Yojana: SWOT Analysis of the Indian Economy

Athar Imam Raza

Updated: Apr 3, 2017 12:30 IST

Probable Questions for IAS Mains Exam

Q1. Outline the performance and strength of the Indian economy.

Q2. Critically analyse the future prospect of the Indian Economy.

Q3. ‘Indian remained an emerging economy of the world’. Critically analyse.

The major focus of the Economic Survey is to analyse the basic strength, weaknesses, opportunities and threats which also known as the SWOT analysis of the Indian economy. The SWOT analysis of the Indian economy is done through the derived support from existing studies in the literature, various commentaries in visual and print media and some new research initiative specifically for the purpose of the various government departments and other research institutions. The Strengths, Weaknesses, Opportunities and Threat analysis of the Indian economy have been given below under separate heads:

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Strengths

• The Economic Survey predicts the growth of Indian economy between and 6.5 per cent and 6.75 per cent during the financial year 2016-17 while the Monetary Policy Committee (MPC) estimates it to be around 7 per cent making the economy as the fastest growing major economy in the world.
• Currently, the rate of inflation is around 4 to 5 per cent, which is in declining path.
• The Current Account Deficit (CAD) of the Balance of Payments (BOP) is less than 1 per cent of Gross Domestic Product (GDP) along with the dollar-rupee exchange rates convincingly stable.
• India is receiving one of the largest inflows of foreign direct investment (FDI) due to FDI reform measures were taken in the last couple of years, which as the proportion of GDP, has grown from 1.7 per cent in 2015-16 to 3.2 per cent in the Second Quarter of 2016-17.
• Significant FDI reform measures led India to receive one of the largest inflows of foreign direct investment (FDI) which has grown from 1.7 per cent in 2015-16 to 3.2 per cent in the Second Quarter of 2016-17 as the ratio of GDP.
• The external debt condition is within safe limits and there is no possibility of slippage from the fiscal discipline and consolidation path is also followed for the last few years, both at the central and state governments with and without Ujjwal DISCOM Assurance Yojana (UDAY).
• The persisting large gap between the WPI inflation rates and the CPI inflation in 2015-16 showing the decreasing trend resulted in restoring the growth in nominal GDP which has a role in raising the government revenue growth.
• The forex reserves have registered a grown of $360 billion by December 2016 which is more than the standard reserve adequacy norms.
• The demonetization drive of high-value currencies in November 2016 is likely to yield long-term benefits of reducing corruption, increasing household financial savings and widening the tax cover.
• India's share in the world manufacturing exports is rising because the country has remained competitive despite high capital inflows and inflation.
• The Goods and Service Tax bill has been passed by the Parliament and its implementation will result in a single nationwide market; better tax compliance; higher investment and growth; and good governance practices.
• The internal mobility of goods given by the interstate trade in India is about 54 per cent of GDP or 1.7 times the international trade. Similarly, the extent of work-related migration is also substantial.
• In terms of commitment to climate change, India has performed better than other countries in imposing a tax on petroleum and diesel.
• A very extensive network and infrastructure are created in the country by JAM —Jan-Dhan Yojana, Aaadhaar cards and Mobile phones, particularly to reach the target groups and remote areas directly and effectively.
• There is a convergence of health outcomes like life expectancy and fertility rates across states over time in the country.
• Considering all the strengths, the Indian economy has the potential to grow at 8 to 10 per cent of GDP in real terms over the medium to long run. This makes the real returns on investments in India most attractive among all comparable and competing countries at present.

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Weaknesses

• One of the major weaknesses of the Indian economy in the milieu of its potential is broad societal ideology, mindset and opinions about redistribution of wealth and income, capacity building for service delivery and market regulations and inquisitive confusion about property rights and the role of the private sector.
• Even the Goods and Service Tax (GST) implementation, to begin with, is likely to suffer from sub-optimal design and too complicated a structure for efficiency gains.
• Together with historically developed vested interests, it has shaped a less conducive socio-political environment for meeting the full economic potential of the economy.
• India has very and inefficient delivery of necessary public services like delivery of health and education does not endow with any good replicable model across states.
• The fiscal deficits in the state government budgets have been rising of late. Implementation of the UDAY scheme is one important reason. Although there is a hope for improvement from the current year, the interest cost of state bonds has sharply increased in the January 2017 auction over October 2016.
• Over the years the private investment is low and exports are not in good shape growing at a very low rate, which are significant sources of growth but has slackened considerably of late in India.
• Heavy reliance on the high growth rate of income to reduce the debt-GDP ratio rather than reducing the primary deficit has not yielded the desired result both at the Central and the State levels.
• The corporate sector and commercial banks are experiencing with their respective stressed balance sheets and the firms are unable to squander on fresh investments because they have already defaulted on their borrowings and the banks are unable to lend more because they have accumulated huge Non-Performing Assets (NPAs).
• Non-tax revenues of the Central government have not achieved the target because receipts from the spectrum, disinvestments and dividends to the government have fallen short of the expectation. They are also not expected to grow in the near term.
• The fiscal deficits in the state government budgets have been rising of late due to the implementation of the UDAY scheme. But there is a hope about the enhancement from the current year, the interest cost of state bonds has sharply increased in the January 2017 auction over October 2016.
• Investment and savings rates have been declining in the country over recent years while Income and consumption inequalities across states are increasing in India.
• The ratio of the working - age population of non-working age population in India will reach its maximum value of around 1.7 by 2020. This is substantially less than corresponding maximum values in other BRICS countries, implying a lower demographic dividend in India. However, India is likely to experience the value of the ratio near its peak over a much longer time.

