State Bank of India has predicted that India’s GDP growth for the Financial Year 20I9-20 would come down to 5% from the earlier 6.1%. This means a record low of just 4.1% in the second quarter (July-September 2019) as automobile sales slowdown. The core sector which measures an index of 8 core industries of coal, crude oil, natural gas, steel, cement, fertilizers, refinery products, and electricity has contracted sharply by 5.2% in September. There is also a heavy decline in investments in the construction and infrastructure space.
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Why Our GDP Growth is Going Down?
India’s economy has grown at the slowest pace over the past 6 years for the June quarter. GDP grew at just 5% from April to June 2019 as consumer demand slowed along with low investments.
What could be the reason for the fall in GDP? Does the answer lie in education, agriculture, infrastructure, and manufacturing? Let’s find out.
Agriculture and the fall in GDP:
Agriculture is very important to the Indian growth story. It contributes to around 17% of the GDP and employs more than 50% of the population of India. Let’s take a look at the growth of agriculture, forestry, and fishing in India. The growth of This segment in real terms was just 2% for the June quarter (April to June 2019). So what ails the agriculture sector?
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Agriculture and GDP:
- Agriculture in India is heavily dependent on the monsoons. This is a gamble with the monsoons. There has been a failure in monsoons in four of the five years from 2014-15 to 2018-2019. A below-normal monsoon has its impact on crop output.
- Yes, the Government has launched irrigation projects, but the farmers have not been able to get the benefits. The problem lies in command area development. (This focuses on an adequate delivery system so that irrigation water reaches the fields). Farmers on both sides of the canal have to pump water using pump sets. This increases their costs leading to wastage of water. Small farmers who cannot afford this and depend heavily on command area development have a problem.
- The cropping pattern is another reason for the fall in GDP. Heavy focus is on food crops like wheat and rice, while less importance is given to oilseeds and pulses. This is faulty agricultural planning which goes back to the period of the green revolution. The focus then and now is on food crops and not commercial crops.
- There is inequality in land distribution in India. Rich farmers own most of the cultivable land, while very little land is owned by the majority of farmers. Take a look at these statistics of the agriculture census 2015-16. Small and marginal farmers who have less than 2 hectares of land account for 86.2% of farmers in India but own just 47.3% of the cropland. The farmers owning 2-10 hectares of land account for 13.2% of farmers but own 43.6% of the cropland.
- The biggest problem in agriculture is the lack of real-time information. Lack of important farming information at the right time leads to heavy losses to the farmers. Technology helps farmers choose the crops, diversify farming to increase productivity, forecast seasonal conditions and look at soil health. There is a need to boost investment in the agriculture sector and focus on technology.
- The biggest problem in agri-marketing is the Agriculture Produce and Livestock Marketing Act, 2017, where farmers are not allowed to directly sell products to customers. The APMC Act has created cartels of buyers that ensure farmers get low prices for their produce and profit at the cost of the end consumer.
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Manufacturing and GDP:
So, what is the problem with the manufacturing sector in India?
- The Indian manufacturing sector expanded rapidly after liberalization in 1991. However, there was a slowdown in the late 1990s. The manufacturing sector did not focus on global demand (export-oriented manufacturing). They became merely factories for foreign players. There was no focus on innovation, like our product design for automobiles was just sourced from European Design Studios. This means there is no competitive advantage in manufacturing.
- The focus in the Indian manufacturing sector has been on the domestic sector and it wants protection from the foreign market. They are content targeting local /domestic demand with protection from foreign competition (This is protectionism). This results in low-quality manufacturing which is hurting Indians consumers and also MSMEs in India. If there is a slump in domestic demand, there is no alternative for these companies as they can’t target the International market.
- Now, MSME is the best industry to exploit domestic demand, but the manufacturing revolution in India never happened. Between the time period of 2003-2009, the focus should have been on MSMEs which did not happen. Risk-aversion in the banking sector in this time period; where banks did not lend to the MSME Sector compounded the problem. Also, a number of small companies could not grow into larger companies because of compliance costs. Sadly, most of the funding from the banking sector goes to large corporates and not the MSMEs and if they can’t contribute to GDP, there’s a GDP slump.
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The solution to this problem:
- Increase the global competitiveness of large corporates and fund MSMEs so that they can compete globally.
- Cashless MSMEs should have no compliance issues. Banks should study MSMEs, identify the good ones and fund them.
Education and GDP:
- Indian education sector focuses on syllabus and exams which are not in touch with ground reality. Any experimentation can be fatal. We need a focus on the syllabus which focuses on experimentation and real issues. Understanding must be through experimentation.
- Another important matter is financial education. There is no focus on financial education at the school level. Children are not taught to save, invest, borrow or spend in the right way. The education system has no value if even graduates are not imparted a holistic financial education.
- The Indian education system in India still follows the ancient British System of the pre-Independence era. Even though we have IITs and IIMs and the best law and medical colleges, the contribution to global innovation is zero. Our education system simply churns out engineers (These engineers follow an out-dated system) and are of not much use. We need more entrepreneurs, artists, scientists, and writers.
See Also: What is an Economy?
Infrastructure and GDP:
- There was near-stagnation in the time-frame between 2012-2014; as private investment in the highway sector dried up. The Government did a good job through the HAM (Hybrid Annuity Model where the Center bears 40% of the cost and the balance is borne by developers.
So where does the problem lie? Infrastructure depends heavily on government funding. (More than 90% of the funding is from the government). The private sector must invest so that infrastructure grows in the country. Funding must come from banks that are currently showing an aversion to lending in the infra space.
- The Government is doing a great job with the increase in Direct and Indirect Tax Revenue in the last few years, especially after demonetization. Black Money from hoarders has flowed in. Still, the Government can’t support the infra sector alone. Private industry and banks have to play their part. However fiscal constraints are a problem and the Government alone cannot support the space.
- Infrastructure in India takes time to build. Project delays are a major problem due to cost overruns. This is because of land acquisition costs and complex issues along with environmental clearances. There is also payment of compensation issues in land procurement.
- The private sector is investing only in urban space and is not focusing on rural areas. Incentives should be given by the Government only to those companies which have a rural focus.
- The focus needs to be on the development of ports, airports and railway modernization to bring rapid development to the infra space.
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