Indian Economy: Challenges and Prospects

Indian Economy, while being called as the Fastest Growing Major Economy is also facing formidable challenges.

About:

• Indian Economy, according to the Asian Development Bank, with a forecasted GDP growth rate of 7.3% in 2018-2019 and 7.6% in 2019-2020 will continue to be the fastest growing major economy ahead of China.

• However, as few recent events point out, Indian Economy is also facing considerable challenges to retain these high growth rates and keep its Macroeconomic fundamentals like Current Account Deficit (CAD), Fiscal Deficit and Inflation under control.

...The economy of a nation is the start and end of everything. You can’t have successful education reform or any other reform if you don’t have a strong economy… — David Cameroon

• Some Achievements of Indian Economy:

Ranking in the World: India is ranked 3rd in the World in terms of GDP at Purchasing Power Parity (PPP) and 6th in terms of GDP (Nominal) with a $2.6 trillion economy according to World Bank 2017 Data.

Moody’s Rating of Indian Economy: Moody’s raised the rating of Indian Economy in 2017 from the lowest investment grade of Baa3 to Baa2, and changed the outlook from stable to positive.

• Economic growth in India has been broadly on an accelerating path and has remained robust enough to sail through global economic crisis.

Ease of Doing Business: India has jumped 23 points in the World Bank’s ease of doing business index to 77th place, becoming the top ranked country in South Asia for the first time and third among the BRICS.

Insolvency and Bankruptcy Code: Over 300 cases have been resolved or liquidated and average recovery in the cases that have seen resolution over the past two years has been to the tune of 46%, against just 26% under the earlier Board for Industrial and Financial Reconstruction (BIFR).

•  Concerns:

Fiscal Health of Indian Economy: While the government had targeted a Fiscal Deficit (FD) of 3.3% for FY2019, economy had breached it by the end of October itself.

The main challenges for fiscal health are as follows:

•Populism in Pre-Election year: For instance, a Central Government sponsored loan waiver.

• Rising Oil Prices: $10 Increase in Crude Oil Barrel Price can lead to 0.2-0.3% increase in FD

• MSP Hikes for Kharif Crops: Government’s decision to hike Minimum Support Price (MSP) for kharif crops can impact GDP by 0.1-0.2% besides adding to inflationary pressures

• Less than expected GST Revenues: While the ideal GST monthly revenues to meet the targets of the government is around 1.1 lakh crores, the average collection in FY19 was only around 0.97 lakh crores.

Resignation of RBI Governor: Many economists agree that the resignation was mainly due to the difference of opinion between the RBI and the Union Government on various key issues like the Resolution of Non-Performing Assets, Banking Frauds, RBI Surplus Transfer, undermining of the independence of RBI.

• Winds against Multilateralism: Economic Survey 20172018 points out that exports and imports together amount to 42% of India’s Gross Domestic Product (GDP) showing Indian economy’s interdependence on the rest of the world economies. In this light, the much talked about tariff war initiated by the US threatens to impact our exports significantly.

• Non-Performing Assets (NPA): The Standing Committee on Finance in its recent report had questioned the Reserve Bank of India (RBI) for failing to take pre-emptive action in checking bad loans in the banking system prior to the Asset Quality Review (AQR) undertaken in December 2015.

• Agrarian Crisis: Agriculture which employs nearly 52% of those who are employed in India continues to be in deep crisis as reflected in the Farmer’s Long March from Nashik to Mumbai and in their agitations in New Delhi in November.

• Higher Bond Yield and Greater Risk: The yield of India’s benchmark long-term government bond at 7.6%-7.8% remains higher than peers in developing economies and is on an increasing trend showing challenging days ahead.

• Twin Balance Sheet Problem: While few Indian companies like Airtel and Tata have turned into global giants, companies like Jaypee Infra and Lanco Power are facing existential crisis due to the Twin Balance Sheet problem (stressed balance sheets of banks and over leveraged corporates).

