Research Journal of Business Management and Accounting Vol. 1(2), pp.

025 - 029, August 2012 Available online at http://www.wudpeckerresearchjournals.org 2012 Wudpecker Research Journals ISSN 2277 0712

Review

A prescription to boost growth in India

Jagan Gaur and Samik Shome
Alliance School of Business, Alliance University Chandapura-Anekal Road, Anekal, Bangalore - 562 106, India.
Accepted 31 July 2012

The core challenge of the Indian government is to stimulate economic growth, control inflation and have fiscal consolidation. This paper reviews and analyzes the current scenario of Indian economy. It also suggested some policy reforms for improving the GDP growth rate. A PEST analysis been conducted to identify various problems and factors that hinder the growth of Indian economy. The paper also attempts to provide the probable ways to tackle these problems. The analysis indicates that there is an urgent need to generate rural non-farm employment, revamp the tax collection system, introduction of GST, reduction of subsidy and financial inclusion. Key words: GDP growth, inflation, fiscal consolidation, rural non-farm employment, financial inclusion. INTRODUCTION India started 2012 with a very dissipated health condition suffering from some major economic crisis such a slow GDP rate, high rate of inflation and high fiscal deficit among others. To make the matter worse, the Indian rupee has depreciated significantly against the US Dollar marking a new risk for Indian economy 1 . In fact, economists predict that the Indian rupee may depreciate by around 20 per cent during next two years on account of dip in confidence about the domestic economy leading to outflow of funds 2 . Therefore, the immediate core challenge of the Indian government is to stimulate economic growth, control inflation and have fiscal consolidation3. Responding to this precarious economic situation, the Finance Minister of India, Mr. Pranab Mukherjee in his budget speech of 2012 to 2013 proposed some measures to improve macroeconomic environment and strengthen domestic growth drivers to sustain high growth in the medium term. He also expressed his view to accelerate the pace of reforms and improve supply side management of the economy4. In this background, the objective of this paper is to identify various problems and factors hindering or slowing the growth of Indian economy. It also attempts to find out the probable ways to tackle these problems. The organization of the paper is as follows. In the subsequent section, a PEST analysis of the overall Indian economy is conducted. Government Initiatives section describes the initiatives taken by the government. The probable alternatives that may improve the economic growth in India are suggested in Probable Solutions section. The last section contains concluding observations. PEST analysis PEST analysis is generally used by management scholars especially in the field of strategic management6.
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*Corresponding author samik.shome@alliance.edu.in.

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E-mail:
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As of May 14, 2012, the rupee closed at a record low of 53.97 to

the US dollar. 2 Accessed on May 9, 2012 from http://www.indiatribune.com/index.php?option=com_content&view=a rticle&id=6123:rupee-could-depreciate-by-20-percent-in-two-yeaRs.&catid=123:business&Itemid=489 3 Accessed on March30, 2012 from http://www.ndtv.com/video/player/news/pranab-mukherjee-onbudget-2012/226586

For more details see, Budget 2012-13, Speech of Mr.Pranab Mukherjee, Minister of Finance, March 12, 2012. Accessed on May 9, 2012 fromhttp://indiabudget.nic.in/ub2012-13/bs/bs.pdf 5 PEST analysis stands for Political, Economic, Social, and Technological analysis.

