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Subject: Economics

  • What changed for Indian industry after 1991 economic reforms?

    Context

    It has been 30 years since the spirit of liberalisation was unleashed in 1991 economic reforms. The private sector, which had been seen very differently up to 1990, was placed at the centre of the reform process. And this has continued and grown since then.

    Challenges and opportunities for Indian industry after economic reforms

    1) Entry of MNCs and centrality to consumers

    • The first challenge was the entry of MNCs through the joint venture (JV) route.
    • Centrality to consumers: The reforms gave centrality to the consumer who till 1991 did not have a choice.
    • The Indian consumer was given choices and companies, both foreign and Indian, wanted to be their first choice.
    • Growth in demand: The surge of new demand from the marketplace transformed the scenario, reflected in GDP growth rapidly moving up to 7 per cent per annum.

    2) Increased competition

    • For the first time, Indian companies faced real competition from other Indian as well as foreign companies.
    • But, many corporates restructured themselves and transformed into competitive forces.
    • The new reality of reduced customs duties and industrial licensing disappearing, removed the protection umbrella and Indian companies, by and large, who had been planning for this day, were ready to face this challenge.

    3) Government-industry partnership

    • Till June 1991, the government and industry were at a distance from each other.
    • June 1991 changed all of that, the government’s dialogue with industry deepened, consultations were frequent.
    • Feedback on what was happening on the ground was taken regularly.
    • A government-industry partnership became a reality.

    4) Boost to aspiration of industries

    • The most significant change brought about by the reforms pertained to the level of “aspirations” of the industry.
    • There was excitement and ambition to be world-class.
    • Rise of IT industry: In this, the IT industry led by TCS, Infosys and Wipro played a major role.
    • They showed that Indian engineers and managers were the best in the world.
    • They exuded confidence which spread to others.

    5) Boost to entrepreneurship

    • Not just the big industry, but also, the small and medium sectors that became part of the new energy in industry.
    • Component manufacturing and exports were new initiatives from ancillaries and suppliers of major manufacturers.

    6) Infrastructure

    • The public sector had a monopoly over infrastructure.
    • This changed and the private sector was invited to participate, to get into public-private partnerships and end the government’s monopoly.

    7) Birth of new private sector bank

    • Banking had been nationalised in 1969.
    • But the reforms of 1991 gave birth to a new private sector bank — HDFC Bank — which, after due diligence by the government and the Reserve Bank of India, opened its doors in 1994.
    • This was a huge step forward in the reform process.

    8) Improvement in corporate governance

    • An industry-led initiative brought out the first-ever task force guidelines and report on corporate governance.
    • This was followed by many other actions and policies.

    Conclusion

    There is still a long way to go, but the die that was cast in 1991 has led to a new tsunami of change.

  • Little progress since years after Indo-US nuclear deal

    Other than the imported Russian-built reactor-based project in Tamil Nadu, which is grandfathered under an earlier 1998 agreement, progress of greenfield projects since the Indo-US nuclear deal has been tardy.

    Indo-US Nuclear Deal

    • The deal was signed in 2008 jointly by then Indian PM Dr. Manmohan Singh and then US President George Bush.
    • India agreed to separate its civil and military nuclear facilities and to place all its civil nuclear facilities under International Atomic Energy Agency (IAEA) safeguards.
    • In exchange, the United States agreed to work toward full civil nuclear cooperation with India.
    • The implementation of this waiver made India the only known country with nuclear weapons which is not a party to the Non-Proliferation Treaty (NPT) but still allowed to carry out global nuclear commerce.

    Q. In India, why are some nuclear reactors kept under “IAEA Safeguards” while others are not? (CSP 2020)

    (a) Some use Uranium and others use thorium.

    (b) Some use imported uranium and others use domestic supplies.

    (c) Some are operated by foreign enterprises and others are operated by domestic enterprises.

    (d) Some are State-owned and others are privately-owned.

