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Subject: Economics

  • India’s Current Account Deficit (CAD) Widens: Implications and Outlook

    Central Idea

    • Data released by the Reserve Bank of India (RBI) reveals that India’s Current Account Deficit (CAD) expanded significantly to $9.2 billion, equivalent to 1.1% of GDP, during the April-June quarter.
    • This represents a substantial increase from the preceding three months when it stood at $1.3 billion, or 0.2% of GDP.
    • Contrasting with the year-earlier quarter of fiscal 2022-23, where the CAD was $17.9 billion (2.1% of GDP), the current scenario reflects evolving economic dynamics.

    What is Current Account Deficit (CAD)?

    • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
    • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
    • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

    Components of Current Account

    Current Account Deficit (CAD) =  Trade Deficit + Net Income + Net Transfers

    (1) Trade Deficit

    • Trade Deficit = Imports – Exports
    • A Country is said to have a trade deficit when it imports more goods and services than it exports.
    • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
    • A trade deficit represents an outflow of domestic currency to foreign markets.

    (2) Net Income

    • Net Income = Income Earned by MNCs from their investments in India.
    • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
    • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
    • Net income is measured by the following things:
    1. Payments made to foreigners in the form of dividends of domestic stocks.
    2. Interest payments on bonds.
    3. Wages paid to foreigners working in the country.

    (3) Net Transfers

    • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
    • It Includes Remittances, Gifts, Donation etc

    How does Current Account Transaction takes place?

    • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
    • Current account transactions are transactions that require foreign currency.
    • Following transactions with from which component these transactions belong to :
    1. Component 1 : Payments connection with Foreign trade – Import & Export
    2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
    3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

    What are the reasons for the current account deficit?

    deficit

    • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
    • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
    • However, with global demand picking up, merchandise exports have also been rising.

    How will a large CAD affect the economy?

    • A large CAD will result in the demand for foreign currency rising, thus leading to depreciation of the home currency.
    • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
    • However, worsening CAD will put pressure on the inflow under the capital account.
    • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

  • Norman Borlaug Field Award to Indian Researcher

    Norman Borlaug

    Central Idea

    • Swati Nayak, a scientist at the International Rice Research Institute (IRRI) South Asia Regional Centre (ISARC), has been honoured with the Borlaug Field Award by the World Food Prize.
    • She is renowned for her groundbreaking research in developing climate-resilient and nutrition-rich rice varieties.

    Contributions of Dr. Swati Nayak

    Extensive Testing Organized over 10,000 tests, evaluating 500+ seed varieties.
    Climate Resilient Varieties Developed high-yield, biofortified, and nutritionally enhanced rice varieties.
    Small Holder Farmers’ Focus Innovated inbred rice varieties to benefit smallholders.
    Collaborative Efforts Collaborated with national and international organizations.
    Addressing Lifestyle Diseases Advocates for low glycemic index, micronutrient-enriched rice varieties.
    Supporting Better Quality Empowers farmers to produce high-quality seeds for better market positioning.
    Biofortified Foodgrains Promotes affordable bio-fortified rice as a nutritional solution.

     

    Who was Norman Borlaug (1914-2009)?

    Contributions Developed high-yielding, disease-resistant wheat varieties, “Father of the Green Revolution”
    Impact Saved over a billion people from hunger, significantly increased global wheat production
    Awards and Honors Nobel Peace Prize, Presidential Medal of Freedom, Congressional Gold Medal, Padma Vibhushan, and more
    Legacy Laid the foundation for modern agricultural practices, inspired efforts to address global food security

     

    About Borlaug Field Award

    Endowed by Rockefeller Foundation
    Presented by World Food Prize Foundation
    Purpose Recognize outstanding contributions in international agriculture and food production by individuals under 40.
    Award Amount $10,000
    Inspiration Honors Dr. Norman Borlaug’s dedication to fighting global hunger and poverty during his early career in Mexico.
    Establishment Year 2011

     

  • India to unveil 50-year Government Bonds

    Central Idea

    • India is set to make history by issuing it’s first-ever 50-year government bonds and 30-year green bonds.
    • These offerings have piqued the interest of insurance companies and provident funds seeking avenues to invest their long-term funds.

