THE CONTEXT: As, the state of the Indian economy and its prospects have to be based on mathematics and statistics, the recently published data by National Statistical Office needs to be analysed. This helps to understand the government’s economic performance as disclosed in Parliament and subsequently published in the media.

ISSUES:

• Misleading data: Post-COVID-19, the growth rate of GDP has been estimated around 6% + annually but this is misleading because what is not disclosed is that the growth rate that includes recovery as well since 2020-22. Hence, if we calculate the GDP growth rate between 2019-20 and 2022-23, two normal years, it can be calculated less than 4% per year for the period.
• Non acknowledgement: India’s GDP growth rate declined annually from 2016-17, and fell below 3.5% in the fourth quarter of 2019-20. This four-year continuous decline from a 7% growth rate to 3.5% rate has never been acknowledged by the government.
• Slow growth rate: It is essential to recognise that since 2020, the current government publicised development model in reality achieved the so-called “Hindu rate of growth” in GDP, which had been “achieved” during the Congress’s socialist period of 1950-77.
• Incoherence in economy: The ruling government has failed to structure economic policy coherently. Incoherence prevailed during the 2014-2023 period and will perhaps continue in the future as well.
• Misleading media: The misleading announcements of promising predictions are being published annually in the media, with claims made by the ruling government. One such claim made in 2019 was that India will become a $5 trillion economy by 2024. There has been no policy structuring presented to achieve this aim nor has anyone in the government shown willingness to debate it on public fora.
• Falling investment: The investment to GDP ratio has been largely falling for many years now. It peaked at 35.81% in 2007–08, which was 15 years ago. In 2022–23, it is estimated to have been 29.21%, an improvement over the three years before that, but worse than where it was before the pandemic broke out.
• Lesser job creation: Falling of investment in the economy implies the creation of fewer jobs, which has an impact on the incomes that people earn, and which, in turn, affects private consumption and further job creation.

THE WAY FORWARD:

• Taking cue from previous governments: During P.V. Narasimha Rao’s and Manmohan Singh’s tenures as Prime Minister, India departed from the socialist path and the GDP growth rates rose for the first time to 6%-8% per year and over a 15-year period i.e., between 1991-96 and 2004-2014. As, then government understood and took steps to reform the Indian economic system by reducing state participation, and increasing incentives for capital and labour providers and achieved a higher and faster growth rate.
• Transparency: The Indian government is elected democratically and it is obligated to disclose the facts and data transparently to the people.
• To generate demand: In this decade of weak demand and relatively excess supply, resources mobilised by the government should be largely through indirect taxes and also through the liberal printing of currency notes to generate demand from non-rich citizens.
• To generate non inflationary demand: The annual interest paid on fixed-term savings in the bank accounts of the middle class should be higher at 9% or so. The interest rates on loans issued to small and medium industries should be no more than 6% on the loans. These essential reforms need to be carried out to generate non-inflationary demand.
• A new economic policy: The recent economic policy of the government has been an unstructured flop. No announced macroeconomic goal has been achieved by the government till date. Thus, India urgently needs a new economic policy that is based on clearly structured and stated objectives and priorities, and a strategy to achieve the targets, with an intelligent and transparent resource mobilisation plan to finance the policies.
• Free market system: The market system is not a free-for-all and is structured with rules of transactions. A market system with transparent and minimal regulation with principal drivers of incentives and domestic savings pushes up factor productivity and thus the GDP growth rate. Even a totalitarian state such as China implemented this. During Deng Xiaoping’s tenure as paramount leader, it allowed the socialist economic system to die, and allowed economic market-based system, even while maintaining the system of political dictatorship.
• Affirmative action: There is a need for affirmative action including social security and safety nets for creating a stake for the poor in the system. It will create a level playing field to ensure transparency, accountability, trusteeship as well as corporate governance to legitimise profit-making that will drive the market system.
• Empowering democratic institutions: Deregulation should also not mean that we reject government intervention for safety nets, affirmative action, market failures, and creating a level-playing field. Democratic institutions have to be empowered to guard against public disorder arising from rapid deregulation, as it happened in Russia post-1991. Russia underwent chaos and misery, which meant dictatorship returned a loss of human rights and democratic values in Russia.

THE CONCLUSION:

India’s economic growth has witnessed significant fluctuations in recent years and to ensure economic stability the government needs to take up stringent measures. This can be done through adequate investment in human capital development along with effective implementation and coordination among various stakeholders.

UPSC PREVIOUS YEAR QUESTIONS

Q.1 Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (2020)

Q.2 Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)

MAINS PRACTICE QUESTION

Q.1 The GDP-centric framing of Indian economic success is wrong-headed and is a flawed metric of national economic welfare. Comment.