• Effective implementation of Organization for Economic Cooperation and Development’s (OECD) Guidelines to control Base Erosion and Profit Shifting (BEPS).

• Changes to the Double Taxation Avoidance Agreements of India with other countries to reduce Tax Avoidance.

MONETARY POLICY OF RBI

Under the Monetary Policy Framework Agreement signed between the RBI and the Union government in 2015, the RBI has agreed that its primary goal would be inflation control and that the Consumer Price Inflation would be contained between 2% to 6%

Status of Inflation: Actual average CPI inflation in first half of FY2019 stood at 4.3%. And the RBI Projection for the second half is in the range of 3.9-4.5%. This is well within the range of the targeted 2%-6%.

Risks for Inflation: RBI in its December Monetary Policy Review had cautioned about 7 Key risks for inflation in the Indian Economy.

They are:

• Prices of several food items are at unusually low levels and there is a risk of sudden reversal, especially of volatile perishable items.

• Uncertainty about the exact impact of higher Minimum Support Price on inflation.

• Crude oil prices due to global demand conditions, geopolitical tensions and Organisation of the Petroleum Exporting Countries (OPEC) Supply Cuts.

• Volatile Global Financial Markets.

• Fiscal Slippages, if any, at the centre or state levels, will influence the inflation outlook, heighten market volatility and crowd out private investment.

• Households’ near-term inflation expectations remain elevated and unchanged.

• Staggered impact of HRA Revision by State Governments which may push up headline inflation.

STATUS OF NON-PERFORMING ASSETS

• A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. Dr. Raghuram Rajan in 2016 had remarked that the growing NPAs are the largest threat to the Indian economy in the near future.

• Current Status: The RBI, in its submissions to the Standing Committee on Finance, said that the gross and net NPAs of scheduled commercial banks had reduced due to the concerted efforts taken by the government and the central bank to address the problem like the Prompt Corrective Action (PCA) Framework, SASHAKT Plan, etc.

• The data shows that gross NPAs of all scheduled commercial banks were at  Rs.10.36 lakh crore at the end of the March 2018 quarter, and subsequently declined to Rs. 10.14 lakh crore by the end of the September quarter.

Few Steps taken to Reduce the Mounting NPAs:

• Prompt Corrective Action Framework •

Insolvency and Bankruptcy Code

• New RBI norms which direct banks to disclose large loan defaults (5 Crores and above) on a weekly basis to the RBI credit registry, which can be accessed by all lenders

• Inter-Creditor Agreement to ensure cooperation among the different lending banks

• Project Sashakt for NPA Resolution

Way ahead for Resolving NPA Problem:

• Mudra Loans: Dr. Raghuram Rajan suggests closer scrutiny of the loan applications while granting Mudra Loans.

• Prompt Corrective Action (PCA) guidelines need to be reframed in a balanced manner to address the dual objectives of growth and NPA resolution.

• Economic Survey 2016-2017 suggests the setting up of a centralized Public Sector Asset Rehabilitation Agency (PARA) that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce NPAs

• The 4th R, which is Reform (of the 4R Strategy for NPAs resolution suggested by Dr. Aravind Subramanian) must be given prime importance if we have to prevent the NPAs Ballooning in the future.

STATUS OF GST COLLECTIONS:

India’s indirect tax reform- The Goods and Services Tax was referred by many economists as one of the largest economic reforms Independent India had witnessed. As more than 18 months had passed since the beginning of GST, it is now time to analyse the GST Collections.

• GST Collections in 2018: While the ideal GST Monthly Revenues to meet the targets of the government are around 1.1 Lakh Crores, the average collection in FY19 is only around 0.97 Lakh Crores.

Reasons for Low Collections:

Low success of the GST Composition Scheme

Continuing Tax Evasion and issues faced while filing returns in the Goods and Service Tax Network (GSTN).

Since implementation of some of the main features of GST such as, matching of returns as well as reverse charge mechanism have been postponed the tax collections are not up to the mark.

