Indian Economy | Indian Economy— Outlook and Challenges Download PDF
This is the concluding section, addressing the outlook for the Indian Economy after discussing at all the facets and perspectives of the domestic economy, the world economy and the economic reforms. The outlook would also have its own set of challenges which would have to be overcome.
Global Perspective—India and China
First, the outlook from a global perspective, India clearly is one of the fastest growing emerging economies of the world, next to China, having the potential to overtake China in the medium-term. Though in recent times there has been a sharp deceleration in growth of India but these are for domestic reasons rather than global compulsions. Some of the distinct advantages which India has over China are:
(1) India is the largest democracy’in the world, elected government, participative and collective wisdom within the government moving up the economic ladder slowly but consensus-driven and with long-term.sustainability.
(2) India with its young population would contribute to the global workforce.
(3) It has the largest number of English-speaking workforce outside the US.
(4) Annually, India produces 6 lakh engineers, some world-class from the IIT and some mediocre. Even if 25 per cent of them are world-class it would mean one lakh engineers a year which is impressive by any global standards.
(5) India is a way ahead of China in respect of market-determined exchange rate, fairly open capital account besides already having current account convertibility.
(6) India’s financial sector is fairly liberalized, transparent accounting practices, standardized income recognition, asset classification norms, with high levels of capital than that prescribed by the international standards.
(a) Indian banks were the first, amongst emerging economies to have already implemented the Basel II accord.
(7) There is a freedom of speech, freedom to express opinions on important issues besides relatively a free media. This provides for internal checks and balances and also testing of policies and consensus building on sensitive economic issues.
(8) In recent times, China with its high growth earlier has started showing signs of an overheated economy with infrastructural constraints surfacing, increase in unemployment and the pinch of inflationary pressures.
India on the other hand, is better placed in these areas as inflationary pressures have already peaked and have begun their down-turn.
However, these latent advantages have to be leveraged by India to reap the benefits of a double digit fastest growing economy.
(1) The government will have to relook at the unfinished agenda of economic reforms and pursue with the right vigour as that displayed during 1991.
(2) It will have to reshape itself becoming more professional in its approach from a ‘driver’ of growth to ‘management’ of growth, which is allowing growth itself to grow with its own momentum, by playing the role of a facilitator.
(3) This would require the government to create an enabling environment, within which the growth not only increases but is allowed to spread more evenly across the economy.
(4) It has to embrace electronic governance, provide for technology and innovation intensive investment, aimed at newer technologies, at affordable prices, benefiting the masses.
(5) It has to look at newer ways of ‘3 Es’ Envisioning, Empowerment and their smooth and seamless Execution.
(6) It cannot lose sight of the problems of poverty and malnourishment of a vast section of population.
(7) It also has to ensure that growth Bates in future should be more broad-based in nature and benefit masses.
(8) Skill formation has to be given priorities by strengthening the institutional framework and that sufficient skills are available to meet the growing output of the economy.
(9) It will require a better understanding of its role changing to creating an enabling environment for all the sectors to deliver.
Finally, from a financial perspective, the role of RBI and its responsibilities would have to radically change as India enters a globalized world.
Outlook for Reserve Bank of India (RBI) .
The RBI would have to play the role of ensuring seamless transition of the Indian banks to the internationally prescribed Basel III norms. It would have to build better risk assessment capabilities, risk appetite and sufficiency of capital, in the Indian banking system, in the wake of the global financial fallout. The government has set up an apex level financial stability development council (FSDC) for addressing issues of financial stability, inter- regulatory coordination, financial literacy and financial inclusion.
Though this council is still at a nascent stage but RBI would be required to play a major role with other regulators providing inputs. Its role should not be that of excessive regulations but to provide a domestic oversight mechanism to financial and other sectors and a conduit to pass on global financial developments. RBI would also need to understand that while credit contraction or expansion by banks lies within its purview, it is not answerable for any deceleration in industrial growth, arising out of credit contraction.
This is what the council should do to provide the interface and not earn the status of a ‘super regulator’ in the economy. It should only be a platform for providing interface with other regulators of the economy. Neither should the council allow emergence of a super regulator in the economy. As a super regulatory would only make the other regulators in the economy meaningless and ineffective, defeating the very purpose of a regulator.
It should also have to take critical decisions especially in respect of exchange rates in determining the levels and timing of its intervention to manage exchange rates. Another aspect would be managing the capital inflows. We had previously discussed about the ‘impossible trinity’ of being able to manage any two, between exchange rate, open capital account and an independent monetary policy. This would be the biggest challenge for the RBI in future.
Overall, the Indian Economy has a bright outlook, from all the angles, but still requires first, conversion of advantages as opportunities and then their encashment. It places great responsibilities on the shoulders of the government and RBI of leading from the front, and make India a front runner amongst the emerging economies in the future.
Indian Outlook—Challenges Ahead
While India is a global prospect, full of opportunities, a potentially fastest growing economy and larger global presence it has some inherent stiff challenges. The first challenge, as outlined previously of the ability of converting advantages into opportunities and subsequent encashment or translation into increased investment, output and income. The second being, the global outlook still has many question marks and uncertainties of the following:
(1) Recovery of large economies post-crisis.
