India's Economic Policy: A Future Path

Jan 13, 20224 min read

Updated: Jan 21, 2022

Revisiting the past

The balance of payment crisis in the 1980s lead to an essential decision in India’s modern history — “The 1991 liberalization policy”. With 8th five-year plan being ‘indicative’ in nature, foreign investments flowed in from various parts of the world over the period which paved a path for India to be a global developing power in 21st century. The world got to notice the India’s rising power) when it tested the Pokhran-II (Nuclear Missile) in 1998. This opened a dialogue with US under the name — ‘U. S–India Civil Nuclear Agreement or Indo-US nuclear deal’. The success of the deal had effect of tail wind on India’s developmental ambitions. The flow of resources in every sector, implementation of progressive tax reforms and policies like Right to Education, Right to Information, Special Economic Zones etc., increased and stabilized the real growth in the economy. The rapid inclusive growth policies (average real growth being 7-8%) in the economy for the needy, led to a massive decline in poverty. India, in a span of 7yrs (2004-2010), lifted 140million people out of poverty. This is considered as one of the greatest achievements in the world. Eventually, due to corruption and the impact of 2008 crisis, the growth in the economy slowed down from 8.5% in 2010 to 5.24% in 2011 within shortest span. It regained its strength and came back to normal (8.26%) in 2016. The NDA-1 government’s ad-hoc policies (of demonetization, hurried GST) and their poor implementation had a negative effect, which in turn lead to a massive decline of growth in real terms, from 8.26% in 2016 to 4.04% in 2019.

Situation during and post COVID-19

With an unprecedented appearance of COVID-19 and a desperate necessity of country-wide lockdown, the economy fell into a pit. Growth being negatively impacted; every factor of GDP has added to adversity. Private consumption, a major component of GDP, fell from 20.24 in end of 2019 to 14.95 in 2020. Reduction in Pvt investment and hesitancy in government spending led the growth to further deter. After certain criticism, the government stepped in with a Covid-19 relief package (~20 lakh crore) by naming it “Atma-Nirbar” (i.e., self-sufficient). Although, the number seems to be big, but on an approx., only 1% of the GDP (in other words, 10% of package) was given to the public. All the other chunk was already under budgeted resources in the recent lapse budget session of 2019, under different schemes. Moreover, RBI played a major role with its monetary policy actions at appropriate times. The reduced interest rates and the loan moratorium provided, helped a lot of small and medium businesses from going bankrupt which also created a new problem — ‘rise in inflation’. Abundance of money supply due to interest rate cut increased asset prices, which in turn is widening the gap of income inequalities. Furthermore, experts have expected the growth to be in V-shape but due to second wave in April and May-2021, the recovery got pushed further. Late recovery leads to high opportunity costs and insufficient employment opportunities.

Future path

Going Further, Government’s priority should be to increase inclusive economic growth. Steps in this direction would help it achieve the desired goals economically and for a better society. The following things will explain what the government may consider in achieving the goal,

Welcoming the open-ness in the market rather being protective.
Implementation of an export friendly policy and reduction in high import duties on products which help in achieving the goal of self-sufficiency and inclusiveness.
Encouraging private sector participation by creating demand in the economy, amending certain sections and legal frameworks for easy flow of ease of doing business (i.e., areas of dispute settlement, judicial reviews, land laws etc.).
Implementing stable tax policies, inflation controlling policies and focusing on to reduce the widening gap of income inequalities.
Increase in negotiations and implementation of free trade agreements with developed and developing countries. Data suggests, there is a threefold increase in growth after implementation of free trade agreements. Such agreements would be beneficial for integration of world economies.
Increase of public investment in Human Capital, as large part of potentially skilled labor is being underutilized or not utilized at all. World Bank Human Capital Index placed India in 116 out of 157 countries. This in itself shows the need for such increase in Human capital investment.
Proper implementation of National Infrastructure Pipelines policy would yield better results in coming decade. Any blunt moves may lead to concentration of money supplied into the hands of big players.
Reduction in Non-Performing assets and write-offs would clear the balance sheets of banks for productive distribution of money supply by encouraging the asset turnaround businesses like restructure companies, which are predominant in global markets in reviving the potential businesses and in free movement of banking funds.
Enhancing the organized governance process for public sector units, especially nationalized banks. The RBI’s Consultation paper on banking sector suggested a due diligence, risk measurement and good governance techniques over PSBs to avoid any happenings of financial mishaps.
Increase of productive expenditure in areas related to the ills of food deprivation, Hunger and nutrition. Recent Global Hunger Index report illustrated the threat, our future generations may face, if the expenditure maintains status-quo.

Conclusion

In this New Cold War era, India’s rapid revival is not only beneficial to itself but also to the democratic world. Now it depends on policymakers to implement policies which increases the stature that India has in the current global market. Remember, Polity is an art of past and future, but not present. Every decision made is based on the analysis of past, when implemented portrays the future. Wise decisions reap maximal benefits within marginal costs.

– ANJAN KUMAR

(Opinion expressed by the author is his personal. The Generalist Insights take no responsibility of the opinion expressed.)