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Insights into Editorial: Is the economy back on track?


Insights into Editorial: Is the economy back on track?


 

Context:

Though there were disturbances on account of demonetisation and the goods and services tax (GST) for a short term, the recent indicators like Index of Industrial Production and GDP growth rates shows that our economy is back on track.

Exports which accounts for 15% of GDP started picking up due to revival of India’s major markets such as the U.S., Eurozone and Japan since September 2017.

Though there are protests by the youth, farmers and traders because of the hardships they face, employment-generating sectors like construction have gradually started reviving.

The latest quarterly growth data suggest that the economy is growing at more than 7% per annum. For 2016-17, the Central Statistics Office revised the fixed capital formation growth to 10.1%.

What are the major challenges to Indian economy?

A major challenge is the worsening rural crisis. The rural economy’s contribution to GDP may not be significant. But in terms of aggregate demand, the rural population impacts more than 50% of the market base. Solving rural crisis is very crucial for the growth we are looking for.

On the agricultural front, farmers do not have direct access to the market. They are deprived of the benefit of increasing market prices of agriculture produce which mostly goes to middlemen. This is the fundamental problems that need to be addressed and corrective steps need to be initiated.

Similarly, farmers should be enabled to play their role as an effective supply force in the market and be in a position to sell their produce at a competitive price. That is possible only when adequate infrastructure support is built for them rather on repeatedly depending on traditional approaches like MSP or farm loan waivers.

On the external front, the government faces several major challenges: the Federal Reserve’s hike, rising crude oil prices, and the move towards protectionism by India’s major export market, the U.S.

Withdrawal by foreign institutional investors in response to federal hikes may weaken the Indian currency and end up in a higher import bill, especially on the crude oil front, if exports do not pick up.

Protectionism is growing, the U.S. has lowered the corporate tax rate sharply so capital inflows may slow down.

So, the government has to bring about strong reform measures. Domestic institutional investors such as LIC, UTI, or public sector banks can be encouraged to invest in the market.

Why is growth of unorganised sector more important?

The unorganised sector accounts for about 45% of the GDP. It has been badly hit by demonetisation and GST. The non-agriculture component of this sector contributes to 31% of the GDP.

The unorganised sector employs 94% of the Indian workforce. A decline in this component impacts employment. Trade, a large component of this sector, has also been hurt.

The estimation of quarterly growth is largely based on corporate sector data. The data for the unorganised non-agriculture sector are obtained only in reference years. So the official data is unable to represent the reality of the un-organized sector.

The efficiency due to GST benefits the organised sector but adversely impacts the unorganised sector due to complexity of the tax design.

The decline in the unorganised sector has impacted demand. Large parts of the economy have not seen an increase in capacity utilisation.

Growing NPAs in the banking sector increased the pressure on the smaller players in terms of getting credit that they need for investments.

We may see reasonably strong recovery in terms of growth rates of 7%, but the problem is that the smaller units are suffering which is bad news for employment.

Hence the government needed to sharply increase public investment for the growth of this sector.

Conclusion

The corporate India is well on its way to recovery. It’s time to shift the focus to non-corporate India.