     

    [wpdiscuz-feedback id=”3yibtmqjzl” question=”Spark the debate!” opened=”1″]Answer this PYQ in the comment box:[/wpdiscuz-feedback]

    Implementation not in spirit

    • The US has been discussing the sale of nuclear reactors to India since the 2008 pact, two subsequent agreements were signed only in 2016 and 2019.
    • A “project proposal” to set up six reactors in collaboration with Westinghouse Electric Company (WEC) has been announced, but work is yet to begin.
    • WEC, alongside Wilmington-based GE Hitachi Nuclear, has been negotiating to build reactors in India since the nuclear deal was inked.
    • The project, however, came under a cloud after WEC filed for bankruptcy in mid-2017 following cost overruns on reactors coming up in the US.
    • The GE Hitachi project has barely made any progress.

    Back2Basics: Non-Proliferation Treaty (NPT)

    • NPT, is an international treaty whose objective is:
    1. to prevent the spread of nuclear weapons and weapons technology,
    2. to promote cooperation in the peaceful uses of nuclear energy, and
    3. to further the goal of achieving nuclear disarmament and general and complete disarmament
    • Between 1965 and 1968, the treaty was negotiated by a Committee on Disarmament, an UN-sponsored organization based in Geneva, Switzerland.
    • The treaty defines nuclear-weapon states as those that have built and tested a nuclear explosive device before 1 January 1967; these are the United States, Russia, the United Kingdom, France, and China.
    • Four UN member states have never accepted the NPT, three of which possess or are thought to possess nuclear weapons: India, Israel, and Pakistan.
    • In addition, South Sudan, founded in 2011, has not joined.

  • Need to deal with the flaws in the existing structure of GST

    Context

    After four years, the promise of the Goods and Services Tax (GST) remains substantially unrealised.

    Why tax base of GST is not expanding

    • The GST is strongly co-related to overall GDP.
    • Revenue collection of the GST is dependent on the nominal growth rate of Gross Value Added (GVA) in the economy.
    • Since inception, GVA per quarter has been between ₹40-lakh crore to ₹47-lakh crore and GST revenue has not been higher than ₹2.7-lakh crore to ₹3.1-lakh crore.
    • The Tax to Gross value addition is only about 5% to 6.5% though GVA growth was much higher.
    • Issues: A very large segment is covered by exemption, composition schemes, evasion and lower tax rate.

    Five Issues with the GST structure

    1) Dominance of the Centre

    • The political architecture of GST is asymmetrically loaded in favour of the Centre.
    • No body to adjudicate: There is no particular body is tasked to adjudicate if there is a dispute between States and between the Centre and the States.
    • Centre’s domination: In the voting, the central government has one-third vote and States have two-thirds of total votes.
    • All states have equal voting rights regardless of size and stake.
    • With the support of a dozen small States whose total GST collection is not more than 5% of the total central government can dominate the decision making process in GST Council.
    • Small states dictate the terms: With equal value for each States’ voting, larger and mid-sized States feel shortchanged.

    2) Flaw in tax structure

    • Nearly 45% to 50% of commodity value is outside the purview of the GST, such as petrol and petroleum products.
    • Certain states not getting revenue as origin state: States which export or have inter-State transfers or mineral and fossil fuel extractions are not getting revenue as the origin States and need a compensation mechanism.
    • The pre-existing threshold level of VAT has been tweaked too often which has led to an evaporation of tax base incentivising, enabling evasion and mis-reporting.
    • Most trading and retail establishments, (however small) are out of the fold of the GST.
    • At the retail level, irrespective of whether Input Tax Credit (ITC) is required or not, the burden can be passed off to the consumer.
    • As a result, the loss could be as high as one third.

    3) Exemptions

    • Exemptions from registration and taxation of the GST have further eroded the GST tax base compared to the tax base of the pre-existing VAT.
    • Ground for evasion: Exemptions are purely distortionary and also provide a good chance to remain under the radar, thereby directly increasing evasion or misclassification.
    • Theoretically, exemptions at the final stages reduce tax realisation.
    • Multiple rates: As multiple rates are charged at different stages, it goes against the lessons of GST history.
    • This tax works well with a single uniform tax rate for all commodities and services at all stages, inputs and outputs alike.
    • While most countries have a single rate, India stands out and is among the five countries to have four rates/slabs.

