25th December 2019 : The Hindu Editorials Notes : Mains Sure Shot for UPSC IAS exam

25th December 2019 : The Hindu Editorials Notes : Mains Sure Shot 

No. 1.

• Note: Today’s article ‘History, technology and shackles of the present’ focuses on the frequent instances of internet shutdown by the government on one hand and the vision of making a digital india on the other.
• It says that the government is using technology as a surveillance tool to shut down protests.
• On the whole it is mostly a critic of the government and says that one cannot aspire to a ‘Digital India’ if technologies are wantonly used for mass surveillance, or cut off altogether when faced with non-violent, democratic protests.
• The main point of the article is on internet shutdowns to curb protests. For Internet shutdown refer to article of 21st December.

 

No.2.

Question – With the government taking various rate cuts to boost economic growth, is this approach effective? What else needs to be done?(250 words)

Context – The economic slowdown.

 

Note – Read it along with the article of 1st and 7th October to understand better.

 

At present:

• Growth rate is declining. From the level of 8.1% in the fourth quarter of 2017-18, quarterly GDP growth fell to 4.5% in the second quarter of 2019-20, a fall of 3.6 percentage points. This steady decline must have had an adverse impact on employment and poverty reduction.

Is the decline cyclical or structural?

• A cyclical economic slowdown is a part of the business cycle having its peaks and troughs. The economy will be moving in cycles with periods of peak performance followed by a downturn and then a trough of low activity. These are expected to be short-term problems that could be addressed with an adequate mix of fiscal and monetary policies.
• On the other hand, sometimes the problems of the economy can go deeper, impeding the efficient and fair production of goods and services. In such a scenario, a monetary and fiscal stimulus won’t be enough to revive the economy. Fixing such problems would require the government to undertake some structural policies. The best example in this regard would be the reforms that were carried out to address the crisis in 1991.
• Now, the question is whether the Indian economy requires structural policies or a stimulus package through monetary and fiscal policy. We can analyse the performance of various indicators that would help us in assessing whether the slowdown is cyclical or structural. The economic growth of any country is driven by a virtuous cycle of savings, investment and exports. Of all the three, investment is considered to be the key driver of growth. To quote the Economic Survey (2019), investment, especially private investment, is the ‘key driver’ that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.
• The investment rate as measured by Gross Fixed Capital Formation (GFCF) as a percent of GDP is showing a declining trend. GFCF as a percent of GDP has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018. Similarly, if we consider the GFCF in the private sector, it declined from 26.9 per cent in 2011 to 21.4 per cent in 2018. Likewise, the new investment projects that were announced in 2011 stood at 5,882, whereas it declined to 3,708 in 2018. On the other hand, the investment projects that were dropped off in 2011 were 945 and it increased to 2,142 in 2018.
• A similar declining trend is also evident in the case of gross domestic savings as a percent of GDP. It declined from 32.7 per cent in 2011 to 29.3 per cent in 2018. During the same period, exports as a percent of GDP also declined from 24.5 percent to 19.6 per cent. Thus, the performance of all the three indicators considered to be the major ingredients of a growth story was not satisfactory.
• Another major area of concern that is also contributing to the declining savings in the economy is wage growth. The economy is experiencing a declining wage growth (both rural and urban wages). Rural wage growth has declined from 27.7 per cent in FY14 to less than 5 per cent in FY19. The corporate wages have also exhibited a single-digit growth in FY19 compared to a double-digit growth a few years back. The declining wages could also lead to a slowdown in consumption, which is what the economy is experiencing now.
• All the sectors, especially the auto sector, is passing through a crisis like situation due to the declining sales. The declining sales and piling inventories are forcing companies to cut down production. The cutting down of production can have repercussions in the job market. For instance, the unemployment rate was 5.6 per cent in July 2018, whereas in July 2019 it was 7.5 per cent.
• Further, the inflation rate in the economy has declined from 10.03 per cent in FY13 to 3.41 per cent in FY19. The low inflation rate would be a relief to the consumers, but a prolonged period of falling prices is not good news for the economy. Low inflation rate depicts weakening of demand that would discourage fresh investments and job creation.
• The slowdown in the economy was further aggravated by the NBFC crisis triggered by the IL&FS default. The NBFC crisis led to a liquidity crunch that further worsened the situation in the economy. Liquidity crisis negatively affected the companies that were plaguing with lower sales. For instance, according to the letter written by SIAM to the Finance Ministry, 70 percent of two-wheeler sales and 60 percent of commercial vehicles sales are financed by the NBFCs.
• Considering the performance of the above indicators, it could be inferred that the slowdown in the economy is more than a cyclical one. The structural factors contributing to the slowdown is evident from the fact that the successive rate cuts by the Central Bank have not yielded the desired results.
• The liquidity crisis in the economy could be a cyclical issue, and the policy response from the RBI and the government would help in addressing the issue. Nevertheless, the IL&FS default was also a result of the delay in the rolling out of various infrastructure projects. The situation calls for simplification of the land acquisition laws in the country. The IL&FS crisis indicates that the country requires more reforms.

