Mains level: The relationship between economic growth and employment in India, Reasons, challenges, and framework for change
What’s the news?
- A recent report, SWI 2023, has brought to light the disconcerting disparity between India’s relentless pursuit of GDP growth and the stark reality of inadequate job creation.
Central idea
- In the realm of policy decisions, a fundamental question often arises: Should the focus be on accelerating economic growth or ensuring widespread employment opportunities? A recent report, India is Broken and the State of Working India 2023, draws insights on how India’s growth trajectory impacts employment, emphasizing the need to consider various social factors in this equation.
The State of Working India 2023 (SWI) Report
- SWI 2023, focusing on a long-term perspective, analyzes data from 1983 to 2023, emphasizing social identities like caste, gender, and religion.
- It highlights how GDP growth benefits are distributed unevenly among various segments of society.
- The quality of jobs created is a crucial aspect of distinguishing between regular-wage jobs and self-employment.
The relationship between economic growth and employment in India
- Job Creation Challenge: The report emphasizes that job creation remains one of India’s most significant macroeconomic challenges. Despite the pursuit of high GDP growth, the report suggests that the correlation between economic growth and employment generation has weakened over time.
- Weakening Employment Elasticity: Employment elasticity, which measures the extent to which employment grows when GDP grows by one unit, has consistently declined since the 1980s. This decline indicates that a 1% increase in GDP now results in less than a 1% increase in employment.
- Recent Trends: The period from 2017 to 2021 showed a notable improvement in employment. However, this improvement came with nuances. While employment numbers increased, it’s essential to distinguish between jobs created due to economic growth and those created out of necessity (self-employment).
- Quality of Jobs: The SWI 2023 report underscores the importance of considering the quality of jobs created. Not all employment opportunities are equal, and the report highlights the prevalence of self-employment, which often lacks regular wages and job security.
- Impact on Women: The changing employment landscape disproportionately affects women. Although women accounted for half of the lost employment during the specified period, they received only a third of the increase in formal employment. This shift also saw more individuals turning to self-employment due to economic distress.
- Uncorrelated Growth: The report’s broader takeaway is that over the long run, GDP growth and employment growth have been uncorrelated in India. This suggests that policies solely oriented towards achieving higher GDP growth rates may not necessarily lead to accelerated job creation.
The dominance of GDP growth
- For years, India’s national discourse has been dominated by the pursuit of high GDP growth rates as the primary indicator of economic progress.
- The belief has been that rapid economic growth will naturally lead to increased employment opportunities.
- However, recent developments challenge this conventional wisdom, prompting us to reconsider our priorities.
The US perspective
- In contrast to India’s GDP-centric approach, the United States, the world’s largest economy, places a strong emphasis on employment levels.
- The Chairman of the US Federal Reserve, Jay Powell, consistently highlights the importance of achieving full employment while maintaining price stability.
Why does India not prioritize employment to the same degree?
- Historical Perspective: India’s approach to economic development has been influenced by its post-independence history. When India gained independence in 1947, it faced widespread poverty, and economic growth was seen as a means to uplift the masses.
- Development Paradigm: India adopted a development paradigm that prioritized industrialization and capital-intensive sectors. The belief was that as industries expanded, they would naturally absorb labor.
- Policy Framework: India’s economic policies, especially since the 1991 economic reforms, have largely centered on liberalization, privatization, and globalization. These policies aimed to attract foreign investment and promote private sector growth, often with an emphasis on manufacturing and services. While these policies aimed at increasing overall economic output, they did not always address the issue of employment directly.
- Data Focus: Economic policymakers often rely on GDP growth as a quantifiable and easily measurable metric to gauge economic performance. Employment data can be more complex to collect and interpret, and the focus on GDP growth has made it the primary indicator of success.
- Political Considerations: Political leaders and parties have, at times, used the promise of high GDP growth as a way to gain popular support and demonstrate economic progress to the electorate. This political narrative has reinforced the emphasis on GDP growth.
- Globalization Trends: The global trend toward globalization and competitiveness has also influenced India’s priorities. The country has sought to position itself as a global economic player, and this often involves pursuing policies that align with international economic norms, including a focus on GDP growth.
- Lack of Comprehensive Social Safety Nets: India’s social safety nets and social security systems have historically been limited in coverage and effectiveness. As a result, there may be a perception that focusing on GDP growth is essential to lifting people out of poverty, as job opportunities are seen as the primary means of economic betterment.
A Framework for Change: Rethinking India’s Growth Strategy
- Promote labor-intensive manufacturing:
- Encourage industries that have the potential for labor-intensive manufacturing, such as textiles, electronics assembly, and agro-processing.
- Implement policies and incentives to attract investments in these sectors, as they can create a significant number of jobs.
- Invest in skill development and training.
- Establish comprehensive skill development programs to enhance the employability of the workforce.
- Collaborate with industries to design training programs that align with their specific needs, ensuring that workers are adequately prepared for available job opportunities.
- Support Micro, Small, and Medium Enterprises (MSMEs):
- Provide targeted support to MSMEs, which often generate substantial employment.
- Simplify regulations and reduce bureaucratic hurdles for MSMEs to encourage their growth.
- Green Manufacturing and Sustainable Industries:
- Explore opportunities in green manufacturing and sustainable industries, aligning with global trends toward environmentally friendly practices.
- Invest in renewable energy, eco-friendly technologies, and sustainable agriculture, which can create employment while contributing to environmental goals.
- Infrastructure Development in Rural Areas:
- Develop infrastructure in rural areas to facilitate economic activities and job creation outside of urban centers.
- Improve connectivity, transportation, and access to markets to boost rural employment opportunities.
- Focus on the formalization of jobs:
- Implement policies that encourage the formalization of employment, including ensuring written contracts and providing benefits to workers.
- Address labor market informality to improve job quality and security.
- Gender-Inclusive Policies:
- Develop and enforce policies that promote gender equality in the workforce.
- Encourage women’s participation in the labor market through initiatives such as affordable childcare facilities and measures to reduce workplace harassment.
- Social Safety Nets:
- Strengthen social safety nets to provide a cushion for workers during periods of economic volatility.
- Ensure that unemployment benefits, healthcare, and retirement provisions are accessible and effective.
- National Employment Policy:
- Develop and implement a comprehensive national employment policy that outlines a long-term vision and strategy for job creation.
- Address both the supply and demand sides of the labor market and promote the quantity and quality of employment.
- Global Trade and Export Promotion:
- Actively engage in global trade and export promotion, which can stimulate economic growth and create jobs.
- Identify and target export-oriented industries with growth potential.
- Decentralized Economic Development:
- Promote economic decentralization by encouraging the development of regional and local economies.
- Invest in infrastructure, skills, and entrepreneurship in underdeveloped regions to reduce regional disparities.
Conclusion
- The time has come for India to reconsider its economic priorities. While GDP growth remains important, a greater emphasis on job creation, especially quality employment, is crucial for sustainable and inclusive development. The findings of the SWI 2023 report offer a compelling case for Indian policymakers to shift their focus towards strategies that prioritize employment generation, ensuring that the benefits of growth are shared by all segments of society.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The tax base is growing – government shouldn’t waste the opportunity
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Basic concepts
Mains level: Growing tax base, recent trends, opportunities and challenges
What’s the news?
- India sees a surge in taxpayer base amidst tax policy challenges; a stable tax-to-GDP ratio raises questions on fiscal maneuverability and economic growth prospects.
Central idea
- In the lead-up to each budget, the Union government cites limited tax revenues as a spending constraint. Recent years have seen a surge in direct and indirect tax payers, challenging the idea that only a small segment contributes. This should ideally raise the tax-to-GDP ratio, yet tax rate cuts and pandemic disruptions have limited fiscal gains, hinting at a deliberate shift to a low-tax regime.
What is meant by fiscal maneuverability?
- It refers to the government’s ability to adjust its revenue and expenditure policies in response to changing economic conditions, budget constraints, and policy goals.
What is Tax-to-GDP Ratio?
- The Tax-to-GDP ratio is a financial indicator that measures the total tax revenue collected by a government as a percentage of its overall GDP for a specific period, typically a fiscal year.
- This ratio is used to assess the level of taxation relative to the size of the economy.
- A higher Tax-to-GDP ratio suggests that a larger portion of a nation’s economic output is being collected in the form of taxes.
What Factors Have Led to the Government’s Limited Fiscal Maneuverability Before Budgets?
- The common refrain: Historically, the Union government has often cited its limited tax revenues as a significant constraint on its ability to maneuver effectively in the run-up to budgets.
- Steady increase in tax base: It’s noteworthy that there has been a consistent increase in both direct and indirect tax payers over recent years.
- Economic context: This expansion in the tax base has occurred during a phase of slower, uneven economic growth.
- Impact of tax cuts and disruptions: Despite the increase in taxpayers, cuts in both direct and indirect tax rates (including GST) and pandemic-induced economic disruptions have limited the fiscal gains from this surge in taxpayers.
How Has the Taxpayer Base Evolved in Recent Years?
- Growth in the taxpayer base: The tax base has shown substantial growth in recent years, challenging the belief that only a small section of society pays taxes.
- Direct tax base expansion: The number of companies paying tax grew by about 43 percent, from 7.46 lakh to 10.7 lakh, between the assessment years 2014–15 and 2022–23.
- Individual taxpayers: Individual taxpayers increased by 65 percent over the same period, rising from 5.38 crore to 8.9 crore.
- Role of small taxpayers: It’s important to note that a significant number of these new tax payers have incomes less than Rs 5 lakh.
Trends and Factors in the Expansion of the Indirect Tax Base
- Indirect tax base growth: The number of active GST payers increased from 1.2 crore in 2019 to 1.4 crore by June 2023.
- Composition: About 80 percent of these taxpayers are proprietorships, with another 10 percent being partnerships.
- Incentives for registration: Smaller establishments are incentivized to register under GST to avail of the input tax credit.
- Indirect tax impact: The growth in the indirect tax base may also be influencing the increase in direct tax payers.
Impact of Tax Rate Reductions
- Corporate tax rate reduction: In September 2019, the government announced a cut in the corporate tax rate for existing companies from 30 percent to 22 percent.
- Impact on revenue: As per government figures, the revenue loss on account of this corporate tax reduction was Rs 1.28 lakh crore in 2019–20 and Rs 1 lakh crore in 2020–21.
- Corporate tax-to-GDP ratio: The corporate tax-to-GDP ratio declined from 3.5 percent in 2018–19 to around 3.1 percent by 2022–23.
- Personal income tax rebates: In the interim budget of 2019, the government announced that individual taxpayers with taxable income up to Rs 5 lakh would get a full tax rebate.
- Personal income tax-to-GDP ratio: The personal income tax-to-GDP ratio increased from 2.5 percent in 2018–19 to 3 percent by 2022–23.
- Increase in zero tax liability: Notably, the number of individuals with zero tax liability also increased from 2.9 crore in 2019–20 to 5.16 crore in 2022–23, which may limit the gains from an expansion in the tax base.
What are the challenges?
- Revenue Sustainability: A challenge arises in ensuring that the gains from an expanding tax base translate into sustainable revenue streams. Despite the increase in taxpayers, tax cuts and disruptions may limit the fiscal benefits.
- Tax Evasion and Avoidance: Addressing tax evasion and avoidance remains a significant challenge. Although the formalization of the economy makes tax evasion more complicated, it requires effective measures to combat tax evasion further.
- Balancing Tax Cuts: The reduction in tax rates, such as the corporate tax cut, has implications for government revenue. Striking a balance between encouraging economic growth through lower taxes and maintaining adequate fiscal resources is a constant challenge.
- Targeted Spending: As the government’s fiscal space expands with a growing tax base, it faces the challenge of allocating resources effectively. Prioritizing and targeting spending on key development objectives while avoiding wasteful expenditures is essential.
Future Prospects
- Fiscal Sustainability: With an expanding economy and tax base, there is potential for improved fiscal sustainability. If managed effectively, this can provide the government with more resources to meet its long-term financial commitments.
- Development Opportunities: The growth in the tax base offers opportunities for increased public investment in critical sectors, fostering economic development, and improving the overall quality of life for citizens.
- Reduced Reliance on Borrowing: An increased tax base can reduce the government’s reliance on borrowing to meet budgetary needs, potentially leading to lower interest payments and debt management challenges.
- Incentive for Formalization: As more individuals and businesses enter the tax net, there’s a natural incentive for greater formalization of the economy. This can reduce the size of the informal sector and promote economic stability.
- Policy Flexibility: A broader tax base can provide the government with greater policy flexibility. It can consider adjustments to tax rates, exemptions, and deductions to support specific policy goals, such as promoting investment or addressing income inequality.
- Enhanced Economic Growth: With appropriate fiscal policies, the increased revenue potential from a growing tax base can contribute to sustained economic growth, job creation, and poverty reduction.
Conclusion
- The government’s strategic choices regarding tax rates have influenced the country’s tax landscape, expanded the taxpayer base while maintained stable tax-to-GDP ratios. As India’s economy continues to evolve, these gains should not be squandered through excessive giveaways but rather strategically allocated to promote sustainable development and economic growth.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
China’s economic slowdown, its ripple effect
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: China’s economic slowdown, its ripple effect, Economic Growth Comparison with India
Central Idea
- The recent news of China’s economic slowdown has sparked a range of responses. China’s concerns about stagnation and the middle-income trap have shifted to fears of deflation, raising global implications. To comprehend the root causes and gravity of China’s current economic dilemmas, it is crucial.
Background: Unstable Growth and Strategic Choices
- Premier Wen Jiabao’s Concerns (2007): Premier Wen Jiabao raised alarms in 2007, highlighting instability, imbalances, a lack of coordination, and unsustainability as China’s economic challenges.
- 2008 Global Financial Crisis Strategy: China responded to the 2008 crisis by investing heavily in infrastructure (railways, highways, energy, and construction) to maintain double-digit growth and stabilize the economy.
- Deferred Structural Issues: While this strategy spurred growth, it deferred addressing issues like low consumption, regional disparities, and inadequate social security measures.
- Leadership Imperative for Growth: The need to sustain prosperity for domestic legitimacy drove China’s focus on high growth rates, even if it meant overlooking structural concerns.
Current Realities
- Transition to the New Normal: President Xi Jinping’s 2017 shift focused on quality-of-life issues, acknowledging the limitations of export-driven, investment-heavy growth.
- Acceptance of Slower Growth: China entered the new normal, accepting slower growth rates and requiring adjustments in economic expectations.
- Challenges in Transition: Slower export growth due to rising labor costs from increased wages and social security investments led to unemployment challenges.
- Balancing Priorities in the New Normal: Adapting to the “new normal” entails managing the delicate balance between sustainable growth, addressing structural issues, and maintaining social stability.
Escalating Challenges and the Evergrande Crisis
- Trade War and De-risking Impact: The escalation of challenges was fueled by the impact of the US-China trade war and the implementation of de-risking strategies. These factors introduced complexities to China’s economic landscape.
- Evergrande Crisis Unveiled: The Evergrande crisis, spanning from 2020 to 2023, emerged as a significant event exposing vulnerabilities within China’s housing sector. The crisis highlighted potential issues of misregulation and systemic risk.
- Path-Dependency Concerns: The Evergrande crisis exacerbated concerns about China’s economic dependence. The fear of a crash landing became more pronounced, underscoring the importance of addressing structural challenges.
- Complexity of Structural Problems: The challenges faced by Evergrande shed light on broader structural issues present within China’s economy. The crisis revealed the intricate interplay of development challenges and regulatory oversights.
- Policy Implications and Regulatory Oversight: The Evergrande crisis triggered discussions about the need for stronger regulatory oversight and effective policy responses. Stabilizing the housing market has emerged as a critical concern for the government.
China’s economic slowdown and its ripple effect
- Global Trade Impact: China’s economic slowdown has implications for global trade. As one of the world’s largest economies and trading partners, China’s reduced economic activity affects international trade flows, impacting both suppliers and consumers worldwide.
- Commodity Markets: The slowdown has led to decreased demand for commodities such as crude oil, cement, and steel. China’s status as a major consumer in these markets has caused a cooling of prices, impacting countries that rely on exporting these commodities.
- Supply Chain Disruptions: China plays a critical role in global supply chains. Its economic slowdown and disruptions in production have affected supply chain dynamics, causing delays and disruptions for companies worldwide.
- Investor Sentiments: China’s economic challenges have led to cautious investor sentiments. Uncertainties about the Chinese economy have influenced global financial markets and investment decisions.
- Global Economic Growth: China’s slowdown contributes to lower global economic growth rates. The country’s reduced demand for goods and services affects other economies, particularly those that heavily depend on exports to China.
- Regional Trade Partners: Neighboring countries that have strong economic ties with China, such as those in Asia, are directly impacted by China’s slowdown. Reduced demand for their exports to China affects their economies as well.
- Currency Exchange Rates: China’s economic slowdown can impact currency exchange rates. Fluctuations in China’s economic performance can influence the value of its currency, affecting exchange rates globally.
Future Outlook
- State-Owned Enterprises (SoEs) Challenges: State-owned enterprises, due to preferential treatment and political networks, pose ongoing challenges. Their resistance to change and reliance on political influence can hinder necessary reforms for economic growth.
- Evergrande Crisis and Systemic Issues: The Evergrande crisis exposed vulnerabilities within China’s housing sector and revealed potential systemic issues. Addressing these challenges is crucial to preventing further disruptions in the economy.
- Middle-Income Trap and Value Chain Advancement: The looming middle-income trap poses a dilemma for China’s economic trajectory. To avoid stagnation, China must navigate this challenge and advance its position in the global value chain, which requires innovation and upgrading industries.
- Economic Growth Comparison with India: Despite the challenges, China’s projected 5% growth rate still surpasses India’s anticipated 6.1% growth rate. China’s size and economic influence make this growth rate significant and impactful on global markets.
Conclusion
- China’s economic challenges underscore the need for strategic decisions in a shifting landscape. Achieving growth while addressing internal imbalances and global uncertainties remains a formidable task. As China’s economy evolves, its choices will resonate on the international stage, reshaping the perception of its rise and risk appetite.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The cost of meals rose by 65% in five years, wages by just 37%
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Thalinomics concept
What’s the news?
- The growing chasm between wages or salaries and the cost of living has given rise to a distressing scenario: the affordability of vital food commodities is under threat.
Central idea
- In Mumbai, the cost of a vegetarian thali surged 65% in five years, while income for laborers and salaried workers in urban Maharashtra increased only 37% and 28%, respectively. This discrepancy is making essential food items unaffordable, leading to compromised meals.
What is Thalinomics?
- Thalinomics is a term coined by an Indian economist and former Chief Economic Adviser to the Government of India, Arvind Subramanian.
- It refers to a concept that involves analyzing changes in the cost of a vegetarian thali (a meal consisting of a variety of dishes served on a single plate) to gain insights into the trends and dynamics of food inflation and affordability.
- It involves tracking the prices of key ingredients that constitute a thali, such as cereals, pulses, vegetables, and other essential items.
- This concept is particularly relevant in countries like India, where food affordability and inflation are significant concerns for a large population.
Key insights: A case study of Mumbai and urban Maharashtra
- Rising Cost of Thali: The cost of preparing a home-cooked vegetarian thali in Mumbai has increased significantly by 65% over the past five years. This increase is attributed to rising prices of essential ingredients like rice, dal, vegetables, and other items that constitute a thali.
- Income Growth: Over the same five-year period, the average wage earned by casual laborers in urban Maharashtra increased by 37%, while the average salary of regular salaried workers increased by 28%. These income growth rates reflect the changes in earnings for these two categories of workers.
- Disparity Between Costs and Income: While the cost of a thali increased by 65%, income growth for casual laborers and salaried workers was significantly lower, at 37% and 28%, respectively.
- Affordability Challenge: The disparity between rising costs and income growth has resulted in essential food items becoming increasingly unaffordable for households. This affordability challenge can lead to reduced portion sizes or a compromise in the variety and nutritional quality of meals.
- Impact on Budget Share: The study also analyzes the portion of monthly wages or salaries required to afford two thalis every day for a month. This share increased from 22.5% of a casual laborer’s monthly earnings in 2018 to 27.2% in 2023. For salaried employees, it increased from 9.9% to 12.8% over the same period.
- Incomplete Data: Data limitations, particularly regarding the absence of certain ingredients like spices and ghee in the analysis, This suggests that the actual cost of making a thali could be even higher than the calculated figures.
Key aspects of the relationship between thali prices and inflation
- Inflation and Ingredient Prices: The prices of ingredients like rice, dal, vegetables, and oil can be affected by inflation. If the prices of these essential ingredients rise due to inflationary pressures, the overall cost of preparing a thali would increase.
- Food Inflation: The cost of a thali, which is composed of various food items, is directly influenced by food inflation. If there’s high food inflation, it can significantly impact the affordability of thalis and other meals.
- Supply and Demand Dynamics: Inflation can be driven by supply and demand imbalances. If there’s a shortage of certain ingredients due to supply disruptions (e.g., poor harvests or transportation issues), prices can rise. Similarly, changes in consumer demand patterns can affect the prices of specific ingredients, further impacting thali costs.
- Monetary Policy: Central banks often use monetary policy tools to control inflation. Interest rate adjustments, money supply regulation, and other measures can impact inflation rates. High inflation rates can lead to increased production costs for farmers and manufacturers, which may trickle down to the prices of thali ingredients.
- Income Effects: Inflation can impact consumers’ purchasing power. When inflation outpaces income growth, households might need to allocate a larger portion of their income to cover basic expenses like food. This can particularly affect lower-income households, leading to affordability challenges for items like thalis.
- Regional Variation: Inflation rates can vary regionally and even locally. Different regions might experience different rates of inflation due to factors like supply chain disruptions, local economic conditions, and government policies.
- Government Policies: Government policies such as subsidies, import/export regulations, and agricultural policies can influence ingredient prices and, consequently, the cost of preparing a thali. These policies can impact the supply and availability of key ingredients.
Implications of the higher cost of a thali
- Nutritional Impact: The rising cost of thali ingredients can lead to compromised nutritional intake as households might cut back on certain items to manage expenses. This can result in inadequate diets and potential health implications.
- Affordability Strain: As thali prices escalate, households may face financial strain by allocating a larger portion of their income to food expenses. This can limit their ability to save, invest, and engage in non-essential expenditures.
- Dietary Diversity: Increased thali costs can potentially lead to reduced dietary diversity as households might opt for cheaper, less nutritious alternatives, affecting overall dietary quality.
- Balanced Meals: Higher thali costs might lead to smaller portions or fewer items in the thali, disrupting the balance of a typical meal and potentially impacting satiety and nutritional completeness.
- Quality of Life: Reduced dietary quality due to affordability challenges can have broader implications for individuals’ quality of life, health, and overall well-being.
- Economic Struggles: For households with limited disposable income, the burden of increased thali costs can exacerbate economic struggles and hinder progress.
Way forward
- Policy Interventions: Implement policies to address the widening gap between thali costs and income growth, ensuring that essential food remains affordable.
- Income Enhancement: Focus on raising wages for casual laborers and salaried workers to match the rising cost of thalis.
- Affordability Measures: Establish measures to mitigate the impact of expensive thalis on households, considering subsidies or targeted assistance.
- Nutrition Awareness: Launch campaigns to educate households about maintaining nutritious diets even when faced with affordability challenges.
- Gender-Inclusive Approach: Address gender disparities by formulating policies that empower women economically.
- Data-Driven Approach: Base policies on accurate and up-to-date data on food prices, wages, and consumption patterns.
- Food Security Initiatives: Strengthen food security programs to ensure access to nutritious food despite thali cost increases.
- Policy Evaluation: Continuously assess the effectiveness of policies in addressing thali affordability and overall well-being.
Conclusion
- The shifting dynamics between escalating costs and relatively stagnant income pose a serious challenge to maintaining a nutritionally balanced diet. As prices continue to rise, a more comprehensive approach is crucial to ensuring that affordable nutrition remains within reach for all strata of society.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Inflation: Dealing with the surge
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Inflation trends
Mains level: Inflation and its impact
Central idea
- In recent weeks, a notable surge in vegetable prices has acted as a harbinger of a potential increase in overall inflation, as gauged by the consumer price index. This inflationary trend, if sustained, could breach the upper threshold of the Reserve Bank of India’s (RBI) targeted inflation framework.
Inflation Trend Analysis
- Initial Indications of Upward Movement: The recent surge in vegetable prices over the past few weeks served as an early signal of an impending inflationary trend. These signs prompted expectations of an escalation in overall inflation, as gauged by the consumer price index, during the months of July and August.
- Confirmed by Official Data Release: The National Statistical Office’s data release on Monday solidified these apprehensions. Headline retail inflation surged to a 15-month high of 7.44 per cent in July, marking a substantial increase from the 4.87 per cent recorded in June.
- Food Prices as the Main Catalyst: Dissecting the data, it becomes evident that the major driving force behind this surge has been the elevated food prices. The consumer food price index soared to 11.51 per cent in July, significantly up from the 4.55 per cent reported the previous month.
- Core Inflation and Goods/Services Inflation Trends:
- Core Inflation: Excluding the volatile food and fuel components, core inflation has shown a moderation trend, as noted by ICRA.
- Goods and Services Inflation: Both goods (excluding food) and services inflation have demonstrated a softening trend, indicating a certain degree of stability.
Food Categories and Their Impact
- Vegetables: This category experienced a staggering price rise of 37.3 per cent, serving as a primary contributor to the overall increase.
- Spices: Prices of spices surged by 21.6 per cent, further accentuating the inflationary pressure within the food segment.
- Pulses and Products: With an inflation rate of 13.2 per cent, pulses and related products added to the upward trend in food prices.
- Cereals and Products: A rise of 13 per cent in this category also contributed to the overall surge in food inflation.
Central Bank’s Perspective
- Early Warnings Heeded: Recognizing the potential implications for overall inflation, the Reserve Bank of India (RBI) took swift action during its recent monetary policy committee meeting.
- Proactive Forecast Revision: In a preemptive move, the RBI adjusted its inflation projection for the second quarter upwards. The initial estimate of 5.2 per cent was revised to 6.2 per cent, reflecting the central bank’s readiness to address the imminent inflationary pressure.
- Confirmation through Data: The RBI’s perspective received validation with the release of official data by the National Statistical Office. The subsequent surge in headline retail inflation to a 15-month high of 7.44 per cent in July, from the previous month’s 4.87 per cent, bolstered the central bank’s concerns.
- Food as a Key Driver: The central bank’s analysis correctly identified that the main driver behind this inflationary surge was the escalating food prices. The consumer food price index’s significant rise to 11.51 per cent in July, compared to 4.55 per cent in the previous month, reinforced the central bank’s focus on this critical aspect.
Impact of the inflation trends
- Consumer Affordability: The surge in vegetable prices contributes to overall inflation, impacting consumers’ ability to afford essential goods. As prices rise, individuals might need to allocate more of their budget to food, potentially reducing spending on other items.
- Budgetary Strain: Higher food prices, particularly vegetables, strain household budgets, affecting families’ purchasing power. This burden is often more pronounced for lower-income households, potentially leading to trade-offs in spending and impacting overall consumption patterns.
- Cost-Push Inflation: The rise in food prices, driven by vegetables and other factors, can lead to cost-push inflation. This occurs when higher production costs are passed on to consumers, causing a general increase in the price level across various sectors.
- Wage Pressure: Elevated inflation can lead to demands for higher wages by workers to maintain their real income levels. Businesses might face challenges managing increased labor costs, potentially affecting profitability.
- Monetary Policy Adjustment: The Reserve Bank of India (RBI) might need to consider adjusting its monetary policy to address the rising inflation. This could involve raising interest rates to control demand and curb price increases, potentially impacting borrowing costs and investments.
Conclusion
- Despite optimism about a forthcoming correction in vegetable prices, the economy remains vulnerable to external shocks such as crude oil price fluctuations. The committee’s continued vigilance and strategic policy responses will be pivotal in managing inflationary pressures and maintaining economic stability.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
China’s Deflation: A cause for concern?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Deflation
Mains level: Read the attached story
Central Idea
- China’s recent bout of deflation, marked by a decline in consumer prices for the first time in over two years, has sparked debates about its implications and causes.
- This article delves into the intricacies of deflation, its potential impact on economic growth, and the unique circumstances driving deflation in China.
Understanding Deflation
- Deflation Defined: Deflation refers to a sustained decrease in the general price level of goods and services within an economy.
- Historical Context: Historically, the terms “inflation” and “deflation” were linked to changes in the money supply, with “inflation” representing a rise and “deflation” a fall in money supply.
Concerns Associated with Deflation
- Economic Slowdown: Many economists view deflation as an indicator of dwindling demand for goods and services, potentially leading to an economic slowdown.
