Issues related to Economic growth

Issues related to Economic growth

Mind your own economic healthop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- What are the essential reforms essential for reshaping the India's economy.


The fragility of the global economy has been exposed twice within the last two decades. In 2008, the collapse of a financial services firm in the US triggered a global financial meltdown. In 2020, the emergence of a novel virus in a food market in Wuhan has done it again.

The global economy and system theory

  • Systems theory: It that systems take various forms. Broadly speaking, there are three types of systems-1. Chaotic systems. 2. Engineered Systems, and 3. Complex self-adaptive systems.
  • As the weather in a storm, chaotic systems are unpredictable and uncontrollable.
  • The global economy is behaving like a chaotic system.
  • Engineered systems, on the other hand, can be controlled quite tightly, like machines.
  • However, they are dull. A nuclear power plant is a well-engineered system. We would want it to do just what it is supposed to and not produce any surprises.
  • In contrast to these systems is the design of nature. It is a complex self-adaptive system. It produces myriad innovations. It evolves. Yet, its fundamental stability is very reassuring.
  • The realisation that mankind’s technologies and engineering marvels are disrupting nature’s stability, has raised alarms about the architecture of global economic governance.
  • More about self-adaptive systems: The architecture of complex self-adaptive systems is formed by essential design principles. One is “permeable boundaries”.
  • The many parts of a complex self-adaptive system have permeable boundaries between themselves. Each part has its integrity. The parts exchange information and energy across their boundaries as required.
  • When there are no boundaries within, or they are too weak, an accident at one end will soon sink the whole ship.

Consequences of boundarylessness within the global financial system

  • The drive for boundarylessness within the global financial system since the 1990s caused the sloshing around of contagion during the global financial crisis in 2008.
  • Whereas global economic growth has undoubtedly been enabled by global supply chains, the vulnerability of economies everywhere to their disruption has become painfully evident with the COVID-19 pandemic.
  • Complex adaptive systems exhibit “fractal-like” shapes. Their parts are complex, combining the same diverse energies that permeate across the whole.
  • Social forces, economic forces, and environmental forces combine within all countries, and in parts within countries too, albeit in different ways.
  • Though the parts are similar to each other, they are not the same. Therefore, the same solutions will not fit all.
  • An insight from systems theory is that global systemic problems such as climate change, persistent economic inequality, among others, will require local systems solutions.

Six reforms for reshaping Indian economy

  • Stress test: Crises create stress tests for the health of systems. The financial crisis of 2008 exposed the fragility of an inter-connected and under-regulated financial system.
  • The COVID-19 pandemic has exposed the architectural weaknesses in the global economy.
  • Instead of worrying too much about the reversal of globalisation, national leaders should now focus on the well-being of their citizens and the health of their own economies.
  • Six reforms are essential for reshaping the Indian economy.
  • First, focus on the provision of universal social security, rather than on the misdirected demand for even more “flexibility” in labour laws
  • Second, respect the “informal” sector which provides the majority of Indians with opportunities to earn incomes, and give it more strength. It is also a great source for practical innovations and widespread entrepreneurship.
  • Third, change the economic paradigm from “trickle-down” to “build up”. Build the internal engine of growth of India’s economy by increasing incomes of India’s citizens.
  • Fourth, strengthen public health services. Medical tourism may put India’s private hospitals on the global map. However, they are not the solution to India’s huge health problems.
  • Fifth, reform and strengthen the public education system. It will contribute greatly to creating a level playing field for all children.
  • Sixth, strengthen local governance in India’s towns and districts to develop and implement local systems solutions. The well-being of Indian citizens will be improved, and India’s economy will be more resilient too.


  • All governments are asking their citizens to increase “social distancing” between themselves to prevent the spread of a health contagion. It would be wise for countries to maintain sufficient “economic distancing” amongst themselves too. They should mind the health of their own economies. Thereby, they will improve the health of the global economy too.
Issues related to Economic growth

Dressing a wounded economyop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Measures to mitigate the impact of steps taken to deal with the coronavirus on Indian economy.


There are going to be the economic impact of the actions designed to combat the virus. The two major tools that the government has available before it are monetary policy and fiscal actions.

Impact of virus and additional slowdown

  • The impact of the coronavirus pandemic is now felt by almost every country.
  • First, there are the health effects of the virus.
  • Second is the economic impact of the various actions that have to be taken to combat the virus.
  • The world is experiencing an additional slowdown on top of the contracting tendencies already present and India is no exception.
  • The economic impact on India can be traced through four channels: external demand; domestic demand; supply disruptions, and financial market disturbances.

Impact on export

  • As the economies of the developed countries slow down (some people are even talking of recession), their demand for imports of goods will go down.
  • This lower demand will affect our exports which are even now not doing well.
  • In fact, after six months of negative growth, it was only in January that Indian exports showed positive growth.
  • The extent of decline will depend on how severely the other economies are affected. Not only merchandise exports but also service exports will suffer.
  • Besides these, the IT industry, travel, transport and hotel industries will be affected.

Oil price factor

  • The only redeeming feature in the external sector is the fall in oil prices.
  • India’s oil import bill will come down substantially.
  • But this will affect adversely the oil-exporting countries which absorb Indian labour. Remittances may slow down.

Supply disruption

  • To ward off the spread of the coronavirus, the government has declared a lockdown of the country.
  • As passengers travel less, the transportation industry, road, rail and air, is cutting down schedules, sometimes drastically.
  • This will affect in turn several other sectors closely related to them. The laying off of non-permanent employees has already started.
  • As people, in general, buy less, shops stock less, which in turn affects production.
  • Perhaps retail units will be first to be affected and they will, in turn, transmit this to the production units.
  • One is unable to make an estimate of the reduction in economic activity at this point.
  • If the situation is not reversed soon, there can be a serious decline in the growth rate during 2020-21.
  • Supply disruptions can occur because of the inability to import or procure inputs.
  • The break in supply chains can be severe. It is estimated that nearly 60% of our imports are in the category of ‘intermediate goods’.
  • Imports from countries which are affected by the virus can be a source of concern.
  • The domestic supply chain can also be affected as the inter-State movement of goods has also slowed down.

Financial market issue

  • Financial markets are the ones which respond quickly and irrationally to a pandemic such as the coronavirus pandemic. The entire reaction is based on fear.
  • The stock market in India has collapsed. The indices are at a three-year low.
  • Foreign Portfolio Investors have shown great nervousness and the safe haven doctrine operates.
  • In this process, the value of the rupee in terms of the dollar has also fallen.
  • The stock market decline has a wealth effect and will have an impact on the behaviour of particularly high wealth holders.
  • How does the government deal with this sudden decline in economic activity which has come at a time when the economy is not doing well? The two major tools that are available are monetary policy and fiscal actions.

Two major tools with government- Monetary Policy and Fiscal Action

  • Monetary policy: In a situation like this can only act to stimulate demand by a greater push of liquidity and credit.
  • The policy rate has already been brought down by 135 basis points over the last several months. There is obviously scope for further reduction.
  • But our own history, as well as the experience of other countries, clearly show that beyond a point, a reduction in interest rates does not work.
  • It is the environment of the overall economy that counts. Credit may be available. But there may not be takers.
  • Any substantial reduction of policy rate can also affect savers. Interest is a double-edged sword.
  • What the RBI needs to do? IT needs to go beyond cutting the policy rate.
  • A certain amount of regulatory forbearance is required to make the banks lend.
  • Even commercial banks on their own will have to think in terms of modifying norms they use for inventory holding by production units.
  • Repayments to banks can be delayed and the authorities must be willing to relax the rules.
  • Any relaxation of rules regarding the recognition of non-performing assets has to be across the entire business sector.
  • The authorities must be ready to tighten the rules as soon as the situation improves. This is a temporary relaxation and must be seen as such by banks and borrowers.
  • Fiscal Policy: Fiscal actions have a major role to play. Once again, the ability to play a big role is constrained by the fact that the fiscal position of the government of India is already difficult.
  • Even without the pandemic, the fiscal deficit of the Central government will turn out to be higher than that indicated in the budgets for 2019-20 and 2020-21.
  • Revenues are likely to go down further because of the virus-related slowdown in economic activity.
  • In this context, the ability to undertake big-ticket expenditures is
  • But there are some ‘musts’. The virus has to be fought and brought down. All expenditures to test and to take care of patients must be incurred.
  • Now that private hospitals are allowed to test, the cost of the people going to private hospitals must also be met by the government.
  • The involvement of private hospitals has become necessary. It is mentioned that a test costs ₹4,500. The total cost can be substantial if the numbers to be tested run in the thousands and more.
  • This may sound exaggerated. But we must be prepared so that we avoid the tragedy of Italy.
  • Therefore, the first priority is to mobilise adequate resources to meet all health-related expenditures which includes the supply of accessories such as masks, sanitisers and materials for tests.
  • The challenge is not only fiscal but also organisational.

Mitigating the impact on the job sector

  • Serious concerns have been expressed about people who have been thrown out of employment. These are mostly daily-wage earners and non-permanent/temporary employees.
  • In fact, some of the migrant labour have gone back to home States. We must appeal to the business units to keep even non-permanent workers on their rolls and provide them with a minimal income.
  • Some relief can be thought of by the government for such business units even though this can be misused.
  • However, in general, in the case of sectors such as hospitality and travel, the government can extend relief through deferment of payments of dues to the government.
  • Issues in making cash transfer universal: There is talk of providing cash transfer to individuals. There is already a programme for rural farmers with all the limitations.
  • For a system of cash transfer to be workable, it has to be universal.
  • At this moment when all the energies of the government are required to combat the virus, to institute a system of universal cash transfer will be a diversion of efforts.
  • The burden on the government will depend upon the quantum of per capita cash transfer and the length of the period.
  • The government should advise all business units not to retrench workers and provide some relief to them to maintain the workers.
  • A supplemental income scheme for all the poor can be thought of once the immediate problem is resolved.
  • Provision of food and other essentials must be made available to the affected as is done at the time of floods or drought. States must take the initiative.


The fiscal deficit is bound to go up substantially. The higher borrowing programme will need the support of the RBI if the interest rate is to be kept low. The monetisation of the deficit is inevitable. The strong injection of liquidity will store up problems for the next year. Inflation can flare-up. The government needs to be mindful of this. All the same, the government must not stint and go out in a massive way to combat the virus. This is the government’s first priority.

Issues related to Economic growth

How policy can bridge the gapop-ed snap


From UPSC perspective, the following things are important :

Mains level : Paper 3- Economic policy changes to mitigate the impact of slowdown on the vulnerable.


India must use the windfall from oil to provide assistance to the most vulnerable to mitigate the impact due to COIVD-19 outbreak.

Estimates of impact

  • Impact on major economies: Minus 40 per cent, -30 per cent, -22 per cent, and -14 per cent. These are the estimated impacts (at an annualised rate) on the quarterly growth rates of China, the UK, Eurozone, and the US because of the Covid-19 virus.
  • Even excluding China and those that are closely tied to its supply chain — Korea and Taiwan — emerging markets (EM) are expected to go into recession in the first half of 2020, with the second quarter taking the biggest hit at over an 8 per cent quarterly decline.
  • Impact on India: India will not be spared this growth shock. In fact, the economic impact could be deeper and longer in emerging markets where the capacity of public health systems is limited at the best of times.

Prospects of recovery

  • Sudden stop to economic activity: We also know from the experiences of the countries already infected that the way to control the spread of the virus is through aggressive containment and social distancing that inevitably brings economic activity to a sudden stop.
  • There doesn’t seem to be a middle path. We also know that unlike natural catastrophes like earthquakes, capital stock is not destroyed by the virus.
  • Sharp recovery and conditions: Once the containment period is over and social interaction normalises, there is every reason to believe that activity can recover very sharply.
  • Unless the containment period is long because of capacity constraints in the healthcare system which could turn supply chain disruptions into a long-term problem, or the credit stress created by the lack of earning by households and firms during the sudden stop stymies the recovery.

India needs to brace itself

  • Unfortunately, India, where the virus still appears to be in the early stage, needs to brace for such a sudden stop.
  • The lockdown could be for an extended period given the already stretched public health system.
  • Impact on urban economy: The swathe of the economy that depends on social interaction — retail sales, entertainment, restaurants, and importantly construction and manufacturing — is very large.
  • Even if one believes that rural areas with relatively low population densities will not be affected much, the impact on urban economic activity could be very large.

Role of economic policy

  • What is the role of economic policy in such circumstances? It needs to “bridge the gap” between the brutal downturn and the eventual recovery.
  • While public health policies force a sudden stop in the economy to save lives, economic policies need to ensure that the impact from the shutdown is cushioned, incomes of households and firms supported, credit stress is contained, and the recovery is not hamstrung by policy headwinds.
  • This requires policy support to be operated on various fronts.
  • Role of the Central bank: Central banks not only need to cut rates but also need to provide adequate liquidity and extend regulatory forbearance to prevent credit stress and non-performing loans from clogging up the already strained financial system when the economy starts to recover.
  • Role of fiscal policy: The role of fiscal policy is even larger, from direct and indirect tax cuts or postponement to targeted credit support for sectors that are likely to be most affected such as airlines and retail trade.
  • Support to the vulnerable: The key is income support to the most vulnerable: From daily wage earners to SMEs (small and medium enterprises).
  • Using JAM trinity for cash transfer: It is here that the government’s efforts over the last five years make India one of the best-placed economies to deliver such cash transfers.
  • Since 2015, substantial time, effort, and resources have been expended to establish Jan Dhan (bank accounts), Aadhaar and mobile banking (JAM), and Mudra, the programme that dispenses loans to SMEs.
  • The objective of JAM and Mudra is to use Aadhaar as a way of accurately identifying beneficiaries and use mobile banking to digitally and seamlessly transfer cash/subsidies directly to households’ bank accounts and provide loans to SMEs without any leakages.
  • According to government reports, the total number of Jan Dhan accounts stand at around 380 million and 59 million MUDRA loans were sanctioned last year.
  • For a country with a population of 1.3 billion and about 63 million SMEs, even if there are duplicate accounts, JAM and Mudra should be able to cover almost all households and SMEs.
  • With Aadhaar accurately targeting beneficiaries, leakages should be minimised. If there ever was a time that India needed JAM and Mudra it is now.

Issue of fiscal space and solution

  • Some will argue that India doesn’t have the fiscal space. But it does.
  • Use oil windfall: In the last month or so, the crude oil price has dropped from around $60/bbl to around $30 and is likely to stay at this level given the breakdown in agreement among oil-producing countries and the massive collapse in global demand.
  • If the government simply taxed the oil windfall by raising excise duties, as it did during the 2014-15 oil price collapse, it could potentially raise almost 1 per cent of GDP or a staggering Rs 2.25 trillion.
  • If 50 million households have to be provided assistance because of the shutdown, it comes to about Rs 14,000 per month for three months or about Rs 24,000 a month to half of the 63 million SMEs.
  • And this without even having to increase this year’s budgeted deficit.


The government might have other uses for the oil windfall. But if India is forced into lockdown, the economic costs will be very large and the recovery will crucially depend on whether the pilot-light of the economy is kept lit through this period. This critically requires income transfers to vulnerable households and SMEs. India cannot complain that it does not have the fiscal space or the infrastructure to provide it.

Issues related to Economic growth

 The double whammy that India’s economy now facesop-ed of the day


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How will India economy be impacted by the Covid-19?


India is currently in the grip of dual shocks: Covid-19 and a financial one.

The supply and demand shock

  • Containing outbreak at economic cost: Even as infection rates have tapered in China, they are rising elsewhere. Countries that have succeeded in containing it have done so at an economic cost, by quarantining people, implementing lockdowns and social distancing.
    • This has resulted in a plateauing of new infection cases in China and South Korea, but they are still rising exponentially across Europe and the US.
  • Supply shock: This is both a supply as well as demand shock. On the former, the impact is via disruptions in China-centred supply chains.
  • Demand shock: But there is also a hit to final demand as infections spread across the rest of the world, hurting travel, tourism, hotels and local retail activity.
  • Tightened financial condition: The correction in equity markets and wider credit spreads have tightened financial conditions, and both consumer and business confidence has faltered.
  • Rising infections in Europe a big concern: Rising infections in Europe and the US are a big concern as both are large services-driven economies. Any pullback in their consumption demand will likely result in a demand shock for the rest of the world.

Global spillover of Covid-19

  • Hitting economies in waves: One uncertainty pertains to how long this shock will last. There are no definite answers as of now. Covid-19 shocks are hitting economies in waves and countries are imposing lockdowns, one by one.
    • Hence, instead of a synchronized global slump over one or two months, the economic impact is getting spread out.
    • For example, supply chain disruptions and lockdowns in China are gradually easing, and we estimate that factories should be operating at full capacity by mid-April.
  • Hit to travel and tourism to last till June: The hit to travel and tourism will last at least until June because even if the number of new infection cases eases, travellers will remain cautious initially.
  • Demand in the US and Europe to remain low until April: Curtailment in discretionary demand due to social distancing in the US and Europe only started in March and will likely continue until April, if not longer.
  • Global spillover to continue till May: The global spillovers of Covid-19 will likely be spread out over February and May, implying a weak first half of 2020.
    • Whether the shocks last longer will depend on whether countries successfully contain infections.
    • It also depends on the ability of countries to prevent spillover effects onto corporate balance sheets (more defaults) and the labour market (job losses).
  • Global GDP to remain low in the first half: Global gross domestic product (GDP) growth in the first half of 2020 is likely to be weaker than during the global financial crisis of 2008-09, due to a sharp first-quarter decline in China, and weaker  final demand in developed economies in the second.

What will be the impact on India?

  • The economic hit to India will be felt through multiple channels.
  • First, India is not a part of China-centric global value chains, but China accounts for a significant share of India’s imports (14%) and its production halt will hit India’s imports of
    • primary and intermediate goods,
    • disrupting domestic production,
    • particularly in industries such as pharmaceuticals, auto, electronics, solar power and agriculture.
  • Second, there will be a slowdown in international and domestic travel and tourism. India earns over 1% of GDP as foreign exchange earnings from tourism annually.
  • Third, social distancing measures, along with the public fear factor will hit domestic retail activity as people avoid public places.
  • Fourth, India will face the indirect effects of weaker global demand, tighter financial conditions and low confidence.
    • Oil windfall offset: Even though lower oil prices are a boon, in the current environment any benefit from lower oil prices will be offset by other negatives.
  • Domestic financial sector risk: Another big challenge for India relates to domestic financial sector risks.
    • The spillover effect of Yes bank: Weak growth and financial stability concerns have been brewing for over a year now and the spillover effects of Yes Bank’s takeover are still reverberating through the system.
    • The fallout of the shadow banking slowdown via potential stress for real estate developers and small and medium-sized enterprises is a risk.
    • If the asset quality of both shadow banks and the banking sector deteriorate in the next few quarters, as is likely, then domestic credit conditions may stay tight, as the perceived risk premium could rise further.
  • GDP growth rate: In this backdrop, the real activity could suffer. The GDP growth is expected to average around 4% year-on-year in the first half of 2020, with risks skewed to the downside.
    • GDP growth in 2020-21 is unlikely to be more than 2019-20’s 5%.

Way forward

  • An optimal policy response to Covid-19: The optimal policy response to is globally-coordinated public health safety and virus containment. India has taken some worthy decisions on this.
    • Since Covid-19 will adversely impact service sectors like retail, hospitality, travel and civil aviation, the government’s fiscal policy response should be aimed well through measures such as tax relief and interest-free loans, particularly for small and medium enterprises.
  • Liquidity easing and policy accommodation: On monetary policy, a combination of liquidity easing and policy accommodation would be needed beyond the moves already made.
    • Macro-prudential steps such as lowering the counter-cyclical capital buffer for banks could be announced.
    • Fixing the financial sector, though, would need a broader response, including a recognition of the full scale of the problem and then adequately recapitalising banks and shadow banks.
    • Else, credit risk premia may stay elevated and credit growth may not pick up.


In all, the economic impact on India due to shocks emanating from Covid-19 could get compounded due to weak domestic balance sheets. The coming quarters call for close vigilance of credit risks and the prioritizing of financial stability.

Issues related to Economic growth

Triggering a Global Financial Crisisop-ed of the day


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Suggestions to avoid next global financial crisis.


Although we could not have predicted it, Covid-19 was not the reason, but just the trigger for the ongoing financial crash as all we needed was the proverbial straw to break the finance sector’s back

Economic sudden stop

  • Not just any trigger: Covid-19 was not just any trigger as it gave birth to the concept of the economic “sudden stop.” When the global equity markets dropped on 31 January 2020 following the WHO declaration of the Public Health Emergency of International Concern, El-Erian (2020) warned the investors on 2 February 2020 that they should snap out of the “buy the dip” mentality.
    • Pointing out two vulnerabilities, namely structurally weak global growth and less effective central banks, he introduced the concept of “sudden stop” economic dynamics.
  • What is sudden stop? It can be considered as an abrupt onset of a deep recession.
    • Supply and demand shock: In the case of Covid-19, it is a sudden stop of economic activity resulting in supply and demand shocks to the global economy as major cities in infected countries, more than 100 and counting, are put on lockdown.
    • And, add to that the deepening oil price war between Russia and Saudi Arabia.
  • On 8 March 2020 in New York, the futures markets opened and oil futures (both Brent and WTI) are trading about 21% down, gold is above $1,700 per ounce, and all United States (US) equity index futures are trading about 4% down.
  • Long terms treasury yield at historical lows: What is worse is that with the long-term US Treasury yields at their historical lows (10-year yield below 0.5% and 30-year yield below 1%), the capital markets are frozen (not to mention many oil projects that will go bust at these prices).

