GDP Recovery Inadequate

• 09 Jun 2023

This editorial is based on Latest GDP estimates which was published in The Indian Express on 07/06/2023. It talks about the momentum of the underlying drivers of growth is not strong enough and there is need to address the challenges.

For Prelims: GDP, MGNREGA, GDP Per capita, investment-to-GDP ratio, Purchasing Power

For Mains: Challenges of economic growth, formalisation of informal sector, Inclusive growth

India's latest GDP estimates have exceeded even the most optimistic projections, leading to upward revisions of economic growth estimates for the ongoing financial year. India's GDP estimates indicate a recovery from the depths experienced during the pandemic.

However, the recovery is not adequate with challenges persisting in rural demand, manufacturing performance, household expenditure, informal sector's growth, investment patterns, depressed household expenditure, and economic loss pose challenges to the country's growth prospects. Resolving these contradictions is crucial for achieving sustainable and balanced economic growth.

Why is GDP Recovery Challenging?

• Subdued Rural Demand despite Agricultural Growth:
  • Rural markets lagging:
    • Despite robust growth in the agricultural sector, rural demand remains subdued, with volume growth in rural markets remaining sluggish.
  • Per capita earnings weighed down:
    • Increased engagement of workers in the farm sector results in lower per capita earnings.
  • Poor performance of the non-farm sector:
    • The non-farm sector, which contributes significantly to rural household incomes, is possibly faring poorly.
    • Work demanded by households under MGNREGA, though fallen below as observed during the Covid years, remains well above the pre-pandemic levels.
    • In 2022-23, 8.76 crore individuals worked under the programme, as compared to 7.88 crore in 2019-20, and 7.77 crore in 2018-19.
• Industrial Sector Slowdown and Manufacturing Performance:
  • Industrial Sector Slowdown:
    • The industrial sector, especially manufacturing, has significantly slowed down.
    • Manufacturing sector growth for the full year was a mere 1.3%, despite a turnaround in the fourth quarter.
• Rise in Informal Sector Employment within Non-Farm Sector:
  • Informal Sector Employment:
    • The share of workers engaged in proprietary and partnership enterprises (informal sector firms) within the non-agricultural sector has increased from 68.2% (2017-18) to 71.8% (2021-22).
    • The rise in informal sector employment contradicts government efforts to formalize the economy and boost employment opportunities.
• Investment Activity and Current Account Dynamics:
  • Healthy Investment Growth:
    • Investment activity experienced healthy trend, with the investment-to-GDP ratio reaching 29.2% (2022-23).
  • Household Sector Driving Growth:
    • Two-thirds of the increase in the investment ratio was driven by the household sector, followed by the public sector and private sector firms.
  • Possibility of Current Account Surplus:
    • The recent GDP data suggests the potential for a current account surplus or a minimal deficit, indicating weak investment demand relative to savings.
• Depressed Household Expenditure and Impact of Inflation:
  • High-end Spending vs. Overall Household Expenditure:
    • Spending on high-end goods and services has grown, while overall household expenditure remains depressed due to subdued spending by lower and middle-income households.
  • Low Income Growth:
    • Limited opportunities for productive employment and low-income growth contribute to suppressed household expenditure.
  • Inflation's Erosion of Purchasing Power:
    • Steady inflation erodes the purchasing power of households, constraining consumption.
• Economic Loss and the Uneven Recovery:
  • Real Growth Shortfall:
    • Compared to the pre-pandemic trend growth, the Indian economy's real growth remains lower than current levels, signifying an economic loss.

What are Key Drivers of Economic Growth?

• Investment:
  • Investment in physical infrastructure, machinery, technology, and human capital is a key driver of economic growth.
  • It leads to increased production capacity, efficiency, and innovation, resulting in higher productivity and output.
• Technology and Innovation:
  • Technological advancements and innovation drive economic growth by improving productivity, creating new industries and markets, and enhancing competitiveness.
  • Investments in research and development (R&D) and technology adoption contribute to economic expansion.
• Human Capital Development:
  • Education, training, and skill development are essential drivers of economic growth.
  • A well-educated and skilled workforce is more productive, adaptable to new technologies, and capable of driving innovation and entrepreneurship.
• Trade and Globalization:
  • International trade and globalization play a significant role in economic growth.
  • By expanding markets, facilitating specialization, and promoting access to resources and capital, trade can enhance productivity, drive economic efficiency, and create employment opportunities.
• Infrastructure Development:
  • Adequate infrastructure, including transportation, communication, energy, and sanitation, is crucial for economic growth.
  • Well-developed infrastructure reduces transaction costs, facilitates the movement of goods and services, and attracts investments.
• Institutional Framework:
  • A strong and efficient institutional framework is vital for economic growth. It includes the rule of law, property rights protection, transparent governance, efficient legal systems, and a business-friendly environment that fosters entrepreneurship and investment.
• Macroeconomic Stability:
  • Maintaining macroeconomic stability through sound fiscal and monetary policies, low inflation rates, and exchange rate stability is critical for fostering an environment conducive to investment, trade, and economic growth.
• Entrepreneurship and Innovation:
  • Entrepreneurial activities and innovation drive economic growth by creating new businesses, products, and services, generating employment, and fostering competition and market dynamism.

