Keep Your Eyes on The Road

The Economic Times     27th August 2020     Save    

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.