Disorderly non-financial private sector debt leading to dire consequences

  • A disorderly global non-financial private sector debt deleveraging, which is likely to lead to deep global debt deflation, followed by a recession (and possibly a depression).
    • Which could result in creating financial and economic instabilities, and further tensions in international relations with dire consequences for emerging and developing countries, not to mention developed countries.
  • Difference in developed and developing countries debts: While in developed and high-income developing countries, the non-financial private sector is more over-indebted, in middle-income and low-income developing countries, the public sector is more over-indebted.
  • Impact on developed economies: Given that the global non-financial private sector debt deleveraging has already started, the public sector debts of the developed and high-income developing countries will also go up and the governments’ ability to rescue their economies will also decline in these countries.
  • Impact on funding for climate change: Furthermore, this will severely constrain the governments’ ability to spend on climate change-related projects to address the potentially catastrophic effects for many years to come, diminishing our hopes to make the necessary investments and innovations to address the now existential climate crisis on time will diminish.
  • The corona factor: The measures we have to take to control the spread of Covid-19 before a cure is found will further challenge the financial system, as people stop earning an income and businesses go bankrupt.

Way forward

  • Three authorities solution: In the suggested framework, there would be three authorities to maintain a deposit account at the central bank in each country
    • 1. A deleveraging authority for leverage reduction.
    • 2. Lastenausgleich (based on German Currency Reforms) authority for capital levies.
    • 3. Climate authority for financing needs in developing national climate plans.
    • These national authorities should be globally coordinated through the appropriate United Nations agencies.
  • Control the three authorities: The Lastenausgleich authority would be under the finance ministry, whereas the deleveraging and climate authorities would be not-for-profit corporations promoted by the government.
  • Capitalisation issue: The government would capitalise the deleveraging and climate authorities by the Treasury-issued zero-coupon perpetual bonds.
  • The deleveraging authority would then sell its equalisation claims to the central bank in exchange for an increased balance in its deposit account at the bank, while the climate authority would wait until the deleveraging concludes.
    • Further, the climate authority would not be allowed to open deposit accounts to its borrowers to ensure that it would be a pure financial intermediary, not a bank.
  • Framework: Assuming that a globally agreed-upon debt reduction percentage that would bring the global non-financial sector leverage well under 100% is determined and that all countries agree to act simultaneously, the framework is as follows
    • (i) the financial institutions comprising the banks and non-bank financial institutions (NBFIs) write down all the loans and debt securities on both sides of their balance sheets by the required percentage;
    • (ii) the deleveraging authority compensates the banks and NBFIs for the loss if any; and
    • (iii) the deleveraging authority pays each qualified resident their allocated amount less than the debt relief if any.
    • If an NBFI gain after the above debt reduction, it should owe equalisation liabilities to the deleveraging authority of its jurisdiction.
    • Note that as all debts mean all debts, public sector debts will also be written down by the same percentage except the official debts of the sovereigns that fall out of the scope of our proposed framework and should be handled by other means.
  • After deleveraging: After deleveraging the balance of the deleveraging authority account at the central bank goes down whereas the total balance of the bank accounts (reserves) at the central bank goes up by the total payment made by the deleveraging authority.
    • Hence, the base money goes up by the total payment of the deleveraging authority.
    • Since NBFIs and residents cannot maintain deposit accounts at the central bank, they have to be paid through a bank which creates deposits for the NBFIs and residents against reserves.
    • Hence, the broad money goes up by the amount of the payment to the NBFIs and residents.
  • Issue of multi-currency balance sheet: One issue is that in many countries, the bank and NBFI balance sheets are multi-currency balance sheets.
    • However, the deleveraging authority payments are in domestic currency, which may create currency risk for some banks and NBFIs.
    • Backed by the central banks, the globally coordinated national deleveraging authorities should stand ready to intervene to avoid potential crises.
  • Condition to spend on climate bonds: The authorities would require their domestic banks and other financial institutions to spend an internationally agreed-upon percentage of their newly found money, if any, after the deleveraging on the interest-bearing, finite-maturity bonds the national climate authorities would issue.
    • Since the promoter of the climate authority is the government, the bonds of the climate authority would have the same credit with the government bonds, and the central bank would accept the climate authority bonds in its open market operations.
  • Climate authority bonds as reserves: Therefore, the climate authority bonds would be the main tool to manage the reserves and deposits created through the equalisation claims.
    • In addition, the climate authority bonds could be used for the greening of the financial system through the investment of foreign exchange reserves of the central banks proposed by the Bank of International Settlements (BIS 2019).
  • Progressive wealth tax collection: Lastly, equipped with a “globally coordinated wealth registry” (Stiglitz et al 2019), the Lastenausgleich authorities would collect progressive wealth taxes from the owners of real and non-debt financial assets for the equalisation of burdens.
    • While a part of these taxes could be used to retire some of the equalisation claims and the corresponding reserves and deposits created in the deleveraging process, another part could be transferred to the climate authorities, and the rest could be spent in the interests of the society.
Issues related to Economic growth

Is the worst really over for the country’s agricultural sector?op-ed snap


From UPSC perspective, the following things are important :

Mains level : Paper 3- Performance of agriculture sector, is the worst over for it?


Estimates of gross domestic product (GDP) released on 28 February confirmed that India’s economy is decelerating. The silver lining was growth in agriculture, which accelerated for the third quarter in a row to 3.5%.

How agriculture sector has performed in the last few years?

  • Robust growth in the last 5 years: A look at the national accounts for a longer period shows robust agricultural growth during the first five years.
    • With agriculture growing at 3.17% per annum between 2013-14 and 2019-20.
    • This is remarkable, given that the broader economy is witnessing a slowdown.
  • Rural economy seen from the other indicators: A variety of other indicators show that the rural economy has been going through possibly its worst phase, with declining wage growth and farmer incomes causing serious distress.

Crop sector growth rate at lowest

  • A clue to this disconnect between the national accounts and other indicators lies in a breakdown of the national accounts.
  • Crop sector growing at lowest in two decades: The GDP data for the agricultural sector shows that the crop sector, which accounts for 56% of total agricultural output and employs a majority of the farmers, has been growing at only 0.3%, the lowest in two decades.
    • By comparison, the sector grew 3.3% per annum during the 10 years under United Progressive Alliance governments.
  • Which sector of agri. is growing at a high rate? The agricultural sub-sectors that showed high growth between 2013-14 and 2018-19 were livestock (8.1%), forestry (3.1%) and fisheries (10.9%).
    • It is a puzzle what drove the high growth of livestock at a time when the crop sector was experiencing negligible growth.
    • The trend defies the logic: This defies past trends and is also difficult to believe, given contrasting trends in other indicators of livestock
  • The declining income of farmers and a decline in wages: The poor performance of the crop sector confirms the declining income of farmers, the majority of whom depend on crops for subsistence. Not surprisingly, even real rural wages are declining.
  • Inflationary pressure and hopes of growth in income of farmers: Hopes were kindled in the last three months as agricultural commodities showed signs of inflationary pressures, with food inflation hitting double-digit rates.
    • Increase in rural demand not the cause of inflation: A careful analysis of the data rules out rising rural demand as the cause of that inflationary trend.
    • Many price pressures were due to the mismanagement of cereal supplies by the government and supply shocks in vegetables.
    • In such circumstances, farmer income could not have risen. Some of this was also a result of food prices rising internationally.

Trend pointing to the fall in agri. prices

  • Softening of food prices: Recent trends in international markets suggest a softening of food prices led by an overproduction of cereals and easing edible oil inflation. Following 3 factors may contribute to its fall.
  • Impact of fall in crude oil price: This trend will gain strength in the wake of the recent slide in crude oil prices.
    • With the global economy displaying signs of a slowdown, prices of agricultural commodities are likely to fall sharply.
    • Relation of food prices with oil prices: They tend to follow movements in crude oil prices, as was seen during the latter’s collapse in August 2014. In all likelihood, a similar decline in agricultural prices is upon us.
  • Food-grain stock with FCI: A second factor that may exacerbate the income troubles in agriculture is the presence of massive food-grain stocks with the Food Corporation of India.
    • This may slow the procurement of farm produce and lower price realizations, particularly cereals but also other crops.
  • The coronavirus outbreak: Lastly, the global slowdown due to the coronavirus outbreak is likely to dampen demand in the economy, and in turn hurt the agricultural sector.


  • Limited room to improve the situation: These factors are likely to worsen agricultural incomes, and domestic policy has limited room to manoeuvre.
  • Opportunity to revive the demand: This situation is also an opportune time to revive rural demand The government could pass on some of the windfalls from the drop in oil prices to rural consumers. This could help lift rural incomes.
    • The government could also increase spending in rural areas to help boost demand and prevent a collapse in agricultural prices.
  • Worst for agriculture is not yet over: Whether the government uses the opportunity or fritters it away again will be known in the coming months. What appears certain for now, though, is that the worst of the rural slowdown is far from over.
Issues related to Economic growth

An unrest, a slowdown and a health epidemicop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Dealing with the trinity of social disharmony, economic slowdown and and global health epidemic.


India faces imminent danger from the trinity of social disharmony, economic slowdown and a global health epidemic.

Social disharmony

  • Violence in Capital: Delhi has been subjected to extreme violence over the past few weeks. We have lost nearly 50 of our fellow Indians for no reason. Several hundred people have suffered injuries.
    • Communal tensions have been stoked and flames of religious intolerance fanned by unruly sections of our society, including the political class.
  • University campuses, public places and private homes are bearing the brunt of communal outbursts of violence.
  • Institutions of law and order have abandoned their dharma to protect citizens. Institutions of justice and the fourth pillar of democracy, the media, have also failed us.

Impact of social disharmony on the economy

  • Exacerbating the economy: At a time when our economy is floundering, the impact of such social unrest will only exacerbate the economic slowdown.
  • Lack of investment by the private sector: It is now well accepted that the scourge of India’s economy currently is the lack of new investment by the private sector.
    • Investors, industrialists and entrepreneurs are unwilling to undertake new projects and have lost their risk appetite.
    • Increase in fears and risk aversion: Social disruptions and communal tensions only compound investors’ fears and risk aversion.
    • Social harmony, the bedrock of economic development, is now under peril.
  • When policy tweaks stop to matter: No amount of tweaking of tax rates, showering of corporate incentives or goading will propel Indian or foreign businesses to invest, when the risk of eruption of sudden violence in one’s neighbourhood looms large.
  • How the vicious cycle works: Lack of investment means a lack of jobs and incomes, which, in turn, means a lack of consumption and demand in the economy.
    • A lack of demand will only further suppress private investments. This is the vicious cycle that our economy is stuck in.

Impact of COVID-19 on the economy

  • Global reactions: Nations across the world have sprung into action to contain the impact of this epidemic. China is walling off major cities and public places. Italy is shutting down schools. America has embarked aggressively both to quarantine people as well as hasten research efforts to find a cure.
    • Many other nations have announced various measures to address this issue.
  • What India can learn? India too must act swiftly and announce a mission-critical team that will be tasked with addressing the issue. There could be some best practices we can adopt from other nations.

Bringing in reforms to address the problems

  • The government must quickly embark on a three-point plan.
    • First, it should focus all energies and efforts on containing the COVID-19 threat and prepare adequately.
    • Two, it should withdraw or amend the Citizenship Act, end the toxic social climate and foster national unity.
    • Three, it should put together a detailed and meticulous fiscal stimulus plan to boost consumption demand and revive the economy.

Turning a moment of deep crisis into a moment of great opportunity

  • The past instance of turning crisis into an opportunity: In 1991, India and the world faced a similar grave economic crisis, with a balance of payments crisis in India and a global recession caused by rising oil prices due to the Gulf War.
    • But India was able to successfully turn this into an opportunity to reinvigorate the economy through drastic reforms.
  • Turning the present crisis into an opportunity: Similarly, the virus contagion and the slowing down of China can potentially open up an opportunity for India to unleash second-generation reforms to become a larger player in the global economy and vastly improve prosperity levels for hundreds of millions of Indians.
    • To achieve that, we must first rise above divisive ideology, petty politics and respect institutional salience.


The India that we know and cherish is slipping away fast. Wilfully stoked communal tensions, gross economic mismanagement and an external health shock are threatening to derail India’s progress and standing. It is time to confront the harsh reality of the grave risks we face as a nation and address them squarely and sufficiently.






Issues related to Economic growth

Is RBI raising systemic risks by pushing retail credit?op-ed of the day


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3-Is RBI raising systemic risks by pushing retail credit?


Credit driven growth may not lead to sustainable growth.

Credit driven economic boom

  • RBI and govt. acting in line: Both the government and Reserve Bank of India (RBI) have acted in line with their stated commitment towards the defined fiscal and monetary stability framework.
    • Given the pressures of a dwindling growth rate and limited fiscal and monetary elbow room, this is commendable.
  • Growth without increasing systemic risk: It is critical that the decisions taken to revive growth have a high likelihood of success without increasing systemic risk in the medium to long run.
    • Recent push may add to systemic risk: In this context, it may be argued that RBI’s recent push for retail credit growth would add to systemic risk, while the benefits for India’s gross domestic product growth (GDP) may be limited.
    • Credit-driven economic booms always end in economic misery.
  • Credit is a necessary evil: To pump-prime an economy, very few tools exist other than credit.
    • Thus there is all the more reason to handle it with care. In current economic growth frameworks, economic growth requires
    • Quite often, credit creation is the ultimate source of capital.
    • If the government spends by increasing its fiscal deficit, government debt increases. If the private sector borrows to invest and kick-start growth, its leverage increases.
    • What could be the best source of credit? The best use of credit is when it is used to finance real assets in the economy.
    • Creation of financial asset: When credit does not create real assets, it inevitably creates financial assets such as bonds held by investors, loans held by banks, or accounts receivables held by firms.
    • The precursor to a crisis: An overabundance of financial assets created by credit is a precursor to a crisis.

How types of loans matters for growth and risk of the system

  • How money is used matters for reviving sustainable growth: Taking a consumer loan to splurge on a vacation or celebratory dinner does very little to support long-term growth. It creates economic activity only in the immediate period.
    • Which sector should be pushed to ramp up credit and how that money is used become important if reviving sustainable growth is the objective.
  • In a paper titled Who Gets The Credit And Does It Matter, Thorsten Beck et al studied the growth dynamics of 45 countries for the period from 1994 to 2005.
    • Only loans to firms contribute to growth: The paper concluded that only loans to firms are linked to GDP growth, the argument being that firms use credit to increase their capital stock, and thus, real assets.
    • Loans to households do not add substantially to growth: Loans to households, while having desirable social outcomes in terms of boosting consumption and allowing households to tide over short-term cash flow mismatches, do not add to sustainable GDP growth.
    • It is debatable whether consumer loans need a push at all.
  • Retail and household debt growth
    • Retail loan growth, while currently below its 2016 peak of 20%, has been managing to grow at around 15%.
    • Household debt: In December 2019, RBI cautioned lenders on household debt levels and the associated risk on retail loans.
    • Relation with banking crisis: Higher growth in household debt is associated with higher chances of a banking crisis (Household Debt And Monetary Stability, IMF, 2017).
  • Consumer loans not always add to capital stocks: Another kind of consumer loan, the home loan, need not always add to incremental capital stock. Given how slowly the supply of homes responds to demand in the short term, excess credit supply is known to add to the risk.
    • Of course, consumer loans such as education loans, which upgrade human resources, are a notable exception.
    • In fact, mortgage booms have played key roles in most credit blow-ups.
  • Surprising steps by the RBI
    • Risk weight of consumer loans lowered: Surprisingly, RBI reduced the risk weight for consumer loans other than credit card debt from 125% to 100% in September 2019.
    • Waiver to CRR requirement: Recently, RBI decided to waive lenders’ cash reserve requirement against new exposure to home, auto and Micro, Small and Medium Enterprises (MSME) loans.
  • Futile attempts to revive commercial lending:
    • Home loan growth was hovering around 15% for the last two years.
    • Commercial credit growth falling: Growth of commercial credit (loans to industry and services as per RBI), which last exhibited 20%-plus growth in June 2012, has been falling.
    • Since 2016, its annual growth averaged around 6%, with a strong downward trend observed since March 2019.
    • Efforts to revive commercial lending have not borne fruit.
    • Misplaced belief needs to be relooked: This misplaced belief—“if not commercial, let retail loans revive the economy”—needs to be re-looked.
    • The simplistic understanding that any credit uptick can revive the economy needs to change.
  • What retails at best can achieve? India’s retail credit push, if successful, may at best check the downward trend in GDP growth.
    • The argument that it will revive growth is based on optimism.
    • The assumption here being that consumption will drive the current capacity utilization of 69% to somewhere above 85%, which will trigger capital expenditure.
    • This assumes that the consumer loan boom, already a decade old, will continue for another 3-4 years.
  • Chances of household balance sheet weakening: In an environment of low job growth, it is difficult to see how household leverage will not increase.
    • If capacity utilization does not pick up sufficiently to revive growth, then along with banking and corporate balance sheets, household balance sheets will also be weakened.
    • Over the next 3-5 years, the downside of RBI’s retail push appears at least as significant as the upside.


  • Polity stability needed: The government and RBI must make more determined efforts to revive corporate activity. Policy stability and confidence in the business environment may push commercial credit better than mere interest rate cuts.
  • Need to increase government spending: Among the options available, using good old government spending to stimulate infrastructure spending, and eventually, the economy, appears to be a wiser option.


Issues related to Economic growth

Conquering the green frontierop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Sustainable economic growth and focus areas to achieve it.


India has to forge a different development model -one that will shift India’s workforce from agriculture to globally leading, resource-efficient businesses.

 How India can deliver sustainable prosperity?

  • The two intertwined forces: Just as liberalisation and globalisation transformed the economy in the past, two different yet intertwined forces will likely transform the economy in the future.
  • FirstHigh competitiveness: India must have globally leading companies across a range of key sectors such as financial services and manufacturing.
    • Global productivity frontier: These super competitive businesses should define the global productivity frontier so that they can surpass the production processes of the best companies in the world.
  • Second-Long term sustainability: India must also adopt a resource-efficient, low-carbon development pathway to utilise scarce natural resources effectively. There is no other way.
    • Apocalyptic air pollution.
    • Dire water shortages.
    • Rising temperatures and-
    • Extreme climate events- have already brought us to the brink of an environmental crisis.
    • The need for India’s leadership for achieving the target: Moreover, note that the world needs India’s leadership to achieve the 2 degree Celsius global warming target.
    • In short, India’s growth has to be green.
  • What is the problem in achieving these goals?
    • No nation has ever attempted these twin transformations — high competitiveness and long-term sustainability — simultaneously.
    • The traditional development model: The traditional development model has been a farm-to-factory development model with economies transitioning from traditional agriculture to resource-intensive, urban manufacturing.
    • India has to forge a different development model — one that will shift India’s workforce from agriculture to globally leading, resource-efficient businesses.
    • Also, these companies must use the most advanced green technologies and business models.
    • India’s development model will, therefore, need to take the Indian economy from “the farm-to-green frontier”.

Three focus area for green transformation

  • The productivity transformation driven by super competitive businesses is well underway.
    • We now need to consider a comprehensive policy package that will enable us to simultaneously undertake a green transformation.
    • Global best practices and India’s own experiences suggest three focus areas for such a transformation.
  • India has the third-largest start-up ecosystem in the world and our larger companies are also pursuing innovation-driven growth.
  • Specific and stable policy goals
    • Specific and stable policy goals need to be established to set detailed green targets for various sectors.
    • A macro-economic model that factors in-
    • Current skills.
    • Sectoral connections.
    • Relative emission and-
    • Financial constraints are necessary to inform such targets going forward.
    • Such a model can then be used to evaluate various green growth scenarios.
    • Decarbonisation approaches in the green frontier scenario will drive the growth of green industries, green jobs, green skills, green entrepreneurs and green finance.
  • Pursuing the policy goals: Global and Indian experience highlights that green targets will have to be pursued in a stable manner across decades.
    • Most large emitters and pollutants are associated with long-lived (20-30 plus years useful life) assets.
    • The basic requirement for investment in green assets: Investments in green assets will only be possible if there is the sanctity of contracts, pricing stability, and consistent policies that are backed up by the full force of law.
    • Implementation: Finally, these specific and stable policy goals need to be implemented urgently to avoid lock-in with high-carbon assets.
  • Revamp the institutional framework: India may need to revamp its existing institutional framework for environmental governance in order to align it with the country’s green transformation.
    • Four levels of institutional structure: As demonstrated by global best practices, a comprehensive institutional framework could include four levels — super sovereign, sovereign, state/province and city.
    • Council for monitoring: An independent council or board may also be required to monitor, report, and verify green targets.
  • Appropriate financing capacity: Indian policymakers and entrepreneurs will unleash market forces that will drive the growth of waste management, solar panels, electric vehicles, super-efficient appliances, recyclable food packaging, clean coal, etc.
    • These green industries will require massive investments and appropriate financing capacity will have to be created to support their growth.
    • Preliminary estimates suggest that India’s green transformation may require an average investment of $95 billion to $125 billion per year, aggregating over $1 trillion in the next decade.
    • A “green super fund” could be established to jumpstart green investments by pooling together international and domestic capital.
    • Dual roles of financial institution: Such a financial institution could play a dual role in mediating and mitigating risk for global capital, as well as identifying sectoral project pipelines.
    • The success of financial institution: Indian financial institutions have been very successful in building up new industries such as microfinance, EdTech, and affordable healthcare, which have delivered both financial and social returns; however, financial support for green industries will have to be orders of magnitude larger.
    • Moreover, the “green super fund” may have to be able to invest across the capital structure (debt plus equity) as well as across the company lifecycle (early stage, growth capital, infrastructure investments, and so on).


