Economy
Is India’s GDP Sailing South?
By Aryan and Gauri Singh
This article is a brief analysis of India’s economic performance in the recent past (until December 2019), particularly for the last five years. It analyses the important macroeconomic parameters viz. GDP growth rate, inflation, exchange rate movements, fiscal deficit, unemployment etc. The article aims to mull over the major challenges faced by the Indian economy in the period sans coronavirus.
Introduction
Whether the GDP is a good determinant of development or not has been a long-standing debate and India has been at the centre of the debate. This is where the line between economic growth and economic development is drawn.
While the extreme income disparities between the rich and the poor in India have remained constant, India has still managed to be amongst the top economies of the world. An attractive investment destination owing to the vast market and cheap labour, India has been growing at a good rate for some time now. However, there have been several hick-ups that the Indian economy has had to face along with several policy failures.
The government of India along with its central bank, the RBI, is fundamentally responsible to ensure fluidity and liquidity in the market. They control the Aggregate Supply and Demand to ensure that the economy stands at equilibrium and other macroeconomic determinants are under check. Ever since, the LPG reforms set in, India has remained on track for an unflattering long-term growth plan.
However, the growth witnessed in India is often called as ‘jobless growth’ wherein India is criticized for having missed the bus and moved directly from the agricultural sector to the service sector. In this transition, the lack of a robust manufacturing sector has given rise to India’s most detrimental economic issue of unemployment.
Falling of India’s GDP
After the success of the ‘Gujrat Model’, the Prime Minister of India, Narendra Modi, was called upon to bring his pro-economy policies at the national level and trigger economic growth. He can be credited for being able to do so for most of his tenure. Primarily, the export sector has boomed under his administration and now, India stands as a global power with respect to its export debts.
However, entering 2019 has not been easy for India as it has been caught under a wave of economic slowdown with its GDP faltering. Several sectors are going through an extremely lean phase putting India’s objective of building a $5 trillion-dollar economy under jeopardy.
On average, the GDP of India was on a rise till 2018 before it started to slow down due to several reasons. As per the report of RBI in August 2019, the real GDP growth in India peaked in 2016–17 but has been on a downfall in 2017–18 and diminished to a five-year low in 2018–19.
Moreover, the RBI in its report also documented the shift in economic growth over the years and provided that the GDP per cent increased from 5.7 in the period 2011–2014 to 7.5 in the period 2014–2019. Despite the average growth, the economy has entered into an economic slowdown post-2019 and as estimated, the growth rate is bound to drop from 8% to 5% in the coming months.
Economists have identified the after-effects of demonetization as one of the reasons for the shrinkage of the Indian economy. Moreover, the incorporation of Good and Service Tax (GST) and poor investments have all cumulatively led to the current economic situation in India. Therefore, going solely by the GDP growth rates, India is in a spot of bother as it approaches the next financial year. While poverty is a perennial problem, several prominent sectors like the automobile and real estate sectors have also shown a lack of consumer demand.
After contemplating one can see that another reason for an unhealthy investment atmosphere in India is the extremely low levels of inflation. While the consumers view the controlled and low level of inflation as a major success, the same doesn’t hold true for the economy and the investors. Low inflation rates ensure that the prices of products remain low, but it also points towards a bluntness in the demand and employment in the country.
India has been working towards controlling inflation in the country since it opened its economy in 1991. Since then, regulation and intervention into the market prices have been a policy priority for India, to ensure that the poor in the country do not suffer due to the rising prices. The same has also been successful as India has largely been able to control inflation to a large extent.
The average inflation rate has been on a constant decline since 2015 with a reduction of 0.93% in 2016. The reduction was even more in 2017 as the inflation rate fell by 2.45%, leading to the inflation rate to be 2.49%. Despite subsequent marginal increases in the following years, continuous low lying inflation rates continue to act as boon and boom for the Indian economy.
Before delving into the macroeconomic consequences of unemployment, it is also imperative to discuss the long-standing fiscal concerns in India. The increasing government expenditure, as propounded by Keynes in his theory on macroeconomics, must lead to efficient employment rates in the country. However, another problem that doesn’t exist in the discussion of such an ideal situation is the problem of inadequate taxation.
Prime Minister Modi has for long been stressing upon the lack of taxation collection in the country. Despite being among the biggest economies in the world, the tax collection in India is restricted to an extremely small percentage of the population. This exposes the income parity and also the high levels of corruption in the economy.
After the failure of demonetization in removing black money from the economy, it is imperative for the government to improve its tax collection to secure better levels of fiscal deficit. The only guiding light for India in this respect is its extraordinary export returns.
India has become an exporting hub and is amongst the prime exporters in several sectors. The recent surge in the demand for Indian pharmaceuticals shows the global dependence on Indian products. The same has added immensely to India’s forex reserves. To put it into perspective, the increasing exports under the current government has risen the growth rate by a whopping 8.73% in 2018–2019.
Coming to the dark spot of the Indian economy; macroeconomic theories have not been able to support the large and perpetual problem of unemployment in India. The macroeconomic theories have come under fire mainly because they lack the essence of pragmatism. While the population is the key factor, lack of job creation is another. The proof of the same is that there are several skilled labourers unable to find a suitable job owing to the extreme shortage of employment opportunities. The ever-rising problem peaked in 2019 as unemployment rate spiked to over 7.5% causing major anxiety among the rural and urban youths.
Post demonetization, a major policy error was exposed in the way people continued to lose their jobs. In the reports published by the Azim Premji Foundation, it reported that between 2016–18, more than five million workers were rendered unemployed. While India boasts of having the majority of its population as a youth, the alarming unemployment is something that it cannot be proud of. The unorganized sector is then the only option for skilled workers as they are willing to work for salaries lower than the minimum wages set by the government.
Therefore, prior to the sweeping effects of the COVID-19 struck India, it was already facing one of the deadliest slowdowns in recent history. Moreover, some of the policies like demonetization and the introduction of the GST framework has seen an irresolute response, causing the GDP growth rate to fall. Moreover, tax evasion and unemployment are two perennial problems of our country.
Conclusion
Henceforth, it is evident from the macroeconomic analysis of India’s performance in the last 5 years that India has seen an ambivalent response to its monetary and fiscal policies. The government has continuously failed to enforce tax laws stringently and provide an incentive for individuals to pay their taxes.
In such a respect, the indirect tax becomes instrumental and it is a challenge for the government to efficiently institutionalize the GST framework. Moreover, with India’s move to terminate all existing Investment treaties, promoting foreign investment in the country is also a challenge.
India is working on a proposal to form investor courts in India that would specifically deal with investment disputes. The same may be instrumental in improving the FDI framework in the country.
Aryan, Third Year Undergraduate Law Student, Jindal Global Law School.
Sonipat Gauri Singh, Second Year Undergraduate Law Student, Durham University, UK.