    Why such move?

    • Ambitious Target: India aims to mobilize ₹6.55 trillion ($78.73 billion) through bond sales from October to March. This includes a significant ₹300 billion allocation to the 50-year security, marking the central government’s maiden auction of such bonds.
    • Natural Demand: Long-term investors, particularly insurers, find the 50-year bonds appealing due to their alignment with asset-liability management requirements.

    Government Bonds in India

    • Government Bonds in India, fall under the broad category of Government Securities (G-Sec) and are primarily long term investment tools issued for periods ranging from 5 to 40 years.
    • It can be issued by both Central and State governments of India. Government bonds issued by State Governments are also called State Development Loans (SDLs).
    • The GB interest rates, also called a coupon, can either be fixed or floating and disbursed on a semi-annual basis.
    • In most cases, GOI issues bonds at a fixed coupon rate in the market.

    Types:

    Fixed-Rate Bonds Offer a fixed interest rate throughout the investment tenure, providing clarity with the coupon rate mentioned.
    Floating Rate Bonds (FRBs) Subject to periodic interest rate adjustments, often with a base rate and fixed spread determined through auctions.
    Sovereign Gold Bonds (SGBs) Allow investments in gold without physical possession, with tax-exempt interest and prices linked to gold’s value.
    Inflation-Indexed Bonds Adjust both principal and interest based on inflation, using indices like CPI or WPI, tailored for retail investors.
    7.75% GOI Savings Bond Features a 7.75% interest rate and available to individuals, minors with legal guardians, and Hindu Undivided Families.
    Bonds with Call/Put Option Permit either issuer or investor to buy back or sell bonds, respectively, on specified dates, after 5 years from issuance.
    Zero-Coupon Bonds Generate earnings from the difference between issuance and redemption prices, as they do not provide interest income.

    Advantages offered

    • Sovereign Guarantee: Government bonds are backed by the government’s commitment, offering stability and assured returns.
    • Inflation-Adjusted: Inflation-indexed bonds protect investors from rising prices, maintaining the real value of their investments.
    • Regular Income: Government bonds provide semi-annual interest disbursements, offering investors a source of regular income.

    Limitations

    • Lower Income: Apart from 7.75% GOI Savings Bonds, government bonds typically offer lower interest rates.
    • Lack of Relevance: With maturity tenures ranging from 5 to 40 years, government bonds may lose relevance over time, particularly in the face of inflation.

  • Extension to the RoDTEP Scheme

    Central Idea

    • In light of a continuous seven-month decline in goods exports until August, the government has taken action to bolster outbound shipments.
    • The Remission of Duties and Taxes on Exported Products (RoDTEP) scheme’s applicability has been extended for nine more months, now in effect until June 30, 2024.

    About RoDTEP Scheme

    Objective To refund central, state, and local duties or taxes on exported products.

    The rebate does not apply to duties and taxes that have already been exempted, remitted, or credited.
    Launch Date Introduced in January 2021.

    Replacement for the Merchandise Export Scheme, which was deemed non-compliant with WTO Rules.
    Rates of Tax Refund Tax refund rates under RoDTEP vary from 0.5% to 4.3% across different sectors.
    Claim Process Exporters can claim the rebate as a percentage of the Freight On Board (FOB) value of their exports.
    Issuance of Rebates Rebates are issued in the form of transferable duty credits or electronic scrips (e-scrips).
    Significance of the Scheme Enhances the competitiveness of Indian products in global markets by refunding various taxes.

    Expected to have a substantial impact on India’s trade volumes, export figures, and competitiveness.

    Enables Indian exporters to meet international export standards and access GST refunds efficiently.

     

  • Centre seeks to ease Angel Tax Provisions

    Central Idea

    • The government has introduced revisions to the angel tax provisions that were initially implemented in this year’s Budget, primarily targeting investments by non-resident investors into startups at a premium over their fair market value.

