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5 ways Indian economy can grow at 8%
Companies profit from a strong economy. They are able to generate better income as the demand surges due to rapid economic growth. Prospects of such high growth in profits motivates investors to get bullish. The Indian economy has gone through a tough period as growth slowed to under 5% in 2013-14 from 9% in 2007-08. However, experts see an improvement. The Organisation for Economic Co-operation and Development (OECD) expects India's Gross Domestic Product (GDP) to grow 5.4% in the current fiscal ending March 2015. The association of rich countries and emerging markets like India recently released an India survey.
It suggests that India can again grow at the 8%-rate or more. In the short run, it depends on bringing down inflation and government debt. However, in the long run, a lot depends on the government's reform process.
Here are 5 ways India's economy can grow at 8%:
The Indian government's expenditure grossly exceeds its revenue. This is called fiscal deficit. A key reason for this is that the government's tax revenue collection misses targets. "Implement a national value-added tax (GST) with only limited exemptions," a new OECD survey of India's economy said this week. The Goods and Service Tax (GST) has been in the pipeline for long. It aims to replace the current complex indirect tax system with a single tax. The GST is expected to make the tax system simple and more efficient. The Direct Tax Code (DTC) also needs to be implemented, which aims to replace the current direct tax structure. Companies and consumers pay indirect tax on the goods and services produced. This is different from the tax paid on income - a form of direct tax.
A significant portion of government spending goes into subsidies. This is the amount the government pays companies for keeping prices of certain goods like fuel and food artificially low. This affects how much the government can spend on productive factors like investment in new infrastructure and so on. This is called capital expenditure - a important contributor in economic growth. OECD suggests that the portion of capital expenditure should increase while subsidies spending should reduce. This would help spur economic growth in the long-term.
Banking system reform:
The banking system is the backbone of the Indian economy. The government is a big player in the sector. Nearly 70% of the total banking assets is held by government-owned public sector banks. However, public sector banks are the least profitable. A key reason for this is the rise in bad loans. The government, then, has to use public money to pay for these loans, which could have otherwise been used to fuel growth. For this reason, a sound policy needs to be put in place that would help banks recognise bad loans well in advance. OECD also suggests that the sector also be liberalised with limited government intervention.
As the economy slowed down, the hiring sector was one of the worst hit. "Job creation has been sluggish," the OECD report stated. As of now, unemployment levels have not risen. But by 2020, the amount of workable people is expected to rise to 113 million from 88 million in 2010. As time passes, the number of jobs created would be much lower than the number of people looking for jobs. This is despite the fact that women participation in the labour workforce is one of the lowest amongst emerging countries. Less than one-third of the total working age women are employed in India. The environment is also not stimulating employment for women. Moreover, more jobs are created in the un-organised sector or small companies. These are not covered by a lot of labour laws like the Employment Protection Legislation. This means the overall quality of life is poor. This can affect growth in the long run.
India's infrastructure, especially electricity supply, is poor, according to the OECD. "As a result, those activities that are heavily dependent on infrastructure, notably manufacturing, have grown more slowly," the report said. A lot of government plans to improve infrastructure have been delayed or postponed. In the last five years, India has invested the most in infrastructure among low and middle income countries. However, more needs to be done. "In the infrastructure sector, impose clear timelines, rationalise documentation, and implement single-window clearance," the OECD recommended.
Inflation is the biggest threat to the Indian economy. Aggregate retail inflation, measured by the Consumer Price Index (CPI), is expected to trend lower to 6.9% this fiscal, according to OECD forecasts. It recently fell to a multi-year low of 5.52% in October from 6.5% the previous month and 7.7% in August 2014.