- Demand-Supply Dynamics: Falling prices may prompt consumers to delay purchases, hampering demand and triggering a ripple effect throughout the economy.
- Resource Utilization: A certain level of inflation is deemed necessary for optimal resource utilization, ensuring full economic potential is realized.
Varied Perspectives on Deflation
- Positive Instances: Some economies have experienced deflation during periods of robust growth. Japan witnessed increased real income levels despite persistent deflation.
- Economic Crises: Deflation can arise during economic crises when cautious spending and resource reallocation occur.
- Consumer Demand and Prices: Some economists argue that consumer demand dictates prices, rather than the other way around.
China’s Deflation Scenario
- Policy Measures: China’s central bank maintained low interest rates to stimulate demand amid the post-pandemic recovery.
- Property Sector Turmoil: China’s pre-pandemic property sector challenges, affecting GDP contribution, may be a root cause of the current deflationary trend.
- Complex Factors: While liquidity may not be the core issue, comprehensive analysis of money supply and monetary transmission is necessary to determine the underlying cause.
Deflation and India
| Period | Causes | Impact on India |
| Great Depression (1930s) | Global economic downturn, reduced demand | Agricultural and industrial contraction, falling prices |
| Post-Independence (1950s-1960s) | Supply-side constraints, monetary policy | Agricultural fluctuations, efforts to control inflation |
| Global Oil Crisis (1970s) | Surge in oil prices, cost-push inflation | Economic slowdown, increased costs, reduced demand |
| Economic Reforms Era (1990s) | Transition to market-oriented economy, policy measures | Sectoral slowdown, reduced demand, short-term deflation |
| Global Financial Crisis (2008-2009) | Global financial crisis, economic slowdown | Reduced consumer spending, limited deflationary impact |
Repercussions of Chinese Deflation
[A] Positive Impacts:
- Cheaper Imports: If Chinese goods become cheaper due to deflation, it could lead to lower import costs for India, benefiting consumers and businesses that rely on Chinese imports.
- Lower Input Costs: Reduced prices for raw materials and intermediate goods from China could lower production costs for Indian industries that depend on these inputs.
- Global Supply Chains: If Chinese deflation reduces the cost of production within global supply chains, Indian businesses integrated into these chains might experience cost savings.
- Improved Trade Balance: Cheaper Chinese imports can contribute to a more favorable trade balance for India, especially if it leads to reduced import bills.
[B] Negative Impacts:
- Export Competition: Cheaper Chinese exports due to deflation could increase competition for Indian exports in international markets, potentially affecting certain Indian industries.
- Import Dumping: A flood of cheap Chinese goods into the Indian market could harm domestic producers, leading to job losses and economic strain.
- Investment Flows: A slowdown in China’s economy caused by deflation might lead to reduced investor confidence and affect foreign direct investment (FDI) flows to India.
- Currency Effects: If China’s central bank devalues its currency to boost exports in response to deflation, it could lead to a stronger Indian rupee, impacting India’s export competitiveness.
- Commodity Prices: Reduced demand for commodities from China due to deflation could lead to lower global commodity prices, affecting Indian exporters of raw materials.
Conclusion
- China’s encounter with deflation amidst efforts to boost demand and stabilize its economy presents a multi-faceted challenge.
- Understanding the nuances of deflation, its interaction with demand dynamics, and China’s unique economic landscape are vital.
- As China navigates its path forward, policymakers must consider the interplay of factors, including the property sector’s impact and broader economic goals.
Back2Basics:
Terminologies related to PRICE RISE |
|
| Inflation | Sustained increase in the general price level of goods and services in an economy over time, leading to reduced purchasing power of money. |
| Deflation | Sustained decrease in the general price level of goods and services, often resulting in reduced consumer spending and economic stagnation. |
| Hyperinflation | Extremely rapid and uncontrollable increase in prices, eroding the value of money and disrupting economic stability. |
| Stagflation | Simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation, contrary to traditional economic theories. |
| Creeping Inflation | Gradual increase in the general price level at a rate of 1-3% annually, considered normal and manageable. |
| Galloping Inflation | High inflation ranging from 10% to several hundred percent per year, eroding savings and economic planning. |
| Demand-Pull Inflation | Rise in prices due to demand exceeding supply, often occurring during periods of strong economic growth. |
| Cost-Push Inflation | Increase in prices caused by higher production costs, such as rising wages or raw material expenses. |
| Built-In Inflation | Cycle of rising prices and wages as workers demand higher wages to match inflation, contributing to a continuous cycle. |
| Structural Inflation | Inflation resulting from supply and demand imbalances due to structural factors like technology changes or market conditions. |
| Open Inflation | When rising prices are publicly acknowledged and factored into economic decisions, including wage negotiations. |
| Suppressed Inflation | Prices rise but are officially reported at a lower rate due to government intervention, subsidies, or price controls. |
| Repressed Inflation | Artificially keeping prices low through government controls despite demand exceeding supply, leading to potential future price spikes. |
| Disinflation | Decrease in the rate of inflation, indicating the general price level is still rising but at a slower rate, often a transition to more stable inflation levels. |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Services PMI at 13-Year High
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Purchasing Managers' Index (PMI)
Mains level: NA
Central Idea
- India’s services sector has exhibited significant growth, as reflected by the S&P Global India Services Purchasing Managers’ Index (PMI), which reached a 13-year high of 62.3 in July.
- The recovery is driven by increased demand, new business opportunities, and robust export orders.
- However, challenges such as rising input costs and cautious output pricing indicate a nuanced landscape.
Service SectorThe service sector, also known as the tertiary sector, includes a wide range of economic activities that are focused on providing intangible goods and services to customers. Some examples of activities that fall under the service sector include:
|
Purchasing Managers’ Index (PMI)
- PMI is an indicator of business activity — both in the manufacturing and services sectors.
- The S&P Global India Services PMI is compiled by S&P Global from responses to questionnaires sent to a panel of around 400 service sector companies.
- It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
- It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
How is the PMI derived?
- The PMI is derived from a series of qualitative questions.
- Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.
How does one read the PMI?
- A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
- Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
- If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.
Recent Feat Achieved
- Output Levels: The survey-based index shows that output levels experienced the fastest growth since June 2010, driven by robust demand and increased new business gains.
- Job Creation: Despite the surge in workload, job creation remained modest, with a “slight” pace of hiring. Firms employed a mix of part-time, full-time, permanent, and temporary staff.
- Rising Input Costs: Input costs recorded the fastest increase in 13 months, primarily due to higher food, labor, and transportation expenses.
- Output Price Dynamics: On the other hand, firms displayed caution in their output pricing strategy, with output prices increasing at the slowest rate in three months. This approach could be attributed to the desire to secure new contracts.
- Overseas Expansion: Export orders received a significant boost, with firms reporting the second-fastest increase in export orders since the inception of the index in September 2014.
- Key Growth Sources: Countries like Bangladesh, Nepal, Sri Lanka, and the UAE emerged as key sources of growth in export orders.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s Economic Ascent: From Top 10 to Top 3 Economies
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India's economic growth
Central Idea
- India is set to become the world’s third-largest economy by FY28, two years earlier than projected, according to economists at SBI Research.
- Prime Minister highlighted India’s remarkable economic progress during his tenure.
India’s Economic Growth Trajectory
- Actual progress: India’s Gross Domestic Product (GDP) has grown by an impressive 83% between 2014 and 2023, a close second to China’s growth rate of 84% during the same period.
- Financial Crisis Impact: While India’s economy was affected by the 2008-09 Global Financial Crisis its resilience was significantly better than that of European countries, contributing to its growth advantage over them.
- Stagnation of Competing Countries: Many other top 10 economies have struggled to maintain significant growth rates, allowing India to overtake them. Ex. the UK’s total GDP grew by only 3%, France’s by 2%, Russia’s by 1%, while Italy’s GDP stagnated, and Brazil’s GDP even contracted by 15% during the same nine-year period.
India’s Projected Growth
- India’s Prospective Rank: According to forecasts from the International Monetary Fund (IMF), India is expected to become the third-largest economy globally by 2027, overtaking both Germany and Japan.
- India’s Growth Advantage: Even with a more moderate growth rate of 6% per annum, India’s GDP in 2027 will be approximately 38% higher than its 2023 level.
- Recessing countries: Japan and Germany are projected to achieve only a 15% increase over the same period, enabling India’s ascendancy to the third rank.
- Challenges of Catching up: The gap between China and the US (the top two economies) and India’s GDP remains substantial.
- Digitalization and Global Sentiment: Positive aspects include increased digitalization of the economy and the opportunity to attract investments due to negative global sentiment towards China.
Issues with such growth: Per Capita GDP Disparity
- Aggregate vs. Per Capita Numbers: While India’s aggregate GDP growth has been impressive, it is essential to consider per capita GDP figures to understand the actual prosperity of the country’s citizens.
- Low Per Capita GDP: India’s per capita GDP, at $2,600 per annum, remains the lowest among the top 10 economies and lags considerably behind the countries it has overtaken, such as the UK, Brazil, and Italy.
Reasons for such disparity
- Pandemic Devastation: MSMEs, contributing 30% to India’s GDP and employing 110 million people, have been hit hard by the pandemic. Government surveys suggest that around 9% of these enterprises have shut down due to COVID-19.
- Inflation: The decimation of MSMEs has resulted in core inflation, giving pricing power to a few large companies and burdening consumers with increased costs.
- Unemployment Woes: The struggles of MSMEs are a significant reason behind India’s failure to reduce unemployment rates, leading many towards the rural job guarantee scheme for paid work.
- Manufacturing-Led Economy: India’s inability to build a manufacturing-led economy remains a challenge, affecting job creation.
- Factor Market Reforms: Successive governments have struggled to implement meaningful factor market reforms in land and labor laws.
Conclusion
- Addressing the hidden crisis will require sustained efforts from the government, focused on supporting MSMEs and implementing crucial reforms.
- Taking timely and decisive action is essential to propel India towards a more stable and inclusive economic future.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Concerns of High Fiscal Deficit and Public debt for Indian Economy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Key concepts
Mains level: Fiscal deficit, public debt its impact and Fiscal consolidation measures
What’s the news?
- The Indian economy grapples with a soaring fiscal deficit and public debt, posing a critical challenge to its financial stability. With impending state and general elections in 2023 and 2024, the electoral budget cycle could worsen the debt situation, raising questions about its sustainability.
Central idea
- The escalating levels of fiscal deficit and public debt in India have been a persistent concern, even before the COVID-19 pandemic hit. Although there has been some recovery in the post-pandemic period, projections indicate that returning to pre-pandemic debt levels in the medium term seems unlikely.
What is meant by fiscal deficit?
- A fiscal deficit refers to the difference between a government’s total expenditures and its total revenues (excluding borrowings) during a specific period, usually a fiscal year.
- It is a crucial component of a country’s fiscal policy and represents the amount of money the government needs to borrow to meet its expenditure commitments when its total expenses exceed its total revenue.
What is meant by public debt?
- Public debt represents the total amount of money that a country’s central government owes to various creditors, whether individuals, financial institutions, or foreign governments, at a specific point in time.
- It is the cumulative result of past fiscal deficits and surpluses. Public debt includes all outstanding government borrowings, including both short-term and long-term debt.
What is meant by financial repression?
- Financial repression is an economic term used to describe government policies and regulations that manipulate interest rates, capital flows, and other financial instruments to channel funds towards the government’s debt obligations and other strategic priorities.
- It typically involves measures aimed at reducing the cost of government borrowing and raising funds for public spending, often at the expense of savers and investors.
India’s fiscal deficit and public debt
- One of the Highest Debt Levels: Even before the COVID-19 pandemic, debt levels were among the highest in the developing world and emerging market economies.
- Fiscal Deficit: The fiscal deficit in 2020–21 increased to 13.3% of GDP and has receded to 8.9% in the post-pandemic period.
- Public Debt: The aggregate public debt relative to GDP was 89.6% in 2020–21 and decreased to 85.7% after the economy started recovering from the pandemic.
- Debt-to-GSDP Ratios in Specific States: The debt-to-GSDP ratios in specific states: Punjab (48.9%), West Bengal (37.6%), Rajasthan (35.4%), and Kerala (close to 33%)
Impact of financial repression
- High Debt and Interest Payments:
- Financial repression may lead to higher government debt levels as it facilitates borrowing at low-interest rates. As a result, interest payments on the accumulated debt can become a significant burden on the government’s finances.
- On average, interest payments constitute over 5% of GDP and 25% of revenue receipts in India. This surpasses government expenditures on critical sectors like education and healthcare, hindering investments in essential infrastructure and human development.
- State-Specific Concerns: Certain states in India, such as Punjab, Kerala, Rajasthan, and West Bengal, are particularly affected by high Debt-to-GSDP ratios. The debt burden in these states poses challenges for managing finances and implementing developmental initiatives.
- Constraints on Fiscal Policy: Elevated debt levels resulting from financial repression can limit the government’s ability to implement counter-cyclical fiscal policies during economic downturns. This constraint can hinder the government’s capacity to respond effectively to shocks and economic challenges.
- Distorted Financial Market: Government interventions, such as the SLR requirement, can create imbalances in the allocation of funds, affecting the availability of credit for productive sectors like manufacturing.
- Impact on Sovereign Rating and External Borrowing: Persistently high deficits and debt levels can lead to lower sovereign ratings by rating agencies. A low sovereign rating can increase the cost of external commercial borrowing, making it more expensive for the government to raise funds from international markets.
- Burden on Future Generations: Excessive debt accumulation can lead to intergenerational equity issues, with future citizens having to repay the debt and interest accrued during the period of financial repression.
Way forward: Financial Consolidation
- Fiscal Responsibility and Budget Management (FRBM) Rules: Enforce and strengthen the existing FRBM rules to ensure prudent fiscal management. Adhering to these rules can help control deficits and prevent excessive debt accumulation.
- Targeted Interventions: Implement targeted interventions to reduce the debt burden while addressing critical needs such as education, healthcare, and infrastructure development. For instance, the government can allocate funds specifically to boost primary education and healthcare access in states with high debt burdens, such as Punjab, Kerala, Rajasthan, and West Bengal.
- Infrastructure Investments: Prioritize investments in physical infrastructure, human capital, and green initiatives to enhance economic productivity and foster sustainable development. For example, investing in renewable energy projects can support the green transition while creating employment opportunities.
- Enhance Tax Collection and Compliance: Improve tax administration and compliance to increase government revenue. Utilizing technology for cross-matching of GST and income-tax returns can enhance tax collection efficiency and curb tax evasion.
- Fiscal Reforms at the State Level: Encourage states to adopt responsible fiscal policies and avoid excessive borrowing. For example, the central government can provide incentives to states that adhere to fiscal discipline and implement reforms to improve fiscal health.
- Disinvestment and Efficient Asset Management: Pursue disinvestment and strategic asset management to optimize government resources and reduce the need for excessive borrowing. For instance, the government can consider divesting non-essential government assets and utilizing funds from asset sales efficiently. Instead of pouring money into BSNL, which may be better served by private sector expertise, the government can explore disinvestment options.
- Market-Based Interest Rates: Gradually transition towards market-driven interest rates on government borrowing to ensure a more efficient allocation of capital in the financial market. This can help improve credit availability for the private sector.
- Encourage Private Sector Participation: Promote private sector participation in critical sectors, allowing the government to focus on its core functions. For instance, the government can encourage private investment in infrastructure projects through public-private partnerships (PPPs).
- Focus on Cash Transfers: Consider providing targeted cash transfers instead of subsidies for specific commodities and services. Cash transfers can be more efficient at redistributing resources without causing unintended distortions in relative prices.
- Medium-Term Fiscal Consolidation: Develop and implement a medium-term fiscal consolidation plan to gradually reduce the fiscal deficit and public debt levels sustainably. This plan can include specific targets for debt reduction and deficit control.
Conclusion
- Financial repression’s adverse effects, along with the heavy costs of high deficits and debt, necessitate responsible policy interventions and fiscal consolidation. Emphasizing technological advancements and prudent economic policies will be vital in tackling the debt burden and ensuring long-term fiscal sustainability.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A roadmap to eliminate poverty in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Economic indicators and concepts
Mains level: India's economic growth, Indicators, future prospect and challenges
What’s the news?
- With the receding impact of Covid-19 and hopeful prospects for an amicable resolution to the Russia-Ukraine War, India must now focus on charting its future growth strategy
Central idea
- India’s current per capita income estimated at $2,379 in 2022-23, which needs to be raised by nearly six times over the next 25 years. This ambitious goal will pave the way for a higher standard of living and the eradication of poverty. However, achieving this vision requires a comprehensive understanding of the challenges ahead and the necessary actions to overcome them.
What is per capita income?
- Per capita income refers to the average income earned by individuals in a specific geographic area. It is calculated by dividing the total income of a population by the total number of individuals in that population.
- Per capita income provides an indicator of the average standard of living and economic well-being within a given population.
What is Gross Fixed Capital Formation (GFCF)?
- GFCF refers to the total value of investment in fixed assets within an economy, such as machinery, equipment, buildings, and infrastructure, during a specific period.
- It represents the net increase in the stock of fixed capital goods.
- GFCF is an essential component of aggregate demand and is considered a driver of economic growth.
- Higher levels of investment in fixed assets contribute to increased production capacity, improved productivity, and long-term economic development.
- The GFCF ratio is often expressed as a percentage of GDP, indicating the proportion of total investment in fixed assets relative to the size of the economy.
What is incremental capital-output ratio (ICOR)?
- The ICOR is an economic indicator that measures- amount of investment required to generate an additional unit of output.
- It represents the ratio between the change in capital investment and the corresponding change in output or GDP.
- It provides insights into the efficiency of capital utilization and the productivity of investment in an economy.
- A lower ICOR indicates that a smaller amount of investment is required to generate a given increase in output, indicating higher efficiency and productivity of capital.
- A higher ICOR suggests that a larger amount of investment is needed to achieve the same level of output growth, indicating lower efficiency of capital utilization.
Growth Target and Investment Requirements
- To sustain continuous growth of 7 percent over the next 25 years, India must maintain a GFCF rate of 28 percent.
- According to the latest release of NSO, the GFCF rate in current prices for 2022-23 is 29.2 per cent of GDP.
- While the commonly assumed incremental capital-output ratio (ICOR) of 4 suggests improved capital efficiency, recent trends indicate an average ICOR of 4.65 from 2016-17 to 2022-23.
- Acknowledge the evolving ICOR and work towards an estimated investment rate of 30-32 percent of GDP.
- Both public and private investments, especially from the corporate and non-corporate sectors, need to increase.
- Direct investments into sectors that promote growth and generate employment opportunities
- Welcoming Foreign direct investment in emerging technological sectors
What global factors at present poses challenges?
- The overall climate for peace– necessary for growth– deteriorated- Ukraine-Russia conflict.
- Prolonged tension and conflicts- negative impact on global stability and economic growth.
- Shifting attitude of some countries towards global trade.
- Developed countries, which previously advocated for free trade, are now imposing restrictions on imports– challenges for developing countries like India, particularly as they strive to compete in the world market.
- Supply disruptions of critical imports, such as oil, can cause setbacks for developing and developed countries alike.
- The absorption of new technologies, such as Artificial Intelligence (AI)- impact on the industrial structure and employment landscape– challenge for populous countries like India
- Balancing economic growth with environmental sustainability may require compromises and adjustments in the growth rate.
What strategy India must follow to sustain its growth?
- India’s economic transformation in 1991 marked a departure from the past, embracing a more market-oriented approach.
- India needs to adopt a multi-dimensional approach that encompasses agriculture, manufacturing, and exports.
- Given India’s strength in the services sector, it is essential to preserve and enhance this advantage.
- Prepare to absorb new technologies, including Artificial Intelligence (AI),
- Reorienting the educational system to equip students with required skills and
- Identifying labour-intensive economic activities to address potential job losses due to adoption of technology
Conclusion
- India has made significant strides in building a strong and diversified economy over the past 75 years. However, India’s per capita income remains low compared to many countries, emphasizing the need for sustained growth. By addressing domestic challenges, seizing opportunities, and prioritizing inclusive development, India can realize its vision of a prosperous and equitable future.
Also read:
Why Indian manufacturing’s productivity growth is plummeting and what can be done?
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Standing Committee on Statistics (SCoS) to review all NSO Data
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NSO
Mains level: Read the attached story
Central Idea
- Revamping the SCES: Standing Committee on Economic Statistics (SCES) set up in late 2019 faced criticism for data quality issues in previous surveys.
- Broader Mandate: The government establishes the Standing Committee on Statistics (SCoS) to replace the SCES, with a mandate to review all surveys conducted under the National Statistical Office (NSO).
Standing Committee on Statistics (SCoS): Composition and Mandate
- Chairperson: Pronab Sen, India’s first chief statistician and former chairman of the National Statistical Commission (NSC), appointed as the chair of the new committee.
- Membership: SCoS consists of 10 official members and four non-official members, including eminent academics.
Need for SCoS
- Concerns from Economic Advisory Council: Members, including Bibek Debroy, called for an overhaul of India’s statistical machinery.
- Lack of technical Expertise: SCoS aims to address critiques by providing technical advice on survey design and methodology.
- Issues with Indian Statistical Service: Questions raised about the expertise of the Indian Statistical Service in survey design.
Roles and Responsibilities of the SCoS
- Reviewing Framework and Results: SCoS is responsible for reviewing the framework and results of all surveys conducted under the NSO.
- Data Gap Identification: SCoS identifies data gaps in official statistics and develops strategies to fill those gaps.
- Use of Administrative Statistics: Committee mandated to explore the use of administrative statistics to improve data outcomes.
Back2Basics: National Statistical Office (NSO)
(a) Historical Background:
- The NSO was established in 1950 as the Central Statistical Office (CSO) under the Ministry of Planning.
- It was later renamed the National Sample Survey Office (NSSO) in 1970 and subsequently became the NSO in 2019.
- Over the years, it has evolved to become the primary statistical agency in India.
(b) Organizational Structure:
- The NSO consists of several divisions and units responsible for different statistical functions.
- These include the Survey Design and Research Division, Field Operations Division, Data Processing Division, National Accounts Division, Price Statistics Division, and Social Statistics Division, among others.
(c) Key organizations under NSO: Central Statistical Office (CSO)
- The CSO is a part of the NSO and focuses on macroeconomic statistics and national income accounting.
- It is responsible for producing key economic indicators such as the Gross Domestic Product (GDP), Index of Industrial Production (IIP), Consumer Price Index (CPI), and Wholesale Price Index (WPI).
(d) Important Surveys Conducted
- Population Census: The NSO conducts a decennial Population Census in collaboration with the Registrar General and Census Commissioner of India. The census collects data on population size, composition, and other demographic characteristics.
- National Sample Survey (NSS): The NSS is a large-scale household survey conducted by the NSO to collect data on various socio-economic aspects. It provides valuable information on employment, consumer expenditure, poverty, education, health, and other important indicators.
- Economic Census: The NSO conducts the Economic Census periodically to collect data on the number of business establishments, their distribution across sectors and regions, employment, and other relevant economic variables.
- Annual Survey of Industries (ASI): The ASI is conducted by the NSO to collect data on the performance and structure of the industrial sector in India. It covers various aspects such as employment, wages, production, and financial indicators.
- Agricultural Census: The NSO conducts the Agricultural Census periodically to collect comprehensive data on agricultural holdings, cropping patterns, land use, irrigation, livestock, and other relevant agricultural variables.
- Health and Morbidity Survey: The NSO conducts surveys on health and morbidity to gather data on healthcare utilization, access to healthcare services, prevalence of diseases, and other health-related indicators.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Why Indian manufacturing’s productivity growth is plummeting and what can be done?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Challenges faced by India's manufacturing sector, declining productivity, and its impact on employment and economy
What is the news?
- According to a recent study Productivity growth in Indian manufacturing has been slowing since the 1990s, with a more pronounced decline in the years leading up to the Covid-19 pandemic. Exploring the causes behind this decline is crucial to develop effective strategies for revitalizing the sector.
Central idea
- India’s manufacturing sector has long been a matter of concern for policymakers and the subject of extensive academic research. The government has consistently aimed to increase the share of manufacturing in the country’s GDP. However, despite efforts to promote manufacturing, the sector’s contribution and overall employment has remained stagnant.
Key Facts about Manufacturing Productivity in India
- Slowing Growth: Productivity growth in India’s manufacturing sector has been declining since the 1990s, with a significant acceleration in the mid-2010s and leading up to the Covid-19 pandemic.
- Gap with the United States: India’s manufacturing productivity per worker is considerably lower compared to the United States. In 2020, it was only around a fifth of the productivity level in the US.
- Regional Disparities: There are wide variations in manufacturing productivity across Indian states. Western and Central Indian states tend to have higher average productivity, while Southern and Eastern states have lower productivity levels. This contrasts with the GDP per capita rankings, where Southern states generally have higher incomes than their Western and Central counterparts.
Potential reasons behind the decline in manufacturing productivity
- Slow Manufacturing Sector Growth: The overall growth rate of India’s manufacturing sector has been decreasing, particularly since around 2015. This sluggish growth can limit the opportunities for productivity improvement and hinder overall sector performance.
- Insufficient Investments: Inadequate investments in technology, infrastructure, and research and development (R&D) can hamper productivity growth. Limited capital expenditure by firms may result in outdated machinery, inefficient processes, and lower productivity levels.
- Skill Mismatch: The manufacturing sector requires a specific skill set, and a mismatch between the skills possessed by the labor force and the skills demanded by the industry can impede productivity. The lack of trained and skilled workers in areas such as advanced manufacturing techniques, automation, and specialized operations may contribute to lower productivity levels.
- Informality and Informal Labor Market: The prevalence of informal employment in the manufacturing sector can hinder productivity growth. Informal workers often lack access to training, social security benefits, and stable employment conditions, which can lead to lower productivity levels compared to formal employment arrangements.
- Regulatory Challenges: Cumbersome regulatory processes, including complex labor laws, bureaucratic red tape, and regulatory compliance burdens, can hamper productivity growth. These challenges may discourage investment and hinder the adoption of efficient production practices.
- Infrastructure Deficiencies: Inadequate infrastructure, such as poor transportation networks, unreliable power supply, and limited access to technology and connectivity, can negatively impact manufacturing productivity. Insufficient infrastructure can increase costs, disrupt supply chains, and hinder efficiency in production processes.
- Inefficient Supply Chains: Weak linkages and coordination within supply chains can contribute to lower productivity in manufacturing. Challenges such as fragmented value chains, inefficient logistics, and inadequate coordination between suppliers, manufacturers, and distributors can result in delays, increased costs, and reduced overall productivity.
- Lack of Innovation and Technology Adoption: Limited emphasis on innovation, research, and development, as well as a slower adoption of advanced technologies, can constrain productivity growth in the manufacturing sector. Insufficient investment in technological upgrades and a reluctance to adopt new manufacturing techniques can lead to lower productivity compared to global standards.
Implications of Declining manufacturing productivity
- Economic Growth: Declining manufacturing productivity can hinder overall economic growth.
- Reduced Competitiveness: Declining productivity in manufacturing can erode a country’s competitiveness in the global market. This can lead to a decline in exports and an increase in imports, negatively impacting the trade balance and potentially affecting the overall economic stability of a nation.
- Employment and Labor Market Challenges: Lower productivity can result in reduced job creation within the manufacturing sector, leading to unemployment or underemployment.
- Technological Progression: When productivity declines, the incentives for firms to invest in research and development or adopt new technologies may diminish, leading to a slower pace of technological advancement within the manufacturing sector.
- Industrial Development and Diversification: A decline in productivity can hinder the growth and diversification of the manufacturing sector, limiting its ability to contribute to overall industrial development.
- Investment and Innovation: Declining productivity in manufacturing can discourage investment and innovation within the sector.
- Sectoral Shifts: Declining manufacturing productivity may result in a shift towards other sectors of the economy. If manufacturing becomes less competitive and less productive, resources and investments may be redirected to other sectors such as services.
What can be done?
- Boost Investments: Encouraging both domestic and foreign investments in the manufacturing sector can help upgrade infrastructure, improve technology adoption, and enhance productivity. This can be achieved through attractive investment policies, tax incentives, and easing of regulatory procedures.
- Skill Development and Training: Focusing on skill development programs tailored to the manufacturing sector can address the skill mismatch and enhance the capabilities of the workforce. Collaborating with educational institutions and industry associations to design training programs and apprenticeships can ensure a skilled labor force.
- Infrastructure Development: Prioritizing infrastructure development, including transportation networks, power supply, logistics, and digital connectivity, is essential for improving productivity. Investment in infrastructure projects can create an enabling environment for manufacturing activities and reduce operational inefficiencies.
