Note4Students

From UPSC perspective, the following things are important :

Prelims level: Economic indicators and concepts

Mains level: India's economic growth, Indicators, future prospect and challenges

What’s the news?

With the receding impact of Covid-19 and hopeful prospects for an amicable resolution to the Russia-Ukraine War, India must now focus on charting its future growth strategy

Central idea

India’s current per capita income estimated at $2,379 in 2022-23, which needs to be raised by nearly six times over the next 25 years. This ambitious goal will pave the way for a higher standard of living and the eradication of poverty. However, achieving this vision requires a comprehensive understanding of the challenges ahead and the necessary actions to overcome them.

Per capita income refers to the average income earned by individuals in a specific geographic area. It is calculated by dividing the total income of a population by the total number of individuals in that population.
Per capita income provides an indicator of the average standard of living and economic well-being within a given population.

GFCF refers to the total value of investment in fixed assets within an economy, such as machinery, equipment, buildings, and infrastructure, during a specific period.
It represents the net increase in the stock of fixed capital goods.
GFCF is an essential component of aggregate demand and is considered a driver of economic growth.
Higher levels of investment in fixed assets contribute to increased production capacity, improved productivity, and long-term economic development.
The GFCF ratio is often expressed as a percentage of GDP, indicating the proportion of total investment in fixed assets relative to the size of the economy.

The ICOR is an economic indicator that measures- amount of investment required to generate an additional unit of output.
It represents the ratio between the change in capital investment and the corresponding change in output or GDP.
It provides insights into the efficiency of capital utilization and the productivity of investment in an economy.
A lower ICOR indicates that a smaller amount of investment is required to generate a given increase in output, indicating higher efficiency and productivity of capital.
A higher ICOR suggests that a larger amount of investment is needed to achieve the same level of output growth, indicating lower efficiency of capital utilization.

To sustain continuous growth of 7 percent over the next 25 years, India must maintain a GFCF rate of 28 percent.
According to the latest release of NSO, the GFCF rate in current prices for 2022-23 is 29.2 per cent of GDP.
While the commonly assumed incremental capital-output ratio (ICOR) of 4 suggests improved capital efficiency, recent trends indicate an average ICOR of 4.65 from 2016-17 to 2022-23.
Acknowledge the evolving ICOR and work towards an estimated investment rate of 30-32 percent of GDP.
Both public and private investments, especially from the corporate and non-corporate sectors, need to increase.
Direct investments into sectors that promote growth and generate employment opportunities
Welcoming Foreign direct investment in emerging technological sectors

The overall climate for peace– necessary for growth– deteriorated- Ukraine-Russia conflict.
Prolonged tension and conflicts- negative impact on global stability and economic growth.
Shifting attitude of some countries towards global trade.
Developed countries, which previously advocated for free trade, are now imposing restrictions on imports– challenges for developing countries like India, particularly as they strive to compete in the world market.
Supply disruptions of critical imports, such as oil, can cause setbacks for developing and developed countries alike.
The absorption of new technologies, such as Artificial Intelligence (AI)- impact on the industrial structure and employment landscape– challenge for populous countries like India
Balancing economic growth with environmental sustainability may require compromises and adjustments in the growth rate.

India’s economic transformation in 1991 marked a departure from the past, embracing a more market-oriented approach.
India needs to adopt a multi-dimensional approach that encompasses agriculture, manufacturing, and exports.
Given India’s strength in the services sector, it is essential to preserve and enhance this advantage.
Prepare to absorb new technologies, including Artificial Intelligence (AI),
Reorienting the educational system to equip students with required skills and
Identifying labour-intensive economic activities to address potential job losses due to adoption of technology

India has made significant strides in building a strong and diversified economy over the past 75 years. However, India’s per capita income remains low compared to many countries, emphasizing the need for sustained growth. By addressing domestic challenges, seizing opportunities, and prioritizing inclusive development, India can realize its vision of a prosperous and equitable future.

Also read:

Why Indian manufacturing’s productivity growth is plummeting and what can be done?