3.1 Starts from India's Rise to Fame
India's economy grew quickly in the first decade of the twenty-first century, with an average annual growth rate of 8 to 9% between 2003 and 2008. This expansion was fuelled by increasing investment, which peaked in 2007–2008 at 38% of GDP. The majority of this investment's funding came from domestic savings, which amounted to close to 10% of GDP, and was supplemented by historically large inflows of foreign capital in the form of foreign direct investment, foreign portfolio investment, and external commercial borrowings.
These resources were allegedly, put to good use, which led to muted criticism despite worries about the large share of short-term financial inflows and the risk for financial instability. Bank lending to the private corporate sector (PCS) surged at an unprecedented rate, with a significant percentage going to major enterprises and businesses with strong political ties, which led to this expansion being debt-driven. Public-private partnerships (PPPs), the preferred method of investments were used to invest these resources in infrastructure projects like as highways, ports, coal, and thermal power plants. According to the Washington Consensus, which at the time served as the cornerstone of economic policy, the government curtailed public investment and practised fiscal prudence (Nagaraj, 2013).
Global Subprime Financial Crisis's Effects Due to its stronger financial rules and limited domestic markets, India was only marginally impacted by the 2008 global financial crisis, which had a substantial influence on the international economy. India's economy recovered quickly despite a temporary setback in 2008–2009 owing to the Group of 20 nations' accommodating monetary and fiscal policies. Quantitative easing (QE) policies adopted by industrialised countries encouraged increasing capital inflows into developing markets in search of higher returns, which powered this recovery.
However, this came to a halt in 2013, with the "Taper Tantrum," where the US Federal Reserve raised the possibility of boosting interest rates while emphasising the risks associated with erratic capital inflows. Because of the slowdown in economic growth, In India, there have been increases in open unemployment rates, worker exodus from the labour market, rising unemployment rates overall, and stagnant real earnings in rural regions. (Sources: "The Impact of the Global Financial Crisis on India" by the International Monetary Fund, published in 2008. "India's Labour Market During the Global Financial Crisis" by the International Labour Organization, published in 2009)
Critics of India's market-oriented reforms during the period of rapid growth have raised concerns about the unequal distribution of its benefits. Atul Kohli, a political scientist, warned in 2006 that the reforms favoured business interests rather than being truly pro-market, and his 2012 book, "Poverty Amid Plenty in the New India", further substantiated a failure to equally distribute the benefits of prosperity and change.
In 2005, economist Amit Bhaduri labelled the period's economic growth as "Predatory Growth" and asserted that strong commercial interests had decimated rural land and woods, destroying livelihoods for the poor and disadvantaged in agriculture and the unofficial sector. The 2018 book "The Billionaire Raj" by journalist James Crabtree explains how India is super-rich, referred to by the author as the "Bollygarchs," became included on Forbes' list of the world's billionaires. It also explains how the liberal economic policy regime strengthened ties between business and politicians, supporting the idea that crony capitalism operates under the guise of fair markets.
The Indian economy saw a slowdown at the beginning of the previous decade in 2011–2012, there was a growing public discontent against the exploitation of land, labor, and natural resources by crony capitalism. This was reflected in the form of mass protests against land acquisitions (such as in Nandigram, West Bengal) and court cases against corrupt business practices. The judiciary played a crucial role in addressing these issues. However, despite the country's positive economic growth, perceptions of corruption and cronyism led to a decline in public support for the government (The Economist, 2014).
3.2 End of the Boom
Following the end of the boom period in the early 2010s, the economic scenario in India underwent a significant change. The growth rate of the economy slowed down, and it impacted several other factors such as domestic saving, investment, and capital inflows. The US imposing tariffs on technology breakthroughs and outsourcing caused a setback for the IT export business. Despite this, the balance of payments deficit became a matter for worry as inflation remained a chronic problem, exacerbated by rising global oil costs.
