[Editorial Analysis] Gearing up for the economic quicksands of 2019

Mains Paper 3: Economy

Prelims level: Economic growth and Development

Mains level: Major challenges faced by the Indian economy in 2018

Context

• The year 2018 was one of significant economic action both within and outside the country.

• The pace of action and swiftness of change in terms of quarter-on-quarter outlook was something that had never been experienced before.

• This may become the norm for the future and, the agility with which a country’s systems, processes and governance mechanisms respond to these changes,

• This will be the key differentiator for countries, businesses and citizens at large. India, on its part, has been quick to respond to most of these headwinds and was successful in unshackling the economy from several legacy issues.

• Positives around the implementation/addressing of concerns regarding some of the key interventions, such as the goods and services tax (GST),

• It moving up the ease of doing business rankings, implementation of the Insolvency and Bankruptcy Code (IBC).

• The power sector reforms and the launch of Ayushman Bharat, will continue to have cascading effects in 2019.

Major challenges faced by Indian economy in 2018

• Global trade protectionism: 2018 was one of posturing by the US and China on trade issues towards rebalancing trade between the two countries. This posturing and tariff impositions, to some extent, have led to a “butterfly effect” on the entire global economy.

• Pressures on the currency: strong growth in the US and hardening of yields close to 3% have led to significant outflow of FII investments. The strain on the current account because of higher crude prices has also been an area of concern. These two have contributed to the weakness and volatility in the currency. 2019 will bring in a fresh mandate for governance for the next five years. It will be the first year of the new government’s five-year tenure. Brave steps on some fronts will help the Indian economy.

• The inclusion of petroleum products and alcohol in GST: while this is the only lever available with the state governments to tap into revenues without going through the consensus mechanism, bringing this into the GST mandate would make the impact of GST more pronounced.

• Implementation of a revamped Direct Tax Code (DTC): we have done well on the indirect tax front with GST, but DTC needs a serious relook to aid ease of doing business.

• Adopting hard measures on ease of doing business: while we have done well to jump 53 notches in the global index over the past two years, this is the result of undertaking relatively easier reforms. Sustaining the momentum would become more difficult over the years if some stringent measures were not taken on this front. This would demand strong political will and we expect the new government to take this up on priority in its first year itself.

• Continued work on addressing the non-performing assets (NPAs): we should continue with the IBC implementation roadmap. There will be some pain, but that is inevitable if we wish to bring in the desired change in borrower behaviour and address the issues around it with finality.

• Adherence to the fiscal deficit roadmap: we hope that the fiscal deficit targets will not be missed in the first quarter. That would put additional strain on the economy over the next three quarters of 2019.

• Ensuring smart implementation of the health insurance scheme: Ayushman Bharat has the potential to reduce inefficiencies in the country’s health delivery mechanism. It can also bring in long-term benefits of enhanced productivity for Indian citizens. However, it is imperative to ensure the scheme is well implemented and its credibility is not undermined.

• Sharp focus on job creation: with the demographic dividend peaking, all stakeholders should make a concerted effort to ensure job opportunities for the youth entering the workforce. It is imperative for the society today and, if we lose focus on this aspect, it could pose serious challenges to stability, not only economic but also social.

• Enhanced capital outlays on infrastructure: though we have a favourable exchange rate, non-oil export growth rates have been lagging. There should be focus on significant enhancement in capital outlays on infrastructure, especially transport and port, and easing customs bottlenecks.

• Ensuring liquidity for non-banking financial companies: they came under stress in 2018 because of the Infrastructure Leasing and Financial Services (IL&FS) crisis. They need to be supported so that there is no demand slump as a result of the credit squeeze.

Way forward

• Global macro-economic shifts are now faster than ever before.


We need to be nimble-footed in policymaking to face these headwinds.

• Who would have imagined a couple of months ago that oil prices will be down to around $50/barrel.

• The US Fed will be talking about a rate increase pause, and the Reserve Bank of India would be thinking about rate cuts.

• Their needs a strong coordination between fiscal and macro-economic policymaking to address these quick shifts and ensure macroeconomic stability.

• This will be key, as India gears up for the much needed high growth rates, especially to address the concerns around job creation in the country.

———————————————

Prelims Questions:

Q.1) The Fifth report submitted to the British parliament in 1813 for consideration was a report on the

a) Welfare of Indian masses

b) Administration and activities of the East India Company in India

c) Industrial development of India

d) Suppressing organized seditious movements in India

Answer: B

Mains Questions:

Q.1) What are the Major challenges faced by Indian economy in 2018?

Share article