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The Big Picture – Is Indian Economy under Stress?

  • November 25, 2016
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The Big Picture- RSTV
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Is Indian Economy under Stress?

 

TOPIC: General Studies 3

  • Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
  • Inclusive growth and issues arising from it.

 

The performance of the Indian Economy has to be identified- if it is performing well or is under stress. The analysts and economists have a mixed answer to this question. A good monsoon, 7th Pay commission bonanza being given to government servants leading to demand creation, 7% GDP and GVA, increased revenue collections, 65000 crore black money disclosure are all signs of economy looking up. However, at the same time, huge bad and stressed loans in banks, slump in credit growth in industrial sector, job creation not happening are some of the few indicators which clearly indicates an economy under stress.

Present state of Indian Economy

There is confusion in current state of Indian economy. Things are pointing in different directions, so by looking at it from a distance, it is very confusing.

Industries

The manufacturing sector is recovering very slowly, lower than expectations. Though the gross value added in manufacturing is shown 8% but IIP is shown in negative. Hence, true picture cannot be concluded.

Industry is still not facing capacity shortages which is why they are not investing. Construction related industry has started picking up because of road projects. Industrial growth, investment growth and manufacturing growth will pick up from next year as new investments are just picking up.

The credit to industry has come down, but over past few years is that there is tremendous growth in the extent to which industry is financing its working capital- by issuing commercial paper (CP). The volume of CP has shot up because cost is much lower. The discounting rate of CP is between 6.5-10%. This is the reason they are not taking loans from banks. The larger corporate sector which can issue CP has seen rise, but it is not true for small and medium industry where also there is a need for credit.

The credit to small and medium is not much visible as the inventories are going down as inventory is one of the reason to take credit. If the inventory is going down, it means that industry is not expecting growth to take place.

Agriculture and Rural economy

There was a consumer boom in rural areas earlier because of big increases in MSP and expansion in NREGA. Both these have now become static.

Agriculture faced drought for last 2 years and this is where demand slacked. It is now expected to rise this year as monsoon was near-normal.

Good monsoon will drive up the agricultural purchases. The credit of take is high in agriculture and this will help rural and urban consumption than last year.

Initially, NREGA allocation and expenditure has been more than budgeted. It is possibility of additional supplementary demand. So there is capacity is there to increase rural demand.

The urban demand will also increase due to pay commission impact.

Investments

The investment in Indian economy has not picked up as per expectations. It was at peak in 2007-08 with 38% and fell to 28% and now it is roughly around 32%.

If there is almost 8% GDP growth, then there should be higher investments, boost in capital goods, industrial and agricultural production should be up and savings should be more. But nothing is growing. So, it doubts if the GDP numbers are actually showing true picture or not.

The capital goods production is down by 22% and the corporate investment is down.

The public investments is increasing, but the overall investment is not. The private sector is investing less and less and hence it negates the increase public investment. The foreign investments are 10% of total investments. So 90% is internal investments whose sources have to be increased.

Boom time saw lot of investments. But many of it came from new entrants like Tata Nano, airlines increasing in India etc. Here, the investments was coming from new companies. The new entrant will do marketing, win business from others and thus there is more capacity and competition. And that is what drove FDI. Currently, even Make in India is not attracting many potential players in manufacturing industry.

External environment

Exports have not been going very well, they have been negative for almost 20 months. This is because the external environment is presenting a very confused picture where US is doing well at times and not at other, sometimes China is slowing down and the BRICS economy is seeing slump and Eurozone is in tepid situation.

Banking

The NPAs are very high. This means that credit to industry is a problem, especially to infrastructure. The emphasis laid by former RBI Governor on cleaning of bank balance sheet should be priority to let the banks to their business.

It is largely due to the mix up of old indicators with new indicators. Base year has been shifted, WPI and CPI indicators have seen change. But old indicaotrs like IIP remain.

So it is important that IIP numbers should be now discardrd as it is giving worng indication of overall indian economy. There is decline in credit to private sector. But if looked at past 6-8 months of Indian economy, it is largely driven by foreign investments and public investments.

Areas of investments

For public investments, the source of money is important.

FDI– Last year, FDI inflow was 31 billion dollars and outflows were about 18 billion dollars. So net investment was of 13 billion dollars. Out of it, many sectors were permitted to have 49% so bulk of it went for buying shares from Indians. So, the greenfield investments were not much and it got only 3 billion dollars which is very less. This is where new jobs and new value addition takes place.

Black money– it was 65000crores, the tax benefits to government is 28000 crore which is not much.

Telecom sector– by higher spectrum prices, the high prices are actually being transferred to people. This is the reason, the government received less than expected revenue from spectrum allocation.

Revenue mobilisation– the direct tax collections seem to have improved but the resources side is cause for concern. There were lot of bets on spectrum and on disinvestments. But they have not met the targets.

Challenges before Finance Minister

The biggest challenge is that there is no job creation. No organised sector job creation, the unorganised sector job creation is also coming to a standstill. This will create sense of insecurity amongst people and this is harmful for overall economic growth.

Instead of resorting to ad hoc revenue options like spectrum allocation and disinvestments, there has to be a stable, predictable policy which will be applied for years to come.

The lowering of RBI interest rates will not have much impact unless the banks pass it on. The EMI is what the current citizens are depending upon for their expenses. And if the interest on them is reduced, there can be a significant impact in demand in the economy.

Conclusion

The Indian economy seems to be moving towards a jobless growth which is a worrying concern. It has also not fared as expected in ‘ease of doing business’ index which could have assured more investments in country and thereby possibility of actual growth.

Though the economy has green shoots too in terms of increased public investments, increased rural demand and better agricultural output, there is need for more robust policies which can actually drive the Indian economy towards qualitative and quantitative growth.

Connecting the dots:

  • What is the present condition of Indian economy? Critically analyse the role of sectors which affect the economy.

 

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