Question Bank

January 4, 2019 @ 2:30 pm
Question Bank

4th JANUARY 2019


(1 Question)

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 impact of recent election results in Bangladesh on Indo-Bangladesh relations.


India’s growth rate in 2018-19 is forecast at 7.4% by the Reserve Bank of India (RBI). Even though the Goods and Services Tax (GST) has stabilised, much will depend on the pickup in the investment rate.

The international environment is not that conducive for growth in our foreign trade; this will have an impact on our exports and, therefore, growth. Following are the major factors that will affect India’s growth rate:

  1. Investment ratio
  • In the final analysis, the growth rate depends on the investment rate and the productivity of capital or its inverse incremental capital-output ratio. The incremental capital output ratio is a catch-all expression. It depends upon a multiple number of factors such as quality of labour, which again depends on education and skill development levels, and technology, which is constantly changing. For ensuring a sustained high growth, we need to raise the investment ratio and keep the incremental capital-output ratio at 4. The Gross Fixed Capital Formation ratio has fallen from 35.8% in 2007-08 to 28.5% in 2017-18. The journey to raise the investment ratio is not going to be easy. ‘Animal spirits’ must be revived. A tranquil political and economic environment needs to be nurtured.
  1. Banking system
  • An important factor affecting economic growth is the condition of our banking system. Non-performing assets (NPAs), including stressed assets, as a proportion of loans of public sector banks stood at 16.7% as of March 2018. As many as 11 public sector banks are under Prompt Corrective Action (PCA). This restricts the lending abilities of these banks. Added to this, the non banking financial company (NBFC) system is also under stress. This is partly a reflection of the stress in the banking system since most NBFCs borrow from banks. Recapitalisation of public sector banks will partly solve the problem. It is not clear at this point how much it will help in adding to lending capacity.
  • Today, banks are responsible both for short-term and long-term lending. Their inability to lend affects the availability of working capital as well as capital expenditures. The decision to pump in more capital to public sector banks must be completed soon. The growth rate in the industrial sector will depend on how quickly the banking system comes back to normalcy.
  1. Employment growth
  • There is a great concern about the inadequate growth of employment. Honestly, we do not have satisfactory employment numbers. The employment data in the organised sector are reliable. But the employment in the informal sector is much larger. We need to keep two factors in mind. Growth can occur either as a result of increase in investment or because of better utilisation of existing capacity. It is growth which is led by new investment that leads to a significant increase in employment. But growth caused by improved efficiency of utilisation of existing capital can lead only to a marginal increase in employment. Much of the growth seen in the last few years is of the latter variety.
  • Second, the increase in employment seen in the period between 2004-05 and 2009-10 was because of the rapid growth of the information technology (IT) and financial sectors. The IT sector has slowed down. The financial sector is under stress. Employment in these sectors was visible and educated entrants into the labour market found ample opportunities.
  • The forecast for world trade and output is not encouraging. There are too many uncertainties which include an intensification in the trade war. Along with export promotion, we also need to contain some of our large imports. A watch on India’s CAD is critically important if we have to achieve growth with stability.
  1. Agrarian distress

The future growth also depends on the performance of agriculture. Agrarian distress is widespread. Strangely, the fall in prices of agricultural products is in one sense a reflection of our success in raising output. Some years ago, the concern was a rise in the price of pulses to abnormally high levels. But today the picture is reversed. Thanks to increase in production, prices have fallen. Similar is the case with respect to vegetables, particularly onion. The need of agriculturists is income in current prices. The solution to the fall in prices lies in government intervening in the market and buying off the surplus over normal levels..

Loan waivers are at best short-term solutions. The fundamental problem is one of increasing productivity and enabling farmers to achieve increased output and better prices. There is also a basic weakness that we have to address. The average size of landholding is so small that any amount of increase in productivity will not give adequate income. Farmers have to think in terms of consolidation of landholdings so that they can get the benefits of larger size. Small farmers will also have to think in terms of higher value-added products like vegetables. A combined attack to increase productivity, consolidate landholdings and improve marketing is needed to assure farmers of better income.

Thus there are the major concerns: raising the investment ratio; putting the banking system back on the rails; employment generation through better growth; enhancing export growth to contain the CAD; and removing agrarian distress by increasing productivity and consolidation of small landholdings. These issues need to be addressed comprehensively, if we have to achieve sustained high growth.

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