Our future depends on how we resolve our environmental challenges. Further, we are the world’s third-largest carbon emitter and will play a crucial role in getting the planet to a low-carbon trajectory. Simply put, we must urgently transform our economy to get to the green frontier.

Issues related to Economic growth

India needs a ground-up growth model for an inclusive economyop-ed of the day


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Inclusive growth in India and need for the new paradigm.


Economists agree that the Indian economy is not doing well. And that they do not agree upon what the remedy is.

Proverbial blinkered men around the elephant

  • Agreement on the problem disagreement on a remedy: For economists, it is clear that the Indian economy is not doing well. And that they do not agree upon what the remedy is.
    • They seem to argue like the proverbial blinkered men around the elephant, each aware of only a part of the animal, yet convinced that he has the solution.
  • Interest rate and fiscal deficit favouring group: One group of economists is fixated on interest rates and fiscal deficits as the levers to improve the health of the economy.
    • They debate the impact on the economic growth of decimal point differences in interest rates and ratios of fiscal deficit to gross domestic product.
    • All this, even though they do not have a good model of the role of money in an economy as Robert Skidelsky explains in Money And Government: A Challenge To Mainstream Economics”.
  • Trade economists: Another group of “trade economists” sees opportunities for India in greater integration with global trade.
    • The weakening of the spirit of 1991 reforms: These economists are alarmed by the weakening of the spirit of the 1991 reforms and the return of protection of domestic industries.
    • Promoters of free trade once protected their economy: As economists like Dani Rodrik, Ha-Joon Chang and others have pointed out, countries that now promote free trade, like the US, had achieved growth by protecting their own infant industries.
  • Governments interfering in the ‘magic’ of the market: A large group of economists is concerned that governments are interfering with the “magic” of the market.
    • Governments are the problem: The above economists’ political heroes are Margaret Thatcher and Ronald Reagan, who promoted the thesis of Milton Friedman and the Chicago school of economics that governments are the problem and not the solution.
    • They accept that the market is poisoned by a concentration of market power.
    • Self-regulation is an oxymoron: In economies where the “business of business must be only business” and where private participants are expected to pursue their self-interest, self-regulation is an oxymoron.
    • They reluctantly accept that governments must shape the rules of the game for the market to work its magic.

The rise of the “anti-expert” movement

  • Focus on making the economy attractive for investors: The dominant school of economics for the past 40 years has concentrated on framing regulations (and their reduction) to make economies attractive for investors.
  • GDP as an indicator of growth: It measures an economy’s health by the size and growth of GDP.
    • Countries, including India, have seen their GDP grow by adopting this ideology and the rules that flow from it.
    • Unequal growth: At the same time, the wealth of investors at the very top has grown much faster than the incomes and wealth of citizens in the lower half of the pyramid.
    • Rise of anti-establishment movement: This unequal growth has fuelled the rise of anti-establishment, “anti-expert” populist movements around the world.
    • Citizens are asking whose interests these economists, or the policymakers who accept their advice, serve.

Questioning the dominant paradigm

  • Some economists question the dominant paradigm.
    • They view economies “bottom-up” and “inside out” from the perspective of people at the bottom.
    • Unlike the dominant school which takes a “top-down” and “outside-in” view from investors’ perspectives. The ruling school derides them as “socialists” and “anti-growth”.
    • Grow the pie then distribute it: First, grow the pie, they say, before you redistribute it.
    • Whereas the bottom-up, people-first school’s view is that to grow the pie, there must be human development alongside, with significant public investment in education and health.

Agreement on structural reforms

  • Economists of all hues now agree that structural reforms are necessary to revive the Indian economy.
    • Deep reforms will require changes in economic structures that have been built up over decades.
    • Fundamental reforms cannot be delivered by a finance minister in one budget. Nor by any government within a five-year term.

Wealth creation

  • Gandhiji’s approach: Mahatma Gandhi had clearly said that he supported wealth creation.
    • The best model for inclusive growth: Gandhi (and J.C. Kumarappa, his long-time adviser in economics) differed with Jawaharlal Nehru (and his advisers) on the best economic model for inclusive growth.
    • Producer-owners model: Gandhi envisaged a model in which producers would-be owners of their tiny enterprises.
    • The charkha was a symbol.
    • He wanted constructive workers to create wealth for themselves, and not be mere wage earners enriching remote owners.
  • Nehru’s approach: Nehru, urged by Indian capitalists, chose the other path of promoting large enterprises.
    • And since private capital was not sufficient then, these were state-owned.
    • Humans as mere workers and wage earners: In both-state owned enterprises and capitalist enterprises owned by remote investors-humans are merely workers and wage earners.
    • The wealth created by their efforts accumulates with remote owners who decide what it will be used for.
    • The State takes some for its maintenance and is expected to spend the rest for the benefit of people.
  • Need for a new paradigm for inclusive growth: Some Nobel laureates in economics recommend a new paradigm for inclusive growth.
    • Joseph Stiglitz, Jean-Paul Fitoussi, and Martine Durand, in their book Measuring What Counts, suggest a model driven by the well-being of citizens, rather than an obsession with GDP.
    • So do Abhijit Banerjee and Esther Duflo in Good Economics For Hard Times.


The elephant in the room for economists is the insufficient increase in employment and incomes at the bottom and the slow pace of human development while GDP grows and millionaires multiply. Economists must listen to people on the ground, and to each other across their ideological differences, to understand how to make the elephant turn. They must develop ideas that may not look good to economists in Washington, Chicago, and London, but resonates with people in India’s villages.


Issues related to Economic growth

Towards a new world orderop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Globalisation and its impact on Climate Change, Lessons from Nordic Model.


Social inequalities and the grim problems of stark and continuing poverty are at the epicentre of the new world.

The ugly face of capitalism and growing inequalities

  • The concentration of the health: The latest Oxfam Report presented at Davos points out that 2,153 billionaires have more wealth than 4.6 billion people.
  • Rising poverty: The emergence of billionaires and oligarchs in different parts of the world coincides with increased poverty among the already poor people, especially children.
  • Concept of stakeholder’s capitalism: These realities make observers question the tenability of stakeholder capitalism as a concept.
  • Faults in the capitalism on display in 2008: The ugliest face of this capitalism was visible during the 2007-2008 economic crisis, first in the U.S. and thereafter across the European Union.
    • At that time, it appeared as if the global economy was on the verge of collapse.

Intensification of energy use and sustainability

  • The relation between growth and energy: One of the chief characteristics of economic development is the intensification of energy use.
    • There is an unprecedented concentration of high energy density in all economic development strategies.
  • Use of non-renewable sources: The bulk of the energy continues to be generated from non-renewable sources.
  • Developing world capturing energy-generating sources: The developed world’s, and China’s, central objective is to capture energy-generating resources from across continents and put them to use to push GDP growth to greater heights.
    • In the process, sustainability is becoming a casualty.
  • Higher waste generation: The higher the use of energy, the larger the amount of waste generated. Entropy, like time, is always unidirectional, it only goes forward.

Disposal of e-waste

  • High energy consumption and disposal of waste: Egregious consumption of energy by the developed world has been accompanied by the disposal of residual products (‘e-waste’) on the shores of many African and Asian countries.
  • Impact on the developing world: As a result of the disposal, the poor in the developing world are, unwittingly, drawn and exposed to toxic, hazardous materials like lead, cadmium and arsenic.
    • Hence, the ‘globalisation’ phenomenon has turned out to be nothing other than the exploitation of the developing world, with most countries being treated as a source of cheap labour and critical raw material.

Unfairness involved in the Globalisation

  • Increasing consumption in the developing world: Countries in the developed world, and China, are ferociously using up finite raw materials without care or concern for the welfare of present and future generations.
  • Bright and the dark side of the development: Certainly, there has been significant technological progress which has brought about a revolution in the fields of healthcare and communications, but there is also a dark side to this.
  • System loaded in the favour of the rich: High expenses and Intellectual Property Rights load the system further in favour of the rich.
    • Pernicious system of carbon credit: To demonstrate how unfair the system is, one can look at the pernicious plan to set up a carbon credit system.
    • Under this, countries with high energy consumption trends can simply offset their consumption patterns by purchasing carbon credits, the unutilised carbon footprint, from poor developing countries.

Understanding the Nordic Economic Model

  • Nordic Economic Model’: It pertains to the remarkable achievements of the Scandinavian countries comprising Denmark, Finland, Iceland, Sweden, Norway, and allied territories. They also have-
    • Large public sector enterprises.
    • Extensive and generous universal welfare systems.
    • High levels of taxation.
    • And considerable state involvement in promoting and upholding welfare states.
    • Among the happiest countries: UN reports also indicate that the Nordic countries are the happiest countries in the world. The U.S., in contrast, is in 19th place.
    • The total population of the Nordic countries is estimated at almost 27 million people.
    • Among the richest countries: These nations are among the richest in the world when measured in terms of GDP per capita.

Enlightened Global Order

  • Taking the Nordic model as a template, there are some ingredients that could be part of a new ‘enlightened global order’.
  • What does the Global Order include? These should include-
    • Effective welfare safety nets for all.
    • Corruption-free governance.
    • A fundamental right to tuition-free education including higher education.
    • And a fundamental right to good medical care.
    • Shutting of tax havens.
    • Tax structure: In Nordic countries, personal and corporate income tax rates are very high, especially on the very rich. If a just, new world order is to arise, taxes everywhere should go up.
  • Holding companies responsible: When it comes to the corporate sector, there are some new perspectives.
    • Changing the parameters of profit: In traditional business accounting, ‘bottom line’ refers to the financial year’s profit or loss earned or incurred by the company on pure financial parameters.
    • The four ‘Ps’: Following vigorous debates, a new format has emerged under which a company’s performance is measured through four ‘Ps’.
    • The first is ‘P’ for ‘profit’.
    • The second ‘P’ is for people — how the company’s actions impact not only employees but society as a whole.
    • The third ‘P’ is for the planet — are the company’s actions and plans sensitive to the environment?
    • The fourth ‘P’ is for purpose, which means the companies and individuals must develop a larger purpose than ‘business as usual’. They must ask: what is the larger purpose of the company, apart from generating profits?
    • Using performance in terms of four ‘P’s: Using big data and text analytics, a company’s performance can be measured in terms of all the four ‘P’s and a corporate entity can be thus held accountable. Market capitalisation need not be the only way to measure the value of a company.


Much work is yet to be done to uplift the global economic order, but the important point is that new tools are now emerging. What is required is a global consensus and the will to make the planet more sustainable, so that all individuals can live with justice and equality, ensuring that not a single child is hungry or seriously unwell because of poverty or lack of affordable medical help.





Issues related to Economic growth

[op-ed snap] Fashioning the framework of a New Indiaop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How could focusing on inclusive growth help spur the Indian economy.


As the Indian economy is going through a severe crisis, a major solution to the present economic crisis is to go in for inclusive growth; it also means shared prosperity.

Where India stands on poverty and how the slowdown is impacting the poor.

  • Bottom 30-40% adversely impacted: The slowing economy has had an adverse impact on the bottom 30%-40% of the population.
    • Absolute poverty on the rise: The incidence of absolute poverty, which has been falling since 1972-73, has increased to 30% (4% jump).
  • 44% population below the multi-dimensional Poverty line: The Human Development Report (2019) has shown, more than 44% of the Indian population is under the multi-dimensional poverty line.
  • Rising inequality: The poorest 50% population at present owns only 4.1% of the national wealth.
    • While the richest 10% of people own 73% of the total wealth in India (Suisse Credit 2019).
  • Rampant malnourishment: India has 15.2% population malnourished (women 15%) as against 9.3% in China.
    • And 50% of the malnourished children in the world are in India.
  • At 112th position on global hunger: India’s global hunger rank has gone up to 112 while Brazil is 18, China is 25 and South Africa, 59.
  • Dismal performance on education: In the field of education as per a UN report (2015), overall literacy in India is 74.04% (more than the 25% are totally illiterate) against 94.3% in South Africa, 96.6% in China and 92.6% in Brazil.
    • Almost 40-45% population is either illiterate or has studied up to standard 4.
  • Poor quality of education: Given the quality of education in India, the overall population is very poorly educated, with the share of ‘educated unemployment’ rising by leaps and bounds.

What needs to be realised?

  • Focus on domestic demand: It needs to be realised that when exports are declining, the economy will have to depend on domestic demand for growth.
    • It is no more feasible for the top 20-25% population to continue growing without depending on the demand from the bottom 40-45% population.
  • Demand by the bottom 40% a must: There is thus a strong reason now for the economy to increase effective demand of this bottom 40-45% population at least to continue growing-to reach a $5-trillion economy by 2024.

What is wrong with the growth process?

  • Bottom 40% not getting the fair share of growth: A major reason for the crisis is that the growth process has marginalised the bottom 40-plus% of the population.
    • It is in the sense that they do not get a fair share of the economic growth, and are more or less deprived of productive employment with a decent income.
    • They have not been used as active participants in the growth process. Their potential has not been promoted.
  • Less spending for the poor and its consequences: Though the bottom population depends on the government for basic health and elementary education (and also for access to higher educational opportunities)-
    • The government spends just 4% of GDP on health (against the norm of 4-6% of GDP) and 3% of GDP on education (against the norm of 6-8% of GDP).
    • How this dismal spending affects the poor: As a result of this below norm spending, these people are left hardly literate and sick, with poor nutrition and high morbidity.
    • They are incapable of acquiring any meaningful skills or participating actively when new technology is spreading in the rest of the economy.
  • The sub-optimal use of labour force: This sub-optimal use of the labour force in the economy is not likely to enable India to achieve optimal growth with proper use of the national resources -the labour force.

Inclusive growth- a solution to the present economic crisis

  • Inclusive growth also includes shared prosperity: Here, inclusive growth does not mean only including all sections of the population in the growth process as producers and beneficiaries; it also means “shared prosperity”.
    • Since India has already committed to sustainable and inclusive growth at the UN General Assembly, India is definitely obliged to implement inclusive growth.
    • This should be our “New India”.
  • What “New India” would involve?
    • Improve the capability and opportunities: To start with, to improve the capabilities of the masses as well as their well-being by expanding productive employment opportunities for them.
    • What expanding productive employment mean? The main steps to expand productive employment for all in the economy should be made up of-
    • A process of inclusion.
    • Expanding the quality of basic health for all.
    • And ensuring quality education to all.
  • How will “New India” help?
    • Which will by itself generate large-scale employment in the government.
    • Having a well-educated and healthy labour force will ensure high employability.
    • Such people will be able to participate actively in the development process.
    • The cycle of more productive employment: Having a well-educated labour force will help start-ups and MSMEs, in turn triggering a cycle of more productive employment in the economy.
    • Global competitiveness increase: This will also improve the global competitiveness of our production units.
    • Labour absorption potential of MGNREGA: Employment guarantee schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) will also increase employment.
      • Assets generated under MGNREGA will expand capital formation in the economy, thereby raising the labour-absorbing capacity of the mainstream economy.
    • Why this strategy is advantageous?
      • Such a strategy has multiple advantages:
      • First– it will raise incomes and the well-being of those who need it most urgently.
      • Second– it will raise effective demand rapidly, which is so badly needed in the economy today to raise economic growth.
      • Third– growth will be equitable and sustainable.

Way forward

  • Finally, how does one raise resources to increase new public investments in the selected sectors?
  • Raise direct taxes: One major strategy is to raise direct taxes, both capital tax and wealth tax.
    • Past growth has failed to reach the poor: Growth led by providing tax cut and extra incentives, but this growth does not much percolate to the poor.
    • Consequently, taxing the rich has to be a major strategy to raise government revenue.
  • Treat public expenditure as an investment: The public expenditure on raising capabilities should be treated as social investment rather than social welfare, policymakers will be willing to spend on this capital formation.
  • Let the fiscal deficit slip: Finally, there was no sound economic reason to control fiscal deficit ratio. Sound macroeconomics never supports this.




Issues related to Economic growth

 [op-ed of the day] The convergence of rich nations with the rest has gone off trackop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Globalisation-Convergence of the rich and the poor economies- hopes and the reality.


Sound policies are needed to put emerging economies back on a higher growth path and ameliorate regional inequalities.

The theory of convergence

  • The theory of convergence is one of the most powerful and noblest ideas in economics.
    • What is it? It is the concept that other things being equal, poorer economies should catch up with richer ones so that inequality between the rich and the poor attenuates, and conceivably even disappears over time.
  • Capital is more productive in poor economies: The premise driving convergence is that capital (whether physical or human) is more productive in poor economies than rich ones due to what economists call “diminishing marginal productivity”.
    • In layman’s terms, a small amount of investment yields a greater increase in output where there is less capital than where there is more.
    • Lesser the development more the development: Even more simply, the rate of return on investment is inversely related to the level of economic development.
  • Experience of Japan and Germany after WW 2: The experience of advanced economies gave economists reason to be optimistic that convergence occurs according to the script.
    • Thus, the devastated economies of Europe, along with Japan, quickly caught up with the advanced economies that had not been ravaged by World War II, most notably, the US.
    • Germany and Japan closing the gap: At the end of the war, with their capital stocks destroyed, Germany and Japan were much poorer than the US; by the 1960s, they had closed the gap.

Globalisation and the unfulfilled hopes of convergence

  • Replication of the rise of Japan and Germany? At one time, it appeared that the same play was at work between emerging economies and advanced economies.
    • Rise of India and China: Economies such as China and India, as well as others, were far outstripping the growth rates of the US and other rich economies,
    • Hope of closing gap: India and China gave hope that at least the more rapidly growing of the emerging economies would close the gap with the rich world within decades rather than centuries.
  • Adoption of technology at low cost: There was presumed to be an additional powerful force working toward convergence.
    • Poorer economies are, almost by definition, far away from the technological frontier at which the richest economies operate.
    • There is thus ample room to absorb newer technologies at relatively low cost and in a relatively short span of time, without encountering slowing growth like the rich economies,
    • In simpler terms, it is difficult and costly to innovate the latest Apple iPhone, but relatively easy to reverse engineers at least some of Apple’s technology.

Reality: Convergence is faltering

  • Recent evidence suggests that convergence is faltering.
  • World Bank report of retarding convergence: A recent World Bank report documents a worrying slowdown in productivity growth in emerging economies, significantly retarding convergence.
    • Lower productivity: The report’s calculations suggest that emerging economies have 14% lower productivity than they would have had if previous trends of high productivity growth were maintained.
    • Lower commodity exports: For commodity exporters, this is a whopping 19%.
  • The silver lining for faltering economies: According to the World Bank, the main driver of falling productivity are-
    • Insufficient investment in physical and human capital.
    • Insufficient mobility of machines and workers from less productive to more productive sectors of the economy.
  • India’s case: The Indian case clearly bears this out, with languishing investment and unfinished productivity-enhancing reforms, especially in the country’s labour market, being the key culprits behind the sharp slowdown in growth.

Way forward

  • Repair financial systems: Governments, including India’s, need to do the heavy lifting of repairing damaged financial systems overladen with bad debt.
  • Restore fiscal rectitude.
  • Inflation focused monetary policy: Ensure that monetary policy remains focused on stable inflation rather than being excessively loose as a risky substitute for structural reforms.
  • Reforms: Press ahead with unfinished reforms to capital, land and labour markets.
  • Address the regional disparities: There is a further critical dimension in the case of large multi-region economies such as India.
    • Not only has convergence been faltering between nations, but it has also been faltering between the richer and poorer regions of large nations such as India.


The data does not present an epistle of despair, but of hope. The pursuit of sensible and conventional sound economic policies ought to put emerging economies as a group back on a higher growth trajectory. Convergence may yet end up being a parable of promise rather than a fable of folly.


Issues related to Economic growth

[op-ed of the day] Economic reforms are best done brick by boring brickop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Economic reform-sudden or persistent and incremental, sustainable.


Rather than big bang measures or a stealthy agenda, India can count on small but significant improvements.