    Key changes introduced

    • The Central Board of Direct Taxes issued a notification, amending Rule 11UA under the Income Tax Act, incorporating changes to the draft norms released earlier.
    • Five distinct valuation methods for shares have been introduced, accompanied by a 10% tolerance allowance for deviations from accepted share valuations.
    • These changes aim to provide some relief to prospective foreign investors interested in Indian startups.

     

    Angel Investment

    • An angel investor is an individual who provides financial backing to early-stage startups or entrepreneurs, typically in exchange for equity in the company.
    • Angel investors are typically high-net-worth individuals who invest their own personal funds, rather than investing on behalf of a firm or institution.
    • Features of Angel Investing:
    1. Early-stage funding
    2. Equity investment
    3. High-risk, high-reward
    4. Active involvement
    5. Personal investment
    6. Flexible terms
    7. Shorter investment horizon

     What is Angel Tax?

    • Referred to as Angel Tax, this rule is described in Section 56(2)(viib) of the Income Tax Act, 1961.
    • Essentially it’s a tax on capital receipts, unique to India in the global context.
    • This clause was inserted into the act in 2012 to prevent laundering of black money, round-tripping via investments with a large premium into unlisted companies.
    • The tax covers investment in any private business entity, but only in 2016 was it applied to startups.

    Why was angel tax introduced?

    • The complicated nature of VC fundraising with offshore entities, multiple limited partners and blind pools is contentious.
    • There has been some element of money laundering or round-tripping under guise.

    Details of its levy

    • The Angel Tax is being levied on startups at 9% on net investments in excess of the fair market value.
    • For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption.
    • However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.

  • Challenge of Phosphorus Scarcity and Pollution: A Need for Innovative Solutions

    Central Idea

    • Phosphorus scarcity poses a growing challenge to global agriculture, with critical implications for food production and environmental sustainability.
    • While the history of land fertilization dates back to ancient agricultural practices, the advent of synthetic fertilizers in the 19th century transformed modern agriculture.
    • However, today’s reliance on synthetic fertilizers, particularly phosphorus, raises concerns about its scarcity and environmental impact.

    Age-Old Challenge of Soil Fertilization

    • Historical Origins: The challenge of fertilizing land dates back to the dawn of agriculture. Early human societies recognized the need to replenish soil nutrients depleted by repeated cycles of cultivation and harvest.
    • Ancient Fertilization: Indigenous communities worldwide devised fertilization techniques, including the use of fish remnants and bird droppings (guano), to restore essential nutrients to the soil.

    Revolutionizing Agriculture with Synthetic Fertilizers

    • 19th Century Advancements: The 19th century witnessed significant progress in chemistry, leading to the creation of synthetic fertilizers. It also marked the identification of key nutrients: nitrogen, phosphorus, and potassium, the foundation of modern chemical fertilizers.
    • Green Revolution’s Impact: The mid-20th-century Green Revolution accelerated the adoption of high-yield crop varieties and intensive fertilizer use, revolutionizing global food production.

    About Phosphorus

    Need Essential nutrient for plant growth, involved in photosynthesis, energy transfer, and root development.
    Impact of Deficiency Leads to stunted growth, reduced flowering, and poor fruit or seed development in plants.
    Types – Superphosphate

    – Triple Superphosphate (TSP)

    – Diammonium Phosphate (DAP)
    Application Applied through broadcasting, banding, or direct placement with seeds during planting.
    Benefits Promotes strong root development, better flowering, fruiting, and overall plant health.
    Environmental Considerations Efficient use is required to prevent runoff and environmental issues like eutrophication.
    Balanced Fertilization Maintain a nutrient balance (N-P-K) in soil to avoid both deficiency and excess of phosphorus.

    Phosphorus Predicament

    • Phosphorus Scarcity: Phosphorus is a finite resource primarily found in specific geological formations. It’s not only depleting but also causing environmental pollution when it enters water bodies, leading to algal blooms and eutrophication.