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Opportunities

• The reform in the bankruptcy laws for exits of various corporations to release locked up resources for which the Government has already reformulated an ‘Insolvency and Bankruptcy Code, 2016’ and now, its efficient implementation will matter the most.
• Strengthening of the legal basis for Aadhaar scheme and allow inter-operability to encourage digitalization payments for the efficient functioning of government schemes to achieve inclusion and equity. Now, the Aadhaar scheme has a legal backup through the Aadhaar Act, which is already passed by the Parliament.
• The focus of the government should be on competitive and cooperative federalism which presents a great potential to attract skills, investment and technology.
• The Government should focus on those agendas of structural reforms which are yet to be finished after the demonetisation drive of high-value currencies.
• The higher growth prospects in developed countries like the US and Germany can generate a new avenue for exports from developing countries including India.
• In the milieu of promoting labour-intensive exports, after the issue of Brexit, India has the better prospect of renegotiating free trade agreements with the UK and Europe and gain substantially for export and employment growth.
• The demographic dividend in the Peninsular States would reach the peak around 2020, but the Hinterland States would reach the peak only around 2040. Thus, the demographic dividend would be enjoyed by the country over a much longer duration than most other countries. This also offers a natural opportunity to close the economic gap existing across the states over time. This aspect offers a specific perspective on the urgency to pursue relevant economic reforms to maximise such a gain.
• There is an opportunity to create a Public Sector Asset Rehabilitation Agency to address the twin balance sheet problem by taking up large and difficult cases and taking tough decisions.

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Threats

• When it comes to the rating agencies, India, unfortunately, has a threat because with almost unrevised ratings over the last seven years, but its performance has significantly improved over the last few years.
• The competitive populism in the federal democracy can damage fiscal discipline and governance standards.
• The international political order and environment are fast changing towards isolation and protectionism. The mood of anti-globalisation regarding the goods, services and labour prevails in advanced economies. This could effectively close a potent option of achieving 15-20 per cent export growth in India to realise its overall growth potential of 8-10 per cent GDP growth over time.
• Challenges arising out of pay revisions and UDAY bonds are significant concerns for states to maintain their fiscal discipline targets.
• If the rising dollar on account of developments in the US economy results in the dollar induced depreciation in Yuan, it may lead to substantial structural transformation and disruptions in China that can have adverse spillover effects on Indian trade and investment. The potential US-China trade war could destabilise the world economy.
• International oil prices are on the rise and so also the commodity prices. However, the Survey fails to recognise likely problems of slippages in oil production on one hand and the threat of shale gas production in the USA on the other hand, which can effectively constrain the oil price rise.
• As a consequence of developments in the US economy, global interest rates and inflation rates in advanced countries are on the way to strengthen. This can have an adverse impact on India's capital inflow and outflow and hence on its investment climate.
• The stat shows that the world exports to GDP ratio have been declining for the last 6 years. So, under such an ominous environment, raising the share of India's exports in the world exports is likely to be very challenging. India's competitiveness in the world market is seriously threatened by emerging countries such as Vietnam, Bangladesh and Philippines. These emerging countries pose competition to India in a wide range of our export commodities and services.
• The demographic dividend India is likely to retreat soon because the peak is likely to be attained by 2020 and the peak is relatively lower than the one reached in China and Brazil.

Economic Survey Analysis for IAS Exam 2017

Conclusion

The Economic Survey 2016-17 have suggested some specific reforms that Government should undertake on a priority basis. The Indian economy has registered the convincing rate of growth after the huge demonetisation of high-value currencies, which was expected to be a bane for the growth of the economy by the experts. Despite the large critics, the economy has shown the convincing rate of GDP growth in the third quarter of 2016-17. In order to make this historical event of demonetisation, the Government should look forward the policies which make a better environment for the private investors and the foreign financial institutions (FIIs).

The Economic Survey has mentioned that states have performed extraordinarily to overcome the issue of fiscal deficits by adopting and implementing the Fiscal Responsibility Legislations (FRLs) while the consumption and income outcomes diverging across states in the face of rapid internal integration of goods, labour and capital are quite confusing because the analysis is based on some empirical evidence which seems not a true reflection of the state consumption and income outcomes.

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