By Rajiv Khosla & R S Bawa
A June 2016 report by the World Bank, showed a decrease in the global growth forecasts from 2.9% to 2.4%. If forecasts are made today, the growth projections will see a further dip. This is due to –
- The predicament in the US Fed Reserve’s interest rate fixation, after Brexit
- geopolitical concerns in the Middle East;
- unstable crude oil prices worldwide;
- sluggish economic recovery of major Eurozone economies;
- continuing slowdown in China; and
- weak global trade.
The problems may aggravate, if Donald Trump and Marine Le Pen win the Presidential elections. It will lead to the decimation of the European Union, isolation of the UK and US and the dominance of Russia in Eastern Europe. New political and economic alliances may emerge, particularly, towards the East.
Economists have forecasted that the ongoing volatile conditions will continue to persist in 2017 as well. The corrective measures taken in the recent past have not shown any significant results. These include:
(a) China introducing the circuit breaker rule to protect the interests of the investors
(b) The European Central Bank providing long-term financing options to the banks in the eurozone to lend more.
(c) The US economy not hiking its interest rates in its quarterly monetary policies
(d) The Bank of Japan implementing the asset-purchase program to stop the economy from falling into recession.
Status of the Indian economy
The Indian economy is better-placed vis-à-vis other economies. The World Bank has projected a 6.7% GDP growth for India in 2016, which is fairly decent under the present circumstances. The causes for imbalances in the economy need to be understood at both the businesses and buyers’ level.
At the business level, surveys by the RBI’s Industrial Outlook and FICCI’s Business Confidence Survey, projected subdued business sentiment and low investment for Indian businesses in the future. Further, recent political instances of turmoil in Jammu and Kashmir is expected to breed uncertainty in the minds of investors.
On the buyers’ side, commercial banks passed on only half the volume of RBI’s rate cuts to the borrowers. Rather, they decreased interest rates on saving instruments to yield lesser returns to the depositors. In light of this, the Monetary Policy Committee’s decision to cut the interest rate by a marginal 25 basis points on October 3, cannot guarantee to put buyers’ confidence towards the north.
Similarly, the government did not let the benefit of falling petroleum prices trickle down to the Indian consumers. The only respite has come through the introduction of the seventh pay commission and OROP scheme. Thus, the cycle of ‘low investment – low employment – low demand – low growth’ has gripped the economy.
The government must understand that the economic fiascos worldwide hinder an easy influx of foreign investment in emerging economies. The efforts by the central banks of many countries to find investors even at zero rates of interest have failed. At this juncture, the government should strive for a consumption-led domestic investment.
The Way Forward for the Indian Economy
The manufacturing sector can generate more employment vis-à-vis the agriculture and service sectors. It is observed that the 60% share of the services sector in India’s GDP has been able to provide employment to barely 24% of the total working population. Thus, the alternative in hand is to lift and generate employment in the manufacturing sector. High employment will boost consumption, India’s exports and give an impetus to further investment.
Extending cheap credit to manufacturing units which employ more labour should be designed. Red tapism should be cut down to provide speedy clearances to businesses. Currently, a manufacturing unit has to comply with nearly 70 regulatory laws along with multiple inspections, besides filing more than 100 returns annually.
The manufacturing sector has been deprived of the top talent due to its inability to pay high packages as compared to the service sector. All higher educational institutes should be sensitized to invite indigenous manufacturing companies first, for placements, rather than financial and consulting companies.
Sustenance of the Indian economy needs work on skill development of existing workers and innovations. India is facing competition not only from low-cost poorer countries like Bangladesh, Vietnam and Indonesia but also from highly innovative advanced economies.
In order to impart skills, mandatory provisions for annual in-house training for the employees in manufacturing units need to be conducted in collaboration with the premier institutes like the National Skills Development Council.
Amidst slowdown that has spread across the globe, the Indian economy can mitigate its impact by reducing its dependence on foreign investment. The focus needs to be on an economy whose foundation is built on manufacturing.
The culture of innovating needs to be cultivated to accelerate growth. With fiscal deficit down, surcharges and cesses need to be shunned in order to dispense additional purchasing power to the masses. Amidst slowdown that has spread across the globe, the Indian economy can mitigate its impact by reducing its dependence on foreign investment. The focus needs to be on an economy whose foundation is built on manufacturing.
Rajiv Khosla is Head, University School of Business, Chandigarh University, Gharuan. R S Bawa is Vice Chancellor is Chandigarh University, Gharuan.
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