India experienced unprecedented growth in 2004–14, which seems to have lost momentum in the past year. The sharp drop in the share of capital investment was the main reason for the decline in prices. Despite the growth of private and foreign investment, the Indian economy remains heavily dependent on government investment. The Prime Minister has promised to correct this trend and start a new cycle of state-led investment.
He has promised the country 100 new cities, a nationwide network of high-speed rail, a national river link initiative, and plenty of other large national transformation projects.
The advent of “smart cities” has become a reality, the nation-wide network of high-speed rail has taken initiate even though several political set backs have been seen. The metro cities were seeing a bloom in expansion of metro services. Yet interestingly guarantees made at the moment are mere caricatures of what have been promised.
The Modi administration was unable to remove the economy from its heavy subsidy burden and the black hole of utilities that only benefit from controlled prices for oil and energy companies. As a result, the image remains dark. Capital goods production fell 1% in July, down from 8.8% growth in the previous year. Durable consumer goods production shrank by 1.3% compared to a nominal increase of 0.2% in the previous year.
Then the Black Swan events happened. The old introduction of monetization and the Goods and Services Tax (GST) and the eruption of feasible remarks in internal politics caused notoriety and attracted attention from foreign countries.
Demonetization dealt a major blow to India's unorganised cash-based economy, which accounts for 40% of the country's GDP. The unorganised sector also generates 90 percent of the country's 450 million workers.
Unemployment:
Unemployment due to demonetisation and the rapid introduction of GST has not yet been empirically confirmed. Estimates are different. The construction industry and vegetable and fruit retailers have been hit hard, with an estimated unemployment rate of about 253 million. These sectors mainly employ low-skilled rural landless workers, forcing them to receive daily salary and income support. That was further put to test in the age of the pandemic.
With the introduction of GST, dealers have reduced inventories, forcing companies to reduce production for the introduction. Inadequate training and preparation were clear enough. Rates were announced prematurely, and many discrepancies between input and output rates contributed to the confusion. While several important commodities such as petrol were never added and causing regular friction between the union and state
In a delayed attempt to reverse these trends, the government plans to ease its budget deficit target of 3.2% of GDP, allowing it to spend up to 50,000 rupees. This is a small amount for an economy whose GDP is currently over 1.5 million rupees.
Currently, there is a net outflow of foreign investment in India. What is needed is a huge cash injection to boost the investment. Relaxing the norms of budget deficits helps. However, a meaningful reduction in subsidies as Modi's term goes to elections is politically infeasible.
It must require to invigorate national sentiment and create optimism for the economy. He now needs a plan to promote investment. He doesn't have to go far to find money to fund this plan.
The government is sitting with reserves of nearly four hundred billion, with approximately one hundred thirty-five billion sitting in US banks' incomes subsequent to nothing. These reserves are equivalent to approximately 80% of our foreign debt.
The important question today is how much money can be freed up for investment from the remaining $ 300 billion. According to economist Kaushik Basu, India's foreign exchange reserves do not need to exceed the country's $ 80 billion current account deficit. Others are a little more cautious.
Possible Solution:
It is evident that we can consider releasing US$ 100,012 million from the Infrastructure Fund (6.58 Lakh crores). The government can create the India Infrastructure Investment Fund and start allocating a significant portion of its foreign exchange reserves to it. The fund will be managed by a group of reputable professionals who can distribute money to beneficiaries in order to prevent normal leakage and political abuse. To stimulate Make in India, the fund must also mandate a minimum amount of local finance and investment.
Hence a possible shift in strategy would be a called for action if not an unsung hero strategy of the prime minister.
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