Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Inclusive growth and issues arising from it.

Key Phrases: High Global Oil Prices, Balance of Payments Deficit, Slower Global Economic Growth, Volatile Geopolitical Situation, Financial Constraints, Food Constraints, Energy Constraints, Export Promotion, Competitive Exchange Rate

Why in News?

• The Indian economy is once again under pressure on account of high global oil prices.
• It is likely that India will end the current fiscal year with a balance of payments deficit of around $60 billion.

Key Highlights:

• The balance of payments deficit will be manageable with the help of the buffer of foreign exchange reserves with the Indian central bank.
• However, the actual situation will depend upon the following issues:
  • Global oil prices
  • Slower global economic growth
  • The response of international investors to the ongoing monetary tightening by many central banks
  • Volatile geopolitical situation

What are the lessons for India from the ongoing turmoil in the global market for crude oil?

• The growth strategy followed by any country depends on empirically identifying important structural constraints to growth, and then designing policies to ease those constraints.

Various Structural Constraints earlier faced and addressed by India:

1. The savings constraint:
   • The growth is challenging for poor countries because of their inability to raise the rate of voluntary savings from 5% to 20% of national income.
   • India too had a very low savings rate in the years after independence, of around 9.5% of gross domestic product (GDP).
   • The country’s savings rate crossed 20% on a sustainable basis only in the late 1980s, though the first big change took place in the 1970s, as bank branches were opened across the country after bank nationalization in 1969, when India’s savings rate went up by more than five percentage points within a decade.
2. The Food Constraint:
   • The shortage of food began steering up in the 1960s, a decade that saw successive droughts.
   • India’s dependence on food imports from the US put independent foreign policy at risk.
   • Therefore, the Green Revolution was started to deal with food shortages.
   • The macroeconomic impact of a poor monsoon is today far less severe than it was 50 years ago, even though rising food prices can still be a major political issue.
3. The Foreign Exchange Constraint:
   • Our policy focus on import substitution with high tariff barriers created the situation of a balance of payments crisis which continued till 1991.
   • The importance of exports began to be recognized in the 1980s, though it was the opening up of the economy in 1991 that helped India to overcome with foreign exchange constraints, both through greater trade with the world and capital inflows into the economy.
4. The Home Market Constraint:
   • India did not have a domestic market that was big enough to absorb industrial goods that were being produced by local manufacturers.
   • Among the underlying reasons was the fact that average incomes were low as well as unequally distributed.
   • The following measures were taken to ease the constraint:
   • A gradual increase in incomes through economic growth.
   • A determined policy in the 1980s to strengthen the rural market via higher support prices for farm produce.
   • A recognition of the importance of the international market, first through rupee depreciation in the 1980s and then the trade reforms of 1991.
   • Other specific policy moves were:
     • pushing banks into unbanked areas
     • incentivizing farmers to take up new crop technology
     • export promotion, a competitive exchange rate
     • re-linking India to the international economy.

Conclusion:

• The other structural constraint being faced by India in the current global order is energy constraint.
• India is structurally deficient in energy. So, it needs to generate foreign exchange from the rest of the world to pay for its energy imports. It can be done either through exports or capital inflows.
• The energy constraint can be addressed through the green transition because India is better endowed with sunshine and other renewable sources than crude oil.
• For this, we need to be part of emerging global supply chains for the provision of new forms of energy in the coming decade.

Source: Live-Mint

Mains Question:

Q. The energy constraint of India can be addressed through the green transition because India is better endowed with sunshine and other renewable sources than crude oil. Discuss the efforts made by India in this direction as well as the challenges being faced by it. (250 words).