(2) Fears of double-dip recession.
(3) Uncertain future of Euro and Eurozone.
(4) Smaller economic ability to destabilize global economy.
(5) Implications of growing sovereign debt of large economies, Implications of a different international reserve currency other than USD.
(6) These uncertainties impose greater challenge for countries such as India and China for lifting global output.
The changing global axis towards the emerging economies is seen as a welcome feature of the new world order. There are two aspects to understand in this shift, one of the axis being ‘pulled’ towards the emerging economies, and the other, of the axis being ‘pushed’ towards the emerging economies. Which is happening ‘pulled or pushed?’
The global crisis is pushing the axis towards emerging economies as the only way going forward. It is not that something dramatic has happened in these emerging economies, especially India. As we have seen previously, the unfinished agenda before the government the pause on economic reforms only re-affirm the aspect of being pushed rather than being pulled.
Thus, the larger question of countries such as India is it ‘prepared’ for such structural shift of the global economy? Capital inflows into these economies was seen as good for them, but large surge inflows recently, has been seen as potentially destabilizing, and has triggered cur¬rency war situations. Most economies have resultantly imposed restrictions of such inflows. India has restrained so far but for how long? .
These inflows are coming because of quantitative easing by the US and not due to any particular positive feature of the emerging economies like India. ‘It is absence of an alternate window which is causing this surge in inflows.’ However, such can also seep into real estate, commodities, besides the stock market and also corporate and sovereign debt market creating ‘asset bubbles’, which by definition, will burst when the economy is least prepared.
An equally greater challenge for countries like India would be how to manage outflows, asset bubbles bursting, if they happen, once an alternate window is available? Another belief of the new world order is the likelihood of increased penetration of countries, for example, India in the global economy with larger share of exports of goods and services.
Given the market imperfections in India, can it be globally competitive to achieve penetration? India’s export sector continues to lack maturity of understanding the importance of moving up the value chain, rather than, exchange rate movements, as more fundamental, to achieve the levels of penetration. The integrated global economy would definitely open opportunities, but penetration, will largely rest on ability of countries like India to emerge as globally competitive.
Yet another aspect is that India and China by virtue of their large population are being seen as potential markets but do these markets have income or purchasing power to actually become market as widely believed? That is, besides the above challenges; it will also have a larger set of domestic challenges. They are as follows:
(1) The major challenge of an impoverished India, home to largest number of people living below USD 1 per day, of absolute poverty, malnourished and a large social sector outside the mainstream of development.
(a) The challenge will be of drawing the vast lot of such people, larger than population of many countries, into mainstream of development.
(2) A larger challenge as expressed by the eleventh five-year plan and would also get echoed in the twelfth five-year plan, of not increasing rates of growth, but of providing greater inclusive growth.
(a) The challenge is thus not growth but how to ensure they are evenly spread to provide broad-based benefits to masses?
(3) Then the issue of a stagnant, traditional and livelihood agriculture. Is the agricultural sector capable and prepared to meet the needs of a growing economy with rising income levels? •
(4) Despite all the talk about India as a new economy, India continues to be a country of villages; the soul of India is in the 6 lakh villages.
It is not about converting villages into towns. Villages are an essential fabric of the Indian economy, but how to make them self-contained in terms of basic amenities and also provide people in the villages, with a source of income?
We have seen earlier, the huge investment deficit especially in infrastructure sector like power. From where does one raise the huge resources required for bridging this deficit?
This is not to talk about rural infrastructure, which is already crumbling, requiring not only re-building but also fresh investment.
(5) Even the industrial and financial sectors where reforms have been centred, there is still a large presence of the public sector.
Will they be competitive and continue to be profitable, as a public sector, in the absence of their privatization, in a rapidly transforming market economy of India?
(6) India’s growing dependence on imported crude petroleum will only increase with increased growth. –
However, how does India insulate itself from sharp volatility in international crude petroleum prices?
How does one build energy security in India? Are we concerned of our structural problems in the energy sector?
(7) In the recent past the government has been accused of a ‘policy paralysis’ but in reality it is more of ‘policy uncertainties’, absence of ‘policy continuity’ and fears of ‘policy reversal’. These are far more critical, influencing the entire economy than policy paralysis. The biggest difference is that policy paralysis can be shrugged off, while others require restoration of faith and that is the challenge of restoration of faith in the government.
An attempt has been made here tb highlight the challenges as India prepares to go into the future. These challenges are not insurmountable, but need to be overcome. However, it will require sustained efforts, desire to overcome, collective political will and above all a realization, on the part of the government, of their criticality and fundamental in reshaping the Indian economy.
To reiterate, India has the advantage over other economies but the ability to harness them as opportunities and taping them, whether global or internal, is in the hands of India only. The fate of the Indian Economy in future is within our own hands, collectively and to shake up the government to make India realize its full potential, if not beyond usher in a new India, and restoring India to its past glory and stature, presently confined as leaves of history.