Saturday, 15 March 2014

Indian Economy: Reviving the Growth

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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