SOURCE: https://www.thehindu.com/opinion/op-ed/the-state-of-the-indian-economy-today/article67838620.ece

THE CONTEXT: Recently, the interim Budget or ‘vote on account’ for 2024-25 was presented by Finance Minister. The budget refrained from making any changes to tax rates either for direct taxes or indirect taxes but highlights increased capital expenditures and fiscal consolidation.

HIGHLIGHTS IN THE BUDGET:

• Capital Expenditure: One important feature of the Budgets presented in recent years is an increase in capital expenditures of the Central government. The interim Budget has maintained this trend and has provided for an increase of 11.1% in capital expenditures when a comparison is made with the 2023-24 Budget Estimates. This aims to stimulate investment climate, potentially catalysing private sector participation and underscores the government’s commitment to infrastructure development.
• Growth Rates Analysis: While the interim budget indicates an 11.1% increase in capital expenditures compared to the 2023-24 Budget Estimates, the growth rate is lower than initially planned. This lower growth rate aligns with the real GDP growth of 7.3% in 2023-24.
• Potential Impact on GDP Growth: The projected 17% growth in capital expenditure for 2024-25 suggests the potential for achieving a 7% real GDP growth. It can be achieved if private sector investment momentum is sustained and state governments maintain their capital expenditure growth, supported by government initiatives such as interest-free loans.
• Tax buoyancy: The buoyancy of tax revenue, coupled with nominal GDP growth estimates, provides flexibility for future expenditure adjustments or deficit reductions. The buoyancy of tax revenue comes to 1.33, if the base is taken as Budget Estimates of the present year and using nominal GDP growth for 2023-24 as per the National Statistics Organisation’s (NSO) first advance estimates.
• Fiscal Planning: The budget showcases prudent fiscal planning and the emphasis on fiscal correction and consolidation reflects a cautious approach to economic management.
• Fiscal Deficit Reduction: A significant aspect of the budget is the projected reduction in the fiscal deficit. The fiscal deficit for 2024-25 is forecasted to decrease to 5.1% of GDP reflecting a decrease of a 0.7 percentage point from the previous year.
• Long-term Fiscal Objectives: The budget discussion revolves around the desired fiscal deficit targets, particularly aiming for 3% of GDP for the Central government and not exceeding 6% of GDP when combined with State governments. The rationale behind these targets is intricately linked to household savings, net inflows from abroad, and the imperative to manage debt-GDP ratios effectively.
• Debt-GDP Ratio: The government proposes a debt-GDP ratio target of 40% for the Centre by 2028-29 which a strategic vision for sustainable fiscal management over the long term. This would be feasible as the government has extended the interest-free loan facility for the State governments. The lower fiscal deficit might also facilitate a lowering of interest rates later during the year.
• Capital formation: Though, capital expenditures of the government are not identical with gross fixed capital formation. However, it contributes to increasing capital formation. It is worth noting that the capital expenditures of the Central government in 2024-25 as a proportion of GDP are budgeted to increase marginally from 3.2% in 2023-24 to 3.4% in 2024-25.

THE WAY FORWARD:

• Continued Government Investment: In developing economies, growth is driven by investment. Therefore, for the continued growth of the economy, there is a need for an sustained investment rate which can be improved only by the government raising its own investment. It could act as a catalyst for private investment.
• Ensuring Economic Stability: These targets are rooted in the goal of ensuring economic stability by maintaining sufficient household savings, curbing inflationary pressures, and fostering sustainable economic growth.
• Setting timelines: The timeline for achieving the targets highlighted in budget must be carefully delineated to mitigate inflationary pressures for ensuring sustainable economic growth.
• Coordination: Achieving these targets necessitate continuous coordination and implementation, considering the dynamic nature of economic conditions amidst evolving global and domestic factors.

THE CONCLUSION:

The recent interim Budget lays a foundation for sustainable fiscal management, emphasizing on capital expenditure enhancement and fiscal consolidation. However, achieving long-term fiscal sustainability requires concerted efforts, including aligning fiscal policies with economic realities and establishing clear targets for deficit reduction.

UPSC PREVIOUS YEAR QUESTIONS

Q.1 What are the reasons for introducing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003? Discuss its salient features and their effectiveness critically. (2013)

Q.2 Public expenditure management was a challenge to India’s government in the context of budget-making during the post-liberalization period. Clarify it. (2019)

MAINS PRACTICE QUESTION

Q.1 Highlight the challenges in achieving long-term fiscal sustainability in the country, considering the dynamic economic conditions amidst evolving global and domestic factors.

