Is South Asia’s Fastest Growing Economy Built on House of Cards?

The Indian economy, despite its growth prospects, has been plagued by several weaknesses and structural flaws that pose significant challenges to its long-term stability and sustainable development. These issues have hindered the country’s progress and impeded its ability to address critical socio-economic concerns.

India is projected to grow at 6.1% in 2023, surpassing overall growth in emerging and developing Asia. The country is expected to be the world’s fastest growing major economy in the year ahead, as a post-pandemic retail boom and recent bank balance-sheet repairs lure new investment. India has a large domestic market and is relatively less exposed to international trade flows, which makes it relatively insulated from global spillovers compared to other emerging markets.

However, India still faces many challenges that undermine its foundation and threaten its long-term sustainability. One of the major challenges is the currency and policy manipulation by the government and the central bank, which has led to inflationary pressures, exchange rate volatility and fiscal imbalances.

 The government has resorted to frequent interventions in the foreign exchange market to prevent the rupee from appreciating too much against the dollar, which affects its export competitiveness and erodes its foreign exchange reserves. The central bank has also kept interest rates low to stimulate growth, but this has fueled credit expansion and asset bubbles, especially in the real estate sector. Moreover, the government has failed to implement structural reforms to improve tax collection, reduce subsidies, streamline regulations and enhance governance.

Another challenge that India faces is the structural failures of its infrastructure, which reflects the poor quality of construction, corruption and lack of accountability. A recent example of this is the collapse of an under-construction bridge over the Ganga river in Bihar on Sunday, which was supposed to connect Khagaria and Bhagalpur districts. The bridge was being built since 2014 at a cost of Rs 1,710 crore, but it collapsed twice in 14 months – first on the Bhagalpur’s Sultanganj side in April 2022 and the second time on Sunday evening on the Khagaria side. The incident sparked public outrage and prompted the chief minister Nitish Kumar to order an investigation and punish those guilty for the disaster. The bridge collapse is not an isolated case, but a symptom of a larger problem of inadequate and unsafe infrastructure in India, which hampers its economic growth and social development.

Moreover, the government has failed to implement structural reforms to improve tax collection, reduce subsidies, streamline regulations and enhance governance. These policies have led to inflationary pressures, exchange rate volatility and fiscal imbalances, which undermine the stability and credibility of India’s macroeconomic framework.

One of the primary concerns is the weak foundation of India’s economy. Despite being one of the world’s fastest-growing economies, it continues to face persistent challenges in crucial areas such as infrastructure development, education, healthcare, and agricultural productivity. Insufficient investment in these sectors has resulted in inadequate physical and social infrastructure, limiting the economy’s potential for growth and development.

Moreover, the Indian economy suffers from significant structural flaws that exacerbate its vulnerabilities. One of the most pressing issues is income inequality, with a large proportion of the population remaining trapped in poverty while a small segment enjoys disproportionate wealth. This disparity not only hampers social cohesion but also impedes equitable economic growth by limiting the purchasing power and demand of the majority.

Another critical flaw is the informal sector’s dominance in the economy. A significant portion of India’s workforce is engaged in informal and unregulated activities, lacking formal job security, social security benefits, and adequate working conditions. This sector’s informality restricts productivity, impedes investment, and undermines the overall competitiveness of the economy.

Additionally, the Indian economy faces challenges related to its financial sector. The banking sector, in particular, has been burdened by the problem of non-performing assets (NPAs) and stressed assets, limiting the flow of credit and hindering productive investment. This issue, coupled with weak governance standards and regulatory frameworks, undermines the overall stability and efficiency of the financial system.

Furthermore, the agriculture sector, which employs a significant portion of the population, suffers from structural deficiencies. Outdated farming practices, limited access to modern technology, and inadequate market infrastructure hamper agricultural productivity and income levels for farmers. This leads to persistent rural distress and exacerbates rural-urban income disparities.

To address these weaknesses and structural flaws, the Indian government needs to implement comprehensive reforms across various sectors. These reforms should focus on improving infrastructure, enhancing the quality of education and healthcare, promoting formalization of the economy, fostering innovation and entrepreneurship, and strengthening the financial sector’s regulatory framework.

Furthermore, targeted policies aimed at reducing income inequality, enhancing agricultural productivity, and promoting inclusive growth are crucial. Investments in skill development, job creation, and social safety nets are necessary to uplift the marginalized sections of society and ensure sustainable and equitable growth.

India’s economic growth in 2023 is not as rosy as it seems, as it is built on weak foundations that can crumble under external shocks or internal stresses. India needs to address its currency and policy manipulation and poor infrastructure urgently, if it wants to sustain its growth momentum and achieve its potential.

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