India’s growth is predicted to decline from 8.2 percent last year to 5.7 percent in 2022 and 4.3 percent in 2023, respectively. This prediction has been made by a recent report of United Nations Conference on Trade and Development(UNCTD), citing higher financing costs and weaker public expenditures as main reasons for decrease in India’s economic growth. The report also noted that the ‘Production-Linked Incentive Scheme’ introduced by the government is incentivizing corporate investment, but on the other it is creating more demand for energy and eventually resulting in rising import bills for fossil resources. Higher import bills are causing a current account deficit.
The deficit is being covered by spending from the reserves. Therefore, the foreign reserves of India continue to deplete. Recently, Reserve Bank of India (RBI) had drawn about 118 billion from the reserves of 642 billion dollars in the previous year. The Indian rupee had also witnessed an all-time low of 83.29 per dollar.
This year, the current account deficit touched the lowest in a decade. It is also imperative to note that in the beginning of the year, the US Federal Reserve initiated a ‘tightening cycle in decades aiming at triggering outflows from emerging economies like India.’ When US Federal Reserve increases its interest rates, the direct pressure comes on the Indian economy, as investors move their assets from emerging or rather unstable economies, like that of India. Therefore, according to Reuters the problem of current account deficit has also coincided with decline in foreign direct investments.
Another reason cited by UNCTD of decreasing growth rate is the weakening of government spending. It is confusing to note that despite economic growth in the previous year, the government of India constrained to spend. Manasi Swamay, an economist wrote in the Times of India that the Indian government’s reluctance to spend is puzzling as its final consumption expenditure fell year-on year to 4.3 percent in the second quarter of 2021. Now after publication of UNCTD report about declining growth of GDP with weak public expenditure as the main reason, the government of India has vowed to spend on rail and road sectors.
It is also ironic to note that despite growth of Indian economy, which was witnessed in the last year there hasn’t been any trickledown effect. The plight of the masses remains unchanged. India ranked 101 out of 116 countries on the hunger index in 2021. Poverty is rampant in India.
It is interesting to note that projections are different from reality. According to a working paper written for IMF by Surjit S Bhalla, Karan Bhasin and Arvind Virmani, which also appeared in the Brookings, a US based renowned think tank, poverty in India has declined. However, political analyst Ajit Ranade in an article that appeared in the Times of India, questioned the validity of these findings by raising several valid questions. He says that if there is enfeeblement in poverty then why the government has announced free food schemes and free gas cylinder schemes and why over qualified people apply in millions for few government jobs?
Growth in India has remained elusive. The poor are becoming poorer and the rich are becoming rich. India is the second most populous country, yet only 5 percent of people in India pay taxes. India has still failed to increase its tax base. It is also ironic to note that in the list of ten wealthiest people of the world there are two Indians, Mr. Mukesh Ambani and Mr. Gautam Adani.
There are several structural problems in India, Prime Minister Narendra Modi boisterously attracted international investors without addressing the structural problems. The international investors were initially attracted to the bandwagon of ‘projections’ but now the short falls have become visible. The Indian economy has an unstable base. It is heavily dependent on the international financial dynamics. The indigenous capacity of the Indian economy has not been explored, improved or even utilized.
Corruption, confusing tariff laws, bureaucratic maneuverings and weak infrastructure are the main hurdles for international investors to invest in India. These problems refrain India from becoming an ‘opportunity’ for international investors, instead, it turns into a maze of problems. Foreign investors are fleeing India. In October, 2021, 23 billion dollars were extracted from India.
In addition, small businesses have also stopped growing in India. According to State Bank of India’s report, the informal sector’s contribution to the GDP in 2017-18 was 52% but it has now decreased to less than 20%. However, according to KE Raghunathan, Convener of the Consortium of Indian Associations (CIA), there is a lack of data and context around Micro Small Medium Enterprises.
The Indian government is playing all its cards in ambiguity. The lack of data creates confusion and investors are trapped through projections alone. A lot of effort has been poured to portray ‘incredible India’. The situation is bleak in reality. There hasn’t been any census after 2011. It was to be held in 2021 but still it hasn’t been initiated as yet.
According to rough estimates the people living below the poverty line are as much as 60 percent of the population, but since there hasn’t been any census, therefore no one actually knows the correct number. In a report produced for CNN, Moni Basu stated that nearly sixty percent of the population of India lives on 3.10 dollar a day, which is the World Bank’s median poverty line.
Without structural reforms aiming at bringing the people out of poverty snare, the Indian economy will remain in the doldrums. The projections may attract investors, but a thin structural foundation which does not have indigenous strength of sustainable systems, will eventually wane off the foreign investments. The key of India’s progress remains in elevating the poor by introducing structural reforms, without it, the outlook of ‘booming Indian economy’ will be nothing more than a smoke screen.
Maryam Mastoor is a Research Analyst (India Program) at Institute of Regional Studies