The Growth Challenges

INTRODUCTION:

• Since the introduction of 1991 economic reforms, the Indian economy has been pursuing a free market economy, greater openness in trade and increased investment in infrastructure. This helped the Indian economy to achieve a rapid rate of economic growth and economic development. However, the economy still faces various problems and challenges, such as a high rate of unemployment; high fiscal deficit; lower output in the agricultural sector; poverty in rural areas and geopolitical challenges.
• India has to face many global challenges such as climate change, urbanisation, migration, technologies like automation, increased inequality, changes in political factors like the US and China policies, Brexit, protectionism and lately ripple effects of Ukraine- Russia turmoil.

ECONOMIC CHALLENGES SINCE INDEPENDENCE:

• Dependence of a large proportion of the population on agriculture for its survival.
• The use of traditional methods of cultivation results in low productivity and stagnation in the agricultural sector
• Low level of development in the industrial sector
• A massive level of unemployment and underemployment
• Lack of medical facilities leads to a high infant mortality rate, low life expectancy, and low literacy rate
• Widespread mass poverty because of natural calamities (famines, epidemics, etc.) and other socio-economic factors
• Little industrialisation and decline of handicrafts.
• Low agricultural output and high imports of grains.
• Low national income and per capita income
• Sluggish economic progress.
• Very high infant mortality rate, low life expectancy and low standard of living.

THE PRESENT STATE OF THE INDIAN ECONOMY:

• As per the 2021-22 Economic Survey, along with a GDP of $3.1 trillion, India is the world's sixth-largest economy. The country has one of the highest GDP growth rates in the world. India's GDP will likely grow by 8-8.5% in FY22.
• At the same time, there are wide disparities within the country's economy, while approximately 25% of the total population pays income tax, it also has one of the highest numbers of billionaires in the world.
• The per capita income has risen rapidly in the recent past yet millions of people continue to live in extreme poverty.
• According to the RBI's weekly statistical supplement, India's forex reserve is $606.475 billion for the week ended April 1^st

India is the third-largest unicorn base in the world with over 83 unicorns collectively valued at US$ 277.77 billion, as per the Economic Survey. By 2025, India is expected to have 100 unicorns, which will create ~1.1 million direct jobs according to the Nasscom-Zinnov report ‘Indian Tech Start-up’.

INDIA’S GDP GROWTH HAS REMAINED STEADY, STABLE AND RESILIENT:

• Steady: The GDP has steadily increased from 4.4% in the 1970s and 80s to 5.5% during the 1990s and early 00s, and further to 7% in the late 2010s. The country aims to become a $5 trillion economy by 2025.
• Stable: Post-1991 liberalization, the growth rate has not only accelerated it has also become stable. The transition of the economy towards a stable service sector has also helped add
• stability to the economy.
• Resilience: The country's large spatially diversified economy, which is not dependent on a few products, commodities, or natural resources, has further added strength to it. India engages with different trading partners spread across the world. Thus, a slowdown limited to one part of the world will not result in a large impact on India.
• Covid-19 impact: In the wake of the nationwide lockdown in March 2020, the GDP growth contracted by a massive 23.9%. As per the National Statistical Office (NSO), gross value added (GVA) came in at -22.8 per cent. India's economy had expanded by 3.1 per cent in the March quarter and dragged FY20 GDP growth to 4.2 per cent, the weakest since the global financial crisis. This was the worst performance of the Indian economy since independence.

CHALLENGES TO ECONOMIC GROWTH IN INDIA

IMPACT OF POPULATION GROWTH:

• It is the current economic issue in India as it is the second-most populated nation in the world, after China. India ranks second after China in its total population. Its population has grown 20% per decade, leading to problems that include food deficits, sanitation deterioration, and pollution. These circumstances increase the economic burden of the nation. Although economic growth numbers look promising, the living standards of most citizens are not changing.

Malnutrition is a severe problem in India that is causing childhood stunting, anaemia in women of reproductive age, and overweight adult women. Only 6% of India's poor have access to tap water versus 33% of the non-poor. Sanitation is a massive ongoing problem that the government has been unable to address.

