AgricultureTouted as the backbone of India’s still predominantly rural economy, agricultural reforms have been much neglected over the past decade, which has contributed to a significant amount of growth and productivity slowdown in the sector. The malaise that has begun to paralyze large swathes of Indian agriculture has now become evident in the rising indebtedness and suicides among farmers. With the discourse around doubling farmers’ income by 2022, one cannot expect a sustained increase in real income with only piecemeal measures such as short term loan waivers. Rising prices of commodities need to start increasingly translating into greater incomes for farmers and this means government/political action on removing vast networks of middlemen who absorb most of the rising price differentials in the country today.

Unemployment – With a staggering rise in unemployment rates over the past four to five years, India’s demographic dividend might soon turn into a liability if issues around unemployment are not addressed soon enough. Unemployment is more a manifestation of the ills plaguing the Indian economy rather than an ill in itself, but makes this list because of it’s dire politico-economic implications on India going forward into the next decade. Identifying the true magnitude of unemployment in the economy through adequate indices, along with the government expanding labour intake in public sector enterprises or other government agencies, while being a short term measure at the very least can go miles at the moment to keep such rising unemployment at bay for lack of other structural reforms.

Industrial Productivity Slowdown – India has undergone a sizeable productivity slowdown since the advent of the financial crisis and never fully recovered from. India’s manufacturing sector slowdown has been an ongoing process with the term “cyclical” hardly being applicable anymore to the phenomenon – it is turning into more of an acute “stagnation”. While rising productivity would theoretically mean lower number of workers per unit of output produced, output and productivity slowdown spells out a worse situation for the economy when its firms are no longer pushing the boundaries of innovation and productivity further. Profitability and feasibility of firms on the supply side, start coming into question en masse when this initiates the process of shutting down of small and medium enterprises due to lack of demand and high credit burden among other things.

Foreign Investments – While the Prime Minister today goes gung-ho at International fora and his visits abroad in portraying India as a hub of foreign investment, India’s foreign investment inflows have only dried up (relative to previous benchmarks) over the last couple of years. This year in-fact has seen a net outflow of foreign portfolio capital from the country, indicating that investors have slowly begun to lose some semblances of their previous confidence on the trajectory of the Indian economy. The government needs to reign this adverse cycle back into control, and also make sure big ticket investment pitches like Make in India, begin to yield results and reverse the flow of declining growth of inflows of direct investment into an emerging market like India.

Foreign Trade –  While export-led growth, for many, is still a gold standard of  growth inducing economic policy among developing and emerging market economies, India’s exports have only flatlined since the advent of the Modi government, with the government registering almost zero to meek growth rates of exports over the past half a decade or so. India has not met key export and trade size targets to various regions it has itself underlined, and has begun to take the backward route to staggered protectionism. It’s inability to sign trade deals due to fear of more competitive foreign products flooding Indian markets in such a barriers-free environment has put India on the backfoot in. a world of re-aligning trade partnerships and increasing economic regionalism. Regionalism and slower global growth could add to India’s struggles to find an export led escape route away from its economic slowdown.

Current and Capital Account Alarm bells –  India’s current account deficit has historically been very sensitive to crude oil prices and other global commodities indices, with the sharp decline in prices recently having come as a quasi-providence for a government waging a war on all fronts of the economy domestically. India’s external imbalances during 2018 have only widened and gone from 2.7% of GDP to 1.9% in the previous year. The current account deficit must be brought into more sustainable levels to drive it away from it’s high variance with oil price shocks. On the capital account, the slowing down of portfolio inflows over the past year has caused net capital inflows to significantly drop. This combination of a widening CAD and a sharp drop in capital inflows has translated into a sizeable BoP deficit for a majority of the past fiscal year, thereby resulting in a steady depletion of foreign exchange and rupee depreciation pressures in the economy.

Exchange Rates –  Combination of flatlining foreign trade prospects and the balance of payments downturn, as mentioned above, will lead to downward pressures in the rupee’s exchange rate. While some degree was necessary, any relentless downward trend in the value of the rupee will lead to the onset of self-fulfilling pressures on the economy, along with greater financial and macroeconomic instability concerns. The pointer to be noted here is that rupee depreciation will not propel exports that suffer from massive competitiveness issues.