Decrease in the number of goods in the Highest Tax Slab

Multiple Tax Slabs along with cesses has made GST more complex and increased cost of compliance.  Many goods like Petroleum, Alcohol etc are still out of GST

Real Estate Transactions are not yet completely part of the GST Regime.

• Issue of Petroleum Products and GST Inclusion:

Unlike the Alcohol products, which are completely out of the GST, Petroleum Products are “constitutionally included” under the GST but with a rider which allowed the GST Council to be the authority to decide when the Petroleum Products would be actually included within the GST System.

GST Council has not yet included them and thus the Input Credit is not available to those Units which use a considerable amount of Petroleum Products in Transportation, Manufacturing, etc

Steps taken by the Govt. to strengthen the GST Regime:

• E-Way Bill System was introduced to reduce tax evasion

• E-Wallet to increase GST compliance of MSME Exporters

• Enhancing the limits for the GST Composition Scheme

• Easing the filing of the returns process

• Reducing the number of items in the highest tax slab. Now only 35 Items are there in the highest tax slab of 28%
Way Ahead:

• Rationalization of GST Slabs and Rates as suggested by Kelkar Committee

• Inclusion of Petroleum Products within the GST Regime

• Addressing the issue of Inverted Duty Structure under the GST for few imported products

• Inclusion of all the Real Estate Transactions within the GST Regime

• Faster processing of GST Refunds for Exporters

Overall Solutions to achieve a New India by 2022:

Using the above analysis of various dimensions of Indian economy, we can come to the conclusion that while India has great economic prospects there are also many challenges which need to be overcome to harness the true potential of the economy. We have already seen the steps government had taken and few micro-level solutions to address these challenges. Now, we shall look at few broader measures which can make our country a “Major Economic Powerhouse”.

• Growth:

• Raise investment rates to 36% of GDP

• Increase tax-GDP ratio to 22% of GDP

• Work with states to improve ease of business and rationalize land & labour regulations

• Employment and Labour Reforms:

• The necessary condition for employment generation is economic growth.

• Fully codify central labour laws and enhance Female Labour Force Participation to 30%

• The employability of labour needs to be enhanced by improving health, education and skilling outcomes and a massive expansion of the apprenticeship scheme.

• Technology & Innovation:

• Establish an empowered body to holistically steer the management of science

• Create a non-lapsable District Innovation Fund

• Industry:

• Develop self-sufficient clusters of manufacturing competence, with plug & play parks for MSMEs

• Impetus to Labour Intensive Export firms

• Launch a major initiative to push industry to adopt Industry 4.0

• Introduce a “single window” in states providing a single point of contact between investor & government

• Doubling Farmers Income:

• Modernize technology, increase productivity & agroprocessing and diversify crops

• Abolish APMC -Adopt Model APLM Act, Model Contract Farming Act & Model Land Leasing Act

• Create modern rural infrastructure & an integrated value chain system

• Link production to processing, set up village-level procurement centres

• Energy:

• Bring oil, natural gas, electricity & coal under GST to enable input tax credit

• Promote smart grid & smart meters

• Ports, Shipping & Inland Waterways:

• Double the share of freight transported by coastal shipping & inland waterways

• Complete Sagarmala project. Open up India’s dredging market

• Logistics:

• Develop an IT enabled platform for integrating different modes of transport

• Rationalize tariffs & determine prices in an efficient manner across different modes

• Create an overarching body that maintains a repository of all transport data.
Conclusion:

…We will be remembered only if we give to our younger generation a prosperous and safe India, resulting out of economic prosperity coupled with Civilizational Heritage…

—Dr. A.P.J Abdul Kalam

To achieve what Dr. Kalam had envisaged along with the above measures we need to revamp our Public Education and Public Health Systems. If we do this we can not only harness our Demographic Dividend, but also move towards a Double Digit Economic Growth in the near future.

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