Indian Economy: The Challenge Ahead

Since India gained independence in 1947, the Indian economy passed through

various challenges. On the eve of independence, the size of its population was

360 million, and the literacy level was just around 12 per cent. Presently, the

population has touched 1.35 billion, and literacy level has jumped to 74

per cent. Its GDP in 1950 was around $30.6 billion. By 2020 beginning, the

GDP rose to $3.202 trillion. The Indian economy is now the fifth-largest in the

world in terms of nominal GDP, and third-largest by Purchasing Power Parity

(PPP) (Mohan, 2020).

The Indian economy adopted different models for development over the years.

During the 1950s, the main emphasis was on having a planned economy/

mixed economy. Industrialisation began mainly in the public sector, and efforts

were made to become self-sufficient in food grain production. Owing to those

efforts, in agriculture India has a surplus in food grains production. The second

phase of the Indian economy started with economic reforms initiated during

the 1980s and accelerated from the 1990s onwards.

In these phases of development of the Indian economy, there is one other

country, i.e. China that can provide a benchmark for comparison. In 1949,

China’s population was 540 million, and literacy level was 20 percent. In 2019,

China has a population of 1.39 billion, and literacy is around 85per cent. Both

India and China have significant reservoirs of human resources. The difference

is only in types of government. In China, the government is centralised and

coercive to achieve targets, while it is democratic in India. Economic reforms

started in both countries during the 1980s.

The third phase of the Indian economy started in 2014 with the present regime

under the leadership of Prime Minister Narendra Modi. The government gave

various energetic slogans and unleashed a new resolve to create a stronger

economy. The NITI Aayog released in 2018 the ‘Strategy for New India @ 75’,

which is the corollary of the Prime Minister’s slogan “New India by 2022”. The main

message was to ensure balanced development across all the states with

collective efforts and effective governance. The strategy covered as many as

41 sectors for balanced growth with few strategic priorities, and set the target

of a $4 trillion economy by 2022 (additional 1 trillion of GDP in three years)

(Aggarwal, 2020). During the COVID-19 pandemic, the PM gave another call of

‘Atmanirbhar Bharat’ (Self-Reliant India) movement supported by the ‘Vocal for

Local’ (Goyal, 2020). The other slogans like Make in India, Digital India, DBT,

and Clean India are meant to impact the economy in future positively.

Since the economy was noticeably suffering a slowdown in January 2020, the

revised GDP growth estimates came downwards to 5per cent, which became a

cause of concern. India’s general government deficit, which was estimated at a

whopping 7.5% to 9% of the Gross Domestic Product in 2019, is mopping up

most of the net financial savings of the households, which are estimated at

around 11% of the GDP. When the economy was not under stress, the gap

between the combined deficit and total household savings was 6 to 8% of the

GDP, which is now around 2%; and therefore, the private sector is

comparatively starved of funds. (Montek, 2020)

Further, two immediate factors which impacted the Indian economy are, firstly, the COVID-199 pandemic, and secondly, the prospect of India- China military face-off spilling over to the realm of economics. To put things in perspective, in

terms of per capita income, China is ahead of India. China is an upper-middle-income country. The per capita income in China is $10,276 against $2,104 for

India. China and India are trading in large volumes, with India suffering a huge

trade deficit.

In six months Covid-19 has already caused a slowdown in global economies.

The cost of economic disruption caused globally by the pandemic has been

estimated between $9 trillion and $33 trillion. The global consulting company

Mckinsey has emphasised that the cost of preventing future pandemics would

be much less than the cost of suffering future pandemics. Rightly observing

that the pandemic has exposed the weaknesses in the walls of infectious disease- surveillance and response capabilities, it rues that investments in

public health and other public goods are solely undervalued; investments in

preventive measures, where success is invisible, are even more so. The attention

should not shift once the pandemic recedes, thinking that the world is free to

have its way for another century till such a pandemic hits again. It is

imperative to understand that this pandemic is neither the last one nor is there

any guarantee that pandemics will not come with higher frequency. According

to the report prepared by McKinsey, global spending of $30-$220 billion over

the next two years and $20-$40 billion annually after that could substantially

reduce the likelihood of future pandemics.

Mckinsey offers a candid caveat that these are high-level global estimates with

wide error bars and that they do not include all the costs of strengthening

health systems around the world. The wide gaps prevail on health expenditures

as a percentage of GDP across countries. In India, health expenditure as a

percentage of GDP is 3.5%, in China, it is 6.5, and in developed countries like

USA, it is 17.7%. In India, the central and state budget allocation to health is

around 4–5% whereas other countries allocate around 8–10% of the budget to

health care.

