Recently, newspapers have been infested with reports of the failing rupee. Rating agencies as well as government agencies are continuously re-assessing their estimates of India’s economic growth to lower figures. Cries have been raised in the political arena as to how the government has completely failed on it’s promise. Internationally, there is much ambiguity about India’s potential as an investment destination.
Predictions about India’s future has, so far been the most futile activity political scientists have engaged in. Whether it be the apocalyptic disintegration that should have taken place in the early years of independence or the ascent to the status of world superpower prophesized after the reforms of 1991, neither has materialized completely. Differences among diverse identities based on religion, region, language and caste have often taken violent forms but have never reached to the point of implosion. Similarly, incomes have considerably increased in the last two decades and growth rates have been tremendously high for a long period but the idea of India as a superpower still seems quite distant.
Where is India now?
Over the past few months, the growth rate of the Indian economy has halved. Current Account Deficit is at an all-time high of 21.8 billion dollars (4.9 percent of GDP) which is equivalent to the GDP of Luxembourg. Although IT and the service sector have grown tremendously in the past few years, our neighbours in east have done considerably better. India’s GDP per capita In PPP terms, is among the bottom 10 in Asia and 126th in the world. Human development indices are still pathetically low and although social inequality has reduced, economic inequalities are grossly prominent. Now all this may seem to present an unjustly bigoted view of the India story considering the incredible rise in the living standards of people in the past two decades. True it is that India is the fastest growing democracy in the world and despite it’s huge population (majority of which is poor and uneducated), cultural and religious diversity (which continue to often lead to internal hostilities) and lack of natural resources, India has risen quickly to become one of the most important voices in the global arena. But still, there are many vital challenges that need to be addressed and these challenges which relate to basic human conditions in the country and the effect that overall economic growth has on the lives of people, cannot be ignored.
The service sector industry
India is presently standing at a very important demographic juncture.
The largest youth population anywhere in the world is in India right now. Many people have been emphasizing on this point since the past few years. But as they all say in the end, this could turn out to be a boon or a curse depending on how the government handles it. Presently, primary education system stands crippled, largely because 70% of the school students study in government schools which are deprived of quality in every possible term one can think of. Even institutes of higher education are finding it hard to keep up with global standards.
Not only does the problem of education retard the potential of our youth population, it has much more far-reaching consequences. Service sector fuels the growth of our economy in today’s times. The reason being the availability of a large English-speaking workforce (comprising mostly of technical graduates) willing to work at extraordinarily cheap wages. Already, NASSCOM has declared in one of it’s reports that 80% of our graduates are unemployable.
At the same time, other countries are slowly catching up with us. Philippines has surpassed India as the world leader in business process outsourcing. Indonesia has surpassed India in becoming the second-fastest growing country among the G20 countries after China. The point is that unlike other rapidly developing countries, our edge does not lie in production of cheap goods. We provide low-cost services in the international market which is responsible in a large way for the upward shoot in our growth trajectory and neutralizing our balance of payments (total exports – total imports). To remain competitive, it is absolutely essential to significantly improve standards of education in India.
The manufacturing sector
A big concern for our economy is the ailing manufacturing sector. If we look at the newly industrialized countries which have done well economically in recent times, almost all of them (including China, South Korea, Mexico, etc.) had an export-oriented outlook towards economic development. Availability of cheap labour was common in all these countries which was leveraged to build an industrial base for cheap, manufactured goods. In this sense, the fact that India has had a nearly stagnant manufacturing sector since the last forty years is somewhat strange.
Production of any good may be either for the domestic market or for the international market. India’s manufacturing sector is mostly inward-looking and exports only account for a small share. This being the case, manufacturing sector becomes dependent on domestic demand and the sector’s expansion is mostly associated with the overall growth of the economy. So what is the problem with this? The biggest employer in the world is said to be the United States Department of Defense which employs close to 3.5 million people. The National Rural Employment Guarantee Scheme (NREGS) in India created 25 million jobs in the single year between 2010-2011. Already suffering from major infrastructural handicaps, this scheme could have been quite useful in construction of valuable assets. But the effectiveness of the scheme in this regard has been a big disappointment. To put it simply, it is not prudent to place such a big burden on the exchequer for an activity which is largely unproductive. It is time that India focus on it’s potential of the export industry in the manufacturing sector. But there are many challenges in this direction as well. The regressive nature of the century-old labour laws makes it very difficult for small businesses (where 85% of our labour force is employed) to compete and expand in the globalized market. According to the World Bank, India stands 132nd on the Ease of Doing Business rankings in the world among 185 countries coming below even Pakistan and Nigeria. Also, it stands at 184th place with respect to contract enforcement which means India is the most difficult place to enforce a contract. All this indicates that bottlenecks created or perpetuated by the administration (ranging from infrastructural handicaps to legislative challenges)is largely responsible for an unfavourable business environment in India despite having naturally favourable conditions.
The oil factor
Lastly, the oil factor is a growing concern. Economic growth will inevitably lead to lead to an increase in energy requirements. Oil is the biggest import burden and all in all, a big reason for the rising current account deficit (expenditure – revenue) of our country. Oil production in India has been more or less, constant since the last 30 years. Involvement of foreign firms was restricted earlier but after commencement of the National Exploration Licensing Policy (NELP), this has changed. Still, state-owned companies account for more than 75% oil & gas production in India. Now, this would not have been a problem had India been one of those countries with abundant hydrocarbon reserves. But that is not the case. India’s domestic production only satisfies 25% of the demand, the rest being furnished by imports. It thus becomes necessary to build a competitive environment in the exploration & production (E&P) sector. This would ensure that the most efficient and up-to-date technological and management methods are put into practice. But again as pointed out earlier, the business environment in India still need a lot of changes to make it a favourable investment destination. Demand for oil will continue to rise in the coming years. India thus, needs a multi-faceted approach to this problem with increase in exploration activities and export-oriented production to offset the import burden occurring simultaneously.
The present slowdown
India’s growth rate has decreased significantly in the past couple of months. But, it is also true that this present slowdown is a global phenomenon. The challenges that we face today are the same ones that we faced before the slowdown. Although the government has been moderately successful in maintaining fiscal balance, it’s failure to bring about effective reforms has been a big disappointment. The Right to Education Act has not materialized in a big way as had been desired. The Food Bill is still stuck in the parliament and although many avenues have been opened up for Foreign Direct Investment (FDI), firms are still not investing in India (which may be probably due to the global slowdown). As the West has now started to recover, we can expect our economy to also come out of the slowdown by next year but objectively, a lot more needs to be done for India to rise at it’s full potential.
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