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http://www.managementparadise.com/article/6496/key-challenges-in-indian-economy-2014-15
Category: Economy / Public Economy
Published on Friday 30 May 2014

Key Challenges in Indian Economy (2014-15)
By Adri Mitra (M.Phil, M.Com, PGDM)


Here are few key challenges of the Indian
economy to be concentrated and solved by new
NDA / Modi Government which exist for long.
The first key challenge will be to start bringing
India's current account deficit to sustainable levels.
The deficit has widened to a record 4.2 percent of
GDP in 2013-14, far above what the Reserve Bank of
India considers to be a sustainable level, namely 2.5
percent of GDP. The key reason for the large current
account deficit lies in the trade deficit having
ballooned due to India's relatively poor
competitiveness and high dependence on oil and gold
imports, which alone account for virtually half of
total imports. Boosting merchandise exports through
greater diversification across destinations and
products are essential to bridge the trade deficit but
this cannot be achieved without boosting labor
productivity and enhancing transportation
infrastructure, especially ports. With regards to gold,
dematerialization, and introduction of inflation linked
bonds would help reduce its physical imports of gold.
Meanwhile, for oil, achieving greater energy
efficiency, aligning domestic oil prices to
international ones are a key.
The second challenge is qualitative and quantitative
fiscal consolidation: Together with the current
account deficit, the stubbornly high fiscal deficit (5.8
percent of GDP in 2013-14) makes the Indian
economy more vulnerable to shocks than most
emerging markets. India's twin deficits have
adversely affected macro stability by pushing up
inflation, undermining growth and leaving limited
room for monetary accommodation. India's fiscal
policy has been too loose for too long. The
government must focus on quality spending by
channeling resources towards infrastructure and
human capital investments while reducing
unproductive spending, particularly on food,
fertilizer and fuel subsidies. Furthermore, the
government must implement revenue enhancing
reforms by making the tax system more efficient and
improving compliance.
The third challenge, very much related to the
previous one, is lowering high and sticky inflation.
India's persistently high inflation is fallout of myriad
factors that are both cyclical and structural in nature.
These include supply side bottlenecks, very high
reliance on imported energy and lax fiscal policy.
While a loose fiscal policy has boosted aggregate
demand, particularly across rural areas, an enabling
environment to enhance supply response is missing,
thus aggravating inflation pressures. Containing
inflation near the RBI's comfort zone of 4 to 5
percent is crucial to facilitate sustainable growth.
The fourth challenge lies in rebalancing the growth
mix in favor of investment: India's GDP growth is
mainly consumption driven in good part due to
consumption subsidies.
Eliminating such subsidies will, thus, actually have
three positive outcomes: reducing the fiscal deficit as
well as excessive consumption which should also
help reignite a virtuous savings investment cycle. In
fact, since the global financial crisis of 2008-09,
India's savings rate has declined (to near 29 percent
from a peak of 37 percent in 2009) amid high
inflation and fiscal slippages. Given that India's
investment upturn during the golden years between
2004-2008 was largely financed by domestic savings,
a revival in India's domestic savings is critical for
aiding a sustainable upturn in investment. In this
regard, the Indian government needs to improve
further on reforms execution and policy clarity so as
to underpin foreign investor confidence.
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The fifth challenge is Building confidence is

essential for encouraging private participation and
sustaining growth momentum. Pending areas of
reform that are within the domain of the Executive
including clarity on transfer pricing, FDI in retail and
removal of APMC Acts are of crucial importance. A
predetermined time bound set course of action as in
the case of diesel price deregulation, would be most
helpful. Lastly, addressing sectoral bottlenecks e.g,
railway connectivity to mines, revised PPP
framework for roads, incentive structure for E&P in
the hydrocarbon sector and a more rule based pricing
of natural resources would go a long way to kickstart
the investment cycle. Second, the job of revival of
growth is particularly difficult while at the same time
we try to reduce the macroeconomic risks that have
accumulated already. Inflation remain high because
pressure points in inflation has emerged at regular
intervals whether its base effect, flare of
international commodity prices, monsoon
unevenness or even structural shift food basket due to
rising income particularly rural regeneration.
Addressing sectoral bottlenecks as highlighted above
itself would help improve supply. Besides we need
some targeted intervention in the area of food
economy including improving cold storage,
moderated MSP hike, removal of APMC, etc. We
don't concur with hardening of monetary policy as a
solution to inflation control. On the second risk
element of fiscal deficit, the Government including
after election, needs to follow the preset fiscal
corrective roadmap or even better it. Third, the
correction in CAD/GDP now seem to have taken root
with investment demand for gold evaporating on its
own aside from the regulatory curb while capital
goods imports remain limited due to slowdown.
The sisth challenge is piece of the puzzle is a more
coordinated policy making between monetary and
fiscal authorities in the first place and a more
anticyclical response from both. Attempt to correct
fiscal laxity through a tighter than warranted
monetary policy creates sectoral mismatches, e.g.,
consumption boom coupled with a slump in the
investment cycle. It is better that the monetary
responses are measured so as to balance the
considerations of growth, inflation, the stage of
economic cycle, the sources of inflation and
consequences of rate decisions.
The seventh challenge is to the boost manufacturing
sector: Being a primarily services driven economy,
the share of manufacturing has been stagnant at a
mere 16 percent of total GDP. India's Asian peers,
such as China, South Korea and Taiwan, have
immensely benefited from a strong manufacturing
sector, which enables greater employment creation,
attracts higher and stable foreign direct investment
and bolsters infrastructure development. However,
bottlenecks in land acquisition, archaic labor laws,
poor physical infrastructure, less favorable tax rules
and tight regulations deter manufacturing sector
growth in India. Reassuringly, the Indian government
has approved a national manufacturing policy aimed
to increase the manufacturing's share in GDP from
the current 16 to 22 percent in a decade and in turn
create millions of jobs and add capacity to sustain the
pace of economic growth. That said, effective
implementation of such policy drive will clearly
prove difficult given past records.
All in all, although India's challenges for 2014-15
look massive, they could still be manageable given
India's huge growth engines stemming from a young
and massive population in a deep urbanization
process. The Indian government must grasp the
opportunity of reform in the good times rather than
waiting any longer.
One positive side is that the first time in three
decades, the Bharatiya J anata Party (BJ P) has won so
many seats (282 out of 543) in India's recently-
concluded general elections that it can hope to be in
office for the next five years without the support of
another political party. Not only does that give the
BJ P an unequivocal mandate for change, but also, it
allows the right-of-center party to adopt a long-term
perspective while making economic policy decisions,
under the circumstances where the last UPA /
Manmohan Singh Government has shown policy
paralysis in all areas.