India’s present GDP per capita is around $2,104. China’s per capita GDP is

$10,261, and that of the US is $54,795. The Indian economy will have to move

forward on a fast track. China’s GDP was 5% of the $GDP in the 1980s, but

today it is almost 60% of the US GDP (Nominal). As per the World Bank

classification, India falls in the lower-middle-class country with GNI per capita

ranging between $1026–3995, while China is an upper-middle-class country

with GNI per capita ranging between $3996–12,375. By way of an illustration

of the objective ahead, the United States of America and a large number of

other countries fall under the high-income countries group with a GNI per capita of

more than $12,376. India’s share of world GDP is less than 4%, whereas it is

around 15% in the case of China and 23.6% in the case of the USA. Indian

economy needs a determined, consistent, big push to scale itself to a much

higher and bigger operating economic platform and to come out of the economic

slowdown that emerged due to the pandemic.

The COVID-19 pandemic, having inflicted direct disruption to production,

supply chain, financial impact on firms and financial markets; unemployment;

the stress of the banking systems due to the moratoria on repayments along

with NPAs; a deadly blow to the hospitality, tourism and transport sectors,

combined with the essential cash and kind subsidies and doles to mitigate the

pandemic stress on the poor in particular, and all sectors of the economy in

general has the potential to put the Indian economy in a tailspin. However, timely

interventions by a decisive and resolute leadership combined with the

tenacity and fighting spirit of the Indian industries, in general, have the

potential of converting the pandemic tragedy into a global opportunity to lead

the other countries through a process of faster recovery.

India’s tax-to-GDP ratio is around 10%; while most developed countries have

tax to GDP ratio of 30%. Indian economy needs resources to strengthen the

health sector leadership, healthcare financing, health workforce, medical

products and technologies, information and research and service delivery,

which is the WHO prescription for achieving the desired outcomes of the

improved health level and equity, responsiveness, financial risk protection and

improve efficiency.

Banking is the backbone of any planned economic resurgence. There has been

a policy trend to undertake public expenditure by the government, either

through direct spending or through facilitating bank credit for private

investments. Although attention has been paid in the recent past to the nonproductive assets accumulated in the banks, some remedial measures are

underway, there has been an indiscreet proportion of lending, at times without

adequate diligence, with the sole purpose of accelerating growth.

As growth in itself has become a politically flagged yardstick of achievement,

the direct or indirect government ownership of the banks has contributed to

dilute their essentially commercial and business-like operations. The public

ownership has created an environment where market discipline is perceptibly

weak, and where the regulators remain circumscribed. Over decades,

investment entities, financial institutions and non-banking financial companies

have been used to support vague and extraneous objectives underwriting the

government’s disinvestment targets, preserving employment in public

enterprises, contributing assistance to states based on the political clout of the

representatives, intermittently providing artificial support to stock markets,

and occasionally ignoring lapses in due diligence.

Special attention is required to ensure sound health and reliability of the

government banking sector, which needs to set up excellent benchmarks for

private banks. However,r in India, it is the other way around. In public

perception, the depositors are no longer as confident of the nationalised banks

for the security of their deposits, as they used to be a decade earlier. It is

interesting to note that between March 2018 and March 2019, when the safety

perceptions got ruffled, the deposits in private banks exceeded those in the

nationalised banks. As against INR 4.8 trillion in deposits in private banks, the

government banks secured only INR 2.3 trillion of deposits after netting out

the deposits of IDBI upon its reclassification as a private bank. Even the

foreign portfolio investors preferred private banks. However, the nationalised

banks still outperform the private banks in return for assets and return on

equity (Patel, 2020). In 2019–20 the government infused INR 70,000 crore into

public sector banks to boost credit for a strong impetus to the economy.

Thanks to an increasing realisation of the government about the need to tackle

the burning issue of non-productive assets (NPAs) of the banks and emphatic

insistence upon provisioning, there has been a reversion to the immensely

needed a working culture of securing the credit with the strictest due diligence.

During this pandemic time, many accounts would turn NPAs, especially those

which were already in stress. Mergers and other administrative initiatives tend

to increase the productivity of nationalised banks, which otherwise suffer from

far lower revenue per employee as compared to their counterparts in private

banking. It is a matter of grave concern that the amounts swindled through

frauds have been ten times more in the nationalised banks as compared to

their counterpart private banks.

