Unveiling India's Economic Policies: Successes, Challenges, and the Road Ahead
Indian School of Public Policy (ISPP)
Democratising public policy & building state capacities
Introduction
India, one of the world's fastest-growing economies, has implemented a variety of economic policies aimed at fostering growth, reducing poverty, and enhancing the country's global competitiveness. While these policies have yielded significant benefits, they also face numerous challenges and criticisms. This article critically examines some of the key economic policies that have shaped India's development trajectory, highlighting both their achievements and shortcomings.
A. Fiscal Policy: Balancing Growth and Stability
India's fiscal policy plays a crucial role in maintaining economic stability and promoting growth. However, the effectiveness and implementation of these policies have often been subjects of debate.
Introduced in 2017, the GST has streamlined India's indirect tax system by replacing multiple taxes with a single unified tax. While GST has improved tax compliance and widened the tax base, it has also faced significant challenges. Small businesses have struggled with compliance due to the complexity of the tax structure and frequent changes in GST rates. Additionally, the compensation promised to states for revenue losses under GST has been delayed, leading to fiscal stress for state governments.
The FRBM Act aims to ensure fiscal discipline by setting targets for reducing the fiscal deficit and managing public debt. However, the strict deficit targets have often been criticised for constraining government spending, especially during economic downturns. The COVID-19 pandemic has exposed the limitations of the FRBM framework, prompting calls for a more flexible approach to fiscal policy.
Launched in 2014, PMJDY is a financial inclusion initiative that aims to provide banking services to the unbanked population. While the scheme has successfully opened millions of bank accounts, the challenge remains to ensure these accounts are actively used. Many accounts have zero balances and limited transactions, indicating that merely opening accounts is insufficient to achieve financial inclusion.
B. Monetary Policy: Controlling Inflation and Stimulating Growth
The Reserve Bank of India (RBI) is responsible for formulating and implementing India's monetary policy. The effectiveness of these policies in achieving their objectives has been mixed.
The RBI follows an inflation-targeting framework with a target range of 4% ± 2%. While this approach has helped anchor inflation expectations, it has also been criticised for being too rigid. During periods of economic slowdown, a strict focus on inflation targeting can limit the central bank's ability to stimulate growth through monetary easing.
The RBI uses the repo rate as a tool to control the money supply. Although repo rate adjustments influence borrowing costs, their transmission to end borrowers has been sluggish. Banks have often been reluctant to pass on the rate cuts to consumers, thereby diluting the intended impact of monetary policy.
Through OMOs, the RBI buys or sells government securities to regulate liquidity in the banking system. While OMOs have effectively managed liquidity, they have also led to concerns about the central bank's balance sheet expansion and potential risks to financial stability.
C. Trade Policy: Integrating with the Global Economy
India's trade policy aims to integrate the economy with global markets. However, protectionist tendencies and inconsistent policies have sometimes hindered these efforts.
Launched in 2014, this initiative encourages domestic and foreign companies to manufacture products in India. Despite its ambitious goals, Make in India has faced several challenges. Regulatory hurdles, infrastructure bottlenecks, and labour market rigidities have impeded the growth of manufacturing in India. Furthermore, the initiative's focus on import substitution has raised concerns about protectionism and its impact on trade relations.
Various schemes, such as the Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS), provide incentives to exporters. While these schemes have contributed to a rise in exports, they have also faced criticism for being overly complex and not adequately addressing the structural issues that impede export competitiveness.
The government has liberalised FDI norms across several sectors to attract foreign investment. However, policy inconsistency and sudden regulatory changes have often created uncertainty for investors. Additionally, the focus on liberalising FDI in certain sectors, such as retail and real estate, has raised concerns about its impact on domestic businesses and small traders.
D. Industrial Policy: Supporting Sectoral Development
India's industrial policy focuses on developing specific sectors to enhance productivity, innovation, and employment. The effectiveness of these policies has been mixed.
This policy aims to increase the share of manufacturing in GDP and create jobs through the establishment of National Investment and Manufacturing Zones (NIMZs). However, progress towards these targets has been slow. Bureaucratic delays, land acquisition issues, and inadequate infrastructure have hindered the establishment and operation of NIMZs.
An initiative to foster entrepreneurship and innovation by providing funding support and a conducive regulatory environment. While the initiative has recognised over 50,000 startups, access to funding remains a significant challenge for many entrepreneurs. Moreover, the regulatory environment, despite improvements, still poses hurdles for startups in terms of compliance and ease of doing business.
Launched in response to the COVID-19 pandemic, this initiative seeks to promote self-reliance by boosting local manufacturing and reducing import dependency. While the initiative has provided much-needed support to various sectors, its focus on self-reliance has raised concerns about potential protectionism and its impact on global trade relations.
E. Social Welfare Policies: Promoting Inclusive Growth
India's social welfare policies aim to reduce poverty and promote inclusive growth. However, implementation challenges and resource constraints have often limited their effectiveness.
A social security scheme that guarantees wage employment to rural households. While MGNREGA has provided a safety net for many, especially during the pandemic, issues such as delayed payments, corruption, and inefficiencies in implementation have undermined its effectiveness.
A housing scheme that aims to provide affordable housing to the poor. Despite significant progress, the scheme faces challenges such as delays in project completion, issues with beneficiary identification, and quality concerns in housing construction.
This act aims to provide subsidised food grains to a large portion of India's population. While the NFSA has been crucial in ensuring food security, the Public Distribution System (PDS) through which it operates has been plagued by inefficiencies, leakages, and corruption.
Conclusion
India's economic policies reflect a dynamic and multifaceted approach to addressing the challenges of development and fostering sustainable growth. While these policies have achieved notable successes, they also face significant criticisms and challenges. By addressing these issues and adopting a more flexible and inclusive approach, India can enhance the effectiveness of its economic policies and achieve more resilient and inclusive growth.
For a broader perspective on global economic strategies that can inform national policies, read our latest blog post on our website: "Economic Policy: Shaping the Future of National Economies".
Written by: Diksha Agrawal
Programm
Programme Advisor – Admissions
Diksha Agrawal, a Sociology graduate from Miranda House and postgraduate from Delhi School of Economics, embarked on her professional journey as a research fellow for Prashant Kishore’s Jan Suraaj initiative. Travelling across various districts of Bihar, she gained profound insights into the diverse needs of communities, igniting a deep interest in the field of public policy.
Furthering her engagement in politics and governance, Diksha served as a consultant for Inclusive Minds, political consultancy working for Indian National Congress during the Chhattisgarh elections. This role provided her with invaluable insights into the socio-political landscape of the state, reinforcing her determination to drive positive change through effective policy formulation and implementation.