- Regulatory Reforms: Streamlining regulatory processes, reducing bureaucratic complexities, and simplifying labor laws can create a business-friendly environment. Establishing a favorable regulatory framework can attract investments, foster innovation, and enhance productivity in the manufacturing sector.
- Research and Development (R&D): Encouraging R&D activities and innovation in the manufacturing sector can lead to technological advancements and productivity gains. Collaborations between industry, research institutions, and academia can facilitate knowledge transfer and promote innovation-driven manufacturing.
- Entrepreneurship and Start-up Ecosystem: Supporting entrepreneurship and nurturing a vibrant start-up ecosystem in manufacturing can bring fresh ideas, innovation, and competitiveness. Providing access to finance, mentorship programs, and incubation support can encourage entrepreneurial growth and drive productivity.
- International Collaborations: Strengthening international collaborations and partnerships can facilitate knowledge exchange, technology transfer, and best practice sharing. Engaging with global manufacturing networks can help Indian manufacturers learn from successful models and adapt to global standards.
Conclusion
- The findings of this study underscore the urgent need for policy interventions to address the challenges faced by India’s manufacturing sector. Encouraging investments in workers, improving labor market conditions, and promoting a conducive business environment are crucial steps that can help revitalize India’s manufacturing sector, enhance productivity, and lift millions out of poverty.
Also read:
Revisiting India’s Manufacturing Dilemma: A Call for Comprehensive Ecosystem Development
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
A macro view of the fiscal health of States
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Key economic concepts
Mains level: Fiscal imbalance and its impact on an economy
Central Idea
- In India, the States play a crucial role in revenue mobilization, government expenditure, and borrowing. Understanding their fiscal situation is essential for drawing evidence-based conclusions about the country’s overall fiscal health.
Relevance of the topic
Despite the decrease in fiscal deficits, it remains important to address the challenges associated with fiscal imbalances, including persistence of revenue deficits in many States
Revise key concepts Fiscal deficit, revenue deficit, Debt-to-GDP ratio etc
Fiscal imbalance and its impact on an economy and thereby social welfare.
The fiscal imbalance at present
- Reduction in Fiscal Deficit:
- There has been a significant reduction in fiscal deficits at both the Union and State levels. The Union’s fiscal deficit decreased from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).
- The aggregate State fiscal deficit also decreased from 4.1% of GDP in 2020-21 to 3.24% in 2022-23 (RE).
- Major States are expected to achieve a fiscal deficit of 2.9% of GDP in 2023-24 (BE).
- Revenue Deficit Challenge:
- Despite the reduction in fiscal deficits, there is persistence of revenue deficits in many States.
- Out of the 17 major States analyzed, 13 have a deficit in the revenue account for the fiscal year 2023-24 (BE).
- Seven States, namely Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal, experience fiscal deficits primarily driven by revenue deficits.
- High Debt-to-GSDP Ratios: Some of the States with revenue deficits also have high debt-to-GSDP ratios. This indicates that these States have accumulated significant levels of debt relative to their Gross State Domestic Product (GSDP).
The Impact of fiscal imbalance on an Economy
- Macroeconomic Instability: Fiscal imbalances, such as high fiscal deficits and revenue deficits, can lead to macroeconomic instability. Large deficits may increase government borrowing, which can put upward pressure on interest rates, crowd out private investment, and potentially lead to inflationary pressures. This instability can hinder economic growth and create uncertainty in the business environment.
- Increased Debt Burden: Persistent fiscal imbalances often result in increased government debt levels. High levels of public debt can have adverse consequences, including increased debt servicing costs, reduced fiscal flexibility, and potential credit rating downgrades. A higher debt burden can also limit the government’s ability to invest in critical areas such as infrastructure, education, and healthcare.
- Reduced Public Investments: Fiscal imbalances may necessitate fiscal consolidation measures, such as expenditure cuts and reduced public investments. This can impact critical areas of public spending, including infrastructure development, social welfare programs, and public services. Reduced investments can hinder long-term economic growth and development.
- Limited Policy Space: Fiscal imbalances can limit the government’s ability to implement countercyclical fiscal policies during economic downturns. A high debt burden or constrained fiscal capacity may prevent the government from effectively using fiscal stimulus measures to boost aggregate demand and support economic recovery.
- Pressure on Social Welfare: Fiscal imbalances may lead to reductions in social welfare programs and public services. Austerity measures implemented to address fiscal imbalances can disproportionately affect vulnerable populations and hinder efforts to address income inequality and social welfare needs.
- Investor Confidence and Credit Ratings: Persistent fiscal imbalances can erode investor confidence and negatively impact the country’s credit ratings. A lower credit rating can increase borrowing costs, discourage foreign investment, and limit access to international capital markets.
- Inter-Generational Equity: Fiscal imbalances, particularly when driven by high levels of public debt, can have inter-generational equity implications. The burden of repaying debt and managing fiscal imbalances may fall on future generations, impacting their ability to invest, save, and achieve sustainable economic growth.
Reducing Revenue deficit: Way forward
- Link Interest-Free Loans to Revenue Deficit Reduction: Implement a mechanism where interest-free loans provided by the Union Government to States are linked to a reduction in revenue deficits. This incentivizes States to prioritize revenue generation and reduce reliance on borrowed funds for revenue expenditure.
- Defined Time Path for Revenue Deficit Reduction: Establish a clear timeline and targets for reducing revenue deficits in States. This includes setting specific goals for revenue deficit reduction and developing a credible fiscal adjustment plan to achieve those targets.
- Performance Incentive Grants: Introduce performance incentive grants to reward States that effectively reduce their revenue deficits. The grants can be designed based on the recommendations of previous Finance Commissions, considering factors such as the extent of deficit reduction, fiscal discipline, and efficient revenue management.
- Fiscal Adjustment and Expenditure Rationalization: Encourage States to undertake fiscal adjustment measures to align revenue and expenditure. This involves conducting a detailed analysis of expenditure patterns, prioritizing essential spending, and identifying areas for rationalization and efficiency gains.
- Strengthen Revenue Mobilization: Enhance efforts to improve revenue mobilization by implementing measures such as broadening the tax base, improving tax administration and compliance, and exploring new revenue sources. This includes ensuring effective collection of Goods and Services Tax (GST) and non-GST revenues.
- Public Financial Management Reforms: Strengthen public financial management systems to enhance transparency, accountability, and efficient utilization of resources. This includes improving budgeting processes, expenditure tracking, and financial reporting mechanisms to monitor and control revenue and expenditure.
- Long-Term Revenue Planning: Develop a comprehensive long-term revenue plan that aligns with the country’s development goals. This involves forecasting revenue trends, identifying potential revenue sources, and implementing policies that support sustainable revenue generation over the long term.
- Capacity Building: Invest in building the capacity of State governments in revenue management, tax administration, and expenditure control. This includes providing training and technical assistance to enhance their skills and capabilities in managing revenue deficits effectively.
- Public Awareness and Participation: Conduct public awareness campaigns to educate citizens about the importance of revenue generation, fiscal discipline, and the impact of revenue deficits on public services. Foster public participation in budgeting processes to promote transparency and accountability.
- Regular Monitoring and Reporting: Establish a robust monitoring and reporting mechanism to track the progress of revenue deficit reduction efforts. Regularly assess and report the performance of States in revenue mobilization and deficit reduction to ensure accountability and facilitate necessary corrective actions.
Prelims mark enhancer
Conclusion
- Effectively managing revenue deficits is crucial for achieving fiscal balance and sustainable economic growth. By adopting a macro view and implementing appropriate measures and incentives, India can consolidate revenue deficits in its States. This would ensure fiscal stability, stimulate State-specific growth, and maintain macroeconomic stability at the national level
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Greedflation and its Counter Arguments
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Greedflation
Mains level: NA
Central Idea: Greedflation
- The concept of “Greedflation” has emerged, suggesting that corporate greed for higher profits is a significant cause of the high inflation experienced in the United States since the pandemic.
- Proponents of this theory argue that increased corporate profit margins have contributed to rising prices.
- However, many economists question the validity of this narrative and offer alternative explanations for inflation.
Inflation and Business Pricing
- Pricing Dynamics: Businesses set prices based on consumer willingness to pay, aiming to maximize profits.
- Consumer Influence: Consumers ultimately determine the market price through their buying decisions.
- Market Competition: Businesses unable to sell products at high prices must lower prices to clear their stock.
Inflation as a Macro-Level Phenomenon
- Widespread Price Rise: Inflation refers to a general increase in the price level across the economy.
- Corporate Influence on Prices: Corporations can impact overall prices by reducing supply, but there is no evidence of deliberate output reduction.
- Monetary Policy and Inflation: The expansionary monetary policy of the U.S. Federal Reserve, combined with supply-chain disruptions, explains recent inflation.
Rising Corporate Profit Margins
- Rising Costs vs. Consumer Prices: Input costs have risen faster than consumer goods prices, leading to unexpected profit margin growth.
- Corporate Profits vs. Wider Economy: Large corporations may have benefited from smaller business closures during the pandemic, but they represent a small portion of the overall economy.
- Profit Margins and Inflation: Rising profit margins do not directly cause high inflation; prices are determined by buyers, not sellers.
Critique of “Greedflation” as Cost-Push Inflation
- Cost-Push Inflation Comparison: Greedflation is likened to cost-push inflation theories that attribute price increases to rising input costs.
- Consumer Influence on Costs: The cost of inputs is indirectly determined by consumers through competitive bidding in the market.
Conclusion
- The notion of greedflation, attributing high inflation to corporate greed, lacks support from economists who emphasize the influence of consumer behaviour and macroeconomic factors.
- While rising profit margins of corporations may indicate market dominance, they do not directly drive inflation.
- Instead, factors such as monetary policy and supply disruptions better explain the recent inflationary pressures experienced in the United States.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
What the Indian economy needs to complete with China
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Various Economic indicators
Mains level: India's economic position compared to China and the Lessons learned from China
Central Idea
- The Indian economy has reached a milestone, surpassing $3.5 trillion in size, reminiscent of China’s position in 2007. While India shows similarities with China, such as comparable per capita income, the two countries diverge significantly in their growth drivers. This divergence has implications for India’s growth trajectory and its ability to achieve upper middle-income status.
Relevance of the topic
India lags behind China on multiple fronts such as investment ratios, export performance, labor force participation, and manufacturing employment. For instance, Female Labor Force Participation of China is 61% (2022) whereas in India it stands at 24% (2022).
The stark disparities provide valuable insights to analyze and propose strategies for India’s future development in areas like investment promotion, export competitiveness, and inclusive growth.
India’s positive growth
- Economic Size: The Indian economy has recently crossed $3.5 trillion in size, according to Moody’s. This indicates a significant expansion of the economy and reflects positive growth.
- Per Capita Income: India’s per capita income is projected to rise from $2,379 in 2022 to $2,601 in 2023, as estimated by the International Monetary Fund (IMF). This upward trend indicates an improvement in individual income levels and suggests positive growth in the economy.
- Exports: India’s exports of goods and services exceeded $770 billion in 2022-23. This demonstrates the country’s ability to compete in the global market and generate revenue through international trade.
- Investment Momentum: While India’s investment ratio has been lower than China’s, there are signs of activity picking up in certain sectors after a slowdown induced by the twin balance sheet problem. This indicates positive momentum in investment and the potential for future growth.
- Services Sector: India has witnessed a growth in the services sector, particularly in areas such as IT and business process outsourcing (BPO). The expansion of the services sector contributes to economic growth and job creation.
- Increase in Formal Manufacturing: India aims to boost formal manufacturing, which has higher productivity compared to other sectors. The focus on manufacturing can lead to increased employment opportunities and overall economic growth.
- Rise in Female Labor Force Participation: Although India’s female labor force participation rate remains lower than China’s, there have been efforts to increase women’s participation in the workforce. This can contribute to enhanced productivity, economic empowerment, and overall growth
Comparison: India’s economic position with China
| Aspect | China (2007) | India (2023) |
| GDP Size | Comparable to India | $3.5 trillion |
| Per Capita Income | $2,694 | $2,601 (estimated) |
| Investment-to-GDP Ratio | Average 40% | Average around 33% |
| Exports | $1.2 trillion (goods) | $770 billion (goods and services) |
| Tariff Rate | 10.69% (2003) to 5.32% (2020) | 25.63% (2003) to 8.88% (2017) |
| Labor Force Participation Rate | Almost 73% | Estimated around 50% (2022) |
| Female Labor Force Participation | 66% (2007) to 61% (2022) | 30% (2007) to 24% (2022) |
| Passenger Car Sales | 6.3 million | 3.8 million |
| Manufacturing Productivity | Twice as productive as transport | Less productive than industry and construction |
The disparities between India and China
- Investment Ratio: China’s investment-to-GDP ratio averaged 40% between 2003 and 2011, while India’s investment ratio during the same period averaged around 33%. This indicates that China had a higher level of investment, which contributed to its rapid economic growth.
- Export Performance: In 2022-23, India’s exports of goods and services surpassed $770 billion, while China’s exports had already crossed $1.2 trillion in 2007. China’s deeper integration with the global economy and higher export volumes indicate a more robust export-driven growth model compared to India.
- Tariff Rates: China experienced a decline in tariff rates, with the simple mean falling from 10.69% in 2003 to 5.32% in 2020. In contrast, India’s tariff rate decreased from 25.63% in 2003 to 8.88% in 2017 but has risen thereafter. China’s lower tariff rates have facilitated its emergence as a global supply chain hub.
- Labor Force Participation: China had a considerably higher labor force participation rate, with almost 73% in 2007, while India’s rate stood at around 50% in 2022. The disparity, primarily driven by female labor force participation, impacts spending capacity and economic growth potential.
- Sectoral Employment: Both countries have similar sectoral distribution, but China experienced a faster decline in agricultural employment compared to India. India’s challenge lies in finding alternative employment opportunities for its declining agricultural workforce, with the construction and service sectors historically providing more jobs than formal manufacturing.
Implications of these disparities for future development of India
- Growth Trajectory: The disparities in investment ratios indicate that India may face challenges in achieving rapid economic growth and reaching its developmental goals without increasing investment levels.
- Export Competitiveness: The disparities in export performance suggest that India needs to enhance its global competitiveness to expand its export base and capitalize on international trade opportunities.
- Job Creation: The disparities in labor force participation rates, particularly the low female participation rate, have implications for employment generation and inclusive growth in India.
- Sectoral Shift: The slower decline in agricultural employment compared to other sectors raises concerns about the need for alternative employment opportunities for the declining agricultural workforce
- Investment Climate: The disparities in investment ratios underscore the importance of creating a favourable investment climate in India to attract domestic and foreign investments necessary for sustained economic growth.
Lessons learned from China
- Emphasis on Investment: China’s high investment-to-GDP ratio played a crucial role in its rapid economic growth. India can benefit from prioritizing investments in infrastructure, industries, and human capital development to drive economic expansion and productivity.
- Export-Led Growth: China’s success in becoming a global manufacturing and exporting powerhouse highlights the importance of export-led growth. India can focus on enhancing its export competitiveness, diversifying export markets, and promoting value-added exports to boost economic growth and job creation.
- Trade Liberalization: China’s gradual reduction of tariffs and its efforts to integrate into global supply chains helped it become a major player in international trade. India can learn from this and work towards reducing trade barriers, improving trade infrastructure, and actively participating in regional and global trade agreements to enhance its integration into the global economy.
- Manufacturing Development: China’s strategic focus on developing its manufacturing sector contributed significantly to its economic growth and job creation. India can prioritize the growth of formal manufacturing, foster a business-friendly environment, and provide targeted support to enhance manufacturing capabilities and competitiveness.
- Infrastructure Development: China’s investments in infrastructure, such as transportation networks, energy systems, and telecommunications, played a vital role in supporting its economic growth. India can invest in modernizing and expanding its infrastructure to create a solid foundation for economic development and attract further investments.
- Human Capital Development: China’s emphasis on education, skills training, and research and development (R&D) has contributed to its technological advancement and innovation capabilities. India can focus on improving the quality of education, enhancing vocational training programs, and promoting research and development to nurture a skilled workforce and foster innovation.
- Long-Term Planning: China’s long-term development plans, such as its Five-Year Plans, provided a roadmap for sustained economic growth and policy continuity. India can develop comprehensive and strategic plans that align with its development goals and ensure consistent implementation of economic policies.
- Infrastructure for Special Economic Zones (SEZs): China’s establishment of SEZs played a pivotal role in attracting foreign direct investment and promoting export-oriented manufacturing. India can learn from this model and develop specialized zones with the necessary infrastructure, incentives, and supportive policies to attract investments and promote targeted sectors.
Conclusion
- In the coming years, India’s growth may continue at a moderate pace, even if low- and semi-skilled job creation in manufacturing falls short. However, achieving the explosive growth witnessed by China between 2007 and 2021 would require increased investment activity, a resurgence in exports (particularly goods), a rise in female labor force participation, and greater employment opportunities in formal manufacturing. India must strive to replicate the success story of its neighbor if it aims to achieve rapid economic advancement.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s Middle Class: Estimation, Expansion and Economic Impact
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Middle class woes in India
Central Idea
- Estimating India’s middle class: This article delves into the estimation of India’s middle class, a crucial indicator of household consumption and the economy’s health.
Key points of discussions
- Lack of clarity in defining the middle class: The absence of a clear definition results in diverse estimations, based on subjective judgments or income ranges and consumption benchmarks.
- Importance of expanding the middle class: Despite the impact of the existing middle class, the focus is shifting towards significant expansion to unleash India’s economic potential.
Understanding a Genuine Middle Class
- Characteristics of a genuine middle class: It entails stable and resilient consumption patterns, enabling them to weather economic downturns without significantly reducing consumption.
- Implications for investors and the economy: A stable and resilient middle-class demand instills investor confidence, leading to job creation and reinforcing the middle class. Surplus income contributes to overall savings.
- Continuous income improvement: A strong foundation for continuous income growth within the middle class drives higher-quality consumption and stimulates diverse and high-quality supply responses.
Features of the Indian Middle Class
- Stable income
- Higher levels of education and skills
- Limited disposable income for discretionary spending
- Homeownership aspirations
- Access to credit and financing
- Affordability of consumer durables and comforts
- Prioritization of healthcare and insurance
- Emphasis on savings and investments
- Associated with upward social mobility
- Value placed on education and success
- Active civic engagement
Estimating India’s Genuine Middle Class
- Discrepancy in popular estimates: Popular estimates tend to overstate the middle class’s size, obscuring the actual extent.
- Concentration within the richest deciles: India’s genuine middle class is primarily concentrated within the richest 10 to 20 percent of households rather than uniformly distributed.
- Concerns about occupation profiles: Instability characterizes the occupation profiles of the richest deciles, with a reliance on small agricultural land and informal non-agricultural occupations.
- Limited upward mobility: Chief wage earners in the richest deciles demonstrate limited potential for upward mobility into higher-skilled occupations.
Issues faced by the Indian Middle Class
- Income Stagnation: Many middle-class individuals in India struggle with stagnant income levels, with limited opportunities for significant wage growth or promotions.
- Rising Cost of Living: The increasing cost of essential goods and services, including housing, education, healthcare, and transportation, often outpaces income growth, putting financial strain on the middle class.
- Inflationary Pressures: Inflation rates impact the purchasing power of the middle class, making it challenging to maintain their standard of living and meet their financial obligations.
- Job Insecurity: Middle-class individuals face concerns about job security, as economic uncertainties and technological advancements lead to changes in job markets and potential layoffs.
- Healthcare Expenses: Rising healthcare costs and limited access to quality healthcare put a significant burden on the middle class, impacting their financial well-being and ability to seek necessary medical care.
Consequences of Limited Middle-Class Expansion
- Economic implications: The limited expansion of the middle class hinders the economy from reaching its fullest potential in terms of consumption, investments, and job creation.
- Inequality concerns: A small middle class contributes to income inequality, as a significant portion of the population remains deprived of upward mobility and economic opportunities.
- Overreliance on the affluent: The concentration of economic power and consumption within the richest deciles may result in skewed market dynamics and limited inclusivity.
Strategies for Expanding the Middle Class
- Enhancing education and skill development: Investing in education and skill-building initiatives to equip individuals with the qualifications needed for higher-skilled occupations.
- Promoting entrepreneurship and small businesses: Creating an enabling environment for entrepreneurial growth, which can generate jobs and foster economic resilience within the middle class.
- Strengthening social safety nets: Developing robust social safety nets to provide support during economic downturns and help individuals bounce back without significant setbacks.
- Addressing informal employment: Implementing policies that promote formalization of employment, providing stability and better benefits for workers.
Way forward
- Strengthen financial literacy: Implement comprehensive programs, accessible resources, and collaborations to improve understanding of personal finance.
- Promote entrepreneurship and innovation: Foster an ecosystem with resources, mentorship, and support for middle-class individuals starting businesses.
- Build social safety nets: Establish comprehensive programs for unemployment benefits, healthcare coverage, and retraining support during economic shocks.
- Foster social dialogue: Create platforms for inclusive discussions, partnerships, and collaborations between policymakers, businesses, and the middle class.
- Prioritize work-life balance: Advocate for family-friendly policies, flexible work arrangements, and support for well-being and productivity.
- Support family-friendly policies: Implement policies for affordable childcare, parental leave, and flexible work arrangements to support work-life balance.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
RBI Monetary Policy Update
Note4Students
From UPSC perspective, the following things are important :
Prelims level: RBI Monetary Policy Committee
Mains level: Read the attached story
Central Idea
- This article discusses the recent policy review by the MPC (Monetary Policy Committee) and its implications for India’s economy.
- The MPC is responsible for making decisions regarding the repo rate and determining the policy stance to achieve specific economic objectives.
Key highlights by RBI
- Repo Rate: Kept unchanged at 6.50%
- Standing Deposit Facility (SDF) Rate: Remains unchanged at 6.25%
- Marginal Standing Facility (MSF) Rate and Bank Rate: Unchanged at 6.75%
- Target Inflation: Medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2%
RBI Monetary Policy Committee |
|
| Purpose | Make decisions on monetary policy in India |
| Constituted by | RBI Act, 1934 |
| Objective | Maintain price stability and foster economic growth |
| Members |
|
| Chairperson | Governor of the RBI |
| Decision Factors |
|
| Key Tools | Policy interest rate (Repo rate)
Policy stance |
| Impact of Decisions |
|
Various MPC tools
| Description | |
| Repo Rate | Rate at which the central bank lends money to commercial banks |
| Reverse Repo Rate | Rate at which the central bank borrows money from commercial banks |
| Cash Reserve Ratio (CRR) | Portion of banks’ deposits that they must hold as reserves with the central bank |
| Statutory Liquidity Ratio (SLR) | Percentage of certain assets that banks are required to maintain in their portfolio |
| Open Market Operations (OMOs) | Buying and selling of government securities by the central bank in the open market |
| Marginal Standing Facility (MSF) | Facility allowing banks to borrow funds overnight from the central bank against eligible securities |
| Liquidity Adjustment Facility (LAF) | Repo and reverse repo rates used by banks to manage their liquidity needs |
| Policy Stance and Communication | MPC’s approach to monetary policy and communication of decisions and outlook |
Key outlooks
- GDP growth and inflation forecasts: GDP growth forecasts provide insights into the expected pace of economic expansion, while inflation forecasts help gauge price stability and purchasing power.
- Stability of forecasts: The MPC’s latest review indicates relatively little change in the GDP growth and inflation forecasts, reflecting a consistent outlook for the economy.
- Goldilocks metaphor for the economy: The reference to a Goldilocks moment alludes to an ideal state where the economy operates optimally, striking a balance between high inflation (too hot) and faltering GDP growth (too cold). RBI surveys on consumer confidence and inflation expectations suggest a positive and favourable economic environment.
Positive Developments
- Surprising GDP growth: India’s GDP growth in FY23 exceeded the RBI’s expectations, reaching 7.2% instead of the projected 7%.
- Decrease in headline retail inflation: Retail inflation dropped to 4.7% in April, marking the lowest reading since November 2021.
- Consumption recovery and private investments: The anticipation of a robust Rabi crop production and a normal monsoon, combined with the government’s emphasis on capital expenditure, suggests a potential increase in consumption levels and private investments.
- Increase in consumer confidence: Consumer confidence is gradually improving, while Indian families expect inflation to stabilize at a more manageable level.
Major considerations
- Expected deceleration in GDP: Despite positive indicators, the MPC anticipates a slowdown in GDP growth from 7.2% to 6.5% in FY24, with professional forecasters projecting an even lower growth rate of 6%.
- Consumer confidence still in negative territory: While consumer confidence metrics show improvement, they remain below the 100 mark, indicating prevailing pessimism among the public.
- Headwinds and potentially economic challenges: Various factors, including weak global demand, volatility in global financial markets, geopolitical tensions, and the potential impact of El Nino on the monsoon, pose potential risks to India’s economy.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s GDP: Post-Pandemic Growth and Investment Challenges
Note4Students
From UPSC perspective, the following things are important :
Prelims level: India's economic growth and other indicators
Mains level: Investment and Growth prospect and impact on GDP, future growth
Central Idea
- India’s GDP level is still 5 percent below its pre-pandemic trajectory, despite recording an average growth rate of 8 percent over the past two years. This indicates the lasting impact of the pandemic and highlights the need for sustained growth of over 7-8 percent to avoid further GDP loss.
Factors Contributing to Sluggish Investment and Growth
- Global Trade Stagnation: Since the global financial crisis, global trade has experienced a slowdown, affecting India’s export-oriented industries and reducing foreign direct investment (FDI) inflows.
- Uncertain Economic Environment: Economic uncertainties, both domestic and global, have led to a cautious approach from businesses, resulting in lower investment levels. Factors such as policy volatility, regulatory hurdles, and geopolitical tensions contribute to this uncertainty.
- Decline in Corporate Investment: Corporate investment as a percentage of GDP has declined from its peak of nearly 14.5 percent in 2007-08 to around 10.5 percent. This decline can be attributed to factors like sluggish demand, high corporate debt, and a lack of investor confidence.
- Slowdown in Residential Housing: The slowdown in the real estate sector, particularly residential housing, has adversely impacted overall investment. Factors such as liquidity issues, regulatory changes, and subdued demand have led to reduced investment in the sector.
- Falling Small and Medium-Sized Enterprise (SME) Investment: Investment from SMEs, which play a crucial role in driving economic growth and job creation, has witnessed a decline. Barriers such as limited access to credit, regulatory complexities, and lack of technological capabilities hamper their investment potential.
- Insufficient Public Sector Compensation: While the central government has increased public sector investment, the overall public sector investment as a percentage of GDP has remained unchanged at 7 percent since the global financial crisis. This lack of compensation from the public sector has limited its ability to boost overall investment levels.
- Lack of “Crowd-in” Effect: The public sector’s inability to “crowd-in” private investment has contributed to sluggish growth. Despite efforts to stimulate private investment, the overall investment climate and business environment need further improvements to attract private players.
- Economic Challenges and Policy Reforms: India faces challenges such as demographic shifts, falling productivity, high indebtedness, structural inflation, and interest rates. These factors affect investor sentiment and may hinder investment and growth prospects.
Impact of Sluggish Investment and Growth on GDP
- Lower Economic Output: With reduced investment, businesses have fewer resources to expand operations, develop new products, and create employment opportunities. This, in turn, limits the overall output and growth potential of the economy.
- Unutilized Capacity: Slower investment hampers the utilization of existing productive capacity in various sectors. This underutilization leads to inefficiencies, decreased productivity, and a reduced contribution to GDP growth.
- Employment Generation: When businesses are hesitant to invest and expand, it results in limited employment opportunities. This can lead to higher unemployment rates, underemployment, and reduced household incomes, negatively impacting consumer spending and overall economic growth.
- Impaired Productivity: A lack of investment hampers productivity-enhancing measures such as adopting advanced technologies, improving infrastructure, and fostering innovation. Insufficient investment in research and development, training, and upgrading of machinery and equipment can lead to lower productivity levels.
- Reduced Business Confidence: When businesses lack confidence in the economy’s future prospects, they may delay or scale back investment plans, impacting productivity and growth. This can create a cycle of low investment and weak growth, further undermining business confidence.
- Fiscal Challenges: Reduced tax revenues and increased demand for social welfare programs can strain public finances, making it challenging for the government to allocate resources for critical development projects, infrastructure, and public services that contribute to economic growth.
- Macroeconomic Imbalances: Sluggish investment and growth can lead to macroeconomic imbalances, such as a higher fiscal deficit, current account deficit, and inflationary pressures. These imbalances can negatively affect the overall stability of the economy and impede sustained and inclusive growth.
Factors Influencing Future Growth
- Policy Reforms and Ease of Doing Business: The implementation of structural reforms and policies that promote ease of doing business can have a significant impact on future growth. Streamlined regulations, transparent governance, and business-friendly policies attract investment, foster entrepreneurship, and drive economic expansion.
