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Measures to reinvigorate Indian Economy

Till a few years back, India was the next big thing on the global economic scene. But a few months back, we saw ourselves standing at a unique, and an unpleasant crossroads. The situation now is very disturbing. India is struggling on almost all facets of its economy. Though this situation seems sudden and unwelcoming but this is not completely unexpected.

India's present economic woes is marked by a rapid fall in the value of the rupee caused by persistent inflation of the past few years and the high current account deficit (CAD) of about $85 billion (4.5 per cent of GDP) which needs to be funded through uncertain capital inflows year after year.

There are ways of looking at the numerous challenges India is facing these days, but four distinct situations standout among them.

  1. Free fall of rupee against dollar and other currencies
  2. Widening current account deficit (CAD)
  3. Soaring inflation
  4. Dampened GDP growth

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.

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 the investors and the industrialists.

India still has time to work towards insulating itself from the vagaries of global finance causing much weakness in the currency and the current account. Here are few suggestions to reinvigorate Indian economy

  1. Government can easily generate $20 billion or one per cent of GDP by allowing higher coal and iron ore production from its large reserves. Our annual coal imports have gone up from roughly $7 billion five years ago to about $18 billion now. The increased dollar outflow was largely avoidable because India has among the largest coal reserves in Asia. India could have saved $10 billion simply by producing more domestic coal. The government must, under a specially regulated dispensation, maybe under the Supreme Court's watch, revive the export of iron ore from Karnataka and Goa where much of the mining has stopped following judicial intervention.
  2. The Centre should adopt an 'expenditure switching' policy, to achieve the fiscal deficit target of 4.8 per cent by cutting back on subsidies and boosting plan capital expenditure.
  3. 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.
  4. In the long run and to avoid future crisis, India needs to strengthen its agriculture sector. As we have seen in the past, not just in India but elsewhere too, for growth revival, investment in agriculture should be increased from 3% to 5 % by the end of the five year plan (2012-2017). Any other growth model would just not be sustainable. So with simple ideas that do not require big bang reforms, India can weather the storm caused by global and domestic economic factors.

-Shubham