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Subject: General Studies (Paper 3 - Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management)

Topic: Inclusive Growth and Issues (Part -1)

Inclusive Growth and Issues (Part -1)

Over two decades, India has implemented wide-ranging reforms that opened up the economy, dismantled the old licensing system and introduced competition into a number of sectors that had previously been dominated by public monopolies. This decisive action has helped the Indian economy to narrow the gap in living standards with advanced economies. Supported by further reforms, convergence accelerated in the 2000s as growth averaged over 8% a year , one of the strongest performances in the world.

The challenge of reviving convergence and enhancing inclusiveness India’s share of global output and trade has continued to climb. The Indian economy now ranks third largest in the world, measured in PPP terms, and world-leading Indian enterprises have emerged across a number of sectors, not least in information technology and business services.

The potential for sustained strong growth is high. The Indian population is young by international comparison and this together with declining fertility has led to a falling youth dependency rate .The national savings rate is also high and, given favourable demographics, could well rise further in the medium term, providing the capital needed to fund investment in infrastructure as well as strong expansion in private enterprise. Furthermore, despite employment rising in the industrial and service sectors, around half of all workers remain in low value-added agriculture .The scope is therefore enormous for economy- wide productivity gains from the further migration of workers into modern sectors.

Weaknesses in the business environment and very restrictive labour legislation have prevented India from reaping the benefits of its large population, notably through the labour- intensive manufacturing boom. To fully reap the benefits of this demographic dividend and support a return to high growth, India needs to continue to address important obstacles to stronger growth. A return to strong, sustainable growth is paramount to ensuring continued progress in reducing severe poverty, catching up and lifting living standards more generally. However, it is not sufficient on its own. India needs to ensure that stronger growth benefits all Indians. While severe poverty gradually but persistently veered down wards, to day large sections of the population still remain below national and international poverty lines ; and inequality has increased. A large share of the population is employed in the informal sector generally in low-paid, low-productivity jobs with no access to training. Access to basic services including health care an delectricity is limited. Widespread informality limits tax collection and in turn the ability of public spending to expand in social areas, innovation and infrastructure.

There has also been growing disparity in performance between the different states, which reflects differences in the product and labour market regulations across states.

UNLOCKING INDIA’S POTENTIAL WITH REFORMS

In order to fully reap the benefits of the demographic dividend and support a return to high and more inclusive growth, India needs to renew its commitment to sound macroeconomic policy and implementation of reforms . These efforts will have to be undertaken at all levels of government, starting by putting public finances on a sound footing and improving the fiscal framework so that persistent large deficits do not undermine ma croeconomic stability an dinvest or confidence. To boost productivity and promote the development of the formal sector, steps need to be taken to strengthen business environments and support the introduction of new technology, including through fostering competition, further reducing international trade and investment barriers and improving of corporate and public governance .Steps to reform the financial sector can also support productivity gains by facilitating the entry of new enterprises and improving the efficiency of capital allocation .

A stronger and wider formal sector means higher tax revenues that could help unlock supply- side bottlenecks, notably in infrastructure and innovation and increase social public spending including on health care where India is among the lowest in the world . Nonetheless, existing government spending should be made more inclusive and better support the poorest groups .Welfare programmes, notably those that provide subsidised food and other goods, suffer from major inefficiencies and often they do not reach their intended recipients. Important energy subsidies also benefit primarily the better-offs and harm the environment. Reducing them would free up resources for essential welfare and growth enhancing programmes and support India’s necessary efforts to increase energy and re source efficiency and make its growth cleaner.

Improved education and reforms of the labour market are also needed to ensure that the demographic dividend is not squandered. Providing access to quality education is fundamental to the country’s long-term economic success as is ensuring opportunities for all. With elementary education now compulsory, enrolment continues to climb and should rise further. However, there is a need to improve quality and capacity at the upper secondary and tertiary levels .To ensure that rising human capital is harnessed effectively, labour market reforms are needed to boost dynamism and support job creation in the formal sector .Inclusion could also be promoted through policies to improve producity the agricultural sector and by strengthening rural financial institutions.

ADDRESSING FISCAL CHALLENGES

Fiscal policy has an important role to play in supporting India’s long-term development. Higher spending on social care, including basic health care, on education an d innovation could help make growth stronger and more inclusive .The current fiscal situation however does not allow for such spending. Despite some improvement of the fiscal situation up to the global crisis, India has been characterised by large public deficits. Although they have not resulted in sizeable increases in the debt-to- GDP ratio thanks to high nominal GDP growth, they are a major drain on national savings and tend to crowd out private investment. They also put pressure on the current account deficit, which has widened considerably in recent years.

Up to the crisis, good progress had been made in reducing large fiscal deficits at central and state levels, under the auspices of the Fiscal Responsibility and Budget Management Act (FRBMA), and related state laws. By 2007-08 the general government deficit had reduced to around 4% of GDP, down from nearly double- digit levels earlier in the decade. This reduction was driven by the expansion of the corporate sector, which boosted corporate tax receipts, and a new tax on services, that broadened the tax base. In addition, personal income tax receipts peaked towards the end of the period with the strength of the economy . Government consumption also declined, reflecting in particular public sector wage restraints.

However, since then, government finances weakened substantially, largely on account of a widening central government deficit .This was partly due to discretionary measures implemented to support the economy, including tax cuts, as well as a cyclical weakening in tax revenues. Still, some of the largest spending measures were more structural in nature, including hikes in public-sector salaries, debt write-offs for small farmers, subsidies for oil- related products, and expansion of the National Rural Employment Guarantee Scheme.

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