- Infrastructure Development: Adequate and modern infrastructure, including transportation networks, power supply, digital connectivity, and social infrastructure, is crucial for sustainable economic growth.
- Human Capital Development: Investing in education, skill development, and healthcare contributes to the development of a skilled workforce, which is essential for innovation, productivity, and long-term economic growth.
- Technological Advancements and Digitalization: Embracing emerging technologies and fostering digitalization can boost productivity, enhance efficiency, and spur innovation. Investments in research and development, digital infrastructure, and technological adoption can drive future growth in sectors such as manufacturing, services, and agriculture.
- Trade and Global Integration: Expanding international trade and deepening economic integration can open up new markets, attract investments, and drive economic growth. Participation in regional and global trade agreements, removing trade barriers, and diversifying export markets can enhance competitiveness and create new opportunities for growth.
- Sustainable Development and Climate Change Mitigation: Transitioning towards sustainable practices, renewable energy, and green technologies can contribute to long-term growth while addressing environmental challenges. Investing in climate change mitigation and adopting sustainable practices can attract investments and promote responsible and inclusive growth.
- Financial Inclusion and Access to Credit: Promoting financial inclusion and ensuring access to affordable credit for businesses and individuals can fuel entrepreneurial activities, stimulate investment, and support consumption-led growth.
- Political Stability and Good Governance: Political stability, effective governance, and the rule of law provide a conducive environment for economic growth. Sound institutions, transparent decision-making processes, and the fight against corruption inspire confidence among investors and foster long-term economic development.
Supply Chain Relocation
- “China + One” Strategy: The supply chain relocation trend known as the “China + One” strategy involves companies diversifying their manufacturing and sourcing activities by establishing additional production facilities outside of China.
- Limited Absorption Capacity: While economies like India, Mexico, and Vietnam stand to benefit from the “China + One” strategy, their absorption capacity for large-scale relocations may be limited. These economies might not have the infrastructure, skilled workforce, or supporting ecosystem to absorb a significant influx of relocation investments.
- Size Matters: Inward FDI into China has remained substantial, indicating its continued attractiveness as a manufacturing hub. The sheer size of China’s market, its infrastructure, and established supply chains make it challenging for other economies to fully replace or surpass its role as a global manufacturing powerhouse.
- Security-Driven Relocation: Another aspect of supply chain relocation involves security concerns, particularly in advanced technology sectors such as advanced semiconductors, AI, and quantum computing. Countries, especially in the West, may relocate supply chains related to these emergent technologies to regions considered within their “circle of trust,” often referring to NATO and close allies.
Climate Change and Investment Opportunities
- Renewable Energy: The transition to a low-carbon economy presents significant investment opportunities in renewable energy sources such as solar, wind, hydro, and geothermal power. Investments in renewable energy infrastructure, research and development, and technology advancements can drive the growth of clean energy industries and contribute to decarbonization efforts.
- Energy Efficiency: Investments in energy-efficient technologies and practices can help reduce greenhouse gas emissions and lower energy consumption. Energy-efficient buildings, smart grids, efficient transportation systems, and industrial processes offer attractive investment opportunities that promote sustainability and cost savings.
- Sustainable Infrastructure: Developing sustainable infrastructure, including green buildings, eco-friendly transportation systems, waste management facilities, and water conservation projects, presents opportunities for investment. Sustainable infrastructure projects can enhance resilience, reduce environmental impacts, and contribute to sustainable development goals.
- Green Finance and Investment Products: The growing demand for sustainable investments has led to the emergence of green finance and investment products. These include green bonds, sustainable funds, and impact investments that prioritize environmental, social, and governance (ESG) factors. Investing in such financial products can align with climate change mitigation goals while generating financial returns.
- Carbon Capture and Storage (CCS): Investments in CCS technologies and infrastructure can help capture and store carbon dioxide emissions from industrial processes, power generation, and other sectors. CCS offers potential solutions to reduce emissions in industries that are challenging to decarbonize and can contribute to achieving climate goals.
- Circular Economy: Shifting towards a circular economy model, which focuses on reducing waste, recycling materials, and promoting resource efficiency, presents investment opportunities. Investments in waste management, recycling facilities, and innovative circular business models can drive sustainability and reduce the environmental impact of traditional linear production and consumption systems.
- Sustainable Agriculture and Forestry: Investments in sustainable agricultural practices, precision farming technologies, agroforestry, and sustainable forestry management contribute to climate change mitigation and adaptation. These investments can enhance food security, conserve biodiversity, and promote sustainable land use.
Conclusion
- India’s economic recovery from the pandemic has been encouraging, but the gap between current GDP levels and the pre-pandemic trajectory needs to be addressed. To achieve sustained growth, India must focus on revitalizing private investment, improving the investment climate, and actively participating in the global transition to a low-carbon economy. Only then can India mitigate the long-term scarring effects of the pandemic and ensure a prosperous future.
Also read:
| Indian Economic Growth Prospects: A Comprehensive Analysis |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Revisiting India’s Manufacturing Dilemma: A Call for Comprehensive Ecosystem Development
Note4Students
From UPSC perspective, the following things are important :
Prelims level: India's Services and manufacturing sector
Mains level: India's Manufacturing versus Services Debate, performance, challenges and way forward
Central Idea
- The ongoing debate regarding India’s preferred path for economic growth, whether it should prioritize manufacturing or services, has resurfaced in public discussions. While India’s software exports previously flourished, questioning why the services sector couldn’t spearhead the nation’s progress. In light of the disappointing manufacturing growth post the 1991 economic reforms, it becomes evident that a structural obstacle inhibits the sector’s progress
Unfulfilled Promises of Manufacturing Reforms
- Limited Increase in Manufacturing Share: Despite the economic reforms of 1991, which were primarily focused on manufacturing, there was not a significant increase in the share of manufacturing in the economy. The expected growth and expansion in the sector did not materialize as anticipated.
- Rising Income Inequality: Although there have been qualitative improvements in the range and quality of products manufactured in India since 1991, the limited expansion of manufacturing in proportion to the overall economy has resulted in a rising income inequality. The benefits of these improvements have not been distributed equitably across the population.
- Persistence of Structural Challenges: Despite policy initiatives and reforms focused on manufacturing, the sector continues to face deep-rooted structural challenges. These challenges have impeded the sector’s growth and hindered its ability to reach its full potential. There is a need for a comprehensive approach to address these underlying issues.
- Limited Demand Constraints: Manufacturing growth is constrained by demand considerations, which are largely independent of supply-side reforms. Household demand for manufactured goods is closely linked to the satisfaction of basic necessities such as food, housing, health, and education. The dominance of food expenditure in a significant portion of Indian households limits the growth of demand for other manufactured products.
- Educational Gap and Skill Development: India lags behind successful manufacturing nations in terms of educational outcomes. Poor performance in international assessments and low literacy and numeracy levels among Indian children highlight the need for significant improvements in the education system.
- Insufficient Focus on Ecosystem Development: The economic reforms of 1991 primarily focused on policy changes but overlooked the need for a comprehensive ecosystem to support manufacturing growth. This ecosystem should encompass aspects such as schooling, training, infrastructure, and supportive policies. A more holistic approach is required to build a conducive environment for the manufacturing sector to flourish.
Recent Initiatives and Underwhelming Performance
- Make in India: Launched in 2014, this initiative aimed to promote manufacturing in India and attract foreign direct investment (FDI). Despite its ambitious goals, the initiative has not yielded the expected results in terms of substantial manufacturing growth and contribution to the economy.
- Production-Linked Incentive (PLI) Scheme: This scheme, introduced more recently, provides production subsidies to incentivize the manufacturing of specific products. While announced with fanfare, the article highlights that the record of these schemes has been unimpressive.
- Low Manufacturing Growth: The first advance estimates for 2022-23, as mentioned in the article, indicate a manufacturing growth rate of only 1.3% for the year. This growth rate lags behind agriculture and major segments of the services sector, suggesting a lack of substantial progress in manufacturing.
The Need for a Manufacturing Push in India’s economy
- Job Creation: Manufacturing sectors have the potential to generate a significant number of jobs, particularly for the growing workforce in India. The government and policymakers recognize the importance of manufacturing in addressing the unemployment challenge and providing livelihoods for the population.
- Economic Growth: A vibrant manufacturing sector can contribute to overall economic growth. By expanding manufacturing, India can increase its GDP and strengthen its position as a global economic player. A robust manufacturing base can enhance productivity, attract investments, and drive economic development.
- Private Sector Readiness: The finance minister, in addressing corporate leaders, emphasizes that the private sector needs to be ready to contribute to the manufacturing push. The private sector’s active involvement is seen as crucial for driving manufacturing growth.
- Public Investment: The government’s increased capital expenditure in the last Union Budget is expected to support the private sector by raising aggregate demand. This investment in infrastructure and other sectors can provide a stimulus to manufacturing and create an enabling environment for its expansion.
Demand Constraints and the Role of Food
- Household Expenditure: Demand for manufactured goods is influenced by household expenditure patterns, which are largely determined by the satisfaction of basic necessities such as food, housing, health, and education. These necessities take up a significant share of household expenditure and are considered non-discretionary expenses that cannot be postponed.
- Food Expenditure: Food occupies a large share of expenditure for a substantial section of Indian households. The high share of food expenditure leaves a smaller portion of disposable income available for spending on other goods and services, which can constrain the growth of demand for manufactured products.
- Negative Relationship with Per Capita Income: Globally, there is a strong negative relationship between per capita income and the share of food in household expenditure. Wealthier countries, such as the United States and Singapore, tend to have lower shares of expenditure allocated to food. In contrast, India, with its lower GDP per capita, experiences a larger share of food expenditure, which can limit the growth of demand for manufactured products.
- Manufacturing Demand Implications: The dominance of food expenditure in household budgets suggests that the demand for manufactured goods is closely linked to the satisfaction of basic needs. As households prioritize spending on food, housing, health, and education, the demand for other manufactured products may be constricted, affecting the growth potential of the manufacturing sector.
- Export Potential: Smaller countries in East Asia have achieved significant manufacturing growth by relying on global markets rather than relying solely on their domestic markets. By diversifying into exports, manufacturers can tap into broader consumer markets and mitigate the constraints imposed by domestic demand limitations.
Exports as a potential solution for the manufacturing sector
- Overcoming Limited Domestic Market: Exporting provides a significant opportunity for the manufacturing sector to overcome the constraints of a limited domestic market. By tapping into global markets, manufacturers can reach a larger customer base and increase their sales potential beyond domestic demand alone.
- Diversification of Markets: Exporting allows manufacturers to diversify their markets and reduce dependency on a single market. This helps mitigate risks associated with fluctuations in domestic demand or economic conditions in the home country.
- Global Competitiveness: To succeed in the export market, manufacturers need to focus on enhancing their global competitiveness. This includes factors such as product quality, innovation, pricing, branding, and customer service. Manufacturers must strive to offer products that meet international standards and are competitive in terms of cost and quality.
- Infrastructure and Logistics: Manufacturers need reliable transportation networks, including roads, railways, and ports, to move their goods to international markets. Access to efficient seaports, airports, and customs facilities helps streamline export processes and reduce turnaround times.
- Cost of Production: Manufacturers need to ensure that their cost structure, including labor, raw materials, energy, and overheads, is competitive compared to other exporting countries. Cost-efficient production methods and economies of scale can contribute to enhancing export competitiveness.
- Trade Agreements and Market Access: Engaging in trade agreements and securing preferential market access can provide manufacturers with a competitive advantage. By accessing markets with reduced tariffs or trade barriers, manufacturers can improve their competitiveness and expand their export opportunities.
- Export Promotion and Support: Governments can play a crucial role in supporting exports through export promotion initiatives, financial incentives, export credit facilities, and market intelligence services. These measures help manufacturers navigate export procedures, access information on international markets, and avail financial assistance to expand their export capabilities.
Conclusion
- India’s economic growth requires careful consideration of the manufacturing versus services debate. While the services sector has played a significant role, a comprehensive ecosystem supporting manufacturing is crucial. Only through concerted efforts and holistic reforms can India truly unlock its manufacturing potential and secure long-term economic prosperity.
Also read:
| Urban-rural manufacturing shift: A mixed bag |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s GDP expanded 6.1% in 2022-23’s last quarter
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Trends in India's GDP Growth
Mains level: Read the attached story
Central Idea
- The National Statistical Office (NSO) has released provisional national income data revealing that India’s GDP growth in the January to March 2023 quarter reached 6.1%.
- This growth in the fourth quarter is the fastest among major economies, indicating better prospects for the current year compared to previous expectations.
Key Highlights
(1) Manufacturing Sector Growth Slows, Despite Q4 Rebound
- Gross Value Added (GVA) in the economy rose by 7% in 2022-23, compared to 8.8% in the previous fiscal year.
- Manufacturing GVA growth declined significantly, reaching only 1.3% compared to 11.1% a year ago.
- The sector experienced a rebound of 4.5% in the final quarter after six months of contraction, but overall growth remained subdued.
(2) Agri and Services Sectors Propel Economic Growth
- The agricultural GVA grew by 4% in 2022-23, an increase from 3.5% in the previous year.
- Financial, real estate, and professional services sectors experienced a 7.1% growth in GVA, compared to 4.7% in 2021-22.
- Trade, hotels, transport, and communication sectors, along with services related to broadcasting, witnessed a marginal increase of 14% in GVA.
(3) Revised GDP and GVA Figures Reflect Changes in Economic Performance
- The NSO revised GDP and GVA numbers for the first half of 2022-23, with slight decreases, but the third-quarter figures were slightly increased.
- The first quarter’s GDP growth in 2022-23 is now pegged at 13.1%, followed by 6.2% in the second quarter and 4.5% growth in the third quarter.
- GVA growth estimates for the first and second quarters were revised to 11.9% and 5.4% respectively, while the third quarter GVA growth increased to 4.7% from the earlier estimate of 4.6%.
(4) Consumer Sentiment and Consumption Growth
- Despite a slight uptick in private final consumption expenditure to 2.8% in Q4 from 2.2% in Q3, consumption growth remained muted.
- This contradicted the uptick in consumer sentiments as per the RBI’s consumer confidence survey, highlighting the disparity between sentiment and actual spending.
(5) Outlook and Challenges for Future Growth
- Maintaining growth above 6% will be challenging amid a global economic slowdown, according to economists.
- Higher-than-expected GDP growth in the previous year may temper growth expectations for the current year, with the government and central bank projecting around 6.5% growth.
- Pent-up demand that supported growth previously may not be as strong, and private sector investment needs to pick up since exports are not expected to contribute significantly to growth.
What can we as an Aspirant infer?
- The resilience of the Indian economy and its promising trajectory despite global challenges is often highlighted in news.
- This article justifies this perception about better performance of Indian Economy.
Conclusion
- To sustain and enhance economic growth, focus on stimulating private sector investment to complement the performance of agriculture and services sectors.
- Addressing the challenges in the manufacturing sector and boosting consumer confidence can lead to increased consumption and overall economic expansion.
- Efforts to diversify and promote exports should be prioritized to contribute to future growth and reduce dependence on domestic consumption.
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[Static Revision] National Income Determination, GDP, GNP, NDP, NNP, Personal Income
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
The Need for a New Economic Paradigm in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Global Solutions Summit
Mains level: Global economic and political divisions, Needs for new economic paradigm
Central Idea
- In the pursuit of communal and caste politics, India’s focus on the economy has been overshadowed. However, the growing divide among classes is silently reshaping the Indian electorate, with more than 50% of the population being left behind by economic growth. It is essential to address the economic concerns of all citizens, regardless of caste and religion, and embrace a new paradigm of economics.
The Global Solutions Summit
- Global Solutions Summit, 2023 held at Berlin.
- The theme at the Global Solutions Summit this year, was a new paradigm for the economy.
- Its backdrop was the rising tensions in the east between the United States and China, and the war in the west between the North Atlantic Treaty Organization (NATO) and Russia
- The dominant G-7 countries, representing only 15% of the world’s population, exert undemocratic pressure on other nations, raising concerns about global democracy.
- The think tanks of the G-20 and other countries at the summit called attention to global problems of climate change, increasing economic inequalities within and among countries, and the effects of the financial and trade sanctions imposed by the most powerful nation, which are affecting the other 85% most of all.
Prevalence of Political and economic divisions in societies worldwide
Political Divisions
- Ideological divisions: Political ideologies such as conservatism, liberalism, socialism, and populism can create stark divisions in society, with contrasting views on the role of government, individual rights, and social policies.
- Partisan politics: Political parties and their supporters often exhibit deep divisions, especially during elections and policy debates, based on party affiliations, policy preferences, and competing interests.
- Identity politics: Divisions along the lines of race, ethnicity, religion, gender, and other social identities can shape political landscapes, with groups advocating for their specific interests and rights.
- Regional disparities: Regional differences in economic development, cultural norms, and historical grievances can lead to political divisions, with demands for greater autonomy or regional representation.
Economic Divisions
- Income inequality: The unequal distribution of wealth and income can create divisions between the rich and the poor, with implications for access to resources, opportunities, and social mobility.
- Urban-rural divide: Disparities between urban and rural areas in terms of economic opportunities, infrastructure, and public services can lead to economic divisions and political differences.
- Global economic disparities: The divide between developed and developing countries, as well as within countries, contributes to economic divisions, with implications for trade, investment, and development policies.
- Labour market divisions: Differences in employment opportunities, wages, and working conditions can create divisions between different sectors of the economy, such as skilled and unskilled workers or formal and informal sectors.
Evolution of Economic Systems
- Traditional Economy: In traditional economies, production is based on customs, traditions, and barter systems. It typically revolves around subsistence agriculture, hunting, gathering, and small-scale artisanal activities. This system is prevalent in agrarian and indigenous societies.
- Command Economy: Command economies emerged with the rise of centralized governments and planned economies. The state assumes control over the means of production, distribution, and resource allocation. Central planning and government directives determine economic activities and resource allocation. The Soviet Union under communism is an example of a command economy.
- Market Economy: Market economies are characterized by decentralized decision-making and the interaction of supply and demand forces in determining prices, resource allocation, and production decisions. Private ownership of property, individual freedom, and competition play crucial roles. Free-market capitalism, as advocated by Adam Smith, is a key model of a market economy.
- Mixed Economy: Most modern economies are mixed economies that combine elements of both market and command systems. In a mixed economy, the government intervenes to regulate markets, provide public goods and services, and address market failures. The extent of government intervention varies across countries and can range from social welfare programs to industrial regulations.
- Socialist Economy: Socialist economies emphasize social ownership and collective decision-making in economic activities. The means of production are typically owned by the state or workers’ collectives. The aim is to reduce inequality and ensure equitable distribution of resources. Examples include the former Soviet Union and China under Mao Zedong.
- Market Socialism: Market socialism blends elements of market economies with socialist principles. It allows for private ownership and market mechanisms but aims to maintain social equity through state intervention, wealth redistribution, and public ownership of key industries. Some Scandinavian countries, such as Sweden and Norway, incorporate aspects of market socialism.
- Post-Industrial Economy: The post-industrial economy is characterized by a shift from manufacturing and heavy industry to service-based industries, information technology, and knowledge-based sectors. It is driven by innovation, technological advancements, and the growing importance of intellectual capital.
Need to reform the GDP-centric model
- Inadequate Measure of Well-being: GDP (Gross Domestic Product) measures the monetary value of all final goods and services produced within a country’s borders. However, it fails to capture important aspects of well-being, such as the distribution of wealth, social indicators, environmental sustainability, and quality of life.
- Overemphasis on Economic Growth: The GDP-centric model places excessive focus on economic growth as the primary indicator of success. While economic growth is important, it should not be the sole measure of a nation’s progress.
- Ignoring Income Inequality: GDP growth does not necessarily translate into equitable distribution of wealth and income. It often perpetuates income inequalities, as the benefits of growth may disproportionately accrue to a few privileged individuals or groups.
- Unsustainable Resource Consumption: The GDP-centric model often encourages unsustainable patterns of resource consumption and production. It fails to account for the environmental costs and depletion of natural resources associated with economic activities.
- Neglecting Non-Monetary Factors: The GDP-centric approach overlooks non-monetary factors that contribute to overall well-being, such as health, education, social capital, cultural heritage, and quality of life. These factors are critical for human development and should be considered alongside economic indicators to provide a comprehensive assessment of progress.
- Inaccurate Reflection of Informal Economy: The GDP-centric model struggles to capture the contributions of the informal economy, which often represents a significant portion of economic activity in many countries. Informal sector workers and their economic contributions remain largely unaccounted for in traditional GDP calculations.
- Need for Alternative Metrics: There is a growing need for alternative metrics and indicators that capture a broader range of factors affecting well-being, such as the Human Development Index (HDI), Genuine Progress Indicator (GPI), Sustainable Development Goals (SDGs), and well-being indices. These metrics consider social, environmental, and economic dimensions to provide a more holistic understanding of progress.
Need for a New Economic Paradigm in India
- Rising Inequality: India faces significant income and wealth inequalities, with a large portion of the population left behind by economic growth. The current economic system has failed to adequately address these inequalities and provide equal opportunities for all citizens.
- Unemployment and Job Creation: India has been grappling with high unemployment rates and a lack of sufficient job opportunities, especially for its burgeoning youth population. The existing economic model needs to be reimagined to prioritize job creation, skill development, and entrepreneurship to harness the demographic dividend effectively.
- Sustainable Development: Environmental degradation, climate change, and resource depletion are pressing challenges for India. A new economic paradigm should prioritize sustainability and integrate environmental considerations into economic decision-making.
- Social Welfare and Human Development: While economic growth is essential, it must be accompanied by investments in social welfare and human development. Access to quality education, healthcare, housing, and social security are critical for the well-being of citizens. A new economic paradigm should prioritize human development indicators alongside economic indicators to ensure the holistic development of the population.
- Agricultural Distress: India’s agricultural sector faces various challenges, including farmer distress, low productivity, and lack of market access. The new economic paradigm should address these issues by promoting sustainable agriculture, improving rural infrastructure, enhancing farmers’ income, and ensuring food security.
- Digital Transformation and Innovation: India is experiencing a digital revolution, with rapid technological advancements and a growing digital economy. The new economic paradigm should leverage the potential of digital transformation and innovation to drive inclusive growth, improve governance, and enhance competitiveness in the global economy.
- Governance and Transparency: Enhancing governance, promoting transparency, and curbing corruption are essential for sustainable economic development.
Conclusion
- India urgently needs a new economic paradigm that addresses the concerns of its citizens. The focus should shift towards inclusivity and social justice, rather than perpetuating economic inequalities. Reforms must prioritize the well-being of all, and economists should revaluate their current models to create a more equitable and sustainable future for India.
Also read:
| Assessing the Indian Economy: A Fuzzy Picture with Bright Spots |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Private: Untitled
Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Managing Inflation and Ensuring Food Security in India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Inflation and challenges overall food and nutrition security
Central Idea
- India’s recent decline in consumer price index (CPI) inflation and food price inflation has brought a degree of comfort to the Reserve Bank of India (RBI). However, the challenge lies in managing inflation while aiming for a GDP growth of 6 to 6.5 percent in FY24. Collaborative efforts between the RBI and the Government of India are crucial to achieving this twin objective.
Current Inflation Scenario
- The CPI inflation for April 2023 stood at 4.7 percent, with food price inflation even lower at 3.84 percent.
- Maintaining overall inflation below 5 percent and GDP growth above 6 percent throughout the year would be a commendable achievement.
Importance of Managing Food Inflation
- Managing food inflation is crucial due to its significant weightage in the consumer price index (CPI) basket in India. The food and beverages component holds the highest weightage of 45.86% among G20 countries.
- Food inflation directly impacts the cost of living for the general population, particularly vulnerable sections that spend a significant portion of their income on food.
- High food inflation can lead to increased household expenses, lower purchasing power, and a decline in the overall standard of living.
- Food inflation can also have social and political implications, as rising food prices can cause public unrest and dissatisfaction.
- Effective management of food inflation contributes to maintaining price stability, ensuring food affordability, and supporting macroeconomic stability.
Implications of Monsoon Season
- Agricultural Production: The monsoon is crucial for agricultural production as it provides the majority of the water needed for irrigation. A normal or above-normal monsoon season supports adequate water availability, leading to higher crop yields and increased agricultural output. Conversely, a below-normal monsoon can lead to drought-like conditions, affecting crop productivity and agricultural incomes.
- Food Prices: The monsoon significantly influences food production, particularly for rain-fed crops. Insufficient rainfall can lead to lower agricultural output, resulting in reduced supplies and higher food prices. Inadequate monsoon rains can impact staple crops such as rice, wheat, pulses, and oilseeds, leading to inflationary pressures on food prices.
- Rural Economy: As agriculture plays a vital role in the rural economy, the monsoon directly impacts rural livelihoods and income levels. A good monsoon season can boost rural incomes, increase agricultural employment opportunities, and stimulate rural consumption. Conversely, a poor monsoon can lead to income losses, lower agricultural wages, and reduced rural demand.
- Hydroelectric Power Generation: The monsoon contributes to water reservoirs, which are essential for hydroelectric power generation. Adequate rainfall ensures sufficient water levels in reservoirs, supporting electricity generation from hydroelectric plants. Inadequate monsoon rains can result in lower water levels, impacting power generation and potentially leading to electricity shortages.
- Groundwater Recharge: The monsoon plays a crucial role in replenishing groundwater levels. Adequate rainfall helps recharge aquifers, which are vital sources of water for irrigation, drinking water, and industrial use. Insufficient monsoon rains can lead to depleted groundwater levels, affecting agriculture, water availability, and overall water security.
- Economic Growth: The performance of the agricultural sector, influenced by the monsoon, has implications for overall economic growth. Agriculture contributes significantly to India’s GDP and employment. A good monsoon season can stimulate rural demand, enhance agricultural productivity, and contribute to higher economic growth. Conversely, a poor monsoon can dampen agricultural output, impacting overall economic performance.
- Fiscal Impact: The monsoon season also has implications for government finances. Adequate rainfall supports agricultural production and reduces the need for government interventions such as subsidies or price support measures. In contrast, a poor monsoon can strain government resources, necessitating increased spending on irrigation infrastructure, relief measures, or support to affected farmers.
What are the challenges in milk inflation?
- Supply-side Factors: Milk inflation is influenced by supply-side dynamics. Factors such as adverse weather conditions, including drought or floods, can impact the availability of fodder and water for cattle, leading to reduced milk production. Any disruptions in the supply chain, such as transportation issues or logistical challenges, can also affect the supply of milk and contribute to inflationary pressures.
- Disease Outbreaks: Disease outbreaks among cattle, such as lumpy skin disease, foot-and-mouth disease, or other health issues, can affect milk production. These outbreaks may result in a decrease in the number of healthy and productive cattle, leading to a decline in milk output and subsequently driving up milk prices.
- Fodder Prices: The cost of animal feed, such as fodder, plays a significant role in milk production costs. Fluctuations in fodder prices can impact the overall cost of maintaining dairy cattle. If fodder prices increase due to factors like supply-demand imbalances, weather conditions, or changes in agricultural practices, it can contribute to higher milk prices.
- Input Costs: Various input costs involved in milk production, such as labor, veterinary services, and energy costs, can affect the overall cost structure. Increases in input costs, including wages, veterinary medicines, or energy prices, can exert upward pressure on milk prices.
- Import Dependence: In some cases, countries may rely on milk imports to meet domestic demand. If the import costs increase due to factors like changes in international prices, trade policies, or exchange rate fluctuations, it can contribute to higher domestic milk prices.
- Market Structure and Competition: The market structure and competition within the dairy industry can impact milk prices. If the market is concentrated with a limited number of dominant players, it may lead to less competition, allowing suppliers to exercise greater pricing power. This can contribute to higher milk prices for consumers.
- Government Policies and Regulations: Government policies and regulations related to milk production, procurement, and pricing can influence milk inflation. Policies such as subsidies, import restrictions, quality standards, or pricing mechanisms can affect the overall supply-demand dynamics and pricing in the milk market
Way ahead
- Focus on buffer stocking policy: To tackle cereal inflation, using the buffer stocking policy more proactively is important. Unloading excess stocks in open market operations can be an effective tool in managing cereal inflation.
- Preemptive policy actions: It is important to implement policy actions in a preemptive manner rather than being reactive to events. This includes timely unloading of excess stocks and adjusting import duties to maintain price stability.
- Monitor and address external shocks: Given that food price inflation can be triggered by external shocks like droughts and supply chain disruptions, it is crucial to closely monitor such factors and take appropriate measures to mitigate their impact.
- Strengthen milk production: To address milk inflation, efforts should be made to address factors like the lumpy skin disease and high fodder prices that have strained milk production. Policies supporting the growth and sustainability of the milk industry should be implemented.