    4) Exclusion

    • Against the interest of States: Petroleum products remaining outside the purview of GST has helped the Centre to increase cesses and decrease central excise, in what would otherwise have been shareable with the States.
    • Now, States will be keen on including petrol and diesel under the GST as their share of tax goes up in the process, even if there is a special rate fixed for it.
    • Equity requires that petrol and diesel be brought under the GST.
    • Cascading of taxes: Apart from the complexity it creates in record keeping and ‘granting ITC’, in the present form it also leads to a cascading which the GST avowedly tried to avoid.

    5) Lack of compliance

    • Compliance with GST return (GSTR-1) filing stipulation and the resultant tax information is not up to date.
    • Fraudulent claims of Input Tax Credit (ITC) because of a lack of timely reconciliation are quite high though it has come down by two thirds.
    • Tax evasion, estimated by a National Institute of Public Finance and Policy’s paper, is at least 5% in minor States and plus 3% in the major States.

    Conclusion

    Policy gaps along with compliance gaps do need to be addressed. Without proper tax information, infrastructure and base, the States would go in for selective tax enforcement. In the long run, voluntary compliance will suffer and equity in taxation will be violated.

  • Vaccination and normalising of monetary policy hold key to economic rebound

    Context

    Increasing pace of vaccination and normalising of monetary policy hold key to economic rebound.

    K-shaped recovery and its impact

    • Growth indicators so far suggest resilience in the short term — a shallow dent in May’s economic activity followed by a recovery in June, back to April’s levels.
    • K-shaped recovery: The external, investment and industrial sectors have been relatively resilient, with consumption and services bearing the brunt.
    • Notwithstanding signs of some fatigue in ultra-high frequency indicators in July, damage from the second wave seems largely limited to April-June 2021.
    • However, K-shaped recovery means light cracks on the top conceal much larger structural faultlines below.
    • Rising poverty: The Pew Research Centre estimates that the pandemic has led to India’s poor rising by 75 million while the middle and upper-middle class has shrunk by 39 million.
    • MSMEs and informal workforce worst hit: A recent survey by the ILO finds that the worst-hit — MSMEs and their informal workforce — have struggled to access the government’s pandemic support programmes.
    • These more structural scars may become blurred in the GDP data in coming quarters but will almost certainly affect the medium-term growth story.

    Way forward in the near term

    1) Policy

    • Achieving two objectives: When inflation is under control, then flush liquidity and ultra-accommodative monetary policy will help achieve two objectives—
    • 1) Ensuring easy financial conditions.
    • 2) Help control borrowing costs of the government’s expansive borrowing programme.
    • Inflation risk: The above strategy is not costless, it effectively uses the central bank’s credibility in controlling inflation as “collateral”.
    • So when inflation flares up and remains sticky, this arithmetic becomes increasingly complicated.
    • The RBI’s consistent message recently has been to view the current inflation surge as a “temporary hump”.
    • Much as the current monetary policy stance maintains that the economy is ill-equipped to handle policy normalisation, it is a matter of when rather than if.
    • As growth strengthens and the RBI’s inflation-targeting credibility comes under greater scrutiny, a policy pivot would become increasingly likely.

    2) Vaccination

    • The “ultimate unlocking” of the economy remains contingent on a critical mass getting vaccinated, which on materialising should trigger a revival in consumer and business sentiment.
    • The uptick in the pace of vaccination over the last few days and higher seroprevalence reported in some states are welcome news.

    Conclusion

    Even with widespread vaccinations, future pandemic waves may well be unavoidable. Fiscal, monetary and administrative policies cannot remain in a suspended emergency.

    Back2Basics: K-shaped recovery

    • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
    • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
    • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
    • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

  • The goal of making the rupee a global reserve currency

    Context

    India will celebrate 100 years of Independence in 2047.  This article makes the case that prosperity is possible and best accomplished by the goal of making the rupee a global reserve currency by India@100.

    What is the purpose of having forex reserves?