Corporate profitability suffered as production growth slowed, making it harder for them to pay off the huge loans they had racked up during the boom. Corporate bad debts increased as a result, which later translated into non-performing assets (NPAs) for banks when businesses defaulted on their loans, limiting banks' capacity to issue new loans.
3.3 The Rise of the NDA Government and its Economic Agenda
The new National Democratic Alliance (NDA) administration, which was elected in 2014–15, was given the task of addressing the deteriorating economic climate and widespread dissatisfaction with the previous political regime. This included promises to eradicate corruption and improve governance through financial regulation and enforcement of tax laws. To this end, the government vowed to use financial regulation to probe and punish financial wrongdoings, including the failure of Kingfisher Airlines and the fleeing of Vijay Mallya from the country. The government's political campaign was framed around the idea of "minimum government and maximum governance," aligned with the free-market ideals of Margaret Thatcher and Ronald Reagan. This philosophy was aimed at appealing to both the global financial elites and the global Indian community. The administration emphasised fiscal conservatism, supported inflation control, and said that it upheld the rule of law. Its improvement in India's position on the World Bank's Ease of Doing Business (EDB) index, which went from 142 in 2014 to 63 in 2019, was one of its major accomplishments in this respect.
However, the government also pursued nationalist initiatives like Make in India, which sought to increase the manufacturing sector's proportion of the GDP to 25% by 2022 while also adding 100 million new manufacturing jobs. In addition, it created populist, targeted welfare programmes like the Pradhan Mantri Ujjwala Yojana, which gave low-income women free cooking gas connections, and the Mudra Loans Program, which gave modest, no-collateral loans to the underprivileged and jobless.
3.4 The Demonetization Controversy
In November 2016, the National Democratic Alliance (NDA) government demonetized the high-denomination currency notes of INR 1000 and 500, which made up 86.4% of the total amount of cash in circulation, in an effort to combat illicit money and encourage digital transactions. The informal and unorganised sector, which relied heavily on cash transactions, employed 90% of the workers, produced about half of the nation's production, and was negatively impacted by this policy shock (Ramakumar, 2018). Despite this action, the Reserve Bank of India (RBI) 2018-19 Annual Report states that the percentage of GDP devoted to cash use has recovered to its pre-demonetization levels.
3.5 The Introduction of GST
A long time in the making, the Goods and Services Tax (GST) was finally implemented to replace different indirect taxes. However, because to its subpar design and implementation, it was criticised when it was implemented in 2017. Due to the numerous computerised filings and procedures required by the GST, small and unorganised businesses found it challenging and expensive to comply. As a result, tax revenue significantly decreased, which had an impact on government finances and the division of revenue between the centre and states.
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Compliance Burden: GST has increased the compliance burden for small businesses, leading to increased costs and decreased profits.
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Inflation: GST has led to an increase in the prices of many goods and services, leading to inflation and affecting the purchasing power of consumers.
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Complexity: GST has a complex structure, making it difficult for businesses to understand and comply with the various rules and regulations.
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Technology Challenges: The implementation of GST has been hindered by technology challenges, including issues with the GSTN network and software.
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Unorganized Sector: The unorganized sector, including small businesses, has been hit hard by GST as they struggle to comply with the new tax regime.
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Input Tax Credit: The process of claiming input tax credit under GST has been complicated, leading to delays and difficulties for businesses.
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Revenue Shortfall: Despite initial projections, GST has resulted in a revenue shortfall for the government, affecting its ability to carry out public welfare projects and programs.
3.6 Economic Report
To keep up with changes in the economic structure, relative pricing, and advancements in statistical methods and databases, statistics offices across the world regularly revise the base year of national accounts. The Central Statistical Office (formerly the National Statistical Office) replaced the previous series with the base year 2004-05 in 2015 by introducing a new GDP series with the basis year 2011–12. Due to the change, the absolute GDP size for 2011–12 was 2.3% lower than it had been in earlier series. However, the subsequent years of the new series revealed noticeably and consistently greater yearly growth rates, which worried analysts because they were at odds with other economic indicators.