It is excruciating, but a very welcome development for future reforms from the

government, as well as the regulator. Reported cases of fraud of around INR 10

billion in 2018 multiplied exponentially thereafter (RBI-December 2019

Financial Stability Report UP 32), and the entire machinery has started the

much-awaited sanitisation by getting after the cases of fraud hidden under the

cloak of non-productive assets of the banks. This will hopefully make the

banking sector emerges more robust anti-corruption measures. The troubled

shadow banks saw signs of stimulus when the government in mid-May

announced INR 3 trillion of collateral-free loans to the nation’s small

businesses and INR 705 billion special credit loans to non-bank financiers.

Another moot point in public spending is that of the systemic leakages that

take away a substantial part of the benefits that every unit of input must seek

to achieve in the process of pump-priming the economy. Though bona fide and

active initiatives have been taken, the leaking pipes have not been

replaced nor adequately repaired. The inevitable result is that more money is

being pumped into the leaking pipes, and the more the money pumped in, the much

more is the leakage. There is hardly any worthwhile quantitative comparison

data between what the NITI Aayog has been able to achieve and improve upon

and what the Planning Commission of India had lacked in the process of

pumping funds into the leaking pipes operated both by the Centre andhttps://sarveshkaushal.com/ by

the States, which enjoyed substantial autonomy in operating the leaky system.

Like the rest of the world, the Covid-19 pandemic has struck at the roots of

almost all market forces, throwing various ongoing trends topsy-turvy. A

demand-driven economy substantially catering to domestic consumption has

suddenly reversed into a surplus capacity economy with the market forces of

demand suffering a free fall on account of curtailed consumption levels.

Nothing can generate more demand than a firm resolve towards creating an

Atmanirbhar Bharat. “The five pillars of Atmanirbhar Bharat — Economy,

Infrastructure, System, Demography and Demand are aimed with a bird’s eye view of all the sectors and sections of society alike. Infrastructure, as an

identity of the country; System, to bring in technology-driven solutions;

Vibrant Demography; and, demand, tapping the demand-supply chain

optimum utilisation of resources” (Yojana, July 2020). The Prime Minister has

announced a unique economic and comprehensive package of INR 20 lakh

crore, equivalent to 10% of India’s GDP, to support the five pillars of

Atmanarbhar Bharat, calls upon the people to become vocal for our local

products, and the industry to make the local products turn global in terms of

production standards, quality and marketing.

Being self-reliant is critical for the growth strategy of the Indian economy and for making it more export-oriented. Just taking note of India’s trade flow with China

for example, the imports by India from China stood at $73.3 billion, much

higher than India’s exports to China pegged at $16.7 billion, leaving India’s

trade deficit with China at the staggering level of $53.6 billion. The

manufacturing sector in India could not grow as fast as compared to China and

South Korea. In China and India, the economic reforms started during the

1980s onwards. During the period from 1961 to 2018, China grew by more

than 10% in 22 years while India could never cross that mark even for a single

year. The miracle of industrial growth happened in China by foreign direct

investments in the selected regions on an experimental basis, the SEZs

(Special Economic Zones) developed with foreign investments. Moreover, the

state-owned enterprises at the local level of cities and villages known as TVEs

linked to markets directly became ancillary industries. The labour laws became

flexible and investments in the enterprises by the locals were encouraged. The

legal system in China does not protect private property rights, and land

acquisition is still not a hurdle as it is in India for setting up industrial units.

Gradually, the Chinese manufacturing sector shifted from labour-intensive to

capital-intensive.

Much more worrying is the nature of India’s imports such as capital goods like

power plants, telecom equipment, and steel projects; intermediate products like

pharmaceutical APIs, chemicals, and plastics engineering goods; and finished

products like fertilisers, refrigerators, washing machines, air conditioners,

telephones etc. Low-cost consumer goods that meet every human need at the

micro-level manufactured in China have invaded the Indian markets and have

given a severe jolt to the Indian traditional and modern manufacturing sectors.

In India, the manufacturing sector always remained under the protection of the

state. High import tariffs, inflexible labour laws, protection for small industries

and inefficiency in state-owned enterprises could not create a milieu for the

development of a competitive manufacturing sector. The industry, with

particular emphasis on SMEs, will have to shed their internal inefficiencies

fundamentally caused by the complacent, unprofessional, and hereditary

ownerships-cum- management. The time has come when the increasing international competition will not allow the industry the luxury it has enjoyed

so far, of passing on the cost of its inefficiencies to the consumers, who opt for

products with higher quality at a much lesser cost.

