India’s economic woes structural; urgent, far-reaching reforms necessary not to end up like Sri Lanka

Indian economy may look reasonably good right now when compared to other countries, but inflation, depleting foreign exchange reserves, falling rupee, spiralling crude oil prices are worrying factors

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KR Sudhaman

Prime Minister Narendra Modi said recently that India is the fastest growing economy at the moment. Statistics-wise, it may be true, as other countries are not doing too well on this count. But the question to be asked is this: is India’s growth story a myth or reality?

On the face of it, the Indian economy may look reasonably good right now when compared to many other countries. Particularly after the Covid pandemic, our recovery seems to be relatively good.

But the question remains: is India on the right track and is it on the proper road to recovery? It is difficult to say. The overall macroeconomic fundamentals of the Indian economy are not all that bad, but there are worrying signals and if corrective actions, some of them drastic, are not taken, the day is not far when the economy could face serious problems.

More than it being Covid induced, the economic woes are structural and far-reaching reforms are needed as was done in 1991 by the Congress govt.

According to experts, India’s economic woes started in 2016, beginning with demonetisation, an ill-advised move. An economy which was growing at over 8 per cent started slowing down quarter after quarter, so much so that it fell close to 4 per cent in the last quarter before the Covid pandemic hit in 2019.

Covid only accentuated the problem, with growth touching its nadir at negative 24 per cent in one quarter of 2019-20. Even more than demonetisation, the poor implementation of GST hit the cash-based informal economy, which accounted for over 85 per cent of the employment and 90 per cent of the small businesses in the country. This led to the shrinking of demand in the entire country, which subsequently affected production, thereby the industry and the economy. Covid and the lockdown only made the situation worse.

The question that is often asked is, will India go the Sri Lanka way or for that matter, Pakistan or Nepal? The answer is a certain no at the moment as there are several positives in the Indian economy with exports picking up, indicating some revival of economic activity. But inflation, depleting foreign exchange reserves, falling rupee, and spiralling crude oil prices are worrying and if structural correctives through the right economic policies are not taken, the Indian economy could face massive difficulties.

The negative trends are already visible, with India’s economic growth projected over nine per cent this financial year having already been revised downwards several times, and the projections now range between 7 to 7.5 per cent. Nomura has forecast a low of 4.7 per cent growth for the Indian economy in 2023, which may be a slight exaggeration, but it does indicate that all is not well for the Indian economy, with recession expected even in some of the advanced economies. The Chinese economy too is not doing well, which could severely impact the sliding global economy adversely.

India may not go Sri Lanka or Pakistan's way as the economy is quite large and some of the developed states are doing reasonably well. But there are warning bells as according to a recent Reserve Bank of India report, 10 states in India have unsustainable levels of debt and high fiscal deficit. This is dangerous. Each state is bigger than Sri Lanka and some of them are as big as Pakistan.

RBI has flagged the issue saying fiscal risks seem moving sub-national. Some of the states, particularly Punjab, Rajasthan and Bihar spend 90 per cent of the revenue they earn on expenditures like salaries, debt servicing and other revenue expenditures.

Hence, there is very little money left for developmental activities and capital expenditure. The other states spend more than 80 per cent of their revenue on routine expenditures, not leaving much money for capital formation. The days are not far off when they may have to start borrowing to meet their revenue expenditure and debt servicing, which is dangerous.

According to RBI’s report, Punjab, Rajasthan and Bihar are expected to remain stressed, with their debt to GSDP (state GDP) ratio likely to exceed 35 per cent by 2026-27. The other states in this situation include West Bengal, Kerala, Andhra Pradesh and Uttar Pradesh.

The report said, “Risks to state government finances arise from macroeconomic uncertainty, declining own tax revenue, re-launch of the old pension scheme by some of the states, rising expenditure on non-merit freebies, expanding contingent liabilities and ballooning overdue to discoms, warranting strategic corrective measures.”

These are strong words and a warning to those political parties which, for their short-term electoral gains, dole out freebies promised during elections, without ensuring they earn enough revenue to fulfil those promises. Free power, free bicycles, free laptops etc to get votes are not good ideas, particularly when the state’s economy is not doing well.

If these states were separate countries like Sri Lanka, Nepal or Pakistan, they would have faced bankruptcy like those countries. Fortunately, these states have an umbrella in the form of a Central government. If such a situation continues for long, it would impact the nation as a whole, which is also facing some structural difficulties that needed correction.


According to the revised estimate, the debt-GSDP of Punjab was the highest at 53.3 per cent, followed by Rajasthan at 39.5 per cent, Bihar 38.6 per cent, Kerala 37 per cent and West Bengal 34.4 per cent.

According to various scenarios built in the RBI report, if contingent liabilities are fully invoked, Rajasthan will see an additional 8.6 per cent debt in relation to GSDP, followed by Punjab (5.3 per cent), Kerala (3.9 per cent), Bihar (3.4 per cent) and West Bengal (0.9 per cent).

The N.K. Singh-led finance commission and the Fiscal Responsibility and Budget Management Committee had suggested a debt-GSDP ceiling of 20 per cent to states. Financial restructuring or bailouts to ailing state discoms will have a severe impact on the debt-GSDP ratios, the report said. Before the pandemic, the combined gross fiscal deficit of state governments remained at a modest 2.5 per cent, much lower than FRBM ceiling of 3 per cent for states.

This is not a happy situation.

The Centre also needs some serious economic policy reforms like massive efforts to push demand, remove supply constraints and pumping in huge investments in infrastructure development to kick-start the economy as well as providing jobs to millions of people, particularly in rural areas.

No one is asking Prime Minister Narendra Modi about his 2014 promise of putting Rs 15 lakh in the bank accounts of each and every Indian by bringing back the ill-gotten money stashed abroad. At that time, the estimate was $1.4 trillion. Now, as per some sources, it stands at $2 trillion.

Already, there are reports of asset bubbles developing in many advanced economies. China too is not doing well. There are reports of many Chinese banks having huge and unsustainable levels of non-performing assets. Many smaller Chinese banks at district level are already moving towards bankruptcy.

So far, the Chinese government has been able to prevent the imminent implosion of the banking system because of its huge foreign exchange reserves at over $3 trillion and strong macroeconomic fundamentals. But going forward, the Chinese economy too faces a bumpy road ahead.

So, overall it is not a happy global economic situation. India might be the fastest growing economy at the moment, but going forward, things may change for the worse.

Immediate and out-of-the-box correctives are needed to steer the country’s economy out of the woods.

(IPA Service)

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Published: 20 Jul 2022, 9:00 PM