• Measures to control Population in India:
• Increasing Minimum age of marriage: Recently the Union Cabinet approves raising the legal age for marriage of women to 21 years.
• Raising the status of women: Women should be given opportunities to develop socially and economically. Free education should be given to them.
• Spread of Education: The spread of education changes the outlook of people. The educated men prefer to delay marriage and adopt small family norms. Educated women are health conscious and avoid frequent pregnancies and thus helping in lowering the birth rate.
• Adoption: Some parents do not have any child, despite costly medical treatment. It is advisable that they should adopt orphan children.
• Providing incentives: Incentives have proved to be an efficient policy measure in combating most development issues including population.
• Legislative Actions: Not much result can be achieved from these if family planning and use of contraception remain optional instead of mandatory. Strict legal steps are required for child marriage, education, abolition of child labour and beggary and family planning to reap significant benefits from it.

UNEMPLOYMENT:

• Cause of unemployment: The inflexible and restrictive labour laws coupled with poor infrastructure prohibits investments in India leading to high unemployment in the country.
• According to CMIE, there were seven states where the unemployment figure was in double digits. In December 2021, Haryana reported an unemployment rate of 34.1%.
• India would need to create around 10 million jobs per annum by 2030 to reduce the growing unemployment in the country. The report estimated 36 million people as "underemployed", which was around 4% of the population aged 15 and above.

IMPACT OF LOW AGRICULTURAL PRODUCTIVITY:

• The current policies are still based on the ‘deficit’ mindset of the 1960s and the procurement, subsidies and water policies are biased towards rice and wheat.
• Diversification of cropping pattern towards millets, pulses, oilseeds and horticulture is needed for more equal distribution of water, and sustainable and climate-resilient agriculture.
• Agriculture should change towards high-value production, better remunerative prices and farm income. The lack of new technology is responsible for low productivity and stagnation in agriculture.
• Land Ownership: There is some degree of concentration of landholding. The large parcels of land in India are owned by a relatively small section of the rich farmers, landlords and money-lenders, while the vast majority of farmers own very little amount of land, or no land at all.
• Conditions of Agricultural Labourers: The conditions of most agricultural labourers in India are far from satisfactory. There is also the problem of surplus labour or disguised unemployment. This pushes the wage rates below the subsistence levels.
• Agricultural Marketing: Agricultural marketing still continues to be in a bad shape in rural India. In the absence of sound marketing facilities, the farmers have to depend upon local traders and middlemen for the disposal of their farm produce which is sold at a throw-away price.

LOW CAPITAL FORMATION:

• Capital formation signifies a very important aspect of economic development. This means making and increasing more capital goods, such as machines, tools, factories, buildings, raw materials, fuels, etc., which are to be further used in producing more goods.
• It should, however, be very clearly understood that capital formation does not mean an increase in money capital, but it refers to an increase in physical capital, i.e., machinery, factories, transport equipment, bridges, power projects, dams, irrigation systems, etc. To sum up, capital formation implies the creation of real assets. The process of capital formation occurs in three stages:

The three stages of capital formation are:

1. Creation of Savings (It is the savings that are transformed into capital.)
2. Effective Mobilization of Savings (Saving needs to be invested)
3. Investment of Savings (Savings of the people must be properly invested to produce capital)

STAGNATION IN EXPORTS:

• The economy has certainly witnessed growth during the last few decades, but the foreign trade growth rate has lagged behind the gross domestic product (GDP) growth rate.
• The export of goods has completely stagnated with an annual growth rate of almost 0% during 2012-19 while the growth rate of service exports declined noticeably to 5.9%.
• India accounts for less than 2% of the world's export manufacturers while the share of China stands at 13%.
• To overcome this stagnation trap of exports would be to diversify into high-technology products while enhancing the competitiveness of our existing export basket.
• India’s main export items comprise petroleum products, gems and jewellery, engineering products, pharmaceuticals, and textiles and clothing. Some of these products are labour-intensive but low-technology items, while the rest are medium-technology items with lower labour intensity.
• Moving into high-technology and high value-added items would require the acquisition of such technology. The short-term solution to this is to identify a few champion sectors and provide attractive incentives to transnational corporations, which own advanced technologies, to set up their manufacturing bases in India. One such step in this direction is Production Linked Incentive Scheme (PLI).
• The long-term plan should be to invest significantly in research and development so that we could, eventually, be the owners of cutting-edge technology and one of the global industry leaders.