Reforms only in crisis or by stealth

  • The accepted conventional wisdom is that economic reforms in India happen only in a crisis or by stealth.
  • Reforms in the crisis
    • Reforms of 1991 : The big example of the former are the 1991 reforms.
    • In 1991 the country faced a huge foreign exchange crisis, resulting partly from the fiscal profligacy of the previous decade.
    • 1999 telecom sector reforms: Another example is from 1999 when the telecom sector was in near bankruptcy, and that crisis led to the shift away from fixed fee for spectrum to revenue sharing.
    • The situation of no other choice: In both cases, there was considerable opposition to those reforms, but they were pushed through because the crisis left no other choice.
  • Reform by stealth: Other than a crisis, more often than not, it has been economic reform by stealth.
    • In the form of executive orders: These reforms are often in the form of an executive decision rather than legislation. Following are the examples of it-
    • Expansion of the list under licence: The expansion of the list of items under the Open General Licence for imports, which is a reform of protectionism, or the reduction in the set of industries reserved for small-scale businesses.
    • Electoral bond introduction: A more recent example of stealth reform was the insertion of an electoral bond scheme in the Finance Bill of 2018.
    • Advantages of going stealth: Reform by stealth offers the advantage of going in either direction.
    • In 2013, faced with a potential currency crisis, the Reserve Bank of India (RBI) quietly retracted the limits on the liberalized remittance scheme (LRS).
    • Problem with stealth reforms: Stealth reforms are introduced stealthily but when they do not yield the desired result they are rolled back unpredictably, increasing uncertainty in policies of the government.

Persistent, encompassing, creative incrementalism in reforms

  • The Economic Survey of 2015 pretty much ruled out Big Bang reforms in India, calling instead for “persistent, encompassing, creative incrementalism” on them.
  • This is the right mantra.
  • What incrementalism means: It implies continuity, not slowness, a sustainable speed that gives reforms predictability and stability. Following are its examples of it-
  • Reform in food subsidy: Example of incrementalism could be reforms that are being carried out in food subsidies.
    • First: Reduce the leakages of the subsidy to non-farmers.
    • Thus, when procurement is done, payments go directly to their Aadhaar-linked accounts.
    • This will lead to non-farmers getting eliminated,
    • Second-Pay subsidy only to the poor: It will lead to subsidy savings, allowing us to limit the subsidy only to poor farmers.
  • Sovereign gold bond scheme: The use of paper gold greatly reduces imports of the physical metal and outgoes of foreign exchange.
    • The sale of these bonds is being expanded, and they would eventually be everywhere, even at post offices.
  • Aggregate licence by RBI: The next example is from a new category called account aggregators licensed by RBI.
    • It allows users’ control over the digital data trail that their transactions generate, and they can monetize it or use it to enhance their creditworthiness.
    • This is an incremental reform with huge ramifications.


  • The reforms cited above are incremental, not a big bang, persistent but not slow, open and not by stealth, and finally, imaginative too, since they respond to real needs.
  • Effective reforms are those that are done brick by brick, the boring measures that chip away at everything that constrains high, inclusive and sustainable growth.


Issues related to Economic growth

[op-ed snap] Limited scope for sharp recoveryop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3-Slowdown in the economy, supply side-demand side, way forward for recovery.


In order to revive the economy, the Government must choose between tax reductions and increasing rural spending.

The Current Status of the Indian Economy

  • 5 % in 2019-20: The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20.
  • Cause of the slowdown: The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical
  • Stagnant income and stagnant incomes: Despite largely stagnant incomes, private consumption has been financed over the past few years through lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led pay-outs.
  • Private consumption is the largest driver of growth.
  • Depleting savings: The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13.
  • Depleting credit in the system: Overall credit in the system has dried up.

 Rural economy

  • Low wages and stagnant incomes: Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent.
  • Weak real estate sector: The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past.
  • The sector is experiencing lower private sector investments recently.

Limited scope for a sharp recovery

  • The following factors render the scope for sharp recovery limited.
  • Consumption issue is structural:  The slowdown in private consumption is a structural issue linked to low household income growth.
  • Low job creation: Low consumption is in turn, linked to the basic problems of low job creation.
  • Low Income: Low consumption is also linked with stagnant farm incomes.
  • None of the above factors is likely to change suddenly, limiting the scope of recovery.
  • Low Investments: Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households.
  • Stressed Government consumption: Which has been supporting growth over the past few years, remains under stress.
  • The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP.
  • The public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.
  • NBFC’s role: Recovery will also depend on the health of the financial sector, especially that of NBFCs.

 Use of the fiscal space

  • Supply-side: The government has shown a clear preference to rely on supply-side measures (like corporate tax cut) to support growth.
  • Need to address demand-side: Expectations will be high that the upcoming Union budget addresses the demand side concerns as well.
  • Spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can decrease pain in rural areas.
  • Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.

Way forward

  • Widening of the tax base- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
  • Broad-basing of the income and consumption profile: Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers.
  • The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.
  • Role of the private sector: Given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.


Reforms that increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus.


Issues related to Economic growth

[op-ed snap] Thumbs downop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Moody rated India down


Rating agency Moody’s has reacted to the turbulence in the economy. It revised the outlook on its sovereign rating for India from stable to negative.

Moody’s rating

    • Moody’s India rating is a little higher than that of Standard & Poor’s.
    • The outlook revision will compensate for its past optimism in India. 

Signals it gives

    • It warns that if the economy fails to bounce back soon enough, the sovereign rating could go bad. 
    • Impact of slowdown – it impacts the fiscal deficit and borrowings.
    • Tax revenue – tax revenue growth is nowhere near budgeted levels. With the slowdown extending into the third quarter, tax revenues will further undershoot. 
    • What it means for government – the government has been forced to spend more to give a leg up to the economy. More than just pushing expenditure on capital projects, the government gave away corporate tax concessions last month.
    • Missed Fiscal deficit – Even with the boost from the ₹1.76 lakh crore dividend payout from RBI, it appears that the government will miss the fiscal deficit target of 3.3% of GDP. Moody has projected that the deficit will slip to 3.7% of GDP this fiscal. 
    • Only positive – India’s borrowings are almost wholly domestic. External debt to GDP is just 20% but the ratings do have an impact on investor sentiment.

Hope lies ahead

    • Signs of revival – the Moody’s outlook revision comes when there are faint signs of a revival in the economy. It may be another quarter or two before growth picks up. The festive season uptick in sales of automobiles and white goods points to the return of the consumer to the market. 
    • Bank creditincrease in the bank credit offtake reported by the RBI for the second successive fortnight is positive news.

Way ahead

    • The government needs to press the reforms harder.
    • There is every need to debug GST. 
    • There is a need to go big on disinvestment in the remaining four months of this fiscal. The target of ₹1.05 lakh crore has to be met with a wide margin to contain fiscal deficit slippage. 
    • The supportive measures announced in the last two months should be closely monitored for implementation.
Issues related to Economic growth

[op-ed snap] The policy way outop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Structural slowdown; Regulatory supervision


India is in the middle of a sharp growth slowdown. The debate surrounding the slowdown is whether it is a cyclical downturn or a structural correction. Diagnosing the problem is key for devising policy responses. 


  • Cyclical slowdowns can be dealt with using temporary fiscal and monetary stimulus. 
  • Structural problems require long-run policy responses.

The slowdown is structuralOil imports

  • Most of the growth between 2014 and 2017 was sparked by a sharp increase in government spending
  • Given India’s oil imports, the decline in the world price of oil by almost $50 a barrel between 2014 and 2016 represented a windfall revenue gain of 3% of GDP. 
  • Since the fiscal deficit barely moved, the government effectively used the windfall to finance various government schemes
  • Now that oil prices have reverted towards their previous levels, a stable fiscal deficit demanded a reduction in government expenditures.
  • If there is no oil windfall, Indian growth over this period would have been 2-3% lower annually. The economic slowdown has been ongoing for almost four years now. 
  • Cyclical downturns last a few quarters, maybe a year. Negative growth pressures for four years indicate structural problems.

Structural slowdown – investment demand

  • Throughout the period 2016-2018, there was a criticism of the Monetary Policy Committee’s refusal to cut rates. 
  • It was argued that high real interest rates, along with the restrictions by RBI on banks’ lending to deal with the NPA problem, were jointly responsible for low investment demand. 
  • Since the beginning of 2019, both the monetary policy stance, as well as PCA norms, have been relaxed by the RBI
  • However, investment demand has barely moved in response.

Dealing with structural slowdown – 

  • Dealing with structural problems doesn’t require fiscal spending. It involves non-pecuniary costs. 
  • The government has to expend some of its considerable political capital in order to usher in long-term labor and land reforms
  • For these, the state governments have to be roped in to get these reforms going.

Corporate tax reduction

  • The move to lower the corporate tax rate is a good one. It is like a capital market structural reform as long as it is not used as a temporary fiscal measure. 
  • The government needs to signal unambiguously to markets that this is a permanent reduction of the base rate.

Financial Infrastructure

  • The public sector banking network accounts for 75% of India’s banking assets. 
  • Public sector banks introduce two complications to the financial system.
    • They allow for the capture of the credit allocation system by non-market forces. 
    • Regulatory capture – Since the regulator of banks is the RBI which is itself owned by the government, this amounts to the regulator regulating the entity that it itself is reporting to. 
  • The government can induce regulatory changes by just changing the personnel it appoints to the upper management of the RBI or to its board.
  • India needs to urgently begin reducing the importance of public sector banks in the economy. 
  • This can be done either through privatisation of existing public sector banks or through the granting of banking licenses to private operators
  • On-tap banking licenses have attracted little interest so far suggests that the privatisation of public sector banks needs to be prioritised.

Sovereign bonds

  • The idea needs to be pursued for multiple reasons.
  • Sovereign bonds would force government debt to be priced in a more competitive setting. Currently, it is priced in a sheltered domestic bond market.
  • Issuing sovereign bonds will force greater clarity and transparency of macroeconomic data since international creditors will demand that.
  • Things like failure to achieve policy targets or reticence in releasing data will attract rapid punishment by markets. This will provide greater discipline for policymaking.

Way ahead

  • The government should revisit the appointments process to key technical and regulatory bodies. 
  • Functions like monetary policy, banking supervision, data collection and dissemination, the audit of government financial accounts need to be independent of government direction.
Issues related to Economic growth

[op-ed snap] Waiting for reforms: On the economic stimuliop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Structural slowdown - need for reforms


Finance Minister presented the third round of stimulus measures to resuscitate the struggling economy. Once again these have largely failed to live up to the initial hype around them. 

Previous plans

  • The previous two rounds of the stimulus plan over the last few weeks focused on:
    • reviving the automobile sector
    • boosting the confidence of foreign investors
    • improving the health of state-owned banks

Present round

  • This time, the focus has been on helping out the export and real estate sectors through fiscal reforms. 
  • A new tax refund scheme and greater priority sector lending for the export sector were announced to incentivise exports. 
  • It is expected that the new tax breaks to the export sector will cause a dent of up to ₹50,000 crore to the government’s revenue. 
  • External commercial borrowing norms have been eased to make it easier for Indian real estate companies to tap funds from abroad.
  • Funds worth ₹10,000 crore have also been allocated to aid the completion of affordable housing projects. 


  • Lack of demand and supply-side bottlenecks are the primary issues facing exports and real estate.
  • The government has been relying almost entirely on providing fiscal relief in the form of tax cuts coupled with a tiny amount of government spending, to tackle the structural crisis. 
  • Without enacting any major supply-side reforms like land and labor reforms, it is hard to see how greater spending can raise growth in the long term. 


The government should aim higher by trying to push through long-pending structural reforms that can raise India’s growth trajectory to the next level.

Issues related to Economic growth

[op-ed snap] An intensifying whimper that has begun to take a global tollop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Global economic slowdown


News show signs of another economic crisis and stock market decline.


  • The economic situation around the world is rather grim. From synchronized global growth in the first half of 2017, we are now in the midst of a synchronized slowdown exacerbated by the US-China trade war.
  • Merval Stock Market dropped 48% in a single day and the peso has fallen by 85% over the last three years.
  • Many countries in Europe have been or have now fallen into negative interest rates, with Switzerland, Denmark, Sweden, and the Eurozone all with minus signs on interest rates.
  • Countries that account for almost a quarter of total global output now have central banks with policy rates set below zero. 
  • The amount of “sub-zero” debt, that is debt with negative interest rates, is at an all-time high of $15 trillion. 
  • Europe’s slowdown is fully demonstrated by the entire German yield curve going below zero last month. 
  • The US economy has lost steam. Real growth is tapering towards 2% on an annualized basis. US consumer sentiment is still there because of low unemployment despite businesses being much more cautious about exports and capital expenditure. 

What is the issue

  • Large parts of the world are starting from negative interest rates. 
  • This means that monetary policy stimulus as a method to combat the slowdown is rendered largely ineffective, and central banks in Europe, Japan, and the US may have to once again increase the size of their balance sheets. 
  • The only other choice is to use fiscal expansion to counter the slowdown. 
  • A third choice is to take the impact of the slowdown without too much of a cushion, but democracies are ill-equipped to deal with the negative political reaction to prolonged recessions.
  • For emerging markets affected by the taper tantrum and now by this synchronized slowdown, it is not good news. 


  • Despite significant variations in global growth, oil prices have ranged between $50 and $70 a barrel over the last few years. So, the pressure on India’s balance of payment (BoP) has stayed.
  • China weakened its currency to combat the trade war, and India is left with little choice than to weaken the rupee in step. 
  • A weakening rupee would reduce India’s flexibility to dramatically decrease interest rates.

Way ahead

  • India must use any window of opportunity to undertake any structural reforms that present themselves. 
  • Low oil prices, good global growth, and moderate inflation are such windows. 
  • India’s medium-term economic growth be supported by favorable demographics.
  • In the short-term government may not undertake deep structural reforms that may impact growth and employment. 
  • A clever cocktail of a stimulus and structural reforms is needed. 
    1. The stimulus should take the form of government infrastructure investment and incentivization of the private sector to invest funds. 
    2. Reforms must focus on factor markets and on the ease of conducting business.
Issues related to Economic growth

[op-ed snap] The anatomy of the coming recession and our optionsop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Global economic slowdown - options ahead


There are growing fears of a global recession at the moment and there are three negative supply shocks that could trigger it by 2020. 

Potential reasons for a global recession

  1. Trade war: Sino-American trade and currency war escalated when the US administration threatened additional tariffs on Chinese exports and labeled China a currency manipulator. 
  2. Technology war: China and America are vying for dominance over the industries of the future: Artificial Intelligence (AI), robotics, 5G, etc.
  3. Oil supplies: If America’s confrontation with Iran escalates into a military conflict, global oil prices could spike and bring on a recession, as happened during previous West Asia conflagrations in 1973, 1979 and 1990.

Impact of a recession

  1. All of these potential shocks would have a stagflationary effect.
  2. There could be an increase in the price of imported consumer goods, intermediate inputs, technological components, and energy due to reduced output by disrupted global supply chains. 
  3. The conflict between the US and China is already fueling a broader process of deglobalization as countries and firms cannot count on the long-term stability of the integrated value chains. 
  4. Trade in goods, services, capital, labor, information, and technology gets increasingly balkanized and global production costs will rise across all industries.

Are we prepared to tackle this

  1. Following the stagflationary shocks of the 1970s, monetary policymakers responded by tightening monetary policy. 
  2. Today, major central banks are already pursuing monetary-policy easing, because inflation and its expectations remain low. 
  3. Any inflationary pressure from an oil shock will be seen as merely a price-level effect, rather than as a persistent increase in inflation.
  4. But negative supply shocks will reduce both growth and inflation by depressing consumption and capital expenditures. 
  5. Firms in the US, Europe, China, and other parts of Asia have cut down capital expenditures and global tech, manufacturing, and industrial sectors are already in a recession. 
  6. As private consumption is still strong, this hasn’t resulted in a global slump yet. 
  7. If the prices of imported goods rise further, real disposable household income growth would reduce and the global economy may enter into a recession.


  1. Central banks should ease policy rates. 
  2. Fiscal policymakers should also prepare a similar short-term response. There is a need for a countercyclical fiscal easing to prevent the recession from becoming too severe.
  3. In the medium term, adjusting to the negative supply shocks without further easing could be the solution. Because negative supply shocks from a trade and technology war would be more or less permanent. 
  4. Such shocks cannot be reversed through monetary or fiscal policymaking. Attempts to accommodate them would eventually lead to both inflation and inflation expectations rising well above central banks’ targets. 
  5. There is an important difference between the 2008 global financial crisis and the negative supply shocks that could hit the global economy today. 
    • The former was mostly a large negative aggregate demand shock that depressed growth and inflation. So it could be met with fiscal and monetary policies.
    • But this time, the world would be confronting sustained negative supply shocks that would require a very different kind of policy response over the medium term. 



  1. A supply shock is an event that suddenly increases or decreases the supply of a commodity or service, or of commodities and services in general.
  2. In economics, a recession is a business cycle contraction when there is a general decline in economic activity.
Issues related to Economic growth

[op-ed snap] Nirmala Sitharaman’s stimulus plan falls short on visionop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Stimulus package for the Indian economy - analysis


Indian economy is slowing down. In this context, the Finance Minister offered a stimulus package. 

What does it offer?

  1. It rolled back the tax surcharge on overseas investors imposed in the budget.
  2. The angel tax on startups has been removed. 
  3. The government will buy more cars for its fleet.
  4. Injection of 700 billion rupees of additional capital into state-run banks.


  1. It gives global banks a break on derivatives they trade in India while denying the same tax benefit to local hedge funds. This can be called unfair discrimination against a nascent industry in domestic alternative assets in India. 
  2. Govt buying cars may arrest the slide in the industry, where July sales slumped 36%. Vehicles purchased now won’t become illegal when stricter pollution standards kick in next year. This can help deal with inventory buildup. 
  3. The capital infusion is beneficial because
    • banks are yet to absorb the 2.4 trillion rupees of bad debt accumulated in just 16 companies
    • Half of that reflects loans to troubled shadow banks, according to Credit Suisse Group AG
    • Even the figures for haircuts are so large

4 A parallel move by RBI to link loan rates to its policy benchmark is laudable.

Way ahead

  1. Carmakers are unlikely to ramp up production until they see a sustainable return to normal volumes. That will require addressing demand and supply-side constraints.
  2. Exports hold enormous potential. With the US-China trade war, India can benefit from integrating into global supply chains, because of the size of its low-paid workforce. 
  3. The three industries that hold the biggest promise for jobs and suppressed wages are textiles, autos, and electronics. They together can support a fourth domestic supply chain – construction and real estate.
    • Bangladesh is ahead in textiles
    • Thailand is stealing a march in autos
    • Vietnam in shining in electronics
    • India needs to show strategic thinking around exports.


Allowing larger firms to flourish, enabling smaller firms to secure cheap financing and forcing the state to retreat from the business will benefit the private sector in the long run.

Issues related to Economic growth

Centre responds with steps to boost economic growthPriority 1


From UPSC perspective, the following things are important :

Prelims level : Various terms mentioned in the news

Mains level : Measures to stabilise economic slowdown

  • The Finance Minister has announced a series of measures to boost economic growth.
  • It decided to reduce the burden on the private sector, including withdrawing the controversial surcharge on Foreign Portfolio Investors (FPIs) and reiterating the PM’s statement that the government “respects all wealth creators”.
  • FM clubbed the 33 measures into five buckets: taxation, banks/ NBFCs/ SMEs, financial markets, infrastructure, and the automotive sector, which has visibly been one of the worst hit leading to many direct and indirect job losses.

Major announcements

  • Announcing that the global GDP growth may be revised downwards from the current estimate of 3.2%, India’s GDP continues to grow at a faster pace than the global economy and any other major economy.


  • Rollback of enhanced surcharge on foreign portfolio investors levied in the Budget, to encourage investment in the capital market.
  • Angel tax provisions to be withdrawn for startups and their investors.
  • A dedicated cell under a member of CBDT will be set up for addressing the problems of startups.

GST refunds of MSME

  • All pending all GST refunds of micro, small and medium enterprises (MSMEs) will be paid within 30 days. Also, in future, all GST refunds of MSMEs will be paid within 60 days from the date of application.

Loans, repo rate

  • Loans for home, vehicles and consumption goods to become cheaper and widely available through banking and non-banking finance companies.
  • Banks will launch repo rate and external benchmark-linked loan products that will lead to reduced easy monthly installments for housing, vehicle and other retail loans.
  • Working capital loans for industry to become cheaper.
  • Public sector banks (PSBs) will ensure mandated return of loan documents within 15 days of loan closure.
  • NBFCs will be permitted to use the Aadhaar authenticated bank ‘Know Your Customer’ (KYC) to avoid repeated processes.

Auto sector

  • BS-IV vehicles purchased up to March 2020 will remain operational for the entire period of registration, FM said.
  • Both electric vehicles (EVs) and Internal Combustion Vehicles (ICV) will continue to be registered.
  • Centre to lift ban on purchase of new vehicles for replacing all old vehicles by government departments.
  • Additional 15 per cent depreciation on vehicles acquired from now till March 2020.
  • Focus will be on setting up of infrastructure for development of ancillaries/components, including batteries for exports.


  • Proposal to establish an organisation to provide credit enhancement for infrastructure and housing projects with an aim to enhance fund flows towards such projects.

