Even with Coalition Government, the Direction of India’s Economic Policy is Unlikely to Change

Why in News?

• The recent general elections in India have culminated in the formation of a coalition government at the Centre, marking a significant shift from the single-party majority that has been in place for the past decade.
• This transition has sparked concerns among certain quarters regarding its potential impact on the country’s economic trajectory.
• Amid this change it is important to explore the implications of coalition politics on India’s economy.

India’s Economic Performance under Past Coalition Governments

• India's economic reforms, initiated in 1991, coincided with a period marked by coalition governments.
• Despite the fragmented political landscape, these coalitions managed to implement significant reforms and maintain high growth rates.
• The past decade's single-party majority was an exception rather than the norm in Indian politics.
• Historical data indicates that coalition governments have been effective in driving economic reforms and sustaining growth.
• For instance, the total factor productivity (TFP) growth in India has risen over the past decade, standing at approximately 2.2 percent, compared to -0.3 percent for emerging markets in the previous decade.
• This trend underscores the resilience and adaptability of India's economy under various political configurations.

The Importance of Continued Reforms and Challenges Under a Coalition Government

• The Issue of Pace and Intensity
  • While the coalition government is poised to continue India’s economic growth trajectory, the pace and intensity of reforms will be critical.
  • Reforms are essential for addressing structural issues and for ensuring long-term economic stability and growth.
  • The nature and scope of reforms have varied under different governments, reflecting their respective political priorities and economic philosophies.
  • Nonetheless, certain fundamental reforms have been pursued consistently, contributing to a robust economic framework.
• Enhancing Productivity
  • Reforms in areas such as manufacturing, ease of doing business, digitisation, and skilling are likely to continue under the new government.
  • These reforms are crucial for enhancing productivity, improving competitiveness, and creating jobs.
  • For instance, initiatives to streamline business regulations and enhance digital infrastructure have already yielded significant benefits, making it easier for businesses to operate and thrive.
• Challenging Under the Coalition Government
  • Some reforms may face greater challenges under a coalition government.
  • Reforms related to agriculture, land, and labour—often referred to as factor market reforms—are particularly contentious and may be more difficult to implement.
  • Similarly, privatisation and asset monetisation, which are essential for improving efficiency and reducing the fiscal burden on the government, may encounter resistance.

Key Steps to Maintain India’s Economic Resilience and Reform Continuity

• Infrastructure Development and Private Sector Involvement
  • Infrastructure development remains a cornerstone of India’s growth strategy.
  • Continued investment in critical infrastructure projects is necessary to support economic activity and improve the quality of life for citizens.
  • While the government has been the primary driver of infrastructure development, there is a growing recognition of the need for increased private sector involvement.
  • This shift is expected to take place gradually, with private capital expenditure playing a larger role in the future.
• Continuation of PLI Schemes
  • The Production-Linked Incentive (PLI) scheme, aimed at boosting the manufacturing sector, is another key initiative that is likely to continue.
  • The scheme is designed to create jobs and enhance manufacturing capabilities, aligning with the global trend towards industrial policy and the China+1 strategy.
  • By incentivising manufacturing, the PLI scheme aims to reduce dependence on imports and strengthen domestic production capabilities.
• Balancing Supply-Side and Demand-Side Measures
  • While the government has predominantly focused on supply-side measures, such as improving infrastructure and business conditions, there is an increasing need to address demand-side issues.
  • Stimulating demand is crucial for ensuring that economic growth is inclusive and benefits all segments of society.
  • This includes measures to support agriculture, rural incomes, social welfare, job creation, and consumption.
• Accommodative Government Spending
  • Government spending must be more accommodative of the needs at the bottom of the economic pyramid.
  • This means allocating resources to areas that directly impact the lives of the poor and marginalised, such as health, education, and social welfare programs.
  • The additional fiscal space of Rs 1.2 trillion (0.35 percent of GDP) available for FY25 provides an opportunity to address these needs without jeopardising fiscal stability.
• Fiscal Discipline and Macroeconomic Stability
  • Maintaining fiscal discipline is essential for ensuring macroeconomic stability.
  • The institutionalisation of reforms, such as the inflation targeting mandate, has provided a framework for fiscal discipline and has helped keep inflation in check.
  • The moderation of global crude prices and the reduced oil intensity of the economy are also positive factors that will help control the current account deficit.
  • With twin deficits; fiscal and current account under control, and the Monetary Policy Committee (MPC) focusing on inflation targeting, India’s macroeconomic stability is unlikely to be jeopardised.
  • The upcoming budget will be a critical indicator of the new government’s economic direction, impacting interest rates and the trajectory of the rupee.

Conclusion

• India stands at a pivotal moment in its economic history, facing both domestic and global challenges, including geopolitical shifts, technological advancements, and the imperative of decarbonisation.
• The new coalition government must navigate these complexities without compromising on economic logic and priorities.

Historical evidence suggests that coalition governments can be just as effective as single-party majorities in driving reforms and, therefore, apprehensions about the return to coalition politics disrupting India’s economic trajectory are largely unfounded.

Q) What are the main drivers of India's economic growth?

The main drivers of India's economic growth include a robust service sector, which contributes over 50% to GDP, a growing manufacturing sector under initiatives like "Make in India," and a significant increase in infrastructure development. Additionally, the rising middle class and consumer spending, along with digitalization and technological advancements, play crucial roles. Reforms in taxation, such as the Goods and Services Tax (GST), and efforts to improve the ease of doing business have also contributed to economic growth.

Q) How has the COVID-19 pandemic affected the Indian economy, and what measures have been taken to mitigate its impact?

The COVID-19 pandemic significantly affected the Indian economy, leading to a contraction in GDP, job losses, and disruptions in various sectors. To mitigate the impact, the Indian government implemented a series of measures, including the Atmanirbhar Bharat Abhiyan (Self-Reliant India Initiative), which aimed at boosting local manufacturing, providing financial support to small and medium enterprises (SMEs), and enhancing infrastructure. The Reserve Bank of India (RBI) also reduced interest rates and provided liquidity support to ensure financial stability. Additionally, vaccination drives and digital initiatives helped in gradually restoring economic activities.

Source:The Indian Express