Issues related to Economic growth
Why India should invest in mining
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Hindu Kush region
Mains level: mineral wealth
Central idea
The article highlights India’s opportunity in the emerging critical minerals market in Afghanistan’s Hindu Kush, emphasizing responsible mining amidst environmental considerations. It connects this opportunity to the global shift towards electric mobility, with the potential for job creation.
Key Highlights:
- Afghanistan’s Riches: The Hindu Kush region in Afghanistan holds minerals worth a trillion dollars, a potential game-changer.
- Mobility Shift: Global movement from oil to electric vehicles is escalating demand for critical minerals.
- Indian Opportunity: Geological hints suggest the possibility of similar mineral wealth in the northern Indian side of the Hindu Kush range.
- Untapped Potential: India, with vast unexplored land and advancements in deep-sea mining, may have undiscovered mineral riches.
Challenges:
- Governance and Environmental Concerns: Past issues highlight the need for robust laws to balance environmental concerns with job creation.
- Political Tensions: Historical discord between the central government and Congress on mining needs resolution for cohesive policies.
- Legislative Balance: Striking a balance between ecological conservation and job creation requires nuanced legislation.
- Private Sector Role: Private sector involvement is crucial for capital-intensive mining, demanding careful governance.
Key Phrases for value addition:
- “Afghanistan: Saudi Arabia of lithium” emphasizes the potential of the Hindu Kush region.
- “Transition from oil to electric mobility” underlines the global shift and increasing demand for critical minerals.
- “New Middle East: Hindu Kush mountain range” positions the region as a significant player in the emerging critical minerals market.
- “Global critical minerals race” highlights the competitive dynamics in securing these resources worldwide.
Analysis:
- Global Shift: The global transition to electric mobility is a key driver behind the soaring demand for critical minerals.
- Indian Potential: India, with its untapped resources, is poised to benefit from the increasing global demand for minerals.
- Balancing Act: Striking a balance between environmental conservation and job creation is essential for sustainable mining practices.
- Private Sector Significance: In the capital-intensive mining sector, the private sector’s involvement is crucial for efficiency and technological advancements.
Key Data:
- Trillion-Dollar Potential: Afghanistan’s Hindu Kush region is estimated to hold minerals worth a trillion dollars.
- Geological Reports: Reports suggest the possibility of untapped mineral deposits in the northern Indian side of the Hindu Kush range.
- Exploration Status: Less than 10% of India’s landmass has been explored, with only 2% mined.
Way Forward:
- Legislation: Enforcing robust environmental, labor, and land laws is crucial for responsible and sustainable mining.
- Private Exploration: Encouraging large-scale private exploration for critical minerals is vital for efficiency and technological advancements.
- Deep-Sea Prospects: Leveraging emerging deep-sea mining technologies can open new avenues for resource exploration.
- Balance Priority: Striking a balance between environmental conservation and job creation should be a priority in future mining policies.
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Issues related to Economic growth
Propelling India’s development the right way
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India’s development strategies, misses, challenges and way forward
What’s the news?
- The op-ed acknowledges India’s technological achievements, emphasizing the need to revive state support, particularly in emerging sectors. It underscores the urgency of addressing persistent inequalities and promoting inclusive economic growth for a more prosperous future.
Central idea
- Aim for the moon is often synonymous with bold ambition, verging on recklessness. India’s foray into space research in the 1960s was initially met with skepticism, given its status as a young and struggling nation. Today, India boasts remarkable achievements in space exploration. However, these accomplishments raise a pertinent question: How do these feats align with the persistent poverty and destitution afflicting millions of Indians?
Historical Foundations of India’s Scientific and Technological Capabilities
- Indian Institutes of Technology (IITs): Between 1951 and 1961, India founded five Indian Institutes of Technology. These institutions rapidly gained global recognition as centers of academic excellence. They played a critical role in nurturing a talent pool of engineers and scientists who would later contribute to India’s technological advancements.
- Indian Institutes of Management (IIMs): In 1961, India inaugurated the first two Indian Institutes of Management. These institutions aimed to foster managerial talent, aligning with India’s broader goals of building expertise and human capital in various fields.
- Public Sector Units (PSUs): Throughout the 1950s and 1960s, India established numerous public sector units across diverse industrial sectors. These sectors included steel production, fertilizer manufacturing, machine tools, electric machinery, drug production, and petrochemicals. These PSUs not only bolstered industrialization but also served as vital testing grounds for emerging technologies.
India’s Moonshot Development Strategy
- The moonshot development strategy aimed to leverage modern industrialization to address developmental challenges.
- Early visionaries like Vikram Sarabhai envisioned satellite technology for nationwide communication, agricultural improvements, and healthcare education.
- Nevertheless, this approach faced criticism for its heavy reliance on public investment and the alleged misdirection of resources toward capital- and technology-intensive industries instead of labor-intensive sectors.
How have inequalities posed significant hurdles to India’s progress and development?
- Lack of Effective Government Intervention:
- India’s development strategy’s lackluster record was not due to excessive government emphasis on technology but rather because the government could not effectively address inequalities and ensure social development.
- One of the missed opportunities was the failure to implement a successful program of land redistribution.
- Ownership Disparities: Ownership of assets remains significantly low among socially oppressed communities, including Dalits and the Scheduled Caste (SC) population. This lack of asset ownership creates barriers to accessing education and economic opportunities.
- Education Underinvestment: India has consistently underinvested in basic education for the masses. This educational deficit further exacerbates inequalities and limits opportunities for those who are socioeconomically disadvantaged.
- Replicated Inequalities in the Labor Market: The historical inequalities in social and economic spheres translate into labor market disparities. Better-paying jobs tend to be concentrated among privileged groups with greater access to higher education, further deepening the divide.
- Employment Disparities: The data from the Periodic Labour Force Survey highlights significant disparities in employment. In 2021–22, a higher percentage of SC workers (38.2%) were engaged in casual employment, which often involves manual labor, compared to workers from other general category castes (11.2%).
- Contrast with East Asian Countries: East Asian countries like Japan and China implemented land reforms and other measures in the 1950s that created a relatively egalitarian social structure. This laid the foundation for progressive economic and social changes in the subsequent years.
- Impact on Industrial and Economic Growth: Inequalities have negatively impacted industrial and economic growth in India. The skewed domestic demand, driven by the upper-income classes, has hindered the growth of manufacturing sectors producing high-quality, mass-consumption goods like food products and garments.
- Narrow Social Base for Entrepreneurship: Entrepreneurship in India has emerged from a narrow social base, limiting the diversity and inclusivity of the entrepreneurial ecosystem.
Way forward
- Reinstate state support:
- India should recognize the strengths and weaknesses of its post-independence development strategy.
- The audacious attempt to build technological and industrial capabilities with generous state support was the right approach.
- India must reinstate such efforts, especially in rapidly growing economic sectors like semiconductors and biotechnology.
- Abandoning industrial policy in a globalized economy, as done after 1991, is a mistake, especially when countries like the United States and China actively support their industries.
- Make Economic Growth Inclusive:
- India needs to redouble efforts to ensure that economic growth is inclusive and broad-based.
- Access to education, particularly higher education, should be made accessible to all, including marginalized communities.
- Strengthen human and social capabilities:
- While technology has played a significant role in India’s development, it’s equally important to focus on building human and social capabilities.
- Empowering the billion-strong population with the skills and capabilities required for upward mobility is crucial.
- Achieving this would be equivalent to a significant leap in economic progress.
Conclusion
- India’s journey toward technological prowess should coexist with a commitment to alleviate inequality and ensure inclusive growth. A moonshot approach to development, grounded in state support for technological advancement, is imperative. By reconciling these objectives, India can pave the way for a prosperous and equitable future.
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Issues related to Economic growth
How India can leverage its biggest strength?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: India's demography: opportunity or disaster, challenges and priorities
Central Idea
- India’s greatest strength lies in its vast manpower. In the coming 25 years, the country has the potential to experience a golden era, provided it effectively utilizes its favorable demographic composition.
Relevance of the topic
The current population of India is 1,420,681,800, based on Worldometer elaboration of the latest United Nations data.
The growth is driven by India’s large, dynamic and young population, with 65% of Indians being under 35 years old.
However, one of the greatest challenges facing young India’s is unemployment. This raises core question is this an opportunity or demographic disaster
There is a need to create opportunities for the existing labour force and the new entrants into the labour market by improving their productivity.
India’s Demographic Advantage
- Young Workforce: India’s average age of 29 years, compared to countries like the US (38), China (38), France (42), Germany (45), and Japan (48), highlights its advantage of having a younger population, which can contribute to economic growth and productivity.
- Favorable Dependency Ratio: The projected old-age dependency ratios indicate India’s advantage in terms of a smaller proportion of the population requiring support from the working-age population. For instance, while India’s projected old-age dependency ratio is 37% in 2075, France is projected to have 55.8%, Japan 75.3%, the US 49.3%, the UK 53%, and Germany 63.1%.
- Rising Working-Age Population: India is currently in a phase where its working-age population is increasing, presenting a potential workforce that can drive economic growth and development for several decades.
- Potential for Labor Supply: With its large population and a growing workforce, India has the potential to become a significant source of labor supply for the rest of the world. This can attract investment and outsourcing opportunities, further boosting economic growth.
- Abundant Human Capital: India possesses a vast pool of educated and skilled individuals, which contributes to its human capital advantage. This workforce can drive innovation, productivity, and economic competitiveness across various sectors.
- Consumer Market: India’s large population provides a substantial domestic consumer market, offering significant opportunities for businesses to cater to the needs and demands of a vast consumer base, driving economic activity.
- Innovation and Entrepreneurship: The young and dynamic population in India fosters a culture of innovation and entrepreneurship, contributing to the development of new industries, technologies, and solutions, creating employment opportunities and driving economic progress.
- Potential for Economic Growth: By effectively utilizing its demographic advantage, India has the potential to achieve higher rates of economic growth and improve its standard of living.
- Global Competitiveness: A young and skilled labor force enhances India’s competitiveness in the global market, attracting foreign investment, promoting export-oriented industries, and positioning India as a preferred business and investment destination.
- Demographic Dividend: India’s favorable demographic composition presents the opportunity to unlock the demographic dividend, leading to accelerated economic growth and development through investments in education, skill development, healthcare, and employment opportunities.
Lessons learned from Asian success stories accordingly
- Harnessing the Demographic Dividend: Asian countries like China, Japan, South Korea, Malaysia, and Singapore have effectively utilized their favorable demographics to drive economic growth and development. India, with its young workforce, can learn from these examples and focus on maximizing the potential of its demographic dividend.
- Focus on Labor-Intensive Manufacturing: Asian success stories have demonstrated the importance of capitalizing on labor-intensive manufacturing sectors to create employment opportunities. India can prioritize these sectors, such as textiles, toys, footwear, auto components, and agricultural processing, to leverage its abundant labor force.
- Structural Transformations: Asian nations have undergone structural transformations by transitioning from labor-intensive industries to more advanced sectors. India can learn from these examples and emphasize technological advancements, innovation, and high-value manufacturing to sustain economic growth and enhance competitiveness.
- Investment in Infrastructure: Developing robust infrastructure is crucial for economic growth. Asian countries have recognized the significance of infrastructure development in reducing trade and transaction costs, improving connectivity, and attracting investments. India should focus on infrastructure development to support its economic growth objectives.
- Trade and Investment Facilitation: Asian success stories have implemented trade facilitation measures and pursued policies to attract foreign direct investment. India can learn from these experiences by adopting measures to facilitate trade, improve ease of doing business, and create a favorable investment climate.
- Support for MSMEs: Micro, Small, and Medium Enterprises (MSMEs) play a pivotal role in the manufacturing sector. Asian countries have provided support to MSMEs to enhance their competitiveness, scale, and integration into global supply chains. India can prioritize support for MSMEs to drive manufacturing growth and job creation.
- Emphasis on Skill Development: Asian success stories have recognized the importance of skill development in enhancing labor force productivity. India should invest in skilling initiatives, re-skilling, and up-skilling programs to improve employability and align the workforce with evolving industry demands.
- Quality Education and Healthcare: Asian nations have prioritized investments in quality education and healthcare. India can learn from these examples by focusing on improving access to quality education and healthcare services, which will contribute to a skilled workforce and a healthy labor force.
- Government Reforms and Policies: Asian success stories have been supported by proactive government reforms and policies. India should implement favorable policies related to labor laws, taxation, ease of doing business, and intellectual property rights to create an enabling environment for economic growth and entrepreneurship.
- Long-term Vision and Implementation: Asian countries that have achieved sustained success have demonstrated long-term vision and commitment to implementing policies and reforms. India should adopt a similar approach by formulating long-term strategies and ensuring consistent implementation to drive sustainable economic growth.
What India needs to capitalize on its demographic dividend?
- Skilling and Education: India needs to focus on skill development programs such as the Jan Shikshan Sansthan, the Pradhan Mantri Kaushal Vikas Yojana, and the National Apprenticeship Promotion Scheme. These programs have shown success in increasing human resource supply in various sectors. However, efforts should be made to upscale and improve the skills of the labor force, especially in the unorganized sector where underpaid jobs prevail.
- Job Creation and Employment Opportunities: India should prioritize sectors with high labor intensity, such as textiles, toys, footwear, auto components, sports goods, agricultural processing, restaurants, hotels, mining, construction, healthcare, and caregiving services. These sectors have significant potential for employment generation. Additionally, the focus should be on infrastructure development to reduce trade and transaction costs and create an environment conducive to doing business.
- Industry and Infrastructure Development: India should accelerate infrastructure development to support economic growth and enhance competitiveness. This includes investment in transportation, energy, digital connectivity, and other critical infrastructure sectors.
- Ease of Doing Business: To attract investments and promote entrepreneurship, India should continue its efforts to improve the ease of doing business by simplifying regulatory processes, reducing bureaucratic hurdles, and enhancing transparency.
- Social Security and Healthcare: India should work towards improving access to quality healthcare services and implementing robust social security programs. Measures like the Ayushman Bharat and Pradhan Mantri Bhartiya Janaushadhi Pariyojana mentioned in the article can help in achieving these goals.
- Government Reforms and Policies: Implementing favorable labor laws, rationalizing taxation systems, and providing policy stability are essential for creating an enabling environment for economic growth. There is importance of reforms such as the National Education Policy 2020, which aims to update knowledge and ensure productive employment opportunities.
Way Forward: Priority areas
- Improving Education Quality:
- India should prioritize the implementation of the National Education Policy 2020, which emphasizes knowledge updating and aims to provide inclusive, equitable, and quality education at all levels.
- Steps should be taken to address challenges such as non-functional schools, resistance to change, and inadequate resources.
- Providing access to quality education up to higher secondary levels for all is essential to create a productive labor force.
- Ensuring Quality Healthcare:
- The government should continue implementing initiatives like Ayushman Bharat and the Pradhan Mantri Bhartiya Janaushadhi Pariyojana to improve healthcare equity.
- Efforts should be made to make drug prices affordable and accessible, and steps should be taken to ensure financial medical protection, such as universal insurance and adequate medical infrastructure.
- Quality health infrastructure for all will contribute to a healthy and productive labor force.
- Accelerating Reforms for Future Success:
- India should accelerate the implementation of reforms and flagship programs to unlock its demographic dividend and drive economic growth.
- Streamlining bureaucratic processes, improving ease of doing business, and creating an investor-friendly environment are essential to attract investments and foster entrepreneurship.
- Additionally, continued infrastructure development, trade facilitation measures, and reforms in labor laws and taxation systems will support the growth of industries and enhance India’s competitiveness in the global market.
Conclusion
- India’s demographic dividend offers a unique opportunity for growth and development in the coming years. By prioritizing skill development, creating employment opportunities, enhancing productivity, ensuring access to quality healthcare and education, and implementing crucial reforms, India can fully harness its demographic advantage. The nation has the potential to become a global labor force supplier and secure a prosperous future.
Also read:
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Issues related to Economic growth
India’s Population Growth: Dividend or a Disaster?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: India's population trends
Mains level: India's population growth analysis and a way ahead
Central Idea
- India’s projected transition as the most populous country from China by mid-2023 presents opportunities for demographic advantage, but also requires focusing on the available demographic dividend. The population growth, size, and composition must be viewed from an empirical and scientific perspective to understand whether it is a dividend or a disaster.
India’s Population Projection
- A UN report released on recently has provided the first official confirmation that India’s population is expected to surpass that of China by the middle of this year at the latest.
