India Growth in the Next Five Years Essay Example Pdf

Can India achieve 9% growth in the next five years? Can India achieve 9% growth in the next five years? This is the million dollar question in every Indian’s mind. It is not just about growing. Growing right and strong is the question because if we are able to grow in a right direction then lot of hurdles the Indian economy is facing can be altered towards a positive direction. If the GDP growth rate of our economy moves from the 4.6% to a 9%, then we have chances to improve whole lot of things including increment in job opportunities, consumption, investment, improved living standard and current government target of reducing poverty further. It also signals that there will be hell lot of opportunities for the government to collect tax revenues. The household savings will be directly available to the private sector without any intervention. When the liquidity flows towards the private sector become stronger and better, high growth becomes possible. After achieving a phenomenal growth rate of more than 9 percent for three consecutive years between 2005-2006 and 2007-2008, alongside the instant recovery from the global stagnation of 2008-2009, the Indian economy has been going through a rough phase that culminated in sub-5 percent GDP Growth for the period 2012-2014. Such a dip in growth rates for two consecutive years was witnessed almost three decades ago in 1986-1988. This Indian trend is approximately in harmony with trends in other emerging economies, but more prominent. India’s growth dropped from 8.3% per annum during 2004-05 to 2011-12 to 4.6% in 2012-13 and 2013-2014. However this trend was seen in other emerging markets and developing economies including China whose average growth declined from 6.8 percent to 4.9 percent in this period. Apart from the slowdown in the growth, inflation appears to be another serious issue which is posing significant challenges to the Indian economic growth. Although average wholesale price index (WPI) inflation declined in 2013-2014 to 6 percent vis-à-vis 8.9 percent in 2011-12 and 7.4 percent in 2012-2013, it is still above comfort levels. Major issues was seen regarding the WPI inflation in food articles that averaged 12.2 percent annually over five years ending 2013-2014 which is significantly higher than non-food inflation. Fortunately, the upward trend of inflation that played a significant role in the slowdown in growth, savings, investment, and consumption, appears to have moderated. It is quite relevant that in India the slowdown in growth and investment was accompanied by elevated levels of consumer price inflation. There is a serious need to address the food inflation in order to obtain a hold on the overall inflationary trend. Resolving supply side constraints through addressing the complex issues of the food markets could lay the foundation of the solution. One of the most feasible ways of increasing the growth rate is by increasing investments but we are lagging behind and are not able to deliver a growth rate of our potential. Simply saying, our investment is not up to the mark. The cost of capital remained high for most of the year as the uncertainty in global markets encouraged central banks to keep the stance of monetary policy tight, in turn discouraging investments. The daunting task that Indian Economy faces today is of generating employment and growth. Jobs get created when firms invest and grow. Hence, it is important to create an environment that is conductive for the firms to invest. Gross fixed capital formation declined from the growth of 17.49% in 2006-2007 to 3.2 percent in 2012-13. Difficulties in obtaining clearances and raw material supplies and of financing brought numerous investment projects to a halt. Difficulties in contracting and providing clearances on time and the lack of a framework to shut down, sell off, or withdraw from projects created further difficulties. Furthermore, the NPAs of the bank are another headache. On one hand we are saying investment is very necessary to pull the trigger but where is the trigger? Fresh NPA of PSBs increased to 3.6% in 2013-2014 as against 3.1% in 2012-13 leading to increase in Gross NPA to 4.4% as on March 31, 2014 from just 3.6% the previous year. Infrastructure sector accounted around one-third of the total industrial credit and the major issues underlying this is that the NPA ratio for infrastructure sector is showing the rising trend during this period. In this context, there are huge doubts whether the promises made by the new government in terms of public private partnership would be a reality one day. We only started PPP model after reforms were ushered in 1991. From 1991 to 2006, hardly any progress were made in PPP models, we witnessed only few improvement in roads and urban development that too in primarily at state level. From 2006-2014 we saw some improvements though it’s not very encouraging, it is the only good we have. Only 758 projects worth Rs. 383300 crores have started under the PPP model in India so far. Main deterrents have been the absence of regulatory authority for PPPs, the commissioning authorities often do not have full clarity about timelines and targets associated with the projects, and private sector dependence on the cash trapped banks is probably the biggest hurdle in the process. Another big hole in the economy is that the entire savings of households which is around 30% of GDP are not effectively channelized for investments. The reasons is that our fixed deposits rate for many important years have remained under the inflation rate faced by households; that make it extremely attractive for the households to pack their savings into physical products rather non-financial products like gold or may be real-estate for the time being. These kind of physical savings accounted for about 68% in FY 2013. This gives alarming signals that large portion of Indian households savings may not be properly channelized toward private sectors investors. It results toward lower investment appetite in the investors. To channelize the household saving towards the financial sector the rates have to be increase or there should be improvement in the inflation rate so that the interest rate are well above the inflation rate but increasing the interest rate would lead to increase in the lending rate too. This will further kill the little appetite they have regarding the investment. So, the solution lies in improving the inflation rate rather than increasing the interest rate. There aren’t much of problem in the demand side of the economy. The major problem lies in the supply side. To improve the supply side problem we need a huge long term investments in infrastructure. For this, we need large sum of money and that is the scary part because we are depended on the bank for the credit but the high interest rate and bank itself suffering from the huge amount of NPAs left us with no way. The flow of credit have almost stopped, there is no any investment appetite in investors. This also asks for the huge improvement in the subsidies. The government