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10 problem areas in the Indian economy

The Indian economy has slowed down in the last few quarters, the Prime Minister’s Economic Advisory Council (PMEAC) acknowledged recently.

The recently re-instated economic body has outlined 10 priority areas that the government should focus on to rev up the economy. The priorities are:

1) Job creation

The PMEAC considers job creation as the top-most priority for reviving the Indian economy.The unemployment rate among graduates in the 18-29 age group is an eye-watering 18.4%. Most of them are equipped with degrees but lack the skills required by the industry.

2) Economic growth

India’s Gross Domestic Product (GDP) growth was 5.7% in the first quarter of the fiscal year 2018, the lowest in the last thirteen quarters. The future isn’t positive either. Recently, the International Monetary Fund (IMF) slashed India’s growth forecast for 2018 from 7.7% to 7.4%.

3) Informal sector

The informal sector is a significant part of the Indian economy. The sector accounts for 90% of the country’s workforce. But, the informal sector has struggled since last year’s demonetisation drive and the recent implementation of the Goods and Services Tax (GST). The excess paperwork involved in GST has impacted their working capital.

The informal sector also faces difficulties in obtaining credit from public sector banks as they are saddled with record level of bad loans.

4) Fiscal policy

India’s fiscal deficit is deepening. The fiscal deficit crossed 92.4% of the budgeted estimate in July. However, fiscal stimulus is not the answer, according to the economic body. It feels a stimulus package would add to government expenditure and stretch the fiscal deficit beyond the set target.

5) Monetary policy

Curbing inflation is another priority. The Reserve Bank of India (RBI) expects inflation to rise to 4.2-4.6% in the second half of 2018. Pay commission allowances, farm loan waivers, price revision after GST implementation, and rising crude oil prices are the reasons for the expected rise in inflation. The PMEAC is set to meet next month to find a solution for the looming problem.

6) Public expenditure

Government expenditure has slowed as well. This comes at a time when private investment is at a low. Government expenditure is crucial because it can help rally the economy. But, the government is relying on public sector enterprises (PSEs) to revive the investment demand. PSEs have been told to declare dividends and set aside Rs. 25,000 crore for this reason.

7) Economic governance

The economic committee, which is headed by NITI Aayog member Bibek Debroy, has flagged economic governance as another reason that has bogged the country. Governance is a key issue when it comes to implementing reforms and policies, especially in a large country like India.

8) Agriculture

A spate of farm loan waivers in recent months have impacted the Indian economy. The farm loan waivers this year amount to Rs 88,000 crore, which has saddled public banks with further debt. Additionally, the waivers are estimated to raise inflation by 0.2%.

Also, loan waivers are a temporary solution to problems existing in the agriculture sector. Waivers encourage farmers to default on loans repeatedly.

9) Consumption

Retail credit growth is driving consumption growth in India, but that may not continue for long. While domestic consumption has grown at an average rate of 13.6% in the last five years, absence of income and employment growth may derail the current trend. 

10) Social sector

The quality and quantity of spending on social sector in India is low compared to global standards, according to HSBC. The full benefits of the social sector spending accrue only after five years. However, it can play a bigger role in job creation and reviving economic growth.