SOURCE: https://www.thehindu.com/opinion/op-ed/road-map-for-fiscal-consolidation/article67821293.ece

THE CONTEXT: The budget reflects the government’s narrative of “transformative growth” during the 2014-24 decade under the Modi administration. However, the focus of welfare schemes and fiscal consolidation may not align with actual spending and resource allocation. The fiscal deficit for 2023-24 is projected to be 5.8% of GDP, marginally below the budgeted level.

THE ISSUES:

• Introduction of an interim budget: The Interim Budget for 2024-25 was presented due to the upcoming elections, as Prime Minister stated. The Interim Budget is seen as a vote-on-account, which could be perceived as an attempt to influence voters before the elections. This indicates that the budget may not fully reflect the government’s long-term vision and plans.
• “Transformative growth” narrative: The Economic Survey presented in the budget portrays 2014-2024 as a decade of “transformative growth.” It suggests that previous periods of growth were inadequate, either due to unaddressed structural challenges or unsustainable credit booms.
• Focus on welfare schemes: The Interim Budget speech primarily focuses on various welfare schemes attributed to the Prime Minister in housing and food. However, apprehensions are raised about these schemes’ implementation and effectiveness, given the discrepancies between the claims and the actual expenditure. For instance, the total food subsidy has fallen from ₹5,41,330 crore in 2020-21 to ₹2,88,060 crore in 2021-22 and a projected ₹2,87,194 crore in 2023-24.
• Fault lines in spending: A significant deviation exists between the actual expenditure and the revised estimates for schemes such as MGNREGA and PM-KISAN. The budgeted expenditure for MGNREGA was ₹1,57,545 crore for 2023-24. The revised estimates are placed at a higher ₹1,71,069 crore. However, the actual expenditure till December 2023 amounted to only ₹1,07,912 crore, or 63% of the total projected in the revised estimates. The budgeted expenditure for the PM-KISAN scheme was ₹1,15,532 crore for 2023-24. The revised estimate is projected at ₹1,16,789 crore. The actual expenditure till December 2023 was ₹70,797 crore or 61% of the revised estimate.
• Pre-election blitz: There are two possible interpretations: either the finance minister is inflating the revised estimates to support farmers and rural workers, or the government plans to initiate pre-election spending to gain political advantage.
• The decline in food subsidies: Despite claims of expanding food support, the data made available by CGA points out that the total food subsidy has declined from 2020-21 to 2021-22 and is projected to decrease further in 2023-24. For instance, the total food subsidy has fallen from ₹5,41,330 crore in 2020-21 to ₹2,88,060 crore in 2021-22 and a projected ₹2,87,194 crore (RE) in 2023-24. This raises concerns about the government’s commitment to food security.
• Revenue projections and fiscal deficit: The government claims to manage its receipts and keep the fiscal deficit below the budgeted level. There is an expected increase in non-tax revenue receipts, mainly driven by income from dividends and profits. The government expects to raise its non-tax revenue receipts by 25% relative to the budget, with income from dividends and profits slated to rise from ₹99,913 crore in 2022-23 to ₹1,54,407 crore in 2023-24 (RE). However, uncertainties remain regarding the realization of disinvestment proceeds.

THE WAY FORWARD:

• Enhanced Transparency and Accountability: Implement more rigorous and transparent accounting and reporting practices to ensure that budget estimates, revised estimates, and actual expenditures are accurately reported and easily understandable. Regular audits and public disclosures of government spending can help maintain transparency and accountability, ensuring funds are utilized as intended.
• Addressing Deviations in Spending: Close monitoring of implementing schemes like MGNREGA and PM-KISAN to ensure that allocated funds are spent within the financial year and reach the intended beneficiaries. Establishing a real-time monitoring system and a dashboard accessible to the public can help track the progress of fund utilization and scheme implementation.
• Focusing on Effective Implementation of Welfare Schemes: Conduct impact assessments of welfare schemes to evaluate their effectiveness in achieving their goals, such as poverty alleviation and employment generation. Based on the assessments, refine and redesign schemes to make them more effective. Engage with stakeholders, including beneficiaries and local governments, for feedback and suggestions for improvement.
• Balancing Welfare Spending and Fiscal Prudence: While welfare spending is crucial, it is equally important to maintain fiscal discipline to ensure economic stability. The government could explore innovative financing mechanisms, such as public-private partnerships (PPPs) for infrastructure projects, to reduce the fiscal burden while continuing to invest in critical areas.
• Strengthening the Food Security System: Address the concerns regarding the decrease in food subsidies and ensure that the National Food Security Act’s objectives are met effectively. Enhance the efficiency of the Public Distribution System (PDS) through technology integration to reduce leakages and ensure the benefits reach the eligible population.
• Rationalizing Non-Tax Revenue Expectations: Set realistic targets for non-tax revenues, including dividends and profits from PSUs and disinvestment proceeds, to avoid overestimation that could lead to fiscal slippages. A strategic approach to disinvestment focuses on enhancing the value of PSUs before disinvestment and ensuring that disinvestment proceeds are used for productive purposes, such as infrastructure development.
• Promoting Sustainable Growth: Focus on addressing structural economic challenges to ensure sustainable and inclusive growth. Invest in education, healthcare, and skill development to improve human capital and research and development (R&D) to foster innovation, laying the foundation for long-term economic growth.
• Fiscal Prudence: The government could focus on maintaining fiscal discipline by avoiding pre-election spending sprees that could undermine the fiscal health of the economy.
• Public Engagement: Engaging the public and stakeholders in the budget process could help set priorities that reflect the needs and aspirations of the population, leading to more effective and accepted fiscal policies.

