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025 - 029, August 2012 Available online at http://www.wudpeckerresearchjournals.org 2012 Wudpecker Research Journals ISSN 2277 0712
A prescription to boost growth in India
Jagan Gaur and Samik Shome
Alliance School of Business, Alliance University Chandapura-Anekal Road, Anekal, Bangalore - 562 106, India.
Accepted 31 July 2012
The core challenge of the Indian government is to stimulate economic growth, control inflation and have fiscal consolidation. This paper reviews and analyzes the current scenario of Indian economy. It also suggested some policy reforms for improving the GDP growth rate. A PEST analysis been conducted to identify various problems and factors that hinder the growth of Indian economy. The paper also attempts to provide the probable ways to tackle these problems. The analysis indicates that there is an urgent need to generate rural non-farm employment, revamp the tax collection system, introduction of GST, reduction of subsidy and financial inclusion. Key words: GDP growth, inflation, fiscal consolidation, rural non-farm employment, financial inclusion. INTRODUCTION India started 2012 with a very dissipated health condition suffering from some major economic crisis such a slow GDP rate, high rate of inflation and high fiscal deficit among others. To make the matter worse, the Indian rupee has depreciated significantly against the US Dollar marking a new risk for Indian economy 1 . In fact, economists predict that the Indian rupee may depreciate by around 20 per cent during next two years on account of dip in confidence about the domestic economy leading to outflow of funds 2 . Therefore, the immediate core challenge of the Indian government is to stimulate economic growth, control inflation and have fiscal consolidation3. Responding to this precarious economic situation, the Finance Minister of India, Mr. Pranab Mukherjee in his budget speech of 2012 to 2013 proposed some measures to improve macroeconomic environment and strengthen domestic growth drivers to sustain high growth in the medium term. He also expressed his view to accelerate the pace of reforms and improve supply side management of the economy4. In this background, the objective of this paper is to identify various problems and factors hindering or slowing the growth of Indian economy. It also attempts to find out the probable ways to tackle these problems. The organization of the paper is as follows. In the subsequent section, a PEST analysis of the overall Indian economy is conducted. Government Initiatives section describes the initiatives taken by the government. The probable alternatives that may improve the economic growth in India are suggested in Probable Solutions section. The last section contains concluding observations. PEST analysis PEST analysis is generally used by management scholars especially in the field of strategic management6.
*Corresponding author firstname.lastname@example.org.
As of May 14, 2012, the rupee closed at a record low of 53.97 to
the US dollar. 2 Accessed on May 9, 2012 from http://www.indiatribune.com/index.php?option=com_content&view=a rticle&id=6123:rupee-could-depreciate-by-20-percent-in-two-yeaRs.&catid=123:business&Itemid=489 3 Accessed on March30, 2012 from http://www.ndtv.com/video/player/news/pranab-mukherjee-onbudget-2012/226586
For more details see, Budget 2012-13, Speech of Mr.Pranab Mukherjee, Minister of Finance, March 12, 2012. Accessed on May 9, 2012 fromhttp://indiabudget.nic.in/ub2012-13/bs/bs.pdf 5 PEST analysis stands for Political, Economic, Social, and Technological analysis.