    • Official foreign exchange reserves of about $12 trillion across 150 countries are currently stored in eight currencies: 55 per cent in US dollars, 30 per cent in euros, and 15 per cent in six other currencies.
    • Protection in case of volatility: This concentration is inevitable given exploding trade, rising capital flows, and the less acknowledged motivation of protecting your reserves from your currency’s volatility.
    •  A reserve currency has to serve as a medium of exchange, a store of value, and a unit of account. 

    Steps India would require to take

    • Full capital account convertibility: To fulfil the ambition of becoming the reserve currency, the first step is full capital account convertibility, as suggested by the Tarapore Committee in 1997. 
    • Advocate rupee invoicing: Dollar investors in the last decade not experiencing the usual big bite out of rupee returns is useful for advocating trading partners to start rupee invoicing.
    • Offshore corporate rupee borrowing: Raising corporate rupee borrowing offshore and onshore will also help.
    • Digital currency: We need to accelerate our CBDC (central bank digital bank currency) plans.
    • Take payment networks to a global level: We need to take our UPI payment technology to the world, the dollar gets heft from global networks like Visa, MasterCard and Swift.
    • Raise tax to GDP ratio: Fiscal policy must raise our tax to GDP ratio, raise the share of direct taxes in total taxes, and keep our public debt to GDP ratio under 100 per cent.
    • Monetary policy: Monetary policy must control inflation while moderating central bank balance sheet size.
    • Economic policy: Economic policy must raise the productivity to reach goals in formalisation, urbanisation, financialisation (100 per cent credit to GDP ratio), industrialisation (less than 15 per cent farm employment), internationalisation (higher share of global trade) and skilling.
    • Institutional reforms: These goals must be complemented by reinforcing institutions that signal rule of law; cooperative federalism, press freedom, civil service effectiveness, and judicial independence.

    How it will help India?

    • Becoming a global reserve currency is helpful because it indirectly aligns fiscal, monetary, and economic policy.
    • Low-interest rate: The main advantage is the “exorbitant privilege” of lower real interest rates.
    • Edge over China: The 2 per cent renminbi share in global reserves — despite a 25 per cent increase last year — doesn’t reflect their status as the world’s second-largest economy and biggest trading nation.
    • China’s astounding economic success seems to be making China overconfident.
    • Chinese overconfidence creates an opportunity for India. 

    Conclusion

    Prosperity for all Indians by India at100 — a precondition for a country where the mind is without fear and the head is held high — needs bold reforms in the next 25 years. These reforms are best measured by the wholesome and achievable goal of the rupee becoming a global reserve currency by 2047. The journey is the reward.

  • What India needs for a just energy transition

    Context

    With an ever-growing list of countries announcing net-zero emissions targets, the global energy system is set to undergo a transformation in the coming decades. But India needs to ensure that this transition is smooth and people-centric.

    Transition in India

    • According to an IEA analysis, 90 per cent of new electricity generation capacity around the world now comes from renewables.
    • In India, that energy transformation is well underway.
    • India is among the world’s top five countries in terms of renewable power capacity.
    • Ambitious target of 450 gigawatts: Its ambitious target to increase India’s renewable energy capacity to 450 gigawatts (GW) by 2030 would help move it closer to achieving the country’s broader climate goals and commitments made under the Paris Agreement.
    • Clean energy leadership by India: India is also showing global clean energy leadership through initiatives such as the International Solar Alliance, which has more than 70 member countries.
    • Transition in rural area: The energy transition in rural India can be driven by dedicated policies to promote renewables, incentivise investment in decentralised low-carbon power sources like rooftop solar, and train and build the capacity of clean energy entrepreneurs.
    • Incorporating energy efficiency in the Affordable Housing Mission: In the short term, stimulus spending in the labour-intensive construction sector could accelerate progress on the Affordable Housing Mission.
    • Incorporating energy efficiency and green construction methods into these projects could ensure millions of homes enjoy thermal comfort, and help make energy efficiency a core part of building designs.