What are the Possible Solutions?

• Boosting Rural Demand:
  • Enhance the non-farm sector in rural areas through targeted policies and initiatives to stimulate growth and employment opportunities.
  • Improve infrastructure and connectivity in rural regions to attract investments and promote economic activities.
  • Increase access to credit and financial services for rural households and entrepreneurs to encourage entrepreneurship and small business development.
  • Implement measures to bridge the income gap between the farm and non-farm sectors, ensuring equitable distribution of economic benefits.
• Reviving the Manufacturing Sector:
  • Implement sector-specific policies to incentivize manufacturing, such as tax incentives, simplified regulations, and ease of doing business reforms.
  • Encourage innovation, research and development, and technology adoption in the manufacturing sector to enhance productivity and competitiveness.
  • Strengthen skill development programs to address the skill gap in the labor force and align it with the requirements of the manufacturing industry.
  • Facilitate public-private partnerships and collaboration to attract investments and promote industrial growth.
• Formalization of the Informal Sector:
  • Introduce policies and programs to promote the formalization of informal sector enterprises, such as providing access to finance, simplifying registration procedures, and offering incentives for compliance.
  • Enhance the social security net for workers in the informal sector to improve their income security and overall well-being.
  • Foster an enabling environment for informal enterprises to transition to the formal sector by providing business development support, training, and access to markets.
• Addressing Income Inequality and Boosting Household Expenditure:
  • Implement progressive taxation policies to redistribute income and reduce wealth disparities.
  • Enhance social welfare programs and safety nets to provide support to low-income households and vulnerable groups.
  • Increase investment in education and skill development to empower individuals and improve their employability.
  • Combat inflationary pressures through effective monetary and fiscal policies to protect the purchasing power of households.
• Monitoring and Evaluation:
  • Establish robust mechanisms to monitor and evaluate the effectiveness of implemented policies and interventions.
  • Regularly assess the impact of policy measures on key economic indicators and make necessary adjustments to ensure desired outcomes.
  • Encourage research and data-driven decision-making to inform policy formulation and implementation.

Drishti Mains Question:

Discuss the key challenges faced by the Indian economy in achieving sustainable and inclusive economic growth.

UPSC Civil Services Examination Previous Year’s Question (PYQs)

Prelims:

Q1. Which of the following can aid in furthering the Government’s objective of inclusive growth?(2011)

1. Promoting Self-Help Groups
2. Promoting Micro, Small and Medium Enterprises
3. Implementing the Right to Education Act

Select the correct answer using the codes given below:

(a) 1 only 
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Ans: (d)

Exp:

• Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits reaching every section
• of society.
• This concept expands upon traditional economic growth models to include a focus on the equity of health, human capital, environmental quality, social
• protection, and food security.
• Promoting Self-Help Groups, MSMEs, and implementation of the Right to Education Act, all aid in furthering inclusive growth.
• Therefore, option (d) is the correct answer.

Q2. Consider the following statements: (2017)

1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.

Which of the statements given above is/are correct?

(a) 1 only 
(b) 2 only 
(c) Both 1 and 2
(d) Neither 1 nor 2

Ans: (d)

Exp:

• Tax revenue as a percentage of GDP has not steadily increased in the last decade instead it has remained almost steady around 10-13%. Hence, statement 1 is
• not correct
• It provides common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, and a common system of classification of goods and services that will lend greater certainty to the taxation system.
• It will boost export and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth; but it is not necessary that it will enable India to overtake China in the near
• future. Hence, statement 3 is not correct.
• It might decrease Current Account Deficit (CAD) by boosting exports and bringing more FOREX.
• But, it is not necessary that there will be drastic change in the reduction of CAD. Hence, statement 2 is not correct.
• Therefore, option (a) is the correct answer.

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Mains:

Question: Despite Consistent experience of high growth, India still goes with the lowest indicators of human development. Examine the issues that make balanced and inclusive development elusive. (2019)