This issue is best demonstrated by two instances.
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The reliability of economic data has come under discussion and criticism in recent years, with two prominent cases emphasising the problem. The government GDP estimation for 2016–17, which reported an 8.2% growth rate, cast doubt on the effects of the demonetisation policy in November 2016, which analysts generally consider to have caused a reduction in both output and employment, particularly in the informal sector. The apparent overestimation of the real growth rate in this estimate drew strong criticism from specialists who pointed it out.
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In addition, the issue of accurate economic data was highlighted by the gap between the official and actual tax returns for the private company sector. According to the statistical report from government on Income Tax Policies for Building New India by the Ministry of Finance published in September 2018, the ratio of fixed investments to GDP decreased from 7.5% in 2015–16 to 2.8% in 2016–17. However, throughout the same time period, the equivalent percentage as reported by the CSO's National Accounts increased from 11.7–12%. The significant difference between the two sets of estimates raises questions about the validity of the national accounts-based corporate investment estimates.
Due to the Employment and Unemployment Surveys' (EUS) irregularity and inadequacy in capturing the operation of the urban labour market, the Indian government replaced the NSSO's (National Sample Survey Agency) five-yearly Employment as well as Unemployment Surveys (EUS) with the redesigned Periodic Labour Force Survey (PLFS). This decision was made based on the recommendations from a task force report, chaired by Arvind Panagariya, and was published by the Ministry of Labor and Employment in 2017.
Prior to the adoption of the PLFS, the Consumer Expenditure Surveys (CES) and Employment and Unemployment Surveys (EUS) were performed simultaneously with the same sample houses. However, in 2017–18, a separate CES was undertaken. The 2017–18 PLFS and CES survey results, however, sparked debate and met with opposition from the administration. The PLFS data was formally rejected since it was said that it could not be compared to the 2011–12 EUS data, however the majority of experts disputed this argument. Similarly, the CES findings for 2017–18 were shelved and not made public owing to a disagreement with administrative data, despite the fact that experts thought the CES data, which had leaked, was genuine and that numerous insightful research studies were now in the public domain.
Because the Employment and Unemployment Surveys (EUS) conducted by the National Sample Survey Organization (NSSO) were infrequent and inadequate for capturing the operation of the urban labour market, the Indian government decided to replace the EUS with the Periodic Labour Force Survey (PLFS). The task force report's recommendations, which were issued by the Ministry of Labor and Employment in 2017 under the leadership of Arvind Panagariya, served as the foundation for this choice.
Prior to the establishment of the PLFS, the EUS and Consumer Expenditure Surveys (CES) were performed concurrently with the same sample of homes. However, a separate CES was undertaken in 2017–18. However, the government objected to the PLFS and CES survey results for 2017–18, leading to the formal rejection of the PLFS data and the cancellation and non–release of the CES data. Despite these criticisms, experts believe the CES data to be reliable, and a number of interesting study studies are now openly accessible.
Table 3 in the report presents the real annual growth rate of GDP from 2010s using mostly official data sources. The data table shows the real annual growth rate of GDP in India from 2010-11 to 2021-22. According to the data, the country experienced significant growth in the first half of the decade, with GDP growth rates ranging from 8.5–8.2%. In the subsequent half of the decade, the growth rate declined, with the lowest being 5% in 2019-20. In 2020-21, the country saw a sharp rebound in growth, with a 7.5% increase, followed by another strong performance in 2021-22 with 8.7% growth.
There are various factors that may have contributed to the changes in the growth rate over the years. For instance, in the first half of the decade, India's economic growth was driven by a number of factors, including increased investment, growing exports, and rising domestic consumption. In the latter half of the decade, however, the country was impacted by various global and domestic economic challenges, including rising inflation, weak global demand, and declining investment.