THE CONCLUSION:

The interim Budget for 2024-25 reflects a eulogy of the two governments of the last ten years, focusing on welfare schemes and infrastructure spending. However, a closer look at the actual expenditure figures reveals discrepancies and potential pre-election spending blitz. The government’s claims of pro-poor initiatives and fiscal prudence may not align with reality. The impact of these strategies on voters and the upcoming elections remains to be seen.

UPSC PAST YEAR QUESTIONS:

Q.1) Public expenditure management is a challenge to India’s government in budget-making during the post-liberalization period. Clarify it. (2019)

Q.2) One of the intended objectives of Union Budget 2017-18 is to ‘transform, energize and clean India’. Analyse the measures proposed in the Budget 2017-18 to achieve the objective. (2017)

MAINS PRACTICE QUESTION:

Q.1) Discuss the implications of the Interim Budget 2024 on welfare schemes, infrastructure spending, and fiscal deficit.

SOURCE:

https://www.thehindu.com/opinion/lead/interim-budget-2024-in-campaign-mode/article67801178.ece

THE CONTEXT: The upcoming budget session is an appropriate time to assess how the current government has managed the economy in the decade since 2014. There is a worrying trend of Indian economy however in the last ten years.

ISSUES:

• Data deficient: There is a constant issue regarding the government avoiding data on various occasions suppressing statistics. This started with the refusal to publish the GDP back series and instead, a new series was commissioned. For the first time since 1872, the census has been indefinitely delayed.
• Fiscal deficit: A key concern before the government is managing the fiscal deficit. Between 2004 and 2014, the fiscal deficit averaged 4.63% whereas it has averaged 5.13% after 2014. The rise in fiscal deficit was necessitated by crises like the global financial crisis of 2008 and COVID-19
• Rise in Debt to GDP ratio: There has been a sharp rise in the gross debt to GDP ratio, crossing the 80% mark and inviting concern from the International Monetary Fund that the ratio could cross 100% by 2027. The Union government is expected to respond to the debt concerns and bring down the fiscal deficit to 4.5% by 2026 (it was 5.9% in 2023-24).
• Reliance on capital expenditure: There is over reliance on capital expenditure which even the ardent supporters of trickle-down economics admit that this reliance on capital expenditure is not bearing fruits.
• Manufacturing sector: Despite multiple revisions and handsome incentives and initiatives like Production Linked Incentive (PLI) scheme the manufacturing sector has not taken off. The manufacturing growth rate has averaged 5.9% since 2013-14, the share of manufacturing has remained stagnant and was at 16.4% in 2022-23, and manufacturing jobs halved between 2016 and 2021. The decade of Make in India saw the share of manufacturing in the workforce decline from 12.6% in 2011-12 to 11.6% in 2021-22. Make in India and now PLI have failed to enthuse MSMEs.
• Disinvestment: Another failure on the part of the government is disinvestment. To make matters worse, public assets have been handed over to select groups inviting concerns from competitors and public sector employees. The proposed national monetisation pipeline has also failed to yield results.
• Employment: The job market remains depressing, especially for the youth. The Centre for Monitoring Indian Economy notes that the unemployment rate in the age group 20-24 years was 44.5% in the October-December 2023 quarter. For the age-group 25-29 years, it was at a 14 month high of 14.33%.
• Rural India: The adversity of the job market is matched by the distress in rural India where the demand for MGNREGA has reached record highs. Stagnant farmer income and falling rural wages at a time when stock markets are soaring comes as a major concern.
• Crude oil prices: Despite lower prices of crude oil in the international market, the government could not pass the benefit to consumers which could have boosted consumption, and thereby the  Instead, the government has consistently kept petrol and diesel prices at a steady higher price and could not use windfall profits which it has used to keep the fiscal deficit manageable.
• Rise in tax to GDP ratio: Tax to GDP ratio has increased by 1% but it is largely because of an increase in indirect taxes.
• Reduction in subsidies: A consistent feature of the ruling government has been sharp reduction in subsidies. In 2013-14, Union government subsidies accounted for 2.27% of the These now stand at 1.34% in 2023-24.
• Rise in capital expenditure: Between 2014 to 2024, capital expenditure has doubled from 1.67% to 3.32%. Post the COVID-19 pandemic, the government allocated increasing sums towards capital expenditure. The stated logic being that this investment will create jobs and in turn raise demand.
• Facing Hunger: On the health front, the pandemic forced the government to raise healthcare expenditure, yet there has been a rise in hunger and malnutrition. India is ranked 111th of 125 countries on the Global Hunger Index. Instead of addressing the issue, the government’s response has been to reject any such adverse findings.

