India Needs A New Economic Policy

Relevance: GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. Inclusive growth and issues arising from it. Effects of liberalization on the economy,

(Source: The Hindu, 08/12/2023)

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Why in the news?

• This article discusses the need for a new economic policy in India in order to create a harmonious and democratic society.
• According to the National Statistical Office, India’s GDP growth accelerated to 6.1% in the January - March 2023 quarter, indicating a growth of 7.2% in the fiscal.
• In comparison, the GDP growth rate in the April- Jun 2020 quarter was -23.8% compared to the GDP growth rate of the same period in 2019-20.

What are the three important conclusions from the NSO data?

• Since 2015-16, the GDP growth rate has been declining annually.
  • In the fourth quarter of 2022-23, it has fallen to 3.5% which is also known as “The Hindu Rate of Growth”.
• The recent rate of growth in the economy is equal to the same rate of growth during the socialist period.
  • This indicates that India’s economy can grow much more.
• In between, 1991-96 and 2004-2014, GDP growth rates rose to between 6% to 8% per year.
  • The higher and faster growth of the economy was attributed to the reforms undertaken in the Indian economic system such as reduced state participation and increased incentives for providers of capital and labor.
• The GDP growth rate has been consistently declining since 2016 but no policy structuring has been presented to correct this.

Steps to be taken

Need for Structured Policy

• Structuring refers to a clear implementation of what the economic objectives should be and how they will be prioritized.
• This should be followed by a strategy that explains which should be incentivized and which should be discontinued.
• Eg: Personal tax should be scrapped and the GST abolished to incentivize investors and earners.
• Other proposals include the mobilization of resources by the government through indirect taxes and the liberal printing of currency notes which are to be circulated in the form of wages for the employment generated in extensive public works.
• In order to increase the purchasing power of the middle classes, the annual interest paid on fixed-term savings in bank accounts should be increased to 9%.
• To increase production and employment in small and medium industries, interest rates on loans to these industries should be limited to within 6% of the loans.

Redefining Economic Policy

• India needs a new economic policy that is based on clear objectives and priorities and has a clear strategy to achieve targets.
  • It must also include an intelligent and transparent resource mobilization plan to finance its policies.

Market System Dynamics

• The market system is not a free-for-all or an ad hoc measure, but a structured market system has rules for transactions, innovations, and incentivization.
• In market system capitalism, incentives and capital when used for innovation results in an increase in factory productivity and GDP growth rate.
• Even a totalitarian state like China recognized this and allowed the socialist economic system to be replaced by an economic market-based system during Deng Xiaoping’s term.

Balancing Market and Welfare

• Deregulation must not neglect safety nets, affirmative action, and addressing market failures.
• Democratic institutions must be empowered to tackle the public disorder arising from rapid de-regulation as it happened in Russia post-1991.
  • Russia experienced chaos and misery with a complete loss of human rights and democratic values.

Conclusion

• It is, therefore, crucial to balance the role of the public sector, de-regulation, sale of loss-making assets, employment generation, and social security, while creating a level playing field for all, especially the poor.
• Such a competitive system will ensure transparency, accountability, trusteeship, and corporate governance which will help in legitimizing the profit-making which is the driver of the market system.
• This also contributes to the reduction of monopolistic tendencies and the formation of a democratic and harmonious society.

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FAQs

MCQs

Question. A decrease in tax to GDP ratio of a country indicates which of the following?

1. Slowing economic growth rate
2. Less equitable distribution of national income

Which of the above statements is/are correct? (UPSC CSE 2015)

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d)  Neither 1 nor 2

Question. Consider the following statements:

1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
3. As per the Constitution of India, it is mandatory for a State to take the Central Government's consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the above statements given is/are correct? (UPSC CSE 2018)

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3