Revival of the Economy: Reality or Myth?

Revival of the Economy: Reality or Myth?

Question: The Indian economy has to be revitalised. Data indicates that the economy is displaying signs of revival. Has the economy made a complete recovery? Discuss.


• Economy is showing signs of revival yet much needs to be done before it makes a complete recovery

• The usual monthly data pertaining to inflation and industrial output has been largely positive

• However, merchandise exports fell for the sixth consecutive month; In May, the decline was by more than 20% followed by 14% in April and 21% in March

• WPI is crucial for policy though RBI has shifted to CPI for monetary policy purposes

• For revival to be complete, the twin objectives of growth and price stability have to be met

• Food inflation has come down in May from April levels with the exception of pulses which rose by 16.6%

• Government should reorient its food procurement policy

• MSP for pulses has risen substantially; GoI has announced only modest increase in staples price; this will cause farmers to switch to pulses for which there is a shortage; GoI is acting proactively for combating price pressures

• Though increase in manufacturing was propelled by capital goods sector growing by 11.1% in April, progress is uneven across sectors

• There is no merit in observing a narrowing trade deficit caused by falling exports as well as imports

• Yet, growth forecasts for the Indian economy are higher; revised national account series incorporates many conceptual and methodological improvements ensuring their consistency with global best practices

• In association with the revised GDP, IMF forecasts growth will rise to 7.5% in 2015-2016 boosted by stronger investments and an improved business climate

• GDP revisions indicate more resilient performance of manufacturing and services sector of the economy

• Though consumption is stronger, investment activity is held back by constraints which are structural and related to supply side

• Inflation has fallen by half to around 5% after being pegged at 10% for several years

• This is because of the tightened monetary policy of the apex bank and the government’s efforts to contain food inflation

• Low and stable inflation can bolster economic growth

• GoI has also worked for fiscal reforms and government’s fiscal deficit fell by 4.1% of GDP in 2014-2015 aided by lower oil prices

• Space has been created for higher spending on infrastructure and this can impact economic growth significantly

• Deregulation of diesel prices and raising of natural gas prices is a step in the right direction

• However, spending on infrastructure such as rail, roads, ports and social spending will enhance the quality of expenditure

• Subsidies leakage needs to be controlled and GST must be implemented to replace a slew of local levies

• India needs to leverage its demographic dividend as around 100 million youth will enter the job market within the next 10 years

• Bottlenecks in energy, mining and power sectors need to be addressed

• Infrastructure gaps of the nation need to be closed

• Land and environmental clearances must be simplified

• Reform in the agricultural sector through revamped PDS and storage systems must be accomplished

• Labour markets need to be more flexible for helping in job creation and boosting female labour force participation

• Education also needs to be improved to meet rising shortage of skilled manpower

Facts and Stats

• Industrial production grew by 4.1% on a Y-O-Y basis, as per the IIP

• There was 5.1% growth in manufacturing which accounts for 75% of the IIP index

• Consumer price index measuring retail inflation rose Y-O-Y by 4.87% in April to 5.01% in May.