    Geopolitical Complexities

    • Global Phosphorus Reserves: Today, a small group of countries, including Morocco and the Western Sahara region, controls the majority of the world’s phosphorus reserves. This geopolitical control raises concerns.
    • Cadmium Contamination: Phosphorus often coexists with cadmium, a heavy metal harmful to health. Cadmium-laden fertilizers can contaminate crops, posing health risks.
    • Largest Importer: India is the world’s largest importer of phosphorus, primarily from cadmium-rich deposits in West Africa.
    • Cadmium Susceptibility: Staple crops like paddy in India are vulnerable to cadmium absorption, potentially causing health issues.

    Challenge of Phosphorus Disposal

    • Loss and Wastage: Only a fraction of mined phosphorus is consumed through food; a significant amount is lost to water bodies due to excessive fertilizer application.
    • Sewage Contamination: Most phosphorus consumed ends up in sewage. Inadequate sewage treatment allows phosphorus to accumulate in water bodies, fueling algal blooms and depleting oxygen.

    Exploring Phosphorus Alternatives

    • Precision Agriculture: Reducing chemical fertilizer use through precision agriculture offers one solution to address phosphorus scarcity without compromising yield.
    • Circular Water Economies: Urban sewage can become a valuable source of phosphorus. Two key strategies:
      1. Source Separation Toilets: Collect urine, a concentrated waste stream rich in phosphorus, and convert it into local fertilizer.
      2. Recycling Wastewater and Sludge: Recover nutrients, including phosphorus, from sewage sludge through innovative methods like sludge mining.

    Incentive Challenges

    • Overuse of Fertilizers: In rural India, powerful farmers often sell fertilizers, encouraging smaller farmers to overuse them. This requires better extension services and awareness campaigns.
    • Perceptions of Sewage: In urban India, sewage has historically been stigmatized, affecting regulations and wastewater treatment practices.

    Rethinking the Approach

    • Systemic Change: Fundamental changes are needed, including lowering sewage mining costs, allowing urban-mined phosphorus in agriculture, and shifting utility incentives from discharge standards to nutrient recovery.
    • Multi-Beneficial Solution: Such changes can tackle multiple challenges, including geopolitical dependency, affordable fertilizers, improved water bodies, and public health benefits.

    Conclusion

    • The phosphorus dilemma is a pressing challenge with far-reaching consequences for agriculture, geopolitics, and the environment.
    • As we grapple with dwindling phosphorus reserves and its environmental pollution, innovative solutions must be embraced.
    • Precision agriculture and circular water economies, including source-separating toilets and sewage recycling, offer promising avenues to alleviate the scarcity issue.

  • Green Hydrogen push will need to counter challenges

    What’s the news?

    • Recently, the government affirmed its commitment to making India a green hydrogen hub with a trial run of two buses that will operate on this clean fuel.

    Central idea

    • Green hydrogen is recognized for its minimal emissions and higher efficiency compared to internal combustion engines. The government’s move to conduct a trial run of two buses on green hydrogen fuel is part of a larger plan to introduce 15 more such buses by the end of the year. However, several challenges must be addressed to ensure the commercial viability of green hydrogen.

    What is green hydrogen?

    • Green hydrogen, often referred to as clean hydrogen, is a type of hydrogen gas produced through a process that uses renewable energy sources or other low-carbon methods with little to no greenhouse gas emissions.
    • Green hydrogen (GH2) is produced by splitting water (H2O) into hydrogen and oxygen (O2) using renewable electricity.
    • It is considered an environmentally friendly and sustainable form of hydrogen production because it does not rely on fossil fuels or emit harmful pollutants or greenhouse gases during its creation.
    • It can serve as an energy source (heavy industry, long-distance mobility, aviation, and power storage) and an energy carrier (as green ammonia or blended with natural gas).

    Have you heard about green steel?

