There’s been a steady decline in growth rates since 2016-17 due to various reason including the fall in investment rates. Discuss. Suggest measures to revive private investment.

There’s been a steady decline in growth rates since 2016-17 due to various reason including the fall in investment rates. Discuss. Suggest measures to revive private investment.

Approach:

  • Introduce with falling growth rate
  • Explain the External and Internal factors responsible for decline in growth rate
  • Suggest ways to revive private investment
  • Conclude appropriately
Model Answer :

From the later quarters of 2016-17, there’s been a decline in the growth rates of India’s GDP. GDP growth rate for the first quarter (April-June) of 2017-18 fell below 6%. Part of the growth decline is due to some systemic shocks like demonetization as well as reforms like GST, but other factors were responsible for steady decline.

Factors contributing to the steady decline in growth rate:

  1. External:
  • Poor exports: Export demand has been weak because of the tepid growth rate of the advanced economies. However, this is only partly responsible for the sharp decline in growth rate.
  1. Internal:
  • Fall in investment rate: The fundamental problem has been the sharp fall in the investment rate. Gross Fixed Capital Formation (GFCF) rate fell to 27.1% in 2016-17 from a high 34.3% in 2011-12. However, the public investment rate has not shown any decline.
  • Decline in private investment: It is the decline in private investment, both corporate and households, that has been responsible for the steady fall.

Stimulating private investment:

  1. Reforms:Reforms like bankruptcy code and GST, modifications in FDI rules are welcome and the reform agenda must be continued.
  2. Improve health of banks: High NPAs caused poor health of banks and sharp reduction in the flow of new credit. The IBC and other measures will hasten the resolution of NPAs. The recent bank recapitalization is a timely boost for the credit to take off again.
  3. Revive stalled projects:A close look must be taken at stalled projects to find ways to revive those which are viable. Industry-by-industry consultations and analyses are needed to pinpoint problems and their solutions.
  4. Boosting SMEs:Even though the progress of small and medium industries is very much dependent on the fortunes of the large, a separate look at medium and small enterprises may be needed to prod them into new investment.
  5. Real Estate: This sector has taken a beating after demonetization. However, there are signs of revival in investment in real estate by the household sector. The Real Estate (Regulation and Development) Act will encourage investment in real estate by protecting the buyers.

Our goal must be to achieve and sustain a growth rate of 8% and above over an extended period. Only when the two engines of public and private investment function at full throttle will India grow at a fast rate.

Subjects : Editorials

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