Infrastructure – India needs much more and much better infrastructure if it is to grow faster. However not enough money is being spent by the Government on building this requisite infrastructure. The twin problem here is that much of the slow growth rates that have been keeping the economy afloat have only come from the Government’s infrastructure spending which signifies the depth of the quagmire India currently finds itself in. While public expenditure is a necessity, the government will have to reign in the private sector which is nowhere near as enthusiastic in opening its purses for something as risky as infrastructure. Earlier such attempts (like PPPs) either ran into trouble or have bogged down the rate of investment on projects, or stalled them altogether. 

MSMEs and animal spirits – Micro, Small and Medium Scale enterprises in India are one of India’s key sources of comparative advantage in terms of small scale employment generation, as well as a major source of tax revenue for state and central governments alike. Till now, the government has not spelt out a comprehensive plan to pull this sector out of the crisis that it currently finds itself in, post the introduction of the GST which had an adverse impact on these industries. (Delayed payment, working capital requirements)

Deficits and debt – As things stand the consolidated the fiscal deficits of the states and the Centre stand at 7% of GDP which is higher than any other emerging market in today’s times. High fiscal deficits will not only make the cost of borrowing higher, but also crowd out private investments beyond the short term, thereby making such a cycle very unsustainable. This does not include a lot of other essential infrastructure investments, welfare schemes and poll promises that have already been made by the current government. India has had a history of ballooning fiscal deficits foreboding not just other external vulnerabilities (such as the 1991 crisis) but also being succeeded by periods of prolonged growth slowdown (such as in 1998-99 and 2009-10). 

Labour Laws – India’s notoriously archaic labour laws have been a significant cause of employee angst across Industries, for the past few years. Labour falls under the Concurrent list of the constitution, and combining states and the centre, there are approximately 200 labour statutes in India to deal from at the moment. These laws provide an incentive for firms to remain small and flexible thereby ridding most smaller enterprises the will to increase in size and hire more (so as to avoid larger costs). India’s labour laws have inhibited the growth of manufacturing firms, which lose out on the gains they could have made from economies of scale and innovation. Due to these reasons India has not been able to undergo industrial development and is finding it difficult to gain from the rise in labour costs in China.

Disinvestment – With a slew of sick PSUs and PSEs going under the hammer in the year 2020, large scale government rollbacks from a number of key industries will be used to raise some much needed revenue for the cash-strapped government. While Air India, BPCL dominate the roster, the government cannot afford to sell these strategic assets at much less than what the current market values of the assets. This Disinvestment process cannot be solely for the sake of raising some change to fund political whims but a better thought out process where the government recoups as much as possible from the assets and enterprises being sold off.

Health –

Education – As much as the government and it’s ideologues may not want to believe it, development and long term growth cannot be divorced from each other. In this, budgetary allocations can’t continue to drop for education with much of the education sector (from primary to higher education) needing a revamp in terms of effectiveness and objectives of state provision of education.

Rising Inequality – While poverty remains central to the Indian developmental discourse, inequality now needs to start getting the due share of appreciation as a potential area of concern for the economy. While the political capital for bringing inequality under the control may take a long time to be exercised, India’s rapid addition to the class of millionaires and billionaires while the economy as a whole battles with unemployment and mass slowdown does not bode healthy signals. Ranked as one of the countries experiencing the fastest rise in inequality over the past decade, India’s development story can become an increasingly asymmetric one with an elite minority generating and distributing most of the wealth and income generated in the economy, amongst themselves.

Banking Sector – The problem of Non-Performing assets is far from gone which is still constraining Indian banks to increase new lending to Indian industry. Cleaning up a lot of these banks will take significant amounts of time whether through the NCLT or through other routes, and will have to include debt restructuring de-risking of banks.  While public sector banks bear most of the brunt today, of government policy declarations like farm loan waivers, issues of PSU governance and risk management still remain contentious issues around the performance of the public sector banks.

Financial Markets – India’s companies still depend too much on banks to meet their borrowing requirements and need quicker access to the corporate bond markets as a source of credit. Banks on the other hand are forced to spend some capital on government debt through the SLR making less capital available for corporate bonds which is the need of the hour. The government still has not found a way to invigorate trust in the financial sector in order to channelize household savings into credit markets rather than on assets such as gold.

Federalism and Decentralization –