Are the Growth Rates of India Sustainable?

Answer

Are the Growth Rates of India Sustainable?

Sustainable economic growth refers to a growth rate which is maintainable without necessarily creating significant economic problems, especially to the subsequent or future generations.  Economic growth occurs when real output increases over a certain period of time, usually one year. The real output is measured by the Gross Domestic Product (GDP) at a constant prices so that the effect of price on the value of national output is removed (Banik 92). There exist a very clear trade-off between rapid economic growth today and growth in the years to come. If not properly managed, rapid economic growth today may exhaust resources and create environment problems in the future including depletion of oil and fish stocks and even global warming.

India has experienced a drastic economic growth making it to be counted as one of the emerging economies in the globe. In the past four years, the country has experienced an average economic growth rate of 8.5% (Khalid, Seema and Amlendu 201). This can be attributed to the strengthening of its health sector, making it one of the best in the world, robust energy renewal policies which drastically improved India’s level of technological innovation, strengthened tax system and an efficient private sector among others.  According to Sarkar and Mathew, on the flip side, however, India is struggling with high inflation rates. In addition, power producers are also struggling with excess capacity, yet the number of buyers of industrial products, as well as real estate is also shrinking day hence posing challenges in restoring consumer confidence (18).

 The main cause of the shrinking number of buyers is the high inflation rates which makes the cost of production and the final price chargeable in the market high. Consequently the purchasing power of consumers reduce day by day (Agarwala 114). These factors make one to doubt the sustainability of India’s growth. This paper, therefore, analyzes the sustainability of India’s economic growth.

Analysis of India’s Economic Growth

The robust performance of India’s economy in the recent years has made the country to make great steps on its economic development. However, there is a huge debate regarding its future economic prospects. The current population of India stands at 1.37 billion (Agarwala and Ramgopal 117). Out of this population, a quarter is still living below the poverty line, which makes one to doubt the sustainability of India’s economic growth. Rapid and sustained economic growth, though not sufficient for eliminating poverty, is certainly a necessary condition for improving living standards (Wu 112). Sustainable economic growth is key in ensuring that all sectors of the economy achieve growth. The government of India has suggested demonetization which has led to improvement of tax compliance which has led to income tax collection doubling from 34.1 billion rupees in the year 2013 to 67.4 billion rupees in the year 2018. This can also be attributed to a very strong fiscal deficit check.

There are a number of specific challenges associated with remarkable economic challenges. There is a double punch of declining rupee and rising crude oil prices which are expected to increase the country’s rupee import bill and aid inflation. Consequently, there will be fiscal implications which cannot be ignored. However, the country has a very strong consumption growth owing to the high population which it has. The weaker rupee will be able to help net-exporting sectors going forward.  The possibility of these creating a sustainable economic growth, however, is still questionable. The double digit economic growth is unlikely to sustain, as a major challenge ranging from poor regulations to infrastructure deficiencies remain.

The International Monetary Fund’s (IMF) world outlook recently reported that India’s real Gross Domestic Product (GDP) growth forecast for the financial year of 2019, remains 7.3%, while that of the year 2020  is projected to be 7.5% (Gakhar 76). This growth rate is higher than China’s, despite the fact that China has taken a greater stride in terms of development compared to India. It is, however, worth to note that unlike China which is almost reaching the optimal level of economic growth and development, India still has a higher window for development owing to the Human Development Index (HDI) of the country. China is projected to have a growth of 6.2% (Agarwala and Ramgopal 121). The price of oil has not escalated in India compared to China, hence stimulating a faster growth.  India has been able to implement a very low pace of monetary tightening.

