India’s economic growth engines need a boost of the right policies

Rohit Chandavakar
Sunday, 17 September 2017

As the political debate around very high prices of petrol and diesel heats up in the country, many seem to be missing the wider picture which is about how several engines of India’s economy still struggle to rotate at the speed they should, to create enough thrust for the economy to take off!  

As the political debate around very high prices of petrol and diesel heats up in the country, many seem to be missing the wider picture which is about how several engines of India’s economy still struggle to rotate at the speed they should, to create enough thrust for the economy to take off!  

It is a widely accepted fact now that new job creation has virtually stopped in the country and realising that neither public sector nor private sector can meet the job creation aspirations of the youths of India, the government is now stressing on self employment. While growth in the manufacturing sector is at a standstill because capacity utilisation of the sector is not moving beyond 60% to 70%, the general expectation of any economist is that inflation should be steady. However, inflation now shows a worrisome trend of growth.

The numbers are now showing a majorly bleak picture as India’s April-June current account deficit widened to its highest in four years because imports surged. However, strong capital inflows comfortably set off the gap as shown in the data coming from the Reserve Bank of India. The deficit widened to 2.4 per cent of gross domestic product, or $14.3 billion, as imports pushed the trade deficit to $41.2 billion from $23.8 billion in the same period a year ago.

In the quarter ending in June last year, the current account deficit was 0.1 per cent or $401 million. It is now at its highest level since the June quarter of 2013. The widening of the year-on-year deficit was primarily due to a larger increase in merchandise imports relative to exports, the RBI said in its release. While imports rose, some export-oriented sectors also slowed after India imposed its new Goods and Services Tax (GST) in July, adding to the current account gap.

Analysts expect the current account deficit to narrow as exports pick up, but capital flows are likely to slow as the foreign investment limits for debt have been fully used up. Despite a wider current account gap, the balance of payments surplus was $11.4 billion in April-June, compared with $6.97 billion a year ago, helped by strong dollar inflows that boosted the rupee 0.43 per cent during the quarter. India’s capital surplus, which includes foreign direct investment and portfolio inflows, stood at $25.4 billion compared with a $7.18 billion surplus a year ago. Meanwhile, exports grew by 10.3%, highest in the last four months, to $23.81 billion in the month of August.  

The government’s focus is now on widening the tax base and increasing the tax income exponentially, but with that, some other incentives for tax payers such as good quality infrastructure in cities, good public transport in smaller towns and other public amenities must come in a reasonable time. The NDA government has already completed three years and these amenities are not yet delivered to most parts of the country. Today, while people pay Rs 79 for a litre of petrol in a city like Pune, almost Rs 50 out of that is going as various state and central taxes. The government must realise that with this kind of taxation in place, now the citizens’ expectations about delivery is going to be high and it must happen in a reasonable time.

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