A surprising but the fact is that the Indian
Economy grew at the rate of around 8% till 2011-12; quite opposite to the
general perception. This reality does therefore give a hope that nothing much
has slipped out of our hands in terms of the Indian Economy. It was just one
year back we were crunching average 8% growth per year that too continually
since 2005. A well deserved appreciation for the economy which was known for
the ‘Hindu Growth Rate’. This is just opposite to the wide spread criticism of
late, for the Indian Economy not only in India but across the world.
First,
let us look into what all made India achieve ‘Accelerated Growth Rate’.
Primarily the reason of this continuous feat for a
period of 7-8 years was that every single sector contributed to the growth. Although,
the blue-eyed services sector which made it largely possible, others were not
left behind. However, other two sectors which contributed immensely to this
success were agriculture and manufacturing. Manufacturing sector grew at a
reasonably unexpected rate, particularly in the watershed year of 2011-12 it grew
at the rate of around 7.4%. Agriculture grew at
the rate of around 3.6% in the same period. Other economic factors which helped
India achieve the feat were its domestic savings rate, making Indian economy,
one of the fastest growing economies. What came handy was enough money making opportunity and Indian habit of
saving money. Country reached to its
highest ever level of domestic savings of 36.8% and Investment Rate of 38.1% of
the GDP, respectively in 2008. The ICOR i.e. Incremental Capital Output Ratio
was maintained till the year 2012 at the level of 4:1. ICOR is the ratio to
know the efficiency of the investment. Higher the ICOR, lower the efficiency of
the investment.
What went wrong in last two years?
This analysis will let you
know real reasons of downfall in last two years. Such introspection hopefully
will help the country, in reverting the trend as it would not be difficult for
resilient Indian Economy to bounce back to the ‘Accelerated Growth Rate’ of
8%+.
As per old proverb, money
makes money. It stands correct in case of Indian economy or any other economy. When country started making money, habit of
savings, made it possible to save. Saved money was rotated back into the
economy. It therefore, means that any weakening of this cycle, will lead to
breaking the momentum in the economy. It
is all that happened, post 2008. World economic crisis, led to low FDI, low
sentiment in the corporate. General public which was happily spending the money
a couple of months before crisis, start hoarding the money. Resulting into slow
growth rate, in short.
Let us look at reasons more
based on Economics theories. The capital in an economy primarily comes from
three sources: household, corporate and government savings, called domestic
savings. In last two years, available data shows that although not much change
has happened with respect to household savings but other two savings i.e.
corporate & govt have gone down drastically. India savings rate which
peaked at 36.8% of the GDP in the year 2008, stooped to 31.3% in 2012 and again
to 30.1% in 2013. A big change was in
the nature of household savings. It moved significantly from financial savings
to physical savings.
This all made situation little
complicated. Market saw short supply of fresh infusion. Further complication
surfaced when supply of coal to manufacturing and power generation plants
became a challenge due to cancellation of mines/litigation cases. Infrastructural
projects which were backbone of employment generation, started spinning off the
track. It resulted in negative change in ICOR that hovered at the level of 5.4%
to 11.4%. ICOR is the index of efficiency of investment. It gives the
indication that investment capital accumulated in projects is not yielding
commensurate output. Overall domestic savings dropped to 30.1% and Investment
Rate to 34.8% of GDP in 2012-13. This is
due to increase in the negative savings by the Government, the decline in
profitability of private players and decline in net financial savings of
households. The widening gap between the savings and investment rate, resulted
in all-time high CAD of 4.8% of GDP in year 2013.
Furthermore, investment rate
which is a function of CAD and saving rate bore the brunt at both the levels.
CAD gone to unexpected high level and saving went down as mentioned above.
Future is bright for sure!!!
Green shoots however, can be
seen in the Indian Economy in last couple of months. We have to water to make
these shoots to grow into big tree again, together.
In last three quarters of the
year 2013-14, the economy has grown by 4.9% rate. The manufacturing sector has
started giving better than expected results. Picture of Agriculture sector is
better than the year 2012-13. Food inflation which was turning out to be an
issue of late has started residing in background. Economists are hoping to close
the year at around 5% growth rate. Not bad at all, keeping the size of the
Indian Economy.
Investment rate is still at
commendable level of 30.4% of GDP, now. But, ICOR has to be brought back to the
level of 4:1, as was the case till 2013.
Government however, has to
work on retaining CAD to the level of 4.2 to 4.8% of the GDP. It has to further
move out of populist measure like subsidies, no matter what. Keeping the
disparity of ‘have & have not’, the government although has to continue
with its subsidy measure, but it should be restricted to food subsidy and
should slowly move away from others. The target should be to retain it at the
level of 1.2% of the GDP from the current 2.2%.
Other specific areas for
government to focus are:
i.
Infrastructure
sector has to be made viable by infusing better liquidity. Projects which got
de-railed of late, fist should be brought back to normalcy level. No further
delays to be tolerated.
ii.
Some specific
measures should be taken to make free agriculture sector from the shackles of
uncertainties.
iii.
Power is another
area which needs immediate attention. Any unavailability effects manufacturing
directly.
iv.
Reforms need to be
pushed forth with undeterred attention. Reforms in the following areas are
already late beyond general comprehension:
a.
Land Acquisition
It has been a tussle point between general public
and growth. Without easy land availability, how country, shall provide required
land for infrastructural development.
b. Environment
Fortunately, we have fuel for our required fire. We
as a country are sitting on huge natural resources of coal etc. We need to be
cautious & careful only to extract it as it is unfortunately available under
our green belt. Although, some compromise has to be made while mining coal as
these are available in dense forests cover of the country. Any unscrupulous
action can lead to havoc to the environment.
c.
Governance
Governance is not only the responsibility of the
government. Private sector has to take serious steps to ensure its compliance,
as well.
d.
Labour Reforms
This is another area which needs immediate action.
Economy today does not rest on steady requirement of labour supply. There are
many employment opportunities which can be termed seasonal and therefore, these
types of companies should be able to hire & fire as per their requirement.
Adjustment to labour requirement should be made possible, as it is followed in
countries like Germany.
For example, textiles industry is extensively
labour intensive industry. Of late, India has started losing its importance, as
countries like Bangla Desh came into fight as they have industry favouring
labour laws. Flexibility of hiring & firing is available to them.
Looking at the trend of economic indices, India
will shine again.
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