What's plaguing India's economic growth?

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Whats plaguing Indias economic growth?
Back on the growth trajectory: India's annual GDP growth rate has averaged 6.17 per cent from 1951 until 2018.

India's not among a Fragile Five, but reforms are key to ensure economic growth improves the lives of millions


Suneeti Ahuja Kohli

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Published: Sat 26 Jan 2019, 10:04 AM

Last updated: Sun 27 Jan 2019, 1:03 PM

Health of an economy is one of the best indicators to judge how a country is faring and what can be in store for its people. India, on this account, is doing good and comparatively better if we consider the growth estimates. The largest democracy in the world is expected to grow at more than 7 per cent by the end of the current fiscal year, March 31.

All three big institutions - Reserve Bank of India, the International Monetary Fund and the World Bank - expect the country to grow at a fast pace, well above the growth estimates. What makes this growth meaningful is its diverse nature: manufacturing is expanding, and so are other key sectors.

The country remains the fastest-growing major economy in the world. Inflation, the other parameter crucial to an economy, too is low. Low fuel prices have helped India in the last few years, and headline inflation has halved in the last four year. The consumer price index inflation rate is hovering at only 2.2 per cent, and the wholesale price index inflation rate is at 3.8 per cent.

India has come a long way from the fragile five to among the most favoured destinations on the world map. A number of factors have worked in the country's favour over the last few years, and helped many industries become globally competitive. The automobile industry, for instance. Last year, India displaced Germany as the world's fourth largest market for vehicle sales by volume and is competing closely with Japan to emerge among the top three. Forecasts from McKinsey suggests it come as soon as 2021. Commercial and passenger vehicle sales in India grew 8.3 per cent last year to 3.99 million compared with 3.74 million sold in Germany during the same period, according to data from LMC Automotive.

Foreign firms are keen to take a slice of the burgeoning consumer market in India. The country had a shining year in corporate deal making as foreign companies and investors seemed more comfortable in making investments in various projects in the country than in other emerging markets. Last year, we saw India jumping 23 rungs on the ease of doing business index, and the change was visible on the ground too. Mergers and acquisitions targeting Indian companies totalled $93.7 billion in 2018, which is significantly high compared with 2017. Notably, this is the highest tally since the Indian economy started opening up in the 1990s, states a report by the Wall Street Journal. Consequently, the value of overseas purchases in India has overtaken those in China. Acquirers spent $39.5 billion in India versus $32.8 billion in China, states the WSJ report.

 This has been possible due to the slew of changes that have been introduced in India over the past few years. Easing of foreign direct investment rules, implementation of a new bankruptcy code, introduction of a goods and services tax, which has replaced multiple taxes and unified the country under one type of tax. Even though GST is underdoing teething issues and will take some more time in truly becoming one slab tax, it has been a step in the right direction.

However, going forward a declining global growth could pose challenges. India's trade deficit is already up from 1.7 per cent of GDP in 2016-17 to 3 per cent in 2017-18. It is further projected to rise further to 3.5 per cent in 2018-19. Slowing global economy would mean less foreign investments in the country. Also, the rising price of oil could affect the foreign reserves, which have already seen a net reduction of nearly $30 billion since April 1, 2018.

Besides this, the other challenges facing the Indian economy are more domestic than international. First is the rising population. Even though India can well take advantage of the demographic dividend, it hasn't been able to do so well. Right to Education is a law, but literacy rates are far from satisfactory. Moreover, educated Indians do not have sufficient jobs to cater to their ambitions and career goals. Despite promising economic numbers, the living standards of people haven't improved as significantly as one would expect in a high growth economy.

Secondly, there is an urgent need to improve the infrastructure. Certain pockets in India are seeing a boom and development of roads and highways, but much more needs to be done. The government has increased infrastructure spending incrementally, but its result needs to seen in places other than metropolitan cities. The country needs to invest in water reforms, trade hubs including the development of inland waterways for transportation, port development, such as ports, coastal shipping and cruise transportation. Infrastructure development is the single most potent tool with the government that can improve lives, bring social change, create jobs and elevate the stature of the country on the global front. Well-developed infrastructure helps improve efficiencies in various sectors and promotes economic growth.

Lastly, corruption. Even though we haven't had any major scandals reported during the present government, corruption has been a blight on the country. India ranks 81 on the Corruption Perceptions Index that ranks 180 countries, and this has been a major stumbling block for the economy. India has jumped 26 ranks on the ease of doing business index, but until it improves on this count, it might be able to realise the economic and development goals it has set its eyes on.

Elections are just around the corner and much will depend on the policies that the new government initiates. The time is right for India, it just needs reforms and growth-centric policies that improves the lives of its citizens.


Inflation: Annual consumer inflation declined to 2.19 per cent in Dec 2018, matching market expectations of 2.2 per cent. It is the lowest rate since June of 2017.
Inflation: Annual consumer inflation declined to 2.19 per cent in Dec 2018, matching market expectations of 2.2 per cent. It is the lowest rate since June of 2017.
Suneeti Ahuja-Kohli
Suneeti Ahuja-Kohli

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