    • Green steel refers to steel that is produced using sustainable and environmentally friendly methods.
    • Green steel is produced using renewable energy sources, such as wind and solar power, and by utilizing low-emission technologies that reduce carbon emissions.
    • One of the main ways to produce green steel is through the use of hydrogen instead of coal or natural gas as the reducing agent in the steel-making process.
    • Green steel is seen as a way to reduce the environmental impact of the steel industry, which is responsible for a significant portion of global carbon emissions.
    • The costs of green steel, made from green hydrogen, are currently much higher but could be reduced with economies of scale and changes in production technologies.

    Challenges and roadblocks

    • Renewable Energy Capacity Gap: India needs to add approximately 100 GW of renewable energy capacity every year for the next seven years to meet its green hydrogen production goals. In contrast, only about 16 GW of renewable energy capacity was added last year, revealing a substantial capacity deficit.
    • Water Intensity: The production of 1 kg of green hydrogen requires around eight to nine liters of water. This poses a significant challenge in regions already grappling with water scarcity issues, potentially straining local resources.
    • Electrolyser Manufacturing Capacity: The global manufacturing capacity of electrolysers, the critical component in green hydrogen production, currently stands at about 10 GW. To meet its 2030 targets, India may need to increase its capacity six to tenfold, indicating a pressing need for rapid expansion.
    • Access to Rare Earth Minerals: Rare earth minerals are essential for electrolyser production, and China currently dominates this market. India must secure a consistent supply of these minerals through strategic partnerships or domestic production to support its green hydrogen ambitions.
    • Safety Concerns: Green hydrogen is highly flammable, necessitating rigorous safety measures throughout the production, storage, and transportation processes. These safety concerns may impact public perception and adoption.

    Way forward

    • Accelerate Renewable Energy Deployment: India should intensify efforts to deploy renewable energy sources like solar and wind power. Policies, investments, and streamlined regulatory processes are necessary to attract investments and expedite capacity expansion.
    • R&D for Water-Efficient Technologies: Investment in research and development is critical to developing water-efficient hydrogen production technologies. Collaborations with research institutions and international partners can expedite progress.
    • Domestic Electrolyser Production: India should prioritize domestic electrolyser manufacturing capabilities. Strategic diplomatic negotiations and alliances can help secure access to rare earth minerals for indigenous production.
    • Stringent Safety Standards: Developing and enforcing robust safety standards and protocols for green hydrogen production, storage, and transport is essential. Ensuring safety will foster confidence in the technology.
    • Infrastructure Development: Building the necessary infrastructure, including pipelines and refueling stations, for green hydrogen production, storage, and distribution is crucial for its widespread adoption.

    Steps in the right direction

    • Green Hydrogen Mission: The Indian government has launched the Green Hydrogen Mission, which aims to produce 5 million tonnes of green hydrogen annually by 2030. This initiative is designed to reduce the country’s dependence on imported fossil fuels and mitigate 50 million metric tonnes of greenhouse gas emissions.
    • Investment in Electrolysis Technology: A significant portion of the Green Hydrogen Mission’s budget is dedicated to developing electrolysers, the devices used in the electrolysis process to produce green hydrogen. This investment is crucial to scaling up hydrogen production capacity in the country.
    • Utilizing the Indian Oil Corporation’s Expertise: The government has wisely leveraged the Indian Oil Corporation’s expertise for the country’s inaugural green hydrogen vehicle project. To access global markets and foster collaborations with other nations, India must further develop its capabilities in the green hydrogen sector.

    Conclusion

    • India’s aspirations to become a green hydrogen hub are laudable and align with global efforts to combat climate change. However, the journey ahead is fraught with challenges. Technological innovation, international partnerships, and a sustained commitment to clean energy are essential to transforming these ambitions into a sustainable reality.

    Also read:

    [Sureshot] National Green Hydrogen Mission

  • RBI asks for SARFAESI Act Compliance

    Central Idea

    • The RBI has issued a directive requiring commercial banks and Non-Banking Financial Companies (NBFCs), collectively referred to as Regulated Entities (REs), to disclose borrower information.
    • This disclosure pertains to borrowers whose secured assets have been repossessed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act).

    What is the SARFAESI Act?