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It is used to study the various macro-environmental factors that influence the market conditions. This model is a useful tool of preliminary analysis. This paper applied PEST model to identify the probable forces that can have an overall impact on the growth of Indian economy. Political factors The coalition government in India has its own advantages and disadvantages. Sometimes the intensity of disadvantages is more than its advantages if not properly managed. In India it is often seen that the coalition government cannot take strong economic policy decisions because of conflict among the allies. Again, sometimes the regional parties act as a hindrance for enacting any strategy for their regional political benefits. For example, internal debates within the government have been observed India in last few months related to the issue of hike in railway fares, setting up an effective Lokpal Bill, deregulation of oil prices, implementation of goods and services tax, among others. Different ideological upbringings of the political parties are also a reason for this confusion. All the participating parties rarely agree on any particular conclusion quickly and as a result, it affects the decision-making process which sometimes affects the investment process. Economic factors Fiscal issue The data released by the Controller General of Accounts (CGA) on government accounts till the end of December 2011 clearly indicated that the fiscal deficit of 4.6 percent of the GDP as given in the Budget estimate for 2011 to 2012 will be impossible to achieve. During the April to February period a year ago (i.e., in 2010 to 2011), the fiscal deficit was 68.6 per cent (compared with 94.6 percent of the fiscal year 2011 to 2012) of the budgeted 7 target . This may be due to higher subsidies in food and fertilizers, increase in global prices of oil and low growth of industrial sector. However, Government cannot cut expenditure side because of various reasons like, elections in different states and also forceful pressure from the other parties within the coalition. GDP growth Indias GDP growth slowed to just 6.1 percent in the
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third quarter (January to March) of the financial year 2011 to 2012 may be due to government policy paralysis, high inflation, euro-zone debt crisis and high interest rates. This GDP growth rate is lower compared to 6.9 percent GDP growth rate in the previous quarter and 8.3 percent GDP growth rate in the same quarter last financial year. This is also the lowest GDP growth rate in last three years. The cumulative GDP growth rate for the financial year 2011 to 2012 stood at 6.9 percent compared to 8.4 percent GDP growth in the same period 8 last year . With this dismal growth rate, it would be tough to achieve the yearly GDP growth rate of 7.6 percent, a target set by the Indian Government. Almost all the sectors have performed badly in the last financial year compared to the previous one. The GDP growth rate was mainly supported by Services and Transport sector which have clocked more than 9 per cent growth rate. Inflation Inflation is a necessary evil but it should always be moderate. In case of India, a low agricultural production, slip in industrial production and increased global oil price especially from January to March 2012 has resulted in high inflation rate. Inflation causes problems for Reserve Bank of India (RBI) to cut interest rates which results in low Foreign Institutional Investments (FIIs) 9 and discouraged investment expenditures in the economy which further caused shortage of supply and another time price rise. However, in January 2012 India recorded a negative food inflation which encouraged RBI to reduce the cash reserve ratio(CRR) by 50 basis points from 6per cent to 5.5 per cent effective January 28.RBI again dropped the CRR to 4.75 percent in the beginning of March 2012 to further increase liquidity10. According to RBI estimates, this change in CRR will infuse approximately Rs.32000 crore into the economy and banks would have more funds for lending. However, greater concern for foreign investors is the cut in interest rate through repo and reverse repo rate. RBI increased the interest rates 13 times in the mid 2010 to end 2011 to tackle the rising inflation. At the higher interest rates investors were hesitant to invest as it affect the returns and the market volatility. However, on April 17, 2012 RBI reduced the repo rate by 50 basis points from 8.5 percent
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For more details, please see Thomas (2007);Qasemi (2009); Schoemaker (2011).

Accessed on March 16, 2012from http://www.cga.nic.in/html/data1202.Htm.

Accessed on May 2, 2012 from https://www.cia.gov/library/publications/the-worldfactbook/geos/in.html 9 Accessed onFebruary 15, 2012 from http://www.sebi.gov.in/sebiweb/investment/FIITrendsNew.jsp 10 Accessed on April 17, 2012 from http://in.finance.yahoo.com/news/rbi-surprises-50-bps-rate053518529.html

