India, a dynamic and intricate economy, grapples with an array of challenges while embracing opportunities for growth and progress. With a population exceeding 1.3 billion and a GDP surpassing $2.7 trillion, India stands as one of the world’s fastest-growing economies. However, the nation’s journey toward becoming a global leader hinges on its ability to surmount its economic hurdles and sustain its reform efforts.
Economic Challenges in India
- Weak Demand Impacting Growth: Stagnant or diminishing demand for goods and services has become a pressing concern. Factors such as sluggish income growth, high inflation, unemployment, and the upheaval caused by the Covid-19 pandemic have contributed to this decline. The repercussions include reduced consumption and investment levels, resulting in diminished tax revenue for the government.
- Persisting Unemployment: Despite robust economic expansion, unemployment remains a stubborn challenge across both urban and rural areas. The Covid-19 pandemic exacerbated this problem as numerous businesses shuttered or scaled back operations, leading to widespread job losses. Notably, the Centre for Monitoring Indian Economy (CMIE) reported a loss of over 1.8 crore salaried positions between April and July 2020. The unemployment rate surged to 7.4% in August 2020, contrasting with the 5.4% of August 2019. Meanwhile, the National Statistical Office’s (NSO) Periodic Labour Force Survey recorded a 4.1% unemployment rate for 2021-22.
- Lagging Infrastructure Development: India’s inadequate infrastructure, encompassing areas like transportation, energy, and sanitation, impairs its economic advancement and global competitiveness. The World Bank estimates a staggering $1.5 trillion infrastructure gap, significantly hampering rural residents’ quality of life and overall health.
- Trade Imbalance and Balance of Payments: India’s persistent current account deficit underscores its reliance on foreign imports over exports. This trade imbalance, particularly evident in its dependence on oil and gold, reflects a lack of export competitiveness. In 2022, the country experienced a 6.59% decline in exports and a 3.63% reduction in imports.
- Rising Private Debt: Amidst easy credit availability and low interest rates, private debt has surged, especially within corporate and household sectors. The risk of default and financial instability looms, potentially escalating with slowing income growth or rising interest rates. The Reserve Bank of India (RBI) reveals that non-financial sector debt amounted to 167% of GDP in March 2020, up from 151% in 2016.
- Growing Inequality: India’s pronounced income and wealth inequality has intensified over time. The World Inequality Database showcases the top 10% of earners claiming 56% of national income in 2019, a stark rise from 37% in 1980. Similarly, the top 10% of wealth holders owned 77% of total wealth in 2019, compared to 66% in 2000. These disparities fuel social unrest, political instability, and hinder economic growth.
Economic Reforms in India
- Liberalization: Commencing in 1991 due to a balance of payments crisis necessitating International Monetary Fund (IMF) aid, India initiated liberalization reforms. These measures aimed to curtail government intervention and regulation across industry, trade, finance, and foreign investment sectors. The elimination of the license-permit-quota system further facilitated private firms’ entry and expansion. This liberalization has propelled India’s growth and integration into the global economy.
- Privatization: Privatization of public sector enterprises (PSEs), under government ownership or control, seeks to boost profitability, competitiveness, and fiscal relief. Strategies encompass disinvestment, strategic sale, or closure. Since 1991, over 60 PSEs have been privatized, amassing more than Rs 3 lakh crore.
- Globalization: India’s embrace of globalization entails heightened openness to the global economy, encompassing trade flows, capital flows, technology transfers, and migration. This strategy offers access to new markets, affordable inputs, foreign exchange, technology, and skills. Yet, it also introduces challenges such as competition, volatility, dependence, and inequality.
New Economic Policy
In response to the Covid-19 pandemic’s impact, India unveiled a comprehensive economic policy in 2020. With a stimulus package amounting to Rs 20 lakh crore (10% of GDP), this policy aims to bolster diverse sectors and segments. It includes reforms in agriculture, labor, education, health, defense, mining, power, and taxation, geared toward fostering self-reliance and resilience in the post-pandemic era.
Insolvency and Bankruptcy Code (IBC): Expedited Resolutions
Designed for timely and market-driven corporate insolvency and bankruptcy resolutions, the IBC prioritizes asset value maximization, entrepreneurship promotion, and business ease. As of 2021, the Insolvency and Bankruptcy Board of India (IBBI) cites 4,541 corporate insolvency resolution processes initiated, of which 2,029 have been resolved.
Labour Codes: Simplifying Labor Laws
Four labor codes aim to streamline central labor laws into wage, industrial relations, social security, and occupational safety and health categories. They provide employers flexibility in hiring and firing, ease business registration and compliance, extend social security to informal workers, and empower trade unions and collective bargaining.
Production-linked Incentive (PLI) Scheme: Boosting Manufacturing
Introduced in 2020, the PLI scheme intends to amplify manufacturing and exports in sectors like automobiles, electronics, pharmaceuticals, textiles, and renewable energy. Financial incentives are accorded to qualifying manufacturers based on incremental sales and investment over five years. This initiative targets job creation, foreign investment, competitiveness enhancement, and import reduction.
Overcoming Economic Challenges: Recommendations
Stimulating Consumption and Investment: To revitalize the economy, the government should offer direct fiscal stimuli to pandemic-hit sectors, coupled with investments in public infrastructure, healthcare, and education.
- Enhancing Export Competitiveness: By providing incentives, subsidies, and infrastructure support, India can bolster export-oriented industries. Engaging in strategic trade agreements will diversify its export markets.
- Revamping the Financial Sector: Addressing non-performing assets, fortifying public banks, refining governance, and fostering financial innovation will strengthen India’s financial landscape.
- Improving Business Environment: Simplification of regulatory frameworks and reform implementation in labor, land, contract enforcement, and bankruptcy laws will enhance business efficiency.
- Nurturing Innovation and Entrepreneurship: Fostering innovation hubs, research partnerships, and intellectual property protection will foster an environment conducive to economic advancement.
- Addressing Inequality and Poverty: Implementing progressive taxation and expanding social welfare programs can bridge the income and wealth divide.
- Mitigating Climate Change: Green policies promoting renewable energy, energy efficiency, and environmental protection will position India as a sustainable global player.
UPSC Mains Question
Considering India’s vast population and diverse economy, how can the government tailor economic reforms to address both urban and rural challenges effectively?
