Viewpoint: India's complex macroeconomic environment

17 APR,2022 | MEDC


 

  • As the K-shaped economic recovery of Covid gradually begins to take hold, and the likelihood of complete vaccination throughout India looms on the horizon, there is much to be hopeful about. At the same time, the global economic environment (which now strongly affects us) has worsened considerably, thanks largely to the Ukrainian crisis, as well as the sizeable outbreaks of Covid variants in several parts of the world. With rising uncertainty regarding fuel prices, inflation in India has spiked sharply. The soaring prices of oil, fertilizers, metals, food grains, and many commodities, along with major supply chain disruptions, have led to an increasingly complex macroeconomic policy environment. The net result is that economic growth is likely to be impacted not only all over the world, but also in India.
  • Technology, climate change, and globalization have combined to considerably transform the world, and national taxation policy must keep pace with it. In this changing milieu, policymakers should focus attention on meeting budgeted fiscal targets for expenditure and revenues. That is the key to a sustainable macroeconomic recovery. However, it will take some innovative thinking. The adverse terms of trade stemming from global developments, is akin to a supply shock which cannot be dealt with simply through higher fiscal imbalances, and certainly not when our government debt-to-GDP ratio is at a record 90%, and the combined (Centre and states) fiscal deficit is at 10% of GDP. These figures first need to be reduced to more manageable levels.
  • The regulatory aspects of India's fiscal system also need to be streamlined, as tax evasion and avoidance cause a loss of revenue that could have financed social spending or infrastructure development, especially on education and healthcare. They also spur inequality and perceptions of unfairness, which are detrimental to national economic growth. With different parties in power at the Central and state levels, the self-serving policies of one region can affect others in damaging and unpredictable ways. If each state sets its own socioeconomic agenda without regard for the adverse effects elsewhere, it could hurt the national economy as a whole.
  • India's employment scenario remains precarious. Manufacturing, in particular, needs greater policy emphasis. Whatever can be done to promote greater low-skill employment through policies (such as implementing new labour laws) or retraining workers for the jobs of tomorrow, should be pursued aggressively. Given their growth-promotion capability, exports should also be strongly incentivized, and especially from the MSME sector, as many of them tend to have high employment-generation potential.
  • National policy needs to gear up adequately to compensate for slower global growth and the inflation-induced costs to the economy. Our policymakers are enlightened enough to minimize the economic and human costs in terms of rising prices, losses in output and employment, along with heightened external financial vulnerability. However, stakeholders will need to learn to sink their differences, as the value of collaboration is even greater as we counteract the socioeconomic consequences of an increasingly uncertain world. History repeats itself, but the future is never identical to the past.

*Picture Credit: Google

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