Discussing the Indian Economy’s pressing problems
10, Dec 2022
Prelims level : Economy Mains level : GS-III Economy
Why in News?
- Several agencies, including the IMF and the World Bank have projected lower growth rates for the Indian economy in FY23, than the 7.2 per cent estimated by the RBI in April. The Central bank has now lowered its forecast to 6.8 per cent. Given the current situation, with the Q2 FY 2023.
Current economic growth estimation:
- Economy is likely to grow at 6.5-7.0 per cent: Given the current situation, with the Q2 FY 2023 GDP growth clocking in at 6.3 per cent, the economy is likely to grow at 6.5-7.0 per cent in this fiscal year.
- Considering economic uncertainties it is difficult to arrive at precise estimate: It is difficult to arrive at a precise estimate for growth this year with unprecedented economic uncertainty worldwide, including high global inflation, synchronized monetary tightening, and the impact of the Ukraine war.
Positive signs in the Indian Economy
- Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity.
- Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
- On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.
What is Indian economy’s pressing problems specifically in terms of Labour-intensive growth?
- Employment a biggest concern: Employment, an issue that has persisted over the last two decades. In brief, we have not generated enough good jobs to match the scale at which the economy has grown, especially in the organised sector. As a result, we have very high under-employment and poor-quality employment, which have hampered a much-needed move away from agriculture.
- Lack of precise data on people living in poverty: We do not have a precise estimate of the current levels of poverty, as there has been no household consumption survey since 2011-12, and the 2017-18 survey was abandoned due to technical issues. But there is reasonable consensus that poverty could be around 10 per cent of the country’s population, A low number compared to the past, but as many as 140 million people could still be living in poverty.
- Lack of non-agricultural jobs: The rising demand for the MGNREGA, and the importance of food distribution schemes and other welfare programmes for the poor are indicators of the lack of non-agriculture jobs being generated.
- Lowest rate of women participation in labour force: An alarming aspect of the employment problem in India is the low participation rate of women in the labour force, which is among the lowest in the world. This loops back to the importance of labour-intensive manufacturing. For example, much of Bangladesh’s success, and that of Southeast Asian countries, in exports and manufacturing stems from the large number of women working in their factories.
- Women literacy is rising but increasing number of educated women are not working: A positive trend in India has been the growing trend in girls attending schools and college in the last 20 years, but this also means that an increasing number of educated women are not working.
- Despite of 1991 reforms still remains an untapped opportunity: With the LPG reforms, the expectation was that, as the economy opened up to global competition, India’s low wage levels would attract private investment into labour-intensive manufacturing, thus generating jobs. This was the path followed by the East Asian economies that experienced high growth and rapid development. But for India this remains an untapped opportunity.
- Manufacturing is shifting to countries other than India: Even with rising wage levels in China, manufacturing is shifting to countries other than India. The PLI (production-linked incentives) scheme has been rolled out to encourage manufacturing. It may need some tweaking to be biased towards labour-intensive manufacturing as China vacates space in this area. This may seem at odds with the more popular view that it is small and medium enterprises which promote employment.
- Country’s real exchange rate is not healthy: An overvalued rupee has discouraged the export of labour-intensive manufacturing goods, which are very price-sensitive in global markets. It has also had a dampening effect on domestic production as our currency has depreciated at a lower rate than other emerging economies like China and Indonesia.
- Depreciated rupee impacting domestic producers by inflow of cheaper imports: Domestic producers of goods that compete with imports into our markets have been impacted by the inflow of cheaper imports. This has disincentivised them from expanding production and generating employment.
- Micro, small and medium enterprises (MSMEs) are severally hit: Problems that have come to the fore post-pandemic include the health of micro, small and medium enterprises (MSMEs). Accurate information on this is somewhat scarce but anecdotal evidence suggests that they have been more severely hit than the formal sector.
- The rupee has been overvalued for long and needs to be allowed to depreciate, though in a calibrated way, ensuring external and financial stability.
- Job growth is crucial if we are to reduce the still high levels of poverty in the country
- Incentivizing the domestic producers so that they can compete with the cheaper inflow of imports and expands their manufacturing thereby generating employment in the economy
- The continued recovery of the formal sector, as indicated by various metrics, in terms of the improved health of corporates and banks should effectively pull up the MSMEs through supply chains linkages, among others.
- We still have a negative real interest rate (that is, the difference between the RBI’s policy rate and inflation). Hence, the policy rate needs to rise further, providing a push to financial savings, which are needed to generate higher investment for growth.
- Inflation need to be contained through supply-side measures as well, such as an improvement in the supply of food products.
- High under-employment and poor-quality employment have hampered a much-needed move away from agriculture. A focus on labour-intensive formal manufacturing is the need of the hour.