- The annual State of World Population report by the UN Population Fund (UNFPA) has pegged India’s mid-2023 population at 142.86 crore, marginally ahead of China’s 142.57 crore, which is 2.9 million higher than China’s population
What is State of World Population Report?
- The report is an annual report published by the United Nations Population Fund (UNFPA), which provides a global overview of population trends and issues.
- The report covers a wide range of topics related to the population, such as fertility, mortality, migration, family planning, and gender equality.
- It also includes analysis and recommendations for policymakers and governments to address population challenges and promote sustainable development.
- The report is widely regarded as a key reference for researchers, policymakers, and international organizations working on population and development issues.
How India’s Population growth can be a resource?
- A larger workforce: A growing population means a larger workforce, which, if trained and employed, can contribute to economic growth and development.
- Domestic market: A larger population can create a larger domestic market, which can drive economic growth by increasing demand for goods and services.
- Innovation and technological advancements: A larger population can provide a greater pool of knowledge and expertise, and a more diverse range of perspectives and ideas, which can lead to innovation and technological advancements.
- Investment in infrastructure: Population growth can create opportunities for investment in infrastructure, education, and health, which can further stimulate economic development.
- Cultural richness: A larger population can lead to cultural richness and diversity. With a diverse population comes a range of languages, traditions, and cultural practices, which can contribute to a vibrant and dynamic society.
- Diplomatic influence: A larger population can give a country greater diplomatic influence on the world stage. As one of the world’s most populous countries, India has significant diplomatic influence and can use its demographic size as a bargaining tool in international negotiations.
How India’s Population growth can be a Burden?
- Strain on resources: A growing population can put a strain on natural resources, such as water, food, and energy. This can lead to environmental degradation, scarcity, and conflict.
- Unemployment: A larger population can create a mismatch between the supply and demand of jobs, leading to high unemployment rates, particularly among young people
- Poverty: Population growth can exacerbate poverty, particularly in rural areas and among marginalized communities. This can create social and economic inequality and limit access to education, healthcare, and other basic needs.
- Overcrowding: A larger population can lead to overcrowding, particularly in urban areas. This can create poor living conditions, increased pollution, and health hazards.
- Infrastructure: A growing population can put a strain on infrastructure, such as transportation, housing, and sanitation. This can lead to inadequate services and poor living conditions.
- Health: A larger population can increase the spread of disease and illness, particularly in areas with poor healthcare infrastructure. This can lead to public health crises and decreased life expectancy.
- Education: Population growth can put a strain on education systems, particularly in terms of providing quality education to all. This can limit social and economic mobility and contribute to inequality.
- Migration: A larger population can lead to migration, particularly to urban areas, which can create social and economic challenges, such as increased crime rates and inequality.
Deeper outlook: Trends of population growth, size and composition
- Replacement level fertility: With total fertility rate of 2.0 in 2023, India is already at replacement level fertility, meaning two children replacing their parents. This indicates that the population is on a path toward stabilisation.
- Negative growth: India continues to experience positive growth, but in a decelerated mode until 2064, from which point it will become negative growth. The peak of India’s population size will be around 169.6 crore in 2063.
- Working age population: Looking at the population composition of India, there are greater prospects for demographic dividend than a disaster. With 68% of the working age population in 2023, the country continues to have a demographic window of opportunity for the next 35 years to reap an economic dividend
Facts for prelims
Fertility Decline
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Mechanism to translate a demographic bonus to economic dividend
- There are four key mechanisms that translate a demographic bonus to economic dividend:
- Employment, 2. Education and skills, 3. Health conditions, and 4. Governance.
- Job creation, education, skills generation, and ensuring a healthy lifespan are important channels that translate demographic opportunity into economic gains.
- Good governance, reflected through conscientious policies, is another essential aspect for reaping demographic dividend.
Way ahead: India’s Demographic opportunity
- India’s relatively younger population provides higher support ratios, with lesser disease, disability, and caring burden.
- India has the potential to become a worldwide market for both production and consumption, with lower manufacturing costs due to a relatively cheaper workforce.
- Available demographic opportunity in the form of a greater share of the working age population has the potential to boost per capita GDP by an additional 43% by 2061.
- However, a total fertility rate of less than 1.8 may not be economically beneficial for India, and population control methods run the risk of inducing forced population aging.
Conclusion
- While India’s demographic transition presents opportunities for demographic advantage, it must focus on reaping the available demographic dividend. The composition of India’s population presents prospects for demographic dividends, but certain mechanisms must be employed to translate demographic opportunity into economic gains. Policies that support an enabling environment that can provide high-quality education, good healthcare, respectable employment opportunities, good infrastructure, and gender empowerment are essential.
Mains Question
Q. India is set to surpass China as the most populous country in the mid 2023. This presents India an opportunity and a challenge of population growth. Analyze and suggest a way ahead to harness the potential of its working age population.
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Issues related to Economic growth
China plus one (C+1) strategy and advantage for India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: C+1 strategy
Mains level: C+1 strategy and India's adavtages
Context
- In January 2023, India surpassed China to become the world’s most populous country with a population count of approximately 1.417 billion as against China’s 1.412 billion, as estimated by the World Population Review (WPR). This creates both opportunities and challenges for India.
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The global turmoil and China as enablers of the Indian growth story
- There are three factors that have enabled the Indian growth story.
- Overdependence on specific economies: If the pandemic had had one crucial lesson for the global economy, it must be reducing the overdependence on China-specific Global Value Chains (GVCs). As is evident from the pandemic, the subsequent Ukraine-Russia war or the recent disastrous COVID-19 surge in China the overdependence on specific economies is bound to have cascading effects on the world economy because of the macroeconomic shocks they produce.
- Glocalised models of economic partnerships: Countries now strive to strike the right balance between globalisation and localisation, through bilateral and multilateral platforms characterised by leveraging sub-regional comparative advantages. To a large extent, these emerging forms of glocalised models are also based on controlling Beijing’s political and economic prowess in the Indo-Pacific and beyond, where India plays an active role.
- Use of technology: There is no doubt that the pandemic has provided an uptick in the use of technology ranging from the provision of social security payments at the grassroots to government-level conferences.
China plus one (C+1) strategy
- The US-China trade war and the pandemic-induced supply chain disruptions emanating from China have indeed paved the way for many western corporates to consider a China Plus One (C+1) strategy.
- The strategy would entail diversifying investments from China to other countries, to mitigate the economic and geopolitical risks associated with the former.
- While many also hail Vietnam as another economy to be in the race of attracting investments fleeing China, India could be the potential frontrunner in the C+1 game.
Why makes India to surge ahead in C+1?
- India’s economic advancement: India has a demographic advantage over China, with a larger percentage of its population under 30. This young population is expected to drive consumption, savings, and investments, leading to India’s goal of a multi-trillion dollar economy.
- Low cost of labour is an advantage: India has a low cost of labor and other forms of capital, making production costs lower and increasing competitiveness in international markets. India’s labor cost is also half that of Vietnam, making it a strong player in electronics and semiconductor manufacturing.
- India’s heavy infrastructure investment: A heavy investment in physical infrastructure through the National Infrastructure Pipeline (NIP) is expected to reduce costs in manufacturing sectors and cut transportation time and costs by 20%. This is in contrast to China, where multiple companies handle different parts of the transportation process, increasing costs
- India’s conducive business environment: Recent policy interventions in India such as the Production Linked Incentive (PLI) scheme, tax reforms, liberalization of FDI policies, setting up of land pools and organizing business summits have helped attract investments to the domestic economy. These efforts, driven by the Make in India initiative, have also been supported by efforts to promote competitive federalism and reduce transaction costs of doing business.
- India’s digital advantage: India’s high internet penetration at 43% allows for digital skilling initiatives to bring returns across various economic sectors, particularly services. A combination of home-grown technologies and greater access to Google and Facebook, which are banned in China, gives Indian youth a digital edge.
- As English is the second language provides ease of communication: the prevalence of the English language skill set in the young Indian populace undoubtedly puts India ahead of China. As English is the second official language in the Indian states, it provides business executives with ease of communication in conducting business with North American and European clients.
- Well balanced economic partnerships: India’s economic partnerships are characterized by utilizing sub-regional comparative advantages and controlling Beijing’s political and economic power in the Indo-Pacific. India’s decision to not join the RCEP in 2020 to protect its domestic market and curb trade deficits sends a strong signal of its disassociation with Beijing in trade partnerships. The CEPA signed with the UAE in 2022 is expected to increase two-way trade to $100 billion in five years by opening access for Indian exporters to Arab and African markets.
- Dynamic Indian diplomacy: India has strengthened its economy through diplomatic partnerships and trade agreements, such as the QUAD, I2U2, and agreements with Australia, Canada, the European Union, and African countries. These partnerships have provided Indian businesses with greater access to finance, technology, and new markets. As India assumes the presidency of the G20 and the Shanghai Cooperation Organization this year, it is well-positioned to navigate changing globalisation trends and be a strong voice for the Global South.
- Most important is the large domestic market: India’s large domestic market with a population of 1.3 billion and increasing incomes at 6.9 percent per annum offers a competitive alternative to China’s massive domestic market. With a population base of 98 million, Vietnam’s market is much smaller in comparison.
Conclusion
- Indian economy that has risen from the ashes like a phoenix after a year of negative growth caused by the pandemic-led lockdown. India’s 74th Republic Day, therefore, should not merely mark a remembrance of the past or a celebration of adoption of the world’s largest and most comprehensive constitution, but should also be a celebration of the dazzling future of a roaring economy that will show light to a dreary world.
Mains question
Q. What is China plus one (C+1) strategy? Discuss why it is said that India will surge ahead in C+1?
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Issues related to Economic growth
Key takeaways form the World Economic Forum’s annual meeting
Note4Students
From UPSC perspective, the following things are important :
Prelims level: World Economic Forum
Mains level: World Economic Forum annual meeting and key takeaways and new initiatives
Context
- The World Economic Forum’s Annual Meeting 2023, held in the Swiss town of Davos, ended Friday a conference that started in a world possibly fundamentally altered, but whose processes and outcomes remained pretty much business as usual.
The theme this year was ‘Cooperation in a Fragmented World’.
World Economic Forum (WEF)
- Headquartered in Geneva, Switzerland, WEF is an international not-for-profit organization, focused on bringing the public and private sectors together to address the global political, social, and economic issues.
- It was founded in 1971 by Swiss-German economist and Professor Klaus Schwab in a bid to promote the global cooperation on these most pressing problems.
- The first meeting of WEF was held more than five decades ago in Davos, which has been the home of the annual gathering almost ever since, also becoming the shorthand for the event.
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key takeaways from WEF on the economy
- Positive outlook for economy: Most business leaders were upbeat about the economy, with US and the European Union (EU) seemingly beyond the risk of a recession now. China ending its zero Covid curbs and opening shop again added to the positive outlook.
- Caution from central banks: Central banks of the major economies cautioned that concerns still remained, and said they would keep interest rates high to ensure inflation is under check. For example, Stay the course is my mantra, European Central Bank President quoted. The US Federal Reserve Vice Chair Lael Brainard was quoted as reminding investors that “inflation remains high, and policy will need to be sufficiently restrictive for some time.
- Potential impact on energy prices: Many also pointed out that China opening up could mean a rise in its energy consumption, thereby driving up energy prices.
- Concerns for developing economies: As the richer nations look to focus inwards, protecting their own workers, energy sufficiency, supply lines, etc., concerns were raised that this policy direction would hit developing economies.
Climate change and green energy discussions at World Economic Forum
- The need for green energy and financing: Everyone agreed upon the need for green energy and the need for more money to flight climate change.
- GAEA initiative to unlock $3 trillion financing: According to the WEF’s website, The World Economic Forum, supported by more than 45 partners launched the Giving to Amplify Earth Action (GAEA), a global initiative to fund and grow new and existing public, private and philanthropic partnerships (PPPPs) to help unlock the $3 trillion of financing needed each year to reach net zero, reverse nature loss and restore biodiversity by 2050.
- International Concerns and Reactions: The EU raised concerns over a US green energy law that benefits products, such as electric vehicles, made in America.
- New Initiatives and Partnerships: The Press Trust of India (PTI) reported that more than 50 high-impact initiatives were launched at the event. 1.Maharashtra Institution for Transformation (MITRA) signed a partnership with the forum on urban transformation to give the state government strategic and technical direction. 2. A thematic centre on healthcare and life sciences is to be set up in Telangana. 3. The Coalition for Epidemic Preparedness and Innovations (CEPI) aims to develop new vaccines for future pandemics.
Ukraine demands more military and financial aid
- Military Aid and Financial Aid for Reconstruction: Ukraine kept up its demand for more military aid to fight its war against Russia, and more financial aid to rebuild after the war, saying the reconstruction fund commitments should start coming in now and not after the war ends.
- President Zelenskyy’s Address and Criticism of US and Germany: While Ukraine President Volodymyr Zelenskyy gave a video address. In his address, Zelenskyy made an indirect criticism of the US and Germany dithering over sending tanks to his country.
Criticism and defence of the Davos Event
- Spectacle of Rich and Powerful Talking about Poverty and Climate: The jarring spectacle of the Davos event where the uber-rich and powerful fly in on private jets to talk about poverty alleviation and climate action came in for criticism yet again.
- Opportunity for Decision-Makers to Meet and Interact: However, others pointed out that despite its flaws, the conference is an opportunity for many decision-makers to meet and interact with each other.
- The Economist’s View on the Importance of Communication and Conversation: As the Economist editor-in-chief Zanny Minton Beddoes put it, while the talks at Davos can be described as “highly-caffeinated speed dating”, more conversation and communication is better than less contact and less communication.
Conclusion
- The World Economic Forum highlighted the pressing need for green energy and financing to combat climate change. Though the event remained focused on business as usual, we can see that the WEF provided an opportunity for decision-makers to meet and interact, and more than 50 high-impact initiatives were launched at the event.
Mains Question
Q. Discuss some of the key takeaways from the WEF’s annual meeting 2023, with a specific focus on the discussions and initiatives related to the economy and climate change.
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Issues related to Economic growth
New India: The world’s next engine of growth
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Global slowdown and India' economic growth
“The mantle of the G20 presidency has come at the right time, allowing India to influence the global agenda based on its own priority of accelerated, inclusive and resilient growth”
Context
- The pandemic has proven to be the breakout moment in India’s long overdue emergence as the world’s next engine of growth. New India is bearing fruit at a time when one-third of the world’s economy is facing a slowdown. Speaking at FICCI’s 95th annual general meeting, Finance Minister said that the upcoming budget will set the template for the next 25 years, which is India’s Amrit Kaal.
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A gloomy global outlook
- Prospectus of global growth: According to the International Monetary Fund (IMF), global growth will nearly halve to 3.2 per cent in 2022 and fall further to 2.7 per cent in 2023, reflecting stalling growth in the US, China and the Euro Zone.
- Global inflation: Higher food and energy prices have led to global inflation peaking at 8.8 per cent in 2022 which is, however, expected to decline to 6.5 per cent in 2023 and 4.1 per cent in 2024.
- Developed nations are struggling to tame inflation: Developed nations have adopted excessive stimulus measures. According to a report by the McKinsey Global Institute, in 2020 and 2021, households globally added $100 trillion to global wealth on paper as asset prices soared and $39 trillion in new currency and deposits were minted and debt and equity liabilities increased by about $50 trillion and $75 trillion, respectively, as governments and central banks stimulated economies.
- Russia- Ukraine conflict inflicting fiscal pain: Meanwhile, the continuing Russia-Ukraine conflict is inflicting fiscal pain beyond the immediate region
- Disrupted supply chain by China’s covid policy: While China’s Covid policy has disrupted supply chains, which are now once again threatened by a potential fallout of an abrupt reversal.
- India’s inflation is largely imported: India’s own fight against inflation, which is largely imported, has been aided by fiscal and monetary policy working in tandem with a little help from easing commodity prices.
India stands at a bright spot amidst significant challenges
- Fastest-growing large economy in the world: However, India stands out as a rare bright spot with the economy estimated to grow around 7 per cent in FY23 and a growth forecast of 6.1-6.5 per cent in FY24, thus retaining the tag of the fastest-growing large economy in the world.