    • Objective: The SARFAESI Act, introduced in 2002, is formally known as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act. Its primary objective is to protect financial institutions against loan defaults.
    • Empowering Banks: The Act empowers banks to seize, manage, or sell securities pledged as collateral for loans, facilitating the recovery of bad debts without the need for court intervention.
    • Broad Application: The SARFAESI Act applies nationwide and covers all types of assets, whether movable or immovable, provided as security to lenders.

    Aim of the SARFAESI Act

    The SARFAESI Act serves two key purposes:

    1. Efficient NPA Recovery: It streamlines and expedites the recovery of non-performing assets (NPAs) for financial institutions and banks.
    2. Asset Auction: It enables financial organizations and banks to auction residential and commercial assets in cases of borrower default.

    Why was such a Law needed?

    • Pre-SARFAESI Era: Before the enactment of the SARFAESI Act in December 2002, financial institutions and banks faced complex procedures for recovering bad debts.
    • Legal Complexity: Lenders had to navigate legal complexities, resorting to civil courts or designated tribunals to secure ‘security interests’ for recovering defaulted loans, resulting in slow and cumbersome debt recovery.

    Powers Granted to Banks under the Law

    • Default Trigger: The SARFAESI Act comes into play when a borrower defaults on payments for more than six months.
    • Notice Period: The lender is required to issue a notice to the borrower, providing them with a 60-day window to clear their outstanding dues.
    • Asset Possession: If the borrower fails to comply within the stipulated period, the financial institution gains the right to take possession of the secured assets and manage, transfer, or sell them.
    • Appellate Avenue: The defaulter has the option to appeal to an appellate authority established under the law within 30 days of receiving a notice from the lender.

    SARFAESI Act: Applicability

    The SARFAESI Act primarily deals with various legal aspects related to:

    • Registration of asset reconstruction companies.
    • Acquisition of rights or interest in financial assets.
    • Measures for asset reconstruction.
    • Resolution of disputes.

  • What’s the link between GDP growth and employment in India

    What’s the news?

    • A recent report, SWI 2023, has brought to light the disconcerting disparity between India’s relentless pursuit of GDP growth and the stark reality of inadequate job creation.

    Central idea

    • In the realm of policy decisions, a fundamental question often arises: Should the focus be on accelerating economic growth or ensuring widespread employment opportunities? A recent report, India is Broken and the State of Working India 2023, draws insights on how India’s growth trajectory impacts employment, emphasizing the need to consider various social factors in this equation.

    The State of Working India 2023 (SWI) Report

    • SWI 2023, focusing on a long-term perspective, analyzes data from 1983 to 2023, emphasizing social identities like caste, gender, and religion.
    • It highlights how GDP growth benefits are distributed unevenly among various segments of society.
    • The quality of jobs created is a crucial aspect of distinguishing between regular-wage jobs and self-employment.

    The relationship between economic growth and employment in India

    • Job Creation Challenge: The report emphasizes that job creation remains one of India’s most significant macroeconomic challenges. Despite the pursuit of high GDP growth, the report suggests that the correlation between economic growth and employment generation has weakened over time.
    • Weakening Employment Elasticity: Employment elasticity, which measures the extent to which employment grows when GDP grows by one unit, has consistently declined since the 1980s. This decline indicates that a 1% increase in GDP now results in less than a 1% increase in employment.
    • Recent Trends: The period from 2017 to 2021 showed a notable improvement in employment. However, this improvement came with nuances. While employment numbers increased, it’s essential to distinguish between jobs created due to economic growth and those created out of necessity (self-employment).
    • Quality of Jobs: The SWI 2023 report underscores the importance of considering the quality of jobs created. Not all employment opportunities are equal, and the report highlights the prevalence of self-employment, which often lacks regular wages and job security.
    • Impact on Women: The changing employment landscape disproportionately affects women. Although women accounted for half of the lost employment during the specified period, they received only a third of the increase in formal employment. This shift also saw more individuals turning to self-employment due to economic distress.
    • Uncorrelated Growth: The report’s broader takeaway is that over the long run, GDP growth and employment growth have been uncorrelated in India. This suggests that policies solely oriented towards achieving higher GDP growth rates may not necessarily lead to accelerated job creation.

