India’s economic slowdown and what Economics has to say

India’s economic crisis can bring about the much needed reforms as Prime Minister Narendra Modi called for the country’s economic reforms within a week of assuming office in May and has made pretty good progress since then.

But to bring economic shift, India will have to change the way it deals with its fiscal deficit, which have had a break from for over two decades under the United Progressive Alliance regime. Thus, the UPA – II and Modi 1.0 was promising in many aspects. Demonetization has surely proved to be a wrong move. GST, which was meant to bring the taxation system of the country under one roof and to further simplify it, has now complicated the nature of doing business.

This in turn will require a rethink of India’s top economic policy levers and a reorientation towards investment, productivity and employment growth, as a part of an overhaul to the country’s economic model. Although India’s fiscal deficit has been a huge problem over the past three years, it does not necessarily reflect India’s overall economic health. But the signs are surely to be seen today. With sectors like automobile, service, real estate and even the Public Sector Undertakings are hit severely by the winds.

Its structural deficit, which measures the state of its infrastructure, is currently just 3.5 per cent of GDP but is projected to reach 7 per cent by 2024 if reforms go right. The key drivers of India’s current fiscal position are the state’s dependence on public borrowing and the high level of its reliance on public investments, as well as rising interest rates that have resulted in a slow and steady kind of a situation. With the government borrowing Rs. 1.76 Lakh Cr from the Reserve Bank of India (RBI) in the month of August was like a shock to the whole system.

To conclude : Economic predictions and models will work only when certain parameters are considered and the dynamics of this vast land are understood. If not, then the blame game will continue to go on.

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