Keep Your Eyes on The Road

Context: India’s recovery from the pandemic depends on deep-rooted structural factors, which have been able to secure the economic outlook; however, specific reforms are needed to ensure a sustainable recovery.   

Factors instrumental in India’s Economic Growth 

• India’s growing working-age population. 

• Savings and investment rates continued to increase until the late 2000s. 
• Financial sector growth, with a rising ratio of bank credit to Gross Domestic Product (GDP). 
• India’s strong institutional base aided in its growth story
• Trade-to-GDP ratio grew rapidly from the early 1990s, until world trade stalled due to the global financial crisis. 

• Credible Monetary and Fiscal Policies Framework

Factors Leading to Contemporary Economic Crisis

• Disruption in economic activity has dented consumption, investment and exports. 
• Weak financial sector growth resulting in anaemic credit growth.
• Limited regulatory, fiscal and monetary policy measures, both in terms of their effectiveness and affordability. 
• Constrained private investment in several sectors due to financial sector inefficiencies, deleveraging, crowding out, and regulatory policy framework. 
• Declining export to GDP ratio.
• Banking Sector: Subdued credit growth, and stressed asset quality of Indian banking system.

Way Forward

• Raise investments: by reducing sector-specific constraints and ensuring policy certainty.

• Encourage FDI for boosting domestic investment and ensuring greater integration in global value chains (GVCs).

• Boosting exports by increasing the competitiveness: By boosting investment in infrastructure and bringing it at par with other global manufacturing hubs.

• Reforming land, labour and financial markets;
• Upgrading the education system to equip its workforce with skills;
• Besides, a competitive exchange rate, deeper trade integration, and greater embedding into Global Value Chains (GVCs) will assume significance.

• Financial Sector Reforms: More needs to be done apart from the following measures taken, to improve the safety, depth and efficiency of financial intermediation.

• Measures were taken:

• Consolidation of banks
• Asset quality review
• Timely resolution for specific institutions
• Strengthened oversight and forbearance.
• Equity infusions.

• Suggested measures :

• Maintain financial sector stability, 
• Undertaking specific reforms in Non-Banking Financial Sector,
• Enhance the role of fintech 
• Only strategic and selective public sector presence

Conclusion: With continued policy attention on reforms — which spur private investment, increase the economy’s competitiveness, promote greater integration into the global economy, and ensure an efficient financial sector — India can revert to the growth path of the past.