Economic crisis in India

Ques. “The problems of the economy stem from macroeconomic imbalances and corruption and unless they are addressed, the economy will not recover. The need today is not only for decisive leadership but also for a new, holistic macroeconomic approach” while analyzing the given statement critically examine the prevailing economic crisis and measures to be taken to boost economy of India.

A high rate of inflation that persists, declining growth, inadequate employment generation, fiscal deficit, current account deficit (CAD) and corruption all contributed to the slow economic growth in India. The economy’s rate of growth has declined every quarter since the end of 2010-11, i.e., for the last 12 quarters. The industrial sector has shown negative or near zero rates of growth. The services sector, the engine of growth for the economy, has experienced declining rates of growth. So has agriculture. In turn, this has led to sluggish employment generation. The problem has been compounded by the capital intensive nature of current investment which uses less labour and more capital, so that even when output rises, employment hardly grows. Most are forced to work in the informal sector at low wages which when coupled with high persisting inflation, causes economic distress and political unrest.

Measures to be taken to boost economy are:

  1. Lowering of tax rates, easing of gold import curbs, clarity on retrospective tax law amendment and early roll out of the Goods and Services Tax (GST) and the Direct Taxes Code (DTC).
  2. The government should make earnest efforts to move away from the aggressive revenue approach and provide a genuine non-adversarial and conducive tax environment.
  3. An amendment to the Income Tax Act, which would promulgate the reversal of retrospective amendment and make all taxation prospective.
  4. A simple, transparent and non-adversarial tax regime bereft of complexities and ambiguities would go a long way to strengthen business sentiment and restore faith of foreign investors in the India growth story.
  5. High on the government’s priorities should be to adhere to the path of fiscal consolidation while not compromising on the quality of adjustment.

Because of the slowdown in the economy, tax revenue increase has suffered. That is why the fiscal deficit has tended to increase. To keep it in check, the Plan size has been curtailed. But that sets up a vicious negative cycle. As the economy slows down, the threat of a downgrade by credit rating agencies increases, revenues of the government rise less and the deficit tends to rise, both of which lead to a loss of confidence and a further slowdown.

Domestic investment — public and private — needs to be revived. Large investment is going to remain hamstrung by environmental and other clearances and difficulties in acquisition of land unless laws are changed but that would take time. Transparency in business decisions is needed to revive investment, which also needs time. So, the only thing that can be done soon is to increase public investment, especially in rural areas where infrastructure is woefully inadequate.

Schools, dispensaries, roads, telecom, water, small irrigation and so on are needed urgently in rural India. This has the potential to create lots of jobs unlike the big investments and would be much less expensive than in urban areas because land is less expensive. Thus, it would benefit many more people and slow down the expensive and environmentally damaging urbanisation currently taking place. But this requires efficient governance.

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