- Inflation coming down within RBI’s tolerance level: In an encouraging sign, retail inflation eased to 5.88 per cent in November, thus coming within the RBI’s tolerance band after 11 months. While it is too early to declare victory in terms of taming inflation, policymakers must now chart out a path that prioritises growth
- India likely to overtake Japan and Germany to become 3rd largest economy: Having recently surpassed the UK to become the world’s fifth-largest economy, India is likely to overtake Japan and Germany before the end of the decade to become the third-largest economy in the world.
- What made this possible: Reforms aimed at enhancing ease of doing business and reducing the cost of doing business in a large, unified domestic market along with a focus on boosting the manufacturing sector through the Production Linked Incentive (PLI) schemes, which are helping attract large investments including in critical areas like semiconductors.
What India has to share with the world?
- G20 leadership to bring about structural transformation: Its priority as G20 president is to focus on areas, which have the potential to bring about structural transformation leading to accelerated, inclusive and resilient growth.
- Concept of LiFE for a sustainable lifestyle: Similarly, the concept of LiFE (Lifestyle for the Environment) draws upon ancient sustainable traditions to reinforce modern-day environmentally conscious practices.
- Knowledge sharing: Finally, knowledge sharing in areas like digital public infrastructure and financial inclusion will enable the wider adoption of disruptive technologies.
Conclusion
- Investors both domestic and global must now come forward and participate in the India growth story which, in turn, will give a much-needed boost to global growth going ahead. Speaking at the World Economic Forum last year, PM Modi said “Make in India, Make for the World”. There has never been a better time to invest in India and reap the benefits of what it has to offer.
Mains question
Q. At a time when one-third of the world’s economy is facing a slowdown India stands at a brighter spot Discuss. Highlight what India has to share with the world?
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Issues related to Economic growth
India’s Economic Growth story and the future roadmap
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Economic indicators
Mains level: India's economic growth story, current challenges and the future roadmap
Context
- By 2047, India will complete 100 years after Independence. By that time, India strives to achieve the status of a developed economy, which means achieving a minimum per capita income equivalent to $13,000.
Economic growth during the British period
- Poor state of economy: It is not realized often that India’s economic progress in the first half of the 20th century under British rule was dismal. According to one estimate, during the five decades, India’s annual growth rate was just 0.89%.
- Negligible growth in per capita: With the population growing at 0.83%, per capita income grew at 0.06%. It is not surprising that immediately after Independence, growth became the most urgent concern for policymakers.
Economic growth after Independence
- In the early period, India’s strategy of development comprised four elements:
- Raising the savings and investment rate;
- Dominance of state intervention;
- Import substitution, and
- Domestic manufacture of capital goods.
- Modest growth till 1970: India’s average growth till the end of the 1970s remained modest, with the average growth rate being 3.6%. With a population growth of 2.2%, the per capita income growth rate was extremely modest at 1.4%.
- Improvement in social indicators: On certain health and social parameters, such as the literacy rate and life expectancy, there were noticeable improvements.
- The success of green revolution: While India had to rely on the heavy imports of food grains on a concessional basis, initially, there was a breakthrough in agriculture after the Green Revolution.
- Industrial base widened: The industrial base expanded with time. India became capable of producing a wide variety of goods including steel and machinery.
- Unsustainable fiscal policy: Plan after plan, actual growth was less than what was projected. The Indian economy did grow at 5.6% in the 1980s. But it was accompanied by a sharp deterioration in the fiscal and current account deficits, and the economy faced its worst crisis in 1991-92.
Statistics of economic growth after 1991
- Rapid economic growth: Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%. Between 2001-02 and 2012-13, it grew by 7.4% and the growth rate between 2013-14 and 2019-20 was 6.7%.
- Sustained period of high growth rate: The best performance was between 2005-06 and 2010-11 when GDP grew by 8.8%, showing clearly what the potential growth rate of India was. This is the highest growth experienced by India over a sustained period of five to six years. This was despite the fact that this period included the global crisis year of 2008-09.
- Rising investment rate: There was a corresponding increase in the savings rate. The current account deficit in the Balance of Payments (BOP) remained low at an average of 1.9%.
- Setback to growth after 2011-12: However, the growth story suffered a setback after 2011-12. The growth rate fell to 4.5% in 2012-13 according to the 2004-05 series. The growth rate since then has seen ups and downs. The growth rate touched the 3.7% level in 2019-20.
Roadmap for Future Growth
- Keeping the sustained growth rate: The first and foremost task is to raise the growth rate. Calculations show that if India achieves a 7% rate of growth continuously over the next two decades and more, it will make a substantial change to the level of the economy. India may almost touch the status of a developed economy.
- Maintaining the incremental capital output ratio: If India maintains the incremental capital output ratio at 4, which is a reflection of the efficiency with which we use capital, India can comfortably achieve a 7% rate of growth.
- Investment must be increased: Raising the investment rate depends on a number of factors. A proper investment climate must be created and sustained.
- Private investment is crucial: While public investment should also rise, the major component of investment is private investment, both corporate and non-corporate. It is this which depends on a stable financial and fiscal system. The importance of price stability in this context cannot be ignored.
- New technologies must be embraced: India needs to absorb the new technologies that have emerged, and that will emerge. Its development strategy must be multidimensional.
- Strong Export and manufacturing: India need a strong export sector. It is a test of efficiency. At the same time, India needs a strong manufacturing sector. The organized segment of this sector must also increase.
- Strengthened the social safety nets: As output and income increase, India must also strengthen the system of social safety nets. Growth without equity is not sustainable.
Challenges for India’s growth
- Low per capita income: India today is the fifth largest economy. This is an impressive achievement. However, in relation to per capita income, it is a different story. In 2020, India’s rank was 142 out of 197 countries. This only shows the distance we have to travel.
- Declining growth in developing countries: The external environment is not going to be conducive. The Organization for Economic Co-operation and Development reports a secular decline in growth in developed countries.
- Climate change may affect the growth: Environmental considerations may also act as a damper on growth. Some adjustment on the composition of growth may become necessary.
Conclusion
- Considering the India’s population, India has no option but to grow continuously. Government has undertaken major structural reform and policy initiatives like GATI-SHAKTI to give fillip to growth of economy. These are the steps in the right directions and more such liberalizing initiatives need to be encouraged.
Mains Question
Q. Briefly describe the history of economic growth of India after independence. What could be the roadmap for future growth of India till 2047?
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Issues related to Economic growth
Retail Inflation and the new trends
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Inflation
Mains level: Inflation and the concerns
Context
- The recent data seems to indicate that retail inflation has possibly peaked and is now likely to trend downwards. But, it would be wise to exercise caution. The latest data, while providing useful nuggets of information about price trends in the economy, challenges some of the widely held conceptions about inflation, and gives mixed signals about its trajectory.
What is a simple definition for inflation?
- Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).
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Inflation Rate
- Inflation Rate is the percentage change in the price level from the previous period. If a normal basket of goods was priced at Rupee 100 last year and the same basket of goods now cost Rupee 120, then the rate of inflation this year is 20%.
- Inflation Rate= {(Price in year 2 – Price in year 1)/ Price in year 1} *100
Five broad trends emerge to consider as reasons behind high inflation.
- Russia- Ukraine war:
- The sharp rise in commodity prices as a consequence of the war is considered to have been largely responsible for the spurt in inflation this year, pushing it beyond the upper threshold of the RBI’s inflation-targeting framework.
- For instance, India’s crude oil import price rose from $84.67 per barrel in January to $112.87 in March, and further to $116.01 in June. The ripple effects of higher commodity prices have been felt across the economy.
- Inflation generalized in formal and informal sectors:
- There are indications that inflation is getting more generalized across both the formal and informal segments of the economy.
- One indication of this comes from the clothing and footwear category, a highly fragmented industry with the presence of both formal and informal segments. Another possible indication comes from rentals.
- Rental inflation in India had tended to remain largely range-bound over much of the past few years. But as this category has the highest individual item-wise weight in the inflation index, any movement in either direction, however small, would have a large impact on core inflation.
- Supply side disruptions during the pandemic: During the pandemic, supply-side disruptions had caused goods inflation to rise, even as services inflation remained relatively muted owing to risk-averse behaviour by consumers and restrictions on high-contact intensive sectors.
- Competition and the pricing mechanism in the economy:
- Prices are rigid on the downside will depend not only on how demand fares now with monetary conditions having been tightened, but also on the extent of competition in the economy, among others.
- After all, greater market concentration creates conditions for greater pricing power. A badly damaged non-corporate sector (MSMEs) would have led to ruptures in the low-cost economy, increasing the pricing power of the corporate sector during this period.
- Wage- price spiral:
- Inflation in India is not a consequence of a strong economy. Wage growth in the large informal rural economy has been lower than inflation.
- While some skill-intensive segments of the urban formal labour force may be able to exercise some bargaining power, the labour force participation rates suggest continuing slack in urban labour markets.
What are the concerns?
- Commodity should have come down over the period: If high core inflation in the months after the beginning of hostilities was an outcome of the passthrough, either in part or completely, of the Ukrainewar, then the decline in commodity prices since then should have led to a moderation in core inflation
- Services inflation vs goods inflation: But as activities normalised, there was an expectation that services inflation would see a strong pick-up. The recent data indicates that this has not been the case. While services inflation has risen, it remains considerably lower than goods inflation, perhaps owing to a combination of lower cost-push pressures, more slack and less demand.
Conclusion
- While inflation may have peaked, it is far from being quashed. The RBI expects inflation to edge downwards from 6.5 per to 5 per cent in the first quarter of the next financial year (2023-24). But RBI ca not afford to underestimate the price pressures in the economy.
Mains Question
Q. What is inflation? Some of the new emerging trends are considered while measuring rising inflation in the current scenario. Discuss.
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Issues related to Economic growth
One must know India’s Economic Growth Story
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Economic indicators and related facts
Mains level: Indias Growth story, Status of Growth drivers amidst the challenge of slowing economies
Context
- As the COVID-19 pandemic fades and hopes to rise for nations and societies to return to some kind of normalcy, there is effort all around to take stock of where we stand and what our prospects look like. A look back over the last few years at how India performed in terms of its economy.
Present situation of India’s economic growth
- Mixed growth story: One group of experts argues, India’s growth story is more mixed. In 2021-22, its GDP growth was 8.7%, which was among the highest in the world. This is good but, against this, we must offset the fact that much of this is the growth of climbing out of the pit into which we had fallen the previous year.
- IMF reduced the growth forecast: In 2020-21, India’s growth was minus 6.6%, which placed the country in the bottom half of the global growth chart. For 2022-23, the International Monetary Fund has cut India’s growth forecast to 6.1%.
Structural assessment of India’s growth
- Rising inequality and high unemployment: Most of India’s growth is occurring at the top end, with a few corporations raking in a disproportionate share of profits, and unemployment is so high, it is likely that large segments of the population are actually witnessing negative growth.
- Slowdown in previous years: What makes India’s growth story worrying is that the slowdown began much before the COVID19 pandemic. It began in 2016, after which, for four consecutive years, the growth rate each year was lower than in the previous year. Growth in 2016-17 was 8.3%. After that it was, respectively, 6.9%, 6.6%, 4.8%, and minus 6.6%.
- Status of unemployment: India’s unemployment rate is high. In October, it stood at 7.8%. However, what is really worrying is youth unemployment. According to International Labour Organization (ILO) data, collated and presented by the World Bank, India’s youth unemployment, that is, from among people aged 15 to 24 years who are looking for work, the percent that does not find any, stands at 28.3%.
Know the basics-What is Unemployment?
- Definition: Unemployment is a phenomenon that occurs when a person who is capable of working and is actively searching for the work is unable to find work.
- Those who are excluded: People who are either unfit for work due to physical reason or do not want to work are excluded from the category of unemployed.
- Unemployment rate: The most frequent measure of unemployment is unemployment rate. The unemployment rate is defined as a number of unemployed people divided by the number of people in the labour force.
- Labour Force: Persons who are either working (or employed) or seeking or available for work (or unemployed) during the reference period together constitute the labour force.
Other perspectives on Indian economy
- The latest GDP numbers suggest: For Q1 FY2022–23 suggest that economic growth is on a healthy track. Consumers, after a long lull, have started to step out confidently and spend private consumption spending went up 25.9% in Q1.
- On the production side: the contact-intensive services sector also witnessed a strong rebound of 17.7%, thanks to improving consumer confidence.
- Healthy agriculture sector: The only sector that consistently performed well throughout the pandemic, remained buoyant.
- Industrial growth: Industrial growth boosted from accelerating growth in construction and electricity, gas, water supply and other utility services sectors.
- Manufacturing is not doing well: A sector that has not yet taken off sustainably is manufacturing, which witnessed modest growth of 4.5% in Q1. Higher input costs, supply disruptions, and labor shortages due to reverse migration have weighed on the sector’s growth. According to the Reserve Bank of India’s (RBI’s) data on nonfinancial firms, surging raw material costs have stressed the profitability and margins of companies.
What are the Challenges for the growth of economy?
- High inflation: The biggest worry is that of high inflation (which has persisted for way too long) and all the challenges that come along with it. Inflationary environments increase the costs of doing business, impact profitability and margins, and reduce purchasing power. In short, inflation thwarts both supply and demand. Central banks’ monetary policy actions, in response to rising inflation, can impede credit growth and economic activity, thereby intensifying the probability of a recession in a few advanced nations.
- Rising current account deficit: The other challenge is the rising current-account deficit and currency depreciation against the dollar. While a rebounding domestic economy is resulting in higher imports, moderating global demand is causing exports to slow. The US dollar’s unrelenting rise and global inflation are further causing India’s import bills to rise.
- Declining forex: The RBI had to intervene to contain volatility and ensure an orderly movement of the rupee. The RBI’s intervention is leading to a drawdown in foreign exchange reserves. Consequently, the import cover from reserves has reduced to nine months from a high of 19 months at the start of 2021 (although, it remains above the benchmark of three months).
The economy’s growth drivers are improving
- Exports: Exports, the first growth driver are slowing down and are likely to moderate along with the probable global economic slowdown.
- Government spending: Government spending, the second driver, is already at an elevated level, thanks to the pandemic, and the government will likely focus on its prudence in utilizing limited resources. The good news is the share of capital expenses is going up even as the government is reducing revenue expenses. Multiplier effects of this spending will aid in growth in income, assets, and employment for years to come. Strong tax revenues may support further capital spending in the future.
- Capital expenditure: According to experts, prospects for capex investments the third growth driver by companies are brighter. Sustained demand growth may be the most-awaited cue for a sustained push for investment.
- Consumer demand: Consumer Demand, the fourth, and perhaps the most important, growth driver has improved significantly in recent quarters. However, spending has not grown sustainable despite improving consumer confidence. For instance, retail sales are growing but the pace is patchy, and auto registrations have remained muted. We expect that receding pandemic fears and the upcoming festive season could give a much-needed boost to the consumer sector.
Conclusion
- Indian economy should not be looked from isolation. It is very much integrated in global economy. Pandemic, Ukraine war, US- China trade war have given a successive shock to global and Indian economy. Despite that Indian has done well than rest of the world. Our focus should be on curbing inequality, not to allow people to descend into extreme poverty and employment generation.
Mains Question
Q. Analyse the present economic macro-indicators of Indian economy. What are the challenges for growth story of India in the context of global uncertainty?
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Issues related to Economic growth
Road to Net Zero Goes Via Green Financing
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Green Financing, India's Net Zero 2070 objective
Context
- Climate finance, or Green Money, remains a critical bottleneck for India in its journey towards the Net Zero 2070 objective and to create a resilient system through climate adaptation and mitigation. The challenge is daunting to make a climate transition for a nation of 1.4 billion people with increasing aggregate national income and individual wealth inequality.
What is the Present arrangement of external financing for climate change
- Estimated cost: Finances for climate change were to be channelized through multi-tiered systems in the form of national, regional, and international bodies. It has been estimated that India will need $15 trillion to finance its Net Zero journey.
- Concessional loans: In most cases, small amounts flowing now into the developing component of the G20 nations are actually in the form of concessional loans rather than grants.
- Technological support from developed countries: There is no doubt that India will need international financial commitments and technological support from developed countries, who have been erratic with their promised deliveries so far.
What is green financing?
- Green finance is a phenomenon that combines the world of finance and business with environment friendly behavior. It may be led by financial incentives, a desire to preserve the planet, or a combination of both.
- In addition to demonstrating proactive, environment friendly behavior, such as promoting of any business or activity that could be damaging to the environment now or for future generations.
