Measures to Strengthen the Indian Economy & its Interface with National Security

Faster, Sustainable and More Inclusive Growth

- the slogan of the 12th Plan, approved in Sep 11

15 Mar 12, the FMs speech

focus on domestic driven growth for recovery

A Perfect Concept!

 But

The Indian economy is on the edge of a precipice. According to the Kelkar Committee report, Indian economy is headed for a "perfect storm" worse than 1991 because government's cash flow by March 2013 is threatening to be Rs 110,000 crore (Rs 1,100 billion), more in the red than the expected Rs 500,000 crore (Rs 5,000 billion).

Purview
Current macro economic scenario. The causes structural deformities. The measures. Interface with national security.

Current Macro-Economic Scenario

Background
A major economy till the 17th century. Left out of the industrial revolution. The Hindu growth rate. Liberalisation of the 1990s. Resurgence leading to 9.5 % growth in 2005-06. Survived the Asian crisis of 1997 and the world recession of 2008.

Current Macroeconomics
Growth rate fell from 9.5 % in 2005-06 to 6.9 % in 201112; expected to fall further. IIP continuously falling; worst being the capital goods sector @ - 15 %; power, telecom, airlines in similar situation. Fiscal deficit : 5.9 % in 2011-12 as against budgeted 4.5 %.

Current Account Deficit (imports exeeding exports and remissions)

3 % in 1990-91. 0.6 % in 2000-01. 3.6 % in 2011-12.

Current Macroeconomics
Rupee devalued by 13 % since Jul 11. Tax revenue as a percentage of expenditure dropped from 60 % in 2006-07 to 46 % in 2001-12. Gross domestic savings dropped from 37 % of GDP in 2007-08 to 32 % in 2011-12. Unproductive public expenditure, especially subsidies at 2.6 % of the GDP, is at an all-time high.

Finance and Industry, the mainstays of an economy, are in dire straits! It could lead to a different FDI !

Fiscal Disaster in India

Where have we gone wrong?

Implementation, delivery, governance, policy paralysis?

Where have we gone wrong?

Implementation, delivery, governance, policy paralysis? More important are certain fundamental and structural concerns!
are our finances sound? a domestic driven economy? inclusive growth where our masses participate?

Structural Deformities

The Financial Sector

Require finance for investment and development. Finance per se has little meaning unless it is fruitfully utilised to generate assets.

Are we frittering away our meagre finances on populist measures instead of on real growth?

The Countrys Finances

Tax revenue a mere 10 % of GDP as against 20-30 % in other countries. External borrowings to the tune of $ 320b - huge interest on govt debt. FDI turned negative ie more Indian companies have invested abroad than foreign investments coming in capital generated in India is de facto being utilised to give jobs elsewhere. High volatility of FII. Doles in the name of welfare. Bank NPAs skyrocketed necessitating bailouts 35,000 cr per annum.Large borrowers like Kingfisher have defaulted approx 47,000 cr and the banks have not even bothered to pursue them.

The Nature of Our Economy

As a nation progress the main focus of its economys activity shifts from the primary, through the secondary and finally to the tertiary sector agriculture/industry/services. In developed countries like the U.S., more than 80% of the population is in the tertiary sector and also contributes proportionately to their economy.

The Nature of Our Economy

In India,
Agriculture contributes to 14 % of GDP but supports 60 % of the population. Services sector contributes to 60 % of GDP but supports only 5 % of the population.

A great imbalance indeed.

Lack of Inclusiveness
77 % of our population (80 cr) lives merely on Rs 20/- per day, and 10 % are just marginally above that.

What can this bottom of the pyramid consume, let alone create?

Increasing Dependence on International Trade

Foreign trade increased from 37 % of the GDP in 2004-05 to 53 % in 2011-12.

Fetches foreign exchange but

cripples domestic market. creates jobs outside. Portends the danger of turning the demographic dividend into a demographic disaster.

Black Economy
50 % of GDP.

Restricts revenue collection. Prevents capital accumulation within the country.

Policy Paralysis
Fragmentation of voters allegiances Indias parliamentary arithmetic excruciatingly tight. Limited ambition and play safe strategy administrative improvisations being taken for genuine reforms.
Decontrol of petrol prices, but permissions for price changes. FDI.

National policy issues not the priority for politicians.

The measures

What Needs to be Done

The financial sector. The Agriculture/Industry/Services dilemma. Necessities for all-round growth. Governance.

Rationalisation of the Countrys Finances

Effective mobilisation of funds from those who can afford to give them shore up tax administration and cut black money. Focus on scientific utilisation of available funds. Utilisation of funds on asset formation. Eschew the temptations of a prematurev welfare state and cut wasteful expenditure, stop bailouts, make subsidies/welfare-oriented rather than dole-oriented. Promote indigenous industry to retain capital.

Rationalisation of the Countrys Finances

Eschew the temptations of a prematurev welfare state and cut wasteful expenditure, stop bailouts, make subsidies/welfare-oriented rather than dole-oriented.

The Agriculture/Industry/Services Dilemma

Depends on the state of progress of a nation. The bulk of our population currently cannot participate in the tertiary sector. Agriculture becoming increasingly unviable. Industry stagnant. We need to have a healthy mix of agricultural, manufacturing and services sectors.

People-Centric Growth
Bring bulk of the Indian people into the growth process sustainable agriculture and industry. People should get the value of their produce reduce the role of middlemen. Industrialisation in the backward regions.

Control Inflation
Inflation, especially food inflation. A supply side problem. Address the supply chain rather than shortterm monetary issues.

Other Measures
Implement Goods and Services Tax (GST). An appropriate Land Acquisition Bill.

Interface with national security

Interface with National Security

Politicians should treat economic growth as a national security issue.
Prime Minister Manmohan Singh, 15 Aug 122

Conclusion