In 2020-21, the sharp rebound in growth was likely due to the government's efforts to support the economy through various stimulus measures, as well as a recovery in the global economy following the COVID-19 pandemic. In 2021-22, the strong performance was likely due to continued government support, as well as an improvement in the global economic outlook and increased investment in the country.
Overall, the data highlights the dynamic and constantly evolving nature of the Indian economy, with both highs and lows over the years. It also underscores the need for policymakers to continue to implement policies that promote growth and stability, particularly in the face of global economic challenges. The official GDP numbers have been validated by a number of studies, however they appear to significantly overstate the growth rates. For example, Arvind Subramanian, in his study employed cross-country growth regression techniques, estimated that the actual growth rate during the period 2011-12 to 2016-17 was around 4.5% with a 95% confidence interval of 3.5–5.5%, while the official estimates placed the growth rate at 7%. This was published in his work in 2019.
From the Table 4 data, it can be observed that the CPI in India was around 10% in 2010 and 2011, which then dropped to around 9.6% in 2013. In the next few years, the CPI showed a declining trend, with the lowest value being 2.9% in 2018. However, the trend took a turn in 2020 with the CPI rising to 6.7%, mainly due to the COVID-19 pandemic, which led to supply chain disruptions, increased demand for essential goods and services, and an overall rise in prices. The trend continued in 2021 with the CPI at 6%, which then dropped slightly to 5.3% in 2022.
Several elements, including monetary policies, supply and demand dynamics, natural catastrophes, international events, and governmental involvement, can be blamed for the volatility in the CPI. For instance, the COVID-19 epidemic had a major influence on the economy and inflation, and the steps the government and Reserve Bank of India took to mitigate those consequences generated changes in the CPI. In conclusion, the Consumer Price Index (CPI) in India serves as a gauge for overall inflation rates and offers a clear picture of how the cost of living has changed over time in the nation. This decline was largely attributed to a decrease in international oil prices, which heavily influence India's inflation, rate given that the country imports nearly 80% of its commercial energy.
Table 5 presents the data on gross savings and investment rates From 2010-11 to 2021-22, the Gross Savings Rate in India has been consistently increasing. It has risen from 29.0% in 2010-11 to 31.2% in 2021-22. The Gross Investment Rate has also been increasing, though not as consistently. It reached a peak of 38.7% in 2016-17 but then slightly decreased to 37.5% in 2020-21. However, it has increased again to 38.2% in 2021-22.
The causes of the increase in Gross Savings and Investment Rates in India could be attributed to several factors. Firstly, India's economic growth and increasing disposable income levels may have led to a rise in savings among households. Additionally, government initiatives aimed at promoting financial inclusion and encouraging household savings may have contributed to the increase in the Gross Savings Rate.
The increase in the Gross Investment Rate could be due to several factors as well. The government's efforts to promote foreign direct investment and encourage domestic investment may have played a role. Additionally, an improvement in the business environment, lower interest rates, and an increase in the availability of credit may have made it easier for firms to invest in new projects.
Overall, the increasing Gross Savings and Investment Rates suggest that the Indian economy is growing and that households and firms are becoming more confident about the future. This could lead to increased economic activity, job creation, and improved living standards for the population.
According to economists, a continual increase in the domestic saving rate was crucial for economic development, which has been observed in the case of many Asian countries in the twentieth century. The significant drop in India's saving rate is therefore a cause for concern regarding the country's future economic progress.
(Reference: Morris, 2019)
Table 6 -The trade ratio of GDP in India is an important indicator of the country's economic performance, as it measures the contribution of trade to the overall growth of the economy. The table above shows that the trade ratio of GDP in India has increased consistently over the years, from 34.7% in 2010-11 to 40.3% in 2021-22.
The causes for the increase in the trade ratio of GDP in India can be attributed to a number of factors. Firstly, the Indian economy has been gradually opening up to the world, with a focus on promoting exports and reducing trade barriers. Secondly, The Indian government has put in place several policies and initiatives aimed at boosting the country's competitiveness in the global market, such as Make in India, Skill India, and Digital India. Thirdly, the rise of e-commerce has enabled Indian businesses to reach new markets and customers, thereby increasing the country's trade volume.