    Factors to consider in transition to clean energy

    • Ensure equity: It must be ensured that the opportunities of India’s transition are shared fairly throughout society — and workers and communities are not left to face the challenges alone.
    • Make it people-centric: To achieve the trifecta of jobs, growth and sustainability, India must strive to put people at the centre of its energy transformation.
    • Provisions for coal-dependent regions: New jobs would need to be found over time for the coal miners affected by the changes, as well as for people who work in the fossil fuel power plants that will close down.
    • Policymakers must earmark special “transition funds” to help coal-dependent regions, some of which are among India’s poorest.
    • Increase investment by rationalising energy subsidies: Energy subsidies must be rationalised and directed towards those who need them most.
    • Fiscal resources freed up through subsidy reform should then be invested in clean energy solutions, especially in underdeveloped regions and marginalised communities.
    • Support rural livelihood: A just transition should focus on how clean energy can support rural livelihoods and increase communities’ resilience in the aftermath of the pandemic shock.
    • Ensure women’s participation in the green workforce: While India’s energy transition will create many new jobs, the limited participation of women in the growing green workforce must be addressed.
    • A 2019 study by CEEW and the IEA suggests that women account for nearly 32 per cent of the renewables workforce globally but only around 11 per cent of the rooftop solar workforce in India.
    • Engage youth: Engaging the youth is critical to ensure that the energy transition is sustainable, inclusive and enduring.
    • Young entrepreneurs in India have already shown their impact by expanding the footprint of renewables and disrupting traditional energy models.
    • Some of these key themes are being explored by the 30 members of the Global Commission on People-Centred Clean Energy Transitions, which the IEA launched in January.

    Conclusion

    A people-centric approach, backed by good policy design, will not only help India build a clean and inclusive energy future, but could also provide a model for other countries and communities worldwide.

  • Poverty in India is on rise again

    In the absence of Consumption Expenditure Survey (CES) data, the Periodic Labour Force Survey shows a rise in the absolute number of the poor in India.

    About Consumption Expenditure Survey (CES)

    • A CES is conducted by the National Sample Survey Office (NSO) every five years.
    • But the CES of 2017-18 (already conducted a year late) was not made public by the Government of India.
    • Now, we hear that a new CES is likely to be conducted in 2021-22, the data from which will probably not be available before end-2022.
    • India has not released its CES data since 2011-12.

    Key highlights

    • Unemployment had reached a 45-year high in 2017-18, as revealed by NSO’s Periodic Labour Force Survey (PLFS).
    • While the PLFS’s questions on consumption expenditure are not as detailed as those of the CES, they are sufficient for us to estimate changes in consumption on a consistent basis across time.
    • It enables any careful researcher to estimate the incidence of poverty (i.e. the share in the total population of those below the poverty line), as well as the total number of persons below poverty.

    There is unemployment induced poverty

    • There is a clear trajectory of the incidence of poverty falling from 1973 to 2012.
    • In fact, since India began collecting data on poverty, the incidence of poverty has always fallen, consistently.
    • It was 54.9% in 1973-4; 44.5% in 1983-84; 36% in 1993-94 and 27.5% in 2004-05.
    • This was in accordance with the Lakdawala poverty line (which was lower than the Tendulkar poverty line), named after a distinguished economist, then a member of the Planning Commission.

    Methodology of Poverty Line

    • In 2011, it was decided in the Planning Commission, that the national poverty line will be raised in accordance with the recommendations of an expert group chaired by the late Suresh Tendulkar.
    • That is the poverty line we use in estimating poverty in the table.
    • As it happens, this poverty line was comparable at the time to the international poverty line (estimated by the World Bank), of $1.09 (now raised to $1.90 to account for inflation) person per day.
    • The PLFS also estimates the incidence of poverty. It also collects the household monthly per capita consumption expenditure data based on the Mixed Recall Period methodology.

    Stunning rise in Poverty

    • It is stunning fact that for the first time in India’s history of estimating poverty, there is a rise in the incidence of poverty since 2011-12.
    • The important point is that this is consistent with the NSO’s CES data for 2017-18 that was leaked data.
    • The leaked data showed that rural consumption between 2012 and 2018 had fallen by 8%, while urban consumption had risen by barely 2%.
    • Since the majority of India’s population (certainly over 65%) is rural, poverty in India is also predominantly rural.
    • Remarkably, by 2019-20, poverty had increased significantly in both the rural and urban areas, but much more so in rural areas (from 25% to 30%).

