17 July 2024 – The Indian Express

Growth Strategy of New India

• India’s growth in 2023–2024 is now expected by the Reserve Bank of India to be 7%, compared to 6.3% predicted by the World Bank and the International Monetary Fund (IMF). The downward trajectory of India’s exports may be reason for alarm in the middle of all these optimistic estimates about the state of the economy. In the previous five years, India’s proportion of worldwide exports in labor-intensive sectors has decreased, according to a report by the Federation of Indian Export Organisations (FIEO). India must adjust its growth plan going forward to account for the shifting global landscape.

What Are the Shifting Worldwide Circumstances?

• Deglobalization movement: Because of ongoing geopolitical conflicts like the Israel-Hamas conflict and the Russia-Ukraine war, there is a noticeable global movement towards deglobalization.
• Sanctions Imposition: Sanctions on specific nations have been imposed as a result of geopolitical conflicts. International payments and supply networks have been disrupted as a result of these restrictions. These issues have been made worse by sanctioned countries’ restricted access to vital networks like SWIFT.
• Falling World real GDP: The demand for exports worldwide has decreased as a result of the world real GDP’s reduction in growth. This pattern reflects the general slowdown in the world economy, which has been brought on by a number of variables including trade tensions, political unrest, and shifts in consumer spending patterns.
• This autumn has resulted in a decrease in the demand for exports worldwide, suggesting a more general slowdown in the economy.
• Price volatility and supply uncertainty have made many nations, including India, wish to lessen their reliance on imported petroleum, which has further decreased demand worldwide.
• Export-led growth strategy: This method of economic development depends on exporting products and services to outside markets. It is a declining strategy. Recent years have seen a number of obstacles and restrictions for this plan, particularly in the wake of the Covid-19 pandemic in 2020–2021 and the global financial crisis in 2007–2008.
• For instance, in India, the percentage of GDP attributable to exports increased significantly between 2003–2004 and 2008–09. 2013–14 had a peak of 25% for this. It was 18.7% in 2019–20 and 2020–21, and it reached a low of 22.8% in 2022–2023.

What Causes the Export-led Growth Strategy to Be Declining?

• Global Demand Declines: The pandemic and crisis have decreased the effective demand for exports from both developed and emerging nations, particularly in industries like manufacturing, tourism, and commodities.
• Many export-oriented economies have seen a decline in their growth prospects and export revenues as a result.
• Rise of Protectionism: The epidemic and crisis have also led to a wave of trade disputes and protectionist policies among major trading partners, including the Brexit vote, the US-China trade war, and the regionalization of supply chains.
• These have weakened the multilateral trading system and put exporters under uncertainty and obstacles.
• Limits of Wage Compression: In order to preserve profitability and competitiveness, many export-led growth models have depended on lowering worker wages and incomes. On the other hand, this has led to increased social unrest, inequality, and limitations on domestic demand.
• Furthermore, it is become harder to compete with nations with low wages or with cutting-edge technologies like automation and artificial intelligence.
• What Effect Does India’s Export-Led Growth Strategy Decline to Have?
• India’s economy, ability to create jobs, and level of global integration are all negatively impacted by the country’s waning export-led growth strategy.
• India’s exports have decreased recently for a number of reasons, including low competitiveness, growing protectionism, and sluggish worldwide demand.
• Given that exports make up roughly 19% of India’s GDP, this has slowed the country’s GDP growth.
• Additionally, it has hindered job growth, particularly in labor-intensive industries like apparel, jewellery, and pharmaceuticals.

What actions ought India to take?

• Boost Domestic Savings: Put policies in place that promote saving and investing in order to counteract the fall in household sector savings, particularly in financial assets. Additionally, examine the elements causing this downturn and create focused interventions.
• Watch Post-COVID Trends: Keep an eye on and evaluate household savings patterns in the wake of the COVID-19 pandemic to discern between transient reactions and potentially long-lasting shifts. Take action to buck the trend if the drop persists.
• Encourage Household Sector Investments: To motivate families to allocate their funds to profitable ventures, raise financial literacy and awareness. Provide financial asset investment incentives to guarantee a steady stream of money for the public and private sectors.
• Maximise Investment Efficiency: To improve the efficiency of investments, evaluate the Incremental Capital-Output Ratio (ICOR) on a regular basis and strive to lower it. A lower ICOR may result in more possible growth, hence increasing resource utilisation efficiency is important.
• Handle Employment Challenges: Understand the distinct demographic advantage and the possible difficulty in creating jobs in the face of labor-saving advances. Set aside funds for skill-building and training initiatives to equip workers for non-agricultural and technologically advanced industries.
• Encourage Non-Agricultural Growth: In order to repurpose labour from agriculture, emphasis should be placed on encouraging non-agricultural growth. To support overall economic growth, put in place rules that make it easier for productivity-enhancing technologies, including generative and artificial intelligence (AI), to be adopted.
• Climate-friendly expansion: By highlighting the service sector, which is comparatively climate-friendly, you may balance economic expansion with environmental sustainability. To promote renewable energy and lower carbon emissions, maintain and improve programmes like One Sun One World One Grid (OSOWOG) and the Green Grids Initiative (GGI).
• Fiscal Responsibilities: To maintain economic growth, adhere to fiscal responsibility standards. Make it a priority to implement measures that will reduce the debt to GDP ratio to 60% and the combined fiscal deficit to 6%. This will lower government dissavings, improve interest payment management, and raise the economy’s overall saves rate.

 Way Forward:

• India must contend with a changing global environment characterised by economic instability and deglobalization. The constraints facing the export-led growth paradigm clearly indicate the need for recalibration. India has to prioritise innovation, sustainable practices, and home resilience if it is to prosper. It is essential to diversify commerce, make educational investments, and practise fiscal prudence. India can effectively handle present problems and establish itself as a resilient and innovative player in the global economy by adopting adaptability and strategic reforms.