India’s Growing Contribution to Global Economic Growth

Context:

According to the IMF, India’s contribution to global economic growth is forecasted to increase by 2%. India’s current 16% contribution is projected to grow to 18% over the next five years. This expected growth is attributed to India’s faster economic expansion.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

1. Factors Contributing to India’s Projected Growth
2. Challenges Faced by India in Achieving Projected Growth
3. Way Forward for India’s Economic Growth

Factors Contributing to India’s Projected Growth:

Monsoon Season and SBI Monsoon Impact Index:

• Overall, the monsoon season saw 6% below-expected rainfall, with a significant 36% rainfall deficit in August.
• However, the spatial distribution was relatively even, with 29 out of 36 states/union territories receiving normal or above-normal rains.
• The SBI Monsoon Impact Index, which considers spatial distribution, scored 89.5, a significant improvement over the 2022 full season index value of 60.2.

Capital Expenditure Focus:

• In the first five months of 2023, states achieved 25% of their budgeted capital expenditure targets, while the Centre reached 37%.
• This reflects an emphasis on capital generation and investment, surpassing previous years.

Robust New Company Registrations:

• The registration of new companies signals strong growth intentions, with around 93,000 companies registered in the first half of 2023-24, compared to 59,000 five years ago.
• Daily registration of new companies increased by 58% from 395 in 2018-19 to 622 in 2023-24.

Accelerated Credit Growth:

• Scheduled commercial banks (SCBs) have seen increasing credit growth since early 2022.
• Aggregate deposits grew by 13.2%, and credit expanded by 20% until September.
• The Government expects robust credit demand in the upcoming months, especially during the festive season.

Formalization of the Economy:

• The growth in credit can be attributed to the formalization of India’s economy over the past decade.
• Individuals with no prior credit history are now becoming integrated into the banking system.
• Around 40% of new credit accounts added in the last nine years are from individuals who previously had no credit history, contributing significantly to incremental credit growth.

Challenges Faced by India in Achieving Projected Growth:

Stagnant or Declining Demand:

• Factors like low income growth, high inflation, unemployment, and the impact of the Covid-19 pandemic have resulted in stagnant or declining demand for goods and services.
• This has adversely affected consumption and investment levels, leading to reduced tax revenue for the government.

Persistent Unemployment:

• Despite rapid economic growth, unemployment remains a serious issue in both rural and urban areas.
• The Covid-19 pandemic has exacerbated the situation, causing business closures and job losses.
• The National Statistical Office’s report for 2021-22 indicated an unemployment rate of 4.1%.

Inadequate Infrastructure:

• India lacks sufficient infrastructure in areas like roads, railways, ports, power, water, and sanitation, which hampers economic development and competitiveness.
• The estimated infrastructure gap, as per the World Bank, is around $1.5 trillion.
• Poor infrastructure also affects people’s quality of life, particularly in rural areas.

Current Account Deficit:

• India has been running a persistent current account deficit, indicating that its imports exceed exports.
• This dependence on foreign goods and services, including oil and gold, along with low export competitiveness, poses challenges.
• In 2022, India witnessed a 6.59% decrease in exports and a 3.63% decrease in imports.

Geopolitical Relationships:

• India’s geopolitical relationships, including border disputes, have the potential to impact regional stability and economic prospects.
• The country is increasingly vulnerable to global economic uncertainties, including ongoing wars and conflicts that may lead to crude oil price inflation and supply shortages.

Trade Imbalances:

• India faces trade imbalances with some major trading partners, which can have implications for economic growth and stability.

Way Forward for India’s Economic Growth:

Private Investment Promotion:

• Private investment plays a crucial role in economic growth. It enhances productivity, fosters innovation, and improves competitiveness.
• The government has already taken steps to facilitate private investment, including ease of doing business improvements, corporate tax reduction, credit guarantees, and foreign direct investment attraction.
• Further reforms in areas such as land, labor, and logistics are necessary to reduce the cost and risk of doing business in India.

Enhancing Global Competitiveness:

• India must boost its global competitiveness by diversifying exports, enhancing infrastructure, promoting innovation, and digitalization.
• Integrating with regional and global value chains is vital for global market access.
• Existing schemes like Production Linked Incentive (PLI), Phased Manufacturing Programme (PMP), and Make in India should be accompanied by trade liberalization and regulatory simplification for a level playing field.

Environmental Challenges and Sustainability:

• India’s commitment to reducing carbon intensity and expanding renewable energy capacity aligns with climate change goals.
• Green bonds have been introduced for green infrastructure projects, but more actions are needed to address environmental challenges like air pollution, water scarcity, waste management, and biodiversity loss.

Macroeconomic Stability:

• Maintaining a stable and low inflation rate can instill confidence and encourage investment.
• Ensuring adequate liquidity and credit availability, especially for small and medium enterprises, is crucial.
• The development of financial markets and institutions can further support savings and investment in the country.

-Source: The Hindu