ECONOMIC CHALLENGES TO THE NEW GOVERNMENT
What’s in news?
The major challenges the new government facing are fixing the country’s financial sector, especially its banks; continuing to reform the tax system; reducing outflows of funds due to loss-making or inefficient government enterprises; and truly reforming the agricultural sector.
The following are the various economic challenges we are going to face;
Fixing the country’s financial sector:
Finance is both the fuel and the lubricant of the economy’s engine, fueling growth by channeling funds to productive investment, and lubricating transactions and day-to-day economic activities. The overhang of debts that are on the balance sheets of banks and other financial institutions, but will almost certainly never be repaid, prevents new investment taking place to the degree it needs to. The new bankruptcy law, and the Reserve Bank of India’s attempt to make it operational and effective, has run into obstacles, which, if not removed, will allow the situation to linger and even worsen, rather than the hoped-for improvement.
Country’s tax system:
India is closing in on three decades of reform of what used to be a devastatingly inefficient tax system. But it remains an under performer in terms of its tax-to-GDP ratio, adjusted for its per capita GDP. The goods and services tax (GST) still need to be simplified and implemented fully. Simplification, and possibly even lowering of rates, can improve both compliance and enforcement.
Even moped sales have fallen over the last two months by 9.8% in March and 5.9% in April. Non-oil, non-gold, non-silver imports—another good indicator of consumer demand—have fallen over the last four months.
With private consumption slowing down, the government spending more will lead to increased income in the hands of people, and then they will spend more and economic growth will revive.
PSBs and NBFCs:
As of 31 December 2018, the total bad loans of these banks amounted to₹8.64 trillion (bad loans are largely loans which haven’t been repaid for a period of 90 days or more). In the last two fiscal years, the government has invested ₹2.06 trillion into these banks to recapitalize them and to keep them going. The interesting thing is that in the interim budget for 2019-2020, presented earlier this year in February, the government has allocated almost nothing towards the continued recapitalization of PSBs.
The country starts with low-value labour-intensive exports and then gradually over the years moves on to high-value ones. The low-value exports create jobs at a massive pace.
The short-term reason for distress in agriculture has been falling food prices. Nevertheless, there is a long-term reason as well. In 2004-2005, agriculture, forestry and fishing, as a percentage of GDP, stood at around 21%. It has since dropped to around 13.1% .