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Factors for slowdown of Indian economy, suggestions for its improvement

Till a few years back, India was the next big thing on the global economic scene. While we succeeded in getting the respect of the developed nations, the developing nations were in awe of us. We hit a minor bump in 2008 due to the global economic meltdown but we rose again and proved to the world that nothing could come in between us and our limitless dreams. But a few months back, we saw ourselves standing at a unique, and an unpleasant crossroads. India has been struggling on almost all faces, economically, since then. Though this seemed sudden and unwelcoming, this was not completely unexpected.

Of the numerous challenges India has been facing these days, four distinct situations stand out- 1) Free fall of rupee against dollar and other currencies, 2) widening current account deficit (CAD), 3) soaring inflation, and 4) dampened GDP growth.

These four factors are alone sufficient to show that we are far from where we were standing a couple of years ago. All these factors possess a cause-effect relationship. The worsening of one factor leads to the impairment of others.

So what exactly went wrong with the economic system of India to cause such a holistic downfall of the national economy?

Surprisingly, the most recent and the most concerning situation at the moment- rupee's tumble- has very little to do with our faults or mismanagement or any shortcoming on the part of our central bank or government policies. The crisis literally started with the announcement by the U.S. Federal Reserve Bank in may that it would taper off its quantitative easing (QE) policy, which pumps a huge amount of capital in developing economic markets, and which can substantially alter the state of a market like India's. Even though the implementation of this policy change is yet to see the light of the day, it has already caused a sense of panic in investors and industrialists. It is not for nothing said that when the U.S. sneezes, the world catches cold. Hence, the reasons for depreciating rupee are less statistical and more speculative.

The next important aspect is the burgeoning CAD- it is currently pegged at 4.8% of GDP (about $90 billions). The most obvious reason for this is increase in imports and decrease in exports in the recent years. India has seen a contract in the mining and quarrying sector and the growth in the manufacturing sector has been nominal.

A soaring inflation, though, can be reasonably attributed to the government's policies, which are more voter-centric than citizen-centric.

Policies like regulating oil and LPG gases and providing huge subsidies for them, which had to be amended at some point of time (petrol has been deregulated recently) were like time-bombs waiting to explode.

Still not ready to learn from its mistakes, the government has recently decided to shoulder yet another colossus subsidy in the form of National food security bill. Though a policy like this is undeniably heartening, the government categorically fails to answer from where the resources necessary for implementation of this apparent game-changing policy will come.

Since all the above concerning situations, except the fall of rupee, stems from inside the system, the solution lies within the system only.

Hence, the situation needs to be faced on a holistic basis, though handling them on different time axes would be more prudent. A very surprising fact about the Indian economy is that India transformed directly from an agrarian economy to a tertiary economy. At the time of independence, most of the people of the nation were dependent on agriculture for their livelihood and most of the share of the GDP came from this sector only.

But today, though 62% people are still dependent on agriculture, only a meager 18% share of the GDP comes from this sector, the majority coming from the service sector.

In this way, India could never realize the full potential of being an industrialist economy.Over-dependence on tertiary sector growth was certain to back-fire sooner than later.

In the long run, India will need to strengthen its industrial sector, and it has no alternatives at all. Any other growth model would just not be sustainable, as we have seen in the past, not just in India but in the entire world.

Since this massive task will start bearing fruits over the next decade or so only, an immediate, short-duration policy is the need of the moment.

Since India has to rebuild its forex reserve, there is nothing more effective than foreign investments, especially foreign direct investment (FDI). FDI is stable, effective and flows directly into the system rather than some private hands, which is the case with FII.

Disinvestment of PSUs, though on a limited basis, can be another stress buster at the moment.

The latest government policies regarding FDI which underline its readiness to welcome foreign investors to bring in investments are very welcoming and should be supported by one and all without partisan differences.

The next important idea is to cut down on unsustainable subsidies, which might prove untenable a few years down the line. The man responsible for bringing India back from crisis in 1992, the Prime Minister himself, should ensure that reforms are pushed again emphatically to ensure sustainable developments.

The CAD has ballooned partly because court orders have closed Indian mines for iron ores and coal, reducing exports and necessitating imports of those products.

The government should understand that non-essential imports, particularly those imports that have affected employment and livelihood, and gold imports have to be reduced substantially.

The Governor-designate of the RBI, Raghuram Rajan has very wisely said that we have to shift our focus from consumption to supply. It is high time we understand that being a consumer doesn't count in the long run; it is being a producer that counts, and that is the key to becoming an economic super-power. And if we are ever dreaming to be one, we better start acting like one.

- Rishav jha