    Why is it intriguing?

    • It is important here to recall two facts: between 1973 and 1993, the absolute number of poor had remained constant (at about 320 million poor), despite a significant increase in India’s total population.
    • Between 1993 and 2004, the absolute number of poor fell by a marginal number (18 million) from 320 million to 302 million, during a period when the GDP growth rate had picked up after the economic reforms.
    • It is for the first time in India’s history since the CES began that we have seen an increase in the absolute numbers of the poor, between 2012-13 and 2019-20.
    • The second fact is that for the first time ever, between 2004-05 and 2011-12, the number of the poor fell, and that too by a staggering 133 million, or by over 19 million per year.

    Fuss over GDP growth

    • This was accounted for by what has come to be called India’s ‘dream run’ of growth: over 2004 and 2014, the GDP growth rate had averaged 8% per annum — a 10-year run that was not sustained thereafter.
    • By contrast, not only has the incidence of poverty increased since then, but the absolute increase in poverty is totally unprecedented.

    Reasons behind this Pauperization

    The reasons for increased poverty since 2013 are not far to seek:

    • GST: While the economy maintained some growth momentum till 2015, the monumental blunder of demonetization was followed by a poorly planned and hurriedly introduced GST.
    • Fall in investments: None of the engines of growth was firing after that. Private investment fell from 31% inherited by the new government, to 28% of GDP by 2019-20.
    • Fall in exports: Exports, which had never fallen in absolute dollar terms for a quarter-century since 1991, actually fell below the 2013-14 level ($315 billion) for five years.
    • Unemployment: Joblessness increased to a 45-year high by 2017-18 (by the usual status), and youth (15-29 years of age) saw unemployment triple from 6% to 18% between 2012 and 2018.
    • Fall in wages: Real wages did not increase for casual or regular workers over the same period, hardly surprising when job seekers were increasing but jobs were not at anywhere close to that rate.
    • Pandemic: Poverty is expected to rise further during the COVID-19 pandemic after the economy has contracted.

    Hence, consumer expenditure fell, and poverty increased.

    Back2Basics:

    Poverty Lines in India: Estimations and Committees

  • [pib] Haldibari- Chilahati Rail Link

    The freight trains have started commuting via the restored Haldibari (India) – Chilahati (Bangladesh) rail link.

    Haldibari- Chilahati Rail Link

    • The Haldibari – Chilahati rail link between India and then East Pakistan was operational till 1965.
    • The distance between Haldibari Railway Station till the international border is 4.5 km, while that of Chilahati is around 7.5 km till the ‘zero points’.
    • This was part of the Broad-Gauge main route from Kolkata to Siliguri during the partition.
    • Trains traveling to Assam and North Bengal continued to travel through the then East Pakistan territory even after partition.
    • However, the war of 1965 effectively cut off all the railway links between India and then East Pakistan.
    • The link was reopened in 2020 for the movement of passenger and goods traffic.

    Other railway links between India and Bangladesh

    As of now, five links connecting India with Bangladesh have been made operational which include:

    • Petrapole (India) – Benapole (Bangladesh)
    • Gede (India) – Darshana (Bangladesh)
    • Singhabad (India) – Rohanpur (Bangladesh)
    • Radhikapur (India) – Birol (Bangladesh)
    • Haldibari (India) – Chilahati (Bangladesh)

  • [pib] Kuthiran Tunnel

    The Union Minister for Road Transport and Highways has inaugurated the Kuthiran Tunnel in Kerala

    Kuthiran Tunnel

    • Kuthiran Tunnel is a Twin-tube tunnel at Kuthiran in Thrissur District of Kerala.
    • It is located on National Highway 544, owned and operated by the National Highways Authority of India.
    • It is Kerala’s first-ever tunnel for road transport and South India’s Longest 6-lane road tunnel.
    • Kuthiran gradient is situated in the Kuthiran Hills, situated in the western part of Anaimalai Hills. The hills are a notified Peechi- Vazahani wildlife sanctuary.
    • It will drastically improve connectivity to Tamil Nadu and Karnataka.
    • The road will improve connectivity to important ports and towns in North-South Corridor without endangering wildlife.

