You are on page 1of 3

Indias Economic Woes By Dr. Ashfaque H.

Khan India is witnessing experiencing what can only be termed an alarming economic downturn. A rapid slowdown in itsits economic growth slowing at a rapid pace, and depletion in its foreign exchange reserves depleting, have been compounded by itsa tumbling currency tumbling, yawning current account deficit yawning, and a crippling budget deficit. crippling and aA series of corruption allegations further damaging the credibility of the government have further exacerbated the situation. Such growing difficulties have given birth to a debate over of a repeat of the 1991 balance of payments crisis. What went has gone wrong in India? Why is a booming economy is witnessing burst all around? This is the subject matter topic of thise article. The Indian economy grew impressively at an annual average rate of 6.4 percent over the last three decades touching; it grew at an average rate of 7.7 percent during 2002 to 2011 and 8.5 percent per annum during 2008 to 2011. However, butit decelerated sharply to 5 percent in 2013. There are indications that growth may further decelerate to 4.5 percent in the current fiscal year. With aA sustained economic growth for over three decades, India succeeded in reducing its poverty from 50 percent to about 20 percent. Indias growth has however been remarkably unbalanced, with the services sector growing rapidly and they, industry growing too sluggishly to absorb labor. Alarmingly,, and agriculture on which 60 percent of people depend for their livelihood, registered a growth ofgrowing at barely 2.0 percent. Undoubtedly, Indias growth did not benefit the vast majority of its population. The services sector-led growth benefited largely to those who were engaged in the IT and Telecom Sector, specializinged in call centers, writing software for European companies, and providing back-office services for American health insurers and law firms and the professions like thesesimilar professions. In short, Indias growth benefited immensely those individuals who were immensely to highly skilled and talented .Indians. Indias manufacturing sector, which can has the capacity to absorb a large number of workersforce, did not maintain pace with services sector in terms of growth. As a result, its contribution to GDP declined from 17 percent in 1995 to around 14 percent today. On the contraryIn comparison, manufacturing accounted for about 34 percent of Chinas economy, making the latter more resilient in terms of growth.. Since the greatest beneficiaries of Indias growth have been the highly skilled manpowerworkers, it has worsened the income disparities in India. According to the latest National Sample Survey of India, the per capita spending of the richest 5 percent of urban Indians in 2011-12 was 15 times higher than that of the poorest 5 percent. Twelve years ago, this ratio was 12. Similarly, in rural India, the rich-poor disparity grew from 7 to 9 times. There appears to be little or no trickle- down effect of growth in India. In the largest democracy of the world, it appears that growth has not been democratized. Growth which is not inclusive, broad-basedGrowth, which is not inclusive, broad-based, and does not benefit the majority of the people is no of little good for countrys balanced development. Besides growth deceleration (Indias economic growth has slowed to 4.4 percent during April-June 2013 quarter), Indias currency witnesses has witnessed a free fall in recent months, losing 20 percent of its value and being adjudged as the worst performing currency in the emerging market. It is unlikely to regain the same strength as it maintained until a few months ago. Various domestic and external factors have contributed to the recent currency crisis in India. Growth slow down to 4.4 percent, widening of current account deficit to 6.7 percent of GDP, rising fiscal deficit to about 9 percent of GDP, double-digit inflation, weakening of the confidence of global investors on Indian economy, policy inaction, resistance to reform have all played important roles in the free fall of the Indian rupee as well as bringing Indias growth story to a premature end.

IOn external factors, as the US economy gains momentum the Federal Reserves are expected to start winding down theits bond-buying stimulus scheme, which has helped to fuel an investment splurge in Asias emerging market. The expectation of reducing $85 billion per month bond purchases by the Federal Reserves resulted in sucking the capital from the emerging market, including India. India is not alone in witnessing a free-falling in currency. From Turkey to South Africa, to Brazil, to Indonesia, most emerging countries are reeling under market pressure on their respective currencies. The worst is not yet over for the Indian rupee. The reaction in currency market will probably depend on how much the extent to which the Federal Reserves decides to reduce its bond purchases when it meets during September 17-18, 2013. There are indications that Indian rupee could hit 70 or 72 to the dollar between this month and early next year, a perceptible increase from the current level of 66-67 to the dollar. The depreciating rupee has caused prices of imported goods to rise and inflation to reach a double-digit. Along with unsustainable current account deficit, crippling budget deficit and slowing growth, India appears to be stuck in an economic mess for some time to come. Why has India landed in such a difficult situation? Indias economic growth is has been in a downturn for the last three years. It has been decelerating at a faster pace and yet did nothas failed to receive the attention of the government. Assuming that its growth momentum would last forever, India became complacent. and assumed that its growth momentum will last for ever. In the process, the government failed to address structural issues such as deteriorating physical infrastructure (roads, ports, electricity, etc) complex, and inflexible labor laws and business regulations. The government concentrated on growth per se and did not bother to look at the sources of growth. Prolonged fFailure to reform and strengthening of the infrastructure for quite some time has caused Indian growth to decelerate. Since the causes of slow down in growth are longstanding, quick recovery in growth is not on the horizon. India is in election mode and popular measures to win elections appear to be the priority of the government. Hence, structural reforms are likely to remain off the radar till a new government takes charge. In the absence of reforms and continuation of policy inaction to revive the economy, Indias economic owes woes are likely to persist. Given the demography of India, approximately one million new job seekers are entering the market every month for which Indian economy must grow at the rate of at least 7-8 percent per annum. Slower growth is therefore bound to generate fewer jobs, and hence the pool of unemployed, particularly youth will continue to rise. India is facing a serious policy dilemma. While slowdown in economic growth has triggered calls for easing monetary policy to help businesses and consumers get through this difficult period, the continued decline in rupee coupled with rising inflation and a large current account deficit have demanded tightening of the monetary policy. How to handleHandling this policy dilemma will be a challenging task for the new Governor of the Reserve Bank of India. When Ratan Tata, one of the countrys leading and most respected business leaders says that India has lost the confidence of the world, restoring global investors confidence will be yet another challenging task for the government. In sum, India needs to give attention to the quality of growth and not juston growth per se. It needs to address the issue of the large current account deficit by tightening monetary policy on the one hand and to curtailing non-essential imports on the other through tariff adjustments. It also needs to address the issue of crippling budget deficit by avoiding populist measures to provide subsidized food grain to about 810 million Indians with over trillion rupees of bills and that too, during the election year. Instead, if India spent trillions in strengthening infrastructure, it could will contribute to growth and will create jobs. The only constant is change. The country must continue to reform itself to cope with growing challenges. Postponement of reforms is bound to retard growth and create difficulties for the country. This is a lesson for all of us.

The writer is Principal and Dean of NUST School of Social Sciences and Humanities Islamabad. Email: ahkhan@nbs.edu.pk