Green financing through domestic market
- Status of Green Bonds: As for domestic financial sources, according to an RBI Bulletin from January 2021, green finance in India is still at the nascent stage. Green bonds constituted only 0.7% of all the bonds issued in India since 2018, and bank lending to the non-conventional energy constituted about 7.9% of outstanding bank credit to the power sector as of March 2020.
- Provision of Green loans: The report also mentioned that the development of green financing and funding of environment-friendly sustainable development is not without challenges, which may include false compliance claims, misuse of green loans, and, most importantly, maturity mismatches between long-term green investments and relatively short-term interests of investors.
What are the challenges to green financing?
- No assessment of climate finance risk: Research report indicates that banks in India, like in many parts of the world, are not prepared to adapt to climate change; and have not yet factored in any climate-related financial risks into their day-to-day decision-making. Some of the criteria used to assess the banks include a commitment to phase out investments in coal, disclosing and verifying direct and indirect emissions, issuing green loans, financing climate mitigation, and Net Zero targets for different types of emissions and their implementation plans.
- Lack of enthusiasm among bankers: The report is also critical that none of the 34 banks have tested the resilience of their portfolios in the face of climate change. Yet, the bankers’ noise around the green finance topic is euphorically loud, without action.
- No standard definition of green financing: These banks and financial institutions are also not geared up for financing green transition. India faces the big challenge of “how to define green”, as there is no uniform green definition and green taxonomy.
- Poor debt market for green finance: The green money is generated through largely debt-based products (green bonds, climate policy performance bonds, debt for climate swaps, etc.), while the fund deployment occurs through debt-based, equity-based, and often, insurance-based instruments, apart from grants and loans. However, the Indian market lacks the depth of its debt markets or the heft of the bond markets.
- Lack of green data governance: There is an inherent problem with “green data governance” that entails tracking the entire data-chain of a green financing initiative.
- Unviable green projects: Like many other private sectors funding, the banks look at rates of return that do not really often make financing “public goods” as viable investments. They are even apprehensive about financing projects with long gestation periods with uncertain returns.
What is way forward for green financing?
- Considering social cost of carbon: An economic return alone might not be sufficient to induce green financing. A more holistic rate of return, considering the social cost of carbon, will be appropriate.
- Return on green investment should include social returns: A longer time horizon will be needed for the cost-benefit analysis and the estimation of the return on investment. This is because, for climate-related projects, the returns increase over time. The extent to which the particular project could result in CO2 reduction and, eventually reduction in the social cost of carbon need to be assessed. As an example, India intends to reduce 1 billion Tonnes of CO2. The present social cost of CO2 (SCC) is $86/tonne. Therefore, the sheer economic gain is to the tune of $86 billion, or 2.1% of the current Indian GDP. Social cost saving is a public good and is enjoyed by all businesses, including the financial institutions.
- Applying the green taxation: Hence, for a stronger business case for climate finance, experts propose to include in its Return-on-investment calculations the cost-benefit returns of the project through NPVSCC20 the Net Present Value of Social Cost of Carbon over 25 years of the project, a time period that compares well with tenor of infra and sovereign bonds. As an incentive, the government could introduce taxation sops for using NPVSCC25.
You may want to know about Net Zero
- Net zero means cutting greenhouse gas emissions to as close to zero as possible, with remaining emissions re-absorbed by oceans/ forests.
- China, US, EU and India contribute 75% of total GHG emissions
- However, per capita GHG emissions for US, EU and China are7,3 and 3 times of India
- India has set target to achieve net zero emissions by 2070.
Conclusion
- The way India finances its journey to Net Zero 2070 could very well be a framework for other nations, for it would need to have contours of social inclusion, economic flexibility, and sustainable financing, while keeping in mind the political compulsions, as well as serving the demographic requirements of creating and sustaining livelihood in decades to come.
Mains Question
Q. Green financing is the most crucial part of achieving Net zero target. Comment. What are the India’s efforts to finance its climate action goals?
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Issues related to Economic growth
Why Private Investment is Lagging in India?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: private investment in manufacturing and economic growth
Context
- Last month, Finance Minister asked captains of industry what was holding them back from investing in manufacturing. She likened industry to Lord Hanuman from the Ramayana by stating that industry did not realize its own strength and that it should forge ahead with confidence. She said, “This is the time for India, we cannot miss the bus”.
What is present situation of private investment?
- Tax cut rate of domestic companies: In the hope of revitalizing private investment, the government had in September 2019 cut the tax rate for domestic companies from 30% to 22% if they stopped availing of any other tax SOP (standard operating procedure).
- Weak private investment: Expert says that Indian private sector investment has been weak for almost a decade now. If we look at drivers of economic growth right now, there are amber lights flashing. The export story will be under threat because of the global slowdown, the government’s ability to support domestic demand would also be limited as the fiscal deficit comes down.
- Impact of k-shaped recovery: Because of the K-shaped recovery, private consumption is only concentrated in some parts of the income pyramid.
Analyzing the investment scenario
- Investment to GDP ratio: As in the June edition of the Ministry of Finance’s Monthly Economic Review, the fixed investment to GDP ratio was 32% in 2021-22. However, there is need for caution in reading the most recent data, as they are subject to revision.
- The National Accounts Statistics: It provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing; over 90% of GCF consists of fixed investments.
- No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
- Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.
- Rise in service sectors: Services’ share rose to 52.3% in 2019-20 compared to 49% in 2014-15.The rise in the services sector is almost entirely on transport and communications. The share of transport has doubled from 6.1% to 12.9% during the same period. Within transportation, it is mostly roads.
- Decline in the share of investment: Its share in the investment ratio (column 2.1) fell from 19.2% in 2011-12 to 16.5% in 2019-20. This indicates that ‘Make in India’ failed to take off, import dependence went up, and India became deindustrialised. Import dependence on China is alarming for critical materials such as fertilizers, bulk drugs (active pharmaceutical ingredients or APIs) and capital goods. Instead of boosting investment and domestic technological capabilities, the ‘Make in India’ campaign frittered away time and resources to raise India’s rank in the World Bank’s Ease of Doing Business Index.
- Decline in foreign capital in GFC: The contribution of foreign capital to financing GCF fell to 2.5% in 2019-20 from 3.8% in 2014-15 (or 11.1% in 2011-12). With declining investment share, industrial output growth rate fell from 13.1% in 2015-16 to a negative 2.4% in 2019-20, as per the National Accounts Statistics.
What is Consumer’s demand situation?
- Average Consumer sentiment index: Private companies invest when they are able to estimate profits, and that comes from demand. The Centre for Monitoring Indian Economy’s (CMIE) consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.
- Buoyant Aggregate demand: RBI’s Monetary policy report dated September 30 says, Data for Q2 (ended Sept) indicate that aggregate demand remained buoyant, supported by the ongoing recovery in private consumption and investment demand. It shows that seasonally adjusted capacity utilization rose to 74.3% in Q1 the highest in the last three years.
- High household savings: Along with household savings intentions remaining high, might hold the key to the investment cycle kicking in.
Conclusion
- Both public and private investment is necessary for sustainable growth trajectory of any economy. Global uncertainty, Ukraine war, oil prices have added to the skepticism of private investors. However, India’s macroeconomic performance is much better than those of developed and developing economies. Private investors must take these into account before holding back their investment.
Mains Question
Q. What role private investment plays in Indian economy? Analyse the post-pandemic private investment situation in India?
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Issues related to Economic growth
Thin line between freebies and public welfare
Note4Students
From UPSC perspective, the following things are important :
Prelims level: NA
Mains level: Social security,Populist measures.
Context
- ‘Revdi Culture’ (sweet) or Govt’s Basic Responsibility? What Prioritising Welfare Is Really About
- While hearing a petition demanding the de-recognition of political parties that promise “irrational freebies” to voters, the Supreme Court recently drew attention to the substantial fiscal cost of freebies.
What are freebies?
- A freebie is any public policy intervention that will have a long-term impact on production as well as productivity.
- Any public policy intervention that doesn’t support medium-term to long-term production and productivity may be termed as a freebie.
- The term Freebies is not new; rather it is a prevalent culture in Indian politics (in the name of socialism).
- The political parties are always trying to outdo each other in luring the Indian voters with
Examples of freebies
- Promise of Rs 15 lakh in our bank accounts
- Free TV, Laptops
- Free electricity
- Loan waivers
- Offering free public transport ride to all women in Delhi
Why are such policies popular among the public?
- Failure of economic policies: The answer lies in the utter failure of our economic policies to create decent livelihood for a vast majority of Indians.
- Quest for decent livelihood: The already low income had to be reoriented towards spending a disproportionately higher amount on education and health, from which, the state increasingly withdrew.
- Prevailing unemployment: Employment surveys have shown that employment growth initially slowed down from the 1990s, and then has turned negative over the past few years.
- Increased cost of living: Real income growth of the marginal sections has actually slowed down since 1991 reforms.
- Increased consumerism: The poor today also spend on things which appear to be luxuries; cellphones and data-packs are two such examples which are shown as signs of India’s increased affluence.
Thin line between freebie and public welfare
- Using freebies to lure voters is not good.
- Voter’s greediness may lead to a problem in choosing a good leader.
- When we don’t have a good leader then democracy will be a mockery.
Negative implications
- Never ending trail: The continuity of freebies is another major disadvantage as parties keep on coming up with lucrative offers to lure more number of votes to minimize the risk of losing in the elections.
- Burden on exchequer: People forget that such benefits are been given at the cost of exchequer and from the tax paid.
- Ultimate loss of poors: The politicians and middlemen wipe away the benefits and the poor have to suffer as they are deprived from their share of benefits which was to be achieved out of the money.
- Inflationary practice: Such distribution freebie commodity largely disrupts demand-supply dynamics.
- Lethargy in population: Freebies actually have the tendency to turn the nation’s population into: Lethargy and devoid of entrepreneurship.
Rational elements in freebies
- Social investment: Aid to the poor is seen as a wasteful expenditure. But low interest rates for corporates to get cheap loans or the ‘sop’ of cutting corporate taxes are never criticized.
- Socialistic policy: This attitude comes from decades of operating within the dominant discourse of market capitalism.
- Election manifesto: Proponents of such policies would argue that poll promises are essential for voters to know what the party would do if it comes to power and have the chance to weigh options.
Why they need to stop?
- Winning election and good governance are two different things. The role of freebies to avail good governance is definitely questionable.
- The social, political and economic consequences of freebies are very short-lived in nature.
- There are many freebies and subsidies schemes available in many States but we still find starvation deaths, lack of electricity, poor education and health service.
- Hence the sorrow of the masses of India cannot be solved by freebies or by incentives.
Conclusion
- There is nothing wrong in having a policy-led elaborate social security programme that seeks to help the poor get out of poverty.
- But such a programme needs well thought out preparation and cannot be conjured up just before an election.
Mains question
Q. Do you think freebies are justified under the name of social security? Critically evaluate the rising freebie culture in India with its negative implications.
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Issues related to Economic growth
Green finance for green future
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Network for Greening the Financial System
Mains level: green future ,green finance
Context
- Inclusion of climate change and green finance in policy is crucial for a strong economy.
What is green finance?
- Green finance is a phenomenon that combines the world of finance and business with environment friendly behaviour. It may be led by financial incentives, a desire to preserve the planet, or a combination of both.
- In addition to demonstrating proactive, environment friendly behaviour, such as promoting of any business or activity that could be damaging to the environment now or for future generations.
Green finance instruments
- Dedicated fund: A “green super fund” could be established to jumpstart green investments by pooling together international and domestic capital.
- Sovereign green bond (SGB): The sovereign green bond is a novel idea. It will be a part of the government’s borrowing programme. The gross borrowing programme of the government is pegged at Rs 14.95 lakh crore. The SGB (sovereign green bond) raised will be part of the aggregate borrowing programme and has to be used for projects which are ESG (environment, social and governance) compliant.
Network for Greening the Financial System
- The Network for Greening the Financial System is a network of 114 central banks and financial supervisors that aims to accelerate the scaling up of green finance and develop recommendations for central banks’ role for climate change.
- The NGFS was created in 2017 and its secretariat is hosted by the Banque de France.
Purpose
- The Network’s purpose is to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low carbon investments in the broader context of environmentally sustainable development.
Significance
- Green goals: Reaching net-zero emissions and other climate-related and environmental goals will require significant investments to enable decarbonisation and innovation across all sectors of the economy. Greening the financial system is key to making these investments happen.
- SDG goals: Green finance initiatives also aim to achieve the 2030 Sustainable Development Goals (SDGs), shifting the focus from creating value for shareholders (economic) to creating value for stakeholders (economic, environmental, and social).
- Green future: And as we begin to recover from the pandemic, green finance presents a huge opportunity to build back with a greener future, creating new businesses and jobs.
- Robust growth: Supports strong and green growth in all sectors of economy .
The issues in mobilization and effective use of green finance are
- Low incentives: The return on green finance is long term, low in monetary value & many times intangible, so that the ability of the financial system to mobilize private green finance, especially in developed countries is difficult.
- Distribution challenge: Developing countries like India have challenges of development & poverty alleviation, so allocation of resources towards meeting fundamental needs & promoting the green projects which require heavy investment is a challenge.
- Skewed investment: In many countries, green finance & much of the green projects are limited to the investment in renewable energy: India whose 60% of installed capacity is coal based, greening of coal technology is required which is mostly limited to private players in developed countries. It is subjected to IPR & makes them cost prohibitory.
- High risk: Green bonds are perceived as new and attach higher risk and their tenure is also shorter. There is a need to reduce risks to makes them investment grade.
Conclusion
- Our future depends on how we resolve our environmental challenges. Further, we are the world’s third-largest carbon emitter and will play a crucial role in getting the planet to a low-carbon trajectory. Simply put, we must urgently transform our economy to get to the green frontier.
Mains question
Q. As the world copes with the repercussions of carbon emissions, there is growing pressure to achieve climate-compatible growth. In this context What do you understand by the term green finance? Discuss how it will help to achieve climate-compatible growth along with limitations of green finance.
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Issues related to Economic growth
How to unleash the entrepreneurial power of 1.3 billion Indians
Note4Students
From UPSC perspective, the following things are important :
Prelims level: SEZ Act
Mains level: Paper 3- Learning from the success of IT industry in India
Context
Last Independence Day, the PM announced that 15,000 of our current 69,000+ employer compliances and 6000+ filings have been identified for removal.
Why India is a development economics outlier?
- Software industry despite being low-income country: Few models predict a $2,500 per-capita income country with five million people writing software and internet data costs per GB at 3 percent of US levels.
- Digital identity: In India there are1.2 billion people empowered with paperless digital identity verification.
- Digital economy: India also witnesses 3.5 billion real-time monthly digital payments.
- Attraction for Investment: $10 billion in private equity raised in July, and a $3 trillion public market capitalization.
- Harvard’s Ricardo Hausman believes, the only sustained predictor of sustained economic success is economic complexity and suggests that India’s prosperity is less than our economic complexity would predict.
India’s software industry
- Our software industry is an oasis of high productivity — 0.8 per cent of India’s workers generate 8 percent of GDP.
- The mandatory global digital literacy program and digital investment super-cycle sparked by Covid will double our software employment in five years.
- Our software industry’s talent, alumni, and global engagement — 50,000 tech startups that have raised over $90 billion since 2014 from 500+ institutional investors.
- India’s software services industry and tech startups are each estimated to be worth about $400 billion today which is expected to grow to $1 trillion by 2025.
Why did India’s manufacturing sector fail to perform while its software industry flourished?
- One of the reasons is the different regulatory thought worlds of the Software Technology Parks India rules of 1991 (STPI) and the Special Economic Zones Act of 2005 (SEZ).
- STPI’s genius was simplicity. It allowed rebadging existing assets, embraced trust over suspicion, and adopted self-reporting that was largely paperless, presence less, and cashless.
- SEZs largely replicated the regulatory cholesterol and distrust that has made India unfavorable for employment-intensive industries.
Way forward
- Productivity: Raising per-capita needs high productivity manufacturing and domestic services firms that disrupt our low-level equilibrium of labor handicapped without capital and capital handicapped without labor.
- Opportunities for India: Until recently, China’s tech industry seemed unstoppable — half of their 160 unicorns operate in AI, big data, and robotics. But this is changing.
- Over 50 recent regulatory actions against China’s tech industry have already cost investors over $1 trillion.
