Date: 03/11/2022

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: Economic Growth rates, India’s economic growth trends, Youth Employment Rate, Effects of policy interventions on growth, Factors impacting growth rates, Investment rate, Drivers of investment rate, Trends of India’s investment rates.

Context:

• As the COVID-19 pandemic fades and various nations and societies return to some kind of normalcy, there is an all-around effort to take stock of where we stand in terms of economic growth and recovery and what our prospects look like in recent years.

Background:

• There have been debates and one hears some arguing that the Indian economy is doing dismally, and others chanting that it is a blazing success.
• In reality the Indian economy is performing decently despite the fact that the Indian rupee has been doing very poorly and inflation, at 7.41%, is high,
• Although these are global problems and almost all currencies are losing out against the U.S. dollar and inflation is high across the globe.

Youth unemployment is a major concern

• India is doing poorly in employment generation and India’s unemployment rate is high.
• In October, it stood at 7.8% but the most worrying is youth unemployment.
  • According to International Labour Organization (ILO) data, collated and presented by the World Bank, India’s youth unemployment stands at 28.3%.
  • This places India in the cluster of troubled West Asian nations such as Iran (27.2%), Egypt and Syria.
  • India is in a much worse state than most Asian countries such as Indonesia and Bangladesh(14.7%).

The growth story is mixed

• Before LPG reforms
  • India had recorded a sluggish growth for about four decades after Independence.
• In the aftermath of LPG reforms
  • India’s growth picked up in the early 1990s, following the liberalisation, privatisation and globalisation reforms of 1991-93.
• Early 2000s
  • In the 2003-08, the economy expanded at an average of 7.9 per cent unprecedented in its recorded history, with India joining the ranks of the Asian super performers.
  • From 2005 to 2008, it was acclaimed globally for being on top of most charts.
    • For three consecutive years, India grew at, respectively, 9.3%, 9.2% and 10.2%.
  • Also, from 2003 to 2011, India was on top of most global rankings in terms of growth performance.
  • With the onset of the global financial crisis (GFC) between mid-2007 and early 2009, GDP growth had plummeted to 3.1 per cent in 2008-09, followed by a sharp but short revival during 2009-11 owing to coordinated fiscal and monetary policy actions.
• Recent decade
  • The 2009-11 revival could not be sustained, giving way to another phase of slowdown between 2011-14.
• Pre-pandemic scenario
  • Following a consumption-led brief boom during 2014-17, a cyclical downturn had set in the Indian economy from 2017-18.
• Post-pandemic Scenario
  • In 2021-22, its GDP growth was 8.7%, which was among the highest in the world.
  • But the fact that much of this is the growth of climbing out of the pit into which we had fallen the previous year is worrying.
  • For instance, in 2020-21, India’s growth was minus 6.6%, which placed the country in the bottom half of the global growth chart.
• Future predictions
  • For 2022-23, the International Monetary Fund has cut India’s growth forecast to 6.1%. There are two concerns regarding this
    • Firstly, most of India’s growth is occurring at the top end, with only a few corporations raking in a disproportionate share of profits.
  • Also, the unemployment is so high, it is likely that large segments of the population are actually witnessing negative growth.
  • The second worry is about how India’s performance has been sliding compared to its own past performance and not so much about India’s dropping rank in the world.

Growth Slowdown is worrying

• Although India grew slower than a majority of nations during the COVID-19 pandemic is not a cause of concern because many countries fell in wrong situations during these troubled times.
• But India’s growth story is worrying because the slowdown began much before the COVID-19 pandemic in 2016.
  • 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%.
  • This downward spiral stretching over four years has never happened before in India since its independence in 1947.

Why is the growth slow?

• Mix bag of good and bad policy interventions
  • India’s policy interventions over the last six or seven years have been a mix of good and bad decisions
    • The new Insolvency and Bankruptcy Code the nation adopted in 2016 was a good move because it was needed to make it easier for bankrupt firms to close down and move on. Without this business was sluggish.
    • On the other hand, the demonetization of 2016 was a big mistake.
• Poor investment rate
  • One of the main reasons behind India’s poor growth performance over the last six years that has been largely overlooked is poor investment rate.
  • This falling investment rate is adversely impacting growth and hurting job creation.

Policy refocus is the way ahead

• Given India’s strong fundamentals and abundance of talent, it needs to shift the policy focus from a few rich corporations to the larger segments of population -small businesses, farmers and ordinary labourers.
• Fiscal policy interventions are needed to transfer income from the super-rich to these segments since inequality in India has risen disproportionately over the last few years.
• A social atmosphere with ethos of inclusion and trust is needed, the erosion of which might be slowing down investment and adversely impacting job creation and growth.

Conclusion:

• Disproportionate growth expands the gap between the poor and the rich which is not desirable thus to achieve the goal of inclusive growth and Sustainable goals there is a need to calibrate policy intervention
• Also, there is a need to rebuild the societal trust to create an atmosphere of trust which boosts investment, growth and job creation.

Source: The Hindu

Mains Question:

Q. “As the level of trust erodes in a society, investment tends to fall”, in light of the statement, discuss the impact of various social issues on investment and economic growth in India. (250 words).