- Lower import duties on fat and skimmed milk powder (SMP): By reducing import duties to around 10 to 15 percent, there could be an increase in imports of fat and SMP, which may help in controlling milk and milk product prices.
Conclusion
- By effectively managing inflation, implementing proactive policies, and fostering collaboration between the RBI and the Government of India, India can navigate the challenges of inflation management, ensure economic stability, and promote sustainable development in critical sectors.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Assessing the Indian Economy: A Fuzzy Picture with Bright Spots
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Indian economics indicators, facts , reports etc.
Mains level: Assessment of the Indian economy, Concerns and way ahead
Central Idea
- The Indian economy is in a state of ambiguity, with different viewpoints and statistics painting a fuzzy picture. While some argue that India is well-positioned to be an economic superpower, the true picture is not that straightforward.
An assessment of the Indian economy based on various factors
- Inflation:
- According to the MPC meeting minutes, inflation is under control, but households are witnessing an increase in the prices of goods and services.
- While the base effect will bring down the inflation numbers, households still complain of having a cumulative inflation of over 18 per cent in the last three years.
- Growth:
- The growth picture is ambivalent, with the new normal appearing to be 6-7 per cent.
- While some argue that India is the fastest-growing economy, this is only true if smaller nations are excluded.
- There is not too much optimism about being on track for the 8 per cent-plus growth rate, which we were used to earlier.
- Exports: While there has been satisfaction expressed by the new heights achieved in the exports of goods and services, exports of merchandise are not too satisfactory. For example, if refinery products are excluded from the export’s basket, there has been a fall in FY23.
- Investment:
- The official position is that investment is picking up in the private sector, but data on all funding sources show that there is a slowdown.
- Bank credit is buoyant more on the retail end than manufacturing. Debt issuances are dominated by the financial sector with manufacturing lagging.
- External Commercial Borrowings (ECBs) have slowed down mainly due to the higher cost of loans.
- Consumption: The consumption picture is also fuzzy, with nominal consumption growing by 16 per cent in FY23, but this is pushed up by inflation, and pent-up demand for both goods and services post the full removal of the lockdown in 2022.
- Employment:
- The average unemployment rate is around 7.5 per cent, but the concern is more on the labour participation rate, which has been coming down. This indicates a growing population in the working age group that is not interested in working.
- Start-ups have not yet been job creators to the degree that was expected, given the push by the government over the years.
- Banking sector: The banking sector has emerged stronger with lower NPA levels and improved profitability, which implies that as and when the economy gets into the take-off mode, banks will be well-equipped to provide the funds.
Facts for prelims: Basics
External Commercial Borrowings (ECBs):
|
What are the concerns?
- Employment Generation: The decline in the labor force participation rate and layoffs in certain sectors raise significant challenges in terms of job creation and reducing unemployment levels.
- Manufacturing Competitiveness: The decline in merchandise exports (excluding refinery products) indicates potential hurdles in enhancing the competitiveness of the manufacturing sector and expanding exports.
- Execution of Investment Intentions: The gap between investment intentions and actual investments is a concern as it indicates potential bottlenecks or challenges in translating investment plans into action.
- Consumption Growth and Affordability: Affordability issues due to inflation impacting real consumption growth raise concerns about sustained consumer demand.
- Export Diversification: The dependence on a few economies for exports and the potential impact of a global economic slowdown on Indian exports are concerns. Diversifying export destinations and exploring new markets can help reduce vulnerability to global economic fluctuations and strengthen export resilience.
- Effective Implementation of Banking Sector Reforms: While improvements have been observed in the banking sector, concerns about funding sources and the need for increased credit flow to the manufacturing sector indicate ongoing challenges.
Way ahead
- Focus on inflation control: While the MPC has managed to keep inflation under control from a policy perspective, efforts should continue to address the impact of rising prices on households. Measures to enhance supply chain efficiency, promote competition, and reduce production costs can help alleviate inflationary pressures.
- Promote sustainable and inclusive growth: While the current growth rate is positive, efforts should be made to achieve higher and more inclusive growth. This can be done by investing in infrastructure development, skill development programs, and initiatives that support the growth of MSMEs (Micro, Small, and Medium Enterprises).
- Boost exports: Enhancing the competitiveness of Indian goods and services in global markets is crucial for a robust export sector. Continued efforts to improve the ease of doing business, implement the Production-Linked Incentive (PLI) scheme effectively, and diversify export destinations can help boost exports.
- Facilitate investment: Policy measures should focus on encouraging private sector investment and reducing funding bottlenecks. This can involve improving the ease of doing business, simplifying regulatory processes, and providing incentives for both domestic and foreign investments.
- Strengthen consumer demand: Initiatives to support consumer demand can include income support programs, targeted subsidies, and measures to enhance consumer confidence. Reducing the impact of inflation on household budgets and boosting purchasing power can help drive consumption growth.
- Address unemployment and labor force participation: Policies aimed at promoting skill development, entrepreneurship, and job creation can help address unemployment concerns. Encouraging sectors with higher labor-intensive potential, such as manufacturing and services, and supporting start-ups and MSMEs can be vital in generating employment opportunities.
- Continue banking sector reforms: While the banking sector has made progress in reducing NPAs and improving profitability, ongoing reforms should be sustained to strengthen the sector further. Maintaining prudent lending practices, enhancing risk management frameworks, and promoting transparency and governance will be essential.
- Foster domestic innovation and technology adoption: Encouraging innovation, research and development, and technology adoption can boost productivity and competitiveness across sectors. This can be achieved through policies that promote collaboration between industry and academia, provide incentives for innovation, and invest in digital infrastructure.
- Maintain macroeconomic stability: Ensuring fiscal discipline, sound monetary policy, and a stable regulatory environment will be crucial for sustaining macroeconomic stability. This can help maintain investor confidence and provide a conducive environment for economic growth.
Conclusion
- The Indian economy’s broad numbers look statistically realistic, but the triad of employment, consumption, and private investment has to bear fruit. Domestic initiatives have to drive the story forward, as the world economy slows down.
Also read:
| Indian Economic Growth Prospects: A Comprehensive Analysis |
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Rural Real Wage Growth In India: The Importance of Accurate Data analysis
Note4Students
From UPSC perspective, the following things are important :
Prelims level: CAGR
Mains level: Significance of accurate rural wage data
Central Idea
- Rural real wage growth is a crucial indicator of the well-being of individuals, particularly the poor, in India. Jean Dreze, a respected economist claims that rural real wage growth in India has been sluggish despite rapid economic growth. However as per Surjit Bhalla another economist, Dreze’s findings are based on weak statistical analysis and incomplete data. Surjit Bhalla’s and presents his own findings, which suggest higher wage growth rates for construction workers, non-agricultural laborers, and agricultural laborers.
Contrast results for instance
- For construction workers, Dreze obtains a rate of growth (CAGR) of just 0.2 per cent (actually 0.15 per cent); However, CAGR stands at eight times larger at 1.2 per cent.
- For non-agricultural labourers (porters and loaders) the same yawning divergence: Dreze obtains 0.3 per cent, whereas it stands 1.2 per cent, and for agricultural labourers, 0.9 per cent vs 1.5 per cent.
What is CAGR?
- CAGR stands for Compound Annual Growth Rate. It is a measure used to calculate the average growth rate of an investment over a certain period of time, assuming that the investment has grown at a steady rate each year.
- It takes into account the effect of compounding, which means that the investment’s growth in one year is added to the base value of the investment, and the total amount is then used to calculate growth for the next year.
- CAGR is often used in finance to compare the performance of different investments or to forecast future growth.
Why are the two results so different?
- Differences in Method of Estimation: Dreze uses semi-log regression on eight observations to estimate the compound annual growth rate (CAGR) for each of three male occupations. His estimate of CAGR is not even significant at the 11 per cent level of confidence for two of these occupations – construction and non-agricultural laborers. Dreze does not uses a population-weighted average of year-on-year growth for each of the 38 sex-occupation categories to estimate CAGR accurately.
- Differences in Time Period of Analysis: Surjit Bhalla also criticizes Dreze’s chosen time period of analysis, 2014-2021. As per Surjit Bhalla, that no study combines pre-Covid and Covid years without even a mention of the difference. Surjit Bhalla presents data for three time periods, including the normal 2014-2018, Covid 2019-2021, and all years 2014-2021.
Why accurate rural wage data is important?
- Poverty alleviation: Rural wage data is used to determine the poverty levels in a country, and accurate data is essential for effective poverty alleviation policies.
- Income inequality: Accurate rural wage data can help policymakers understand the level of income inequality in rural areas and design policies to reduce it.
- Agricultural productivity: Rural wage data is used to assess the productivity of the agricultural sector, which is a key source of income for rural households.
- Labor market trends: Accurate rural wage data helps policymakers understand the trends in the rural labor market, such as changes in demand for different types of labor, and design policies to support employment growth.
- Minimum wage determination: Accurate rural wage data is necessary for determining minimum wages for rural workers, which is important for protecting the rights of workers and reducing labor exploitation.
- Social protection: Rural wage data is used to design social protection programs such as cash transfers, food subsidies, and public works programs to support the poorest households in rural areas.
- Macro-economic policy: Rural wage data is used to inform macro-economic policies such as inflation targeting and monetary policy, as well as to evaluate the effectiveness of such policies on rural households.
Conclusion
- The issue of rural real wage growth in India is complex and requires a nuanced understanding of data selection, treatment, intensity, and estimation. There is need for a more comprehensive set of data and a different method of estimation.
Mains Question
Q. What is Compound Annual Growth Rate (CAGR). Why do you think, accurate rural wage data is so important?
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Indian Economic Growth Prospects: A Comprehensive Analysis
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Initiatives for private investment and labour force participation
Mains level: India’s Growth Prospects, Private Investment and challenges
Central Idea
- India has had an established track record of high growth, with an average annual GDP growth of 6.6% in the decade leading up to the Covid-19 pandemic. In fiscal 2023, India is seen growing at 7%, making it the fastest-growing large economy. But with an imminent global slowdown and the full manifestation of the lagged impact of interest rate hikes since May 2022, the economy is expected to decelerate and grow at 6% in fiscal 2024.
Indian economic growth prospects
- Growth accounting: Growth accounting provides a useful framework to analyse medium-term prospects by decomposing their drivers into the contribution of capital, labour and efficiency.
- Economic growth next five years: Indian economy expected to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour.
- Changing growth model: The growth model is changing to an infrastructure and manufacturing-driven one.
- Capital spending: The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.
- Investment ratio: Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.
- Contribution of productivity to growth: The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).
What is holding back a swift and broad-based lift in private investments?
- Economic uncertainty, primarily, and geopolitical events to a lesser extent.
- Sustainability challenge looms for the manufacturing sector as manufacturing and infrastructure growth are carbon-intensive.
- Low-quality skilling of the workforce is holding back its contribution to growth.
- Quality and the skilling of the workforce
- Falling labour force participation of women
What is holding back in Labour’s contribution to growth?
- Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group, this cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back.
Why private investment is essential for Indian economic growth?
- Capital formation: Private investment helps in creating capital formation, which is essential for economic growth. It helps in building infrastructure, creating jobs, and generating income, which in turn drives consumer spending and boosts economic growth.
- Innovation: Private investment is often associated with innovation and technological advancements. Companies that invest in research and development (R&D) can develop new products and processes that can boost productivity and create new markets. This, in turn, can lead to increased profits and more investment in R&D, creating a virtuous cycle of innovation and growth.
- Employment: Private investment creates jobs, which is critical for economic growth and development. When companies invest in new projects or expand their operations, they often need to hire additional workers, which reduces unemployment and boosts consumer spending.
- Foreign investment: Private investment is also an important driver of foreign investment. When companies invest in India, they often bring new technology, skills, and expertise that can help boost local industries and drive economic growth.
- Tax revenue: Private investment can also help increase tax revenues, which can be used by the government to fund public goods and services such as education, healthcare, and infrastructure.
Steps taken by the government to encourage private investment
- Investment-Friendly Policies: The Indian government has launched several investment-friendly policies, such as Make in India, Start-up India, and Digital India, to encourage private investment in the country.
- Infrastructure Development: The government is investing heavily in infrastructure development, including roads, railways, airports, and ports, to create a conducive environment for private investment.
- Tax Reforms: The Indian government has implemented several tax reforms, such as the Goods and Services Tax (GST), to simplify the tax structure and make it more investor-friendly.
- FDI Liberalization: The government has liberalized foreign direct investment (FDI) norms in several sectors, including defense, insurance, and retail, to attract more foreign investment.
- Insolvency and Bankruptcy Code (IBC): The government has implemented the Insolvency and Bankruptcy Code (IBC), which has made it easier for businesses to exit, and has increased investor confidence in the Indian economy.
- Production Linked Incentives (PLI): The government has launched the Production Linked Incentives (PLI) scheme to encourage manufacturing in India and make it more competitive globally.
- Easing of Business Regulations: The Indian government has eased several business regulations to improve the ease of doing business in the country and attract more private investment.
- Skill Development: The government has launched several initiatives, such as Skill India and Pradhan Mantri Kaushal Vikas Yojana, to develop the skills of the Indian workforce and make it more attractive to investors.
Facts for prelims: Steps taken by the government to encourage labour force participation of women
|
Initiatives |
Description |
| Maternity Benefit Programme | A scheme to provide financial assistance to pregnant women and lactating mothers for their health and nutrition needs. |
| Pradhan Mantri Ujjwala Yojana | A scheme to provide LPG connections to women from Below Poverty Line households. |
| National Urban Livelihood Mission | A programme to provide self-employment opportunities and skill development training to urban poor women. |
| National Rural Livelihood Mission | A scheme to provide self-employment opportunities and skill development training to rural women. |
| Mahila E-Haat | A digital platform to provide a market for women entrepreneurs to sell their products online. |
| Beti Bachao Beti Padhao | A campaign to address the declining child sex ratio and to promote education among girls. |
| Sukanya Samriddhi Yojana | A savings scheme for the girl child to ensure their education and marriage expenses are taken care of. |
Way ahead
- Focus on green transition: As the manufacturing and infrastructure growth are carbon-intensive, so it’s important to have a significant and simultaneous focus on green transition. Having a high sustainability quotient can only embellish India’s credentials as a production destination.
- For instance: Research suggests that between fiscals 2023 and 2027, over 15 per cent of India’s capex could be towards green initiatives involving renewable energy, transportation, altering the fuel mix, and green hydrogen. In the fragmented geopolitical milieu, which is shifting towards supply-chain diversification and friend shoring, India can attract foreign investments.
- Enhancing labour force participation of women: The labour force participation of women is falling. This will have to be reversed through employment policies and investing in the health and education of women.
- For instance: According to a World Bank report in 2018, India could add 1.5 percentage points to its GDP growth by improving the participation of women in its workforce.
Conclusion
- India is going to become a $5 trillion economy by fiscal 2029, given the current growth dynamics. However, the impact of climate risk mitigation will be felt across revenue, commodity prices, export markets, and capital spending. To win the growth marathon, India’s focus must be sharp on the drivers of pace.
Mains Question
Q. Highlight India’s growth prospects in the next five years? Discuss the significance of private investment for economic growth and enlist factors that holding back the private investment.
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Inflation in India is Driven by Food Prices
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Inflation, WPI and CPI
Mains level: Inflation trends in India
Central Idea
- The recent trajectory of inflation in India is attributed to the pricing power of five big corporates or ‘Big 5’ according to former Deputy Governor of Reserve Bank of India, Viral Acharya. However, the argument is flawed as the Indian inflation is different from the rest of the world, and it is driven by food price inflation. While corporate pricing power does exist, it is limited, and the extent to which it drives overall inflation is still debatable.
The factor of food price inflation
- Divergence between Indian and Western inflation rates is not new:
- Sudden surge of Inflation in India: After the global financial crisis of 2008, Indian inflation surged higher than the economies of the US and UK due to food price inflation caused by negative agricultural shocks and high procurement price hikes.
- Core inflation: Food-price inflation tends to feed into core inflation, so it would be hasty to conclude that Indian inflation is higher than the West today due to corporate pricing power.
- Food price inflation: Evidence suggests that in India, food price inflation affects core inflation, and food price inflation enters costs of the non-agricultural sector.
- Corporate pricing power in India:
- Corporate pricing power and overall inflation: Corporate pricing power exists in Indian industry, but the extent to which it drives overall inflation in India is debatable. The question is how much corporate power is driving inflation beyond its obvious role in elevating the price level.
- Prices of food: To measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
- Inflation control strategy: India’s inflation control strategy needs to address the challenge of ensuring the production of food at affordable prices.
- Comparing WP inflation with CP inflation
- Comparing WP inflation with CP inflation is to acquiesce in a mismatch.
- The commodity basket corresponding to CP includes items that do not enter the wholesale price index, so we would be comparing apples with oranges.
The argument is based on a short time period
- WP inflation has eased considerably in the six months preceding March 2023, but CP inflation has not. However, a mismatch between WP and CP inflations is not new.
- So, the maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 may just be a compensating mechanism, i.e., the rising input cost of the retail sector is being passed on with a lag.
Facts for prelims: WP inflation VS CP inflation
| Aspect | Wholesale Price (WP) Inflation | Consumer Price (CP) Inflation |
| Definition | Measures the change in average price level of goods sold by producers at the wholesale level | Measures the change in average price level of goods and services purchased by households |
| Captures | Changes in prices of goods before they reach the retail market | Changes in prices of goods and services at the retail level |
| Indicator of | Early indicator of changes in overall price level of economy | Inflation that households experience in their day-to-day lives |
| Impact | Affects production cost and supply chain | Affects purchasing power of consumers |
| Calculation | Based on price changes of goods sold in bulk to retailers or other businesses | Based on price changes of goods and services purchased by households |
| Usage | Used by policymakers to monitor changes in cost of production and production-level inflation | Used by policymakers to monitor inflation and make decisions related to monetary policy |
| Examples | Wholesale prices of raw materials, oil, and other commodities | Retail prices of food, clothing, transportation, and other consumer goods and services |
Rising food prices driving current inflation
- Over 75% of the direct contribution to inflation in the first three quarters of the financial year came from sectors in which the Big 5 are unlikely to be represented in a big way.
- The contribution of food products alone was close to 50% in most time periods.
- Rising food prices are driving current inflation in India.
The current inflation control strategy
- Considerable rise in food prices: In India, food prices have only risen, and in recent years their rate of inflation has been very high. For all the reforms since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably.
- What matters most to public must be considered: In the context, to measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
- Current strategy restricted to using the interest rate to dampen aggregate demand: India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand. This strategy avoids addressing the challenge of ensuring the production of affordable food.
- Question mark on RBI’s ability to control inflation: The RBI has been unable to control even the core inflation which central banks are assumed to be able to control. A recent intervention explaining core inflation in India has highlighted the RBI’s inability to control inflation.
Conclusion
- Inflation is being discussed only in terms of core inflation, which excludes the inflation in food and fuel prices because these prices tend to fluctuate and even out the changes, so it is assumed that they do not require a policy response. However, this assumption is flawed in the context of India’s economy, as food and fuel prices have a significant impact on the economy and people’s livelihoods. Therefore, limiting the discussion to core inflation ignores the role of corporate pricing power and the impact of food and fuel prices on the economy.
Mains Question
Q. What is the factor that primarily drives inflation in India? Highlight the relationship between food price inflation and overall inflation in India?
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RBI’s Pause On Repo Rate Hike: Concerns Over Inflation And Global Pressures Remain
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Basic concepts
Mains level: RBI's pause on rate hikes, reasons and implications
Central Idea
- The RBI has decided to not increase the repo rate amid continuing hikes by important central banks such as the US Federal Reserve (Fed) and European Central Bank (ECB), and domestic inflation concerns. However, if incoming data point to rising inflation risks, this decision could prove to be only a pause in the rate hiking cycle.
The RBI’s decision to pause on rate hikes
- The RBI feels that money market rates have effectively risen more than the 250-basis-point yank in the repo rate since May 2022, and hence it decided to pause and assess the impact of rate hikes.
- The key reason behind the MPC decision is the expectation of a decline in inflation to 5.2% in the current fiscal, driven by a healthy rabi crop, normal monsoon, moderating international commodity prices, and the impact of rate hikes.
- The RBI acknowledges the upside risks and stated its readiness to fight any unexpected rise in inflation.
Impact on GDP growth
- The RBI expects GDP growth to slow to 6% from 7% this fiscal as slowing global growth, domestic interest rates, and messy geopolitics bite.
- Slowing global growth will be net negative for India’s exports, and the growing dependence on commodity exports makes India more vulnerable to global growth volatility.
- Fiscal 2024 will, therefore, test the resilience of India’s domestic demand amid rising interest rates.
Reasons for the expected cooling of consumer inflation
- Fuel inflation expected to reduce: Fuel inflation is expected to reduce to 3% from a high of over 10% in the current fiscal because some easing of crude oil prices is likely as global growth slows down.
- Decline in core inflation: Slowing domestic growth will ease core inflation from very sticky levels of over 6% last fiscal to 5.5% in the current one. However, the decline in core inflation will be limited as input cost pressures have not dissipated. To protect their margins, firms will continue to pass on input costs to end-consumer. Services inflation will also continue to exert pressure as the rotation of consumption demand from goods to services continues.
- Moderate food inflation: Food inflation, which has a high weightage in the Consumer Price Index and has driven headline inflation in the past, is projected to moderate to slightly below 5%, assuming a normal monsoon. However, food inflation has always been volatile and carries upside risks largely because of climate-related factors affecting agriculture output and prices.
How slowing global growth will have a negative impact on India’s exports?
- The impact of the growth slowdown in the US and Europe is deeper than the recovery in China: The US and Europe have a combined GDP that is twice that of China. Therefore, the impact of the growth slowdown in the US and Europe will be deeper than the recovery in China. This will have a negative impact on India’s exports to the US and Europe.
- India’s exports to the US and Europe are more than to China by a factor of six: India exports more to the US and Europe than to China by a factor of six. Therefore, the negative impact of the growth slowdown in the US and Europe will be felt more by India than by China.
- India’s growing dependence on commodity exports makes it more vulnerable to global growth volatility: India’s exports of petroleum products and steel are growing, and this makes India more vulnerable to global growth volatility. As global growth slows down, demand for commodities is likely to decline, which will have a negative impact on India’s exports.
External vulnerabilities
- India’s external vulnerability is expected to decline with a narrower current account deficit (CAD) and modest short-term external debt.
- The CAD is expected to narrow to 2% of GDP this fiscal from an estimated 2.5% last fiscal.
Conclusion
- The RBI’s decision to pause on rate hikes is driven by expectations of a decline in inflation. However, inflation risks remain, and the impact of rate hikes on GDP growth is expected to be significant. India’s external vulnerabilities are expected to decline, but the banking turmoil playing out amid interest rate hikes by important central banks and elevated debt levels remains a risk. The RBI’s decision to pause on rate hikes will be closely watched, and further rate hikes may be necessary if inflation risks persist.
Mains Question
Q. Enumerate the factors that led RBI to pause on rate hikes, and discuss the potential risks and impacts on the Indian economy?
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Current Paradigm of Economics In India Is Inadequate
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Indian economy challenges
Central Idea
- The current paradigm of economics in India is inadequate in providing solutions to the three major economic challenges the country is facing. The economists need to break out of their self-referential silo and examine the science of complex self-adaptive systems.
The Poly-crisis faced by India
- The Indian government is grappling with three economic challenges at the same time:
- Management of inflation,
- Trade agreements, and
- Employment
- Economists do not have a systemic solution for this poly-crisis. Consensus among them has broken down even about solutions to its separate parts.
Lessons from China and Vietnam
- Foreign investment in China: China and India opened their economies to global trade around the same time, some 35 years ago. Since then, China attracted foreign investment that was many times more than in India, and the incomes of its citizens increased five times faster.
- Vietnam emerging as more attractive destination: To attract investors, India must compete with other countries. Vietnam is often cited as a country that is proving to be more attractive than India to western and Japanese investors. However, when looking into Vietnam, they rediscover what was learned from China.
- High levels of human development: When both countries opened to foreign investors China before Vietnam, they had already attained high levels of human development, with universal education and good public health systems.
The Problem with the Current Paradigm
- There are some fundamental flaws in the current paradigm of economics.
- Economists often cite Tinbergen’s theory, which states that the number of policy instruments must equal the number of policy goals. This is a mechanical and linear view of how a complex system works.
- In complex organic systems, root causes contribute to many outcomes. The behaviour of the system cannot be explained by linear causes and effects. The causes interact with each other, and effects also become causes.
Facts for prelims: What is Tinbergen’s theory?
- Tinbergen’s theory states that the number of policy instruments (P) must be equal to the number of policy goals (G), in order to achieve the desired outcome.
- In other words: P = G
- This means that for each policy goal, there should be at least one policy instrument to achieve it.
- For example, if the policy goal is to reduce inflation, then there should be a policy instrument such as interest rate changes to achieve that goal. Similarly, if the policy goal is to promote employment, then there should be a policy instrument such as job creation programs to achieve that goal. Tinbergen’s theory emphasizes the importance of having a clear and consistent policy framework to achieve desired outcomes
Crises and the Inadequacy of the System
- Policies that fit one country may not fit the needs of others: Macro-economists search for global solutions, but trade and monetary policies that fit one country may not fit the needs of others. Their needs have emerged from their own histories.
- Emphasis on data trends: Economists arrive at solutions by comparing data trends of different countries, and in their models, people are numbers. Economists do not listen to real people, whereas politicians try to at least.
- For instance: The inadequacy of the current paradigm was revealed by several crises in this millennium, the 2008 global financial crisis, inequitable management of the global COVID-19 pandemic, and the looming global climate crisis.
Conclusion
- A new economics is required to solve the poly-crisis faced by India. A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West. India’s economists must step forward and lead the change towards a new economics paradigm based on the sciences of complex self-adaptive systems. India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time, and the current paradigm of economics cannot provide solutions.
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Growth Prospects: India Better Positioned Than China
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India and China's Comparative Growth prospects
Central Idea
- The Chinese government’s growth target of 5% for 2023 has disappointed observers, given that it is lower than last year’s target and below the expected GDP growth for India in 2023. This is all the more surprising if one considers that India is benefiting from the positive impact of the country reopening after COVID-19 lockdowns while China should benefit from its reopening only this year.
Reasons for China’s lower growth target?
- Risk of undershooting growth target again: The Chinese government does not want to run the risk of undershooting its growth target again, as it happened in 2022.
- Weak external demand and doubts about private investment: Even if consumption is recovering, external demand remains weak and it is hard to know whether private investment will indeed rise given the doubts about the role of the private sector in the Chinese economy as well as increasingly cautious sentiment being expressed by foreign investors.
- Real estate sector dragging down growth: The real estate sector is still dragging down growth.
Sustainable growth
- The Chinese government recognizes that too high a growth rate is no longer desirable, as it only aggravates financial imbalances.
- Instead, they are promoting sustainable growth, which involves a structural shift of the Chinese economy and the implementation of tighter regulatory measures to contain financial risks and achieve more social objectives, such as a green economy and food security.
Job creation and foreign investment
- China emphasises the importance of job security as an objective of sustainable growth, with a higher target for new jobs set by the Chinese government.
- China’s recent charm offensive to retain foreign direct investment in China is an important source of job creation, given the country’s concern about the job market, especially young workers.
- However, investors are looking at new pastures, with India likely to be a major beneficiary. Foreign investors are beginning to contribute more substantially to job creation in India, which could pose challenges for China as it tries to hold on to foreign direct investment within the country.
Comparison of India and China’s growth prospects
- The growth prospects of India and China, with a focus on job creation and competition for foreign direct investment.
- while India and China may not be too different in size and population, growth prospects differ substantially.
- The Chinese government’s cautious growth targets are consistent with the current challenges facing the Chinese economy, but they face more competition than before, especially from India, which has a larger market size and labor pool.
- This pattern of India’s resilient growth and China’s cautious growth targets will accelerate in the next few years, especially if the reshuffling of the value chain continues, pushed by geopolitics and high costs in China.
Conclusion
- The Chinese economy could be facing structural deceleration while India enjoys the benefits of its demographic dividend. China’s structural deceleration and tighter regulatory measures may also affect its future growth prospects. As a result, India may be better positioned for sustained growth compared to China in the coming years.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
NSO’s New Data: India’s GDP Growth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Economic indicators, GDP and current trends
Mains level: India's GDP growth
Central Idea
- The National Statistical Office (NSO) has released a new set of data on India’s annual and quarterly national income, providing a final assessment of the COVID-19 pandemic’s impact on the country’s GDP growth. The latest numbers and sector-wise performance, highlighting areas of growth and contraction.
