What ails the Indian economy?

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India’s once robust economy is slowing

India’s economy grew at its slowest pace for three years in the April-to-June quarter and growth has declined for six quarters in a row. Economic analyst Vivek Kaul explains why one of the world’s fastest growing economies is sputtering to a halt.

On Monday, Prime Minister Narendra Modi revived India’s economic council, a body that he had abolished soon after coming into power in 2014.

India has just seen its slowest economic growth since Mr Modi took over as the prime minister on the back of promises over more jobs and a stronger economy.

For the period between April and June 2017, Indian GDP grew by just 5.7% (as against 9.1% a year earlier).

Much of that 5.7% was because the government spent more than it usually does. The non-government part of the GDP, which forms roughly 90% of the economy, grew by a meagre 4.3%.

Industry as a whole grew by 1.6%, with manufacturing and construction growing by 1.2% and 2% respectively.

The last time the economy grew by less than 6% (at 5.3%) was between January and March 2014, when Manmohan Singh was the prime minister.

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Narendra Modi took over as the prime minister in May 2014

We live in a world where any rate of growth greater than 2% is considered to be good. But what is true for Western countries isn’t necessarily true for India.

India’s GDP needs to grow at a rate faster than 7% for the country to continue to pull millions out of poverty.

“Even a small change in the growth rate of per capita income makes a big difference to eventual income per head,” writes economist Vijay Joshi in India’s Long Road – The Search for Prosperity.

This is what economists call the “power of compound interest”.

And how would things look for India by 2040 at different rates of economic growth?

According to Joshi: “At a growth rate of 3% a year, income per head would double, and reach about the same level as China’s per capita income today. At a growth rate of 6% a year, income per head would quadruple to a level around that enjoyed by Chile, Malaysia and Poland today.

“If income per head grew at 9% a year, it would increase nearly eight-fold, and India would have a per capita income comparable to an average high-income country of today.”

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Agriculture still employs half of India’s workforce

Agriculture, which accounts for around 15% of GDP, continues to employ half the country’s workforce.

But exports between April and August 2017 are lower than they were in 2013 and 2014.

There is also India’s so called demographic dividend – 12 million young Indians are entering the workforce every year.

But given the lack of a good education, most of these young people need low-skilled jobs, which the construction and real estate industries can provide.

With both sectors growing at the rate they are, where will the jobs come from? The services sector continues to grow robustly, but it still needs support from industries like construction.

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Millions of unskilled young people enter India’s workforce each year

Even those industries that have the potential to create many jobs, such as apparel manufacturing, continue to operate on a small scale because of India’s convoluted labour laws.

A recent report, Ease of Doing Business – An Enterprise Survey of Indian States, published by a federal institute, found that 85% of the firms operating in the apparel sector employed less than eight workers.

In fact, 85% of Indian manufacturing firms employ less than 50 workers.

The government feels that it has done enough to reform labour…

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