THE WAY FORWARD:

• Public investment: The government should also invest in public infrastructure, health, education, and social protection, which can create jobs, improve productivity, and enhance human capital. India needs large scale public investments in education and healthcare. Such investments in our human capital have great potential to create significant jobs and will also have a direct impact on the standard of living of our citizens. A key landmark of this government was the adoption of a new National Education Policy (NEP). NEP 2020 recommends that investment in education should be 6% of the
• New economic policy: India needs to adopt a new economic policy urgently. It needs to be a policy that is based on clear objectives, priorities, have a strategy to achieve targets, and spell out an intelligent and transparent resource mobilisation plan to finance policies. As far as the Finance Ministry is concerned, we have only incoherent public announcements a hotchpotch with no accountability.
• Boosting Consumption and Investment Demand: The government should provide direct fiscal stimulus to the sectors and segments of the economythat have been hit hard by the pandemic, such as MSMEs, informal workers, rural households, and low-income groups. The stimulus should aim at increasing their income, purchasing power, and access to credit.

THE CONCLUSION:

The Indian economy is currently facing a number of challenges including high fiscal deficit, high debt to GDP ratio, reliance on capital expenditure and many more. In addition, the country faces significant infrastructure and employment needs and a growing population that is increasingly young and educated. These factors present both opportunities and challenges for the country’s economic growth in the years ahead.

UPSC PREVIOUS YEAR QUESTION

Q: How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country? (2016)

MAINS PRACTICE QUESTION

Q: India’s economic growth is witnessing significant downfalls in recent years. In this context, examine the existing economic challenges responsible for the decline in GDP growth and the measures that the government should undertake to rejuvenate the economy.

SOURCE: https://thewire.in/economy/india-economy-modi-government-rule

THE CONTEXT: The Economic Research Department of the State Bank of India (SBI) recently published its study Debunking K-shaped recovery.

MORE ON THE NEWS:

• It is being widely debated that the post-pandemic recovery in India has been K-shaped. The debate over K-shaped recovery is also linked to widening inequality in the country.
• However, SBI research study claims to have “debunked” this belief. The report highlighted at a “conspiracy” against India and its growth.

WHAT IS K-SHAPED RECOVERY?

• A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. It refers to a situation where some sectors of the economy revive after slowdown or recession while others don’t. It means not all sectors/parts of the economy are recovering.
• This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
• A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
• This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

SBI REPORT’S ARGUMENTS

• Positive Emerging Patterns: It highlights patterns of income, savings, consumption, expenditure and policy measures aimed at public welfare.
• Parameters under Scrutiny: The report challenges traditional parameters used to assess economic well-being. It questions the use of old parameters like low two-wheeler sales or fragmented land holdings.
• New Considerations: It highlights patterns in income, savings, consumption, expenditure, and policy measures designed to empower the masses through technology-driven solutions, questioning the reliance on outdated indicators like 2-wheeler sales or land holdings.
• Rising Disposable Incomes in Non-Metro Areas: It cites data from Zomato as an example of rising disposable income in non-metro areas.
• Decrease in Inequality: It refers to the income tax data for FY22 to note that the Gini coefficient had declined significantly from 0.472 to 0.402 between FY14 and FY22.
  It highlights that 36.3% of individual tax return filers belonging to the lowest income in FY14 have left the lowest income group and shifted upwards.

