- According to 2011 Census data:
- 20% of Indians in the age group 15-24 were jobless.
- Unemployment rate in the working population of age group 15-59 was 14.5%.
- High growth and employment prospects, and his idea to scale up the Gujarat model of development for India has played a major role in drawing voters, especially the youth, to elect PM Narendra Modi.
- With labour force in India increasing at the rate of more than 12 million annually, unless the GDP moves up by 8-10%, these hopes are likely to be shattered.
- In the short 60 days of the govt, 3 factors which may threaten growth prospects have emerged. They are:
- A flawed concept of fiscal prudence and unrealistic target on fiscal deficit.
- There has been continued focus on fiscal prudence, a concept which adopts no differentiation between budget expenditure for public consumption or public investment.
- Rather than reducing fiscal deficit by reducing subsidies or other consumption expenditures, focus focus should have been on measuring fiscal prudence by revenue deficit in the entire public sector.
- Fiscal prudence should have been defined more clearly, and even admitted to a higher fiscal deficit if it could be proven that 4.1% was unreal and that borrowings were being used for productivity-enhancing investments.
- The obsession with fiscal deficit has brewed many forms of creative accounting. The 1st quarter by itself has already accounted for 45% of the total deficit budgeted for 2014-15.
- The new govt should compress growth in govt expenditure if it wants to achieve the fiscal target and public investments in infrastructure development are likely to bear the brunt of this.
- This will consequently affect the total investment rate and have a negative effect on GDP growth rate.
- High interest rate policy.
- The RBI policy of high interest rate policy has failed to effectively contain inflation in the past 4 yrs.
- In the present situation where economy is operating well below its productive potential and there are excess capacities in a wide spectrum of industries, the policy may not serve its purpose.
- The current inflation is possibly due to cost-push factors like increase in, wages, minimum agriculture support prices, urban land prices and housing rentals, together making India globally uncompetitive.
- Increasing capital costs may damage this further, increase our imports from China and even have negative effect on investment and growth.
- Strong rupee policy.
- While India considers its external value of rupee as a matter of pride, East Asian economies have been promoting exports and reducing imports by undervaluing their exchange rate.
- Appreciation of real effective exchange rate is in fact deterring exports and increasing imports resulting in slower growth.
- A flawed concept of fiscal prudence and unrealistic target on fiscal deficit.
- All these factors may work together towards pushing the GDP below 5% and with it increase unemployment rate by nearly 5 million every year.
- The govt should seriously consider revising its current policy to prevent the same.
- Read at: http://www.thehindu.com/todays-paper/tp-business/need-for-a-sharp-midcourse-correction/article6278542.ece