    The dominance of GDP growth

    • For years, India’s national discourse has been dominated by the pursuit of high GDP growth rates as the primary indicator of economic progress.
    • The belief has been that rapid economic growth will naturally lead to increased employment opportunities.
    • However, recent developments challenge this conventional wisdom, prompting us to reconsider our priorities.

    The US perspective

    • In contrast to India’s GDP-centric approach, the United States, the world’s largest economy, places a strong emphasis on employment levels.
    • The Chairman of the US Federal Reserve, Jay Powell, consistently highlights the importance of achieving full employment while maintaining price stability.

    Why does India not prioritize employment to the same degree?

    • Historical Perspective: India’s approach to economic development has been influenced by its post-independence history. When India gained independence in 1947, it faced widespread poverty, and economic growth was seen as a means to uplift the masses.
    • Development Paradigm: India adopted a development paradigm that prioritized industrialization and capital-intensive sectors. The belief was that as industries expanded, they would naturally absorb labor.
    • Policy Framework: India’s economic policies, especially since the 1991 economic reforms, have largely centered on liberalization, privatization, and globalization. These policies aimed to attract foreign investment and promote private sector growth, often with an emphasis on manufacturing and services. While these policies aimed at increasing overall economic output, they did not always address the issue of employment directly.
    • Data Focus: Economic policymakers often rely on GDP growth as a quantifiable and easily measurable metric to gauge economic performance. Employment data can be more complex to collect and interpret, and the focus on GDP growth has made it the primary indicator of success.
    • Political Considerations: Political leaders and parties have, at times, used the promise of high GDP growth as a way to gain popular support and demonstrate economic progress to the electorate. This political narrative has reinforced the emphasis on GDP growth.
    • Globalization Trends: The global trend toward globalization and competitiveness has also influenced India’s priorities. The country has sought to position itself as a global economic player, and this often involves pursuing policies that align with international economic norms, including a focus on GDP growth.
    • Lack of Comprehensive Social Safety Nets: India’s social safety nets and social security systems have historically been limited in coverage and effectiveness. As a result, there may be a perception that focusing on GDP growth is essential to lifting people out of poverty, as job opportunities are seen as the primary means of economic betterment.

    A Framework for Change: Rethinking India’s Growth Strategy

    • Promote labor-intensive manufacturing:
      • Encourage industries that have the potential for labor-intensive manufacturing, such as textiles, electronics assembly, and agro-processing.
      • Implement policies and incentives to attract investments in these sectors, as they can create a significant number of jobs.
    • Invest in skill development and training.
      • Establish comprehensive skill development programs to enhance the employability of the workforce.
      • Collaborate with industries to design training programs that align with their specific needs, ensuring that workers are adequately prepared for available job opportunities.
    • Support Micro, Small, and Medium Enterprises (MSMEs):
      • Provide targeted support to MSMEs, which often generate substantial employment.
      • Simplify regulations and reduce bureaucratic hurdles for MSMEs to encourage their growth.
    • Green Manufacturing and Sustainable Industries:
      • Explore opportunities in green manufacturing and sustainable industries, aligning with global trends toward environmentally friendly practices.
      • Invest in renewable energy, eco-friendly technologies, and sustainable agriculture, which can create employment while contributing to environmental goals.
    • Infrastructure Development in Rural Areas:
      • Develop infrastructure in rural areas to facilitate economic activities and job creation outside of urban centers.
      • Improve connectivity, transportation, and access to markets to boost rural employment opportunities.
    • Focus on the formalization of jobs:
      • Implement policies that encourage the formalization of employment, including ensuring written contracts and providing benefits to workers.
      • Address labor market informality to improve job quality and security.
    • Gender-Inclusive Policies:
      • Develop and enforce policies that promote gender equality in the workforce.
      • Encourage women’s participation in the labor market through initiatives such as affordable childcare facilities and measures to reduce workplace harassment.
    • Social Safety Nets:
      • Strengthen social safety nets to provide a cushion for workers during periods of economic volatility.
      • Ensure that unemployment benefits, healthcare, and retirement provisions are accessible and effective.
    • National Employment Policy:
      • Develop and implement a comprehensive national employment policy that outlines a long-term vision and strategy for job creation.
      • Address both the supply and demand sides of the labor market and promote the quantity and quality of employment.
    • Global Trade and Export Promotion:
      • Actively engage in global trade and export promotion, which can stimulate economic growth and create jobs.
      • Identify and target export-oriented industries with growth potential.
    • Decentralized Economic Development:
      • Promote economic decentralization by encouraging the development of regional and local economies.
      • Invest in infrastructure, skills, and entrepreneurship in underdeveloped regions to reduce regional disparities.