- This offers an opportunity for India due to its attractiveness to factories, multinationals, startups, venture capital, and pension funds.
- Replicate regulatory trust and simplicity offered to the technology industry to other sectors: India’s global soft power by reaching revenue and valuation possibilities that felt unimaginable — have come before physical infrastructure, farm employment reduction, and higher women’s labor force participation.
- Massifying our prosperity needs massive formal, non-farm job creation.
- Creating the productive firms that will offer these jobs to our young needs replicating the regulatory trust and simplicity that our technology industry enjoys in the rest of our economy.
Conclusion
Imagine India@100 if we cut regulatory cholesterol today and spent the next 25 years unleashing the entrepreneurial energies of 1.3 billion Indians — 65 percent of whom are below 35 years old.
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Issues related to Economic growth
Opportunity in the Covid-19 crisis
Note4Students
From UPSC perspective, the following things are important :
Prelims level: FRBM Act.
Mains level: Paper 3- Opportunity to bring in reform that could benefit us in the medium term as well.
Context
Coronavirus pandemic offers a trigger to fundamentally strengthen the Indian economy, and protect the vulnerable. This requires cooperation between the Centre and states.
Opportunity to do things good for the medium term
- Minimising the impact on the vulnerable: The current crisis is so terrible in its toll of life and livelihoods that the need of the hour must be minimising the health, humanitarian and economic costs, especially for the most vulnerable.
- Rising expenditure may force hard choices: Rising public expenditures to help tens of millions of workers and their families alongside plummeting resources will inevitably force hard choices.
- Appropriately, much of the policy discussion and the government’s first response have focussed on addressing the immediate imperatives.
This crisis is also an opportunity to do things that are not only good for now but for the medium term as well. Few are discussed below.
1. Revamp macro-fiscal framework
- Massive fiscal expenditure may require: If the pandemic follows the exponential trajectory seen in other countries, the crisis is going to entail massive fiscal expenditures, perhaps up to 4-5 per cent of GDP, much more than what the government has announced.
- Macro-fiscal targets have to be exceeded: Consequently, the basic macro-fiscal framework — for example, the Centre’s FRBM target of 3.5 per cent of GDP, and the revenue and deficit estimates for 2020-21 — has been fundamentally overtaken by events.
- Allow states to exceed deficit targets: The Centre should immediately announce that even the states will be allowed to exceed their fiscal responsibility legislation targets because they will be in the front line of taking action against the pandemic.
- Opportunity to review the FRBM: The crisis is an opportunity to revisit the entire framework.
- The focus on unattainable targets, the fact that the FRBM has been honoured only in the breach, and the consequences in terms of loss in budgetary integrity and transparency need serious review, even overhaul.
- Once the crisis ebbs, India might be looking at overall deficits well in excess of 10 per cent and debt levels much greater than those today. If the starting point is going to be so different, the old goals and targets won’t retain meaning.
2. Remake finance and adopt a data-driven lending model
- Going into the crisis, India’s corporate and financial sector were under severe stress — the so-called Four Balance Sheet problem.
- This crisis will, unfortunately, add consumers and small and medium enterprises to that This will be an extremely hard — but critical — problem to address.
- A takeover of bad loans will be unavoidable: To allow banks to revert to normalcy, a largescale takeover of their bad loans will be unavoidable not least because the current bankruptcy process will be severely inadequate.
- Opt for the tech. driven lending model: This crisis opens the door for the new lending model proposed by Nandan Nilekani i.e. technology-driven lending.
- What is Technology-driven lending? It uses data rather than collateral, allowing the 10 million-odd businesses with deep digital footprints (for example, based on GST invoices), to get loans from the thriving ecosystem of new financial players.
3. Complete JAM
- One of the major achievements of the government was to create the plumbing — Jan Dhan, Aadhaar, and Mobile (JAM) — to augment weak state capacity.
- How JAM is proving helpful in this crisis? The state could now make cash transfers swiftly, with reduced leakages, whether as income support, scholarships or pensions, and potentially eventually implementing a Universal Basic Income.
- In the current crisis, it is proving to be an important part of the social safety net that is helping to cushion the most adversely affected groups.
- JAM is not complete yet: But the JAM plumbing is still incomplete because there is a “last mile problem”.
- Not all those with bank accounts can access money either because of difficult geography or because bank functionaries give incomplete or misleading information.
- Opportunity to fix the shortcomings: This crisis is an opportunity not just to leverage JAM to enhance cash transfers, but to empower citizens. This will require the government to identify remaining weaknesses on a war footing and fix them.
4. Re-shape Indian agriculture
- Need to create one market for agriculture: The need to preserve supply chains in agriculture in times of crisis reinforces the need to create one market for agriculture across India.
- This requires eliminating legislation like the Essential Commodities Act and the panoply of resulting restrictions.
- Phase-out subsidies and opt for DBT: Second, the crisis has shown the possibilities created by JAM and direct transfers.
- Phasing out in cycles: Building on PM-Kisan and various state-level schemes, pernicious subsidies, especially for fertilisers and power, could be phased out over 5-6 crop cycles.
- This could be done through small but frequent increases in fertiliser prices (the technique used to eliminate fuel subsidies).
5. Focus on Make in India
- The critical source for almost all the essential Active Pharmaceutical Ingredients (API) used to manufacture drugs, the ability also to fight death, is largely made in China.
- India was once a major producer of such APIs but lost ground to China.
- Frame intelligent industrial policy: The crisis should be the opportunity to go on war footing to do intelligent industrial policy — incentives, regulatory help, trade policy — that would resurrect India’s manufacturing capability.
- Previous Make in India attempts have shown lackadaisical results.
- Focus on the pharmaceutical sector: The crisis creates the momentum to focus the effort on one sector, pharmaceuticals. As a result, the ability to save lives could be Made in India, again.
6. Establish migrants as full citizens
- Need to change the place-based benefits to person-based benefits: The plight of migrant workers reinforces the need to move from immobile place-based benefits to mobile person-based benefits, which is possible as the JAM infrastructure is strengthened.
- Portability of benefits: This will require portability of benefits, including access to the PDS, Ujjwala and Ayushman Bharat.
- The crisis has highlighted the travails of migrant labour and their second-class status.
- The large gap between the organised and unorganised sector worker: It reflects a broader chasm between the few securely employed in the organised sector and the vast majority subject to the vicissitudes of the unorganised sector.
- Differences not just in the levels of income but in their volatility as well as differential access to social insurance (healthcare, pensions) distinguish these two classes.
7. Upgrade Health
- Weakest state capacity in health and education: State capacity over 70 years in India has been weakest in the areas of education and health.
- The COVID-19 pandemic must lead to a serious strengthening of the health infrastructure for dealing with pandemics.
- Set up an apex institution on the lines of US’s CDC: To start with, India needs an apex institution like the US’ Centers for Disease Control with a network across all the states.
- They should invest in disease surveillance systems, set up diagnostics labs, be able to gather real-time data and analyse them etc.
- The Taiwan model, which has been so successful in this pandemic, could be studied.
- More fundamentally, the crisis is a wake-up call to address India’s severe limitations in the provision of basic health.
- Focus on basic public health: Creating tertiary health facilities must be subservient to strengthening basic public health and early childhood care.
8. Build a National Solidarity Fund
- The severe downturn in economic activity ahead will savagely hit the informal poor.
- How would the Solidarity fund be set up? The government should consider a Solidarity Fund with a one-time annual contribution coming from the wealthy and the employees in the organised sector.
- Contribution to the fund: This contribution can take the form of taxes or elimination of middle-class subsidies identified in the Economic Survey of 2016.
- The wealthy could contribute via a wealth tax with thresholds set by property values say above Rs 5 crore.
- Salaried employees in the public and private sectors could contribute via a small, progressive tax on salaries and pensions.
- Middle-class subsidies that could be eliminated include interest and tax deductions for small savers, favourable taxation of gold and other luxuries.
- Wealth taxes and elimination of subsidies for the rich should, in any event, be part of the long-run reform agenda to reduce growing inequality.
Conclusion
These examples illustrate how the crisis can be converted to an opportunity to fundamentally strengthen the Indian economy, and protect the vulnerable. A common thread to many of these actions — indeed prerequisites for their success — is cooperation between the Centre and states. Central direction combined with flexibility and nimbleness in the states and local bodies is India’s way through the crisis and beyond.
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Issues related to Economic growth
Pull out all the stops
Note4Students
From UPSC perspective, the following things are important :
Prelims level: "Natural Disaster" clause in FRBM Act.
Mains level: Paper 3-What should be the policy response of the government to the damage inflicted by the Covid-19 on the economy.
Context
Though there is coherence in India’s response to the Covid-19, still there is more that needs to be done.
Sense of coherence in India’s response
- Since last week, a sense of coherence is settling over India’s response to the COVID-19 outbreak.
- The national lockdown, the incomes and credit support, and the three-month debt moratorium announced by the government and the RBI are the needed first steps to contain the outbreak on the one hand and lessen the economic impact on the other hand.
Uncertainty in two important factors
- Several laundry lists of measures have already been proffered by many, however, these are not of much help.
- Uncertainty: Given the extreme uncertainty clouding how long and intensely social distancing policies will need to be pursued, the attendant economic impact and, crucially, how quickly and strongly the recovery can take place.
- 1. The answer to the first depends on how much the outbreak tests the capacity of the already-stretched public health system.
- Extending the social distancing policy: If the lockdown does not slow the spread of the virus to a rate that the healthcare system can handle, then the social distancing policies, in some form or another, will need to be extended.
- Destruction of demand: The longer such containment measures last, the larger will be the destruction to (of) demand and the bigger the collapse in output and incomes.
- 2. Then, there is the question about the pace and strength of the recovery.
- Much will depend on how much damage the eventual output loss inflicts on households’ and corporates’ balance sheets.
- Lower consumption: For example, even if a worker starts earning once the lockdown is lifted if one has incurred large debts in the interim, one’s consumption demand will naturally be much lower than before the crisis.
- The same holds for corporates, both big and small.
- No help from global demand: What makes the situation worse is that there is not likely to be much help coming from global demand.
- Growth estimates: It is now expected global growth would decline to 5 per cent (annualised) in 1H20 (first half 2020), considerably more than during the global financial crisis, and rebound only partially in 2H20, leaving global GDP 2.5 percentage points below its pre-crisis level at the end of this year.
How the uncertainty makes policy response calibration difficult?
- Difficulty in assessing economic damage: Given these extreme uncertainties, it is very hard to assess the economic damage with any degree of conviction.
- In fact, in last week’s policy review, the Monetary Policy Committee refrained from providing any projections for future growth and inflation, breaking from its normal practice.
- So, if the outlook is so uncertain, how does one calibrate the policy response?
- 1. Under-support the economy: One can easily under-support the economy, which could prolong the slowdown.
- 2. Or over-support the economy, which could end up stoking inflation (as it did in 2010-13 when the massive monetary and fiscal easing during the global financial crisis was not withdrawn quickly) or creating asset price bubbles.
What is the way out in such a situation?
- Don’t try to calibrate: The way out is not to even try calibrating policies under such extreme uncertainty but to let the size of the support be determined endogenously by the extent and nature of the economic damage.
- Falling back of first principles: This requires falling back on first principles. We know that the economic damage could be very large.
- Delay in recovery: We also know that if the damage to households’ and firms’ balance sheets is substantial, then the recovery could be delayed and weakened.
- Give extensive income support: This calls for extensive income support through existing government Jan Dhan and Mudra accounts to households and SMEs, and temporary tax cuts or deferments to the larger corporates.
- Tax cuts needed: It also needs substantial cuts in indirect taxes (GST) when social distancing is relaxed.
Problems with RBI measures
- RBI providing support: The RBI has begun to provide support via its liquidity facility (TLTRO) and regulatory forbearance that allows banks to offer a debt moratorium to their customers for the next three months.
- But both these measures work through banks.
- The problem of bank turning risk-averse: Given that banks have turned substantially risk-averse because of the restructuring and bad debt problems of the last few years, the RBI likely needs to start providing liquidity directly to corporates, as recently announced by the US Fed.
- At the same time, any debt moratorium will reduce profit and, in turn, capital, banks might be reluctant to extend it to all their customers.
- Accommodate capital shortfall in the bank: Consequently, the RBI also needs to change regulations to accommodate possible shortfalls in bank capital because of the debt moratorium.
What should be the scope and size of the policy support?
- Support should be based on the extent of the damage: The scope and size of such policy support need to be determined by the extent of the economic damage, and not by perceived limits about what India can afford or those imposed by existing institutional arrangements and practices.
- It is quite possible that the size of the economic damage ends up requiring support that widens the fiscal deficit substantially.
- India clearly does not have the fiscal space to provide any material economic support when measured against standard benchmarks of fiscal prudence.
- Directly funding the budget deficit: The market is on edge, and fears of eventual large government borrowing has spiked long-term interest rates despite large cuts in short-term rates by the RBI, which are likely to delay and weaken the recovery.
- Any large bond auction by the government, even if it is offset by the RBI through open market operations, is not likely to calm market nerves and bring down lending rates.
- The government should invoke “natural disaster” clause: What is needed is for the government to invoke the “escape” or the “natural disaster” clause in the fiscal responsibility act (FRBM) that allows the RBI to directly fund the budget deficit without having to go through market auctions.
Conclusion
Such a proposal is likely to raise the hackles of any fiscal conservative and there is the natural question about how rating agencies might react. As long as the government credibly commits to reversing the action as soon as the crisis is over, rating agencies and fiscal conservatives alike will likely treat this kindly, as it is a response to a crisis caused not by poor economic policies, but by an act of nature.
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Issues related to Economic growth
Mind your own economic health
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- What are the essential reforms essential for reshaping the India's economy.
Context
The fragility of the global economy has been exposed twice within the last two decades. In 2008, the collapse of a financial services firm in the US triggered a global financial meltdown. In 2020, the emergence of a novel virus in a food market in Wuhan has done it again.
The global economy and system theory
- Systems theory: It that systems take various forms. Broadly speaking, there are three types of systems-1. Chaotic systems. 2. Engineered Systems, and 3. Complex self-adaptive systems.
- As the weather in a storm, chaotic systems are unpredictable and uncontrollable.
- The global economy is behaving like a chaotic system.
- Engineered systems, on the other hand, can be controlled quite tightly, like machines.
- However, they are dull. A nuclear power plant is a well-engineered system. We would want it to do just what it is supposed to and not produce any surprises.
- In contrast to these systems is the design of nature. It is a complex self-adaptive system. It produces myriad innovations. It evolves. Yet, its fundamental stability is very reassuring.
- The realisation that mankind’s technologies and engineering marvels are disrupting nature’s stability, has raised alarms about the architecture of global economic governance.
- More about self-adaptive systems: The architecture of complex self-adaptive systems is formed by essential design principles. One is “permeable boundaries”.
- The many parts of a complex self-adaptive system have permeable boundaries between themselves. Each part has its integrity. The parts exchange information and energy across their boundaries as required.
- When there are no boundaries within, or they are too weak, an accident at one end will soon sink the whole ship.
Consequences of boundarylessness within the global financial system
- The drive for boundarylessness within the global financial system since the 1990s caused the sloshing around of contagion during the global financial crisis in 2008.
- Whereas global economic growth has undoubtedly been enabled by global supply chains, the vulnerability of economies everywhere to their disruption has become painfully evident with the COVID-19 pandemic.
- Complex adaptive systems exhibit “fractal-like” shapes. Their parts are complex, combining the same diverse energies that permeate across the whole.
- Social forces, economic forces, and environmental forces combine within all countries, and in parts within countries too, albeit in different ways.
- Though the parts are similar to each other, they are not the same. Therefore, the same solutions will not fit all.
- An insight from systems theory is that global systemic problems such as climate change, persistent economic inequality, among others, will require local systems solutions.
Six reforms for reshaping Indian economy
- Stress test: Crises create stress tests for the health of systems. The financial crisis of 2008 exposed the fragility of an inter-connected and under-regulated financial system.
- The COVID-19 pandemic has exposed the architectural weaknesses in the global economy.
- Instead of worrying too much about the reversal of globalisation, national leaders should now focus on the well-being of their citizens and the health of their own economies.
- Six reforms are essential for reshaping the Indian economy.
- First, focus on the provision of universal social security, rather than on the misdirected demand for even more “flexibility” in labour laws
- Second, respect the “informal” sector which provides the majority of Indians with opportunities to earn incomes, and give it more strength. It is also a great source for practical innovations and widespread entrepreneurship.