Recovery since pre-COVID year
- Advance estimates: NSO’s second advance estimate (SAE) shows a contraction of (-) 5.7% in 2020-21, lower than its first advance estimate (FAE) at (-) 7.7%.
- Benefited sectors: Manufacturing, construction, and financial sectors benefited the most in the revised estimate.
- GDP growth: Real GDP in the COVID-19 year amounted to ₹136.9 lakh crore, higher than the earlier assessment of ₹134.4 lakh crore. GDP grew by 9.1% in 2021-22 and 7% in 2022-23.
- Negative growth in 2020: The compound annual average growth rate between 2019-20 and 2022-23 was 3.2%. Comparison with other countries, including China, Bangladesh, and Vietnam, shows India’s negative growth rate in 2020.
Back to basics: Advanced estimates
- Advance estimates refer to the preliminary projections made by the government regarding the likely economic growth, inflation, or other macroeconomic indicators of a country for a given period. These estimates are usually released a few months before the actual data for the period becomes available.
- Advance estimates are based on various economic indicators such as industrial production, agricultural output, exports, and consumption expenditure, among others. These indicators are used to extrapolate the economic activity for the full period, based on which the government makes its initial projections.
Sector-wise Performance
- Overall GVA in 2022-23 is higher by 11.3% compared to 2019-20.
- Mining and quarrying sector still shows a contraction at (-) 0.3%.
- Trade, hotels, transport, etc., show weak growth of 4.3%.
- Construction sector shows higher-than-average growth at 18.6%.
- Manufacturing sector also shows robust growth at 14.8%.
- Financial, real estate, etc., grew at 14.3%.
- Agriculture sector grew at 12%.
- Government final consumption expenditure (GFCE) grew at 7.4%.
- Gross fixed capital formation and private final consumption expenditure (PFCE) increased by 17.7% and 13.1%, respectively.
Investment and Capacity Utilization
- Gross fixed capital formation to GDP ratio in nominal terms increased to 29.2% in 2022-23 from 28.6% in 2019-20.
- Real investment rates increased to 34% in 2022-23 from 31.8% in 2019-20.
- Estimated incremental capital output ratio (ICOR) decreased to 4.9 in 2022-23 from 8.5 in 2019-20.
- Capacity utilization ratio in the manufacturing sector was only 70.3% in 2019-20, but it increased to 73.5% in the first half of 2022-23.
- Subdued growth implies lower capacity utilization and higher ICOR.
Quarterly Growth and Projections
- Q3 2022-23 saw a decline in real GDP growth to 4.4% from 6.3% in Q2 and 13.2% in Q1.
- Growth rate in Q3 and expected growth rate in Q4 are quite low.
- High frequency indicators point towards improved economic activity.
- PMI manufacturing in January and February 2023 remained above its long-term average.
- PMI services increased to a near 12-year
Conclusion
- the NSO’s latest data on India’s GDP growth provides a final assessment of the COVID-19 pandemic’s impact on the country’s economy. The NSO’s data shows that India’s economy is recovering, albeit at a slower pace, from the COVID-19 pandemic.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India bats for Sovereign Credit Rating upgrade
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Sovereign credit rating
Mains level: Read the attached story
Central idea: India is seeking an upgrade to its sovereign credit rating, currently at the lowest-possible investment grade, as it believes its economic metrics have improved considerably since the pandemic.
What are Sovereign Credit Ratings?
- A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
- It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
- The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.
India’s current ratings
- S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest-possible investment grade, but with a stable outlook.
What does BBB mean?
- A ‘BBB’ rating indicates that expectations of default risk are currently low.
- The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
What is a Rating Agency?
- Rating agencies assess the creditworthiness or potential of an equity, debt or country.
- Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
- They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
- In simpler terms, these reports help investors gauge if they would get a return on their investment.
What do they do?
- The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
- Their reports are sold and published in financial and daily newspapers.
What grading pattern do they follow?
- The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
- Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
- Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
- Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
- Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.
Significance of such ratings
- Access to Capital: Higher credit ratings mean that a country can access capital at a lower cost, while lower ratings indicate that borrowing costs will be higher.
- Investment Decisions: Investors use credit ratings as a tool to evaluate a country’s creditworthiness and assess the level of risk associated with investing in that country.
- Economic Growth: Higher credit ratings typically lead to increased foreign investment, which can create jobs, boost productivity, and stimulate economic growth.
- International Trade: Countries with higher credit ratings are viewed as more stable and trustworthy, making them more attractive trading partners for other countries.
- Reputation: Countries with lower credit ratings may be seen as less reliable or stable, which can negatively impact diplomatic relationships and political influence.
Criticism of the rating agencies
- Credibility: Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
- Bias: These agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
- Fouled metrics: The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
- Erroneous: They were charged for methodological errors and conflict of interest on multiple counts.
Why is India seeking upgrade in its credit ratings?
- Improved creditworthiness: These ratings are used to judge a country’s creditworthiness, often impacting its borrowing costs.
- Stable indicators: India has series of stable parameters such as economic growth rate, inflation, general government debt and short-term external debt as a percentage of GDP, and political stability, among others.
Measures taken to improve ratings
- India aims to cut its fiscal deficit to 5.9% of GDP next fiscal year, from the 6.4% target for the current year that ends March 31, and to further reduce that to 4.5% in the next three years.
- India’s Economic Survey has forecast growth of 6% to 6.8% for 2023-24, which would make it one of the world’s fastest-growing major economies.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India close to Hindu Rate of Growth: Raghuram Rajan
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hindu Rate of Growh
Mains level: Read the attached story
Central idea: Former RBI Governor Raghuram Rajan has warned that India is “dangerously close to the Hindu rate of growth”.
What is Hindu Rate of Growth?
- The “Hindu Rate of Growth” is a term used to describe the slow growth rate of the Indian economy between the 1950s and the 1980s.
- It was coined by the Indian economist Raj Krishna in the 1970s.
- During this period, the Indian economy grew at an average rate of around 3.5% per year, which was much lower than other developing countries like South Korea, Taiwan, and Hong Kong.
- The term is considered controversial as it suggests that the slow growth rate was a result of cultural or religious factors rather than economic policies and structural issues.
- However, the term is still used in academic and policy discussions to refer to the slow growth of the Indian economy during this period.
Features of Hindu Rate of Growth
The then features which led to the coining of this term were-
- Low GDP growth rate: The term refers to the period from the 1950s to the 1980s when India’s economy grew at an average rate of around 3.5% per year, which was much lower than other developing countries.
- Slow Industrialization: The industrial sector was dominated by a few public sector companies, and the private sector was heavily regulated.
- Stagnant Agriculture: There was little investment in agriculture, and the sector was not given much priority in government policies.
- License Raj: India had a socialist economic model with heavy government regulation. The License Raj system required permits and licenses for businesses, creating a bureaucratic and corrupt system that hindered innovation and entrepreneurship.
- Import Substitution: India followed a policy of import substitution, where the government tried to develop domestic industries by protecting them from foreign competition. This led to a lack of competition, low quality of products, and high prices.
- Inefficient Public Sector: The public sector dominated the economy, but it was inefficient, unproductive, and plagued by corruption. Public sector companies were often overstaffed and poorly managed, resulting in low productivity.
- Lack of Foreign Investment: India was not attractive to foreign investors during this period, and there was little foreign investment in the economy. The government imposed strict controls on foreign investment, and the regulatory environment was not conducive to foreign investment.
Concerns flagged by Rajan
Rajan noted that India’s economic growth rate had been declining even before the COVID-19 pandemic hit the country.
(a) Decline in GDP growth rate
- India’s economic growth rate had fallen to 4.5% in the September quarter of 2019, before the pandemic hit in early 2020.
- During the pandemic, the Indian economy contracted sharply, with GDP falling by 7.7% in the 2020-21 fiscal year.
- The economy has rebounded somewhat, with the IMF forecasting GDP growth of 9.5% for the current fiscal year.
(b) Lower growth potential than hyped
- However, Rajan noted that India’s potential growth rate is likely to be lower than in the past, due to factors such as an aging population, a decline in the working-age population, and sluggish investment.
- He also cited the country’s poor performance on human development indicators, such as education and health, as a constraint on growth.
Key suggestions
- Rajan called for measures to address the structural factors that are holding back growth, such as investment in infrastructure and education, and improving the ease of doing business in India.
- He also emphasized the importance of macroeconomic stability and maintaining fiscal discipline, to avoid inflation and currency depreciation.
- He also called for measures to address inequality, such as better targeting of subsidies to those who need them most.
Conclusion
- Overall, Rajan’s remarks suggest that India faces significant challenges in maintaining high levels of economic growth, and that structural reforms will be needed to address these challenges.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Current Account Deficit (CAD): Desirable and Undesirable Components
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Current Account Deficit
Mains level: CAD and deficit financing
Central Idea
- As per the RBI’s quarterly statistics, the current account deficit (CAD) widened to 4.4 per cent of GDP in the second quarter of 2022-23, down from 2.2 per cent in the preceding quarter. This marks a reversal from an unusual surplus of 0.9 per cent of GDP in 2020-21. In the third quarter of this financial year, while the merchandise trade deficit has widened, the CAD may witness a fall.
What is Current Account Deficit (CAD)?
- Current Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers
- A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
- This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
- A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.
Components of Current Account
- Trade Deficit
- Trade Deficit = Imports – Exports
- A Country is said to have a trade deficit when it imports more goods and services than it exports.
- Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
- A trade deficit represents an outflow of domestic currency to foreign markets.
- Net Income
- Net Income = Income Earned by MNCs from their investments in India.
- When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
- Net income is measured by Payments made to foreigners in the form of dividends of domestic stocks, Interest payments on bonds and Wages paid to foreigners working in the country.
- Net Transfers
- In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners. It also Includes Remittances, Gifts, Donation etc.
India’s CADs have both desirable and undesirable components
- Desirable:
- A desirable deficit is a natural reflection of rising investment, portfolio choices and the demographics of the country.
- If CADs can be financed by stable capital inflows, such as FDI inflows, they are desirable as they are less prone to capital flight.
- Stable capital flows are desirable as they allow debtor countries, such as India, to utilize and allocate them into sectors that may yield long-term productive gains and foster higher economic growth.
- Undesirable:
- Large and persistent CADs can be undesirable if they reflect bigger problems such as poor export competitiveness and are financed by unstable financing.
- If deficits are financed by volatile capital flows such as portfolio flows, there may be a cause of concern. Portfolio flows are capricious and more susceptible to reversals in case of any global financial shock.
The countercyclical nature of India’s CAD: A matter of concern
- Dominance of external shocks: Research suggests that the country’s CAD rises when output falls rather than when demand rises, indicating the dominance of external shocks.
- For instance: If oil prices rise, and as oil is an input in the production process, it raises the cost of production and leads to a fall in economic growth. In this case, CADs rise with falling growth due to both the inelasticity of oil import demand as well as its major share in India’s total imports.
Remarks to be Noted
- Remittances and services exports have provided a counter-balance to rising merchandise trade deficits.
- India’s services exports grew at 23.5 per cent in 2021-22.
- While capital flows are pro-cyclical and react negatively to contractionary monetary policy by the Fed, remittances have exhibited remarkable stability.
Challenges and a Way ahead
- The composition of financing is crucial. While FDI inflows were enough to finance the deficit in 2021-22, these inflows have been weak in the current fiscal year.
- Over the medium term, policymakers need to arrest the negative spillovers from the slowdown in global trade on merchandise exports.
- Further rate hikes by the US Fed may lead to capital outflows leading to additional exchange rate market pressures. This could be challenging in the current situation as a weaker currency, coupled with a sticky import basket will lead to imported inflation.
- Policy measures thus must facilitate exports by focusing on structural reforms to improve trade competitiveness, alongside which the government must sign free trade agreements.
Conclusion
- India is currently facing the twin-deficit problem of high fiscal and CADs. While aggressive fiscal consolidation may be undesirable in the face of rising fears about a global slowdown, a comfortable external environment can be maintained by ensuring stable financing, along with using exchange rates as a shock absorber to weather the adverse global economic situation.
Mains Question
Q. Explain the concept of Current account deficit? India’s CAD have both desirable and undesirable components. Discuss.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
‘BIMARU’ Tag: What does this term mean?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: BIMARU states
Mains level: Read the attached story
Central idea: While addressing a summit in UP, PM recalled the tag of ‘BIMARU’, once used to describe the state.
What are BIMARU states?
- The term “BIMARU” is an acronym formed from the first letters of five states – Bihar, MP, Rajasthan, and UP – that were believed to be economically and socially backward in the 1980s and 1990s.
- The term was popularized by economist Ashish Bose in the 1980s to describe the poor economic and social indicators of these states.
- He coined this term in a paper presented to then-PM Rajiv Gandhi.
- These states were characterized by low literacy rates, poor infrastructure, high poverty rates, and low levels of industrialization.
- The term “BIMARU” itself is an amalgamation of the Hindi words “bimar” (sick) and “ru” (a suffix meaning “land of”).
Behind the slang name ‘BIMAR’
The BIMARU states of Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh are characterized by several economic and social features that distinguish them from other states in India. Some of these features include:
- Low per capita income: These have traditionally had low per capita income levels compared to other states in India, with Bihar having the lowest per capita income among Indian states.
- High poverty rates: They have a high percentage of people living in poverty, with Bihar and Uttar Pradesh having some of the highest poverty rates in the country.
- Low literacy rates: They have lower literacy rates than the national average, with Bihar having the lowest literacy rate among Indian states.
- Poor healthcare indicators: They have traditionally had poor healthcare indicators, with high infant and maternal mortality rates.
- Agriculture-based economy: These states are primarily agricultural states, with a significant percentage of the population engaged in agriculture and related activities.
- Significant population: They are among the most populous states in India, with Uttar Pradesh being the most populous state in the country.
Overall, the BIMARU states have traditionally lagged behind other states in India in terms of economic and social development, although in recent years, there has been progress in improving development indicators.
Persisting challenges
These states still face significant challenges, including high levels of poverty and unemployment.
- Still a national laggard: There is still a significant development gap between these states and the more developed regions of the country. For example, in 2019-20, per capita income in Bihar was only about a third of the national average, and in UP, only about half of the population has access to basic sanitation facilities.
- High Population: The share of BIMARU states in the absolute increase in India’s population during 2001-26 will be of the order of 50.4 per cent while the share of the south will be only 12.6 per cent.
How are these states faring now?
- In recent years, some of these states, such as Rajasthan and Madhya Pradesh, have shown significant improvement.
- In terms of economic growth, several of these states have experienced high growth rates in recent years, with Madhya Pradesh and Bihar recording growth rates of over 10% in 2019-20.
- Uttar Pradesh and Rajasthan have also recorded growth rates of over 7% in recent years.
- There has also been progress in improving social indicators such as literacy rates and healthcare infrastructure.
- For example, Bihar has seen a significant increase in literacy rates, with the state’s literacy rate increasing from 47% in 2001 to 63% in 2011.
Alternatives to ‘BIMARU’ terms
- PM has urged to refrain the use of such terms as they only serves to reinforce negative stereotypes and inhibit progress towards more equitable development across the country.
- He coined the term such as ‘Aspirational Districts/Blocks’ as alternative to such negative word.
Way forward
This involves several key strategies to address the economic and social challenges that these states face. Some of these strategies include:
- Enhancing economic growth: The BIMARU states need to focus on enhancing economic growth through policies that encourage investment, job creation, and entrepreneurship. This can include measures such as improving the ease of doing business, providing infrastructure, and investing in sectors with high growth potential.
- Improving social indicators: They need to focus on improving social indicators such as literacy rates, healthcare, and sanitation. This can involve investing in education and healthcare infrastructure, and implementing programs that target poverty reduction and social inclusion.
- Enhancing agricultural productivity: Given that agriculture is a major contributor to the economy of BIMARU states, efforts should be made to enhance agricultural productivity and efficiency. This can include investments in irrigation and modern agricultural techniques, and support for small and marginal farmers.
- Encouraging inclusive development: In order to reduce disparities and ensure inclusive development, policies and programs should be targeted towards the most vulnerable and marginalized sections of society. This can include measures to promote gender equality, social inclusion, and address issues such as caste-based discrimination.
- Leveraging technology: The BIMARU states can leverage technology to enhance economic and social development. This can involve the use of digital technologies to improve access to education and healthcare and promote entrepreneurship and innovation.
Conclusion
- Overall, while the BIMARU states have made progress in recent years, there is still a long way to go in terms of achieving more equitable development across the country.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Role of regulators in the Stock Market
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Stock Market, Role of regulators and investors, SEBI
Context
- On 25 January, US-based Hindenburg Research put out a tweet, talking about a negative report on the Adani Group that it had published. The report made many allegations against the group which triggered a fall in the price of their listed stocks.
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Just think of this situation
- A research report is released by a global firm that is also a short seller (that is, one who sells shares that it does not own, but buys them back at a lower price once the price falls).
- The report outlines areas of concern in a company that is listed in another jurisdiction. The issues raised could relate to the firm’s accounting or market practices.
- The report is released, quite curiously, before the company is going in for an equity issuance.
What happens after the news?
- Panic sale: As equity markets run on sentiments, such news leads to a panic sale and the share price of the company comes down sharply.
- Widespread uncertainty: The market sees investor wealth eroding sharply, leading to widespread uncertainty, as this is how contagions progress.
- Outrage: Denials are issued by the concerned company while the short seller stands firm on its views. However, shareholders have seen an erosion in their wealth and there is outrage everywhere.
In such a situation, what can the regulator do?
- Policies and system in place to put verified facts in public domain: It is for regulators in other jurisdictions to have policies/systems in place for verified facts to be put in the public domain.
- In the current context: The Securities and Exchange Commission of the US would matter and if the broker complied with its rules, then there is nothing to stop their views from being aired in a globalised world. This is why it is said that if any company opts for listing in overseas markets, there is more reason to ensure that its accounts are in place and there are no deviations from best practices.
What can regulators do to protect investors?
- It is necessary to understand that when share prices tumble: Only when someone sells the shares that have declined in value will a loss be actually incurred. This is the first point that ordinary investors need to keep in mind. While the media will talk of the loss of value and wealth, it is notional for those shareholders who don’t sell. And stock prices will return to their equilibrium once the storm passes.
- There is a need to have a wide market intelligence network: A special division that continuously analyses the messaging about Indian companies across the world. Given that such reports do not come up without signals being sent along the way, monitoring of views on companies listed overseas would be essential.
- While citing financial accounting irregularities need to be looked into: the accounting and auditing firms need to take on more responsibility to ensure that the Generally Accepted Accounting Practices (GAAP) are followed for overseas-listed firms. They will have to be made partners in any such crisis in terms of taking ownership and clarifying the same.
- Detecting price manipulation: Price manipulation, for instance, is one practice that has always been a concern for regulators. And it takes a lot of experience to detect it. Thus exchanges need to ensure that their market watch and surveillance practices are robust. This is where trading patterns can show if there has been market manipulation.
- Restoring assurance and sanity in the market: It is necessary that investors have some assurance from the regulator, which may be needed to restore sanity in the markets. However, this should be an immediate and time-bound investigation which looks at the allegations or the shortcomings of the report.
- Investing derivative segments too: As a corollary, the regulator needs to investigate the derivative segment too and probably talk to other regulators to analyse how the short positions have been created and whether they were in order. This will mean being in touch with other regulators, especially the SEC which regulates the jurisdiction for most overseas listings.
- Audit firms can be employed to flag off the concerns: The regulator should insist that all overseas listed companies have regular investor calls with stakeholders where meetings are recorded and transmitted back home for special teams to examine so that there is a sense of how potential investors feel about the companies.
Conclusion
- In the cases of overseas reports, investors must have some assurance from the regulator, which can restore sanity in the markets. But investors also need to be proactive when investing. Those who are more active investors would perhaps need to be aware of developments in the companies that they have invested in.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Possibility of global recession?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Current status of global economy and Global recession implications
Context
- There have recently been growing concerns about the global economy slipping into recession. These concerns were primarily triggered by the contraction of the US economy, observed in the first half of 2022. Negative growth in two consecutive quarters is commonly but not officially used as an indication of recession.
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Background: Status of the US economy
- First and second quarter of 2022: As reported by the Bureau of Economic Analysis (BEA), the US real Gross Domestic Product (GDP adjusted for inflation) decreased at an annual rate of 1.6 per cent and 0.6 per cent in the first and second quarters of 2022, respectively.
- Third quarter: In the third quarter, however, the US economy grew by 3.2 per cent, signalling a significant recovery.
- Fourth quarter: The latest BEA advance estimates show that the US real GDP increased at an annual rate of 2.9 per cent in the fourth quarter.
- Expansion of US economy a positive sign: Despite the slight decrease from the third quarter, the continued expansion of the US economy at the end of 2022 marks a positive sign, soothing concerns about a recession in 2023.
Economic recovery of the US economy
- Positive growth in fourth quarter: The positive growth in the fourth quarter can primarily be attributed to consumer spending, which increased by an annualised rate of 2.1 per cent, and private inventory investment that showed an upturn in 2022. Although a significant decline from the 5.9 per cent increase in 2021, the difference accounts for the enthused post-Covid economic recovery in 2021.
- The US labour market continues to remain robust: The unemployment rate was recorded at a low of 3.5 per cent in December 2022, matching the pre-pandemic levels. Also, the total non-farm payroll employment increased by 2,23,000 in December, exceeding the Dow Jones estimate of 2,00,000.
- Inflation has eased: While the labour market remains tight, US inflation has eased in the last few months. Consumer prices fell 0.1 per cent in December the largest month-over-month decrease since April 2020, due to reductions in motor vehicle and gasoline prices.
- Layoffs not yet translated into rise in jobless claims: Although not a perfect association, the decline in jobless claims in January shows that the mass layoffs in recent weeks, particularly in the tech sector, have not yet translated into a rise in claims, suggesting the possibility of finding new jobs.
- The reopening of China’s borders can have positive implications for the global economy: As China resumes its economic activities to pre-Covid levels by boosting growth, domestic consumption is expected to increase significantly. With the ease of trans-border movement and eventual increase in exports of consumer and industrial goods, global trade is expected to strengthen as well.
What is Recession?
- A recession is a significant decline in economic activity that lasts for months or even years.
- Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
- Recessions are considered an unavoidable part of the business cycle or the regular cadence of expansion and contraction that occurs in a nation’s economy.
Possibility of a global recession
- Elevated inflation continues to be a cause for global concern: Despite the fall in consumer prices, the headline CPI for the US showed an annual increase of 6.5 per cent in December 2022. In spite of the slow-paced increase in headline CPI, persistent elevation in core inflation excluding food and energy continues to be a major issue across economies.
- Interest Rate Hikes on the Horizon: Consequently, the central banks are expected to continue with interest rate hikes in the coming months. On an annualised level, the CPI inflation in Australia also jumped to 7.8 per cent in the 2022 fourth quarter, increasing the likelihood of respective interest rate hikes as well.
- China’s Impact on Commodity Prices: Moreover, an increase in China’s demand for goods post-reopening could drive up commodity prices, thereby creating an inflationary impact. For instance, China’s increased demand for natural gas would mean more competition with the European market, leading to higher commodity prices that can put further inflationary pressures on Europeans already dealing with high energy bills.
- Higher borrowing costs: Rising interest rates would incur even higher borrowing costs that could dampen consumer spending. While sectors sensitive to high borrowing costs such as housing and construction have slowed down significantly.
Conclusion
- Among the positive signs are the continued expansion of the US economy and the reopening of China’s borders. Rising inflation remains a cause for global concern. However, prevalence of mixed signals suggests that the onset and depth of a global recession in 2023 are not certain.
Mains question
Q. Highlight the current situation of global economies. Discuss if there’s a global recession in 2023?
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Layoff and the conditions for retrenchment
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Layoffs, reasons and impact, Industries, Employment and economy
Context
- Last year, around 1,60,000 workers in the tech industry were laid off globally. In contrast, in just this month alone some 60,000 tech workers have been laid off till now. On the back of a gloomy global economic outlook and prospects of a possible recession, tech firms across the world from US-based giants like Alphabet, Amazon and Meta to early-stage startups have engaged in large-scale retrenchments.
What is means by Lay-Off?
- A layoff is the temporary or permanent termination of employment by an employer for reasons unrelated to the employee’s performance.
- Employees may be laid off when companies aim to cut costs, due to a decline in demand for their products or services, seasonal closure, or during an economic downturn.
- When laid off, employees lose all wages and company benefits but qualify for unemployment insurance or compensation (typically in USA).
Inflation after strong recovery of the global economy: Two factors
- Outpaced demand: Buoyed by extraordinary pandemic relief support to households, aggregate demand in advanced economies outpaced supply.
- Supply chain disruption as a result of Russia- Ukraine war: the armed conflict between Russia and Ukraine caused supply-chain disruptions, leading to global inflationary pressures for food and fuel. In response, the US Federal Reserve has rapidly hiked rates.
Layoff drive in India
- Lay-offs in India: As multinational firms seek to cut their payroll figures worldwide, this lay-off drive has made its way to India as well.
- Impact on Indian workers: Indian workers, including expatriates and local employees, in both the traditional IT sector and the tech-based startup sector have been affected.
- Slowdown in funding in 2022: Despite a strong start, funding in India began to slow down in 2022, with third-quarter funding falling to a two-year low.
- Rising interest rates and cost of capital: Rising interest rates have meant that the cost of capital has increased and venture capitalists have to be more selective about how they deploy funds in this funding winter.
- Restructuring and cost-cutting for Indian tech startups: Indian tech startups are under pressure to cut costs and restructure their businesses in search for profitability. As a result, startups, including unicorns have engaged in broad-based retrenchments.
Retrenchment conditions according to Industrial Disputes Act
- One month notice with reasons is must: Employers must give a one-month notice with reasons for retrenchment to workers who have been in continuous service for at least a year.
- Must provide compensation: Employers must give retrenchment compensation.
- Notice shall be served: A notice in the prescribed manner must be served on the appropriate government.
- Principle of last come first go shall be followed: Employers must follow the principle of last come, first go while retrenching employees.
Concerns for contract workers
- Employers often skirt legal requirements by asking for voluntary resignations to remain outside the scope of retrenchment provisions.
- In any case, these mandates only apply to non-managerial employees; managerial employees are governed by their employment contracts.
- There are no similar protections available to gig or contract workers.
Conclusion
- Even as India seeks to lead a digital and technologically-driven world, it is important to note that the tech sector is not immune to harsh macroeconomic realities. It is crucial for the government and private sector to work together to mitigate the impact of layoffs on workers and to ensure that the industry continues to grow and create opportunities for all.
Mains question
Q. Layoffs have been frequently reported in the news recently. In this context, briefly explain the term layoffs and discuss the factors contributing to them? Highlight the impact of layoffs in India.
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State of the Economy Report and the Macroeconomic Stability
Note4Students
From UPSC perspective, the following things are important :
Prelims level: State of the Economy report
Mains level: Indian economy- Monetary policy and macroeconomic stability
Context
- The Reserve Bank of India (RBI) just-released State of the Economy report. The report suggests that while controlling inflation was a big concern in 2022, the bank may now be more focused on avoiding a recession in 2023. There is still debate about whether the recession will be short and mild or long and severe.
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What is State of the Economy report?
- A State of the Economy report is a paper that the Reserve Bank of India (RBI) releases which gives a summary of how the country’s economy is doing.
- The report talks about things like prices going up, how much the economy is growing, how many people have jobs, and the bank’s plan for managing money.
- The RBI uses the report to make decisions about interest rates and other economic rules, and it also helps people like economists, investors, and regular citizens understand the economy and make smart choices.
What the RBI’s State of the Economy report says?
- Retail inflation eased: Retail inflation eased to 5.72 per cent in December. In November, the inflation print was 5.88 per cent. The government has mandated the central bank to keep inflation at 4 per cent with a +/- 2 per cent band.
- Consumer price inflation within RBI’s upper tolerance limit: The report said the country’s macroeconomic stability is getting bolstered with inflation being brought into the tolerance band. consumer price inflation in the last two months falling within the RBI’s six per cent upper tolerance limit
- Hopeful for the fiscal consolidation: It is even hopeful of fiscal consolidation underway at central and sub-national levels and the external current account deficit on course to narrow through the rest of 2022 and 2023. RBI said in a report that they want to keep prices steady at a certain level and bring it down to 4% by 2024.
- Narrowing CAD: Lead indicators suggest that the current account deficit is on course to narrow through the rest of 2022 and 2023.
- Stock market continue to outperform peers: The country’s stock markets stood out in 2022 and continue to outperform peers on the strength of macroeconomic fundamentals and retail participation.
Who prepares the report and what the authors says?
- Views expressed are not of the institution: The report was prepared by RBI’s deputy governor Michael Patra and other RBI officials. The views expressed in the report are of the authors and not of the institution, the report said.
