9th June 2018
Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.
Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.
Q1. Discuss the reasons for India’s slow economic growth recently.
- There should be focus on production, as incomes are low in India and the expansion of employment is a function of the growth of output. However, growth has not taken off in a way that was anticipated during the election campaign of 2014.
- The first factor alluded to above is macroeconomic policy. We have seen four years of contractionary macroeconomic policy.
- Over the five budgets that have been recently presented, the share of capital expenditure but this has occurred alongside a declining total expenditure, perhaps motivated by the pursuit of ‘less government’. The net effect of these is a slightly lower budgetary capital outlay as a share of GDP. Second, the rate of growth of ‘government final consumption expenditure’ has been steadily increased. The growth implications of such a strategy are obvious.
- Conduct of macroeconomic policy has resulted in slowing demand growth. The second factor contributing to slack demand in the economy has been agricultural performance. The growth of agricultural incomes could not but have been affected by this. In 2016-17, however, agricultural output rebounded, posting very strong growth. But nowdemonetisation, by disrupting the supply chain, is likely to have not just stymied the growth of agricultural incomes but actually lowered them. The growth of manufacturing reflects this. The CSO’s estimates show that it declined considerably in 2016-17, and by 2017-18 was barely half of what it was in the year before the demonetisation. ‘Make in India’, which had targeted manufacturing, has not had much success despite any progress made on the ease of doing business.
- External environment has mostly been benign. For three years running from 2014-15 the price of oil fell continuously.The windfall could have been used to step up India’s creaking public infrastructure to address hardship and boost demand. But it appears to have been used up expanding government consumption expenditure. Another favourable development, which unlike the oil price decline continues, is that the world economy is growing steadily for the first time since the global economic crisis set off in 2007-08. Surprisingly, however, India’s export performance since 2014 is far less impressive than it was in the five years following the crisis. The balance of payments is being shored up by capital inflow, much of it short-term. India’s high foreign reserves, advertised by the Prime Minister at Davos, reflect this aspect rather than dollars earned. This is costly for growth. It keeps interest rates high and demand shackled.