At present, Indian Economy is going through a tough phase. There are many problems which are to be addressed and finally solved. Here we have explained all the major problems of Indian Economy which will help students to understand the present status quo of the economy. After words, it will also help in understanding the solutions for those problems.
1. Poverty Reduction
After almost 70 years of Independence, India not only has a low per capita income, but Indian economy also has great inequalities in the distribution of income and wealth.
In India, with the time, inequalities are on the rise. The logical corollary of this inequality is mass poverty. Nearly 60 percent of the total population share one-third of India’s national income while only rich 5 percent of the total population enjoy the same amount of national income.
This inequality worsens the problem of poverty. In 1972-73, more than 50 percent of the total population lived below the poverty line.
Due to some economic progress it has come down from 36 percent in 1993-94 to about 27.5 percent in 2004- 05.In short, Indian economy still staggers under the vicious circle of poverty.
2. Macroeconomic stability
By and large, the present government has been putting efforts to maintain the fiscal moderation. India still runs a bad revenue deficit of about 2% of GDP and successive governments have not done enough work to eliminate it.
A top priority for credible macroeconomic performance will be to target a low current account deficit and a small but positive revenue surplus.
3. Restrictions in Business
It is said that if entrepreneurs are the planets in the solar system, then the government is the sun, the single largest facilitator.
It is noticeable that India still maintains a dismal ease of doing business raking as per the World Bank report.
Due to a maze of laws and regulations, it takes more of an effort for an entrepreneur to start a business in India than most of the other places in the world, and after he /she succeeds in setting up a business, it takes even a greater effort to comply with sector, department, state and centre laws.
4. Demographic Problem
So far as the size of population is concerned, India ranks second next only to China (1312 million in 2006). During the decade of 1991, the growth rate of population in India was 1.61 p.c. per annum, as compared to 0.7 p.c. growth rate of population of developed countries.
High birth rate (23.5 per 1000) coupled with low death rate (7.5. per 1000 in 2005-06) is the genuine cause for population explosion in India. In the 20th century, India’s population went up by 5 p.c. as against 3 p.c. increase in the world’s population as a whole.
There are roughly 480 million people (38%) who belong to the working-age group. Of these, 62% reside in rural India and nearly 73% of them (333 million) are literate. Despite strides made by successive governments in achieving the goal of education for all, India continues to lag behind other developing countries. In 1960, South Korea, Hong Kong and Thailand had literacy rates of nearly 70% in the region, while India lagged behind with 28%. By the 1990s, the East Asian tigers had crossed the 90% literacy mark compared to just 50% in India. In 1990 and 1999, China’s literacy rates were higher than India’s by 28% and 27%, respectively.
5. Stagnancy in Jobs
In recent years, investment proposals have been plummeting while the latest numbers from the Reserve Bank of India show that manufacturing shrunk for the first time in seven years, from a growth rate of 12.9% in 2009-10 to -3.7% in 2015-16.
It has been strongly believed that injecting fresh capital investment will automatically lead to job creation. But it is increasingly clear, that correlation is questionable.
A report of International Labor Organization (ILO) shows that India’s employment elasticity, a common measure of how employment growth responds to GDP growth, fluctuated around 0.3 between 1991 and 2007.
In other words, 1% of overall economic growth produced 0.3% of employment growth. In recent years, that number has been declining quite alarmingly since, and now stands at only about 0.15%.
The overall index for April 2017 was 10.9% lower than a year ago. That means new job creation in the month was 10.9% lower than April 2016. What’s more, the overall index for April 2017 was lower than where it was in July 2015.
6. Lack of Technological Penetration
Accessibility of the Internet to all Indians is an urgent priority. In India, the cost of mobile phone access is already low by international standards. And with a supportive policy environment involving smart spectrum management, public-private partnerships, and intelligent regulations of Internet markets can be achieved for Internet access.