Easing surcharges

  • The surcharge of 3 per cent and 7 per cent on those earning between Rs 2 crore and Rs 5 crore, and over Rs 5 crore respectively had been announced by Sitharaman as part of her Budget proposals.
  • This had led to different taxation outcomes for FPIs registered as Association of Persons or trusts and companies, even as those registered as companies were spared of this surcharge.
  • Ever since the budget announcement, markets have been seeing a selloff on most trading days, largely in light of the FPI impact.
  • These announcement reverses the levy imposed in the budget.

Easing CSR rules

  • The amendment to the Companies Act, passed earlier this month, introduced harsh penalties including jail term for non-compliance on CSR (corporate social responsibility) by listed companies.
  • This had been slammed by industry as a regressive move, especially given the fact that in the last five years, the total CSR spend of companies has progressively jumped from 70% to over 90% now, according to data sourced from Prime Database.

Capital infusion in PSBs

  • The government also decided to front-load the ₹70,000 crore of capital infusion in public sector banks that was announced in the Budget.
  • It was aimed at increasing private investment by facilitating greater credit disbursal by the banks.
  • According to the government, this ₹70,000 crore will lead to about ₹5 lakh crore of fresh liquidity that can be loaned out.

Taxmen reined in

  • The government has also significantly curbed in the discretionary powers of the tax authorities.
  • From October 1 onwards, all notices and summons by the Income Tax Department would be generated by a centralised computer and would carry a unique code.

Housing finance

  • The Centre has announced an additional ₹20,000 crore of liquidity to the housing finance companies, over and above the ₹10,000 crore earlier announced.
Issues related to Economic growth

[op-ed snap] Flee MarketMains Onlyop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Falling stock market and slowng growth are causes of worry


The wheels of India’s multi-year stock market rally are slowly beginning to come off. Since the Union Budget was presented this month, there has been a palpable change in mood among investors, who in June led a mini-rally in the market as signs emerged one after another that the government led by Prime Minister Narendra Modi would be returning to power at the Centre.


  • The Nifty and the Sensex are down roughly by about 5% since the Budget was presented.
  • Foreign portfolio investors have pulled out over ₹2,500 crore in July, in contrast to June when FPIs made a net investment of close to ₹10,400 crore. 
  • Investors who were quite enthusiastic about the prospects of structural reforms that could boost India’s economic growth under the second Modi government, have been quite disappointed by the Budget proposals.
  • Among other things, Finance Minister Nirmala Sitharaman imposed new taxes on the “super rich” and on companies that buy back their own shares, and raised the mandatory minimum public shareholding in listed companies (a move that is seen to be against the interests of promoters).
  • Not surprisingly, investors have been taken aback by these measures, which are seen as increasing the burden on businesses.

Falling stock market

  • Even more worrying is the signal that is sent across by the falling stock market.
  • As stock prices discount the future, lacklustre market performance could well be a prelude to the further worsening of general economic conditions in the near term.
  • There is already a significant downturn in sectors such as automobile with major companies reporting falling sales and earnings, and automobile dealers closing down showrooms and slashing jobs.

Slowing growth

  • The overall gross domestic product growth, which slipped below 6% to hit 5.8% in the fourth quarter, has also been slowly catching up with the bleak picture painted by high-frequency economic indicators for quite some time.
  • The underlying turmoil in Indian markets becomes evident when one looks beyond the Sensex and the Nifty at the mid-cap and small-cap space that has witnessed significant value erosion since the start of 2018.
  • The small-cap index has lost almost a third of its value since January 2018 while the mid-cap index has lost about a fifth of its value.


Interestingly, many industrialists who were previously enthusiastic cheerleaders for the Narendra Modi government have turned vocal about their disappointment at the government not being bold enough in pushing through structural reforms needed to boost economic growth despite the majority it enjoys in Parliament. This suggests the deep sell-off in stocks over the last 18 months may well be a sign of disappointed investors voting with their feet.

Issues related to Economic growth

[op-ed snap] An employment-oriented economic policyMains Onlyop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Ways to correct macroeconomic policy to boost employment and growth.


In the heated debate on jobs, the crucial link between macroeconomic policy and unemployment has not been flagged.

Tasks associated with economic Policy

  • The first is to review the conduct of macroeconomic policy.
  • Though it must come across as arcane, this is an element of public policy that makes a difference to whether we enjoy economic security or not.
  • This brings up the second task for the winner, namely employment generation.

Impact of poor Macroeconomic Policy

1. Fiscal consolidation

  • The government has continued with fiscal consolidation, or shrinking the deficit, while mandating the Reserve Bank of India (RBI) to exclusively target inflation leaving aside all other considerations.
  • This has contracted demand.
  • That high fiscal deficits and high inflation per se can never be good for an economy does not justify a permanently tight macroeconomic stance.
  • The rationale given for one is that it is conducive to private investment, said to be shy of fiscal deficits and held back by inflation.
  • Both the deficit and inflation have trended downward in the past five years, yet investment as a share of national income has remained frozen.

2.Inflation targeting

  •  Arguably though, India has seen a virtual inflation targeting since 2013 when the policies of the RBI became more closely aligned to the practices of central banks in western economies.
  • Thus in 2013-14 the real policy rate saw a positive swing of over four percentage points, and it has more or less remained there.
  • Admittedly, at double digits, inflation had been high in 2012-13 but that could have been due to abnormal hikes in the procurement price and not due to runaway growth.
  • The high interest rate regime in place since 2013 could not but have had a negative impact on growth by raising the cost of capital to industry.

Reviewing RBI’s role

1.Reasons for review

  • A regime of high-interest rates can be bad not only for investment — and thus for growth and employment — but also for financial stability.
  • Sharp increases in interest rates can trigger distress.
  •  There has been a growth of non-performing assets of banks even after a change in the method of classification first resulted in their surging in 2015. This feature along with the spectacular collapse of the giant Infrastructure Leasing and Financial Services Ltd (IL&FS) recently point to the need to review the role of the RBI.

2.Changes in Responsibility

  • Experience suggests that it must be tasked with far greater responsibility for maintaining financial stability while being granted wider powers.
  • Finance Ministry and its nominees on the RBI Board should desist from insisting upon actions that could jeopardise financial stability in trying to quicken the economy.
  • It also suggests that the movements in the financial markets are to be treated as the bellwether in economic policy-making.
  • Actually, over the past 30 years, from Mexico to southeast Asia, financial markets can be seen to have been fickle, self-serving and capable of causing great harm as they switch base globally in search of profits through speculation.


Job creation

1.Strengthening Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS)

We can assist the unemployed by strengthening the employment programme we already have, namely the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Timely Payment

First, there have been reports that though the budgetary allocation for the scheme may have increased, workers face delay in payment.

Extending the MGNREGS to urban India

Second, as has been suggested, there is a case for extending the MGNREGS to urban India for there is unemployment there.

Review of MGNREGS

  • However, as with macroeconomic policies, a thorough review of how the MGNREGS works on the ground is necessary.
  • The MGNREGS should target the waste dotting our countryside, and when extended to urban India should aid municipal waste-management efforts.
  • We would then have a cleaner environment and have at the same time created jobs.
  • That would a fitting tribute to the man after whom the programme is named, one who had worked for a clean India much of his life.
Issues related to Economic growth

[op-ed snap] The governance dashboardop-ed snap


From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Evaluation of Government's policies in last 5 years


The current regime has failed to deliver on its promises of development and clean government.

Disappointment with previous regime

  • Towards the end of the second term of the United Progressive Alliance government (UPA-II), from 2009 to 2014, the corporate sector (captains of industry) had become thoroughly disappointed with the slow rate of “progress” being made.
  • The reputation of UPA-II had been tarnished by several high-profile corruption scandals.
  • Significant sections of the Indian elite, both urban and rural, were also upset about the government’s modest welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) and also rights and entitlements such as the Right to Information, Right to Education and the Land Acquisition Act, 2013.

Lack of data to evaluate the Current progress

  • it is very difficult to imagine how a reasoned debate can occur without adequate evidence.
  • Since Independence, India has carefully built an enviable reputation in terms of the integrity of its statistical organisations and the quality of its economic data.
  • Currently Government destroyed this reputation by meddling in the work of statistical organisations, changing the methodology of computation of key figures (such as GDP), and by suppressing important data.

Parameters For Evaluation

  • Two issues that are important in evaluating any regime are economic growth and distribution. India, of course, has been celebrated along with China as the growth engine of the world in recent decades.
  • Recent changes in methodology by the Central Statistics Office have rendered such comparisons very difficult.

Inequal Growth

  • In terms of distribution, researches (for the period 1991-2011) indicates that the Indian economy, after economic liberalisation, was largely driven by inequality-heightening rapid urban growth.
  • Farmers and informal workers in the urban areas have faced acute distress and witnessed losses in their income shares.
  • Given this, the volume draws upon other sources of data such as income taxes and the Credit Suisse Global Wealth Database to make a persuasive case that Indian inequality has continued to rise.

Rise in inequality

  • The share of the top 10% of income-tax payers has increased at the expense of the bottom half. The wealthiest group (top 1%) owns more than half the nation’s wealth today and has consolidated itself during 2014-2018.
  • Crimes against Scheduled Castes have increased during the period 2014-16. What is noteworthy is that both overall crimes and crimes registered under the Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act have increased.

Impact of signature Policies

  • The two major signature policies that the government undertook — demonetisation (ostensibly to root out corruption) and the goods and services tax (GST) — have proved to be colossal disasters for the economy and the vast majority of Indians
  • Comparing the periods before and after demonetisation, while the world economy witnessed improved growth (2.6% to 3.1%), the Indian economy suffered a growth decline from 7.8% to 6.8%


As Rabindranath Tagore reflected, if the choice is between a nation that is fundamentally exclusionary, and a society that stands for basic human values and espouses tolerance among a multiplicity of cultures and identities, the path forward is clear.

Issues related to Economic growth

India ranks 140th in global happiness listIOCR


Mains Paper 3: Economy | Inclusive growth & issues arising from it

From UPSC perspective, the following things are important:

Prelims level: World Happiness Report

Mains level: Need for introspecting various governance factors affecting happiness levels in India


  • The World Happiness Report- 2019 was recently released by the UN.

India’s slips down

  • Indians are not as happy in 2019 as they were in 2018 and the country figures at 140th place, seven spots down from last year, a/c to the UN World Happiness Report- 2019.
  • The overall world happiness has fallen over the past few years, which has mostly been fuelled by a sustained drop in India, which came in 140th place this year compared with 133rd place a year ago.
  • Pakistan is ranked 67th, Bangladesh 125th and China is placed at 93rd position, according to the report.
  • The list is topped by Finland for the second year in a row.
  • The US ranks at 19th place despite being one of the richest countries in the world.

Who are most unhappy?

  • People in war-torn South Sudan are the most unhappy with their lives.
  • It is followed by Central African Republic (155), Afghanistan (154), Tanzania (153) and Rwanda (152).

About World Happiness Report

  • The World Happiness Report is a landmark survey of the state of global happiness that ranks 156 countries by how happy their citizens perceive themselves to be.
  • It is released by the Sustainable Development Solutions Network for the United Nations by the UN General Assembly.
  • It ranks the countries of the world on the basis of questions primarily from the Gallup World Poll.
  • The Gallup World Poll questionnaire measures 14 areas within its core questions: (1) business & economic, (2) citizen engagement, (3) communications & technology, (4) diversity (social issues), (5) education & families, (6) emotions (well-being), (7) environment & energy, (8) food & shelter, (9) government and politics, (10) law & order (safety), (11) health, (12) religion and ethics, (13) transportation, and (14) work.
  • The results are then correlated with other factors, including GDP and social security.
Issues related to Economic growth

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


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

From UPSC perspective, the following things are important:

Prelims level: Nothing as such.

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



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

Economic Growth

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

Two speed Economy

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

Effects Of two speed Economy on rural economy

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

Global Economic Situation

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

Future prospects of Indian Economy

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


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




Issues related to Economic growth

[op-ed snap] Technology, globalization and the good jobs challengeop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: Nothing as such.

Mains level: The news-card analyses the issue that governments must realize that failure to generate good, middle-class jobs has very high social and political costs, in a brief manner.


  • Around the world today, the central challenge for achieving inclusive economic prosperity is the creation of sufficient numbers of “good jobs”.
  • Without productive and dependable employment for the vast majority of a country’s workforce, economic growth either remains elusive, or its benefits end up concentrated among a tiny minority.
  • The scarcity of good jobs also undermines trust in political elites, adding fuel to the authoritarian, nativist backlash affecting many countries today.

Definition of a good job

  • The definition of a good job depends on a country’s level of economic development.
  • It is typically a stable formal-sector position that comes with core labour protections such as safe working conditions, collective bargaining rights, and regulations against arbitrary dismissal.
  • It enables at least a middle-class lifestyle, by that country’s standards, with enough income for housing, food, transportation, education and other family expenses, as well as some saving.

Need to improve employment conditions

  • There is much that individual enterprises all over the world can do to improve employment conditions.
  • Large firms that treat their employees better—by providing them with higher pay, more autonomy and greater responsibility—often reap benefits in the form of lower turnover, better worker morale and higher productivity.
  • “Good jobs” strategies can be as profitable to firms as they are to workers.

Structural problem: low-skilled labour force

  • But the deeper problem is a structural one that goes beyond what firms can do on their own.
  • Developed and developing countries alike are suffering today from a growing mismatch between the structure of production and the structure of the labour force.
  • Production is becoming increasingly skill-intensive while the bulk of the labour force remains low-skilled.
  • This generates a gap between the types of jobs that are created and the types of workers the country has.

Manufacturing and services are becoming increasingly automated and digitized

  • Technology and globalization have conspired to widen that gap, with manufacturing and services becoming increasingly automated and digitized.
  • While new technologies could have benefited low-skilled workers in principle, in practice technological progress has been largely labour-replacing.
  • In addition, global trade and investment flows, and global value chains in particular, have homogenized production techniques around the world.
  • This has made it very difficult for poorer countries to compete in world markets without adopting skill- and capital-intensive techniques similar to those of the advanced economies.

Intensification of economic dualism

  • Every economy in the world today is divided between an advanced segment, typically globally integrated, employing a minority of the labour force, and a low-productivity segment that absorbs the bulk of the workforce, often at low wages and under poor conditions.
  • The shares of the two segments may differ: developed countries obviously have a greater preponderance of highly productive firms.
  • But, qualitatively, the picture looks quite similar in rich and poor countries—and produces the same patterns of inequality, exclusion and political polarization.

Strategies to reduce the mismatch

There are three ways to reduce the mismatch between the structure of productive sectors and that of the workforce.

  1. Investment in skills and training
  • The first strategy, and the one that receives the bulk of policy attention, is investment in skills and training.
  • If most workers acquire the skills and capabilities required by advanced technologies, dualism would eventually dissipate as high-productivity sectors expand at the expense of the rest.


  • Such human capital policies are important but even when they are successful, their effects will be felt in the future.
  • They do little to address labour-market realities at present.
  • It is simply not possible to transform the labour force overnight.
  • Besides, there is always the real risk that technology will advance faster than society’s ability to educate its labour-force entrants.

2. Convince successful firms to employ more unskilled workers

  • In countries where the skill gaps are not enormous, governments can nudge their successful firms to increase employment—either directly or through their local suppliers.
  • Governments in developed countries also have a role to play in affecting the nature of technological innovation.
  • Too often, they subsidize labour-replacing, capital-intensive technologies, rather than pushing innovation in socially more beneficial directions, to augment rather than replace less skilled workers.


  • Such policies are unlikely to make much difference to developing countries.
  • For them, the main obstacle will remain that existing technologies allow insufficient room for factor substitution: using less-skilled labour instead of skilled professionals or physical capital.
  • The demanding quality standards needed to supply global value chains cannot be easily met by replacing machines with manual labour.
  • This is why globally integrated production in even the most labour-abundant countries, such as India or Ethiopia, relies on relatively capital-intensive methods.
  • This leaves a broad range of developing economies—from middle-income countries such as Mexico and South Africa to low-income countries such as Ethiopia—in a conundrum.
  • The standard remedy of improving educational institutions does not yield near-term benefits, while the economy’s most advanced sectors are unable to absorb the excess supply of low-skilled workers.

3. Boosting an intermediate range of labour-intensive, low-skilled economic activities

  • Tourism and non-traditional agriculture are the prime examples of such labour-absorbing sectors.
  • Public employment (in construction and service delivery), long scorned by development experts, is another area that may require attention.
  • But government efforts can go much further.


  • Such intermediate activities, chiefly non-tradable services carried out by small and medium-size enterprises, will not be among the most productive, which is why they are rarely the focus of industrial or innovation policies.
  • But they may still provide significantly better jobs than the alternatives in the informal sector.

Way Forward

  • Government policy in developed and developing countries alike is too often preoccupied with boosting the most advanced technologies and promoting the most productive firms.
  • But failure to generate good, middle-class jobs has very high social and political costs.
  • Reducing those costs requires a different focus, geared specifically toward the kind of jobs that are aligned with an economy’s prevailing skill composition.
Issues related to Economic growth

[op-ed snap] Surveying India’s unemployment numbersop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of India’s demographic dividend.

Mains level: The news-card analyses the India’s low labour participation rate and why it fell sharply after demonetisation, in a brief manner.


  • India’s labour participation rate which is very low by world standards, fell sharply after demonetisation.
  • The women were largely at the receiving end and bore the brunt


  • Monthly measurement of the unemployment rate is one of the requirements of the Special Data Dissemination Standard (SDDS) of the International Monetary Fund (IMF).
  • The SDDS was established in 1996 to help countries access the international capital markets by providing adequate economic and financial information publicly.
  • India was one of the early signatories of the SDDS.
  • India complies with many requirements of the SDDS, but it has taken an exception with respect to the measurement of unemployment.

Exception: Govt does not produce any measure of monthly unemployment rate

  • The Government of India does not produce any measure of monthly unemployment rate, nor does it have any plans to do so.
  • Official plans to measure unemployment at an annual and quarterly frequency is in a shambles.
  • This does not befit India’s claims to be the fastest growing economy and as the biggest beneficiary of a famed demographic dividend.

Centre for Monitoring India Economy (CMIE) Survey

  • The Centre for Monitoring India Economy (CMIE), a private enterprise, has demonstrated over the past three years that fast frequency measures of unemployment can be made and that seeking an exception on SDDS compliance is unnecessary.
  • The CMIE decided to fill India’s gap in generating fast frequency measures of household well-being in 2014.
  • In its household survey, called the Consumer Pyramids Household Survey (CPHS), the sample size was 172,365 as compared to that of the official National Sample Survey Organisation (NSSO), which was 101,724.
  • In both surveys, the sample selection method has been broadly the same.

Advantage of CMIE survey over NSSO survey

  • The CPHS is comprehensive, surveying its entire sample every four months where each survey is a wave.
  • The CPHS is also a continuous survey, and so, for example, three waves are completed in a year.
  • The CMIE’s CPHS thus has a much larger sample and is conducted at a much higher frequency than the NSSO’s.
  • Further, the CPHS is conducted as face-to-face interviews necessarily using GPS-enabled smartphones or tablets.
  • Intense validation systems ensure high fidelity of data capture.
  • All validations are conducted in real-time while the teams are in the field.
  • The data capture machinery ensures delivery of high quality data in real time obviating the need for any further “cleaning”, post field operations.
  • Once the data is collected and validated in real-time, it is automatically deployed for estimations without any human intervention.
  • In 2016, the CMIE added questions regarding employment/unemployment to the CPHS.

Difference between the CPHS and the NSSO surveys

  • A difference between the CPHS and the NSSO surveys is the reference period of the employment status of a respondent.
  • While the NSSO tries to capture the status for an entire year and for a week, the CPHS captures the status as on the day of the survey.
  • This could be as one of four factors: employed; unemployed willing to work and actively looking for a job; unemployed willing to work but not actively looking for a job, and unemployed but neither willing nor looking for a job.
  • Since the recall period in the CPHS is of the day of the survey and the classification is elementary, the CPHS has been able to capture the status fairly accurately with no challenges of the respondent’s ability to recall or interpret the status.
  • In contrast, the NSSO’s system is quite complex.

Key findings

  • India’s labour participation rate is very low by world standards and even this low participation rate fell very sharply after demonetisation.
  • The average labour participation rate was 47% during January-October 2016.
  • The world average is about 66%.
  1. Labour participation rate fell after demonetisation
  • Immediately after demonetisation in November 2016, India’s labour participation rate fell to 45%;
  • 2% of the working age population, i.e. about 13 million, moved out of labour markets.
  • That is a lot of people who were willing to work who decided that they did not want to work anymore.

2. Unemployed gave up looking for jobs any further, unemployment rate fell

  • The data show that it was not the employed who lost jobs and decided to stop working.
  • The employed mostly retained their jobs.
  • But it was largely the unemployed who decided that the labour markets had been so badly vitiated after demonetisation that they gave up looking for jobs any further.
  • In short, they lost hope of finding jobs in the aftermath of demonetisation.
  • As more and more unemployed left the labour market, the unemployment rate fell.
  • This is because the unemployment rate is the ratio of the unemployed to the total labour force.
  • This fall gave misleading signals implying that the unemployment rate was falling in a positive sense.
  • In reality it was a reflection of an exodus of the unemployed from the labour markets — a fall in the labour participation rate.

