India Economy

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India Economic Growth in Last 57 Years
A good way to measure economic growth is taking a look at the GDP growth. The following table provides approximate figures regarding various facets of India’s GDP from 1960 till 2016:

YearGDP (current US$) in TrillionsGDP growth (annual %)GDP, PPP (current international $) in Trillions

Key Factors Hampering India’s Economic Growth At present the Indian economy is facing several crises such as reducing GDP growth rate, gradual devaluation of national currency, and significant rates of inflation. The ongoing financial crisis in the western hemisphere can be blamed, to a certain extent, for India’s present predicament. In fact, Brazil and China are facing a similar situation as well.

In the 2011-12 fiscal, net inflows in India have gone down to 0.6 billion dollars during the months of April to October. At the same period in 2010-11 fiscal the corresponding amount was $27.5 billion. The present crises being faced by India are signs of its weak economic base.

All these problems are related to each other and will have to be solved through policies that are well coordinated and consistent. The RBI is not the only one to blame here, nor can it be expected to solve all the problems by itself.

The fact that the INR is experiencing a free fall is not surprising. From 2008 onwards the inflation rate in India has been higher than the rest of the world put together. Thus it is expected that the rupee’s value will be decreasing in order to have a consistent rate of real exchange.

Its value will be good enough only if it is able to draw high amount of net foreign inflow. The situation could have become worse but for India’s substantial reserves. If India looks for alternate arrangements like an East Asian backup pool or agreements with other leading reserve banks in the region, its financial reserves will be far lesser. However this, at present, is a matter of future.

One of the major problems impeding India’s growth is the overall economic slowdown and the absence of political coordination for going on with the reforms that are urgently needed at this time. The recent problems regarding FDI in retail shows that political groups may not be willing to let necessary reforms take place seamlessly.

At present several important reforms such as land acquisition and insurance are stuck in the Parliament and the states have withheld the GST. There are zero chances of reforms in the labor sector. The condition of the national currency is such that exports are a better prospect than imports and at present offer the maximum opportunities for an economic restoration.

Investment is expected to be a problematic area thanks to the financial condition of major companies in India and the future of India’s exchange rate. Experts feel that it will be tougher to deal with inflation with a weak currency. There could be either a major financial deficit or higher inflation in view of the present condition.

Inflation had always been a major problem even before the INR’s devaluation started. It can be safely said that the Indian currency weakened as a result of inflation and not the other way round. Other major problems for India have been its weak economic policies and high fiscal deficit.

A financial stimulus program was run after the global financial meltdown of 2008. This program was successful in taking the growth rate to 8 percent from 2009 to 2011 but it also contributed to inflation as several bottlenecks were created in the supply side of things thus making it significantly lesser than the demand.

The RBI decided to deal with the situation by hiking the interest rates, which was a reversal of its stance but this only contributed in slowing the economy even more. The market is still pretty liquid but the uncertainty regarding policies has meant less investment.

A majority of government expenses is taken up by the wage bill, which is increasing steadily, and the subsidy payments that are going up as well. Both these factors are only contributing to higher inflation.

India’s food inflation has gone up owing to PDS negligence – a substantial portion of the country’s food grains has been damaged owing to factors like transport crunches and inadequate storage facilities.

The administration, as per the experts, needs to combine better storage with judicious usage of private stock holdings and better purchase deals in the global futures markets. It is expected that the new FDI retail law will help improve the way margins and losses are dealt with.

Now the question that comes up is how can India achieve the growth rate during 2002-2007 fiscals? Simple steps like increasing taxes and reducing expenses will not be sufficient – these will only help in avoiding any trouble but the economic growth will be lower.

Experts opine that the administrators should come up with new reforms that will bring back confidence in national economy. A 3 year time period will be necessary to reduce deficit through reforms in the tax structure and restructuring the expenses. The following reforms are urgently needed as per the analysts:
  • Land acquisition
  • GST
  • Labor laws
  • FDI in retail
Red-tapism needs to be reduced and the SMEs have to be provided greater access to financial services. It is expected that these factors will help India climb the growth charts again.

It is expected that the Indian leadership is aware of what needs to be done in this situation. The major challenge is however, going to be dealing with legalizing these changes. If this is not done then India will only have experienced good economic growth for a short period of time.

Future of Indian Economy
In the past few years Indian economy had been growing in double digits but in the previous fiscal its growth rate has come down to an unimpressive 6.5%. The newest statistics show that its mining sector has virtually stopped growing and car sales and industrial production have decreased. The inflation rate, on the other hand, is increasing by leaps and bounds.