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to 8 percent11. Rupee depreciation The Indian rupee has been mauled nearly 20 per cent in the last one year. And the downslide is unstoppable. After staying in a band of Rs. 44 to Rs. 46 in 2010 and for most part of 2011, the rupee has been on are relentless slide vis-a-vis the dollar since then. In the last quarter of 2011 alone, the rupee has depreciated by 13 per cent, falling from the level of Rs. 45 in August 2011 to Rs. 54.30 as of 15 December 2011.This has forced Indias government to use its foreign exchange reserves (FOREX) of $1.01 billion and as a result the Forex Reserves dropped to $292.5 billion. Special Drawing Rights (SDR) declined by $4.7 million to $4.4 12 billion . Indias reserve position in the International Monetary Fund (IMF) fell by $2.8 million to $2.7 billion. However, the amount of reserves in gold remained stable at $26.62 billion13. Social factors During the year 2011, India faced two major financial scams like 2G Spectrum and Commonwealth Games. India is ranked 95th among 183 countries on Corruption Perception Index (CPI) in 2011 as against 72th rank in 2007. According to World Economic Forums Global Competitive Report 2011 to 2012,the second most problematic factor for doing business in India after inadequate supply of infrastructure is corruption (Schwab, 2011). As a result, many foreign investors lost their confidence on the government which showed a drastic fall in FII for the period 2011 to 2012 14 .Anti-corruption movement of Anna Hazare gained a significant attention from global media. Technological advancements There have been much advancement in technology and science in the recent years. Technological advancements have shown a substantial growth concerned with each and every field whether it be the communication systems, automobiles, electronic devices of daily usage, building
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and architectural design techniques or the computers. However, India is still far behind than many developed countries with respect to research and development. Therefore, Indian government needs to do much more to change the face of Indian science and technology. GOVERNMENT INITIATIVES The Indian government lead by the Honorable Prime Minister Mr. Manmohan Singh is trying for a fast pace implementation of reforms encouraging huge investments from both domestic and foreign players. It has also taken initiatives to tackle the major problems by the various measures like fiscal consolidation policy, oil subsidy target to be under two percent of the GDP, increased turnover limit for tax exemption to SMEs from Rs.60 lakh to Rs.1 crore, indirect tax relief for sectors under stress such as agriculture, infrastructure, railways, manufacturing and aviation. According to the Union Budget of 2012 to 2013, the fiscal deficit is targeted to 5.1 percent of the GDP and the growth rate to be 7.6 percent. To tackle with the current account deficit import duty on gold has been increased which in turn will reduce gold imports as it contributes major portion to deficit apart from oil. However, with the relentless pressure from the jeweler associations, the government had to roll back their decisions. The tax removal may boost the demand for gold in India, but it will also increase the imports15. The Planning Commission released an approach paper consist of Twelve Strategy Challenges to initiate consultations for the 12th Five Year Plan 16 . It refers to some core areas that require new approaches to produce the desired results. It includes: (i) enhancing the capacity for growth; (ii) enhancing skills and faster generation of employment; (iii) managing the environment; (iv) markets for efficiency and inclusion; (v) decentralization, empowerment and information; (vi) technology and innovation; (vii) securing the energy future for India; (viii) accelerated development of transport infrastructure; (ix)rural transformation and sustained growth of agriculture; (x) managing urbanization; (xi) improved access to quality education; and, (xii) better preventive and curative health care.
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ibid

Accessed on January 13, 2012 fromhttp://rbi.org.in/scripts/WSSView.aspx?Id=16803

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Accessed on January 20, 2012 http://rbi.org.in/scripts/WSSView.aspx?Id=16826 14 Accessed onMarch10, 2012 from http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii

Accessed on May 10, 2012 from http://www.zerohedge.com/news/india-folds-gold-excise-taxindian-gold-restocking-imminent 16 Accessed on March10, 2012 from http://planningcommission.nic.in/data/datatable/index.php?data =datatab

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PROBABLE SOLUTIONS As a part of the objective this paper made an attempt to touch upon all relevant issues which are affecting the growth of Indian economy. However, at this juncture when the Planning Commission is preparing the plan