  • A cycle of low growth, higher inflation

    Context

    In recent times, several economists have been arguing that the Government does not need to do anything with the economy. They argue that like after the Great Depression, the economy rebounded worldwide, and so will it with us. The argument is fallacious on four accounts:

    Four factors that make recovery different from the recovery after the Great Depression

    1) Demand destruction

    • In the case of the Great Depression, demand was created by the Second World War effort, especially in the United States.
    • Demand destruction: In the current scenario, the COVID-19 pandemic has resulted in demand destruction.
    • This is because many jobs have been lost, and even where jobs were retained, there have been pay cuts.
    • Both of these trends were confirmed in the Centre for Monitoring Indian Economy and other surveys.

    Bright spot on export front

    • The only bright spot in this dismal scenario is that the western world has spent a lot of money stimulating the economy.
    • However, the Indian exporter face the challenge of rising freight costs and structural issues such as a strong rupee relative to major competitors.
    • Only the Indian IT sector is placed well to capitalise on rising demand in the world markets.

    2) Inflation and factors driving it

    • India is suffering from stagnant growth to low growth in the last two quarters.
    • As in the low initial base set by last year, almost any growth this year is seen as a significant growth percentage.
    • Commodity prices and monetary policy: Inflation in India is being imported through a combination of high commodity prices and high asset price inflation caused by ultra-loose monetary policy followed across the globe.
    • Liquidity infusion: RBI is infusing massive liquidity into the system by following an expansionary monetary policy through the G-SAP, or Government Securities Acquisition Programme.
    • Foreign portfolio investors have directed a portion of the liquidity towards our markets.
    • India has a relatively low market capitalisation, therefore, India cannot absorb the enormous capital inflow without asset prices inflating.
    • Supply chain issues: Additionally, supply chain bottlenecks have contributed to the inflation we see in India today.
    • Rising fuel prices: India’s usurious taxation policy on fuel has made things worse.
    • Rising fuel prices percolate into the economy by increasing costs for transport.

    Impact of inflation

    • The middle and lower-middle-class get destitute due to regressive indirect taxes and high inflation, with their wealth eroding due to said inflation.
    • Especially in the case of the lower middle class, inflation is lethal as they do not have access to any hard assets, including the most fundamental hard asset, gold.
    • The increase in fuel prices will also lead to a rise in wages demanded as the monthly expense of the general public increases.
    • This leads to the dangerous cycle of inflation and depleting growth.

    3) Interest Rate

    • The only solution for any central banker once he realises that inflation is entrenched is tightening liquidity and further pushing the cost of money.
    • If this does not dampen inflation, repo rates will need to go up later this year or early next year.
    • Tightening the money supply is a painful act that will threaten to decimate what is left of our economy.
    • Rising interest rates lead to a decrease in aggregate demand in a country, which affects the GDP.
    • There is less spending by consumers and investments by corporates.

    4) Rising NPA and its impact on credit growth

    • Rising interest rates, lack of liquidity, and offering credit to leveraged companies instead of direct subsidies to support small and medium-sized enterprises (SMEs) and micro, small and medium enterprises (MSMEs) to counter the COVID-19 pandemic and its effects will result in NPAs of public sector banks climbing faster.
    • Our small and medium scale sector is facing a Minsky moment. 
    • The Minsky moment marks the decline of asset prices, causing mass panic and the inability of debtors to pay their interest and principal.
    • India has reached its Minsky moment.
    • This means that the public sector unit and several other banks will need capital in copious amounts to make up for bad debt.
    • The Union government’s Budget is in no position to infuse large amounts of capital.
    • As a result of the above causes, credit growth is at a multi-year low of 5.6%.

    Way forward

    • Indian economy is in a vicious cycle of low growth and higher inflation unless policy action ensures higher demand and growth.

    Conclusion

    In the absence of policy interventions, India will continue on the path of a K-shaped recovery where large corporates with low debt will prosper at the cost of small and medium sectors. This means lower employment as most of the jobs are created by the latter.