    Conclusion

    • The time has come for India to reconsider its economic priorities. While GDP growth remains important, a greater emphasis on job creation, especially quality employment, is crucial for sustainable and inclusive development. The findings of the SWI 2023 report offer a compelling case for Indian policymakers to shift their focus towards strategies that prioritize employment generation, ensuring that the benefits of growth are shared by all segments of society.

  • What are the Reasons for Rise in Global Debt?

    global debt

    Central Idea

    • Record High: The Institute of International Finance (IIF) reported that global debt reached an all-time high of $307 trillion by the end of June 2023, marking an increase of about $100 trillion over the last decade.
    • Debt-GDP Ratio: After seven consecutive quarters of decline, global debt as a share of gross domestic product (GDP) has started rising again, reaching 336%.

    Understanding Global Debt

    • Global debt encompasses borrowings by governments (sovereign), private businesses, and individuals.
    • Governments borrow to cover various expenses and pay interest on past debts, while the private sector borrows primarily for investments.

    Drivers of Rising Global Debt

    • Historical Trend: Both nominal global debt and the debt-to-GDP ratio have been steadily increasing over the years. The pandemic briefly halted this trend as economic activity slowed, but debt levels have been on the rise again.
    • Advanced Economies: Over 80% of the first-half increase in global debt came from advanced economies like the U.S., the U.K., Japan, and France. Among emerging markets, China, India, and Brazil saw substantial debt growth.
    • Surge Amid Rising Interest Rates: Despite expectations of declining demand for loans due to rising interest rates, global debt increased by $10 trillion in the first half of 2023. This trend is not unusual as increased savings often lead to higher debt levels when channelled into investments.

    Inflation’s Impact on Debt

    • Unique Trend: More intriguing than rising debt levels is the preceding seven consecutive quarters of declining global debt as a share of GDP before 2023.
    • Inflation’s Role: The IIF attributes this decline to price inflation, which allowed governments to erode their debts denominated in local currencies through inflation. This process, known as inflating away debt, involves central banks creating new currency to pay off government debt, indirectly taxing the economy through rising prices.

    Causes for Concern

    • Debt Sustainability: Rising global debt levels often raise concerns about debt sustainability, especially in the case of government debt driven by reckless borrowing for populist programs.
    • Impact of Rising Interest Rates: As central banks raise interest rates to combat inflation, governments with heavy debt burdens may struggle to service their debt. Rising rates could lead to defaults or attempts to inflate away the debt.
    • IIF Warning: The IIF warns that the global financial infrastructure is ill-prepared to handle unsustainable domestic debt levels.
    • Private Debt Concerns: Rapidly increasing private debt levels also raise alarms as they are often linked to unsustainable booms that can culminate in economic crises, particularly when such lending lacks genuine savings.
    • Looming Financial Crisis: The 2008 global financial crisis serves as a recent example of an economic boom fueled by easy credit policies, such as those by the U.S. Federal Reserve, preceding an economic downturn.

    Conclusion

    • The surge in global debt warrants attention, given its potential implications for economic stability, sustainability, and the capacity of financial systems to address mounting debt challenges.