Key macro- economic challenges for India, at present, include:

Inflation:

Rising Wages, property prices and food prices have all surged inflation in our country,
manifesting a bleaker outlook. The RBI has often spoken about the imminent problems that the
country may face, owing to inflation. RBI Governor Subbarao has stated that while the wholesale
price inflation has fallen to 7.18% for December 2012, it is comparatively higher and needs to be
lowered. The government has been unable to bring down borrowing rate as it may further
trigger inflation with money becoming cheaper.

Current Account Deficit:

India’s present current account deficit stands at 5.4% of the GDP, since we have been a net
importer of goods and services. Throughout the past years, exports have been declining and
imports are on the rise. We have been constantly banking on foreign capital flows to keep up
with the pace of rising US dollar demand. In order to continue foreign portfolio inflows, the
Government has postponed the enforcement of GAAR.

Fiscal Deficit:

The Government ‘s expenditure has been more than its earnings with respect to tax revenues
and other such means , resulting in a high fiscal deficit. Hence, the borrowings from the RBI,
have been rising sharply. A recent report has mentioned that the government has not taken any
constructive step in cutting down the fiscal deficit wherein it has to curtail the expenditure and
strengthen its reserves. Apart from that, the report also mentions that the government has to
spend around Rs. 3,00,000 crore to eke out and provide job opportunities, food, fertilizer and
reasonably priced fuel by 2013-14 that could further put a dent in the country’s reserves,
resulting in high demand for money and interest rates.

Balance of Payment:

India has to bank on external finances, extensively for the huge amount of imported goods and
services that it has to cater. The debts have increased two- fold in the last five years as the
country’s current overall fiscal debt is being reported to be $ 36 bn for 2012-2013, leading to a
slowdown in the capital inflows. The situation can turn out to be volatile owing to the
repercussions of the balance of payment crisis. In order to grapple with the problem and pull
the plug, India must endeavor to boost its exports.
Investment growth:

India’s gross fixed capital formation has fallen to around 2%, showing no signs of recuperation,
since the last four quarters. RBI stated that this is the lowest rate, the country has seen since
2008-2009, exhibiting the reluctance of investors.

Gross fixed capital formation represents the rate at which new assets are created and
investments are made by businesses and the government.

Experts consider the country’s rising gold imports as the triggering factor for its macro-
economic stability. Kotak Mahindra, in its report, mentioned that India has invested around $
124bn in gold assets between 2004 and 2008. On the contradictory, the government‘s planned
expenditure in the 11th five year plan for infrastructure was 25% of the same.

The country’s growth potential could be severely affected if the government does not take any
constructive step to address the macroeconomic imbalances

Answer:

India emerged as the world's seventh largest economy in 2018 and likely to go past the United
Kingdom and France in 2019 to become 5th largest economy of the world. After 1991 economic
liberalization, India achieved 6-7% average GDP growth and became fastest growing major
economy. It continues to remain the fastest growing major economy in the world in 2018- 19,
despite a slight moderation in its GDP growth from 7.2 per cent in 2017-18 to 6.8 per cent in
2018-19.

Despite being the fastest growing economy in the world, it is facing several macro-economic
challenges in recent times.

 Twin balance sheet crisis - Indian banking sector has been dealing with twin balance
sheet problem, which refers to stressed corporate and bank balance sheets. The increase
in Non-Performing Assets (NPA) of banks leads to stress on balance sheets of banks, with
the Public Sector Banks (PSBs) taking in more stress. Over-leveraged corporates and
over-exposed lenders pulling down credit growth potential and hampering private
investments. NPAs currently are amounting to more than Rs 10 lakh crore. If the NPA
crisis isn't resolved, it could hurt India's long term growth prospects.

 Rising oil prices – India is the largest oil consumer after US and china. So little
fluctuations in global oil prices can affect the global scenario, especially India. Rising
 crude oil prices has widened India's trade and current account deficit- India's CAD which
was as low as 1.9% in 2017-18 rose to 2.6% in 2018-19 .The US Fed's rate hikes has
resulted in capital outflow affecting emerging economies while the Turkish lira's fall
exacerbated the crisis. Sanctions on Iran (cheaper source of oil) further add to the woes.

 Prospects of export growth remain weak if status quo is maintained. The major threat
facing the world economy is the increase in trade tensions between U.S. and China,
outcome of Brexit and downside risk to China’s growth. The lower global growth and the
increased uncertainty about trade tensions may negatively affect export demand,
including that of India’s, which in turn will further lower GDP growth rates of several
countries.