- India at a bright spot: Authors said the prospect of India as a bright spot amidst 2023’s encircling gloom is burnished by most recent history and current developments. By cross-country standards, the country’s economy exhibited resilience through 2022 in the face of the triad of shocks war; monetary policy tightening; and recurring waves of the pandemic.
- India will be ahead of UK: According to the authors, at current prices and exchange rates, India will still be the 5th largest economy in the world in 2023, worth $3.7 trillion and will be ahead of the UK.
Back to basics: What is Monetary policy?
- Monetary policy is the macroeconomic policy laid down by the central bank.
- It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
- A contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation.
- During times of slowdown or a recession, an expansionary policy grows economic activity, by lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.
What are the concerns and prognosis over the report?
- Predictions are too optimistic: The report’s release is significant, as it comes before the Union Budget for 2023-24. However, the report’s predictions may be too optimistic.
- Risks tilted towards growth than inflation: The balance of risks is currently tilted towards growth rather than inflation, both globally and domestically.
- Slowing down the pace of monetary tightening: It is appropriate for the RBI to slow down or pause the pace of monetary tightening. Monetary policy takes time to have an effect, so the impact of these increases may take a few quarters to realise actually.
- Wait and Watch Approach: The RBI can afford to adopt a wait-and-watch approach and allow the impact of past actions to be fully felt. This does not mean neglecting inflation, as bringing it down to 4% is still important.
Conclusion
- The world is, no doubt, viewing India favourably as an investment destination, both for its large domestic market and the need to de-risk from China in the current geopolitical environment. The government’s focus on improving the country’s physical as well as digital infrastructure is boosting the investors’ confidence. Demonstrating macroeconomic stability and policy credibility can be the icing on the cake to bring the world to India.
Mains question
Q. Highlight RBI’s State of the Economy report and discuss what makes India a favorable investment destination?
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Economic growth and the government disintermediation
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India's fiscal challenge and options
Context
- Between spending and saving, governments are generally better at the former. High growth comes with the advantage that government revenue expands and gets spent, as is happening this fiscal. But this is also habit-forming. If growth tapers down as is expected in FY 2024 cutting back government spending will be politically rocky just before a general election. Better then, to get selective on spending early on.
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Current economic indicators
- Finance Minister Nirmala Sitharaman took over the hot seat in May 2019. True to character, she resolved to pick up this rolling can by tabling in the FY 2021 budget, an amount of INR 2.64 trillion (1.2 percent of GDP) to pay these overdues.
- India, yet again, in an era of high inflation and high oil import prices. It has taken courage and sagacity to reduce the FD from 9.2 percent (FY 2021—the COVID-19 year) to a targeted 6.4 percent this fiscal.
Challenges to establish a declining trend back towards an FD of 3.5 percent of GDP
- The oil slick of global uncertainty and inflation: Oil price uncertainties, created by the Ukraine standoff, which was partially cushioned via nimble Indian diplomacy resisting the boycott of cheaper Russian oil, has kept imported oil at US$77.7 per barrel in January 2023. But the ongoing opening up of China could firm up oil prices.
- India’s high-debt burden compromises fiscal resilience: Interest payments in FY 2023 (budgeted) at INR 9.4 trillion, are the largest expense outlay bucket, accounting for 43 percent of budgeted Union net revenue receipts, up from 41.7 percent in FY 2021. Defence and domestic security services at 15 percent come next, followed by subsidies (food, fertilizers, and fuel) at 14 percent and inflation-indexed government pensions at 9 percent.
- Infrastructure lags: Infrastructure remains a drag on growth although intercity highways have improved. Multimodal transport solutions remain underdeveloped as do train stations and bus terminals in most towns and rural areas. The competitiveness of major Indian ports in 2018 was ranked 42nd well below China, Malaysia and Thailand- pulled down by low outcomes in infrastructure and turn-around time. The gas grid remains nascent with just 10.1 million connections versus 309 million users for LPG canisters a more volatile substitute for cooking fuel, than piped natural gas.
What is the worrying situation?
- Inflation: The Reserve Bank of India (RBI) expects retail inflation, assessed at 5.78 percent (December 2022) to trend downwards in FY 2024. But signals of embedded inflation via core inflation (other than volatile food and fuel) above 6 percent are worrying.
- Disrupted energy supply: A disruption in energy supplies could upset sanguine inflation expectations.
- Taming inflation would increase fiscal crunch: Taming the resulting inflation by reducing taxes on the retail supply of petroleum products would increase the fiscal crunch.
- Interests funded by additional borrowings is risky strategy: High-growth economies can afford to fund by borrowings as can start-ups, which borrow against their future growth prospects. For a large, lower middle-income economy like India, with historically moderate long-term growth rates (4 to 6 percent), it compromises reserve fiscal capacity to respond, through counter-cyclical measures, to economic downturns induced by economic shocks a risk-laden strategy.
What India should do?
- Resume much delayed disinvestment: Resume the much-delayed privatisation and disinvestment of public sector enterprises and government-owned financial sector entities.
- Make Indian railway and autonomous entity: Second, make Indian Railway an autonomously regulated, commercially run entity, providing a surplus to the government rather than looking for budgetary support.
- Encourage public finance outlays: Maximise the economic impact by encouraging public finance outlays to be driven by competitive metrics of allocative efficiency across investment options and program/project implementation models.
Conclusion
- For a new phase of growth, government disintermediation is appropriate. It allows for increased competition and innovation in the private sector, leading to greater efficiency and economic growth. India has momentum. What it needs is for the reins to be lightly held.
Mains question
Q. What obstacles does the Indian economy face as it enters a new era of growth, and what should India do?
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A Bumpy Ride for India’s Economy in 2023: A perspective
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Prospectus on Indian economy
Context
- India’s general elections, scheduled for 2024, will also bring in their wake high-pitched rhetoric and spin-doctoring to further muddy the waters. In short, buckle up because the next 12 months promise a flurry of conflicting signals and a rather bumpy ride. A perspective on Indian economy in 2023.
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Turbulent global situation
- Pandemic plus Ukraine war: One conflicting signal is already staring us in the face, the seemingly doomed future of globalization. Post-Brexit, the covid pandemic and Russia-Ukraine conflict, there are multiple signs indicating retrenchment of globalization.
- Collapse of Supply chains: The collapse of global supply chains due to economic lockdowns has refocused attention towards near-shoring or on-shoring.
- Trade barriers: In an associated move, nations have erected protective trade barriers; both the US and EU are using climate plans to renege on free-trade promises. The end result, reduced global trade.
What are the prospects from international institute?
- BlackRock Investment Institute’s 2023 Global Outlook: Various financial institutions across the globe are trying to wrap their heads around the phenomenon. According to BlackRock Investment Institute’s 2023 Global Outlook, “We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs.
- Citi’s wealth outlook for 2023: Citi’s wealth outlook for 2023 intoned ominously, as a less globalized, more polarized world presents challenges for investors.
Effect of globalization and policy change by developed economies
- Rising federal rates: As US employment numbers and demand data continue to stay elevated (despite, paradoxically, slowing growth), the Federal Reserve is likely to be unrelenting in its endeavor to bring the inflation rate back to 2%.
- Rise in domestic interest rates: The Fed’s actions will undoubtedly strengthen the dollar further, forcing many central banks across the global economy to raise interest rates in tandem. Interestingly, central banks in emerging economies today face threats to their independence from an external agency and not from the political dispensation at home.
- Increase in food and fuel cost: Beyond interest rates, inflation also travels easily across national boundaries, especially through food and fuel trade. The fractured supply chains and war in Europe have ensured that inflation’s harmful impact might sustain through 2023.
- Omicron variant and travel restrictions: The other undesirable effect of globalization could be the persisting effect of the Omicron variant that has travelled seamlessly from one corner of the world to another. The Indian government has been forced to resume random screening of passengers arriving from different parts of the world to test for the numerous Omicron variants that have witnessed a resurgence in recent times.
Impact on Indian Economy
- Over-priced equity markets: Indian equity markets have been soaring since early 2020, once the initial shock of the covid pandemic was negotiated. Cross-country comparisons across emerging markets by various valuation indices show the Indian market to be considerably over-priced currently, both relative to its own past performance as well as compared with the rest of the world.
- High retail investors: Interestingly, the market held its own despite foreign portfolio investors (FPI) pulling out money over the past few months. Domestic investment institutions and retail investors are believed to have kept the market valuation up. But below this cheery visage lies a grim reality.
- Worrisome credit records: Sectoral credit deployment data from the Reserve Bank of India (RBI) shows credit growth in commercial banks in recent months has been driven by only two segments: non-bank financial companies (NBFCs) and consumer loans.
- High retail borrowings: A large chunk of the NBFC borrowing was also for on-lending to retail borrowers, given tepid industrial credit demand. RBI data for commercial banks shows consumer loans in four categories advances against fixed deposits, advances against shares or bonds, loans against gold jwellery and other personal loans grew by almost 71% between April 2020 and November 2022.
- Loans for equity investments: It is quite likely that a large proportion of these loans have found their way into stock markets; the Nifty-50 index gained close to 118% between April 2020 and November 2022, at a time when FPI investments during the same period witnessed a net inflow of only ₹1,464 crore.
Conclusion
- The year 2023 appears to be very bumpy for economy in general and credit growth and recovery in particular. SEBI and RBI need to protect the retail investors from Ponzi scheme and fake promises of guaranteed returns.
Mains Question
Q. How policy changes in developed economies affects the India’s decision making? Assess the effect of turbulent global situation on credit growth in India.
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Indian economic growth forecast
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Indian economic growth estimate and the areas of concern
Context
- The Indian economy is expected to grow at 7 per cent in 2022-23 as per the first advance estimates of national income released by the National Statistical Office (NSO) on Friday. This is marginally higher than the RBI’s most recent assessment in the December monetary policy committee meeting, the central bank had lowered its expectation of growth to 6.8 per cent.
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Estimate: Indian economic growth
- As per the latest estimates growth is likely to slow down in later half: Considering that the economy grew by 9.7 per cent in the first half of the financial year (April-September), the latest estimate implies that growth is likely to slow down to 4.5 per cent in the second half of the year (October-March) as the base effect wanes.
- Full year growth estimates India will be fastest growing economy: Notwithstanding that, the full-year growth estimate suggests that India will be one of the fastest-growing economies in the world.
Positive signs in the Indian Economy
- Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity.
- Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
- On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.
Areas of concern
- Private consumption is likely to contract in the second half of the year: While the pace of contraction is expected to be marginal, the slowdown in spending could be due to either the exhaustion of pent-up demand or the lagged impact of a tighter monetary policy.
- Exports growth likely to grow: As per the estimates, exports are likely to grow at almost 12 per cent in the second half of the year. This is at odds with recent data which showed that export growth has actually slowed down considerably as advanced economies have come under pressure.
- Agriculture growth likely to slow down: Agricultural growth is expected to slow down in the second half. As per some analysts this is not in sync with the healthy sowing rates and reservoir levels.
- Manufacturing will go upward: The manufacturing sector, which was almost flat in the first half of the year, is expected to witness an uptick in the second half. It is difficult to reconcile this with the view that both domestic demand and exports are likely to remain subdued, which would in turn impact industrial production.
- Government spending will remain almost flat: Public administration, defence and other services, which largely connotes government spending, is expected to remain more or less flat in the second half. This is odd considering that government consumption expenditure is pegged to grow at 7.2 per cent during the period.
As the data is not yet concrete, estimates made are likely to change
- As the first advance estimates suffer from data limitations, they are based only on seven to eight months of data these are likely to change once more data is available.
- However, they do provide some sense of underlying momentum in economic activities, and are useful in the context of the upcoming Union budget.
- The last budget had assumed a nominal GDP growth of 11.1 per cent. However, as per the latest estimates, nominal GDP is expected to grow at a significantly higher pace of 15.4 per cent.
Conclusion
- Along with trends in tax collections as per which the government’s revenues will surpass budgeted targets by a significant margin, these growth estimates only increase the likelihood of the Centre meeting its budgeted fiscal deficit target for the year.
Mains question
Q. As per the first advance estimates of national income released by the National Statistical Office, Indian economy is expected to grow at 7 per cent in 2022-23. In light of this discuss some of the latest projections and the areas of concern for Indian economic growth.
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Blue economy and marine pollution
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Blue economy
Mains level: Blue economy , maritime pollution and associated challenges
Context
- Blue economy relates to presentation, exploitation and regeneration of the marine environment. It is used to describe sustainability-based approach to coastal resources. The worry is that the oceans are under severe threat by human activities, especially when the economic gains come at the cost of maintaining environmental sanity.
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From the beginning: The Blue economy
- Origin of the concept: Gunter Pauli’s book, “The Blue Economy: 10 years, 100 innovations, 100 million jobs” (2010) brought the Blue Economy concept into prominence.
- A project to find best nature inspired and sustainable technologies: Blue Economy began as a project to find 100 of the best nature-inspired technologies that could affect the economies of the world. While sustainably providing basic human needs potable water, food, jobs, and habitable shelter.
- Inclusive approach and objective: This is envisaged as the integration of Ocean Economy development with the principles of social inclusion, environmental sustainability and innovative, dynamic business models
- Environment friendly maritime infrastructure: It is creation of environment-friendly infrastructure in ocean, because larger cargo consignments can move directly from the mothership to the hinterland through inland waterways, obviating the need for trucks or railways
Significance of Maritime transport
- One of the largest employers within ocean-related activities: Maritime transport plays a big role in the globalised market in the form of containerships, tankers, and ports, coastal tourism is the largest employer within ocean-related activities.
- Eighty percent trade happens on the seas: Eighty per cent of world trade happens using the seas, 40 per cent of the world’s population live near coastal areas, and more than three billion people access the oceans for their livelihood.
- Annual value makes up equivalent to seventh largest GDP: A healthy marine environment is essential for a sustainable future for people and the planet. Its value is estimated to be over $25 trillion, with the annual value of produced goods and services estimated to be $2.5 trillion per year, equivalent to the world’s seventh largest economy in gross domestic product (GDP) terms.
- Ensures food security: The oceans, seas and coastal areas contribute to food security and economic viability of the human population. The ocean is the next big economic frontier, with the rapidly growing numerous ocean-based industries.
What are the concerns?
- Human induced Oceanic pollution: Marine activities have brought in pollution, ocean warming, eutrophication, acidification and fishery collapse as consequences on the marine ecosystems.
- Oceans are rarely financial institutions: The ocean is uncharted territory, and rarely understood by financial institutions. Hence preparedness of these institutions in making available affordable long-term financing at scale is nearly zero.
- Developing nations pay heavy price: In this journey of achieving blue economy goals, it is developing nations that pay a heavy economic price.
- Lack of capacity is a critical hindrance: Many of the developing nations have high levels of external debt. Lack of capacity and technology for transition between agri economy and marine economy is also a critical hindrance.
- Not having a elaborative guiding principles is a major concern: There is concern that without the elaboration of specific principles or guidance, national blue economies, or sustainable ocean economies, economic growth will be pursued with little attention paid to environmental sustainability and social equity.
What should be the approach towards achieving Blue economy?
- Inclusive discussion and participation is must: The blue economy is based on multiple fields within ocean science and, therefore, needs inter-sectoral experts and stakeholders. It is imperative to involve the civil society, fishing communities, indigenous people and communities for an inclusive discussion.
- SDG-14 journey cannot undermine the other SDGs: The UN stresses that equity must not be forgotten when supporting a blue economy. Land and resources often belong to communities, and the interests of communities dependent on the ocean are often marginalised, since sectors such as coastal tourism are encouraged to boost the economy.
- Integrated marine spatial planning with national and global expertise is necessary: Developing the blue economy should be based on national and global expertise. It is important that any blue economy transformation should include using integrated marine spatial planning. This would provide collaborative participation of all stakeholders of the oceans, and would make room for debate, discussion and conflict resolution between the stakeholders.
Where does India stand at this hour?
- Suitable natural geography: Vast coastline of almost 7,500 kilometres, with no immediate coastal neighbours except for some stretches around the southern tip. In some sense, India has the advantage of its natural geography
- Opportunity on G20 presidency: It is an opportunity for India to use its G20 Presidency to ensure environmental sustainability, while providing for social equity.
- Rising role and significance: India’s engagement in the blue economy has been rising, with its active involvement in international and regional dialogues, and maritime/marine cooperation.
Conclusion
- Achieving the Blue economy goal would need tremendous human effort, and would call for global cooperation through various legal and institutional frameworks. This also includes the need to develop newer sectors such as renewable ocean energy, blue carbon sequestration, marine biotechnology and ex-tractive activities, with due attention paid to the environmental impacts.
Mains question
Q. What do you understand by mean Blue economy? Highlight the importance of maritime transport and discuss what need to be done to achieve blue economy in a true sense?
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Stock Trade and the Economy
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Indian Economy, stock trade indicators and economic growth
Context
- Even as the RBI steadily downgraded India’s growth forecasts for the year from 7.2 per cent in April to 6.8 per cent in December, and the benchmark Nifty50 index ended the year up a mere 4.1 per cent, a handful of stocks delivered outsized returns to investors.
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Expansion of business and reward
- Adani gained because of expansion: The top trade was undoubtedly that of Adani Enterprises with the stock more than doubling over the year. But that should not come as a surprise. After all, the group has embarked on a breathless pace of expansion (both organic and inorganic) that is perhaps unparalleled in recent times.
- Unexpected rise in prices: Share prices of associated companies such as Adani Green have also seen a remarkable surge, catapulting the group into the top leagues of Indian conglomerates.
- Risky price-to-rent ratio: One should be forgiven for thinking that residential real estate in Delhi, with a price-to-rent ratio that ranges between 40-50, is expensive. Adani Enterprises is currently trading at a price-to-equity ratio of 394 as per NSE. The Nifty50, in comparison, is trading just above 21.
Performance of Public sector banks
- SBI AND PNB gained: The year also belonged to Indian banks, more specifically to public sector banks, who at last seemed to have turned the corner. SBI is up more than 30 per cent, while Punjab National Bank is up almost 50 per cent. Others like Bank of Baroda and UCO Bank have more than doubled.
- Outperforming private banks: While private sector bank stocks have also seen a sharp rise Axis is up almost 35 per cent, while ICICI is up 17 per cent, public sector banks have outperformed their private counterparts by a significant margin. The Nifty PSU bank index is up 70 per cent for the year, while in comparison, the private bank index is up only 21 per cent. This was perhaps to be expected.
- Cleaning up balance sheet: Public sector banks have been on a multi-year drive to clean up their balance sheets, and shore up capital. And while there are still some concerns over possible slippages from accounts that were restructured during the pandemic, gross non-performing assets or bad loans were down to 6.5 per cent at the end of September 2022.
- Rising lending rates: Moreover, lending is growing at a brisk pace. And banks’ spreads also have improved with the interest rate cycle on the upswing. In typical fashion, lending rates have risen faster than deposit rates. But, as credit growth picks up and competition for deposits among banks begins to intensify, deposit rates are likely to edge upwards, putting pressure on the spread.
Status of Consumption and auto sector
- Consumption is up: while concerns over the unevenness of the economic recovery persist, consumption stocks have fared well. ITC is up more than 50 per cent, as are Britannia (almost 20 per cent) and HUL (9 per cent).
- Real wages have not increased: But with firms underlining the continuing pressure on volumes with elevated inflation, real wage growth has been subdued in rural areas it is likely that in some product segments, the formalisation theme is still playing out.
- Size of market is not expanding: The bigger formal firms gaining market share even as the overall size of the market isn’t expanding as hoped.
- Auto sector have done well: Among the auto stocks, M&M and Maruti are up 50 per cent and 12 per cent respectively, though Tata motors is down 22 per cent, while among the two-wheelers, both Bajaj and Hero are up.
Better performance of Infrastructure
- Moderate uptick in infrastructure: Infrastructure stocks are a mixed bag. Larsen & Toubro, often thought of as a proxy for the domestic capex cycle, is up almost 9 per cent, recently hitting a new high.
- Impact of PLI scheme: Perhaps, this reflects a pick up in the public sector capex or the private sector push under the government’s production-linked investment scheme.
- Mix picture of steel and cement: Among cement stocks, Ultratech is down, though ACC is up, while among steel stocks, SAIL is down, Tata steel is almost flat, but JSW Steel is up.
IT sector was worst performing
- IT NIFTY significantly down: The sector which has taken a beating has been IT. The Nifty IT index is down 26 per cent.
- Heavy correction in market: All major IT firms from TCS to Infosys to Wipro have witnessed heavy correction.
- Impact of slowdown in advanced economy: Valuations of the sector will be heavily influenced by market views over the slowdown in advanced economies which are major revenue centres for these firms.
Conclusion
- Though stock market doesn’t reflect the entirely true picture of economy but it certainly a good indicator of where the retail investor and common man invest his money. India’s stock market is going to be top 3 in the world. SEBI must protect the retail investor from this highly volatile terrain.
Mains Question
Q. Analyze the performance of the auto and IT sector in India through lenses of stock market? Why the balance sheet of public sector banks is improving?
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New Year and the Indian economic growth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Indian economic growth prospect and challenges
Context
- The new year begins on a slightly more optimistic note for India. Global crude and food prices are down, the rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022, even as official foreign exchange reserves have recovered. However, there are challenges to the economic growth of India which needs an immediate attention and action.
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The current scenario and the optimism around Indian economy
- Global crude and food prices: Global crude and food prices are roughly 38 per cent and 15 per cent down respectively from their highs in March, following Russia’s invasion of Ukraine.
- Stabilised rupee: The rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022
- FOREX recovered: even as official foreign exchange reserves, which had plunged to $524.5 billion on October 21 from a year-ago peak of $642 billion, have since recovered to $562.8 billion.
- Environmental conditions are good for Rabi crops: With the prospects for the upcoming rabi crop looking good, as there is favourable soil moisture conditions, timely onset of winter and improved fertiliser availability on the back of declining international prices one can expect consumer inflation to ease further.
What is inflation?
- Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).
What are the challenges?
- Challenge is more on growth than on Inflation: The challenge for India this year is likely to be more on the growth than on the inflation front.
- It seems, Chinese’s authoritarian policies making India a favourable investment destination: On paper, the world’s disillusionment with China (more specifically, the authoritarian policies of Xi Jinping, both at home and beyond) and its diminishing economic prospects, worsened by a looming demographic crisis, should be making India every investor’s favourite destination.
- On paper government efforts are honest to attract investment: The present government’s focus on improving the country’s physical as well as digital infrastructure plus schemes such as production-linked incentive to attract investments in specific sectors, from solar photovoltaic modules and drones to specialty steels ought to have given added impetus to this process.
- But on the ground, neither domestic nor foreign companies are really investing: The biggest drag on investment during the last decade was over-leveraged corporates and bad loans-saddled banks.
- Deepening global slowdown is a major challenge to the economic growth: That twin balance sheet problem has more or less resolved itself. Today’s problem has mainly to do with strained government and household balance sheets. That, coupled with a deepening global slowdown constricting export demand, could have a bearing on India’s economic growth.
What is Current Account Deficit (CAD)?
- A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
- This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
- A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.
What should the government do?
- Refrain from fiscal stimulus and maintain macroeconomic stability: It should certainly refrain from any fiscal stimulus to kick-start investment or drive growth. Far from stimulus, what the country needs is macroeconomic stability and policy certainty.
- Managing current account deficit: The current fiscal deficit and public debt levels are far too high to allow any new populist schemes in the name of putting money in people’s hands or sharp tax cuts to supposedly revive investor sentiment. Large government deficits will invariably spill over into current account deficits. The latter number, at 4.4 per cent of GDP in July-September, was the highest for any quarter since October-December 2012 and the prelude to the last so-called taper tantrum-induced balance of payments crisis.
- Must prioritize fiscal consolidation: The coming budget must prioritize fiscal consolidation. This will enable the RBI to also pause interest rate hikes and further monetary tightening, which is probably not the best thing for an economy already facing multiple growth headwinds.
Conclusion
- India’s challenge has shifted from inflation management to facilitating growth in 2023. Policy stability and credibility should be the mantra that will ultimately work for India.
Mains question
Q. It is said that the new year 2023 is starting on a slightly more optimistic note for the Indian economy. In this background, discuss the challenges facing India’s economy and what the government should do?
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
India’s Path to Prosperity through Formal Employment
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Emmployment issues
Context
- Mass prosperity for massive populations is hard. India’s large remittances from a small population overseas and IT sectors employability reinforce that our mass prosperity strategy should be human capital and formal jobs.
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Why human capital formation is effective tool for mass prosperity?
- Disproportionate contribution of IT employees: A strong case for human capital-driven productivity is our software employment — 0.8 per cent of workers generate 8 per cent of GDP.
- Remittance by NRIs: This case is reinforced by remittances from our overseas population of less than 2 per cent of our resident population crossing $100 billion last year.
- Shift towards formal employment: A World Bank report suggests that the qualitative shift during the previous five years from low-skilled, informal employment in Gulf countries (dropped from 54 per cent to 28 per cent) to high-skilled formal jobs in high-income countries (increased from 26 per cent to 36 per cent) is significant.
- Remittances are higher than FDI: Our rich forex remittance harvest roughly 25 per cent higher than FDI and 25 per cent less than software exports is fruit from the tree of human capital and formal jobs.
Limitations of Fiscal and monetary policy
- Credit availability is bigger issue: Monetary policy is, at best, a placebo, painkiller, or steroid especially since credit availability is a bigger problem in India than credit cost.
- Source of finance is important than expenditure: Global experience suggests where governments spend money (pensions, interest, salaries, education, healthcare, roads, etc) and how this spending is financed (taxes or debt) matters more than how much is spent (about Rs 80 lakh crore in India this year).
- Fiscal policy tends to overshoot: Covid made enormous fiscal and monetary policy demands, but the bigger the binge, the bigger the hangover. Western central banks are struggling to shrink their balance sheets because they used what Harvard’s Paul Tucker calls “unelected power” to chase goals outside their mandate, administer medicine with poorly understood side effects, and speed down highways with no known return paths.
- India avoided the fiscal and monetary trap: Rich-country borrowing rates have risen by 300 per cent plus and inflation hurts the poor the most. India avoided these fiscal and monetary policy excesses. This prudence now combines with previous structural reforms (GST, IBC, MPC, UPI, DBT, NEP, etc) and a reform “tone from the top” to create a fertile habitat for productive citizens and firms.
What should be the strategy in next fiscal year for employment generation?
- Targeting the job creation: The Finance Bill must target productivity and continuity by legislating human capital and formal job reforms previously proposed.
- NEP should be implemented in 5 years: It should reduce the implementation glide path for the powerful National Education Policy 2020 from 15 years to five years.
- Abolishing the licensing: It should abolish separate licensing requirements for online degrees and freely allow all our 1,000-plus accredited universities to launch online learning.
- Accelerating apprentices: It should accelerate growing our 0.5 million apprentices to 10 million by allowing all universities to launch degree apprentice courses under tripartite contracts with employers under the Apprentices Act.
What are the other steps that can be taken through next budget?
- Notify labour code: It should notify the four labour codes for all central-list industries while appointing a tripartite committee to converge them into one labour code by the next budget.
- Universal enterprise number: It should continue EODB reforms by designating every enterprise’s PAN number as its Universal Enterprise Number.
- Remove the factory act: It should explore manufacturing employment by abolishing the Factories Act this painful Act accounts for 8,000 of the 26,000 plus criminal provisions in employer compliance and require all employers to comply under each state’s Shops and Establishment Act (like Infosys, TCS, and IBM India do).
- Ensuring better compliances by employer: It should create a non-profit corporation (like NPCI in payments) that will operate an API-driven National Employer Compliance Grid and enable central ministries and state governments to rationalise, digitise and decriminalise their employer compliances.
- Making EPFO contribution optional: Making employees’ provident fund contributions optional but raising employer PF contributions from the current 12 per cent to 13 per cent. It should notify a previous budget announcement to create employee choice in their contributions to health insurance (ESIC or insurance companies) and pensions (EPFO or NPS).
- Subsidy to high wage employer: Most importantly, it should link all employer subsidies and tax incentives to high-wage employment creation (a difficult-to-fudge and easy-to-measure effectiveness metric for this public spending is employer provident fund payment).
Conclusion
- Experience and evidence now firmly suggest the odds of mass prosperity in the planet’s most populous nation rise from possible to probable by anchoring our strategy in human capital and formal jobs rather than fiscal or monetary policy.
Mains Question
What are the limitations of Fiscal and monetary policy in mass welfare of people? What are the possible strategies for creation of mass prosperity in India?
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Credit Ratings Agency and their Significance
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Credit Rating Agency
Mains level: Not Much
Fitch Ratings on December 20, 2022, retained its rating for India at ‘BBB’-with a stable outlook.
