Daily Answer Writing
13 September 2021

Q. In the current and the coming fiscals, growth is expected to be a challenge. Outlining these challenges comment of the ways to improve growth. (150 Words)

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  • Source: TH - Page 7/ OPED: What the Q1 GDP numbers say
  • GS 3: Economy

 

Approach Answer:


Introduction:  Due to the impact of the lockdowns due to COVID-19, the growth have been subdued for two years. In 2020-21 the GDP contracted by 7.3% and in 2021 it has not yet achieved the level of 2019. Considering that the growth in 2019 itself was not very impressive, this is a big challenge.

 

Various challenges for Indian Economy:

    • High unemployment: COVID-19 has led to many structural changes in the economy which has led to a lower employment rates than before.
    • High inflation: in the good items and the fuel. This has not only impacted the poor and middle class, but also the MSMEs.
    • Private consumption is poor: Given that people's savings as well as incomes have depleted the private consumption has shown some poor growth. Given that its share in GDP is more than 50%, growing the economy with lacklustre private consumption would be difficult.
    • Erratic Monsoon: The Monsoon in 2021 has been delayed and many regions have received rainfall deficit. This can impact Agricultural growth, which have been excellent in the last two year.
    • Key Service Sector including trade, transport, storage; had contracted severely in 2020. This may still suffer due to lower propensity to travel as well as high fuel prices.
    • NPAs:  Non-performing assets can create a negative impact on the financial sectors in India, which as already reeling with NPA crisis before COVID-19.
    • Fiscal Stress on the State: Due to heavy expenditure on health and lower GST collection, the states' fiscal position has been in doldrums.
    • High Debt: India's debt to GDP ratio(State + Centre) has already crossed 90% and may climb further. This is much higher than the 60% target set by the FRBM act. Here the Centre alone has a debt to GDP of 62% currently.

 

Ways to improve the condition of the economy

    1. Rationalization of Taxes:
      • Lowering of GST: Currently various important items such as chemicals like adhesives, metals, cement etc. come under 28% GST rate which make Indian material uncompetitive in the international markets.
      • Brining Fuels under GST: Fuel is not only used for transportation, but various petroleum products are also used as raw material for manufacturing of chemicals. Brining it into GST would create a great chain of input credits lowering the effective taxes for the industry.
      1. Bringing electricity under GST: This would lower the rate of electricity for the MSMEs.
    1. Ease of doing business: Promoting the ease of doing business by following ways:
      1. Single window clearance: for various permits such as construction department, labour department, pollution departments etc.
      2. Easing Border compliance for exports as well as imports.
      3. Ease of establishment: land conversion, getting electricity, water and sewerage connections should be eased.
      4. Contract enforcement: The law and order situation must be improved including Judicial reforms for better protection of business interests.
    2. Enhanced Government incentives: Currently, various sectors are covered under the Production linked Incentive(PLI) scheme in India. These must expand to as many sectors as possible
    3. Easing Labour laws: Quick implementation of new labour codes and the Establishments to be visited by an Inspector should be decided through a computerized random allotment.
    4. Easing Agricultural Markets: These can be improved by implementing the farm laws passed by the Parliament after adequate consultation with the stakeholders.
    5. Capacity Utilization: Government and the Industry has many resources which are underutilized. The Government can monetize its resources with effective utilization, whereas, the private sector needs adequate resources to invest into its resources effectively.
    6. Increasing the Investment expenditure: This would lead to higher gross capital formation and thus higher growth.

 

Conclusion: The COVID -19 crisis has given a unique opportunity to India to improve its position in global trade, due to breaking of supply chains, higher inflation in the international market and greater incentives provide in India to the producers. India can thus leverage its situation to achieve higher growth in the coming years.

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