What can be done?

1. Increase demand – for this there is a need to increase government consumption expenditure, government investment and exports.

• Exports can help to stimulate the economy since exports are influenced by the state of the economy in the rest of the world. Unfortunately, in the current situation, the rest of the world is also not booming. However, an effort can still be made to get a better export performance.
• Also in the context of government expenditure, it is important that increase in government expenditure is diverted towards capital expenditure. The old dictum of “digging holes and filling them up again” will not do.

2. Quickening the resolution process of bad loans – RBI has focused much on monetary policy rate cuts like reducing the repo rate. But monetary policy generally is more effective in controlling inflation than stimulating an economy. In the present context of the banking situation, the RBI’s role that is even more important than pure monetary policy will be to quicken the resolution process of bad loans and help banks to move to a more healthy situation.

• Increase in capital expenditure and relaxation in fiscal deficit targets – one critical question that is under debate is whether the present situation warrants a breach in fiscal deficit norms. It may be recalled that against the background of the international financial crisis of 2008, the fiscal deficit of the Government of India was raised to 6.0% in 2008-09 and it went up to 6.5% in 2009-10. While this extraordinary increase led to the growth rate rising immediately, it landed us in problems later on. However, a modest breach in fiscal deficit may be acceptable. A focused increase in capital expenditures of the Government and the Central public sector undertakings (PSUs) may help to apply the brakes on the slowdown. It might also help to “crowd in” private investment.

3. Reform in GST – Reform of the Goods and Services Tax (GST) is very much needed. We need a relook at the commodities falling under various slabs. Perhaps in an effort to get the GST through, a lot more of commodities were pushed under the lower slabs. The GST has to become more manufacturer and trader friendly.
4. Revamping the banking system – The present economic situation, in a sense, has become more complicated because of the poor health of the financial system. An excessive expansion of credit in the earlier years combined with the slowdown have contributed to a rise in non-performing loans in the banking system. Had the banking system been healthy, it could have been used as a lever for stimulating the economy. On the other hand, the banking system, currently, has become a burden. Quickening of the resolution process along with the recapitalisation of public sector banks has to take priority. The cleansing of the financial system which also includes finding solutions to the problems of non-banking financial companies will help to push the economy up.

Way forward:

• Increased government expenditure, particularly in capital expenditures, is one intervention which is very much needed. Private investment can pick up provided the growth rate begins to look up. Restoring financial institutions — banking and non-banking — to a healthy state when they can begin to lend confidently is the most essential prerequisite for faster growth.

 

 

No. 3.

Note – today there is another article titled ‘double trouble’. It is on inflation combined with sluggish growth. It has already been covered. See to the article of 18th November on Stagflation.