A DIFFERENT PERSPECTIVE

• Not representative: The research of SBI is not representative of the Indian economy, it also brings out a newly-destined ‘narrative’. It just focuses on the “privileged” formal sector that, going by various estimates, has recorded impressive growth.
• Contrasting Reports: In 2022, another report, “The State of Inequality in India,” commissioned by the Economic Advisory Council to the Prime Minister, highlighted rising inequality in the country. It noted that an individual earning a monthly wage of Rs 25,000 was among the top 10% of earners, underscoring the stark income disparities.
• High Welfare Spending indicated Economic distress: The government has been forced to extend the scheme of subsidized food grain to 800 million Indians.
• Tax Data does not reflect Broader Economy: Only a very small minority of people pay direct income tax. Hence, it is not reasonable to draw conclusions from tax data about broader inequality. Income tax data is nominal and is affected by overall inflation, thus making it unviable for drawing conclusions.

THE WAY FORWARD:

• Increase government spending: The government must spend where necessary to alleviate the concerns in the most troubled areas of the economy.
• Addressing debt issues: There is a need for a credible target for the country’s consolidated debt with the setting up of an independent fiscal council to put forward on the quality of the budget would be a great step.
• Include budgetary resources: Budgetary resources needs to be expanded through asset sales, including parts of government enterprises and surplus government land.
• Analysing data: The shape of economic recovery is not an exact science, but the predictions help governments, investors, and consumers alike in planning monetary policies and investments.

THE CONCLUSION:

The recent SBI research provides a unique perspective on India’s economic recovery and inequality but its focus on a limited sample from the formal sector raises concerns about its representativeness. There is a need to emphasis on more comprehensive understanding of the diverse economic landscape in India.

UPSC PREVIOUS YEAR QUESTION

Q. Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer. (2021)

MAINS PRACTICE QUESTION

Q. ‘Recent SBI report has debunked the theory that India has experienced K-shaped economic recovery in the post-pandemic era’. Examine.

SOURCE:https://www.downtoearth.org.in/blog/economy/debunking-k-shaped-recovery-why-the-sbi-s-new-report-gets-it-all-wrong-about-india-s-economic-growth-94086#:~:text=The%20Economic%20Research%20Department%20of,of%20the%20economy%20are%20recovering.

THE CONTEXT: There are many indications everywhere that India continues to be going through a job crisis. Both official data sources as well as many on-the-ground reports point to this fact.

Two types of employment that prevail in an economy such as India.

1. Wage employment: It is a result of labour demanded by employers in their pursuit of profits.

2. Self-employment: Here labour supply and labour demand are identical, i.e., the worker employs herself.

A further useful distinction can also be made between wage labour and jobs.

1. Wage labour: It includes all forms of labour done for an employer including daily wage work at one extreme and highly paid corporate jobs at the other.

2. Jobs generally refer to relatively better paid regular wage or salaried employment. In other words, all jobs are wage labour, but all wage labour cannot be called jobs.

The labour demand in the formal non-agricultural sector is determined by two distinct factors:

1. Demand for output: Firms in the formal sector hire workers to produce output for profit, labour demand depends on the amount of output that firms are able to sell. Under any given level of technological development, labour demand in the formal sector rises when demand for output rises.

2. State of technology: Labour demand depends on the state of technology that dictates the number of workers that firms need to hire to produce one unit of output. Introduction of labour-saving technologies enables firms to produce the same amount of output by hiring a lower number of workers.

Employment growth rate is determined by the relative strength of two factors:

1. Output growth rate: Policies that promote higher economic growth would also achieve higher employment growth.

2. Labour productivity growth rate i.e growth rate of output per worker: If labour productivity growth rate rises, employment growth rate falls for a given output growth rate. If labour productivity growth rate does not change, higher output growth rate increases employment growth rate.

Macroeconomic policy framework

• Keynesian theory: It highlight the role of aggregate demand as the binding constraint on employment. Fiscal policy was perceived to increase labour demand by stimulating output. The developing countries that inherited a dual economy structure during their independence, confronted additional constraints on output.
• Mahalanobis strategy: It identified the availability of capital goods as the binding constraint on output and employment, putting forward the policy for heavy industrialisation.
• The structuralist theories based on the experiences of developing countries highlighted the possibility of agrarian constraint and the balance of payment constraints.
• Both these constraints led to key policy debates in India, particularly during the decade of the 1970s and early 1990s.
• Nonetheless, what remained common to all these different frameworks was the presumption that increasing the output growth rate in the non-agricultural sector would be a sufficient condition for increasing the employment growth rate in the formal sector.