Overall, the increasing trend in the trade ratio of GDP in India suggests that the country is becoming more integrated into the global economy, which could lead to greater economic growth and development in the future.
The table shows the share of manufacturing and industry in the GDP of India from 2010-11 to 2021-22. The data reveals that the segment of manufacturing and industry in the GDP has steadily increased over the years. In 2010-11, the share of manufacturing was 15.7% while the share of industry was 25.5%. By 2021-22, the share of manufacturing had increased to 18.6% while the share of industry had increased to 29.0%.
The causes of this increase can be attributed to various factors such as favorable government policies, investment in infrastructure and technology, and the growth of small and medium enterprises (SMEs). The government has launched several initiatives to boost the manufacturing sector in India such as the Make in India campaign and the Skill India program. These initiatives aim to attract investment and create job opportunities in the manufacturing and industrial sectors. The expansion of SMEs has also helped to improve the manufacturing and industrial sectors' proportion of the GDP. In conclusion, the growth of manufacturing and industry as a percentage of India's GDP is a trend that is indicative of the expansion and development of the national economy.
3.7 Completing the Puzzle: A Comprehensive Economic Analysis
The studies of Mehtorta and Parida (2019) and Kannan and Ravindran (2019) present an analysis of the relationship between weak domestic output growth and its effects on the labor market. According to the statistics in their analysis, between 2011–12 and 2017–18, there was a loss of employment ranging from 6.2 million to 15.5 million, with rural India being the most impacted, losing 2.1 crore jobs, while Indian urban centres saw an huge surge of roughly 1.5 crore jobs. The groups most affected by the job loss were women employees, Youngsters, Muslims community, and also the members of the Other Backward Classes (OBCs). On the other hand, job gains were primarily for men, members of the Scheduled Castes (SCs), Scheduled Tribes (STs), and the 'Other' castes. In addition, the open unemployment rate—defined as the percentage of the labour force who had no job in the preceding week—rose from 3–8.8%. Last but not least, the labour force participation rate, which measures the proportion of people aged 15 to 59 who are employed or actively looking for a job, fell from 39.5–36.9%. This shows that a shortage of employment options has caused employees to leave the labour force. The Indian economy has been facing numerous challenges with regards to labor, jobs, and employment between the period of 2019 to 2022. The government has taken a number of steps to address these challenges, including harmonization of labor laws and initiatives to reduce the gender gap in the workplace. However, despite these efforts, unemployment remains a major issue in India, and is a concern for policymakers and the general public alike.
As contrast to the past phenomena of "jobless growth," the present economic phase in India might be described as "job-loss growth." The rural economy has been negatively impacted by the growing unemployment rate and declining labour force participation rate, especially for agricultural labourers who make up a sizable component of the agricultural workforce and represent the lowest socioeconomic group in rural areas. In India, there are 107 million agricultural labourers, or 26.5% of all employees, according to the 2011 Census. In sharp contrast to the 6.7% annual growth recorded over the last five-year period from 2009 to 2013, between December 2014 and December 2018, the real average salaries of agricultural and rural employees increased by just 0.5% each year (Damodaran, 2019). The research points to socially and economically weak populations as being primarily responsible for the negative effects of the present boom phase.
There have been job losses, stagnant rural incomes, and a decrease in personal consumer expenditure as a result of the current slowdown in India's domestic output growth. The National Sample Survey Office (NSO) report, which was leaked but subsequently abandoned, states that between 2011–12 and 2017–18, real per capita personal consumption expenditure decreased by 3.7% in India, with rural India experiencing a more significant 8% decrease and urban India experiencing a 2% increase. Some analysts, however, disagree with this consumption reduction since they claim it conflicts with the National Accounts' estimate of increased consumption (Rangarajan and Mahendra Dev, 2019; Felman et al., 2019).