The GDP growth rate was mainly supported by Services and Transport sector which have clocked more than 9 per cent growth rate. Inflation causes problems for Reserve Bank of India (RBI) to cut interest rates which results in low Foreign Institutional Investments (FII’s) 9 and discouraged investment expenditures in the economy which further caused shortage of supply and another time price rise.1 percent in the 6 7 third quarter (January to March) of the financial year 2011 to 2012 may be due to government policy paralysis.cia. Almost all the sectors have performed badly in the last financial year compared to the previous one.6 percent of the GDP as given in the Budget estimate for 2011 to 2012 will be impossible to achieve. 2012 from http://in. 2012 from http://www. RBI increased the interest rates 13 times in the mid 2010 to end 2011 to tackle the rising inflation. However.6 percent. 2012from http://www.html . on April 17..cga. 2012 RBI reduced the repo rate by 50 basis points from 8.5 percent 8 For more details. implementation of goods and services tax.html 9 Accessed onFebruary 15.32000 crore into the economy and banks would have more funds for lending. increase in global prices of oil and low growth of industrial sector. Economic factors Fiscal issue The data released by the Controller General of Accounts (CGA) on government accounts till the end of December 2011 clearly indicated that the fiscal deficit of 4. Political factors The coalition government in India has its own advantages and disadvantages.in/sebiweb/investment/FIITrendsNew. a target set by the Indian Government. At the higher interest rates investors were hesitant to invest as it affect the returns and the market volatility. However. among others.sebi. 2012 from https://www.6 percent of the fiscal year 2011 to 2012) of the budgeted 7 target . This GDP growth rate is lower compared to 6. All the participating parties rarely agree on any particular conclusion quickly and as a result. With this dismal growth rate. Government cannot cut expenditure side because of various reasons like. For example.yahoo. euro-zone debt crisis and high interest rates. Schoemaker (2011). greater concern for foreign investors is the cut in interest rate through repo and reverse repo rate. This may be due to higher subsidies in food and fertilizers. in 2010 to 2011).9 percent compared to 8.Qasemi (2009). deregulation of oil prices.RBI again dropped the CRR to 4. In India it is often seen that the coalition government cannot take strong economic policy decisions because of conflict among the allies. this change in CRR will infuse approximately Rs.Htm.finance. Accessed on May 2. This is also the lowest GDP growth rate in last three years.5 per cent effective January 28. in January 2012 India recorded a negative food inflation which encouraged RBI to reduce the cash reserve ratio(CRR) by 50 basis points from 6per cent to 5. it would be tough to achieve the yearly GDP growth rate of 7.in/html/data1202.e.9 percent GDP growth rate in the previous quarter and 8.4 percent GDP growth in the same period 8 last year .6 per cent (compared with 94.com/news/rbi-surprises-50-bps-rate053518529. This paper applied PEST model to identify the probable forces that can have an overall impact on the growth of Indian economy. Accessed on March 16. sometimes the regional parties act as a hindrance for enacting any strategy for their regional political benefits. a low agricultural production. GDP growth India’s GDP growth slowed to just 6.Shome and Gaur 26 It is used to study the various macro-environmental factors that influence the market conditions. In case of India. However. elections in different states and also forceful pressure from the other parties within the coalition.gov.3 percent GDP growth rate in the same quarter last financial year. However. please see Thomas (2007). setting up an effective Lokpal Bill. internal debates within the government have been observed India in last few months related to the issue of hike in railway fares. During the April to February period a year ago (i. Again.nic.gov/library/publications/the-worldfactbook/geos/in. Inflation Inflation is a necessary evil but it should always be moderate. Different ideological upbringings of the political parties are also a reason for this confusion. The cumulative GDP growth rate for the financial year 2011 to 2012 stood at 6. slip in industrial production and increased global oil price especially from January to March 2012 has resulted in high inflation rate.75 percent in the beginning of March 2012 to further increase liquidity10. high inflation. it affects the decision-making process which sometimes affects the investment process. This model is a useful tool of preliminary analysis. the fiscal deficit was 68. Sometimes the intensity of disadvantages is more than its advantages if not properly managed. According to RBI estimates.jsp 10 Accessed on April 17.