Fitch, a prominent ratings agency, has already decreased its prediction for Indian economy to a negative one. It had further stated that India’s economic growth is facing a lot of risks.

It has stated categorically that if proper structural reforms are not made quickly then India’s economic growth rate will go down even further. Standard & Poor’s is set to reduce India’s investment rating to the junk level. It has said that India could be the first of the BRICS member that fell from grace, so to speak.

The latest 2012 Global Economic Prospects Report of the World Bank states that factors like stuck reforms, inadequate electricity, and governance issues have stalled India’s progress. The situation only seems to get worse for the UPA alliance that is ruling the roost at the moment.

Prime Minister Manmohan Singh has been trying his best to retrieve the situation with promises of governmental emphasis on infrastructural improvement through private-public partnerships.

However, the government has gone back on several reforms such as liberalizing the retail fund, which has been expected for a long time now and all these have caused some major credibility issues for it.

Macquarie Fund, from Australia, has been trying to invest in India’s infrastructure sector and had also generated 1.2 billion dollars in 2008 but till now has been able to spend only 67% of that amount.

The major issue is finding a project that has already started a fair bit of construction – the main reason behind this choice is that an advanced level of construction implies the project has successfully cleared governmental hurdles, which are the major problems plaguing the government contracts sector.

Andrew Mouat, an analyst with Macquarie Securities has appreciated the PM’s opinions but indicated at the same point – bureaucratic difficulties. He has even questioned their intention to follow what the PM has been saying.

He has stated that foreign capital is already hard to procure and if there are doubts regarding project delivery, it will only make matters far worse. However, he says that India is not facing a fund crunch. This is an important observation, given the fact that international investment is reducing and S&P has made some dire forecasts.

Mouat has cited the instance of Gujarat that has been able to provide a proper framework for investment and offer good project delivery prospects. India, at the moment, is at an interesting point and has been witnessing the simultaneous entry and exit of international companies.

Recently, the German organization Fraport, who specialize in operating airports and are the second biggest in the world when it comes to investment in airports, has announced that it will be leaving the Indian market. It has already waited 6 years for opportunities to invest over here.

The PM had promised that more airports will be privatized but that was not enough to make them stay as such promises had been made before as well. Ansgar Sickert, chief of Fraport’s India operations, states that when they came to India they were pretty keen on investing in the market as they believed that it had a lot of potential.

However, the government has not been able to realize its promise of privatizing airports in the smaller towns of India and this has put Fraport off. Telecom companies Etisalat, based in Abu Dhabi, and BTEL.BH, based in Bahrain, have had their 2G telecom licenses canceled by the Supreme Court and thus exited the Indian market.

Telenor, a Norwegian government funded organization, has put in 2.5 billion dollars in India but its licenses were cancelled as well. It has expressed its willingness to leave the country.

Fidelity Worldwide, a major US based mutual fund, and New York Life Insurance have already sold their shares in India and other companies of their ilk are expected to follow suit.

Nomura, an organization specializing in global business analysis, has stated that in 2011 MNCs have withdrawn 10.7 billion US dollars from India. The amount for 2010 was $7.2 billion and for 2009 it stood at $3.1 billion. The incoming amount for India in 2011 was $36.5 billion.

Majority of this amount came from a couple of energy deals that were worth several billion dollars each. However, the S&P and Fitch ratings, which are expected to be negative, could reduce the foreign investment in days to come.

S&P have cited India’s lack of unity in leadership as the major reason behind its predictions. The reform plans of the Indian PM have been facing several hurdles such as fuel and food subsidies that are being supported by Sonia Gandhi, the President of Congress.

India is also suffering from the situation in Europe and the steps being taken by the banks to reduce liquidity. However, the general feeling among experts is that the government favors short term and populist decisions to deal with inflation instead of focusing for the long haul.

Analysts think that the situation can be retrieved if the government takes some difficult steps like doing away with the fuel subsidy that is becoming less sustainable by the day and allow total foreign investment in the retail sector. It also needs to implement a direct tax code and eliminate tax evasion and corruption.

Ruchir Sharma, a noted economist based in New York, is of the opinion that India’s economic depreciation is not because of indigenous factors as its improvement was not for the same reason as well. He has attributed the present situation to the global financial scenario.

Sharma feels that India could do well in future since its per capita income was approximately 1500 dollars. He opines that this can help them achieve double digit growth in the future. He has compared the situation with China that reforms its system every 5 years and also feels that this is the biggest warning India will ever get.

Last Updated on: November 15, 2017