Given that there has been no change in the methodology employed between the two rounds of CES data (2011–12 and 2017–18), making the estimates based on the sample surveys similar, the concerns regarding the accuracy of the CES data may not be warranted. Similar discrepancies between consumer survey estimates and national accounts-based estimates exist in several countries, including India. In India, there is a lot of study on the topic of the incompatibility between CES and NAS consumer spending estimates, and the conceptual and empirical disparities between the two series have received a lot of attention but are still unresolved.
The NAS dataset is not of the quality expected of an independent validator dataset, and both datasets have limitations, but a sizable portion of household consumer expenditure data from the NSS and independent private consumption estimates from the NAS cross-validate, according to the highly regarded contribution of B S Minhas (1988) on this topic.
Absolute poverty has increased as a result of the observed drop in per capita personal spending, as indicated in the leaked (but officially discarded) National Sample Survey Office (NSO) report. Absolute poverty surged by nearly one percentage point for the first time in 25 years, rising from 21.9% in 2011–12 to 22.8% in 2017–18, reversing the long-term downward trend and bringing 30 million people back into poverty. Poorer states like Bihar, Jharkhand, and Orissa, as well as Maharashtra, have been particularly impacted by the growth in poverty rates. The southern states and Gujarat are the states where poverty rates have decreased (Bhattacharya and Devulapalli, 2019).
In order to understand the current state of labor, jobs, and employment in India, it is important to examine the recent data and research on these issues. Between 2016 and 2019, employment rates significantly decreased, and the jobless rate increased from 3.3–8.8% of the workforce, according to the Centre for Monitoring Indian Economy (CMIE). Along with this rise in unemployment, there has also been a decline in labour force participation rates, stagnation of rural earnings, and a drop in per capita spending.2
In addition to these trends, there have also been disparities in the labor market between men and women, with women facing greater barriers to entry into the workforce and experiencing a wider gender pay gap compared to men. The government has sought to address these disparities through a number of initiatives, including the implementation of affirmative action programs and policies aimed at promoting gender equality in the workplace.3
To address the issue of unemployment, the government has also introduced a number of schemes aimed at creating jobs and boosting economic growth, including the National Employment Guarantee Scheme and initiatives aimed at boosting bank credit in the rural economy. These policies have the potential to help mitigate the impact of the economic slowdown and create jobs, but would require sustained efforts and investment to achieve their goals.4
Overall, while there have been some positive developments in the Indian labor market in recent years, much remains to be done to address the challenges of unemployment and promote equality and opportunity in the workplace.
The numbers that are available paint a picture of a struggling economy. A decrease in per capita personal consumption and an increase in absolute poverty have resulted from the drop in output growth, which also caused job losses, a rise in open unemployment, and stagnation in rural wages. A reversal of prior results throughout the 2010s has led to significant economic misery and a fall in social wellbeing as a whole.
According to Subramanian (2019), whose research is mentioned in the article, the economic situation in rural India, which according to the 2011 Census made up about 70% of the country's population, has gotten worse. Even if it is insufficient, a basic headcount ratio of poverty paints a clear picture of the deterioration in social welfare.
The Causes of Economic Regression in India: A Macroeconomic Perspective The reasons behind the economic slowdown in India during the 2010s are primarily domestic and related to policy decisions. The impacts of globalization are limited as India's economy is largely domestically focused, and the decline in international oil prices has helped maintain stability in the external balance. The fall in output growth is primarily due to a decline in demand, with the only decrease in aggregate demand being gross capital formation, which chop from 36.2–32.5% of Indian GDP between 2011-12 and 2017-18. This decline is largely due to a fall in the private corporate sector and has been masked by overestimations of the sector's volume and growth in the new-fangled GDP series.
The government's demonetization policy in 2016 has widely been acknowledged as a disaster, and the issues with the Goods and Services Tax (GST) are now becoming more evident with the rise in revenue shortfalls. To understand the cause of the economic slowdown, it is crucial to examine the policy decisions and their impact on the economy.