Reasons for this crisis:

• Low labour demand: There is inadequate labour demand particularly for regular wage work.
• Disguised employment: The Indian economy has historically been characterised by the presence of both open unemployment and disguised employment. It means high level of informal employment consisting of the self-employed as well as casual wage workers. It also indicates a lack of adequate employment opportunities in the formal sector. This lack of opportunities is reflected by a more or less stagnant employment growth rate of salaried workers in the non-agricultural sector in the last four decades.
• Jobless growth: In India, the employment growth rate of the formal and non-agricultural sector remained unresponsive despite a significant rise in the GDP growth rate and the value added growth rate during the 2000s as compared to the decade of the 1980s and 1990s. The lack of responsiveness of employment growth rate to changes in output growth rate reflects a phenomenon of jobless growth.

Two types of jobless growth regimes based on the connection between output growth and labour productivity growth.

1. Responsiveness of labour productivity growth rate to output growth rate is weak: The possibility of jobless growth in this case emerges exclusively on account of automation and the introduction of labour-saving technology. But employment growth rate in such regimes would necessarily increase if output growth rate happens to increase. Here, the solution to the jobs crisis is just more rapid economic growth.

2. Responsiveness of labour productivity growth rate to output growth rate is high: This is the case in Inda. Here, the positive effect of output growth rate on employment fails to counteract the adverse effect of labour-saving technologies. Employment growth rate in such regimes cannot be increased simply by increasing GDP growth rate.

THE WAY FORWARD:

• Both demand and supply side reforms: Such employment policies will need both demand side and supply side components. At the same time, direct public job creation will be needed.
• Bridging the skill gaps: There is a need for adequate skilled labour and increasing the quality of the workforce through better public provisioning of education and health care.
• Reorienting macroeconomic framework: Financing expenditures while maintaining debt-stability requires the reorienting of the current macroeconomic framework in a significant way. It can include increasing the direct tax to GDP ratio by reducing exemptions and improving compliance.

THE CONCLUSION:

With the given scenarios, the employment challenge can no longer be met only through more rapid GDP growth. There is a need for separate policy focus on employment.

UPSC PREVIOUS YEAR QUESTIONS

Q) Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard. (2023)

Q) Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (2022)

MAINS PRACTICE QUESTIONS

India is witnessing jobless growth in current times. In this respect, analyse India’s recent economic performance and its impact on job creation.

Source: https://www.thehindu.com/opinion/lead/indias-jobs-crisis-the-macroeconomic-reasons/article67671927.ece

THE CONTEXT:  Official Index of Eight Core Industries for September and S&P Global’s Purchasing Managers’ Index (PMI) for the manufacturing sector for October, point to softening in economic momentum.

MORE ON THE NEWS:

• Output growth in India’s eight core sectors slowed to a four-month low of 8.1% in September, from 12.5% in August, with the Index of Core Industries (ICI) dipping to a seven-month low.
• Growth in cement production hit a six-month low of 4.7%, while fertilisers production rose 4.2%, the fastest pace in four months.
• Coal production grew 16.1%, the second highest pace in at least 12 months, while Steel and Electricity rose 9.6% and 9.3%, respectively. Natural gas output rose 6.5%, the slowest uptick in three months, while refinery products were up 5.5%.
• Only fertilizers registering a quickening in growth from the preceding month as farmers stocked up on the key agricultural input ahead of the rabi season.

 PURCHASING MANAGER’S INDEX(PMI):

• It is an economic indicator which is derived after monthly surveys of different companies.
• It is a survey-based indicator that is compiled and released each month by the Institute for Supply Management (ISM).
• There are two types of PMI: Manufacturing PMI and Services PMI.
  • It shows trends in both the manufacturing and services sector.
  • A combined index is also made using both manufacturing PMI and services PMI.
• The index helps in determining whether the market conditions, as seen by purchasing managers, is expanding, contracting or staying the same.
• A PMI number greater than 50 indicates expansion and number less than 50 shows contraction.

CHALLENGES:

• Dampening demand: Heavy rains in the final month of the southwest monsoon season, which resulted in 13% surplus precipitation for September. This likely contributed to decrease in demand and production for cement, electricity, and steel.
• Contracted production: Production in all eight key infrastructure sectors contracted in September 2023, with the overall index declining 4.8% from August. Coal offered the silver lining: the year-on-year growth in output of the fuel eased only slightly to a still robust 16.1% pace, from August’s 17.9%, and posted just a 1.5% sequential contraction.
• Unemployment: The increased unemployment rate when combined with the increase in population clearly shows that a far larger number of people are looking for work than in the past.
  • According to a recent survey: Only 4% reported adding staff in the manufacturing sector. This contributed to the slowest rate of job creation in manufacturing since April.