- Third, change the economic paradigm from “trickle-down” to “build up”. Build the internal engine of growth of India’s economy by increasing incomes of India’s citizens.
- Fourth, strengthen public health services. Medical tourism may put India’s private hospitals on the global map. However, they are not the solution to India’s huge health problems.
- Fifth, reform and strengthen the public education system. It will contribute greatly to creating a level playing field for all children.
- Sixth, strengthen local governance in India’s towns and districts to develop and implement local systems solutions. The well-being of Indian citizens will be improved, and India’s economy will be more resilient too.
Conclusion
- All governments are asking their citizens to increase “social distancing” between themselves to prevent the spread of a health contagion. It would be wise for countries to maintain sufficient “economic distancing” amongst themselves too. They should mind the health of their own economies. Thereby, they will improve the health of the global economy too.
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Issues related to Economic growth
How policy can bridge the gap
Note4Students
From UPSC perspective, the following things are important :
Mains level: Paper 3- Economic policy changes to mitigate the impact of slowdown on the vulnerable.
Context
India must use the windfall from oil to provide assistance to the most vulnerable to mitigate the impact due to COIVD-19 outbreak.
Estimates of impact
- Impact on major economies: Minus 40 per cent, -30 per cent, -22 per cent, and -14 per cent. These are the estimated impacts (at an annualised rate) on the quarterly growth rates of China, the UK, Eurozone, and the US because of the Covid-19 virus.
- Even excluding China and those that are closely tied to its supply chain — Korea and Taiwan — emerging markets (EM) are expected to go into recession in the first half of 2020, with the second quarter taking the biggest hit at over an 8 per cent quarterly decline.
- Impact on India: India will not be spared this growth shock. In fact, the economic impact could be deeper and longer in emerging markets where the capacity of public health systems is limited at the best of times.
Prospects of recovery
- Sudden stop to economic activity: We also know from the experiences of the countries already infected that the way to control the spread of the virus is through aggressive containment and social distancing that inevitably brings economic activity to a sudden stop.
- There doesn’t seem to be a middle path. We also know that unlike natural catastrophes like earthquakes, capital stock is not destroyed by the virus.
- Sharp recovery and conditions: Once the containment period is over and social interaction normalises, there is every reason to believe that activity can recover very sharply.
- Unless the containment period is long because of capacity constraints in the healthcare system which could turn supply chain disruptions into a long-term problem, or the credit stress created by the lack of earning by households and firms during the sudden stop stymies the recovery.
India needs to brace itself
- Unfortunately, India, where the virus still appears to be in the early stage, needs to brace for such a sudden stop.
- The lockdown could be for an extended period given the already stretched public health system.
- Impact on urban economy: The swathe of the economy that depends on social interaction — retail sales, entertainment, restaurants, and importantly construction and manufacturing — is very large.
- Even if one believes that rural areas with relatively low population densities will not be affected much, the impact on urban economic activity could be very large.
Role of economic policy
- What is the role of economic policy in such circumstances? It needs to “bridge the gap” between the brutal downturn and the eventual recovery.
- While public health policies force a sudden stop in the economy to save lives, economic policies need to ensure that the impact from the shutdown is cushioned, incomes of households and firms supported, credit stress is contained, and the recovery is not hamstrung by policy headwinds.
- This requires policy support to be operated on various fronts.
- Role of the Central bank: Central banks not only need to cut rates but also need to provide adequate liquidity and extend regulatory forbearance to prevent credit stress and non-performing loans from clogging up the already strained financial system when the economy starts to recover.
- Role of fiscal policy: The role of fiscal policy is even larger, from direct and indirect tax cuts or postponement to targeted credit support for sectors that are likely to be most affected such as airlines and retail trade.
- Support to the vulnerable: The key is income support to the most vulnerable: From daily wage earners to SMEs (small and medium enterprises).
- Using JAM trinity for cash transfer: It is here that the government’s efforts over the last five years make India one of the best-placed economies to deliver such cash transfers.
- Since 2015, substantial time, effort, and resources have been expended to establish Jan Dhan (bank accounts), Aadhaar and mobile banking (JAM), and Mudra, the programme that dispenses loans to SMEs.
- The objective of JAM and Mudra is to use Aadhaar as a way of accurately identifying beneficiaries and use mobile banking to digitally and seamlessly transfer cash/subsidies directly to households’ bank accounts and provide loans to SMEs without any leakages.
- According to government reports, the total number of Jan Dhan accounts stand at around 380 million and 59 million MUDRA loans were sanctioned last year.
- For a country with a population of 1.3 billion and about 63 million SMEs, even if there are duplicate accounts, JAM and Mudra should be able to cover almost all households and SMEs.
- With Aadhaar accurately targeting beneficiaries, leakages should be minimised. If there ever was a time that India needed JAM and Mudra it is now.
Issue of fiscal space and solution
- Some will argue that India doesn’t have the fiscal space. But it does.
- Use oil windfall: In the last month or so, the crude oil price has dropped from around $60/bbl to around $30 and is likely to stay at this level given the breakdown in agreement among oil-producing countries and the massive collapse in global demand.
- If the government simply taxed the oil windfall by raising excise duties, as it did during the 2014-15 oil price collapse, it could potentially raise almost 1 per cent of GDP or a staggering Rs 2.25 trillion.
- If 50 million households have to be provided assistance because of the shutdown, it comes to about Rs 14,000 per month for three months or about Rs 24,000 a month to half of the 63 million SMEs.
- And this without even having to increase this year’s budgeted deficit.
Conclusion
The government might have other uses for the oil windfall. But if India is forced into lockdown, the economic costs will be very large and the recovery will crucially depend on whether the pilot-light of the economy is kept lit through this period. This critically requires income transfers to vulnerable households and SMEs. India cannot complain that it does not have the fiscal space or the infrastructure to provide it.
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Issues related to Economic growth
The double whammy that India’s economy now faces
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- How will India economy be impacted by the Covid-19?
Context
India is currently in the grip of dual shocks: Covid-19 and a financial one.
The supply and demand shock
- Containing outbreak at economic cost: Even as infection rates have tapered in China, they are rising elsewhere. Countries that have succeeded in containing it have done so at an economic cost, by quarantining people, implementing lockdowns and social distancing.
- This has resulted in a plateauing of new infection cases in China and South Korea, but they are still rising exponentially across Europe and the US.
- Supply shock: This is both a supply as well as demand shock. On the former, the impact is via disruptions in China-centred supply chains.
- Demand shock: But there is also a hit to final demand as infections spread across the rest of the world, hurting travel, tourism, hotels and local retail activity.
- Tightened financial condition: The correction in equity markets and wider credit spreads have tightened financial conditions, and both consumer and business confidence has faltered.
- Rising infections in Europe a big concern: Rising infections in Europe and the US are a big concern as both are large services-driven economies. Any pullback in their consumption demand will likely result in a demand shock for the rest of the world.
Global spillover of Covid-19
- Hitting economies in waves: One uncertainty pertains to how long this shock will last. There are no definite answers as of now. Covid-19 shocks are hitting economies in waves and countries are imposing lockdowns, one by one.
- Hence, instead of a synchronized global slump over one or two months, the economic impact is getting spread out.
- For example, supply chain disruptions and lockdowns in China are gradually easing, and we estimate that factories should be operating at full capacity by mid-April.
- Hit to travel and tourism to last till June: The hit to travel and tourism will last at least until June because even if the number of new infection cases eases, travellers will remain cautious initially.
- Demand in the US and Europe to remain low until April: Curtailment in discretionary demand due to social distancing in the US and Europe only started in March and will likely continue until April, if not longer.
- Global spillover to continue till May: The global spillovers of Covid-19 will likely be spread out over February and May, implying a weak first half of 2020.
- Whether the shocks last longer will depend on whether countries successfully contain infections.
- It also depends on the ability of countries to prevent spillover effects onto corporate balance sheets (more defaults) and the labour market (job losses).
- Global GDP to remain low in the first half: Global gross domestic product (GDP) growth in the first half of 2020 is likely to be weaker than during the global financial crisis of 2008-09, due to a sharp first-quarter decline in China, and weaker final demand in developed economies in the second.
What will be the impact on India?
- The economic hit to India will be felt through multiple channels.
- First, India is not a part of China-centric global value chains, but China accounts for a significant share of India’s imports (14%) and its production halt will hit India’s imports of
- primary and intermediate goods,
- disrupting domestic production,
- particularly in industries such as pharmaceuticals, auto, electronics, solar power and agriculture.
- Second, there will be a slowdown in international and domestic travel and tourism. India earns over 1% of GDP as foreign exchange earnings from tourism annually.
- Third, social distancing measures, along with the public fear factor will hit domestic retail activity as people avoid public places.
- Fourth, India will face the indirect effects of weaker global demand, tighter financial conditions and low confidence.
- Oil windfall offset: Even though lower oil prices are a boon, in the current environment any benefit from lower oil prices will be offset by other negatives.
- Domestic financial sector risk: Another big challenge for India relates to domestic financial sector risks.
- The spillover effect of Yes bank: Weak growth and financial stability concerns have been brewing for over a year now and the spillover effects of Yes Bank’s takeover are still reverberating through the system.
- The fallout of the shadow banking slowdown via potential stress for real estate developers and small and medium-sized enterprises is a risk.
- If the asset quality of both shadow banks and the banking sector deteriorate in the next few quarters, as is likely, then domestic credit conditions may stay tight, as the perceived risk premium could rise further.
- GDP growth rate: In this backdrop, the real activity could suffer. The GDP growth is expected to average around 4% year-on-year in the first half of 2020, with risks skewed to the downside.
- GDP growth in 2020-21 is unlikely to be more than 2019-20’s 5%.
Way forward
- An optimal policy response to Covid-19: The optimal policy response to is globally-coordinated public health safety and virus containment. India has taken some worthy decisions on this.
- Since Covid-19 will adversely impact service sectors like retail, hospitality, travel and civil aviation, the government’s fiscal policy response should be aimed well through measures such as tax relief and interest-free loans, particularly for small and medium enterprises.
- Liquidity easing and policy accommodation: On monetary policy, a combination of liquidity easing and policy accommodation would be needed beyond the moves already made.
- Macro-prudential steps such as lowering the counter-cyclical capital buffer for banks could be announced.
- Fixing the financial sector, though, would need a broader response, including a recognition of the full scale of the problem and then adequately recapitalising banks and shadow banks.
- Else, credit risk premia may stay elevated and credit growth may not pick up.
Conclusion
In all, the economic impact on India due to shocks emanating from Covid-19 could get compounded due to weak domestic balance sheets. The coming quarters call for close vigilance of credit risks and the prioritizing of financial stability.
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Issues related to Economic growth
Triggering a Global Financial Crisis
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Suggestions to avoid next global financial crisis.
Context
Although we could not have predicted it, Covid-19 was not the reason, but just the trigger for the ongoing financial crash as all we needed was the proverbial straw to break the finance sector’s back
Economic sudden stop
- Not just any trigger: Covid-19 was not just any trigger as it gave birth to the concept of the economic “sudden stop.” When the global equity markets dropped on 31 January 2020 following the WHO declaration of the Public Health Emergency of International Concern, El-Erian (2020) warned the investors on 2 February 2020 that they should snap out of the “buy the dip” mentality.
- Pointing out two vulnerabilities, namely structurally weak global growth and less effective central banks, he introduced the concept of “sudden stop” economic dynamics.
- What is sudden stop? It can be considered as an abrupt onset of a deep recession.
- Supply and demand shock: In the case of Covid-19, it is a sudden stop of economic activity resulting in supply and demand shocks to the global economy as major cities in infected countries, more than 100 and counting, are put on lockdown.
- And, add to that the deepening oil price war between Russia and Saudi Arabia.
- On 8 March 2020 in New York, the futures markets opened and oil futures (both Brent and WTI) are trading about 21% down, gold is above $1,700 per ounce, and all United States (US) equity index futures are trading about 4% down.
- Long terms treasury yield at historical lows: What is worse is that with the long-term US Treasury yields at their historical lows (10-year yield below 0.5% and 30-year yield below 1%), the capital markets are frozen (not to mention many oil projects that will go bust at these prices).
Disorderly non-financial private sector debt leading to dire consequences
- A disorderly global non-financial private sector debt deleveraging, which is likely to lead to deep global debt deflation, followed by a recession (and possibly a depression).
- Which could result in creating financial and economic instabilities, and further tensions in international relations with dire consequences for emerging and developing countries, not to mention developed countries.
- Difference in developed and developing countries debts: While in developed and high-income developing countries, the non-financial private sector is more over-indebted, in middle-income and low-income developing countries, the public sector is more over-indebted.
- Impact on developed economies: Given that the global non-financial private sector debt deleveraging has already started, the public sector debts of the developed and high-income developing countries will also go up and the governments’ ability to rescue their economies will also decline in these countries.
- Impact on funding for climate change: Furthermore, this will severely constrain the governments’ ability to spend on climate change-related projects to address the potentially catastrophic effects for many years to come, diminishing our hopes to make the necessary investments and innovations to address the now existential climate crisis on time will diminish.
- The corona factor: The measures we have to take to control the spread of Covid-19 before a cure is found will further challenge the financial system, as people stop earning an income and businesses go bankrupt.
Way forward
- Three authorities solution: In the suggested framework, there would be three authorities to maintain a deposit account at the central bank in each country
- 1. A deleveraging authority for leverage reduction.
- 2. Lastenausgleich (based on German Currency Reforms) authority for capital levies.
- 3. Climate authority for financing needs in developing national climate plans.
- These national authorities should be globally coordinated through the appropriate United Nations agencies.
- Control the three authorities: The Lastenausgleich authority would be under the finance ministry, whereas the deleveraging and climate authorities would be not-for-profit corporations promoted by the government.
- Capitalisation issue: The government would capitalise the deleveraging and climate authorities by the Treasury-issued zero-coupon perpetual bonds.
- The deleveraging authority would then sell its equalisation claims to the central bank in exchange for an increased balance in its deposit account at the bank, while the climate authority would wait until the deleveraging concludes.
- Further, the climate authority would not be allowed to open deposit accounts to its borrowers to ensure that it would be a pure financial intermediary, not a bank.
- Framework: Assuming that a globally agreed-upon debt reduction percentage that would bring the global non-financial sector leverage well under 100% is determined and that all countries agree to act simultaneously, the framework is as follows
- (i) the financial institutions comprising the banks and non-bank financial institutions (NBFIs) write down all the loans and debt securities on both sides of their balance sheets by the required percentage;
- (ii) the deleveraging authority compensates the banks and NBFIs for the loss if any; and
- (iii) the deleveraging authority pays each qualified resident their allocated amount less than the debt relief if any.
- If an NBFI gain after the above debt reduction, it should owe equalisation liabilities to the deleveraging authority of its jurisdiction.
- Note that as all debts mean all debts, public sector debts will also be written down by the same percentage except the official debts of the sovereigns that fall out of the scope of our proposed framework and should be handled by other means.
- After deleveraging: After deleveraging the balance of the deleveraging authority account at the central bank goes down whereas the total balance of the bank accounts (reserves) at the central bank goes up by the total payment made by the deleveraging authority.
- Hence, the base money goes up by the total payment of the deleveraging authority.
- Since NBFIs and residents cannot maintain deposit accounts at the central bank, they have to be paid through a bank which creates deposits for the NBFIs and residents against reserves.
- Hence, the broad money goes up by the amount of the payment to the NBFIs and residents.
- Issue of multi-currency balance sheet: One issue is that in many countries, the bank and NBFI balance sheets are multi-currency balance sheets.
- However, the deleveraging authority payments are in domestic currency, which may create currency risk for some banks and NBFIs.
- Backed by the central banks, the globally coordinated national deleveraging authorities should stand ready to intervene to avoid potential crises.
- Condition to spend on climate bonds: The authorities would require their domestic banks and other financial institutions to spend an internationally agreed-upon percentage of their newly found money, if any, after the deleveraging on the interest-bearing, finite-maturity bonds the national climate authorities would issue.
- Since the promoter of the climate authority is the government, the bonds of the climate authority would have the same credit with the government bonds, and the central bank would accept the climate authority bonds in its open market operations.
- Climate authority bonds as reserves: Therefore, the climate authority bonds would be the main tool to manage the reserves and deposits created through the equalisation claims.
