Structural Reforms in Indian Economy

Of late 2011 and early 2012, Indian economy has shown resilience and positive growth momentum. It is true that India has come out reasonable well in macro-economic policy reforms compared to many other countries with inflation moderating and the government taking measures to check its deficit. Inflation has eased from close to double digits indicating another cyclical recovery .However India’s economic fundamentals have weakened over the last four years which indicates this recovery to be short lived and may be backstabbing soon without structural reforms.

Enhanced structural reforms in infrastructure, farm sector, labour market, fiscal policies and trade liberalisation need to have a stable, long term economic growth in India.

Administration of Subsidies

Post 2008-09 India’s subsidy bill rose from Rs 70,000 crore ($15 billion) in 2007-08 to Rs 2,16,000 crore ($45 billion) in 2011-12 – and as a consequence, spending in productive sectors of the economy and infrastructure considerably reduced. The subsidy even was not enough to tackle high oil prices and gas.

Now India had only two options either increase domestic prices of these products or wait for international decline. There is no clear cut policy to tackle such situation and hence it keeps coming back and effecting people with price rise, decline of growth in a cyclical trend.

Public distribution Infrastructure

The food entitlement has increased with programmes like (MGNREGA) and has also given better bargaining power to labour and consequently the overall wage rates have gone up raising the demand for food.

Further, demand for protein based products and vegetables have increased substantially with rise in income. The demand-supply mismatches in the case of these items have resulted in rise in their prices. At the same time, less focus exists in the management of supply chain with investment in rural infrastructure.

Investment Infrastructure

Industrial employment will have to expand so also the relative contribution of industry to tame growing unemployment. Accordingly, there is a need to step up investment in infrastructure.

Besides budgetary support, the bulk of the funds have to be emanated from banks to support this.

Apart from the need for substantial financial outlays for infrastructure, there are several non-financing constraints: particularly land acquisition delays.

Fiscal Consolidation

There is a need for the Government to revert to its rule-based pre-crisis fiscal consolidation path without compromising on the quality of fiscal correction.

This is necessary to obviate the risk of twin deficits and to raise the overall saving rate.

Financial Inclusion

Further, Although India has a well-diversified financial system, and several measures for financial inclusion have been taken in the recent past, credit penetration continues to be relatively low in comparison with several other developed and emerging market economies.

Accelerated economic growth will depend on access to formal finance by the bulk of the population and greater credit penetration. This will require greater monetary-fiscal coordination and alleviation of supply constraints, particularly in agriculture.

Problems in implementation of Reforms

With high fiscal deficit, implementing reforms will lead into the current account deficit to soar high and inflation will also remain high.

Further, in the absence of an investment revival to expand the economy’s productive capacity, any reduction in interest rates will only fuel consumption demand. Hence, monetary policy easing without structural reforms and fiscal consolidation is likely to lead only to a short-lived growth spurt, because of rising inflation and a widening current account deficit.

The high cost of doing business and continued domestic policy uncertainties may push companies to relocate operations overseas, and India’s young, skilled labour could follow.

For a developing country like India, external factors like Europe’s recovery, the price of oil and foreign fund flows can take the annual GDP growth trend-line in either direction. Even manufacturing productivity is required to be boosted through new corporate investment in physical assets. Corruption in private-public partnership projects and other acts of political misgovernance have reduced foreign investment, widened the trade and current account deficit and put pressure on the rupee and downgraded India’s credit rating. This has raised corporate borrowing costs, slowing new investment in productive assets and setting off a vicious downwards spiral.

This problems demands initiatives with substantial and effective structural reforms to address growing poverty, growth and unemployment in all major macro economic divisions to recover from such short term fluctuation and cyclical trend of growth.