falling from the level of Rs. the government had to roll back their decisions. After staying in a band of Rs. 54.1 percent of the GDP and the growth rate to be 7. India’s reserve position in the International Monetary Fund (IMF) fell by $2.jsp?s=fii Accessed on May 10. (ix)rural transformation and sustained growth of agriculture. J. (vii) securing the energy future for India. However. 2011). the rupee has depreciated by 13 per cent.in/data/datatable/index. railways. manufacturing and aviation.org. (v) decentralization. To tackle with the current account deficit import duty on gold has been increased which in turn will reduce gold imports as it contributes major portion to deficit apart from oil.aspx?Id=16826 14 Accessed onMarch10. It has also taken initiatives to tackle the major problems by the various measures like fiscal consolidation policy. In the last quarter of 2011 alone. 2012 from http://www. Technological advancements have shown a substantial growth concerned with each and every field whether it be the communication systems. oil subsidy target to be under two percent of the GDP. but it will also increase the imports15.01 billion and as a result the Forex Reserves dropped to $292.nic. (xii) better preventive and curative health care.7 billion.6 percent. According to the Union Budget of 2012 to 2013. with the relentless pressure from the jeweler associations. the rupee has been on are relentless slide vis-a-vis the dollar since then.in/scripts/WSSView. (vi) technology and innovation.1 crore.php?data =datatab . Rupee depreciation The Indian rupee has been mauled nearly 20 per cent in the last one year. empowerment and information.5 billion.in/sebiweb/investment/statistics.4 12 billion . Manmohan Singh is trying for a fast pace implementation of reforms encouraging huge investments from both domestic and foreign players.org. 46 in 2010 and for most part of 2011.Anti-corruption movement of Anna Hazare gained a significant attention from global media. the fiscal deficit is targeted to 5. 2012 from http://planningcommission. electronic devices of daily usage. And the downslide is unstoppable.aspx?Id=16803 13 Accessed on January 20.zerohedge. Special Drawing Rights (SDR) declined by $4.” 15 ibid Accessed on January 13. automobiles. increased turnover limit for tax exemption to SME’s from Rs. India faced two major financial scams like 2G Spectrum and Commonwealth Games. many foreign investors lost their confidence on the government which showed a drastic fall in FII for the period 2011 to 2012 14 . India is ranked 95th among 183 countries on Corruption Perception Index (CPI) in 2011 as against 72th rank in 2007. (xi) improved access to quality education. It includes: (i) enhancing the capacity for growth.the second most problematic factor for doing business in India after inadequate supply of infrastructure is corruption (Schwab. However. (x) managing urbanization. (ii) enhancing skills and faster generation of employment. The tax removal may boost the demand for gold in India. building 11 12 and architectural design techniques or the computers. indirect tax relief for sectors under stress such as agriculture.60 lakh to Rs. India is still far behind than many developed countries with respect to research and development. 45 in August 2011 to Rs. Acc. Technological advancements There have been much advancement in technology and science in the recent years. infrastructure. and. Social factors During the year 2011. It refers to some core areas that require new approaches to produce the desired results. Manage.62 billion13. to 8 percent11.8 million to $2. According to World Economic Forum’s Global Competitive Report 2011 to 2012.gov. 2012 http://rbi. Indian government needs to do much more to change the face of Indian science and technology.in/scripts/WSSView. (iii) managing the environment.This has forced India’s government to use its foreign exchange reserves (FOREX) of $1. The Planning Commission released an approach paper consist of “Twelve Strategy Challenges” to initiate consultations for the 12th Five Year Plan 16 . Therefore.27 Res.sebi. Bus.30 as of 15 December 2011. 44 to Rs. 2012 fromhttp://rbi. 2012 from http://www. the amount of reserves in gold remained stable at $26.com/news/india-folds-gold-excise-taxindian-gold-restocking-imminent 16 Accessed on March10. (viii) accelerated development of transport infrastructure. GOVERNMENT INITIATIVES The Indian government lead by the Honorable Prime Minister Mr. (iv) markets for efficiency and inclusion. As a result.7 million to $4. However.
this paper provides a broad framework of policy initiatives that the government may pursue in the next five-year period to achieve the desired growth rate. This might be because of poor government policies. Similarly. According to Desai et al. lack of awareness. Currently most part of expenditure goes on subsidy side rather than investment in agricultural research and development. Revamping of tax collection system The procedure of tax collection in India has evolved over the years and is now subject to several acts. rules. as laid down by the Indian Income Tax department. It will be a dual tax in the form of Central GST and State GST component (MoF. Again. labour intensive technology) will show a movement of surplus labour from the agriculture sector to industrial sector and therefore it will decrease the disguised employment problem in agricultural sector. term deposits and amount deposits in the banks instead of buying gold products. It was subsequently extended to all the districts of the country. has substantially reduced the problem of rural-urban migration (Shome et al. 2012). The objective of the Act is ‘enhancement of livelihood security of rural households by providing at least one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work’. Development of rural non-farm sector There is an urgent need of developing a strong industrial base in the rural areas to boost the economic performance of the country. crucial support of the Unique Identification (UID) or Aadhaar Cards is required. 