- In addition, the climate authority bonds could be used for the greening of the financial system through the investment of foreign exchange reserves of the central banks proposed by the Bank of International Settlements (BIS 2019).
- Progressive wealth tax collection: Lastly, equipped with a “globally coordinated wealth registry” (Stiglitz et al 2019), the Lastenausgleich authorities would collect progressive wealth taxes from the owners of real and non-debt financial assets for the equalisation of burdens.
- While a part of these taxes could be used to retire some of the equalisation claims and the corresponding reserves and deposits created in the deleveraging process, another part could be transferred to the climate authorities, and the rest could be spent in the interests of the society.
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Issues related to Economic growth
An unrest, a slowdown and a health epidemic
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Dealing with the trinity of social disharmony, economic slowdown and and global health epidemic.
Context
India faces imminent danger from the trinity of social disharmony, economic slowdown and a global health epidemic.
Social disharmony
- Violence in Capital: Delhi has been subjected to extreme violence over the past few weeks. We have lost nearly 50 of our fellow Indians for no reason. Several hundred people have suffered injuries.
- Communal tensions have been stoked and flames of religious intolerance fanned by unruly sections of our society, including the political class.
- University campuses, public places and private homes are bearing the brunt of communal outbursts of violence.
- Institutions of law and order have abandoned their dharma to protect citizens. Institutions of justice and the fourth pillar of democracy, the media, have also failed us.
Impact of social disharmony on the economy
- Exacerbating the economy: At a time when our economy is floundering, the impact of such social unrest will only exacerbate the economic slowdown.
- Lack of investment by the private sector: It is now well accepted that the scourge of India’s economy currently is the lack of new investment by the private sector.
- Investors, industrialists and entrepreneurs are unwilling to undertake new projects and have lost their risk appetite.
- Increase in fears and risk aversion: Social disruptions and communal tensions only compound investors’ fears and risk aversion.
- Social harmony, the bedrock of economic development, is now under peril.
- When policy tweaks stop to matter: No amount of tweaking of tax rates, showering of corporate incentives or goading will propel Indian or foreign businesses to invest, when the risk of eruption of sudden violence in one’s neighbourhood looms large.
- How the vicious cycle works: Lack of investment means a lack of jobs and incomes, which, in turn, means a lack of consumption and demand in the economy.
- A lack of demand will only further suppress private investments. This is the vicious cycle that our economy is stuck in.
Impact of COVID-19 on the economy
- Global reactions: Nations across the world have sprung into action to contain the impact of this epidemic. China is walling off major cities and public places. Italy is shutting down schools. America has embarked aggressively both to quarantine people as well as hasten research efforts to find a cure.
- Many other nations have announced various measures to address this issue.
- What India can learn? India too must act swiftly and announce a mission-critical team that will be tasked with addressing the issue. There could be some best practices we can adopt from other nations.
Bringing in reforms to address the problems
- The government must quickly embark on a three-point plan.
- First, it should focus all energies and efforts on containing the COVID-19 threat and prepare adequately.
- Two, it should withdraw or amend the Citizenship Act, end the toxic social climate and foster national unity.
- Three, it should put together a detailed and meticulous fiscal stimulus plan to boost consumption demand and revive the economy.
Turning a moment of deep crisis into a moment of great opportunity
- The past instance of turning crisis into an opportunity: In 1991, India and the world faced a similar grave economic crisis, with a balance of payments crisis in India and a global recession caused by rising oil prices due to the Gulf War.
- But India was able to successfully turn this into an opportunity to reinvigorate the economy through drastic reforms.
- Turning the present crisis into an opportunity: Similarly, the virus contagion and the slowing down of China can potentially open up an opportunity for India to unleash second-generation reforms to become a larger player in the global economy and vastly improve prosperity levels for hundreds of millions of Indians.
- To achieve that, we must first rise above divisive ideology, petty politics and respect institutional salience.
Conclusion
The India that we know and cherish is slipping away fast. Wilfully stoked communal tensions, gross economic mismanagement and an external health shock are threatening to derail India’s progress and standing. It is time to confront the harsh reality of the grave risks we face as a nation and address them squarely and sufficiently.
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Issues related to Economic growth
Is RBI raising systemic risks by pushing retail credit?
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3-Is RBI raising systemic risks by pushing retail credit?
Context
Credit driven growth may not lead to sustainable growth.
Credit driven economic boom
- RBI and govt. acting in line: Both the government and Reserve Bank of India (RBI) have acted in line with their stated commitment towards the defined fiscal and monetary stability framework.
- Given the pressures of a dwindling growth rate and limited fiscal and monetary elbow room, this is commendable.
- Growth without increasing systemic risk: It is critical that the decisions taken to revive growth have a high likelihood of success without increasing systemic risk in the medium to long run.
- Recent push may add to systemic risk: In this context, it may be argued that RBI’s recent push for retail credit growth would add to systemic risk, while the benefits for India’s gross domestic product growth (GDP) may be limited.
- Credit-driven economic booms always end in economic misery.
- Credit is a necessary evil: To pump-prime an economy, very few tools exist other than credit.
- Thus there is all the more reason to handle it with care. In current economic growth frameworks, economic growth requires
- Quite often, credit creation is the ultimate source of capital.
- If the government spends by increasing its fiscal deficit, government debt increases. If the private sector borrows to invest and kick-start growth, its leverage increases.
- What could be the best source of credit? The best use of credit is when it is used to finance real assets in the economy.
- Creation of financial asset: When credit does not create real assets, it inevitably creates financial assets such as bonds held by investors, loans held by banks, or accounts receivables held by firms.
- The precursor to a crisis: An overabundance of financial assets created by credit is a precursor to a crisis.
How types of loans matters for growth and risk of the system
- How money is used matters for reviving sustainable growth: Taking a consumer loan to splurge on a vacation or celebratory dinner does very little to support long-term growth. It creates economic activity only in the immediate period.
- Which sector should be pushed to ramp up credit and how that money is used become important if reviving sustainable growth is the objective.
- In a paper titled Who Gets The Credit And Does It Matter, Thorsten Beck et al studied the growth dynamics of 45 countries for the period from 1994 to 2005.
- Only loans to firms contribute to growth: The paper concluded that only loans to firms are linked to GDP growth, the argument being that firms use credit to increase their capital stock, and thus, real assets.
- Loans to households do not add substantially to growth: Loans to households, while having desirable social outcomes in terms of boosting consumption and allowing households to tide over short-term cash flow mismatches, do not add to sustainable GDP growth.
- It is debatable whether consumer loans need a push at all.
- Retail and household debt growth
- Retail loan growth, while currently below its 2016 peak of 20%, has been managing to grow at around 15%.
- Household debt: In December 2019, RBI cautioned lenders on household debt levels and the associated risk on retail loans.
- Relation with banking crisis: Higher growth in household debt is associated with higher chances of a banking crisis (Household Debt And Monetary Stability, IMF, 2017).
- Consumer loans not always add to capital stocks: Another kind of consumer loan, the home loan, need not always add to incremental capital stock. Given how slowly the supply of homes responds to demand in the short term, excess credit supply is known to add to the risk.
- Of course, consumer loans such as education loans, which upgrade human resources, are a notable exception.
- In fact, mortgage booms have played key roles in most credit blow-ups.
- Surprising steps by the RBI
- Risk weight of consumer loans lowered: Surprisingly, RBI reduced the risk weight for consumer loans other than credit card debt from 125% to 100% in September 2019.
- Waiver to CRR requirement: Recently, RBI decided to waive lenders’ cash reserve requirement against new exposure to home, auto and Micro, Small and Medium Enterprises (MSME) loans.
- Futile attempts to revive commercial lending:
- Home loan growth was hovering around 15% for the last two years.
- Commercial credit growth falling: Growth of commercial credit (loans to industry and services as per RBI), which last exhibited 20%-plus growth in June 2012, has been falling.
- Since 2016, its annual growth averaged around 6%, with a strong downward trend observed since March 2019.
- Efforts to revive commercial lending have not borne fruit.
- Misplaced belief needs to be relooked: This misplaced belief—“if not commercial, let retail loans revive the economy”—needs to be re-looked.
- The simplistic understanding that any credit uptick can revive the economy needs to change.
- What retails at best can achieve? India’s retail credit push, if successful, may at best check the downward trend in GDP growth.
- The argument that it will revive growth is based on optimism.
- The assumption here being that consumption will drive the current capacity utilization of 69% to somewhere above 85%, which will trigger capital expenditure.
- This assumes that the consumer loan boom, already a decade old, will continue for another 3-4 years.
- Chances of household balance sheet weakening: In an environment of low job growth, it is difficult to see how household leverage will not increase.
- If capacity utilization does not pick up sufficiently to revive growth, then along with banking and corporate balance sheets, household balance sheets will also be weakened.
- Over the next 3-5 years, the downside of RBI’s retail push appears at least as significant as the upside.
Conclusion
- Polity stability needed: The government and RBI must make more determined efforts to revive corporate activity. Policy stability and confidence in the business environment may push commercial credit better than mere interest rate cuts.
- Need to increase government spending: Among the options available, using good old government spending to stimulate infrastructure spending, and eventually, the economy, appears to be a wiser option.
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Issues related to Economic growth
Conquering the green frontier
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Sustainable economic growth and focus areas to achieve it.
Context
India has to forge a different development model -one that will shift India’s workforce from agriculture to globally leading, resource-efficient businesses.
How India can deliver sustainable prosperity?
- The two intertwined forces: Just as liberalisation and globalisation transformed the economy in the past, two different yet intertwined forces will likely transform the economy in the future.
- First–High competitiveness: India must have globally leading companies across a range of key sectors such as financial services and manufacturing.
- Global productivity frontier: These super competitive businesses should define the global productivity frontier so that they can surpass the production processes of the best companies in the world.
- Second-Long term sustainability: India must also adopt a resource-efficient, low-carbon development pathway to utilise scarce natural resources effectively. There is no other way.
- Apocalyptic air pollution.
- Dire water shortages.
- Rising temperatures and-
- Extreme climate events- have already brought us to the brink of an environmental crisis.
- The need for India’s leadership for achieving the target: Moreover, note that the world needs India’s leadership to achieve the 2 degree Celsius global warming target.
- In short, India’s growth has to be green.
- What is the problem in achieving these goals?
- No nation has ever attempted these twin transformations — high competitiveness and long-term sustainability — simultaneously.
- The traditional development model: The traditional development model has been a farm-to-factory development model with economies transitioning from traditional agriculture to resource-intensive, urban manufacturing.
- India has to forge a different development model — one that will shift India’s workforce from agriculture to globally leading, resource-efficient businesses.
- Also, these companies must use the most advanced green technologies and business models.
- India’s development model will, therefore, need to take the Indian economy from “the farm-to-green frontier”.
Three focus area for green transformation
- The productivity transformation driven by super competitive businesses is well underway.
- We now need to consider a comprehensive policy package that will enable us to simultaneously undertake a green transformation.
- Global best practices and India’s own experiences suggest three focus areas for such a transformation.
- India has the third-largest start-up ecosystem in the world and our larger companies are also pursuing innovation-driven growth.
- Specific and stable policy goals
- Specific and stable policy goals need to be established to set detailed green targets for various sectors.
- A macro-economic model that factors in-
- Current skills.
- Sectoral connections.
- Relative emission and-
- Financial constraints are necessary to inform such targets going forward.
- Such a model can then be used to evaluate various green growth scenarios.
- Decarbonisation approaches in the green frontier scenario will drive the growth of green industries, green jobs, green skills, green entrepreneurs and green finance.
- Pursuing the policy goals: Global and Indian experience highlights that green targets will have to be pursued in a stable manner across decades.
- Most large emitters and pollutants are associated with long-lived (20-30 plus years useful life) assets.
- The basic requirement for investment in green assets: Investments in green assets will only be possible if there is the sanctity of contracts, pricing stability, and consistent policies that are backed up by the full force of law.
- Implementation: Finally, these specific and stable policy goals need to be implemented urgently to avoid lock-in with high-carbon assets.
- Revamp the institutional framework: India may need to revamp its existing institutional framework for environmental governance in order to align it with the country’s green transformation.
- Four levels of institutional structure: As demonstrated by global best practices, a comprehensive institutional framework could include four levels — super sovereign, sovereign, state/province and city.
- Council for monitoring: An independent council or board may also be required to monitor, report, and verify green targets.
- Appropriate financing capacity: Indian policymakers and entrepreneurs will unleash market forces that will drive the growth of waste management, solar panels, electric vehicles, super-efficient appliances, recyclable food packaging, clean coal, etc.
- These green industries will require massive investments and appropriate financing capacity will have to be created to support their growth.
- Preliminary estimates suggest that India’s green transformation may require an average investment of $95 billion to $125 billion per year, aggregating over $1 trillion in the next decade.
- A “green super fund” could be established to jumpstart green investments by pooling together international and domestic capital.
- Dual roles of financial institution: Such a financial institution could play a dual role in mediating and mitigating risk for global capital, as well as identifying sectoral project pipelines.
- The success of financial institution: Indian financial institutions have been very successful in building up new industries such as microfinance, EdTech, and affordable healthcare, which have delivered both financial and social returns; however, financial support for green industries will have to be orders of magnitude larger.
- Moreover, the “green super fund” may have to be able to invest across the capital structure (debt plus equity) as well as across the company lifecycle (early stage, growth capital, infrastructure investments, and so on).
Conclusion
Our future depends on how we resolve our environmental challenges. Further, we are the world’s third-largest carbon emitter and will play a crucial role in getting the planet to a low-carbon trajectory. Simply put, we must urgently transform our economy to get to the green frontier.
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Issues related to Economic growth
Towards a new world order
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Globalisation and its impact on Climate Change, Lessons from Nordic Model.
Context
Social inequalities and the grim problems of stark and continuing poverty are at the epicentre of the new world.
The ugly face of capitalism and growing inequalities
- The concentration of the health: The latest Oxfam Report presented at Davos points out that 2,153 billionaires have more wealth than 4.6 billion people.
- Rising poverty: The emergence of billionaires and oligarchs in different parts of the world coincides with increased poverty among the already poor people, especially children.
- Concept of stakeholder’s capitalism: These realities make observers question the tenability of stakeholder capitalism as a concept.
- Faults in the capitalism on display in 2008: The ugliest face of this capitalism was visible during the 2007-2008 economic crisis, first in the U.S. and thereafter across the European Union.
- At that time, it appeared as if the global economy was on the verge of collapse.
Intensification of energy use and sustainability
- The relation between growth and energy: One of the chief characteristics of economic development is the intensification of energy use.
- There is an unprecedented concentration of high energy density in all economic development strategies.
- Use of non-renewable sources: The bulk of the energy continues to be generated from non-renewable sources.
- Developing world capturing energy-generating sources: The developed world’s, and China’s, central objective is to capture energy-generating resources from across continents and put them to use to push GDP growth to greater heights.
- In the process, sustainability is becoming a casualty.
- Higher waste generation: The higher the use of energy, the larger the amount of waste generated. Entropy, like time, is always unidirectional, it only goes forward.
Disposal of e-waste
- High energy consumption and disposal of waste: Egregious consumption of energy by the developed world has been accompanied by the disposal of residual products (‘e-waste’) on the shores of many African and Asian countries.
- Impact on the developing world: As a result of the disposal, the poor in the developing world are, unwittingly, drawn and exposed to toxic, hazardous materials like lead, cadmium and arsenic.
- Hence, the ‘globalisation’ phenomenon has turned out to be nothing other than the exploitation of the developing world, with most countries being treated as a source of cheap labour and critical raw material.
Unfairness involved in the Globalisation
- Increasing consumption in the developing world: Countries in the developed world, and China, are ferociously using up finite raw materials without care or concern for the welfare of present and future generations.
- Bright and the dark side of the development: Certainly, there has been significant technological progress which has brought about a revolution in the fields of healthcare and communications, but there is also a dark side to this.
- System loaded in the favour of the rich: High expenses and Intellectual Property Rights load the system further in favour of the rich.
- Pernicious system of carbon credit: To demonstrate how unfair the system is, one can look at the pernicious plan to set up a carbon credit system.
- Under this, countries with high energy consumption trends can simply offset their consumption patterns by purchasing carbon credits, the unutilised carbon footprint, from poor developing countries.