The reasons behind India's economic downturn during the 2010s have been widely debated and attributed to a variety of factors. According to Singh (2023), the causes of the economic regression are entirely domestic and policy-induced. The demonetisation in the year 2016 and the enactment of the Goods and Services Tax (GST) have been criticized for their negative impact on the economy. The decline in output growth is primarily a result of a drop in aggregate demand, particularly in the form of gross capital formation. The fall in investment is widely seen as a sign of policy failure, with policymakers defending the authorized growth record by demanding that India's economy is consumption-led and that the weakening in investment would not impact output growth.
However, Singh (2023) argues that this consumption-led growth narrative lacks a proper understanding of economic theory. It is commonly accepted in the area that over several decades, a domestic investment rate of about 40% of GDP is necessary for sustained economic growth and industrial maturity, with the household savings rate being 2–4 percentage points less than the investment rate. With its investment to GDP ratio constantly above 50% over the previous three decades and a concomitant decline in private consumption to one-third of GDP, China is used as an extreme example.
3.9 Analyzing the Slowdown and Policy Recommendations
The sudden and severe change in India's economic situation is a result of domestic and policy-induced factors. The usual course of business has not been significantly disrupted by political or natural events, but there have been policy decisions, such as demonetization in 2016, that have been widely recognized as problematic. The Goods and Services Tax (GST) has also revealed its faults with increasing revenue shortfalls.
From a macroeconomic perspective, the slowdown in output growth is caused by a drop in demand. According to the new National Accounts series, only gross capital creation, which dropped from 36.2–32.5% of GDP between 2011–12 and 2017–18, has reduced as a part of aggregate demand. The primary cause of this decline is the collapse of the private sector, but the new GDP series conceals this fact by exaggerating the sector's size and growth by using questionable methods and databases.
Despite the explanation that a collapse of investments during an economic downturn is natural, a secular decline in investments for nearly a decade is a clear indication of policy failure. The government's argument that India is a success story driven by consumption and that the drop in investment will not have an impact on production growth is unsupported by the data. In actuality, the idea of a successful consumption-led growth is refuted by the fall in per capita personal spending in 2017–18 based on similar NSSO consumer expenditure surveys.
Furthermore, no nation has grown its economy and reached industrial maturity without boosting domestic investment to about 40% of GDP over a long period of time (with the domestic saving rate 2–4 percentage points less than the investment rate). This reality is shown by China, where private consumption has decreased to one-third of GDP but the investment to GDP ratio has been maintained at over 50% for three decades.
3.9 The Growth of Non-Performing Assets (NPAs) and Crony Capitalism in India
Amounts of debt that were unmanageable and an increase in the percentage of non-performing assets (NPAs) relative to total bank loans limited the recovery of private business investment. However, rather than being the result of firm- or bank-specific factors, these NPAs were mostly caused by an unanticipated reversal of the economic boom and altered economic conditions. This tendency may have been reversible with the aid of an appropriate policy package for particular sectors and businesses. Policymakers saw the NPAs, which reflected the government's anti-corruption campaign, as the product of the banking sector's ineffective loan screening and lending processes as well as pervasive crony capitalism. In order to remedy this, the Reserve Bank of India (RBI) tightened the guidelines for NPA recognition, which caused a dramatic increase in NPAs as a percentage of gross advances. As a proportion of gross advances, bank non-performing assets (NPA) in India have been trending upward from 2010–11 to 2021–22, as seen in the data table above. Loans that the bank has identified as problematic or dubious are referred to as NPAs. The danger to the financial industry and the economy as a whole increases with increasing NPA.
From the data, it can be seen that the NPA has steadily increased over the years, reaching a high of 6.2% in 2021-22. This indicates a rising level of risk in the banking sector and highlights the need for effective risk management strategies to be put in place.
