ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Agenda For the EconomySubscribe to Agenda For the Economy

Economic Challenges to the New Government

India faces two distinct uncertainties in the short run: the nature of the electoral outcome, and the reduction in the United States' bond buying programme. The potential shocks could cause short-term volatility, though the economy now seems better placed than a year ago to face the challenge. Yet, stabilisation does not ensure economic revival. Stepping up investment demand, without jeopardising the current account balance and increasing external debt would be the key to sustainable growth. As the private corporate sector is mired in debt, a pragmatic increase in public investment by revisiting fiscal rules is the only credible option. A complete pass-through of fuel prices to domestic consumers would encourage investment in the industrial and energy sectors, while an easy credit for agriculture and small-scale industry is likely to augment wage goods output to restrain the rise in consumer prices.

The Great Reversal

Adverse supply shocks in agriculture have contributed to the slowdown of the Indian economy and the inflation surge. A decline in public capital formation has also played a part in the slowdown. However, the contribution of the widening fiscal deficit is less clear-cut. A revival of growth calls for an easing of the constraints in the farm sector and larger public investment outlays, accompanied by higher public savings.

Negawatts and Green Megawatts

The next government in New Delhi will have to proactively address the energy crisis in India. The steps to be taken have to be in keeping with a long-term strategy that should aim to increase effi ciency of existing power generation capacities, thereby reducing India’s dependence on imports. The government’s emphasis should be on “negawatts” of power and “negatonnes” of coal and oil and a transition to renewables or “green megawatts” over the next 10 to 15 years. The guiding principle should be to minimise the resource intensity of the economy.

India's Current Account Deficit

India's current account deficit has widened in recent years primarily because of the steep increase in the deficit on the merchandise trade account. While imports have grown with the surge in gold imports, export performance has been indifferent despite the fact that India has formalised several free trade agreements. Policymakers will have to move away from a reliance on ad hoc solutions and find ways to address the infi rmities in the domestic economy.
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