RISING INFLATION:

• Inflation erodes purchasing power or how much of something can be purchased with currency.
• Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy. As an economy grows, businesses and consumers spend more money on goods and services.
• Inflation in India is primarily driven by changes in the prices of food and fuel. A prolonged period of high crude prices is likely to upset the budgetary math of the government and also eat into the purchasing power of the common people.
• The diversification of dietary patterns and a rise in per capita income have raised the demand for high-value food products such as meat, milk and fish in India. A change in the prices of crude oil is also responsible for inflation spikes in India. In the recent past, supply-chain disruptions caused by the pandemic have also contributed to a rise in prices.

Steps Taken by the Government:

1. Price Stabilisation Fund (PSF):

• • Established in 2014-15, PSF is any fund created to absorb extreme volatility in selected commodity prices.
  • Such goods will be procured directly from farmers or farmers' organisations at the farm gate/mandi, and made available to consumers at a more affordable price.
  • Losses sustained, if any, between the Centre and the states must be shared in the operations.
  • The sum in the fund is usually used for activities aimed at bringing down/up the high/low prices say, for example, acquisition of certain goods and distribution of the same as and when appropriate so that costs remain within a range.

2. Higher MSP: Higher MSP has been announced to incentivize production and thereby enhance the availability of food items which may help moderate prices.
3. Reviewing India’s Imports and Exports: Government will review the import and export of all essential commodities regularly and impose controls on exports and ease restrictions on imports, including tariff reduction where necessary, to improve domestic supplies.
4. Action against hoarding: Government takes stringent action against hoarders and black marketers manipulating market prices, under the relevant legal provisions, to ensure that products reach the markets in a timely manner to moderate the prices. Cartelisation by large traders is being strictly dealt with.

GENDER PAY GAP:

• Unequal pay refers to situations where women are paid less than men for doing the same work. To counter this, equal pay is legally enforced in most organized sectors. The gender pay gap, on the other hand, is a measure of the gap in the overall earnings of men and women.
• All over the world men tend to earn more than women. Women are often underrepresented in senior positions within firms. Women are often overrepresented in low-paying jobs.
• In India, men are more likely to own land and control productive assets than women. Women often have limited influence over important household decisions, including how their own personal earned income is spent.

• Closing gender gaps benefits countries as a whole, not just women and girls. Closing the gap in well-being between males and females is as much a part of development as is reducing income poverty. Greater gender equality also enhances economic efficiency and improves other development outcomes.
• To broaden women’s access to economic opportunity, thereby reducing male-female disparity in earnings and economic productivity, a combination of policies is called for.

FISCAL DEFICIT:

• It is the shortfall in the government’s revenue compared to its expenditure or when the government spends beyond its income. A higher fiscal deficit is not just something that the government has to deal with, but it also has an impact on our financial lives.
• The Fiscal deficit stood at Rs 13.16 trillion at the end of February this year, as per the data released by the Controller General of Accounts (CGA).
• India's fiscal deficit shot up to a record 9.3 per cent as the government spent on fertiliser and food subsidies in providing free food for its 800 million poor during the pandemic.
• At times, a sustained high fiscal deficit can impact a country's rating. An increase in the fiscal deficit, however, can also boost a sluggish economy by giving more money to people who can then buy and invest more.
• The government must focus on gradual fiscal consolidation and opt for investment-driven growth. As the governments borrow more to finance their fiscal deficits and accumulate more debt, interest rates tend to go up.
• The government needs to look at innovative ways to shore up tax revenues.

