Global Economies


Prime Minister Narendra Modi has massively improved the Indian economy from his predecessor Manmohan Singh since coming to power in 2014, but the growth rate of just 5.7% compared to 9.1% a year earlier represents worrying signs for the Indian economy and the continuation of their growth and wealth. It has been over 3 years since growth rates have fallen below 6%, and with India experiencing slowing growth for the past 6 quarters in a row, is it beginning to falter in its pursuit for economic prosperity.

India needs to maintain a growth rate above 7% to continue to reduce absolute poverty in the country and improve living standards nationwide, and a small change in this growth rate can have a huge impact on the incomes of citizens, a phenomenon known as the “power of compound interest”. At a growth rate of 6% a year until 2040, income per head would quadruple, reaching levels experienced in Malaysia, Poland and Chile today. So why is India struggling to maintain their growth?

This accounts for around 15% of GDP but employs 50% of workers. However falling exports has meant profits from agriculture are dwindling, and with industry growing just 1.6%, India is struggling to find work for the 12 million young Indians that join the workforce each year. The service sector continues to grow, but with poor education standards and millions of unskilled workers, it needs construction and better infrastructure as well as improved education before it can begin recruiting more and more young workers.

Many businesses struggle to hire workers due to labour laws with the prime example of the apparel and clothing sector – 85% of firms in this sector employ less than 8 workers. The government feels it has done a lot to reform labour laws however industry still favours capital intensive rather than labour intensive expansion, contributing to the huge underemployment in the country. This situation is exacerbated in rural India – just 3/5 of workers can find a job during one year.

India cancelled 86% of its currency overnight in an attempt to wipe out corruption and forgery in the country; however this has only made things worse for the economy. Many firms in the cash driven informal sector, which was a huge source of jobs in the country were forced to shut down, and combined with the new Goods and Services tax, small scale companies are suffering.

17/21 Indian banks have bad loan rates of 10% or more, mainly as a result of lending to industry, and this has forced the government to add close to £17 billion to keep the banks afloat. Despite this, the federal government is extremely reluctant to privatise banks and optimise their efficiency, despite the huge impact that bad loans have had not only on the economy but on confidence for consumers and businesses.

These long term structural issues pose a huge threat to the Indian economy and if growth rates of 7-8% are desired, then the government must prioritise these problems to aid growth in the long term and bring the Indian economy up to superpower status.

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