There are several causes behind the rise in NPAs in India. One of the main causes is the weak economic environment, which has resulted in increased default rates among borrowers. Additionally, the slow pace of economic growth has led to lower demand for credit, which has resulted in increased competition among banks and an increased risk of loan defaults.
Other factors contributing to the rise in NPAs include the poor credit assessment practices of banks, insufficient loan recoveries, and corruption and inefficiency in the banking sector. Addressing these issues and implementing effective risk management strategies would be crucial in reducing the levels of NPAs in India and maintaining stability in the financial sector.
When India's economy was booming in the early 2000s because to rising investments and software exports, bank lending to the private corporate sector also expanded significantly. An unprecedented amount of both local and international cash was being invested, especially in infrastructure projects through P3s (PPP). These investments were a classic case of "herd behaviour" in investment and financial decisions since they were predicated on the expectation of ongoing strong production growth under advantageous macroeconomic conditions. At the time, policymakers pushed banks to aggressively promote the investment boom.
The Global Financial Crisis (GFC) in 2008 abruptly put an end to this expansion, but because to the favourable monetary and fiscal policies put in place by G-20 nations, the investment cycle continued until 2011–12. India's economy, however, was adversely impacted when global growth slowed and oil costs increased. The majority of investments were made in infrastructure and industrial projects, but many of them failed to make enough money to pay off their loan, which increased the amount of bank NPAs. As a result, banks were less able to provide new loans, which led to a vicious cycle.5
It is acknowledged that some banks lent excessively to a few large businesses with political connections. Such practices need to be dealt with legally. However, it is not fair to generalize the entire debt-led investment boom as corrupt and politically influenced.
3.10 Hence, there can be two ways of looking at the problem of bank NPAs.
Bank Non-Performing Assets (NPAs) in India have become a major concern for policymakers in recent years. The NPAs have been seen as the result of two factors: (i) inefficiency in loan screening and lending practices by the banking sector and (ii) the presence of crony capitalism. This view has been reinforced by the anti-corruption agenda of the government (Nagaraj, 2020). However, there are different perspectives on the issue of NPAs. On one hand, some argue that tougher standards for NPAs in the banking industry and more enforcement of rules are necessary to address the NPAs, which are a symptom of pervasive crony capitalism. According to the rulings of bankruptcy courts, this would require defaulting debtors to pay or face liquidation (Nagaraj, 2020).
On the other hand, it can also be argued that a significant part of the NPAs was beyond the control of enterprises, resulting from a slowdown in output growth and changing macroeconomic conditions. In this case, reviving development through public investment would be the answer to NPAs until private investment regained its impetus (Nagaraj, 2020).
This viewpoint does not, however, ignore the widespread corruption, cronyism, and purported inefficiencies in the banking industry. Long-term fixes are necessary for these problems, such better banking governance and oversight. A boost from government investment was required once the investment boom peaked to maintain infrastructure expenditure, as China did in reaction to the Global Subprime Financial Crisis (Nagaraj, 2020).
According to businessman Rahul Bajaj and former prime minister Manmohan Singh (2019), in an opinion piece published in The Hindu, India's financial woes have been made worse by the NDA government's drive to fight corruption, which has bred fear and influenced investment choices. Due to the malfunctioning of legal institutions and the excessive length of the processes, the Insolvency and Bankruptcy Code (IBCresolution )'s proceedings have had little effect on addressing the bank debt issue (Nagaraj, 2020).
2 Centre for Monitoring Indian Economy (CMIE). "Unemployment in India." https://www.cmie.com/kommon/bin/sr.php?kall=wsection&type=1&page=SEResults&dy=1&source=search&nodeid=5
3 Ministry of Labour and Employment. "Initiatives for Women Empowerment in the Labour Market." https://labour.gov.in/initiatives-women-empowerment-labour-market.
4 Government of India. "National Employment Guarantee Scheme." https://www.nrega.nic.in/.
5 Reserve Bank of India (RBI) data on NPA growth
Literature on the impact of the Global Financial Crisis on India's economy