Efforts to make the Indian MSMEs (Micro, Small and Medium Enterprises)

competitive globally leaves much to be desired. MSMEs contribute as much as

30% of the GDP and hence become a top priority. Presently, one of the

welcome steps to support viable MSMEs in the face of their destabilisation due

to theCOVID-199 pandemic is the Reserve Bank of India stepping in to

restructure the advances to this priority sector.

With a liberal classification on August 6, 2020, raising the aggregate exposure

limit to the borrower INR 25 crore as of March 1, 2020, with a few more

conditions, RBI has stepped in to benefit their accounts which may have

slipped into the NPA category. Similarly, the RBI has allowed banks to reckon with the

funds infused by the promoters in their MSME units through loans under Credit

Guarantee Fund Trust for Micro and Small Enterprises / Distressed Assets Fund

as equity/quasi-equity from the promoters for debt-equity computation.

Further, the Indian economy can leapfrog ahead of others by dint of a creative

policy on innovation. India’s Science, Technology and Innovation Policy of the

year 2013 cater to the three pillars of talent, technology and trust, aimed at

orienting public procurement towards innovative production.

India has a large population; some feel that it is a liability. A large population is

not altogether a liability if it is converted into an economy’s strength. It creates

much consumption-related demand; and if made employable and productive, it

creates a massive tailwind for the economy to push it to grow at a faster pace.

The issue is squarely related to the productivity of our labour and value-added

per average labourer in the process of production, which adds to the Gross

Domestic Product. It is a matter of concern that the value added per worker in

India is just about 10% of a US worker. China’s labour productivity in terms of

value-added per worker is 2 ½ times more as compared to India’s. A two-pronged approach of skilling India’s labour force and providing it with the

requisite resources is a prerequisite to increasing the value-added per worker,

thereby increasing the gross domestic product of India. Pradhan Mantri

Kaushal Vikas Yojna operated by the Ministry of Skill Development and

Entrepreneurship (PMKVY) has the potential of giving a quantum jump to the

gross national product by increasing productivity and value-added per

worker far beyond the present levels. There is a dire need to upgrade the skills

of the Indian labour force to international standards by involving the industry in developing the necessary framework, curriculum and quality benchmarks.

The prioritisation of relevant skills should be left to the industry to meet

their demand, with a clear idea of those skills which can have a catalyst effect

and multiply productivity by geometrical growth. Though the National Skill

Development Corporation boasts of having trained more than 5 million

students in India, the qualitative skilling evaluation would not only capture the

total numbers but essentially the increase that it has caused in the value

addition per trained worker as compared to an untrained one. The government

of India has identified high-priority sectors for imparting skills with an eye upon

fast track results as a part of the Make in India initiative, where the economy has

still, miles to go ahead.

Agriculture and allied activities are already areas of specific focus because even

though the contribution of the primary sector to the GDP has come down

substantially over the years, about 70% of farm households in India still own

less than 1 hectare of land and about 85% of the farm households own less

than 2 hectares of land. Livestock and other allied agricultural activities which

are required to supplement the income arriving from core agriculture require a

revolution to take the primary sector to the next higher level of productivity

and value addition. Indian agriculture made rapid progress in terms of

production, but certain geographical constraints and a lack of market orientation

make it less competitive relative to countries like China.

The Indian and Chinese agrarian economies are two ancient economies of the

world. In both nations, a massive number of farmers depend upon agricultural

income for survival. China has an advantage in irrigation when compared to

Indian agriculture. India is the land of monsoons, where torrential rainfall is

concentrated in a concise period of the year; whereas, in China, the average

rainfall (at least in the more settled parts of the country) is somewhat more

evenly distributed over the year. Reservoir storage of water supply in China for

irrigation is almost five times that of India. Chinese agriculture productivity

started improving since the 1980s when the shift came from collective farms to household-responsibility farming. Chinese rice productivity is two times more

than that in India. The share of agriculture in GDP in China is 7.11 per cent,

and in India, it is 15.4 per cent. The percentage of persons employed in agriculture

in China is 25.1, and in India, it is 42.39 per cent as large inequality prevails in