At the end of 2014, there were 227 million Internet users in India, compared to 665 million in China. And Fewer than two out of every five Indian businesses had an online presence compared to almost two-thirds of firms in China.
Though modern industrial sectors employ advanced technology, village industries still employ old and hackneyed methods even in the age of modern science and globalized world. It is a reasonable conclusion that low productivity of Indian labor is explained in terms of low level of technology.
7. Low Productivity
The total productivity of the resources and labor is very low in India in compared to the developed countries.
The total factor productivity of a system can be increased by improving the productivity of the most constrained resource in the system, and/or obtaining more of the scarcest resource.
Japan had Land and space, and money, not labor, as the scarcest resources for Japanese companies. Then, they applied methods of total quality management. And, now they are amongst the top productive nations in the world. We can try to learn from Japanese model of enhancing productivity.
The infrastructure is very important tool to carry out development works. In India, the capital required to modernize Indian Railways— complete broad-gauging, updating signals, upgrading passenger rakes and railway stations and electrifying comprehensively—is huge.
A modern, more connected and efficient inter-state rail system combined with city metro rail can energize India’s commuter, passenger and goods economy.
Apart from it, the government’s initiatives on affordable housing is welcome but more needs to be done to encourage supply delivered by ethical, value-based developers who can join the surging number of affordable housing finance companies that already exist.
In total, India’s infrastructural facilities or economic and social overheads of capital are inadequate.
The superstructure of an economy largely depends on the availability of infrastructural facilities.
Per capita energy use (oil equivalent) of an Indian in 2004 was 531 kg in compared to USA’s 7,921 kg. Even China’s per capita energy use was higher (1,242 kg.) than India’s.
9. Low per Capita Income
National income and per capita income are the parameters to gauge the economic growth of any country. It is said that higher the level of national income, higher is the rate of economic growth.
India’s net national product (NNP) at factor cost in 2007-08 at 1999-2000 prices stood at Rs 27,60,325 Cr. Population during the time stood at 1124 million.
This means per capita NNP came to Rs 24,256 or Rs 2,021 per month. This indicates that, the standards of living of masses are badly low. Even the basic necessities are beyond the means of the majority of population.
10. Stressed Banking Sector
The RBI’s December Financial Stability Report 2016 said that large borrowers (the RBI defines these as debtors to whom lenders have an exposure of at least Rs5 Cr) account for 56% of bank debt and 88% of their NPAs.
Even the Finance Ministry has accepted the fact that the stressed assets or NPA problem is mostly confined to 50 large loan defaulters.
Now the government is trying to resolve those stress assets with the help of an ordinance.
This ordinance will empower the RBI and it can effectively ask banks to sit down with defaulters and reach a settlement as part of the package.
According to Credit Suisse estimates, about 40% of debt lies with companies with an interest coverage ratio of less than 1.
The asset quality of the banks has deteriorated further with gross non-performing advances ratios (GNPAs) increasing to 9.1 per cent from 7.8 per cent between March and September 2016, pushing the overall stressed advances ratio to 12.3 per cent from 11.5 per cent during the same period.
The system level credit risk of the banking sector against macroeconomic stress revealed that the GNPA may increase to 9.8 per cent by March 2017 and further to 10.1 per cent by March 2018.
Further, capital to risk-weighted asset ratio (CRAR) for the public sector may continue to be lowest at above 11 per cent by March 2017 and less than 10 per cent by March 2018, an indication of just how much the public sector banks (PSBs) are undercapitalized.
As we have seen above, that India is going through a job crisis mode. And, the quality and quantity of education in India is making it worse because education is itself in an abysmal state in India. In the absence of good quality universal education at the primary, secondary and tertiary levels, we will continue to produce poor quality workforce.
In India, presently, a little over 10% (48 million) of literate youth are graduates or have higher degrees. Nearly 53% of the youth have studied up to the higher secondary (12th class) level.
But, many reports suggest that those educated young people lack of professional skills which is one of the major reasons for the large number of unemployed graduates—three million at last count.