CORRUPTION:

• Corruption acts as an inefficient tax on business, ultimately raising production costs and reducing the profitability of investments. Corruption may also decrease the productivity of investments by reducing the quality of resources.
• Corruption in India is a consequence of the nexus between bureaucracy, politics and criminals. Corruption deepens inequalities and increases poverty and obstructs the growth prospects of the nation.
• Corruption weakens education and health systems, depriving people of the basic building blocks of a decent life; Undermines democracy by distorting electoral processes and undermining government institutions, which can lead to political instability; Exacerbates inequality and injustice by perverting the rule of law and punishing victims of crime through corrupt rulings.

ECONOMY AND INFORMALITY:

• An Informal economy represents enterprises that are not registered, where employers do not provide social security to employees.
• The challenges of informality loom large for India. Lack of job security, absence of social security benefits, and tax evasion, all point toward the need for the formalization of the informal sector at a faster yet sustainable pace. Policy interventions, fiscal support, education and upskilling have a major role to play in the formalization of the economy.
• Policy efforts directed at bringing the informal sector into the fold of formality by alleviating legal and regulatory hurdles are laudable.

POOR HEALTH CARE:

• High out-of-pocket expenditure remains a stress factor: Poor health can make households property exhausted, indebted, and reduce their essential consumption because people with poor health are not only having productivity and income losses but also out-of-pocket (OOP) expenses for needed healthcare services.
• India will be the most populous country in the world by 2030, and nearly 200 million Indians will be at least 60 years of age by 2025. However, the growing elderly population is placing an enormous burden on the healthcare system.
• Urbanization also led to stress on public infrastructure with the rise in communicable and lifestyle diseases.
• Lack of infrastructure: India has been struggling with deficient infrastructure in the form of a lack of well-equipped medical institutes.
• Shortage of efficient and trained manpower: India remains a severe shortage of trained manpower in the medical stream, this includes doctors, nurses, paramedics and primary healthcare workers.
• Unmanageable patient load: Even before the outbreak of the Covid-19 pandemic, healthcare facilities had been feeling the strain due to unmanageable patient load. This needs to be suitably addressed for the growth of healthcare in the future.

INCREASING WEALTH INEQUALITY:

• The increasing inequality is going to be a critical deterrent for long-term growth. According to the World Inequality Report 2022, the top 10 per cent of Indians had about 96 times more income on average than the bottom 50 per cent. As per the recent Multi-dimensional Poverty Index (MPI) prepared by NITI Aayog, one in every four people in India was multidimensionally poor. This inequality widens the problem of poverty.
• Interestingly, wealth inequality increased at a much faster rate than income inequality, and more importantly, wealth inequality increased at a much faster rate between 1991 and 2020—i.e., in the post-liberalisation phase—as compared to its movement between 1961 and 1991.
• Since the mid-1980s, deregulation and liberalisation policies have led to one of the most extreme increases in income and wealth inequality in the world. While the top 1 per cent has largely benefited from economic reforms, growth among low and middle-income groups has been relatively slow and poverty persists.

UNDERDEVELOPED INFRASTRUCTURE:

• India’s infrastructural facilities or economic and social overheads of capital are inadequate. It consists of (a) transport and communications, (b) energy, (c) finance, housing and insurance, (d) science and technology, and (e) health, education, etc.
• The availability of these infrastructures creates the conditions for favourable growth. The superstructure of an economy largely depends on the availability of infrastructural facilities.
• In the past, the business community has continuously cited poor infrastructure as the biggest constraint towards improving economic growth and corporate performance.
• India is rich in natural resources like land, water, minerals, and power resources. Yet as compared to other Asian countries like Malaysia, Thailand Japan Hong Kong and last but not least China which is revamped by the level of development in their countries our country is still lagging behind them in various sectors.
• Due to problems like inaccessible regions, primitive technologies, and a shortage of capital, these resources are largely under-utilized. This contributes to the economic issues in India.
• India’s biggest initiative toward infrastructure development is the creation of the National Investment and Infrastructure Fund. But more actions are still needed to scale up investments.