The Main Pillars for Economic Growth in India

Foreign Direct Investment

Other than being one of the most critical drivers of economic growth, Foreign Direct Investment (FDI) is a major source of non-debt financial resource for the development of Indian’s economy (Sarka and Mathew 34). Foreign companies usually invest in India in order to benefit from the robust labor force whose cost is very economical. Besides, the Indian government has set a policy which grants tax exemptions for foreign companies. This is mainly done in order to encourage more investors into the Indian economy and reduce the high level of unemployment in this country.  It is worth to note that in countries where foreign investment is made, India has been able to import technical knowhow at a low cost and create employment opportunities for its citizens by encouraging foreign direct investment. Indian government’s favorable policy regime and business environment have ensured that the foreign capital keep flowing into the economy. The government has been able to take many initiatives in the recent past, for instance, FDI norms across the sectors such as the defense department, the oil refineries, telecom, power exchanges, and stock exchanges among others (Sarkar and Mathew 77).

The current population of India stands at 1.3 billion. This makes it the second most populated nation after China, a position which it has held for a number of years. Consequently, India remains one of the best markets in the globe with a very consistent high demand. This is another critical factor which attracts many FDIs to continue investing in India. In the year 2018, for instance, India was rated as the highest recipient of direct cash inflows within the commonwealth nations. More than 80% of this cash flow comes from FDI. The government of India has also set a long and short term strategies for FDI. In the year 2019, for instance, the government of India targets to increase the cash flow from FDI to $ 75 billion. In the next two years, the government is expecting growth of FDI to $ 100 billion (Agarwala and Ramgopal 130). If this will be achieved, then India will be the top global partner.

Strong and Stable Market

India’s Gross Domestic Product (GDP) is estimated to have grown with 7.2%, hence making it retain the third position globally in terms of growth of GDP (Agarwala and Ramgopal 127). The growth rate in India has mainly been sustained by a stable market with very high demand level. The demand level in India is mainly attributed to high population which the country has.  The government policy of encouraging investors has also contributed to market stability by ensuring fair competition.

Technology Advancement

This is another influential factor of Indian’s economy. India has been able to import technology from the neighboring developed nations such as Japan and China. This has been done either through diplomatic relations which promote labor mobility or through FDI (Agarwala and Ramgopal 112). Technology has been able to increase the level of productivity in India with the same level of labor in terms of quantities thus accelerating the rate of development. With high level of technological development in India, factories have been able to produce at affordable rates, hence making the final prices charged to be within the market range. This consequently makes the demand stable, hence encouraging more production.

Natural Resources

The discovery of more natural resources such as oil, water, natural gas, forests and mineral deposits have also boosted the shifts on economic growth which has been witnessed in India (Wu 112). This is due to the fact that these natural resources have increased access to raw materials, hence creating a shift in the country’s production possibility curve.  This has also increased the rate of production, hence making the country able to produce enough for its economy and even have surplus. These among others are the key pillars for the drastic rate of economic growth which has been experienced in India.

The Challenges Facing India’s Growth

Though India has been able to have its economy growing consistently at an increasing rate, there are numerous challenges which are facing this growth rate, making most economic scholars to question the ability of the country to sustain the level of growth which this country has. The following are some of the key challenges which makes India’ economic growth rate questionable.

Labor Intensive Industry

Though India has been able to adopt technology on its production transitionally, a number of its industries still remain labor intensive. The high level of labor intensive industries in India can be attributed to the low cost   of labor, which has been creating some level of comfort to the investors in the Indian market. The labor intensive industries in India are consistently languishing. This has consequently affected the volume of exports from India into the world market.  The irony of this trend is that importation of labor intensive products is on the rise. This trend could adversely affect the rate of employment creation in India. For instance, labor’s intensive-industries such as gems and jewelry, textiles and leather are facing a downward trend in the revenue and their output levels thereof.

Gakhar argues that the challenge in the labor intensive industries suffered most when goods and services tax (GST) was implemented in the year 2017 (11). Unfortunately, this sector has not been able to recuperate so far. Labor intensive sectors were also among the key casualties of the note ban. A number of Small and Medium Enterprises (SMEs) could not cope with the demand of GST. With closure of these industries, the rate of unemployment will obviously shoot. Besides, labor intensive industries are becoming obsolete day by day, as technological innovation evolves. With this trend, the rate of exports by India will soon reduce as their products will not have demand in the global market.

