6th November 2019
TOPIC: Indian economy. (Paper III)
Discuss that the viability of a business depends on the vitality of the economy in which it is embedded.
News of a continuing improvement in India’s ranking according to the World Bank’s ‘Ease of Doing Business’ Index appears to have come in handy for a government otherwise beleaguered by seemingly endless bad news on the economic front.
- The Finance Minister was quick to express both satisfaction and a determination to take India into the top 50 countries- it is pegged at no. 63 now among the 190 ranked according to this index.
- In a country where economic policy has for long remained impervious to the challenges faced by its smaller businessmen, any real attention their condition gets is to be welcomed.
Enable the self-employed:
- The scale of the problem is better understood if we recognise that by far the largest number of working Indians is self-employed.
- Among them are our carpenters and service providers neither the grand industrial policy statements of the Nehru era nor Narendra Modi’s ‘Make in India’ programme appear to have realized that they need to be enabled too.
- Having said the ease of doing business is important, it needs to be emphasised that a business cannot flourish on its own.
- Its fortunes are tied to the health of the economy within which it is embedded.
- The viability of a business depends on the vitality of the economy in which it is embedded.
- Our economic policymakers would today be making a mistake if they spend all their energy on improving the ease of doing business while ignoring the state of aggregate demand in the economy.
- This is suggested precisely by the fact that, when judged by the above-mentioned ease of doing business index, things have improved rapidly and significantly in recent years.
- India’s rank improved from 142 in 2014 to 77 in the report for 2019, and 63 for 2020.
- However, this has done little for private investment, which, when measured as share of GDP, has remained unchanged since 2014.
- The recent surge in India’s ranking on the ease of doing business has come at a time of a distinct slowing of growth.
- It appears that we would be unwise to judge the state of the economy by observing movements in the ease of doing business index.
Reasons for a slowdown:
- A slowing of aggregate demand growth can take more than one form.
- In the textbook view it is part of the investment cycle, and deficit spending can take the economy out of it.
- But what we may be witnessing right now could be a demand slowing with Indian characteristics.
- This is related to the fact that the greater part of the population is located in a very slow-growing agricultural sector, putting a brake on consumption growth.
- Now, as the income distribution shifts away from the overwhelming majority of the population, aggregate demand growth slows.
- When faced with an aggregate demand growth slowdown an active macroeconomic policy is needed.
- Of monetary policy it seems we are doomed to see a change too little too late after years of the RBI having nursed a high-interest rate regime.
- Fiscal policy alone holds some promise but calibration would be necessary in its use.
- Spending must focus on the rural sector to raise agricultural yields and build the infrastructure needed to support non-farm livelihoods so that pressure on the land can be reduced.
- This will also expand aggregate demand.
Right now the government needs to be pro-active rather than adopt hands off approach. Business cannot go it alone.
6th November 2019
TOPIC: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests. (Paper-II)
Though there are reasons for India to stay out of RCEP, but discuss the need for the tariff walls to remain low.
India eventually decided to play it safe by pulling out at the last minute from the Regional Comprehensive Economic Partnership (RCEP) which was finalised by 15 countries in Bangkok.
- The pressure mounted on the government and the Prime Minister by interest groups, ranging from farmers, small industries and traders, to political parties across the board, surely played a major role in the decision to stay out of the grouping.
- The country had little choice but to exit after its safeguard requests were not conceded.
- On the one side was the looming figure of China in the group and that country’s desperate need to find newer markets for its products in the backdrop of its trade dispute with the U.S.
- That India runs a massive bilateral trade deficit of $53 billion with China and the fact that China has not taken satisfactory efforts to whittle down the deficit certainly were major inputs in India’s decision.
- Second, India’s experience with countries with which it has signed free trade agreement till now is not exactly a happy one.
Trade with other nations:
- Though trade has increased post-FTA with South Korea, ASEAN, Japan, imports have risen faster than exports from India.
- According to a paper published by NITI Aayog, India has a bilateral trade deficit with most of the member countries of RCEP.
- More importantly, while exports to RCEP countries account for just 15% of India’s total exports, imports from RCEP countries make up 35% of the country’s total imports.
- Given this, it is obvious that in the immediate context the country had more to lose than gain from joining RCEP.
- India’s request for country-specific tariff schedules was rejected early in the negotiations.
- So was its suggestion of an auto-trigger mechanism to check a sudden surge in imports from particular partner countries.
- India also argued for stricter rules of origin, and rightly so too, but this too failed to pass muster.
- Movement of professionals was another area that saw an impasse.
- Given these, there was little chance of the political leadership agreeing to join the bloc.
- Policymakers must have reasoned that India has active FTAs with most members of the RCEP except China, Australia and New Zealand and there will be no economic impact.
- However, the fallout of India’s decision is that has burnished its image as a protectionist nation to open its gates.
- The smart way to handle this is to initiate reforms on the export front, bring down costs in the economy and simultaneously, increase efficiencies.
India cannot miss out on being a part of global supply chains and this can happen only if tariff barriers are reduced. And the best way to balance the effect of rising imports is by promoting exports. Tariff walls cannot be permanent.