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The road to economic recovery

Context: The return of economic activity and declining active Covid-19 cases in India have raised hopes of recovery. Yet a second wave in Europe and US raise concerns. What is the way forward for businesses and investors?


GS Paper 3: Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein.

Mains questions:

  1. Among several factors for India’s potential growth, savings rate is the most effective one. Do you agree? What are the other factors available for growth potential? 15 marks
  2. Our economic recovery will be a function of top-down factors like fiscal and monetary stimulus as well as bottom-up entrepreneurial efforts. Comment 15 marks

Dimensions of the article:

  • Objectives of growth in India.
  • Current status of Indian Economy.
  • Challenges to revival of the growth
  • Measures to improve the growth
  • Way forward

Objectives of growth in India:

  • Besides having high growth rate, it is also necessary to ensure that growth is inclusive, sustained, clean and formalized.
  • The investment rate should be raised from 29 per cent to 36 per cent of GDP which has been achieved in the past, by 2022-23.
  • Exports of goods and services combined should be increased from USD 478 billion in 2017-18 to USD 800 billion by 2022-23.
  • Moving from capital intensive sectors to labour intensive sectors to provide employments to young generation.
  • Making India as a five trillion dollar economy by 2024.

Current status of Indian economy:

  • Lower oil, gold and Chinese goods imports have made India current account-surplus. Foreign exchange reserves are about to exceed foreign exchange debt.
  • Global firms are opening up their purses for direct as well as portfolio investment.
  • Agriculture reforms will materially benefit a large rural population.
  • Labour reforms and postal life insurance schemes are steps in the right direction for India becoming a manufacturing hub, although a lot more needs to be done on the ground.
Figure 1.1: India's real GDP growth 
IQ2 3 
Source: Ministry of Statistics and Programme Implementation

Challenges to revival of growth: There are four drivers of growth i.e. household expenditure, government expenditure, private investment and trade. Indian economy in present circumstances is facing challenges in all these four drivers of growth.

  • Household expenditure:  Household expenditure is very low due to recent pandemic, high unemployment, poverty etc which reduced the demand in economy.
  • Government expenditure: The government through expenditure revives the economy however it has to maintain fiscal prudence moreover it’s fiscal expenditure is controlled by FRBM Act therefore the fiscal expenditure has limited role to revive the economy.
  • Private Investment: Indian economy is facing Twin Balance Sheet Problem which deals with two balance sheet problems. One with Indian companies and the other with Indian Banks. Thus, TBS is two two-fold problem for Indian economy which deals with: Overleveraged companies – Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans.
  • Trade: there are multiple challenges related to trade in present circumstances like pandemic, trade war between USA and China etc.

Measures to revive the Economy:

Raising investment rates to 36 per cent by 2022-23:  To raise the rate of investment (gross fixed capital formation as a share of GDP) from about 29 per cent in 2017-18 to about 36 per cent of GDP by 2022-23, a slew of measures will be required to boost both private and public investment.

  • India’s tax-GDP ratio of around 17 per cent is half the average of OECD countries (35 per cent) and is low even when compared to other emerging economies like Brazil (34 per cent), South Africa (27 per cent) and China (22 per cent). To enhance public investment, India should aim to increase its tax-GDP ratio to at least 22 per cent of GDP by 2022- 23.
  • The government should increase the Fixed Capital formation from 4% to 7% t of GDP by 2022-23 through greater orientation of expenditure towards productive assets, and minimizing the effective revenue deficit.
  • Two areas in which higher public investment will easily be absorbed are housing and infrastructure. Investment in housing, especially in urban areas, will create very large multiplier effects in the economy.
  • The government should continue to exit central public sector enterprises (CPSEs) that are not strategic in nature. Inefficient CPSEs surviving on government support distort entire sectors as they operate without any real budget constraints.
  • Private investment needs be encouraged in infrastructure through a renewed public-private partnership (PPP) mechanism on the lines suggested by the Kelkar Committee.

Macroeconomic stability through prudent fiscal and monetary policies: Sustained high growth requires macroeconomic stability, which is being achieved through a combination of prudent fiscal and monetary policies.

  • The government has targeted a gradual lowering of the government debt-to-GDP ratio. It will help reduce the relatively high interest cost burden on the government budget, bring the size of India’s government debt closer to that of other emerging market economies, improve the availability of credit for the private sector in the financial markets.
  • The fiscal deficit and borrowing targets should not be set in isolation and the government can use “escape and buoyancy” clauses under Fiscal Responsibility and Budget Management (FRBM) architecture .
  • The effective revenue deficit should be brought down as rapidly as possible. Capital expenditure incurred for the health and education sectors, which in effect builds human capital, should be excluded from estimates of revenue expenditure. This will increase government savings.

Efficient financial intermediation: Efficient functioning of the financial markets is crucial to maintain high growth in the economy. There is a need to deepen financial markets with easier availability of capital, greater use of financial markets to channel savings and an improved risk-assessment framework for lending to avoid a situation of large-scale nonperforming assets in the banking sector.

  • Governance reforms in public sector banks require, apart from the establishment of independent and commercially driven bank boards, performance assessment of executives and increased flexibility in human resources policy.
  • The Gujarat International Finance and Tech City (GIFT) should be leveraged to push the envelope on financial sector liberalization.
  • Enable alternative (to banks) sources of credit for India’s long-term investment needs. The bond market needs deepening through liberalization of regulations and continued fiscal consolidation.

Focus on exports and manufacturing: India needs to remain globally competitive, particularly in the production and exports of manufactured, including processed agricultural, goods. The following reforms would help in improving the competitiveness:

  • A focused effort on making the logistics sector more efficient is needed.
  • Power tariff structures may be rationalized to ensure global competitiveness of Indian industries.
  • Import tariffs that seek to promote indigenous industry should come with measures to raise productivity which will provide the ability to compete globally.
  • Strengthen the governance and technical capabilities of Export Promotion Councils (EPCs) by subjecting them to a well-defined, performance-based evaluation.

Employment generation: The necessary condition for employment generation is economic growth.

  • A large part of jobs would hopefully be generated in labour-intensive manufacturing sectors, construction and services.
  • The employability of labour needs to be enhanced by improving health, education and skilling outcomes and a massive expansion of the apprenticeship scheme.

Way forward

The wealth acquired capably without causing any harm yields righteousness and joy. Only when wealth is created will wealth be distributed. India’s aspiration to become a $5 trillion economy depends critically on creation of wealth by strengthening the invisible hand of markets and supporting it with the hand of trust.

December 2023