Understanding the Nordic Economic Model
- ‘Nordic Economic Model’: It pertains to the remarkable achievements of the Scandinavian countries comprising Denmark, Finland, Iceland, Sweden, Norway, and allied territories. They also have-
- Large public sector enterprises.
- Extensive and generous universal welfare systems.
- High levels of taxation.
- And considerable state involvement in promoting and upholding welfare states.
- Among the happiest countries: UN reports also indicate that the Nordic countries are the happiest countries in the world. The U.S., in contrast, is in 19th place.
- The total population of the Nordic countries is estimated at almost 27 million people.
- Among the richest countries: These nations are among the richest in the world when measured in terms of GDP per capita.
Enlightened Global Order
- Taking the Nordic model as a template, there are some ingredients that could be part of a new ‘enlightened global order’.
- What does the Global Order include? These should include-
- Effective welfare safety nets for all.
- Corruption-free governance.
- A fundamental right to tuition-free education including higher education.
- And a fundamental right to good medical care.
- Shutting of tax havens.
- Tax structure: In Nordic countries, personal and corporate income tax rates are very high, especially on the very rich. If a just, new world order is to arise, taxes everywhere should go up.
- Holding companies responsible: When it comes to the corporate sector, there are some new perspectives.
- Changing the parameters of profit: In traditional business accounting, ‘bottom line’ refers to the financial year’s profit or loss earned or incurred by the company on pure financial parameters.
- The four ‘Ps’: Following vigorous debates, a new format has emerged under which a company’s performance is measured through four ‘Ps’.
- The first is ‘P’ for ‘profit’.
- The second ‘P’ is for people — how the company’s actions impact not only employees but society as a whole.
- The third ‘P’ is for the planet — are the company’s actions and plans sensitive to the environment?
- The fourth ‘P’ is for purpose, which means the companies and individuals must develop a larger purpose than ‘business as usual’. They must ask: what is the larger purpose of the company, apart from generating profits?
- Using performance in terms of four ‘P’s: Using big data and text analytics, a company’s performance can be measured in terms of all the four ‘P’s and a corporate entity can be thus held accountable. Market capitalisation need not be the only way to measure the value of a company.
Conclusion
Much work is yet to be done to uplift the global economic order, but the important point is that new tools are now emerging. What is required is a global consensus and the will to make the planet more sustainable, so that all individuals can live with justice and equality, ensuring that not a single child is hungry or seriously unwell because of poverty or lack of affordable medical help.
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Issues related to Economic growth
[op-ed snap] Fashioning the framework of a New India
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- How could focusing on inclusive growth help spur the Indian economy.
Context
As the Indian economy is going through a severe crisis, a major solution to the present economic crisis is to go in for inclusive growth; it also means shared prosperity.
Where India stands on poverty and how the slowdown is impacting the poor.
- Bottom 30-40% adversely impacted: The slowing economy has had an adverse impact on the bottom 30%-40% of the population.
- Absolute poverty on the rise: The incidence of absolute poverty, which has been falling since 1972-73, has increased to 30% (4% jump).
- 44% population below the multi-dimensional Poverty line: The Human Development Report (2019) has shown, more than 44% of the Indian population is under the multi-dimensional poverty line.
- Rising inequality: The poorest 50% population at present owns only 4.1% of the national wealth.
- While the richest 10% of people own 73% of the total wealth in India (Suisse Credit 2019).
- Rampant malnourishment: India has 15.2% population malnourished (women 15%) as against 9.3% in China.
- And 50% of the malnourished children in the world are in India.
- At 112th position on global hunger: India’s global hunger rank has gone up to 112 while Brazil is 18, China is 25 and South Africa, 59.
- Dismal performance on education: In the field of education as per a UN report (2015), overall literacy in India is 74.04% (more than the 25% are totally illiterate) against 94.3% in South Africa, 96.6% in China and 92.6% in Brazil.
- Almost 40-45% population is either illiterate or has studied up to standard 4.
- Poor quality of education: Given the quality of education in India, the overall population is very poorly educated, with the share of ‘educated unemployment’ rising by leaps and bounds.
What needs to be realised?
- Focus on domestic demand: It needs to be realised that when exports are declining, the economy will have to depend on domestic demand for growth.
- It is no more feasible for the top 20-25% population to continue growing without depending on the demand from the bottom 40-45% population.
- Demand by the bottom 40% a must: There is thus a strong reason now for the economy to increase effective demand of this bottom 40-45% population at least to continue growing-to reach a $5-trillion economy by 2024.
What is wrong with the growth process?
- Bottom 40% not getting the fair share of growth: A major reason for the crisis is that the growth process has marginalised the bottom 40-plus% of the population.
- It is in the sense that they do not get a fair share of the economic growth, and are more or less deprived of productive employment with a decent income.
- They have not been used as active participants in the growth process. Their potential has not been promoted.
- Less spending for the poor and its consequences: Though the bottom population depends on the government for basic health and elementary education (and also for access to higher educational opportunities)-
- The government spends just 4% of GDP on health (against the norm of 4-6% of GDP) and 3% of GDP on education (against the norm of 6-8% of GDP).
- How this dismal spending affects the poor: As a result of this below norm spending, these people are left hardly literate and sick, with poor nutrition and high morbidity.
- They are incapable of acquiring any meaningful skills or participating actively when new technology is spreading in the rest of the economy.
- The sub-optimal use of labour force: This sub-optimal use of the labour force in the economy is not likely to enable India to achieve optimal growth with proper use of the national resources -the labour force.
Inclusive growth- a solution to the present economic crisis
- Inclusive growth also includes shared prosperity: Here, inclusive growth does not mean only including all sections of the population in the growth process as producers and beneficiaries; it also means “shared prosperity”.
- Since India has already committed to sustainable and inclusive growth at the UN General Assembly, India is definitely obliged to implement inclusive growth.
- This should be our “New India”.
- What “New India” would involve?
- Improve the capability and opportunities: To start with, to improve the capabilities of the masses as well as their well-being by expanding productive employment opportunities for them.
- What expanding productive employment mean? The main steps to expand productive employment for all in the economy should be made up of-
- A process of inclusion.
- Expanding the quality of basic health for all.
- And ensuring quality education to all.
- How will “New India” help?
- Which will by itself generate large-scale employment in the government.
- Having a well-educated and healthy labour force will ensure high employability.
- Such people will be able to participate actively in the development process.
- The cycle of more productive employment: Having a well-educated labour force will help start-ups and MSMEs, in turn triggering a cycle of more productive employment in the economy.
- Global competitiveness increase: This will also improve the global competitiveness of our production units.
- Labour absorption potential of MGNREGA: Employment guarantee schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) will also increase employment.
- Assets generated under MGNREGA will expand capital formation in the economy, thereby raising the labour-absorbing capacity of the mainstream economy.
- Why this strategy is advantageous?
- Such a strategy has multiple advantages:
- First– it will raise incomes and the well-being of those who need it most urgently.
- Second– it will raise effective demand rapidly, which is so badly needed in the economy today to raise economic growth.
- Third– growth will be equitable and sustainable.
Way forward
- Finally, how does one raise resources to increase new public investments in the selected sectors?
- Raise direct taxes: One major strategy is to raise direct taxes, both capital tax and wealth tax.
- Past growth has failed to reach the poor: Growth led by providing tax cut and extra incentives, but this growth does not much percolate to the poor.
- Consequently, taxing the rich has to be a major strategy to raise government revenue.
- Treat public expenditure as an investment: The public expenditure on raising capabilities should be treated as social investment rather than social welfare, policymakers will be willing to spend on this capital formation.
- Let the fiscal deficit slip: Finally, there was no sound economic reason to control fiscal deficit ratio. Sound macroeconomics never supports this.
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Issues related to Economic growth
[op-ed of the day] The convergence of rich nations with the rest has gone off track
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Globalisation-Convergence of the rich and the poor economies- hopes and the reality.
Context
Sound policies are needed to put emerging economies back on a higher growth path and ameliorate regional inequalities.
The theory of convergence
- The theory of convergence is one of the most powerful and noblest ideas in economics.
- What is it? It is the concept that other things being equal, poorer economies should catch up with richer ones so that inequality between the rich and the poor attenuates, and conceivably even disappears over time.
- Capital is more productive in poor economies: The premise driving convergence is that capital (whether physical or human) is more productive in poor economies than rich ones due to what economists call “diminishing marginal productivity”.
- In layman’s terms, a small amount of investment yields a greater increase in output where there is less capital than where there is more.
- Lesser the development more the development: Even more simply, the rate of return on investment is inversely related to the level of economic development.
- Experience of Japan and Germany after WW 2: The experience of advanced economies gave economists reason to be optimistic that convergence occurs according to the script.
- Thus, the devastated economies of Europe, along with Japan, quickly caught up with the advanced economies that had not been ravaged by World War II, most notably, the US.
- Germany and Japan closing the gap: At the end of the war, with their capital stocks destroyed, Germany and Japan were much poorer than the US; by the 1960s, they had closed the gap.
Globalisation and the unfulfilled hopes of convergence
- Replication of the rise of Japan and Germany? At one time, it appeared that the same play was at work between emerging economies and advanced economies.
- Rise of India and China: Economies such as China and India, as well as others, were far outstripping the growth rates of the US and other rich economies,
- Hope of closing gap: India and China gave hope that at least the more rapidly growing of the emerging economies would close the gap with the rich world within decades rather than centuries.
- Adoption of technology at low cost: There was presumed to be an additional powerful force working toward convergence.
- Poorer economies are, almost by definition, far away from the technological frontier at which the richest economies operate.
- There is thus ample room to absorb newer technologies at relatively low cost and in a relatively short span of time, without encountering slowing growth like the rich economies,
- In simpler terms, it is difficult and costly to innovate the latest Apple iPhone, but relatively easy to reverse engineers at least some of Apple’s technology.
Reality: Convergence is faltering
- Recent evidence suggests that convergence is faltering.
- World Bank report of retarding convergence: A recent World Bank report documents a worrying slowdown in productivity growth in emerging economies, significantly retarding convergence.
- Lower productivity: The report’s calculations suggest that emerging economies have 14% lower productivity than they would have had if previous trends of high productivity growth were maintained.
- Lower commodity exports: For commodity exporters, this is a whopping 19%.
- The silver lining for faltering economies: According to the World Bank, the main driver of falling productivity are-
- Insufficient investment in physical and human capital.
- Insufficient mobility of machines and workers from less productive to more productive sectors of the economy.
- India’s case: The Indian case clearly bears this out, with languishing investment and unfinished productivity-enhancing reforms, especially in the country’s labour market, being the key culprits behind the sharp slowdown in growth.
Way forward
- Repair financial systems: Governments, including India’s, need to do the heavy lifting of repairing damaged financial systems overladen with bad debt.
- Restore fiscal rectitude.
- Inflation focused monetary policy: Ensure that monetary policy remains focused on stable inflation rather than being excessively loose as a risky substitute for structural reforms.
- Reforms: Press ahead with unfinished reforms to capital, land and labour markets.
- Address the regional disparities: There is a further critical dimension in the case of large multi-region economies such as India.
- Not only has convergence been faltering between nations, but it has also been faltering between the richer and poorer regions of large nations such as India.
Conclusion
The data does not present an epistle of despair, but of hope. The pursuit of sensible and conventional sound economic policies ought to put emerging economies as a group back on a higher growth trajectory. Convergence may yet end up being a parable of promise rather than a fable of folly.
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Issues related to Economic growth
[op-ed of the day] Economic reforms are best done brick by boring brick
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much.
Mains level: Paper 3- Economic reform-sudden or persistent and incremental, sustainable.
Context
Rather than big bang measures or a stealthy agenda, India can count on small but significant improvements.
Reforms only in crisis or by stealth
- The accepted conventional wisdom is that economic reforms in India happen only in a crisis or by stealth.
- Reforms in the crisis
- Reforms of 1991 : The big example of the former are the 1991 reforms.
- In 1991 the country faced a huge foreign exchange crisis, resulting partly from the fiscal profligacy of the previous decade.
- 1999 telecom sector reforms: Another example is from 1999 when the telecom sector was in near bankruptcy, and that crisis led to the shift away from fixed fee for spectrum to revenue sharing.
- The situation of no other choice: In both cases, there was considerable opposition to those reforms, but they were pushed through because the crisis left no other choice.
- Reform by stealth: Other than a crisis, more often than not, it has been economic reform by stealth.
- In the form of executive orders: These reforms are often in the form of an executive decision rather than legislation. Following are the examples of it-
- Expansion of the list under licence: The expansion of the list of items under the Open General Licence for imports, which is a reform of protectionism, or the reduction in the set of industries reserved for small-scale businesses.
- Electoral bond introduction: A more recent example of stealth reform was the insertion of an electoral bond scheme in the Finance Bill of 2018.
- Advantages of going stealth: Reform by stealth offers the advantage of going in either direction.
- In 2013, faced with a potential currency crisis, the Reserve Bank of India (RBI) quietly retracted the limits on the liberalized remittance scheme (LRS).
- Problem with stealth reforms: Stealth reforms are introduced stealthily but when they do not yield the desired result they are rolled back unpredictably, increasing uncertainty in policies of the government.
Persistent, encompassing, creative incrementalism in reforms
- The Economic Survey of 2015 pretty much ruled out Big Bang reforms in India, calling instead for “persistent, encompassing, creative incrementalism” on them.
- This is the right mantra.
- What incrementalism means: It implies continuity, not slowness, a sustainable speed that gives reforms predictability and stability. Following are its examples of it-
- Reform in food subsidy: Example of incrementalism could be reforms that are being carried out in food subsidies.
- First: Reduce the leakages of the subsidy to non-farmers.
- Thus, when procurement is done, payments go directly to their Aadhaar-linked accounts.
- This will lead to non-farmers getting eliminated,
- Second-Pay subsidy only to the poor: It will lead to subsidy savings, allowing us to limit the subsidy only to poor farmers.
- Sovereign gold bond scheme: The use of paper gold greatly reduces imports of the physical metal and outgoes of foreign exchange.
- The sale of these bonds is being expanded, and they would eventually be everywhere, even at post offices.
- Aggregate licence by RBI: The next example is from a new category called account aggregators licensed by RBI.
- It allows users’ control over the digital data trail that their transactions generate, and they can monetize it or use it to enhance their creditworthiness.
- This is an incremental reform with huge ramifications.
Conclusion
- The reforms cited above are incremental, not a big bang, persistent but not slow, open and not by stealth, and finally, imaginative too, since they respond to real needs.
- Effective reforms are those that are done brick by brick, the boring measures that chip away at everything that constrains high, inclusive and sustainable growth.
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Issues related to Economic growth
[op-ed snap] Limited scope for sharp recovery
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Not much
Mains level: Paper 3-Slowdown in the economy, supply side-demand side, way forward for recovery.
Context
In order to revive the economy, the Government must choose between tax reductions and increasing rural spending.
The Current Status of the Indian Economy
- 5 % in 2019-20: The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20.
- Cause of the slowdown: The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical
- Stagnant income and stagnant incomes: Despite largely stagnant incomes, private consumption has been financed over the past few years through lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led pay-outs.
- Private consumption is the largest driver of growth.
- Depleting savings: The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13.
- Depleting credit in the system: Overall credit in the system has dried up.
Rural economy
- Low wages and stagnant incomes: Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent.
- Weak real estate sector: The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past.
- The sector is experiencing lower private sector investments recently.
Limited scope for a sharp recovery
- The following factors render the scope for sharp recovery limited.
- Consumption issue is structural: The slowdown in private consumption is a structural issue linked to low household income growth.
- Low job creation: Low consumption is in turn, linked to the basic problems of low job creation.
- Low Income: Low consumption is also linked with stagnant farm incomes.
- None of the above factors is likely to change suddenly, limiting the scope of recovery.
- Low Investments: Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households.
- Stressed Government consumption: Which has been supporting growth over the past few years, remains under stress.
- The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP.
- The public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.
- NBFC’s role: Recovery will also depend on the health of the financial sector, especially that of NBFCs.
Use of the fiscal space
- Supply-side: The government has shown a clear preference to rely on supply-side measures (like corporate tax cut) to support growth.
- Need to address demand-side: Expectations will be high that the upcoming Union budget addresses the demand side concerns as well.
- Spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can decrease pain in rural areas.
- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
Way forward
- Widening of the tax base- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
- Broad-basing of the income and consumption profile: Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers.
- The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.
- Role of the private sector: Given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.
Conclusion
Reforms that increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus.
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