28 percent solely in off-farm work. as discussed earlier. More importantly there should be an improvement in agricultural education for farmers to improve farm production. As money invested in gold does not circulate in the economy.. at this juncture when the Planning Commission is preparing the plan document for the 12 five year plan (2012 to 2017). This is completely information technology enabled system of tax collection. However. Introduction of GST Introduction of Goods and Services Tax (GST) system can be an important policy decision by the Indian government to integrate central and state indirect tax regime. In implementation of this policy. However. by guaranteeing employment within rural areas. They should be educated about the benefits of connecting to financial system of the economy. 17 th A major proportion of the tax revenues are lost due to unorganized trade activities and improper records by the business and trades which in turn creates a huge revenue loss for the government. and 21 percent engaged in both. So the Government needs to make well advance plans to educate the stakeholders and to make it a success. Reduction of subsidies It is the appropriate time to cut subsidies on goods like petroleum products and increase indirect taxes to deal with the current fiscal deficit. Financial inclusion There is need to educate rural people and create awareness among them about the financial inclusion. investment in rural infrastructure such as roads and transportation will also help to develop better connectivity with big cities and towns. MGNREGA was enacted on September 2005 in India. People should also be encouraged to buy financial products such as insurance policies. . The paper proposes the government to make changes in the mechanism of tax collection system. The policy of direct subsidies transfer in the form of cash to farmers through banks should be implemented soon and the focus should be more on agriculture investment rather than subsidies. animal care and farm labour. and regulations. Mahatma Gandhi National Rural Employment Guarantee Act 17 (MGNREGA). 2011). inability of small firms and enterprises to maintain records or procedures. 51 percent of employed rural men are engaged solely in farm-oriented activities including own account cultivation.Shome and Gaur 28 PROBABLE SOLUTIONS As a part of the objective this paper made an attempt to touch upon all relevant issues which are affecting the growth of Indian economy. (2010). it may be difficult for the government to implement this because of the coalition structure. It was first brought into force with effect from February 2006 in 200 of the most backward Indian districts. Tax system should be simple to understand even by a common man and it should also be easy to make payment of taxes without requiring much of technicalities. The growth of rural non-farm employment (mainly. This might be a challenge for small tax payers in migrating to GST because of inadequate resources and skills. effective rural development projects and programs can change the demographic trend of migration. poor technical and accounting skills of small enterprises. For instance.
Thomas H (2007) “An Analysis of the Environmentand Competitive Dynamics of Management Education”. R Vanneman (2010).html Ministry of Finance (MoF) (2011). 26(1): 9-21. The reforms in industrial sector will lead to reallocation of surplus labour from farm sector to non-farm sector in rural area. Simplification of tax system will help in generating more revenues for both the Centre and the States which in turn will address the problem of budgetary deficit.in/GST/IT_Strategy_for_GST_ver0. Manage.85. India Human Development Survey. “Techniques in Innovative Policy Making: Example of National Rural Employment Guarantee Act in India”. Int. New Delhi. “The General Environment”. The probable solutions suggested in the paper are subject to a strong political will. the process of implementation should be properly planned. tax collection processes. It will be a good step as India has 1.55 lakh post offices all over the country. Joshi M Sen. Schoemaker PJH (2011). therefore people should be encouraged to open more saving bank accounts. A Dubey BL. Report of the Empowered Group on IT Infrastructure on GST. Shome S (2011). there is strong need of economic and social reforms in different sectors including non-farm employment. This may be an easy way to approach the unbanked population of India. However. Dev. J. “The IT Strategy for GST”. Mr. In this context. Manage. CONCLUDING OBSERVATIONS India is going through a tough phase where the GDP growth rate is subsiding continuously. Government of India. This paper is particularly important at a time when India is undergoing substantial macroeconomic crisis.29 Res. Kapil Sibal suggested that all post offices should be commercialized and they should be given banking license so that postal offices will be converted to ‘postal banks’. The PEST analysis reveals a gloomy picture of the Indian economy where coalition government is unable to take decisions efficiently and effectively. A Shariff. Geneva. Public Admin. The Minister of Communications and IT. “The Global Competitiveness Report 2011-12”. .edu/report. 34(5): 267-278.nic. Acc. Oxford University Press. Bus. J. financial inclusion programs etc. Understanding Strategic Management.ity Press.. “PEST Analysis in Strategic Human Resources Planning”. Chapter 2. which will improve the employment scenario.umd. Introduction of GST and reducing subsidies will also be a good move in the same direction.pdf Qasemi HR (2009). REFERENCES Desai SB. http://finmin. http://ihds. Islamic Azad University of Iran. Oxford UniveRs.. Schwab K (2011). “Human Development in India: Challenges for a Society in Transition”. J.World Economic Forum.
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