 Depreciation of Indian Rupee- Economists also attribute slower growth of India’s

economy to a movement of the Indian rupee against the dollar. The rupee appreciated 3
percent in 2017, while it depreciated 5 percent the following year. The depreciation of
Rupee is due to concerns related to widening of CAD owing to rising crude oil prices
coupled with tighter financial conditions in US caused by increase in Federal Funds rate
by the US Federal Reserve.

 Fiscal deficit: The fiscal deficit for FY2018 stood at 5.9%. The Government ‘s expenditure
has been more than its earnings with respect to tax revenues, resulting in a high fiscal
deficit. Hence, the borrowings from the RBI, have been rising sharply. The increase in
expenditure by the government for providing job opportunities, food, fertilizer and
reasonably priced fuel further puts a dent in the country’s reserves, resulting in high
demand for money and interest rates.

 Inflation: Rising Wages, property prices and food prices have all surged inflation in our
country, manifesting a bleaker outlook. The wholesale price inflation is higher and needs
to be lowered. The government has been unable to bring down borrowing rate as it may
further trigger inflation with money becoming cheaper.

 Infrastructural bottleneck, arbitrary regulatory regime, outdated labour laws, poor

logistics performance etc. also hold back the economy from achieving its true potential
and makes our exports uncompetitive.

 GST aftereffects - While the GST has simplified the indirect tax regime and widened the
tax base, revenue potential hasn't properly realized. While compliance issues remain,
export sector issues due to delay in input tax credit, hurt growth. Rationatizing rates
might improve revenue growth in medium term.

 Agricultural distress – Agriculture sector growth declined from 5.6% to 3.8% from the
period FY14 to FY19. Although the IMD has predicted a normal monsoon, floods and
droughts have affected several districts. Several states have been forced to announce loan
waivers due to crash in prices after a spurt in production. This has affected the potential
of doubling farm incomes by 2022.
  Unemployment and jobs- Voluntary unemployment and underemployment have emerged
as major challenges and skill development of the workforce in an era of technological
disruption remains the key to realizing our demographic dividend.

 Manufacturing sector is affected by the slowdown in the automobile sector, where the
production growth for all categories, apart from commercial vehicles declined in 2018-
19, as compared to 2017-18. Sales growth has decelerated in many segments of the
automobile sector, including passenger vehicles, tractor sales, three and two wheeler
sales.

Way ahead:
 While the govt has taken measures like recapitalization of banks and restructuring of
assets through the IBC route, it has failed to make a major dent in the NPA crisis forcing
banks to take major haircuts.
 Creating an asset reconstruction company and eventual privatization of stressed PSBs as
suggested by experts might be the way forward.
 The mechanism of Insolvency and bankruptcy code should be made robust as it is now
largely favourable to the creditors.
 Implementing the Swaminathan Commission's recommendations in letter and spirit
remains the only way to resolve farm sector distress.
 Pradhan mantri “har khet ko pani” scheme should be implemented effectively to reduce
dependence on monsoon and reduce agricultural goods import to lower current account
deficit.
 The overdependence on crude can be eased by discovering new domestic oil sources,
shifting the focus to Renewable Energy (175 GW by 2022 is a step in this direction) and
finding other alternate sources of energy like biofuels. This would contain CAD, fiscal
deficit and inflation.
 Maintain inflation within set targets and curb inflow of black money. The Government
needs to find the right balance between contractionary and expansionary policies to
maximise the welfare of its people.
 One aspect that needs attention is to reduce non plan expenditure. This would help to
control fiscal deficit.
 To maintain 7% plus growth rate, job creation and reduction in poverty should also be
priority. While India's growth rate remains robust, further structural reforms remain the
way forward to enhance job growth for our burgeoning population.
 Special focus should be on manufacturing sector so as to make India as an industrial hub
which will give a boost to exports.
 However, reorientation of export policies to target countries/markets based on our own
relative comparative advantage and the importing country’s exposure to Indian goods can
foster export performance. Maintenance of domestic stability will also boost the export
and reduce the trade deficit.
 Improved efficiency in production and better infrastructure are equally important. Also
primary and secondary sector needs a modern overhauling.
Indian economy obviously bearing the fruits of demonetisation and GST but the journey is
longer and government will have to keep moving with economic reformism zealousness.