Foreign Direct Investment

India’s economy relies more on FDIs which is subject purely to the economic state of the nation. Indian government gives tax advantage to these investors in a bid to encourage them.  This consequently discourages local investors. It is worth to note that local investment stands a chance of creating more opportunities as compared to FDIs. This is due to the fact that, most FDIs are controlled by foreigners and they come with a lot of conditions, which works to their advantage.

Low Rate of Job Creation

Insufficient rate of job creation is one of the challenges which is makes the sustainability of Indian’s growth questionable. Recent national sample survey, estimates that the rate of unemployment in India, stands at 6.1% (Agarwala and Ramgopal 117). The International Monetary Fund (IMF) has reported gender gaps in labor participation within India. The gender gap effects, which is otherwise known as potential output of the country, harms the inclusivity required in a sustainable growth.  The new fiscal policy does not focus on measures through the rate of unemployment can be reduced, as well as reduction of the gender gaps in the labor force.  This is despite the fact that the country has a very high population, whose Human Development Index (HDI) is still very low.

High Cost of Energy

            Lack of reliable power continues to be a major constraint to the sustainable economic growth in India. According to (Agarwala and Ramgopal 110), electricity shortages are estimated to cost the country about 7% of its GDP. Despite the high rate of industrial growth in India, the rate of electricity supply has only increased with an average of 5.3% on annual basis (Sarkar and Mathew 87). Improved performance of the energy sectors is necessary for the country to ensure sustainable economic growth. With largely rural population, there is a low access to modern energy services and a high dependence on the traditional sources of energy.  Non-commercial biomass is still a significant energy source, constituting about 30%s of the total fuel mix in the country. About 350 million lack access to electricity (Khalid, Seema and Amlendu 115). This low access to electricity, reduces the level of productivity, especially to the agricultural sectors.

India continues to rely heavily on fossil fuel, for its power sector. This is despite the fact that it has hydropower, whose absolute potential is approximated to be 150,000 MW (Gakhar and Divya 112). The potential of the hydropower is however, low, taking into consideration the energy needs of India. More than 60% of the firms in India rely on captive back up generation. The level of reliability, fuel efficiency and environmental performance of about 27,000 of old coal based capacity have their need for improvement overdue (Gakhar and Divya 114).  The level of efficiency as well as the technical customer care measures remains very low. Unfortunately, the power generation and supply in India is dominated by the government. With these hiccups, the government parastatals perform dismally financially, which discourages private investors to venture into this sector. This, therefore, make the hope of a quick fix of the current challenges diminish.

Depletion of the Natural Resources

As had been stated above, the discovery of natural resources within the Indian borders has led to an increase in the level of productivity (Banik 12). However, the level of depletion of these resources are also on the rise, hence making one to question their possible existence in the near future.  The high rate of depletion can be attributed to weak government policies to protect these resources, as well as the high population, which continues to exert high pressure on these resources.

Unrealistic Fiscal Policies

        According to Gakhar, in the interim budget of the year 2019, the government of India announced to transfer of income to small and marginal income (10). This policy is not feasible. This policy is seen as a powerful policy to the other welfare schemes designed by the Central Government. The big question is, will other welfare schemes be eliminated, or will it lead to an additional fiscal program? Either way, the severe drawback of such policies is lack of attention to the public service provisioning.  This policy is set to have very limited or no impact on GDP growth, as well as HDI increase.

Conclusion

          From the above analysis, it is factual to conclude that the sustainability of India’s economic growth is questionable. This is due to the constraints in critical sectors such as power, unrealistic and ambitious fiscal sector, and overreliance on FDI, depletion of natural resources and deteriorating agricultural sector. The country should, therefore, change its fiscal policies and sanitize its critical sectors which are suffering for it to realize sustainable economic growth.