India’s Economic Growth: A Strategy for the New Economy
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Besides, the Government has also come up with Digital India initiative, which focuses on three core components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.
Executive Summary & Overview
Recent Developments With the improvement in the economic scenario, there have been various investments in various sectors of the economy. What is remarkable about this election is that this is the first time since that an incumbent prime minister has secured an absolute majority for their party for a second successive term by winning even more seats than before. Not just the election outcome this year, but the general election too broke several electoral records. Voter turnout was It surpassed the For the first time, the voter turnout of men and women was almost equal, with the gap narrowing down significantly from 9 percent to only 0.
The proportion of women candidates to total, however, remained less than 10 percent. The other major events of the month were the data release of GDP for Q4 FY and the unemployment rate for the July —June period on the last day of the month. GDP data came in lower than expected, printing a five-year low of 5.
Annual growth for FY was 6. Private domestic demand performed even poorly at 6. Private final consumption expenditure, which has been the sole engine of growth, declined. One of the primary reasons for the drop was rural distress and tightening lending conditions, which were, in turn, a result of ailing health of the financial institutions, specifically the nonbank financial companies. At the same time, growth in gross fixed capital formation dipped to 3.
On the industry side, construction and manufacturing registered better growth than in FY, but growth in agriculture and allied activities as well as in mining declined significantly, resulting in poor rural income. Services, the biggest contributor to GDP, grew by 7.
According to the data released by the Ministry of Labour and Employment, the unemployment rate was 6. Therefore, an apples-to-apples comparison with previous years is difficult.
Team India Blogs
While the single-party majority mandate has set the foundation for a stable central government for another five years, significant headwinds potentially lie ahead. Domestic risks such as slowing demand and poor health of the banking sector , together with external risks from uncertainties around global trade , will likely impact business investment and credit growth, and thereby, growth.
However, the government does not have many weapons to manage decelerating growth. Room to maneuver the fiscal policy is limited. For the center, the government has pegged its FY fiscal deficit target at 3.
Nonetheless, public sector borrowing requirements remain high, and any further rise may crowd out private investments and stress the financial sector further. Besides, a higher deficit will likely impact the efficacy of the monetary policy, which is the other policy instrument that the market expects the government to use to counter slow growth. The government is tasked with achieving fiscal consolidation and propelling growth by a counter-cyclical fiscal policy—clearly, this is a tough balancing act.
That said, in the coming months, monsoon will play a crucial role in calibrating monetary policy. Besides, if global uncertainties such as the global trade crisis intensify, there could be pressure on the currency and trade balance. The RBI will closely monitor economic conditions and likely undertake corrections and adjustments accordingly.
However, it will be a tightrope walk. When viewed dispassionately, in the current economic scenario, India likely needs more than just monetary policy to correct its course. Future policy actions have to be more strategic. The government will have to manage the fiscal account and yet address structural deficiencies with full accountability and transparency as monetary policy cannot alone turn the tide. The government has acknowledged the challenges and already started taking actions. In addition, the government wants to tackle the challenge of economic growth and jobs sooner than later—it set up the two new cabinet committees on investment and employment just days after the GDP data release.
It was a tightrope walk balancing the need to boost growth, create jobs, and offer tax breaks without straining expenditure. CMIE's consumer durables index for December, was at its lowest in the past 4 quarters. Downtrend in petroleum product consumption also points to slowdown. The quarters ended September and December, with 1. Evidence from the financial services industry suggests a similar trend.
RBI reported over Rs 1 lakh crore fall in bank credit in the latest fortnight of April It meant India squandered the opportunity to participate in 5 golden years of world trade when the global trade grew at a very healthy per cent per annum after nearly a decade of a debilitating slowdown. But India clearly missed the bus in the interim when the world economy was on an upswing.
There are some bright sparks still. For instance, real estate, where commercial segment is doing very well while demand is picking up in residential segment as well.
2. The phenomenal growth of China and India
But remember the realty sector is rising from the ashes. And low base effect may be at play there. There is no magic wand. But the economic formula to recover from a slowdown or recession is so simple that it has been deployed over and over again around the world-in US, China, Germany-with amazing regularity and success. When the chips are down, the government has to take the lead with public expenditure-loads of it-and for years on end. Public investment through infrastructure building, for instance, revived the US through the Great Recession.
Govt reworking strategy to enhance direct tax mop-up: CBDT member
Infrastructure and allied industries-when pumped with demand-create demand in those sectors. Done over a long period of time, it has a contagious effect on growth.
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India must do that with renewed vigour. If public investment starts firing up the consumption engine, even in select sectors to start with, it could substantially bridge the per cent gap in capacity utilisation in various sectors over quarters. It is this gap that has stayed put in the last years which has prevented private consumption from coming back.
Especially, greenfield investments in new capacity building. Only then will the private sector be emboldened to rethink new capacity creation.
From here to $20 trillion: India’s economic growth strategy
If the economy continues its downward spiral, it may even require an economic stimulus. But we haven't reached that stage just yet.
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Also, demand side measures such as aiding consumption tend to have a longer term impact than supply side measures such as one-off fiscal stimulus whose impact could wane soon enough. There are other avenues too.