THE WAY FORWARD:

• The Government should fast-track disinvestment of public sector units and meet the required revenue target. It would help to unlock the capital to garner resources for meeting the developmental priorities of the country and assist in capital formation.
• To effectively reduce unemployment, it is crucial to empower the demographic dividend through skill development and job creation initiatives.

CONCLUSION:

India wants to emerge as a developed economy in the near future. It is well recognised that to bring this dream to fruition, it is important that the economy continues the high and resilient growth path in the years ahead as well.

PREVIOUS YEAR QUESTION:

Q) Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (2022)

MAINS PRACTICE QUESTION:

Q) What do you understand by Purchasing Manager’s Index? How can it be used to assess the state of economy? Explain in the context of recent developments.

Source: Slowing momentum: The Hindu Editorial on palpable softening in economic momentum – The Hindu

THE CONTEXT: Recently, the G20 expert panel on strengthening Multilateral Development Banks (MDBs) has discussed the need to shift the MDB’s focus from financing individual projects to prioritising programmes. This development  has once again brought the issue of reform in MDBs into the  forefront.

WHAT ARE MULTILATERAL DEVELOPMENT BANKS?

• Multilateral Development Banks are institutions whose members include multiple developed and developing countries, which have to fulfill certain lending obligations to facilitate developmental objectives.
• They provide financing and technical assistance to countries and organisations undertaking projects across sectors including transport, energy, urban infrastructure, and waste management.
• Usually, developed countries in MDBs contribute to the lending pool, while developing countries primarily borrow from these institutions to fund development projects.
• MDBs include the World Bank Group, the Asian Development Bank, the African Development Bank, the Inter-American Development Bank, etc.

NEED FOR REFORMING WITHIN MDBS

• Climate crisis: The G20 expert group cites the issue of climate crisis that there is a lack mechanisms for mitigation of crisis, especially in emerging markets and developing economies (EMDEs).
• Existing perception of MDBs: The expert group also notes that the existing perception and practices of MDBs have adversely impacted their engagement with the private sector. MDBs are often seen as possessing bureaucratic hurdles which deters the private sector from being more involved in assisting with financing.
• Outdated framework of MDBs: The current legal and institutional framework of MDBs is outdated and inadequate to deal with the rapid changes and complexities of the current global order.
• Inefficient resource: MDBs face resource constraints in meeting the increasing demands for development financing. The current funding levels are not sufficient to address the scale of challenges faced by developing countries.

MDBs AND INDIA

• As a leader of global south: India, as a leader and partner of the Global South, has a stake and a role in shaping the reforms of MDBs to make them more responsive and effective in addressing these issues and opportunities.
• As a major beneficiary, India is also a major borrower and beneficiary of MDBs, especially the World Bank Group and the Asian Development Bank. India has received loans and grants from these institutions for various sectors such as infrastructure, health, education, agriculture, etc. MDBs have played a crucial role in India’s development journey by financing key infrastructure projects with longer gestation periods.
• As a contributor: India is also a contributor and shareholder of MDBs. India has provided capital and resources to these institutions to support their operations and lending capacity. India has also participated in their governance and decision-making

THE WAY FORWARD:

• To better deal with global challenges: According to the expert group, a reformed MDB ecosystem can equip stakeholders to better deal with global challenges in effective ways. Therefore, MDBs should operate more in sync with the developmental priorities of individual nations.
• Private sector role: Given that MDBs need to ramp up financing to $390 billion by 2030, the private sector can play a pivotal role in making that happen by reversing the current trend of disappointingly low private financial flows to EMDEs.
• Achieving SDG: According to the expert group, MDBs should focus their operations  financial as well as analytical on helping national governments to create and operationalise their respective country platforms for the highest priority sustainable development goals (SDG).
• Promoting Inclusive Growth and Shared Prosperity: MDBs can help Middle-income countries (MICs) address the challenges by supporting policies and programs that enhance productivity, competitiveness and

THE CONCLUSION:  MDBs are facing several challenges and limitations that affect their relevance and performance in the changing global context. Therefore, there is a need to reform and strengthen MDBs to make them more responsive and effective in addressing the emerging challenges and opportunities.

PREVIOUS YEAR QUESTIONS

Q.1 India has recently signed to become a founding member of the New Development Bank (NDB) and also the Asian Infrastructure Investment Bank (AIIB). How will the role of the two Banks be different? Discuss the strategic significance of these two Banks for India. (2014)

Q.2 The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate. (2013)

MAINS PRACTICE QUESTION

Q. Discuss the challenges faced by the Multilateral Development Banks in mobilizing the resources. What steps can be taken to address these challenges? Explain.

SOURCE: https://indianexpress.com/article/explained/explained-economics/reforms-proposed-world-bank-multilateral-development-8990139/