What does BBB mean?
- A ‘BBB’ rating indicates that expectations of default risk are currently low.
- The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
What is a Rating Agency?
- Rating agencies assess the creditworthiness or potential of an equity, debt or country.
- Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
- They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
- In simpler terms, these reports help investors gauge if they would get a return on their investment.
What do they do?
- The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
- Their reports are sold and published in financial and daily newspapers.
What grading pattern do they follow?
- The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
- Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
- Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
- Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
- Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.
Criticism of rating agencies
- Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
- However, credit rating agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
- The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
- They were charged for methodological errors and conflict of interest on multiple counts.
Do countries pay attention to ratings agencies?
- Lowered rating of a country can potentially cause panic selling or offloading of investment by a foreign investor.
- In 2013, the European Union opted for regulating the agencies.
- Over reliance on credit ratings may reduce incentives for investor to develop their own capacity for credit risk assessment.
- Ratings Agencies in the EU are now permitted to issue ratings for a country only thrice a year, and after close of trade in the entire Union.
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India’s Current Account Deficit (CAD) Strategy amidst the Global Uncertainty
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Concept of CAD
Mains level: India's problem of CAD, effects and solutions
Context
- There seems to be considerable optimism about India’s near-term growth prospects now that the major global energy and commodity shocks have subsided. Even if these shocks have subsided, India still faces one big problem of its large current account deficit (CAD). How will this be managed? It turns out that the answer to both questions lies in one word exports.
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What is Current Account Deficit (CAD)?
- A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
- This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
- A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.
- CAD = Trade Deficit + Net Income from Abroad + Net transfers
What has been the recent trend?
- Swelling CAD: Over the past year, the post-pandemic normalisation has caused the current account deficit to swell to exceptional proportions.
- Decline in demand abroad: At home, normalisation has spurred a renewed demand for imported inputs. But abroad, it has had the opposite effect, leading to a decline in demand.
- India’s import soared while exports fell: Foreign households are no longer demanding so many goods now that the lockdowns that kept them in their houses and the fiscal stimuli that gave them the money to spend have both ended. So, India’s imports have soared just at a time when its merchandise exports have started to fall.
- Statistics for instance: The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
- Service sector is saviour: However, based on robust performance by computer and business services, net service receipts rose both sequentially and, on a year, -on-year basis.
Future projections
- Looking ahead, the situation seems set to worsen: Foreign demand will slow further as advanced countries slip into what now seem like inevitable recessions.
- In the backdrop of recession India’s CAD could widen further: In that case, India’s CAD could widen even further, possibly to four per cent of GDP in 2022-23, double the level that the Reserve Bank of India (RBI) traditionally regards as “safe”.
Analysis: How should India respond?
- Attracting foreign capital inflow: Attract foreign capital inflows worth at least four per cent of GDP.
- Is this realistic in time of global uncertainty: The world is currently facing unprecedented levels of uncertainty. Two years of the pandemic, now a land war in Europe, inflation and energy crisis in Europe, interest rate hikes in the history of the US Federal Reserve, slowdown in china, etc. In such an uncertain environment, foreign investors prefer to invest in safe assets such as US government bonds rather than emerging markets like India. As a result, India has witnessed large outflows of foreign capital in 2022-23
- Deploying RBI’s Forex to pay for imports: If India cannot attract the required amount of capital inflows, the RBI’s foreign exchange reserves could be deployed to pay for imports.
- Is this strategy sustainable: The country’s reserves are meant to tide the country over short-term problems, such as commodity price spikes. India’s merchandise exports have been structurally weak, stagnating for the past decade, until the pandemic induced a short-lived boom.
How depreciating rupee could be helpful?
- Price needs to be adjusted by depreciating rupee: This means that something fundamental needs to change. Ultimately, India’s CAD reflects a mismatch between the demand and supply of foreign exchange. To restore balance, first and foremost, the price needs to adjust, that is, the rupee needs to depreciate.
- Exporting becomes more profitable: When this happens, exporting becomes more profitable, inducing more and more firms to explore foreign markets. Meanwhile, foreign demand improves, because the rupee depreciation makes India’s products more price-competitive. As a result, exports increase and the CAD falls.
- Exchange rate depreciation is helpful in sustained growth: The recovery of the Indian economy from the pandemic was largely fuelled by exports. But with exports now declining, this crucial source of growth has now become uncertain for India. Strengthening the export sector is, therefore, critical for sustaining growth.
Way forward
- Allow the rupee to depreciate,
- Encourage foreign firms to produce in India by letting them access their supply chains,
- Encourage domestic firms to step up to the competition, and
- Create a level playing field for all players.
Conclusion
- The large CAD, however, is not a short-term problem: It is a long-term problem requiring a long-term solution. By adopting the discussed strategy, India could potentially solve its two most important macroeconomic problems that are reducing the large CAD and securing rapid, sustained growth.
Mains question
Q. What is Current account deficit (CAD)? In a time of global uncertainty How India can reduce its large CAD and secure sustained growth. Analyze
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[pib] Social Progress Index (SPI) for states and districts
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Social Progress Index (SPI)
Mains level: Read the attached story
Economic Advisory Council to Prime Minister (EAC-PM) will release the Social Progress Index (SPI) for states and districts of India on December 20, 2022.
Social Progress Index (SPI) Report
- SPI is a comprehensive tool intended to be a holistic measure of the Social Progress made by the country at the national and sub-national levels.
- The report has been prepared by Institute for Competitiveness, headed by Dr Amit Kapoor and the Social Progress Imperative, headed by Michael Green.
- It was mandated by Economic Advisory Council to the Prime Minister of India.
Objectives of the report
- With state and district-wise rankings and scorecards, the report aims to provide a systematic account of the social progress made at all levels in the country.
- The report also sheds light on the achievements of the districts that have performed well on the index and the role of the states in achieving social progress.
- A special section of the report provides an analysis of the Aspirational Districts of India, leading to a broader understanding of the social progress at the grassroots level.
- The report will act as a critical enabler and tool for policymakers in the coming years for achieving sustained socio-economic growth.
Components of SPI
SPI assesses the performance of states and districts on three dimensions of social progress:
- Basic Human Needs: It assesses the performance of states and districts in terms of Nutrition and Basic Medical Care, Water and Sanitation, Personal Safety and Shelter.
- Foundations of Wellbeing: It evaluates the progress made by the country across the components of Access to Basic Knowledge, Access to Information and Communication, Health and Wellness, and Environmental Quality.
- Opportunity: It focuses on aspects of Personal Rights, Personal Freedom and Choice, Inclusiveness, and Access to Advanced Education.
(This newscard will be updated once the report is published.)
Need for SPI
- GDP is not a holistic measure of a nation’s development: It would be incorrect to state that the economic progress is completely divorced from progress made in areas mentioned above.
- Social outcomes of developmental economics: The primary goal of the SPI is to provide a rigorous tool to benchmark progress and stimulate progress within countries.
- No single holistic parameter available: Several indicators, like GHI and HDI, go beyond GDP, but none captures social progress as finely as SPI.
- Doing away with biased reports: India does not display a respectable position in the index, as even the small neighbours like Nepal have a better rank. India is also the lowest rank holder in BRICS.
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Capital Expenditure and Fiscal Consolidation
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Basics of Budget
Mains level: Capital expenditure and fiscal consolidation
Context
- The 2023-24 Union budget will be announced on February 1, followed by the states’ respective budgets. These budgets will set the policy tone for the rest of the year and, as such, are followed closely.
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Situation of Capex and fiscal consolidation after pandemic
- Rise in fiscal deficit: The overall fiscal deficit of the government has soared and we believe the next few years will be all about getting it back on track.
- Rising interest payments: This is important because interest payments on past debt make up a whopping 50 per cent of net tax revenues for the central government, leaving very little room for other spending.
- less room for social spending: Given the needs of the economy on various fronts like health, education and capex, it is important to lower the interest burden over time. That can only be achieved by fiscal consolidation.
Analysing the tax revenue and expenditure of central and state Government
- Central government tax revenues have risen faster than state revenues: Both benefitted as small and informal firms struggled with the lockdowns and lost market share to large firms, which tend to pay more taxes.
- Disparity in revenue collection: A large chunk of the tax revenues in the early part of the pandemic period came from the “special” duty and surcharge on oil, which went primarily to the central government. To be fair, the central government subsequently cut the duty on oil (in both 2021-22 and 2022-23) and the tax share that went to the states rose somewhat.
- Capex of centre is more: The Centre has committed to more current expenditure than the states. While it increased across the board during the pandemic, current expenditure rose more for the central government.
- Higher spending on social schemes: This was led by higher social welfare spending (for instance, on the free food distribution scheme) and, more recently, higher subsidies (for example, fertilisers) in the face of rising commodity prices.
- States have a moderate capex: The common perception is that states have gone all out on unsustainable current expenditure. But the data shows that it’s just a few states which have spent heavily (for example, Telangana, Assam, West Bengal and Punjab).
Analyzing the capex and fiscal deficit of central and state government
- The central government capex has risen but state capex has contracted: Making a commendable choice, the central government used both its tax bounty as well as its ability to borrow more at a time when banking sector liquidity was loose to raise capex spending, which rose by 1.2 per cent of GDP between 2019-20 and 2021-22.
- Cut in state capex: On the other hand, the states cut back on capex, which has fallen as a percentage of GDP over the last few years, and continues to be on a weak footing in the current year. In fact, putting the central government’s capex alongside the state and public sector capex shows that the overall public sector thrust is not any stronger than it was back in 2018-19.
- Centre has breached the fiscal deficit target: The central government’s fiscal deficit has overshot targets while the state deficit is relatively contained. At a budgeted 6.4 per cent of GDP in 2022-23, the central government’s fiscal deficit has risen above the pre-pandemic level of 3.4 per cent in 2018-19, and is well above the 3 per cent medium-term target.
- Sharp fall in states fiscal deficit target: Even though the state fiscal deficit rose in the first year of the pandemic (from 2.5 per cent of GDP in 2018-19 to 3.8 per cent in 2020-21), it has fallen sharply since (to 2.7 per cent in 2021-22).
- Low borrowing by states: In fact, state government borrowing is rather low in the current year so far. If this continues, the fiscal deficit could be even lower in 2022-23 (around 2.5 per cent of GDP), which is well under the 3 per cent medium-term target, and bang in line with pre-pandemic levels.
What are the challenges?
- Less consolidation by states: The states have less fiscal consolidation to do than the central government.
- High quality spending: Both have a common challenge to commit to more capex, which is considered high quality spending as it “crowds in” private investment if done responsibly. And we believe investment is the only sustainable way to increase the capacity of the economy to grow and create jobs.
- Balancing the capex and fiscal consolidation: For the central government, the challenge is to hold on to its capex push at a time of fiscal consolidation. For the states, the challenge is to start doing more.
What should be the way forward?
- Lowering the fiscal deficit: The central government’s aim is to lower the fiscal deficit by about 2 per cent of GDP over the next three years. About half of this consolidation can come from lowering current expenditure to pre-pandemic levels.
- Raising the tax revenue through formalization: Continued formalisation of the economy that raises tax revenues (though “organic” formalisation will likely be more sustainable than “forced” formalisation).
- Disinvestment of PSUs: A bigger push for disinvestment by selling stakes in public-owned companies, and further tax reforms (in terms of direct taxes and the GST).
- Capex cut is the last option: If these don’t work, the default option will be to cut capex, which is a concern as it has implications for medium-term growth.
Conclusion
- Fiscal consolidation and capital expenditure should go hand in hand. More government spending means more infrastructure building and more chances of growth and employment. However, this spending should be done with sound fiscal base.
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Urban-rural manufacturing shift: A mixed bag
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Urban rural manufacturing shift, advantages and challenges
Context
- There is growing evidence to suggest that the most conspicuous trend in the manufacturing sector in India has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas. This ‘urban-rural manufacturing shift’ has often been interpreted as a mixed bag, as it has its share of advantages that could transform the rural economy, as well as a set of constraints, which could hamper higher growth.
Recent data by Annual Survey of Industries for 2019-20
- In terms of capital: The rural segment is a significant contributor to the manufacturing sector’s output. While 42% of factories are in rural areas, 62% of fixed capital is in the rural side.
- In terms of value addition: In terms of output and value addition, rural factories contributed to exactly half of the total sector.
- In terms of employment: In terms of employment, it accounted for 44%, but had only a 41% share in the total wages of the sector.
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Why is this shift of manufacturing away from urban locations to rural?
- A report on manufacturing shift brought out by World Bank: The movement of manufacturing away from urban locations was brought out by the Work Bank in a report a decade ago, “Is India’s Manufacturing Sector Moving Away from Cities? Policy Research Working Paper, World Bank).
- Higher urban-rural cost caused this shift: This study investigated the urbanisation of the Indian manufacturing sector by “combining enterprise data from formal and informal sectors and found that manufacturing plants in the formal sector are moving away from urban areas and into rural locations, while the informal sector is moving from rural to urban locations”. Their results suggested that higher urban-rural cost ratios caused this shift.
- Steady investment in rural areas: This is the result of a steady stream of investments in rural locations over the last two decades.
- Input costs are relatively less in rural area: Rural areas have generally been more attractive to manufacturing firms because wages, property, and land costs are all lower than in most metropolitan areas.
- Factory floorspace supply constraints: When locations get more urbanised and congested, the greater these space constraints are.
- Increased capital intensity of production: The driving force behind such a shift is the continuing displacement of labour by machinery as a result of the continuous capital investments in new production technologies. In cities, factories just cannot be expanded as opposed to rural areas.
How this trend is a welcome sign?
- Fulfilling the need of balanced development: Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign.
- Created an opportunity for small scale industries to survive after liberalization: In the aftermath of trade liberalisation, import competition intensified for many Indian manufacturers, forcing them to look for cheaper methods and locations of production. One way to cut costs was to move some operations from cities to smaller towns, where labour costs are cheaper.
- Source of livelihood diversification in rural area: The shift in manufacturing activities from urban to rural areas has helped maintain the importance of manufacturing as a source of livelihood diversification in rural India.
- Make up for loss of employment: This trend helped to make up for the loss of employment in some traditional rural industries. The growth of rural manufacturing, by generating new jobs, thus provides an economic base for the transition out of agriculture
What are the challenges ahead and a solution to it?
- While the input cost is less but the cost of capital is high, offsetting the benefits: Though firms reap the benefits of lower costs via lower rents, the cost of capital seems to be higher for firms operating on the rural side. This is evident from the shares in rent and interest paid. The rural segment accounted for only 35% of the total rent paid, while it had 60% of the total interest payments. The benefits reaped from one source seem to be offset by the increased costs on the other front.
- Skill shortages in rural area: There exists an issue of “skills shortage” in rural areas as manufacturing now needs higher skilled workers to compete in the highly technological global ‘new economy’. Manufacturers who need higher skilled labour find that rural areas cannot supply it in adequate quantities. Manufacturers who depend only on low-wage workers simply cannot sustain their competitive edge for longer periods as this cost advantage vanishes over time.
- Solution to this issue lies in skill development: This suggests the need for clear solutions to the problems of rural manufacturing and the most important is the provision of more education and skilling for rural workers. A more educated and skilled rural workforce will establish rural areas’ comparative advantage of low wages, higher reliability and productivity and hasten the process of the movement out of agriculture to higher-earning livelihoods
Conclusion
- Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign. However, the compulsions of global competition often extend beyond the considerations of low-wage production and depend on the virtues of ‘conducive ecosystems’ for firms to grow.
Mains Question
Q. There is growing evidence to suggest that the trend in the manufacturing sector in India has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas. Discuss the reasons for this trend and note down the challenges ahead.
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Discussing the Indian Economy’s pressing problems
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India's economic growth and the problems
Context
- Several agencies, including the IMF and the World Bank have projected lower growth rates for the Indian economy in FY23, than the 7.2 per cent estimated by the RBI in April. The Central bank has now lowered its forecast to 6.8 per cent. Given the current situation, with the Q2 FY 2023.
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Current economic growth estimation
- Economy is likely to grow at 6.5-7.0 per cent: Given the current situation, with the Q2 FY 2023 GDP growth clocking in at 6.3 per cent, the economy is likely to grow at 6.5-7.0 per cent in this fiscal year.
- Considering economic uncertainties it is difficult to arrive at precise estimate: It is difficult to arrive at a precise estimate for growth this year with unprecedented economic uncertainty worldwide, including high global inflation, synchronized monetary tightening, and the impact of the Ukraine war.
Positive signs in the Indian Economy
- Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity.
- Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
- On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.
What is Indian economy’s pressing problems specifically in terms of Labour-intensive growth?
- Employment a biggest concern: Employment, an issue that has persisted over the last two decades. In brief, we have not generated enough good jobs to match the scale at which the economy has grown, especially in the organised sector. As a result, we have very high under-employment and poor-quality employment, which have hampered a much-needed move away from agriculture.
- Lack of precise data on people living in poverty: We do not have a precise estimate of the current levels of poverty, as there has been no household consumption survey since 2011-12, and the 2017-18 survey was abandoned due to technical issues. But there is reasonable consensus that poverty could be around 10 per cent of the country’s population, A low number compared to the past, but as many as 140 million people could still be living in poverty.
- Lack of non-agricultural jobs: The rising demand for the MGNREGA, and the importance of food distribution schemes and other welfare programmes for the poor are indicators of the lack of non-agriculture jobs being generated.
- Lowest rate of women participation in labour force: An alarming aspect of the employment problem in India is the low participation rate of women in the labour force, which is among the lowest in the world. This loops back to the importance of labour-intensive manufacturing. For example, much of Bangladesh’s success, and that of Southeast Asian countries, in exports and manufacturing stems from the large number of women working in their factories.
- Women literacy is rising but increasing number of educated women are not working: A positive trend in India has been the growing trend in girls attending schools and college in the last 20 years, but this also means that an increasing number of educated women are not working.
- Despite of 1991 reforms still remains an untapped opportunity: With the LPG reforms, the expectation was that, as the economy opened up to global competition, India’s low wage levels would attract private investment into labour-intensive manufacturing, thus generating jobs. This was the path followed by the East Asian economies that experienced high growth and rapid development. But for India this remains an untapped opportunity.
- Manufacturing is shifting to countries other than India: Even with rising wage levels in China, manufacturing is shifting to countries other than India. The PLI (production-linked incentives) scheme has been rolled out to encourage manufacturing. It may need some tweaking to be biased towards labour-intensive manufacturing as China vacates space in this area. This may seem at odds with the more popular view that it is small and medium enterprises which promote employment.
- Country’s real exchange rate is not healthy: An overvalued rupee has discouraged the export of labour-intensive manufacturing goods, which are very price-sensitive in global markets. It has also had a dampening effect on domestic production as our currency has depreciated at a lower rate than other emerging economies like China and Indonesia.
- Depreciated rupee impacting domestic producers by inflow of cheaper imports: Domestic producers of goods that compete with imports into our markets have been impacted by the inflow of cheaper imports. This has disincentivised them from expanding production and generating employment.
- Micro, small and medium enterprises (MSMEs) are severally hit: Problems that have come to the fore post-pandemic include the health of micro, small and medium enterprises (MSMEs). Accurate information on this is somewhat scarce but anecdotal evidence suggests that they have been more severely hit than the formal sector.
Way ahead
- The rupee has been overvalued for long and needs to be allowed to depreciate, though in a calibrated way, ensuring external and financial stability.
- Job growth is crucial if we are to reduce the still high levels of poverty in the country
- Incentivizing the domestic producers so that they can compete with the cheaper inflow of imports and expands their manufacturing thereby generating employment in the economy
- The continued recovery of the formal sector, as indicated by various metrics, in terms of the improved health of corporates and banks should effectively pull up the MSMEs through supply chains linkages, among others.
- We still have a negative real interest rate (that is, the difference between the RBI’s policy rate and inflation). Hence, the policy rate needs to rise further, providing a push to financial savings, which are needed to generate higher investment for growth.
- Inflation need to be contained through supply-side measures as well, such as an improvement in the supply of food products.
Conclusion
- High under-employment and poor-quality employment have hampered a much-needed move away from agriculture. A focus on labour-intensive formal manufacturing is the need of the hour.
Mains Question
Q. India is showing positive signs of economic recovery however the economy still has a hangover from the past and some are exacerbated by Covid. Discuss.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Healthy tax collection and the challenge of effective utilization
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Healthy tax collection, advantages and challenges
Context
- Notwithstanding the likely slowdown in economic momentum in the second half of the year, the Union government’s tax collections are on track to surpass its budgeted target by a significant amount this year.
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The current status Union government’s tax collection
- Gross tax collections have already touched the target: Data released by the Controller General of Accounts last week shows that gross tax collections have already touched 58 per cent of the full year’s target, growing by 18 per cent in the first seven months (April-October) of the current financial year.
- Healthy growth in corporate tax collection: Under the broad rubric of taxes, direct tax collections have grown by a robust 26 per cent in the first seven months of the financial year, with healthy growth being seen across both corporate and income tax collections.
- Higher than the nominal GDP growth: While the pace of direct collections has eased during July-October when compared to the first quarter, it continues to be higher than nominal GDP growth in the second quarter.
- Healthy indirect tax collection: On the indirect tax side, GST collections continued to witness healthy growth, recording an increase of 11 per cent in November.
Memory shot in short: Types of Direct Taxes
- Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid. The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.
- Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
- Estate Tax: It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
- Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax.
- Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments
What the Healthy tax collection imply?
- Higher devolution to states: Higher tax collections at the level of the central government imply that devolution to states will be higher than the budgeted amount of Rs 8.16 lakh crore. The months of August and November have in fact witnessed double instalments as the Centre has stepped up devolution.
- States can increase fiscal expenditure: Along with the interest free loan scheme extended by the Centre, higher devolution implies that states have considerable fiscal room to increase capital expenditure. However, this has not been the case so far. Capex by states has been rather muted.
- Provides comfort to governments fiscal arithmetic: As per recent statements by revenue secretary Tarun Bajaj, the government is now hopeful of exceeding the budgeted target by nearly Rs 4 lakh crore. With its spending also likely to surpass earlier expectations by a considerable margin, higher tax collections will provide some comfort to the government’s fiscal arithmetic.
Challenges on the expenditure side
- Increased subsidy bills: On the expenditure side, the Union government is facing a massive increase in its subsidy bill.
- Spending is more than actual budget: Actual spending on the food and fertilizer subsidy and also on LPG will be significantly higher than what has been budgeted for. This is likely to make the fiscal situation challenging.
- Effective utilization is necessary: Considering that the central government has maintained the momentum on its capital spending, growing by around 60 per cent in the first seven months of the year, the overall general government fiscal impulse will depend on how effectively states are able to utilise the extra space available to them.
Conclusion
- Calls for increasing spending to support the economy during this uncertain period will only gain traction as the budget approaches. The government must however resist the temptation. It should stick to the glide path of fiscal consolidation.
Mains Question
Q. In a time of possible economic slowdown, India’s tax collection is on a healthy path. Discuss what good tax collection means for economy?
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Current status of India’s economic growth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India's economic growth amidst the global slowdown
Context
- India’s economic growth slowed to 6.5 percent during the July-September quarter because of a fading low-base effect. For the full year, the economy is expected to grow at 7 percent, with risks tilted to the downside. This implies that the second half of the year (October–March) will see growth slow down to 4.6 percent, again largely due to the base effect and slowing global growth.
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Background: The COVID Pandemic, geopolitical tensions and the Prospects
- This was the second consecutive quarter with no functional disruption of economic activity caused by the COVID-19 pandemic.
- Since October, Google, too, has stopped reporting mobility indicators, which had become one of the most tracked data points for analysts and policymakers since the pandemic struck.
- This suggests that COVID-19 is unlikely to come in the way of growth for most parts of the world, with China, which is following a zero-COVID policy, being the key exception.
Performance of Indian economy amidst the current global slowdown
- Spill over effect in India: In an interconnected world, Geopolitical tensions, high and broad-based inflation in many parts of the world and sharp increases in policy rates in developed countries amid a looming recession will continue to confront the global economy. These effects will spill over to India as well, despite its structural strengths.
- Slow growth of contact- intensive service sector: Growing at 14.7 per cent, contact-intensive services such as trade, hotels and transport continued to be key drivers of the growth momentum in the second quarter. This segment had borne the brunt of the pandemic because of recurrent lockdowns, and is showing a strong rebound because of pent-up demand, a trend that is likely to continue this year.
- Strong private consumption: Private consumption was quite strong in the second quarter, growing by 9.7 per cent, and now 11.2 per cent above the pre-pandemic level.
- Rising domestic demand, good for the economy: The resilience of domestic demand will shape the contours of GDP growth in coming quarters as the global growth momentum is anticipated to lose steam. Advanced economies, whose growth is expected to slow sharply next year, account for almost 45 per cent of India’s merchandise exports.
- Strong and firm Agriculture sector: Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter.
- Healthy tax revenue: So far, healthy tax revenue collections have allowed the government to finance its bloated subsidy bill and investments without much pressure on the fiscal deficit. Led by government capex, investments grew 10.4 per cent in the second quarter.
- Good corporate balance sheets: strong corporate balance sheets not only cushion them against global headwinds but also provide an opportunity to kick-start the investment cycle once uncertainty subsides.
The current status of India’s manufacturing growth
- Slowed growth: Manufacturing GDP growth slowed rather sharply due to the base effect and margin pressure on manufacturing companies. This is somewhat contradictory to the relatively strong signals from the Purchasing Managers’ Index (PMI) which, at 55.9, was in the expansion zone during the July-September quarter, while also being slower than the IIP growth of 1.4 per cent in the same quarter.
- Support from the government: Currently, manufacturing is finding some support from government spending on infrastructure, particularly in sectors such as steel and cement. The production-linked incentive scheme has incentivised private investment and fast-forwarded manufacturing investments in electronics and pharmaceuticals.
- Overall demand is low except few high value segments: The festive season-related production and the continued strong demand in the automobile sector (especially in high-value segments), was not enough to prevent an overall slide in manufacturing.
The current status of Agriculture sector
- Strong and firm Agriculture sector: Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter. Although rains were 6 per cent above normal this year, they were quite lopsided and led to a drop in rice acreage in some of the rice-growing regions on account of rainfall deficiency and some damage to crops from excess unseasonal rains in October.
- Inconsistency in rainfall may affect kharif: In fact, October rains were 47 per cent above the long-period average. Rain shortfall in some regions, excess in others, and unseasonal excess rains point towards some hit to kharif production.
- Rabi crops look in good swing: That said, the prospects for the winter crop (rabi crop), which is largely irrigated, look good owing to favourable soil moisture conditions and healthy reservoir levels. While rabi sowing was initially delayed on account of unseasonal October rains, it is now progressing well, with sown area until November 18 about 7 per cent higher than during the same period last year.
- Overall agriculture growth prospects: This trend, if sustained, should offset the hit to kharif production to some extent. Overall, we expect agriculture to grow at 3 per cent this year, lower than the decadal average of 3.8 per cent.
- Food inflation: Abnormal weather has also triggered food inflation, particularly in cereals, which will cool off only when the prospects for rabi crop become clear. While fall in inflation in October was largely due to a high base effect, core inflation continues to be sticky and food inflation risks persists.
Conclusion
- India’s growth cycle has become well-synchronized with those of advanced economies. So, a sharp slowdown in these countries will spill over to India and the maximum impact of domestic interest rate hikes on growth will play out next fiscal given that monetary policy impacts growth with a lag. The key policy challenge for India will be to manage a soft landing amid the possibility of a hard landing in advanced countries.
Mains question
Q. COVID pandemic disrupted the global economy, moreover the geopolitical tensions are adding to the existing slow growth. In this context, discuss the current status of Indian economy.
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Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc
Assessing The Impact of Falling Rupee
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Falling of Indian rupee, challenges and advantages
Context
- The Indian rupee has been quite the controversial newsmaker this year. Having fallen more than 11 percent against the US dollar so far in 2022, the rupee breached the much-feared 80-mark in July and went on to set record lows, touching 83 to a dollar late in October.
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Impact on trade
- Widening trade deficit: The first phenomenon is one of the biggest worries caused by a falling rupee, a rise in import costs, threatening higher inflation and a widening trade deficit.
- Advantage for export: However, there also exists a ray of hope, a depreciated currency implies cheaper, more competitive exports and therefore, a possible export-led boost to the domestic economy. The net effect of these opposing forces would determine the impact of a depreciating currency on an economy.
- Robust Purchasing Manager’s Index (PMI): The import bill has risen not only on the back of a raging dollar and hardening crude prices but has also been spurred by strengthening domestic demand and manufacturing, as evidenced by a robust Purchasing Manager’s Index (PMI) of 55.3 in October.
- Subdued merchandized export: Although service exports have done fairly well in FY 2022-23, merchandi