- Prelims: Indian Economy(GDP, BOP, GVA, Economic reforms etc
- Mains GS Paper III: Indian economy and issues related to planning, mobilization of resources, Effect of liberalization on the economy etc
ARTICLE HIGHLIGHTS
- In 2023, the Board of Directors of the International Monetary Fund (IMF) praised the performance of the Indian financial sector.
- The 2024 review of the National Council of Applied Economic Research cheered a 20% increase in banks.
INSIGHTS ON THE ISSUE
Context
International Monetary Fund (IMF) projections:
- India is currently the fifth largest economy in the world in U.S. dollar terms
- It projects that India will be the third-largest economy by 2027.
- India has registered the highest growth rate amongst G20 countries, surpassing China’s for two successive years.
- IMF’s historical data shows that India took six decades (1947 to 2007) to cross the one trillion-dollar GDP mark in 2007 ($1.2 trillion).
- It took India just seven years to become a $2 trillion economy in 2014.
- It added another $1.2(one point two)trillion by 2021.
- If India hits the IMF’s projected figure of $5.2(five point two)trillion by 2027: It would be adding $2 trillion in just six years.
Challenges:
- The credit growth deflects attention from the deep-rooted jobs’ and human capital deficit.
- When lending expands, the financial sector looks in good health as new loans pay off old ones.
- It collapses when lending slows and options for more loans to repay earlier obligations get shut.
- Heavily indebted households and businesses sharply reduce spending to repay their debt, causing an economic crunch.
Issues with Household lending(between 25% and 30% a year):
- Financial intermediaries have pushed their loans, many lower- and middle-income households have viewed the funds as easy cash to make ends meet or to buy homes, gadgets and cars, pay for education, and indulge in ‘lifestyle’ spending,
- including vacations and elective medical procedures.
- A household debt boom is a quintessentially “bad” boom.
- It does not add to productive capacity but, instead, bids up domestic prices, making the country less competitive.
- Economists Atif Mian and Amir Sufi report: the higher the household debt burden, the steeper the crash that follows.
- The financial crisis will cause not just economic pain but will also degrade the economy’s long-term well-being.
- Unable to generate job-rich manufacturing growth, successive policymakers have pushed the financial services industry to raise headline GDP growth rates.
- Indian household debt, at 40% of GDP, is low by international standards, but household debt-service-to-income ratio, at 12%, is among the highest in the world
- because of high interest rates and predominantly short duration loans.
- The Indian household debt-service ratio is alarmingly similar to that in the United States and Spain just before their 2008 financial crisis, when high household debt-service burdens precipitated major economic downturns.
- Despite buoyant credit growth, household consumption is increasing at an excruciatingly slow pace.
- Households are struggling; their savings rates have declined and they are boosting meager consumption by borrowing money.
Issues with Financial services industry:
● Indian-style liberalization has promoted a large and chaotic financial services industry.
● Scheduled commercial banks and major non-banking financial institutions (NBFCs), have a history of rogue behavior.
● Thousands of smaller players, including fly-by-night NBFCs and new fintechs operate in dubious ways.
- There are too many financial services’ providers with too few options to lend for productivity-enhancement projects.
- Over time, lending opportunities have narrowed as the Indian corporate sector has reduced its investment-GDP ratio and borrowing pace.
- Financial institutions have been under great pressure to generate profits.
- After COVID-19, financial services providers redirected lending toward households eager to borrow in lieu of stagnant incomes.
- The newly emergent fintechs led this charge by offering loans to desperate households at extortionary interest rates.
- A new set of scammers preyed on the gullible.
- Yet, some borrowers became addicted to such loans.
- Growing share (approaching a quarter) of household loans is “unsecured,” backed by no collateral.
- Unsecured consumer borrowing is credit card debt(January 2024): Indians owned almost 100 million credit cards, up from 20 million in 2011.
- While the cards bring convenience, aggressively peddling them to low-creditworthy individuals builds up stress for both borrowers and the financial system.
- RBI: explosive credit card growth has attracted “below-prime” or riskier borrowers.
Way Forward
- Preventing the crisis requires surgically downsizing the financial services industry to better match lending capacity and productive borrowing needs
- weakening the rupee to help expand exports and cushion the downturn when it comes.
- Rapid credit growth and an overvalued exchange rate are a lethal combination.
- Joan Robinson’s dictum that finance must follow growth
- Indian policymakers have committed themselves to the notion that finance will spur growth
- It will help overcome the country’s severe developmental handicaps in human capital and other public goods.
- Policymakers are committed to a strong exchange rate as a metric of the nation’s virility.
- As the risks of a financial crisis grow, an acute job shortage persists, reflected most poignantly in a catastrophic regression of the workforce back to agriculture.
QUESTION FOR PRACTICE
Do you agree that the Indian economy has recently experienced recovery ? Give reasons in support of your answer.(UPSC 2021) (200 WORDS, 10 MARKS)