document for the 12 five year plan (2012 to 2017), this paper provides a broad framework of policy initiatives that the government may pursue in the next five-year period to achieve the desired growth rate. Development of rural non-farm sector There is an urgent need of developing a strong industrial base in the rural areas to boost the economic performance of the country. According to Desai et al. (2010), 51 percent of employed rural men are engaged solely in farm-oriented activities including own account cultivation, animal care and farm labour; 28 percent solely in off-farm work, and 21 percent engaged in both. The growth of rural non-farm employment (mainly, labour intensive technology) will show a movement of surplus labour from the agriculture sector to industrial sector and therefore it will decrease the disguised employment problem in agricultural sector. Similarly, effective rural development projects and programs can change the demographic trend of migration. For instance, Mahatma Gandhi National Rural Employment Guarantee Act 17 (MGNREGA), by guaranteeing employment within rural areas, has substantially reduced the problem of rural-urban migration (Shome et al., 2012). Again, investment in rural infrastructure such as roads and transportation will also help to develop better connectivity with big cities and towns. Revamping of tax collection system The procedure of tax collection in India has evolved over the years and is now subject to several acts, rules, and regulations, as laid down by the Indian Income Tax department. The paper proposes the government to make changes in the mechanism of tax collection system.
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A major proportion of the tax revenues are lost due to unorganized trade activities and improper records by the business and trades which in turn creates a huge revenue loss for the government. This might be because of poor government policies, inability of small firms and enterprises to maintain records or procedures, lack of awareness, poor technical and accounting skills of small enterprises. Tax system should be simple to understand even by a common man and it should also be easy to make payment of taxes without requiring much of technicalities. Introduction of GST Introduction of Goods and Services Tax (GST) system can be an important policy decision by the Indian government to integrate central and state indirect tax regime. It will be a dual tax in the form of Central GST and State GST component (MoF, 2011). This is completely information technology enabled system of tax collection. This might be a challenge for small tax payers in migrating to GST because of inadequate resources and skills. So the Government needs to make well advance plans to educate the stakeholders and to make it a success. Reduction of subsidies It is the appropriate time to cut subsidies on goods like petroleum products and increase indirect taxes to deal with the current fiscal deficit. However, as discussed earlier, it may be difficult for the government to implement this because of the coalition structure. The policy of direct subsidies transfer in the form of cash to farmers through banks should be implemented soon and the focus should be more on agriculture investment rather than subsidies. In implementation of this policy, crucial support of the Unique Identification (UID) or Aadhaar Cards is required. Currently most part of expenditure goes on subsidy side rather than investment in agricultural research and development. More importantly there should be an improvement in agricultural education for farmers to improve farm production. Financial inclusion There is need to educate rural people and create awareness among them about the financial inclusion. They should be educated about the benefits of connecting to financial system of the economy. People should also be encouraged to buy financial products such as insurance policies, term deposits and amount deposits in the banks instead of buying gold products. As money invested in gold does not circulate in the economy,

MGNREGA was enacted on September 2005 in India. The objective of the Act is enhancement of livelihood security of rural households by providing at least one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work. It was first brought into force with effect from February 2006 in 200 of the most backward Indian districts. It was subsequently extended to all the districts of the country.

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therefore people should be encouraged to open more saving bank accounts. The Minister of Communications and IT, Mr. Kapil Sibal suggested that all post offices should be commercialized and they should be given banking license so that postal offices will be converted to postal banks. It will be a good step as India has 1.55 lakh post offices all over the country. This may be an easy way to approach the unbanked population of India. However, the process of implementation should be properly planned. CONCLUDING OBSERVATIONS India is going through a tough phase where the GDP growth rate is subsiding continuously. This paper is particularly important at a time when India is undergoing substantial macroeconomic crisis. In this context, there is strong need of economic and social reforms in different sectors including non-farm employment, tax collection processes, financial inclusion programs etc. The PEST analysis reveals a gloomy picture of the Indian economy where coalition government is unable to take decisions efficiently and effectively. The reforms in industrial sector will lead to reallocation of surplus labour from farm sector to non-farm sector in rural area, which will improve the

employment scenario. Simplification of tax system will help in generating more revenues for both the Centre and the States which in turn will address the problem of budgetary deficit. Introduction of GST and reducing subsidies will also be a good move in the same direction. The probable solutions suggested in the paper are subject to a strong political will.
REFERENCES Desai SB, A Dubey BL, Joshi M Sen, A Shariff, R Vanneman (2010). Human Development in India: Challenges for a Society in Transition, India Human Development Survey, Oxford UniveRs.ity Press, New Delhi. http://ihds.umd.edu/report.html Ministry of Finance (MoF) (2011). The IT Strategy for GST, Report of the Empowered Group on IT Infrastructure on GST, Government of India. http://finmin.nic.in/GST/IT_Strategy_for_GST_ver0.85.pdf Qasemi HR (2009). PEST Analysis in Strategic Human Resources Planning, Islamic Azad University of Iran. Schwab K (2011). The Global Competitiveness Report 2011-12,World Economic Forum, Geneva. Shome S (2011). Techniques in Innovative Policy Making: Example of National Rural Employment Guarantee Act in India, Int. J. Public Admin., 34(5): 267-278. Schoemaker PJH (2011). The General Environment, Understanding Strategic Management, Chapter 2, Oxford University Press. Thomas H (2007) An Analysis of the Environmentand Competitive Dynamics of Management Education, J. Manage. Dev., 26(1): 9-21.