has got the political majority, now it is the time to complete their duties because they have lot of economic compulsion to deliver on account of the subsides. There has been 2.4% increment in the subsidies as compare to last fiscal which stood at 251397crores. Subsidies account for almost 19% of the expenses which is a huge amount when growth is hovering below 5%. A reduction of Rs 50000 crore on subsidy account would have helped to reign in the revenue deficit at 2.5% offering significant benefits to the account. To emphasize on, only a sustained reduction in the inflation rate will help the households to channelize their saving into the deposits. Similarly another part of the story is the Current account deficit. Though, the economy has seen improvement in the current account deficit which is standing at around 1.7% in 2014 ending. It has given some relief in terms of appreciating rupee but however taper talks moving like a rampant we can expect some further increment in the current account deficit when tapering actually starts. Furthermore, if we see the foreign inflows in the country it has been in terms of FII i.e. more like a portfolio type rather than the proper FDI. There are no any major FDI inflows in the country. The decision to increase the FDI limits from 26% to 49% in insurance and defense sectors are welcomed by many but its results are yet to be seen. Again increasing the limit from 26% to 49% wouldn’t make a huge difference until and unless the increment is up to 51% because there is a huge difference in right given to the foreign company in 51% as compare to 49%. So we can say that no major foreign companies will be lured to operate in India. Again, the Modi Government has not specifically mentioned the route via which the fund will be channelized into the country. We just have a figure rather number but how the number will be implemented? We don’t have the answer. Again, the Modi government must liberalized the way the defense sector transactions are treated so that investors feel there is something really attractive to invest in the defense sector. Another major issue hindering the growth of the economy in India is the governance issue. India has the huge capacity and tremendous opportunity but for this best practices and good governance is of utmost important. If we had showed good governance then the Indian growth story has been completely different and probably our levels of growth would have been livelier. India has faced many criticism of ICOR being high, which indicates there is a governance issue due to which huge volume of money is required to create just appreciable level of growth. In the middle of slowing down investments, many scams, allegations of corruption and black money and discrepancies in the allocation of natural resources are playing their part to cut the growth rate to below 5%. The Modi government seems to be very crucial in maintaining good governance. They have successfully implemented the Gujarat Model cutting down the bureaucracy, and this act is needed to be implemented in the center as well. There has been some impressive move already in terms of unification of power and coal ministry successfully. Other issue like proper guidelines on PPP route i.e. from where the funds will be generated, the proper entry and exit procedure and proper guidelines in terms of the timeline should be specified. Similarly, urea reform, GST, PDS reform, subsidy issues and cracking the hoarders and middle man is of utmost important. To summarize, reviving investment is very essential for growth of employment and income. That is the only way an economy can move on the growth trajectory. It requires three faceted approaches that will turn the face of Indian economy extensive growth prospects. The moral of the story is there should be low inflation in the country with proper monetary policy in placed, fiscal consolidation should be the major focus area no matter what, and last but not the least improvement in the food market is very important to improve the supply side hurdle. Second could be putting fiscal policies on track through tax and expenditure reforms by putting public finances on sustainable path. Tax reforms in the form of GST, DTC is very important to achieve the desirable growth rate at the moment, basically we need more predictable tax administration. Thirdly, expenditure reforms must focus on designing new subsidy program and good mechanisms for accountability. Capacity must be created at the state level to address market failures by repealing the old legacy laws and removing structural constraints. The emphasis have to remain on fiscal consolidation but on a sustained manner being too optimistic and accepting challenges without any proper base won’t do any good for the economy. The reversion to growth rate of around 8-9% can only occur if everything is in place. We can’t firmly say the growth will be 9% or not because previous governments have left us with many dark spot that will require time to heal. There are many factors that will govern the growth rate of India as the economy is globalized and many international events will have the huge impact upon the Indian economy. We can think of a 5 year period within which all the policy constraints are in place, there are no any loop holes followed by well-placed reforms and period within which the Indian economy has fully absorbed the new environment in terms of the new government, new policy measures and achieved an expected growth rate. Similarly, the focus of new policy should be on structural reforms to improve the supply-side constraints. Revival of Investment is of utmost important for accelerating the growth rate of the economy. In addition to this simplification of tax policy and administration is the need of the hour. An atmosphere of policy certainty, continuity and transparency will help boost business sentiments further. There should be a proper mechanism to check the fiscal deficit and maintaining the CAD within the range of 2-2.5 percent can give us the huge boost in the growth trajectory, though we have already achieve the 1.7% of the CAD , consistency of those will play the part in the future. Another daunting problem faced by the Indian economy is in terms of the Inflation. A well measured step to reduce the inflation rate to 6% will allow the RBI to come up with more dynamic monetary policy that will help the Indian economy to face the external challenges effectively. To sum up, the growth rate of 9% is achievable provided everything is in place but as we all know that today the world economy have globalized and have become interdependent. So we can’t be sure about the exact growth rate but we can be sure that India will be in the growth trajectory and we can expect lot of things to improve in the coming years not just the sentiments in the market. The loop holes in the policy, the governance issues and hell lot of other issues which were not addressed during the UPA 1 and 2 will be address in the New government regime and can expect acche din to come!!.

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