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Economy: The key challenges... - Views on News from Equitymaster
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  • Jun 5, 2007

    Economy: The key challenges...

    The recent figures released by the CSO paint a robust picture as far as the growth of the Indian economy is concerned, with the latter having registered a growth of 9.4% in FY07. While this indeed lends credence to the optimism surrounding the India growth story, there are nevertheless certain issues that the country needs to address if it wants to sustain this kind of growth going forward. In this article, we shall examine some of the key challenges that the Indian economy faces.

    Infrastructure: Infrastructure continues to remain a spoke in the wheel of India's growth story. These roadblocks in infrastructure are in the form of power shortages, inadequate road, port and airport development. World-class infrastructure is pivotal in achieving sustained growth in any economy. However, due to poor infrastructure, the Indian economy continues to be a laggard when compared to its developing peers. To put things in perspective, in India, the power generated should ideally be 1.5 times the GDP growth i.e., to achieve economic growth of 8%, power generation should grow at 12% p.a. However, this not being the case, India has had to succumb to growing energy shortages. Similarly, poor quality of roads not only in the rural areas but also in the more affluent metros, have proven to be major bottlenecks. While the Indian government has laid a stronger emphasis on infrastructure developments, execution will be the key going forward.

    Fiscal deficit: A fiscal deficit is not a bad sign, if the government is utilizing the borrowings for productive purposes. However, out of the government's total expenditure, around 10% is being diverted towards non-plan expenditure such as interest payments and subsidies. This means that the government is effectively borrowing to pay off debts and the interest on the existing debt, compounding the fiscal deficit problem. Hence, it is imperative for the government to step up its capital expenditure on infrastructure and other productive uses to generate returns and curb the fiscal deficit problem.

    Agriculture: Another most challenging issue relates to development of agriculture. While over 60% of the workforce is dependent on agriculture, the sector accounts for barely 20% of the GDP (Source: Reserve Bank of India (RBI)). Further, the GDP growth generated from agriculture is only marginally above the rate of growth of the population, which is not adequate to ensure rapid poverty reduction. Besides this, agriculture is largely dependent on the vagaries of the monsoons, which needs to be reduced through development of irrigational facilities and better quality seeds and farm inputs.

    Education and healthcare: Delivery of essential public services such as education and health by to large parts of the population continues to be a major challenge that faces the government. While education will empower the poor to participate in the growth process, healthcare services are important to an economy as they play a significant role in reducing the mortality rate and enhancing the quality of life. Revenues from the healthcare sector account for 5.2% of the GDP and it employs over 4 m people (Source: IBEF). Also, the public sector accounts for 20% to 25% of the total healthcare expenditure (accounting for nearly 1% of GDP) and is saddled with a host of problems, which include resource crunch, political interference, inflexibility and other bureaucratic roadblocks. Thus, the poor state of the health infrastructure in the country becomes an important issue that needs to be addressed.

    Summing it up...
    The long-term growth story India is expected to remain strong going forward with the GDP estimated to grow by around 7.5%. The country also has an advantage in terms of a much younger population providing that extra needed workforce, the burgeoning middle class and the rise in personal disposable incomes leading to increased consumption activity. Having said that, as mentioned earlier, the government needs to lend more focus on addressing the four key issues going forward, if India has to sustain its growth momentum in the future.



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