3. India’s female labour participation rate is very low

  • Official statistics have always shown that India’s female labour participation rate is low and falling.
  • The CPHS shows that the situation with respect to women’s participation in the labour force is extremely poor.
  • The entire brunt of demonetisation was borne by women.
  • Their labour participation fell sharply while that of men did not.

Reason for the decline

  • Researchers have shown that this fall is because of rising household incomes that reduce the need for women to join the labour force;
  • increased enrolment in higher education by women which delays their entry into the labour force, and
  • cultural and security factors that keep women away from the labour market in India.
  • Further, it is evident that employers are also biased against hiring women.

4. The Goods and Services Tax shock

  • After the demonetisation jolt came the Goods and Services Tax shock of July 2017 that drove away small enterprises which could not compete in a tax-compliant environment out of business.
  • This caused a substantial loss of jobs.
  • Preliminary estimates suggest that employment shrunk by 11 million in 2018.
  • The brunt of this was again borne largely by women.
  • But men too were also impacted.

Labour participation rate declined

  • Male labour participation rate was 74.5% in 2016.
  • This dropped to 72.4% in 2017 and then to 71.7% in 2018.
  • In contrast, female labour participation was as low as 15.5% in 2016 which dropped to 11.9% in 2017 and then 11% in 2018.
  • Urban female labour participation rates fell faster than rural female participation.
  • In urban India it dropped from 15.2% in 2016 to 10.5% in 2018.
  • The corresponding values for rural women were 15.6% and 11.3%, respectively.
  • Although female labour participation is substantially much lower than male participation, the few women who venture to get employment find it much more difficult to find jobs than men.
  • The unemployment rate for men was 4.9% in 2018 and that for women in the same year was much higher — 14.9%.


  • This higher unemployment rate faced by women in spite of a very low participation rate indicates a bias against employing women.
  • Drawing women into the labour force by removing the impediments they face to at least bring their participation levels close to global standards is critically important for India to gain from the demographic dividend opportunity it has.
  • This window of opportunity is open only till 2030.
  • By not using a good data monitoring machinery, the Indian government is keeping both itself and the citizenry in the dark.
Issues related to Economic growth

[op-ed snap] Risks to global growthop-ed snap


Mains Paper 2: Economic Development| Inclusive growth and issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the newly released World Economic Situation and Prospects for 2019.

Mains level: The news-card analyses the issues and challenges w.r.t global economic growth, in a brief manner.


  • The newly released World Economic Situation and Prospects for 2019 illustrates how rising economic, social and environmental challenges hamper progress towards the United Nations Sustainable Development Goals.

Headlines do not tell the whole story

  • On the surface, the world economy remains on a steady trajectory.
  • Many developed economies are operating close to their full potential with unemployment rates at historical lows.
  • However, beneath the surface, a worrisome picture of the world economy emerges.
  • There are many risk factors that could inflict significant damage on longer-term development prospects.


  • Over the past year, trade policy disputes have escalated, and financial vulnerabilities have increased as global liquidity tightens.
  • Global private and public debt is at a record high, well above the level seen in the run-up to the global financial crisis.
  • Interest rates remain very low in most developed economies, while central bank balance sheets are still bloated.
  • With limited monetary and fiscal space, policymakers around the globe will struggle to react effectively to an economic downturn.
  • Given waning support for multilateral approaches, concerted actions like those implemented in response to the 2008-09 crisis, may be difficult to arrange.


  1. Seeds of growth not reaching the intended
  • Even if global growth remains robust, its benefits do not reach the places they are needed most.
  • Incomes will stagnate or grow only marginally this year in parts of Africa, Western Asia, Latin America and the Caribbean.
  • Many commodity exporters are still grappling with the effects of the commodity price collapse of 2014-16.
  • The challenges are most acute in Africa, where per capita growth has averaged only 0.3% over the past five years.
  • Given rapid population growth, the fight against poverty will require faster economic growth and dramatic reductions in income inequality.

2. Effects of Climate change

  • Most importantly, the transition towards environmental sustainability is not happening fast enough.
  • The nature of growth is not compatible with holding the increase in the global average temperature to well below 2°C above pre-industrial levels.
  • In fact, the impacts of climate change are becoming more widespread and severe.
  • The frequency and intensity of extreme weather events are increasing, damaging vital infrastructure and causing large-scale displacement.
  • The human and economic costs of such disasters fall overwhelmingly on low-income countries.

Way Forward

  • Many of the challenges are global in nature and require collective and cooperative policy action.
  • Withdrawal into nationalism and unilateral action will only pose further setbacks for the global community, especially for those already in danger of being left behind.
  • Instead, policymakers need to work together to address the weaknesses of the current system and strengthen the multilateral framework.
Issues related to Economic growth

[op-ed snap] Distributing the rewards of reformop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the reform rewards proposed in Budget 2019.

Mains level: The news-card analyses several rewards of reforms as proposed in the Budget 2019, in a brief manner.


  • The expansive Budget 2019 reflects the fruits of fiscal consolidation, tax reform and streamlined delivery of subsidies.


  • Since Budget 2019 is the last before the general election this year, it was widely expected to be an assessment of the government’s performance.
  • There was a debate on whether the Budget should have announced any substantive measures since they would bind the next government, post-election.
  • Painstaking fiscal consolidation, tax reform, more efficient delivery of subsidies, and a rise in the share of capital expenditure, have created the space to reward tax-payers as well as announce a relief measure for farmers in distress without substantially compromising fiscal consolidation.
  • It is fair that the present government, which imposed the painful reforms and undertook difficult action, should also distribute some rewards of that reform.

Rewards of higher growth

  • It may be asked how payment of ₹20,000-₹75,000 crore can be made to farmers and the tax benefits given with only a marginal impact on the fiscal deficit.
  • But a larger size economy can afford to spend larger absolute amounts with only a small rise in deficit ratios and borrowing requirements.
  • The fact that India is the sixth largest and fastest growing economy in the world has some advantages as well as responsibilities to equitably share the rewards of growth.

Those who bore the cost of reforms, should now benefit from its success

  • Demonetisation, the goods and services tax (GST) and other steps towards formalisation increased the tax base, and it follows that tax rates can themselves be cut.
  • Again it is fair that the aam aadmi, who bore some of the costs of reform, should now benefit from the success of these.
  • It makes good economic sense to move towards a system of a wider base and lower rates.
  • Tax receipts have grown from 10% of GDP — a level at which they had stagnated since the tax cuts after the global financial crisis — to 12%.
  • Although the GST has not yet resulted in a rise in indirect tax ratios above 5.5%, it is likely to do so in the future as it stabilises.
  • The transfers to farmers and tax cuts amount to only 0.4% of GDP this year and are partially funded by a 0.3% rise in tax ratios.
  • The JAM (or Jan Dhan-Aadhaar-Mobile) complex is the other major set of reforms that enable a smaller expenditure to have a larger impact on social welfare.
  • Jan Dhan bank accounts opened through the country and the Aadhaar data base make a cost-effective Direct Benefit Transfer (DBT) possible for farmers.

Rewards of lower inflation

  • A slight rise in fiscal deficits to fund transfers to farmers does not threaten macroeconomic stability when inflation is low and food prices are crashing.
  • In fact they are likely to help stabilise prices so that farmers do not cut production in the next crop cycle.

Deficits has been maintained

  • Moreover, this year, the revenue deficit has been maintained, the primary deficit been reduced, and expenditure on capital account been increased.
  • Better quality of government expenditure as well as the GST tax cuts, reductions in obstacles to inter-State trade, and soft commodity prices will keep inflation low.

Other factors

  • The Budget points out that highways are being built at the rate of 27 km per day, which makes India the fastest builder in the world.
  • Railway safety has improved.
  • Better implementation and reduction in waste brings down costs across the board.
  • The shift in the Budget date to earlier in the year and the focus on spending in the first half have resulted in a better achievement of sectoral spending targets this year.

Government borrowing

  • The size of government borrowing is larger than what the market anticipated, and this has raised G-Sec rates.
  • The rise in gross borrowing is because of higher redemptions but net borrowing is similar to that last year.
  • There was a sharp rise in G-Sec yields that year.
  • As a result, interest payments as a ratio to GDP rose to 3.2 against the budgeted 3.
  • But 3.4% of GDP is not a large fiscal deficit, and market conditions are likely to be more supportive of government borrowing this year.

Effects of global economic conditions

  • The international rate rise has peaked, with the U.S. Fed turning dovish and indicating that there will be no more rise; it is likely to maintain its balance sheet.
  • Emerging market inflows are set to rise, creating demand for G-Secs up to the current cap of 6% of the domestic market.
  • Soft oil prices will encourage foreign investors to return to Indian markets.
  • But since global growth is slowing, inflows are unlikely to be as large as they were in 2017.
  • Therefore, there will be more room for open market operations (OMO) from the Reserve Bank of India that support the debt market.
  • Softening interest rates will also make banks more willing to hold G-Secs.
  • When international demand is slowing, it is important to maintain domestic demand.
  • Therefore, tax cuts, more income to farmers and various schemes to improve demand for housing, which has been under stress, are all appropriate.

Way Forward

  • It is necessary that sharing of growth benefits is done in ways that sustain growth, reduce distortions, and improve capabilities to participate in growth.
  • Well-targeted transfers can be made without destroying fiscal consolidation and creating macroeconomic vulnerabilities.
  • The Budget continues the effort to reduce transaction costs and improve compliance incentives.
  • Stamp duty amendments that seek to tax just one transaction, which will be shared across State governments, on the basis of the domicile of the buying client, will reduce a major market irritant, increase transactions and take the country further toward becoming one effective market.
  • As income tax returns rise, a less than 0.05% will be selected for scrutiny in non-discretionary, machine-based ways without any interface between the tax-payer and the examining officers, thus reducing potential tax-payer harassment.
Issues related to Economic growth

[op-ed snap] Why government must spend moreop-ed snap


Mains Paper 2: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of the Indian economy in contemporary context.

Mains level: The news-card analyses the measures to boost the Indian economy in present context, in a brief manner.


  • As the Union budget is set to be announced tomorrow, several economists believe that private consumption, investment demands must rise to boost the Indian economy.

Precarious situation of the Indian economy

  • When the current government took over in 2014, the declared fiscal deficit was at 4.5 per cent while the actual was estimated to be in the range of 5.5 per cent.
  • The gap between these two figures was because the previous government incurred off balance-sheet expenses like oil bonds (issued to the tune of Rs 1,42,202 crore and not reflected in government accounts),
  • It withheld income tax refunds and rolled over to the next year payments which would have ideally come in towards the end of financial year 2013-14.

India was part of the “fragile five”

  • Coupled with weakness on the external account, India was part of a group that was informally referred to as the “fragile five” — countries being the weakest links in the global economy.

Govt managed its financial affairs in a very prudent manner

  • Falling global oil prices were leveraged to generate better revenue for the government.
  • Measures like demonetisation and the Goods and Services Tax (GST) were launched,
  • Establishing audit trail and ownership of money and simplification in indirect tax structure.
  • Macroeconomic parameters like inflation and fiscal deficit have been contained,
  • the current account deficit is manageable and foreign exchange reserves and GDP growth rates are inching higher.
  • In doing so, the government has not sacrificed any essential expenditure.

Indian economy during 2014-15 to 2018-19

  • As per the publicly available data, the 2014-15 to 2018-19 period has seen the best combination of GDP growth rate (high) and inflation (low).
  • Success on the macro-economic management front has been one of the biggest achievements of the government.
  • India is not only one of the fastest-growing economy, but also the sixth-largest economy in the world.
  • PwC’s annual Global Economy Watch report projects India’s real GDP growth in 2019-20 at 7.6 per cent.
  • Accordingly, India is likely to surpass UK in 2019 rankings of world’s largest economies and occupy the fifth position.

Achieving a higher and participative level of GDP growth

  • At the centre of all initiatives is the ordinary citizen of India and the goal is to ameliorate her condition of living.
  • The target is to achieve a higher level of GDP growth and to make it as wide and participative as possible.
  • In the roadmap for doing so, macroeconomic parameters are self-imposed road signs.
  • The government should consider ground realities while making its economic policies.


  • Currently, agriculture and allied sectors are facing some challenges due to lack of sufficient demand for their output.
  • The Micro, Small and Medium Enterprises (MSMEs) sector is another segment that is facing headwinds due to lack of liquidity in the financial system and lack of demand.
  • Increased demand brings in private investment and if there is resource constraint with the government, fiscal expansion is the way out.

Need to create demand

  • The economy will grow only when there is sufficient demand.
  • Government expenditure has increased tremendously in the last five years and sectors like steel and cement have benefited immensely.
  • However, private consumption and investment demands need to increase further.
  • For this there is scope for expansionary fiscal policies, particularly when inflation is low.

Way Forward

  • Fiscal discipline during the last five years has been one of the best and has given the government the elbow room to boost expenditure.
  • The government might consider measures like interest subvention on agricultural loans,
  • direct cash transfer to farmers based on their landholdings,
  • relaxation in income tax slabs for the lower-middle and the middle class and
  • injection of liquidity in the financial sector to boost credit availability.
  • These measures might put some upward pressure on inflation which might not be such a bad thing.
  • Cash transfers to farmers are constrained by the lack of updated land records with the state governments and a way around it must be found.
  • Such a transfer will boost demand for agricultural and non-agricultural products in the rural areas and help the agriculture and MSME sectors.
Issues related to Economic growth

[op-ed snap] Think universal basic capitalop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge Universal Basic Capital.

Mains level: The news-card analyses the issue that a simplistic universal basic income will not solve the fundamental problems of the Indian economy, in a brief manner.


  • India’s GDP is growing quite well. However, India needs to do much better to improve overall human development, in which it continues to be compared with countries in Sub-Saharan Africa.

Growth must trickle down

  • Even India’s poorer sub-continental neighbours are improving health and education faster.
  • Benefits of India’s economic growth must trickle down much faster to people at the bottom of the pyramid: to poorer farmers, landless rural labour, and hundreds of millions of workers living on the edge in low-paying, ‘flexible’ forms of employment with no social security.
  • Economists seem to be offering three solutions to the economy’s structural problems:

(a) that there is no problem.

(b) more privatisation.

(c) a universal basic income (UBI) to be provided by the state.

Ground still to be covered

  • Many economists are juggling with statistics to prove that the Indian economy is doing quite well.
  • According to them, it is providing enough jobs and statistically, poverty has reduced a lot.
  • However, a lot more must be done to improve education and health care.
  • And to address the persistent informality and small scale of enterprises that are providing most of the employment in the country.
  • An ideological solution that the government is unable to provide them is more privatisation of public services.
  • However, the private sector is structurally not designed to provide affordable public services equitably.
  • Businesses run with a profit motive. They cannot take on the burden of subsidising citizens who cannot pay for their services.

Increasing economic inequalities and basic income

  • Structural forces within the global economy have been driving down wages and creating insecure employment while increasing the mobility of capital and increasing incomes from ownership of capital.
  • ‘Industry 4.0’, which has not yet spread too far, is expected to worsen these problems.
  • An economic consequence of declining growth of wage incomes will be reduction of consumption.
  • Which will create problems for owners of capital and automated Industry 4.0 production systems.
  • For, no one will buy all the material and services that these systems will produce.
  • Therefore, the UBI has appeared as a silver bullet solution.
  • It will be an income provided to everybody by the very state that the capitalists say should get out of their way, and to whom they are unwilling to pay more taxes.

Proponents for basic income

  • The beauty of a ‘universal’ basic income is that it avoids messy political questions about who deserves assistance.
  • It also side-steps the challenge of actually providing the services required: education, health, food, etc.
  • Just give the people cash and let them buy what they need.
  • However, if the cash will not provide citizens with good quality and affordable education and health, because neither the government nor the private sector is able or willing to, this will not solve the basic human development problems that must be solved.

Quasi-universal basic rural income

  • Some economists who were proponents of UBI have now begun to dilute their simplistic concept of UBI to make it financially and politically feasible.
  • They propose a QUBRI (quasi-universal basic rural income), targeted only at poorer people in the rural areas.

Limitations of QUBRI

  • The scheme is no longer universal.
  • It will exclude the not-so-poor in rural areas as morally it should.
  • Political questions about who should be included will have to be addressed.
  • It will not cover the masses of urban poor working for low and uncertain wages.
  • Therefore, some other schemes will have to be drawn up for the urban sector, and entitlement and measurement issues will have to be addressed for these schemes too.
  • All the schemes (rural and urban) could be cash transfer schemes, which Aadhar and the digitisation of financial services will facilitate.
  • However, this still begs the question about how to provide good quality public services for people to buy.

Strengthening of institutions of the state

  • A simplistic UBI will not solve the fundamental problems of the economy
  • An unavoidable solution to fix India’s fundamental problems is the strengthening of institutions of the state to deliver the services the state must (public safety, justice, and basic education and health), which should be available to all citizens regardless of their ability to pay for them.
  • The institutions of the state must be strengthened also to regulate delivery of services by the private sector and ensure fair competition in the market.
  • The building of state institutions, to deliver and to regulate, will require stronger management, administrative, and political capabilities.

An alternative approach: Universal Basic Capital

  • A better solution to structural inequality than UBI is universal basic capital (UBC) which has begun to pop up in international policy circles.
  • In this alternative approach, people own the wealth they generate as shareholders of their collective enterprises.
  • Amul, SEWA, Grameen, and others have shown a way.
  • Some economists go further and also propose a ‘dividend’ for all citizens, by providing them a share of initial public offerings on the stock market, especially from companies that use ‘public assets’, such as publicly funded research, or environmental resources.

Way Forward

  • Three better solutions to create more equitable growth than the ones on offer are:

(a) Focus on building state capacity beginning with implementation of the recommendations of the Second Administrative Reforms Commission.

(b) Strengthen the missing middle-level institutions for aggregation of tiny enterprises and representation of workers.

(c) The creativity of economists could be better applied to developing ideas for UBC than UBI.

Issues related to Economic growth

[op-ed snap] India now faces its own version of Soviet Union’s scissors crisisop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: Nothing as such.

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


  • Recently, Inflation numbers released by the government earlier this month shows that the prices that consumers pay for food have been falling for three months in a row.
  • Wholesale food prices have fallen for six months in a row.


  • Experts have pointed out that this is the first time since 1990 that the prices farmers get for their produce at the farm gate have fallen for six consecutive months.
  • Farmer incomes have taken a hit even if one assumes some amount of productivity gains in Indian agriculture.
  • The trend in food price inflation since the new consumer price index was introduced deserves closer attention because it throws light on one of the most important challenges in the Indian political economy.

Why Food price inflation has been volatile but overall trend has been down?

  • Food price inflation has been expectedly volatile since January 2012, but the overall trend has been down.
  • According to the experts, Indian agriculture has entered a new era of structural surpluses in many crops through the use of better seeds, as well as new technology.
  • This is far from the old belief that Indian economic growth was held back by a food constraint.
  • It is also a very different situation from the belief among many policymakers at the beginning of this decade that Indian inflation was being driven by rising protein prices.
  • Higher incomes were driving up protein prices since there was no adequate supply response.
  • The production of pulses—an important source of protein in Indian diets—has soared since then.

Trade between agriculture and the rest of the economy: A struggle for govts

  • Successive governments have struggled to deal with the terms of trade between agriculture and the rest of the economy.
  • The previous government had tried to engineer a structural change in favour of the rural economy through higher minimum support prices as well as the rural jobs programme.
  • It did spark off a rural boom. However, food inflation began to climb.
  • It stayed in the double digits for 19 months in a row from June 2012 till December 2013 and soon spilled over into generalized inflation.

India battled inflation crisis when the world faced deflation

  • India battled an inflation crisis in the early years of this decade even as the rest of the world was facing deflationary pressures.
  • The decision of the present govt to temper the annual increases in minimum support prices helped bring down food inflation.
  • Critics of inflation targeting have also argued that farmers have had to bear the brunt of the sharp disinflation over the past four years.

Politics of food prices: Not a distributional issue alone

  • Higher food prices benefit those who are net sellers of food.
  • Lower food prices benefit those who are net buyers of food, including rural labourers.
  • Managing the distributional politics of food prices has foxed successive governments.
  • However, it is not a distributional issue alone.

Indian production has faltered in recent years

  • Low nominal income growth in rural India also hurts demand for various industrial goods.
  • The fragile home market for industrial products plus the weak foreign demand for them is one reason why Indian production has faltered in recent years.

Soviet Union’s scissors crisis

  • There is a parallel between what is happening in India right now with what happened in Soviet Union around 100 years ago soon after the civil war that the communists eventually won.
  • Political stability as well as the withdrawal of draconian controls over Russian agriculture led to a huge rise in food production.
  • The weather also cooperated and Russia saw bumper harvests.
  • Food prices fell. However, the prices of industrial goods continued to rise.
  • A graph of these two price trends resembled the two blades of a pair of scissors.
  • Soviet commissars began to call it the scissors crisis.
  • Farmers who were not getting enough for their output did not have money to buy what the factories were producing.
  • Some farmers chose not to sell the crop at all.
  • Soviet planners tried to deal with this internal terms of trade problem with price controls on industrial goods.