land ownership in India. (Bardhan, 2011) For the production of high-value

crops, contracts between farmers and corporates are more successful in India

than in China, especially in dairy and food processing. Market liberalisation in

agriculture came in China after de-collectivisation. The compulsory quota and

procurement systems have been abandoned by the government. In India,

recently at the time of the pandemic, special packages have been designed for

the agriculture sector and certain legislations have been amended to make the

market free from state control. The Essential Commodities Act is being

amended to help the farmers generate higher incomes by deregulating

agricultural foodstuffs including cereals, edible oils, oilseeds, pulses, onions

potatoes etc. No stock limit applies to processors or value chain participants,

with a few conditions, and further, it has been decided to impose stock limit

under rare circumstances like national calamities, famine etc. as a price

intervention by the state. The ordinances namely The Farmers Produce Trade

and Commerce (Promotion and Facilitation) Ordinance, 2020, and The Farmers

(Empowerment and Protection) Agreement Price Assurance and Farm Services

Ordinance, 2020, has been promulgated with a focus on the rural economy.

The implications of various initiatives envisaged through these legislations have

evoked much interest and are being intensely debated by various stakeholders.

The resistance to these amendments from the farmer unions in many states is

a big challenge to the government.

The Indian economy has indeed made substantial progress in the field of

governance through the re-engineering of business processes, technology and data

analysis. The CEO of NITI Aayog informs that the Direct Benefit Transfer (DBT)

has been implemented across 437 schemes, and helped to save INR 83,000

crore till date. He further discloses that its implementation has led to 2.75

crore duplicate, fake or non-existent ration cards being deleted, and 3.85 crore

duplicate and inactive consumers for Liquefied Petroleum Gas (LPG) subsidies eliminated. Blockchain technologies can improve India’s prospects at the

ease of doing business rankings, elimination and resolution of litigation arising

out of contractual obligations, compromises in quality control, and others. The

Goods and Services Tax (GST), though still under the process of stabilisation,

has added 3.4 million new indirect taxpayers. There is an imperative need to

focus on the application of Artificial Intelligence in the fields of agriculture,

health care and education in the Indian economy.

As the Indian economy gears up on a fast track of growth, the conflict between

“development” and “environment” will surely become more intense. The

central and state ministries of environment will have to play a far more

proactive role to ensure that development and ecological concerns are

balanced for not only increasing the GDP but also for ensuring long-term

sustainability through a pollution-free life. “If development is about the

expansion of freedom, it has to embrace the removal of poverty as well as

paying attention to ecology as an integral part of a unified concern, aimed

ultimately at the security and advancement of human freedom. Indeed,

important components of human freedom crucial ingredients of our

quality of life is thoroughly dependent on the integrity of the environment,

involving the air we breathe, the water we drink, and the epidemiological

surroundings in which we live” (Dreze & Sen, 2013).

These are indeed challenging times. It is time for tough decisions, sound

strategy, and a zero-error implementation to be ahead of others in the

changing global scenario.

*Sarvesh Kaushal is a retired Bureaucrat. He is a former Chief Secretary of

Government of Punjab (India).

References:

1. Ahluwalia, Montek Singh (2020): Backstage: The story behind India’s

High Growth Years, Rupa Publications, Delhi, pp

2. Patel, Urjit (2020): Overdraft: Saving the Indian Saver, Harper-Collins

Publisher, Delhi, pp

3. Kant, Amitabh (2018): The Path Ahead: Transformative Ideas for India,

Rupa Publications, Delhi, XVII.

4. Dreze, Jean & Sen, Amartya (2013): An Uncertain Glory: India & its

Contradictions, Penguin Books, India, pp

5. McKinsey & Company. “Not the Last Pandemic: Investing Now to

Reimagine Public-Health Systems.” Https://Www.mckinsey.com/~/

Media/McKinsey/Industries/Public and Social Sector/Our Insights/Not the

Last Pandemic Investing Now to Reimagine Public Health Systems/Not the-Last-Pandemic-Investing-Now- to-Reimagine-Public-Health-SystemsF.pdf, July

6. Guruswamy, Mohan (2020): “We are trying with destiny”. The

Economic Times, August

7. Bardhan, Pranab (2011): Awakening Giants: Feet of Clay, Oxford

University Press,

8. Aggarwal, Aradhana (2020): “Slogans, Policies and a Reality Check”. The

Financial Express, August

9. Goyal, Garvit (2020): “Vocal for Local: PM Narendra Modi’s big boost to

Indian companies”. The Economic Times, May 19.

— — — — — — — — — — -

*Sarvesh Kaushal, Ex IAS, MA(History),(Economics), LL.B; Ex-Chief

Secretary to Punjab Government; presently a legal consultant, social

worker and academician. He can be contacted at

<citizenssynergy.plus@gmail.com>