CLIMATE CHANGE AND FOOD SECURITY:

• Climate change threatens India's attempts to improve its citizens' standard of living. Climate change and rising demand mean that about 40% of people in India will live with water scarcity by 2050 compared with about 33% now. Both the Ganges and Brahmaputra river basins will also see increased flooding as a result of climate change, particularly if warming passes 1.5°C.
• Most of India's rainwater falls during the four-month monsoon season. It isn't captured efficiently. Climate change will increase flooding from these monsoons. Till date, the dependence of Indian agriculture on monsoon rain for irrigation poses a grave threat to its productivity and adds vulnerability.
• Food production and food security will be hit by climate change globally, high temperatures and extreme weather events, such as droughts, extreme rainfall events, heatwaves and floods, are damaging crops and will increasingly limit crop production if temperatures continue to rise.
• Given that an average household in India spends nearly 50 per cent of its earnings on food, the poor spend more than 60 per cent. The price rise will precipitate the worst crisis in the country. The poor will face a double whammy: One, they will be forced to spend much more on food, and, two, their health will further deteriorate.

POSITIVE GROWTH FOR INDIA:

• The results of growth-enhancing policies and schemes (such as production-linked incentives and the government’s push toward self-reliance) and increased infrastructure spending will start kicking in from 2023, leading to a stronger multiplier effect on jobs and income, higher productivity, and more efficiency—all leading to accelerated economic growth.
• The emphasis on manufacturing in India, various government incentives such as lower taxes, and rising services exports on the back of stronger digitization and technology transformation drive across the world will aid in growth.
• Also, several spillover effects of geopolitical conflicts could enhance India’s status as a preferred alternate investment destination. It is expected that due to the ongoing Russia-Ukraine conflict, the global in-house centres and multinationals, for instance, may prefer India over Eastern European markets (especially those that border Ukraine) to shift their current operations or open new facilities.
• On the health front, a large, vaccinated population will likely help contain the impact of subsequent infections waves, if any.
• India has almost eradicated extreme poverty and brought down consumption inequality to its lowest levels in 40 years through state-provided food handouts, according to a new working paper published by the International Monetary Fund (IMF).

ACHIEVING HIGHER ECONOMIC GROWTH:

Higher economic growth is possible when India’s agricultural and industrial production increase, as well as the Service sector, expands in the desired manner. Some of the steps taken by the government in this direction are as follows.

• Increasing income for farmers: When farmers are prospering, they support other sectors of India’s economy through their own consumption. Products like fertilizer, working attire and tools are necessary for farmers, especially as they expand their business. This increase in expenditure directly creates jobs for others.
• Through government expenditure and investment in infrastructure: Government spending is necessary to increase the overall GDP per capita. By spending money on building and repairing roads and bridges, the government will provide citizens with greater ease and efficiency in their work and create jobs in construction. Furthermore, by using more funds to pay higher salaries, private consumption increases, promoting higher business investment and improving the market for imports and exports.
• Urbanizing India’s rural populations: Urbanization drives economic growth, and because India’s farming population is so prominent, moving some of these farmers to cities would allow them to get jobs in manufacturing. Not only would this increase agricultural productivity by decreasing the number of farmers using the same amount of land, but it would help grow some of India’s medium-sized cities into more prominent urban landscapes. Inevitably, more development and urbanization would create new opportunities for international investments and manufacturing exports.
• Becoming competitive in high-potential sectors. India has the opportunity of establishing itself as a competitive manufacturer of electronics, chemicals, textiles, auto goods and pharmaceuticals. Currently, the country’s imports constitute a greater percentage of global trade than its exports. By increasing competitiveness in these sectors, India would not only increase its potential for exports but also decrease its reliance on imports, curbing the amount of money spent by citizens on foreign products.

CONCLUSION:

• Considering the state of the economy after the pandemic, the path to economic recovery will not be as straightforward as it seems, but India’s government has several means through which it can achieve the desired targets. So far India's economic recovery from COVID-19 is progressing well, with better than expected growth rates, and the trajectory.
• Improving India’s GDP per capita would directly benefit the nation and its citizens. Greater opportunities for manufacturing exports, foreign investments and urbanization are all benefits the country would reap from its own investment in its working class.
• India needs policies focused on infrastructure development, accelerating labour-intensive manufacturing, education and skill of workers, improving social sector development and sustainable development.