India facing its own variant of the scissors crisis

  • India could now be facing its own variant of the scissors crisis—core inflation and food inflation are moving in different directions.
  • Managing the relative price of food in terms of industrial goods will be one of the biggest policy challenges for the new government that will take charge of the country later this year.

Way Forward

  • One important response to the Indian scissors crisis will be to remove controls on Indian farmers—be it their ability to sell directly to consumers or the freedom to export.
  • Modern rural supply chains could also help undermine the stranglehold of middlemen.
  • Forward markets will reduce at least some of the price risk that farmers face.
  • However, the most potent solution to rural distress continues to be outside of agriculture.
  • India needs to create jobs in productive enterprises so as to create opportunities for millions who seek to escape farming, where they are condemned to deal with the vagaries of the weather as well as wild fluctuations in prices.
Issues related to Economic growth

[op-ed snap] China and India: Struggling to rebalanceop-ed snap


Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: IMF, WTO

Mains level: Comaprison between India-China growth levels and various factors affecting growth


Economic challenges for India-China

  1. China and India make up for two contrasting—but fascinating—case studies of economic management in emerging economies
  2. Policymakers in both countries are struggling to rapidly rebalance their economies
  3. China, which is demand-constrained, is trying to cushion its structural deceleration, whereas India, which is supply-constrained, is struggling to unlock its potential for higher trend growth

The wide gap between India and China

  1. Economic reforms took off in China in 1978, while India was a late bloomer, with major structural reforms seeing the light of day following the balance of payments crisis in 1991
  2. The International Monetary Fund (IMF) pegs India’s per capita gross domestic product (GDP) this year at $2,135. This is around a fifth of China’s per-capita GDP of around $10,000
  3. The gap in per capita GDP in the two economies was less than $40 in 1990
  4. China was at India’s current per-capita GDP back in 2006, a gap of 12 years that is similar to the 13-year head start China had compared to India in initiating economic reforms
  5. China’s per capita GDP surged slightly less than five times between 2006 and 2018, while India’s increased two-and-a-half times

Factors for China’s unprecedented growth

  1. China benefited immensely from its entry into the World Trade Organization (WTO) in 2001
  2. China adopted and adapted to the export-driven model of development, with a strong emphasis on keeping its exchange rate undervalued
  3. The disinflationary impact of its stepped-up supply-side and the ballooning of its current account surplus also facilitated a sustained downshift in the structure of local interest rates
  4. This in turn also boosted growth
  5. China’s early focus on education, skills and infrastructure is an important reason that it can make everything, from a simple but good-quality and reasonably-priced toy to cars; specialized and fancy electrical and electronic gadgets to high-speed railways

What are areas in which India lags behind?

  1. Frequent worries about the size of its chronic current account deficit and about its stable financing sometimes cause dislocations that undermine growth
  2. An often overlooked feature of India’s half-baked economic model is that policymakers have reformed end product markets before addressing the entrenched problems in factor markets: high cost of capital, inadequate and insufficiently skilled labour force, and recurring palpitations with land acquisition
  3. All these factors compromise the pace, magnitude and nature of the unlocking of India’s economic potential
  4. Manufacturing, which is critical for absorbing the growing pool of labour, remains a suboptimal link in India’s economic evolution
  5. Also, India is still lost about reforms in agriculture and education
  6. India wants more investment-driven growth, especially focused on upgrading its creaky infrastructure, but is still struggling to jump-start the upturn in investment

The challenge for China

  1. China took up a multi-year investment surge that also contributed to its undisputed status as the factory to the world
  2. The debt-fuelled investment binge that cushioned the hit from the global financial crisis in 2008 has now become the proverbial albatross around China’s neck
  3. The challenge for China is cushioning its deceleration in growth to avoid any social upheaval from a hard landing and/or rising unemployment

Common problems for India & China

  1. The pace of economic rebalancing in both economies is substantially held to ransom by their banking sectors, including the shadow-banking channels
  2. The underlying problem in both cases is home-grown, with politics distorting the more efficient allocation of savings
  3. Both rely substantially on their clunky banking systems for intermediation of domestic savings, though India’s financial sector can justifiably claim to be relatively better regulated and more transparent than China’s

Way forward

  1. The pace of rebalancing in both countries will continue to be slower than what investors expect
  2. Financial markets suffer from tunnel vision and look for quick outcomes, while adjustments in the real economy take time
  3. India’s challenges to unlock its growth potential aren’t unprecedented; several other emerging economies have had to cross several similar hurdles
Issues related to Economic growth

[op-ed snap] Why economic freedom is important in Indiaop-ed snap


Mains Paper 3: Economy | Inclusive growth & issues arising from it

From UPSC perspective, the following things are important:

Prelims level: Economic Freedom of the World (EFW) report

Mains level: India’s strides in the liberalization of the economy and areas where the focus needs to be made


EFW report 2018

  1. Cato Institute and Fraser Institute’s annual Economic Freedom of the World (EFW) report was released this week
  2. The EFW report notes that support for free markets has been dipping across the world from well before the financial crisis
  3. There is a strong correlation between economic freedom and well-being

Findings of the report

  1. The EFW report finds that “Nations in the top quartile of economic freedom had an average per capita GDP of $40,376 in 2016, compared to $5,649 for bottom quartile nations” in terms of purchasing power parity in constant 2011 US dollar terms
  2. In the top quartile, the average income of the poorest 10% was almost seven times the average income of the poorest 10% in the bottom quartile
  3. There is a gulf of almost two decades in life expectancy of the nations in the top and bottom quartiles
  4. Political and civil liberties and gender equality levels show similar divergence

India’s place in rankings dipping

  1. India’s overall ranking has dropped from 83 in 1990, when it stood on the cusp of liberalization, to 96 in 2016
  2. This is due to expansion in the number of countries the index looks at, as well as the progress made by them
  3. Judicial and law and order capacity continues to lag in India
  4. Labour market regulations also need to be reshaped
  5. India’s score has barely budged between 1990 and 2016 in index’s transfer and subsidies category
  6. On property rights, likewise—the backbone of a market economy—the scores indicate insufficient progress

Steps being taken to improve on these lacunae

  1. There is a trend towards direct benefits transfers which is making subsidy regimes more efficient
  2. National Land Records Modernization Programme, now part of the Digital India push, is a move in the right direction
  3. State governments are also doing considerable work, for example, Karnataka’s Bhoomi Project to Rajasthan’s Urban Land (Certification of Titles) Act, 2016
  4. Andhra Pradesh government’s push to use blockchain technology for preventing property fraud has perhaps the most potential of the lot

Progress made by India

  1. India has made appreciable progress on some fronts—from the government vacating space for the private sector in various industries to monetary policy with the Reserve Bank of India adopting an inflation-targeting regime in 2015
  2. By 2022, the number of Indians living in extreme poverty is expected to drop to 20 million

Way Forward

  1. India has underestimated the importance of free markets and the economic freedoms they underwrite
  2. A hard-nosed approach can be reductive, particularly in the context of a country like India
  3. An efficient government—one that draws down its intervention where it is distortionary and goes big where it needs to—is a better goal
Issues related to Economic growth

[op-ed snap] Need for an employment policy to solve jobless growthop-ed snap

‘Need for an employment policy to solve jobless growth’


Mains Paper 3: Economy | Development & employment

From UPSC perspective, the following things are important:

Prelims level: State of Working India 2018 report

Mains level: The paradox of high GDP vs low job growth and need of a national employment policy

Job growth not in sync with GDP growth

  1. A new study released by Azim Premji University’s Centre for Sustainable Employment named the ‘State of Working India 2018’ confirms the spectre of jobless growth
  2. The study contends that the divergence between growth and jobs had increased over time
  3. In the 1970s and 80s, when GDP growth was around 3-4%, employment growth was about 2%
  4. Currently, the ratio of GDP growth to employment growth is less than 0.1 i.e. a 10% increase in GDP results in a less than 1% increase in employment

Findings of the study

  1. The study uses government data to show that total employment actually shrank by seven million between 2013 and 2015
  2. It cites private data to posit that an absolute decline has continued in the years since
  3. Unemployment has risen to more than 5% overall
  4. In geographic terms, north Indian States are the most severely affected, while in demographic terms, young people with higher education levels suffer an unemployment rate as high as 16%
  5. Rural wage growth collapsed in 2014 and has not risen since
  6. In the organised manufacturing sector, though the number of jobs has grown, there has also been an increase in the share of contract work, which offers lower wages and less job security

Divergence in productivity and wages

  1. There is a divergence of productivity and wages in the organised manufacturing sector
  2. Labour productivity in the sector is six times higher than it was 30 years ago but managerial and supervisory salaries have only tripled in the same period
  3. The production workers’ wages have grown a measly 1.5 times

Caste gap in jobs

  1. With regard to earnings, the caste gap is actually larger
  2. Dalits and Adivasis are over-represented in low-paying occupations and severely under-represented in higher-paying ones
  3. They earn only 55-56% of upper caste workers’ earnings


  1. The government ought to formulate a National Employment Policy that takes these trends into account
Issues related to Economic growth

[op-ed snap] Suddenly, another emerging market currency crisisop-ed snapPriority 1


Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Slide in the value of rupee & the reasons behind it


Sliding value of currencies across the world

  1. In January 2017, when Donald Trump was sworn in as president, the Turkish lira was trading at 3.5 to $1
  2. In the roughly 18 months since, the TRY has lost half its value, hitting a level of 7 TRY to $1 last week
  3. This old emerging markets-style crisis, which has been brewing for the last few months, took down with it the Chinese yuan by nearly 10% from the highs of the year, the Brazilian real by 18% year to date (YTD), the Russian ruble by nearly 20% YTD, the Indian rupee by nearly 10% YTD, and the Pakistan rupee by nearly 17% YTD

Reasons for this crisis

  1. The weakest currencies have been the ones with the most external hard currency borrowing (Turkey), political turmoil (Brazil and Turkey) and/or the highest current account deficits (Pakistan, 5.7% of gross domestic product)
  2. A stubbornly high oil price has added pressure on currencies like the Indian rupee and the yuan
  3. Good economic growth in the US has necessitated a normalization of the low-interest rates that have been the norm since the global financial crisis
  4.  In proximate terms, this steady increase in dollar interest rates has led to a “currency tantrum” in the emerging markets
  5. Also, Trump has openly quarrelled on trade with other countries—particularly those that maintain a trade surplus with the US—and has noisily slapped tariffs on a host of products
  6. Almost all those countries have retaliated with counter-tariffs and this has escalated into an all-out trade war

How is the case of Turkey different?

  1. Turkey has a low savings rate and an extraordinary appetite for hard currency borrowing by companies
  2. This resulted in a high current account deficit and a tendency towards inflation
  3. An “independent” central bank should have raised rates many quarters ago but it was bullied by a populist authoritarian president into not doing so
  4. Companies in Turkey behaved as if they were members of the European Union and North Atlantic Treaty Organization at the same time
  5. That fundamental dichotomy snapped global investor confidence last week and manifested in the lira’s rout

Steps by strong economies

  1. China and, to a lesser extent, India and Indonesia, have competent institutions that have prudently raised rates and have adequate firepower in terms of foreign exchange reserves to bring stability to their economic systems
  2. The Reserve Bank of India can take some credit for seeing this coming and raising interest rates twice

Lessons for India

  1. For the longer term, the lesson from the Turkish crisis is to promote domestic savings—both post-tax savings and pensions
  2. This is one more reminder that India must nurture pension-related savings in the government, corporate and individual sectors
  3. These savings can, and should, substitute for the disproportionate role that foreign capital still plays on our stock market and in foreign direct investment
  4. For the government, it should explicitly set a zero revenue-deficit goal in the next administration

Way Forward

  1. The first panacea for a mismanaged nation is inflation of the currency; the second is war
  2. Both bring a temporary prosperity; both bring a permanent ruin
  3. India needs to be cautious in allowing the inflation of rupee
Issues related to Economic growth

[op-ed snap] Two engines of the economy need to fireop-ed snapPriority 1


Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Sluggsh investments in economy especially from private sectors and ways to revive them


Investments picking up slowly

  1. The recovery in investments will continue in fiscal 2019, led by government efforts to build roads and houses
  2. Capacity utilization, which is a pre-condition to the revival in private sector investments, should also keep improving
  3. The crowding-in impact of public investments is expected to kick in later
  4. Yet a broad-based and decisive pick-up in the investment cycle will take time

Investment rate in India

  1. The share of gross fixed capital formation—fresh investments in the form of plant and machinery, dwellings and other buildings—in the gross domestic product (GDP), is called the investment rate
  2. India’s investment rate averaged 31% in fiscals 2015-2018, compared with 33.6% in fiscals 2010-2014
  3. It touched a decadal low of 30.3% in fiscal 2016

The decline in private investment

Data suggests weakness on two fronts as the reason for the decline in investments

One, the sticky share of private corporate sector investments in GDP

  • CSO data shows private non-financial corporate investments have remained subdued
  • Data from the Reserve Bank of India (RBI) also suggests that capital expenditure by the private sector declined for the sixth straight year in fiscal 2017

Two, a secular decline in household investments

  • The household sector was the biggest contributor to investments in fiscal 2012 (share of about 45%), but its share has declined consistently since then and was about 31% in fiscal 2017
  • Purchase of houses is generally the largest part (more than three-fourths) of household investments, so a slowdown on that score becomes a key reason for the decline

Reasons behind the decline

A broad-based pickup in private corporate investments was elusive for three reasons:

First is the capacity overhang

  • Data from the RBI suggests overall capacity utilization declined to 74% at the end of December 2017 from 81% at the end of March 2011
  • CRISIL Research analysis corroborates this trend

Second is the focus of corporates on improving their capital structure

  • High leverage has also been haunting the corporate sector and has been a deterrent for fresh investments in the economy
  • Companies are, therefore, focused on improving capital structure than investments
  • Consequently, debt/equity and interest coverage ratios have improved, not so much investments

Third was that the transitory shocks from demonetization and implementation glitches in the roll out of the goods and services tax (GST)

  • It added to the uncertainty, which further delayed investment decisions

Productivity of investment

  1. The productivity of investments is measured by the incremental capital-output ratio (ICOR)
  2. Lower the ICOR, higher is the productivity of capital because ICOR measures the capital required to produce an additional unit of output

Expectations on the pickup in investments

  1. A broad-based pickup in investments is unlikely this fiscal as capacity overhang persists and corporates continue to focus on reviving their capital structure
  2. Pre-election year uncertainty, too, discourages private sector investments
  3. This fiscal is expected to see a mild improvement in investments, given the government’s sharp focus on affordable housing, rural infrastructure and roads
  4. Beyond the current fiscal year, there is more optimism on a broad-based pick-up in investments
  5. The government has initiated a number of steps to ease the business environment:
  • big moves such as the GST and Insolvency and Bankruptcy Code (IBC)
  • introducing an online single-window model for providing clearances and filing compliances
  • fast-tracking foreign investments
  • surpassing the Foreign Investment Promotion Board

Way Forward

  1. Both investment and its productivity should pick up as the deleveraging phase gets over, crowding-in benefits of public investment kick in and efficiency-enhancing reforms start bearing fruit
  2. That will lead to faster economic growth
Issues related to Economic growth

India’s top 10% own 63% of country’s wealth, bottom 50% own 5.3%: Oxfam report


Mains Paper 3: Economy | Inclusive growth & issues arising from it.

From UPSC perspective, the following things are important:

Prelims level: Oxfam, World Inequality Report, World Bank

Mains level: Income inequality in India

Income inequality rising

  1. India’s top 10% already held over half the country’s wealth (52%) in 1991
  2. The situation worsened further by 2012 with their share in total wealth rising to 63%
  3. In the same period, the share of wealth held by the bottom 50%, which was already low at 9% in 1991, fell to 5.3%
  4. This was revealed in a report by Oxfam India

India among the three worst nations

  1. The report used national sample survey data sets and other sources and concluded that the level of inequality prevalent in India is among the three worst in the world
  2. Only Indonesia and the United States are doing more worse than India
  3. These findings closely mirror the broad findings of the World Inequality Report released last month

Wealth inequality

  1. The wealth of India’s billionaire club has increased by 10 times in the last decade
  2. In the same period, the national per capita income only grew by two times

Solutions to address the problem of inequality

  1. Progressive taxation policies
  2. Creation of more salaried, formal sector jobs (World Bank too made a similar recommendation in a recent draft report)


World Inequality Report

  1. It is a report by the World Inequality Lab at the Paris School of Economics
  2. It provides estimates of global income and wealth inequality based on the most recent findings compiled by the World Wealth and Income Database (WID)
  3. WID, also referred to as, is an open source database, that is part of an international collaborative effort of over a hundred researchers in five continents
  4. It provides data on both distribution of income and wealth
  5. The first report, entitled World Inequality Report 2018 was released on December 14, 2017 at the Paris School of Economics during the first Conference
Issues related to Economic growth

[op-ed snap] The circular economy


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Circular economy, Smart Cities Mission, Indian Resource Panel

Mains level: Unique ideas that can be implemented to make economy more efficient and sustainable


Challenges of the disposable economy

  1. Products today are designed to have a shelf life
  2. It is a period of time during which they can be used and after which we are constrained to replace them
  3. This is either because a newer, more feature-rich model has presented itself or because the latest apps and software run too slowly on these old machines

What does this lead to?

  1. This economic construct requires a resource-intensive industrial infrastructure
  2. This infrastructure focuses exclusively on the extraction and consumption of natural resources without paying heed to the need for replenishment or conservation

Concept of circular economy

  1. It is a model that is regenerative by design and aimed at ensuring that products are maintained at their highest utility at all times
  2. It describes a continuous cycle aimed at preserving capital and minimizing system risk by efficiently tracking and managing finite stocks
  3. The circular economy requires that value creation be decoupled from consumption of finite resources

How does circular economy work?

  1. It draws its inspiration from the biological world where the nutrients that are metabolized by life processes are generated from other living systems after their death and ensures that the earth remains a stable, self-contained ecosystem
  2. The circular economy attempts to mimic this circle of life
  3. It tries to achieve the same results through technical cycles that recover and restore products and components through strategies like reuse, repair, refurbishment, re-manufacture and recycling
  4. It depends on sustainable practices, but more than that looks to encourage a change in the way in which people think about their business
  5. It asks them to focus on keeping products alive for as long as possible rather than requiring them to be constantly replaced

Indian society and circular economy

  1. Indian society has always had circular ideals
  2. As a people, it is ingrained in us to reuse and recycle as much as possible
  3. On average we reuse up to 60% of our discarded plastics—10 times as much as the US
  4. For the most part, this recycling happens at the end of the value chain by the poorest sections of society
  5. This results in value loss and also health risks for those who extract value from waste

Appplication of circular economy principle in present scenario

  1. While the Smart Cities Mission will help bring feedback-driven efficiencies to our cities, we could do with more constructive action in the areas of urban sanitation, water management and local community development
  2. In the agricultural sector, we should look to develop digital food supply chains that transmit accurate market information to food producers, connecting them more closely with customers
  3. We could also look to borrow from nature, developing self-sustaining cultivation habits like rice-fish farming, which improves rice yields without the use of fertilizers and pesticides
  4. The other area of the economy that shows considerable promise is urban mobility- India could ensure that, unlike the West, vehicle ownership never rises above its current 5% levels

Way Forward

  1. In 2015, the ministry of environment and forests established the Indian Resource Panel with the specific purpose of facilitating the use of recycled materials and promoting resource efficiency
  2. This initiative is facilitating efficient flows of materials from the product design stage to collection after use, repair, reuse, refurbishment, and recycling
  3. We need to tap our cultural instincts and we will have no problem adapting circular practices directly into our national economic model
Issues related to Economic growth

[op-ed snap] Six steps to job creation

Image source


Mains Paper 3: Economy | Development & employment

From UPSC perspective, the following things are important:

Prelims level: AMRUT Scheme, inverted duty structures

Mains level: National health policy, National manufacturing policy and other initiatives related to industrial growth


  1. India is indeed the fastest growing large economy in the world
  2. Yet with investment low, credit offtake low, capacity utilisation in industry low, agricultural growth low, plant load factor low, it is hardly surprising that job growth is low as well

Groups in need of jobs

  1. In India’s highly segmented labour market, there are at least three demographic groups that are in urgent need of jobs
  2. These are: A growing number of better-educated youth; uneducated agricultural workers who wish to leave agricultural distress behind; and young women, who too are better educated than ever before

Reason(s) for low job growth

  1. Among many dimensions of this problem is the fact that in the quarter-century since economic reforms began, it is not manufacturing that has been the leading sector driving growth
  2. Manufacturing should drive productivity in the whole economy
  3. Services cannot, as services by definition ‘service’ the distribution of produced goods

What can policy-makers do to revive job growth?

  1. Industrial, trade policy
  • An industrial and trade policy is needed
  • For 20 years after economic reforms began in 1991 there was no National Manufacturing Policy, and the Policy, when it came in 2011, was not even implemented
  • The Department of Industrial Policy and Promotion (DIPP) is finally preparing an industrial policy
  • It is essential that trade policy is consistent with such an industrial policy
  • Otherwise, the two may work at cross purposes and undermine each other’s objectives
  • Manufacturing has been badly affected by inverted duty structures

    2. Special packages needed for labour-intensive industries

  • There are a number of labour intensive manufacturing sectors in India such as food processing, leather and footwear, wood manufacturers and furniture, textiles and apparel and garments
  • The nature of the package will need to be individually designed for each sector defined as quickly as possible

   3. Cluster development

  • There should be cluster development to support job creation in micro, small and medium enterprises (MSMEs)
  • Most of the unorganized sector employment is in MSMEs, which tend to be concentrated in specific geographic locations
  • There is a cluster development programme of the Ministry of MSMEs, which is poorly funded and could be better designed as well

   4. Align urban development with manufacturing clusters

  • Infrastructure investment by the government always creates many jobs
  • The Ministry of Urban Development (MoUD) has a programme called AMRUT (Atal Mission for Rejuvenation and Urban Transformation) aimed at improving infrastructure for small towns
  • An engagement between the Urban Development and MSME Ministries is necessary to ensure that the infrastructure investment under it is taking place in towns which have clusters of unorganised sector economic activities
  • It will attract more investment to industrial clusters, which is where most non-agricultural jobs are

   5. Focus on women

  • Girls are losing out in jobs, or those with increasing education can’t find them, despite having gotten higher levels of education in the last 10 years
  • The problem with skilling programmes has been low placement after skilling is complete
  • Skilling close to clusters (rather than standalone vocational training providers), which is where the jobs are, is likely to be more successful
  • The availability of jobs close to where the skilling is conducted will also enhance the demand for skilling

   6. Public investments in health, education, police, and judiciary 

This can create many government jobs


  • Public investment in the health sector has remained even in the last three years at 1.15% of GDP, despite the creation of the National health policy at the beginning of 2017
  • Given the state of health and nutrition of the population, it is critical that public expenditure on health is increased faster
  • More government expenditure in health means more jobs in government and better health outcomes
  • Preventive and public health has always been in all countries the responsibility of government


  • Government schools have poor quality and parents are voting with their feet by spending money on private schools, whether or not the poor parents can afford it
  • The number of teachers required, at secondary and higher secondary levels, is very high, particularly in science and mathematics
  • Many new government jobs can be provided if more young people could be trained specially to become teachers for science and mathematics at the secondary and higher secondary levels

Police and Judiciary

  • While the number of paramilitary personnel continues to grow, State governments are not filling even sanctioned posts in the policy and in the judiciary (at all levels there are vacancies)
  • More police and a larger judiciary can both reduce crime as well as speed up the process of justice for the ordinary citizen


Inverted duty structures

  1. An inverted duty structure has the following features: higher duty on intermediate goods compared to final finished goods, with the latter often enjoying concessional customs duty
  2. As a result, domestic manufacturers face high tariffs, leading to higher raw material cost at home
  3. This has prevented many manufacturing sectors from growing since economic reforms began
Issues related to Economic growth

[op-ed snap] Why the economic slowdown, and how to fix it?


Mains Paper 3: Government Budgeting, Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.

From UPSC perspective, the following things are important:

Prelims level: Fiscal stimulus, expansionary policy

Mains level: How to revive the economy




  1. The article puts forward a case for increased spending by the government and lowering of interest rates by the RBI. The author argues that fiscal stimulus is the only logical way to pull the economy out of slowdown.


Current state of the economy-

  1. Data from 107 companies from the organised sector (excluding IT & financial services) indicate that number of persons employed by them has decreased by 2% between Mar-2016 and Mar-2017.
  2. The latest RBI Consumer Confidence Survey concludes that there is significant dip in the consumer confidence and business sentiment in manufacturing.


Background of the slowdown-

  1. The period 2003/04-2007/08 witnessed the most rapid sustained GDP growth in India at 8% per annum, riding on the boom in the world economy.
  2. Then came the bust, as growth dropped to 3.9% in 2008-09.
  3. Surprisingly, GDP growth rose to 5% per annum during 2009/10-2010/11. This recovery was attributable to counter-cyclical macroeconomic policies among other things.
  4. But the resilience did not last long. Growth slowed to 4% per annum during 2011/12-2013/14, as fiscal imbalances mounted, inflation quickened, and the current account deficit in the balance of payments widened.
  5. In 2015-16 and 2016-17 the GDP growth rate averaged 7.5% owing to one thing only- sharp drop in world oil prices, from more than $110 per barrel to less than $50 per barrel. This led to decrease in current account deficit and fall in inflation.


Reasons for slowdown-

Demonetisation and introduction of GST have led to decrease in output in mainly unorganised sectors. But these are not the real reasons for the current slowdown in the economy.

The real reasons for slowdown are structural-

  1. Rural distress: GDP per capita in the agricultural sector has been less than one-tenth GDP per capita in the non-agricultural sector for 25 years. Employment creation is negligible. The outcome is rural distress.
  2. Low share of manufacturing: The share of manufacturing in GDP and employment is lower than it was 25 years ago. India’s share in industrial production and manufactured exports in the world economy has declined steadily.
  3. Thus, GDP growth is supported largely by the services sector, while employment growth in the economy has been sustained essentially by construction activities and the informal services sector both of which have been hurt by demonetization.
  4. RBI’s reluctance to cut interest rates: Between 2013-14 and 2015-16, the RBI repo rate, which sets interest rates in the economy, was reduced by a mere 1.25 percentage points although inflation came down by almost 5 percentage points in terms of the consumer price index. The opportunity to stimulate investment by dropping interest rates sharply was missed out altogether
  5. Appreciation of rupee leading to erosion of export competitiveness: Between January 2014 and June 2017, the rupee appreciated by 10% in nominal terms and 15% in real terms.



  1. Government should undertake fiscal stimulus by increasing spending and reviving demand. The government need to break free from the 3.5% fiscal deficit target and increase it to 4.0%. It is to be noted that borrowing is bad for the economy only when it is used for paying debts. But if it is used for creation of infrastructure and investment then it is actually god for the economy.
  2. RBI should lower the interest rates by 2 percentage points: It has to be noted that the inflation in economy was controlled not due to lowering of interest rates but because of the fall in global crude oil prices.



  1. Fiscal Deficit: A Fiscal Deficit occurs when government’s total expenditures exceed its total revenues (excluding borrowings).
  2. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment, increase money supply in the market and increase demand in the economy.
  3. Expansionary monetary policy: This refers to  a monetary policy by a central bank in which interest rates are cut in order to ease money supply in the economy.
Issues related to Economic growth

Mr PM: It’s time for bold economic thinking


Mains Paper 3 | Indian Economy


Prelims: GDP, Real Interest Rate

Mains level:  This article highlights the reasons for the paradoxical situation of the Indian economy and also gives a five step action plan to bring the economy back to high growth path.


Present State of Indian Economy

The Indian economy is currently in a paradoxical situation

Reasons for high Economic growth

  1. The rapid economic growth, inflation is down, forex reserves are more than $400 billion, fiscal deficit is on target and current account deficit until recently has been less than 1% of GDP and comfortably financed by capital inflows.
  2. India’s oil imports in FY13 was $164 billion and by FY17 it was only $83 billion, thereby lowering the current account deficit as a percentage of GDP.
  3. The stock market is at an all-time high in anticipation of a surge in earnings which is yet to materialise.
  4. However, the state of the economy has been called to be ‘sinking’.


But economy is facing challenges like lack of investment and unemployment.

The RBI, in its latest monetary policy report, lowered the projected growth rate for FY18 from 7.3% to 6.7% .


Reasons for slow economic growth

  • The demonitisation and the introduction of GST.
  1. But on a positive note,  the culture as well as the regime for direct and indirect tax compliance in India is undergoing a fundamental shift for the better in a way that has not happened before.
  2. This will expand production in the near future. However, there is uncertainity how fast this is going to happen.
  3. For reforms to yield results necessary follow up policy actions by the government is needed.
  • The lack of speedy resolution of the stress in PSU banks and corporate balance sheets.
  1. This has eroded business confidence leading to lower investment and poor job creation.
  2. The announcement of stimulus package by the government may deal with the problem cosmetically rather than address its root.
  3. Mission Indra-Dhanush has also failed to resolve this problem.
  4. The recent RBI move to refer large stressed accounts to the National Company Law Tribunal so that they could be dealt with under the Insolvency and Bankruptcy Code but it will take a long time to resolve and recoveries will be much lower than what would have been possible by way of one-time payments negotiated with delinquent borrowers for full and final settlement of dues.
  5. The aim to question boards and executive of PSU banks from probes by the three Cs, CBI, CVC and CAG, will delay resolution of distressed loans and causing more losses to PSU banks.
  6. Due to this the high savings in India are currently not directed to productive, long-term investments as corporates have still not been able to repair their balance sheets.
  • The intangible thing called “confidence”, be it consumer or business, has been faltering.
  • The real interest rate which is calculated as the difference between the yield on the 90-day Treasury Bill and consumer price inflation is hovering around 4% therefore the investment might not pick up fast.

Five step plan to bring India back on the high growth track

  1. To counter the effects of demonetiation was politically successful but an economic failure.
  • Introduce an amnesty scheme, a laIndonesia, to allow tax payers to voluntarily disclose hitherto undisclosed income kept domestically and abroad.
  • Indonesia — a nation of 250 million people, with 32 million registered tax payers but only 8.9 million actual tax payers — had close to 1 million people disclose approximately 40% of GDP of undisclosed income this year, the bulk of which was held domestically and a portion abroad, notably in Singapore.
  1. The Indian government should announce a one-time programme valid till December 31, by when anyone can disclose previously undisclosed income held within the country and abroad, for which they will pay a small, one-time fine of 4%, while 50% of the domestic holdings will need to be invested in two large government funds — one for infrastructure and the other for bank recapitalization.
  • The amounts thus invested will be locked for seven years with a compound interest of 4% per annum. Post redemption, the amounts and the interest thereon can be used freely for any lawful purposes in India.
  • From January 1, criminal prosecution should be instituted against Indian residents holding large sums of undisclosed income.
  • By highlighting the automatic exchange of financial account data with nations such as Singapore and Switzerland, it can ensure that the scheme is taken seriously.
  • The work done so far by the SIT on money stashed abroad and the information obtained through Panama leaks can be used as a input to test and start the scheme.
  1. To ensure that the full extent of the NPA problem is recognised latest by December 31 and that banks make necessary provisions in this regard. The consequent shortfall in equity capital adequacy for PSU banks should be met through recapitalisation by March 31.
  • The boards of PSU banks should be recast by bringing in persons with demonstrated professional experience and achievement.
  • The selection of CEOs of PSU banks and determination of their tenure and compensation package should henceforth be the exclusive domain of their boards.
  • Boards should be fully empowered decide on loan resolution by way of real restructuring, with or without haircut, and one-time payment.
  • All cases of suspected wrongdoing involving collusion between borrowers and banks in loan resolution should be screened and vetted first by a high-level committee of former bankers drawn from public and private sectors before being taken up by the 3 Cs.
  • Clear guidelines should be established for such screening and vetting.
  1. Accelerate infrastructure investments, especially in agricultural storage/ support infrastructure, in post-harvest processing, water efficiency technologies, extension services etc. to make agriculture more productive.
  2. Facilitate new export engines — ‘Make in India’ and ‘Serve in India’ — with emphasis on defense exports and medical tourism.
  • An ambitious target of $100 billion over the next 10 years can be set for these two segments as the world is becoming an increasingly dangerous place and global population less healthy with chronic diseases for which India can offer holistic cures.
  1. The PM must take a leaf from the book of former Prime Minister, Narasimha Rao who brought a technocrat to lead the economic reforms that time.









Issues related to Economic growth

Inflation set to pick up in H2FY18: RBI


Mains Paper 3| Indian Economy

Prelims: Inflation- WPI and CPI, GST

Mains level: Not much


  1. Consumer price inflation is likely to pick up in the second half of 2017-18 with food prices set to rise.
  2. There has been a broad-based increase in CPI inflation excluding food and fuel.
  3. The RBI has kept the repo rate unchanged at 6 per cent in the bi-monthly monetary policy
  4. Inflation is expected to rise from its current level and range between 4.2-4.6 per cent in the second half of this year, including the house rent allowance by the Centre.

Why RBI feels that inflation will pick up?

  1. Early indicators show that prices of pulses which had declined significantly to undershoot trend levels in recent months, have now begun to stabilise.
  2. Some price revisions pending the goods and services tax (GST) implementation have been taking place.
  3. International crude prices, which had started rising from early July, have firmed up further in September.
  4. Implementation of farm loan waivers by states and salary and allowances


  • Consumer Price Index:CPI is used to monitor changes in the cost of living over time, it reflects the price of goods and services bought by the final consumers. The CPI compares the price of a fixed basket of goods and services to the price of the basket in the base year that is 2011-12. India has adopted CPI to measure inflation. CPI is calculated by Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation (MOSPI).
  • Whole sale Price Index: WPI is used to monitor the cost of goods and services bought by producer and firms rather than final consumers. WPI basket does not cover services. In IndiaOffice of Economic Advisor (OEA), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry calculates the WPI. The new base year for WPI is 2011-12




Issues related to Economic growth

[Op-ed snap] In need of a psycho-economic boost


Mains Paper 3: Indian Economy: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment,Government Budgeting

From UPSC perspective, the following things are important:

Prelims level: Concepts: Fiscal and monetary stimulus, economic cycle
Schemes: SEIS & MEIS

Mains level: Steps to revive the economy



  1. The article talks about how fiscal and monetary stimulus can help in reviving the economy
  2. The central idea of the article is follows: in a slumping economy, in addition to fiscal and monetary stimulus, a psychological boost is also required in to boost the “animal spirits”

 Current scenario in the economy-
 Investor enthusiasm from the private sector is lacking. Added to their lack of demand is the reluctance of supply of investible funds.

  1. GDP growth is continuously declining six quarters in a row (from 9.2% to 5.7%)
  2. Investment share of GDP is falling for last 5 years
  3. The value of stalled projects is record high at ₹13.2 lakh crore
  4. Newly announced projects are at 4 years low at ₹84,000 crores
  5. Cautious banks: In spite of healthy deposits, the banks are reluctant to extend new credit because the ratio of NPAs have been growing for 5 years in row now.
  6. The new Insolvency and Bankruptcy code could be good but has yet not been tested.


Way forward-

On the spending side government should focus on four areas-

  • Provide fresh capital either to existing banks or the new ‘bad bank’.
  • Provide wage subsidy as incentive to labour intensive sectors like textiles etc.
  • Provide big boost to affordable housing by funding land acquisition for the builder and interest rate subvention for the home buyer
  • Promote export oriented labour intensive sectors by enabling weaker exchange rate, quicker refund of GST credit and expanding the scope of the Merchandise Export from India Scheme and Service Exports from India Scheme.

These short-term measures will try to lift the psychological atmosphere in the economy and hence boost private investment.

For Prelims:

Merchandise Export from India Scheme (MEIS)

  • Under the Ministry of Commerce and Industry
  • Launched under Foreign Trade Policy of India (FTP) 2015-20.
  • Aim: To offset infrastructural inefficiencies and associated costs involved in export of goods and products, which are produced and manufactured in India
  • It seeks to enhance India’s export competitiveness of these goods and products having high export intensity, employment potential

Service Export from India Scheme (SEIS)

  • Under the Ministry of Commerce and Industry
  • Launched under Foreign Trade Policy of India (FTP) 2015-20.
  • It provides for incentives to all service providers of notified services who are providing services from India


  1. Meaning of Investment Share of GDP: This is the quantum of investment which is responsible for creation of new capital in terms of factories and other infrastructure which will give returns in the future.
  2. Keynesianism: M. Keynes was a British economist who suggested (during the Great Depression of 1930s) that in order to pull an economy out of a slump (recession/depression) increased government expenditure and cutting taxes is the way out. This is in short called as Keynesianism.
  3. Fiscal Stimulus: Increasing government spending on infrastructure etc in order to lift investor sentiment and increase money supply in the market.
  4. Monetary Stimulus: Cutting interest rates by the central bank of an economy in order to enable availability of cheaper credit in the market, consequently encouraging more people to spend and increase money supply.
  5. Bad Bank: There is a suggestion to collect all the bad loans from the various banks and move them to a freshly capitalised bank, the so-called “bad bank”. The bad bank would focus solely on liquidating the collateral, bringing in fresh owners and managers to run distressed companies. Once freed from NPAs, the existing banks can resume lending to the healthy sectors.
  6. NPA: When loan payment has not been done for the past 90 days then such an asset is termed as a Non- Performing Asset.
  7. The Insolvency and Bankruptcy Code, 2016: Read in detail here.



Issues related to Economic growth

[op-ed snap] Pause before you leapop-ed snap

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Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Fiscal stimulus, Current account deficit (CAD)

Mains level: Reasons behind the economic slowdown in India and what needs to be done in order to re-stoke growth



  1. The slowing of GDP growth to below 6 per cent has created anxiety and concern.
  2. One suggestion is to go for a fiscal stimulus to re-stoke growth
  3. To assess the efficacy of any intervention, it’s crucial to first correctly diagnose the problem

What are reasons behind the slowdown? 

  1. Growth has now been slowing for five quarters. The slowdown has been accentuated in 2017, because of demonetisation and GST 
  2. Despite this slowdown, manufacturing imports have accelerated sharply, widening the current account deficit (CAD)
    • CAD has quadrupled from 0.6 per cent to 2.4 per cent of GDP
    • Seventy per cent of this is on account of increased manufacturing imports
  3. The growth slowdown before demonetisation was a natural consequence of
    • The oil windfall rolling off
    • Economy embarking on de-leveraging.
  4. This has been compounded by a negative supply shock after demonetisation, as supply chains have been disrupted inducing more imports.
    • Since demonetisation, imports have been growing at 13 per cent.
  5. Domestic supply chains have been disrupted in the manufacturing sector post-demonetisation — likely involving SMEs and that activity has been replaced by imports

Possible implications of a fiscal stimulus?

  1. Expansionary fiscal is unlikely to rehabilitate disrupted supply chains.
  2. Instead, a fiscal stimulus — in the wake of an adverse supply shock — will stoke more imports and result in a larger current account deficit. 

Way forward?

  1. Supply-side shocks need supply-side solutions.
  2. Improve the regulatory and business environment for SMEs
    • Improve their access to credit
    • Resolve teething GST problems and
    • Simplify the burdens of firms competing in the formal sector.
  3. Keep pushing hard on the stressed-asset resolution, so that the twin-balance sheet problem does not remain a binding constraint for larger firms.


Issues related to Economic growth

[op-ed snap] India’s economy: Dark clouds and Silver liningsop-ed snap


Mains Paper 3: Indian Economy growth and development; Investment Models

The following things are important from UPSC perspective:

Prelims: GDP, Current Account deficit, Capital Account Deficit, Functions of RBI

Mains level: What are the structural and cyclical reasons for declining growth rate and its impact on the economy. Also give solutions to reverse declining economic growth.



  1. Economic growth has declined for six quarters in a row.
  2. Inflation has more than doubled in the three months since June.
  3. The current account deficit (CAD) in the first quarter of the current fiscal year was at its highest level in four years as a proportion of gross domestic product (GDP).
  4. Is it time to hit the panic button?


Some of the worries are overdone because-

  1. Inflation was expected jump back from an absurdly low level in June.
  2. The current account deficit is still being comfortably financed by strong capital flows.


  1. The increased CAD may be because of dominance of debt investments and spurt in electronics and gold imports.
  2. Decline in economic growth in the three months to June can be explained by inventory destocking by companies ahead of the launch of the goods and services tax (GST), so a cyclical bounce back is quite likely over the next two quarters.
  3. The government was facing a comfortable growth trajectory till now because-
  4. The collapse of global crude oil prices and it used it prudently to strengthen its finances rather than immediately pass the benefits to the consumers.
  5. Monetary tightening by the Reserve Bank of India also helped secure macroeconomic stability after nearly five years.
  6. That hard-earned stability does not seem to be at risk—despite the latest numbers on inflation and the current account deficit.


 So,  What is the more serious problem-

  • It is the Declining Economic Growth.
  • It may be due to two reasons- Structural or Cyclical.
  • But, at this point of time it is difficult to figure out how much of the decline can be attributed to structural reasons or the cyclical ones.
  • It is also because of the two consecutive exogenous shocks given to the economy—first demonetization and then the transition to GST.
  • Economic growth is expected to claw back once the effects of the above mentioned shocks abate, especially if there is no hysteresis.
  • An important structural element to the economic slowdown is that the Indian economy began started losing momentum well before the demonetization decision was announced in November.
  • In other words, we may expect pleasant surprises in the next two GDP’s.

What can be done to arrest this economic decline ?

  • The key to a sustainable recovery is the investment cycle.
  • The private sector is still struggling with excess leverage and the banks are struggling with bad debts
  • So, the macroeconomic strategy will thus have to delicately balance between the need to push public investment on the one hand and keep the fiscal deficit under check on the other.

Money for investment can come from

  • The extra taxes that the GST is expected to send into the treasury should hopefully create fiscal space for higher public investment.
  • The government should push ahead with a privatization programme that should be used as a way to switch assets—from airplanes to roads, for example.


India may see a small cyclical recovery in the months ahead. However, a sustainable recovery will depend on investment activity. Public investment will have to hold the fort till the private sector deleverages, banks are cleaned up and excess capacity is worked out of the system.


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