Need for structural reforms

In a recent interview, International Monetary Fund (IMF) Chief Economist Geeta Gopinath expressed concern over India’s economic situation and said that the Indian government should focus on structural reforms to overcome the slowdown in domestic demand. According to Geeta Gopinath, “Politically, this is the most suitable time for structural reforms for India.” It is known that according to the official data released by the government last month regarding the second quarter (Q2) of the current financial year, India The economic growth rate has reached 4.5 percent. The GDP growth rate in the first quarter of the current year was estimated at 5.0 percent. India’s GDP growth rate has been steadily falling over the past five quarters, with experts believing that the situation is clearly a threat to India’s economy.

Structural reform required

  • In view of the economic downturn clouded by the economy, many big economists have demanded structural reforms from the government. Experts believe that if the government does not take an important decision in this regard soon, the situation may worsen further.
structural reforms
  • According to the data released by NSO, the total value of GDP of the country in the second quarter (Q2) of the current financial year (2019-20) is about 35.99 lakh crore rupees, compared to 34.43 lakh crore rupees in the first quarter (Q1) of the same year. This shows that India’s GDP growth rate is around 4.5 percent.
  • At the same time, there has also been a decrease in personal final consumption expenditure (PFCE) of Q2. While this PFCE was 9.8 percent in the same quarter of the last financial year (2018-19), it has fallen to 5.1 percent in the same quarter of the current year. This decline clearly highlights the crisis of confidence among ordinary citizens in the country.
  • Apart from this, Gross Fixed Capital Formation (GFCF) in Q2 of the current financial year also fell to 1.0 percent from the second quarter (11.8 percent) of the last financial year.
  • It is known that the GFCF refers to the estimation of net capital expenditure on permanent capital in the government and private sector. It is believed that if a country’s GFCF is growing at a rapid pace, then the economic growth of that country will also increase rapidly. On the contrary, the decline in GFCF is a matter of concern for the policy makers of the economy. For the past few years, India’s GFCF is witnessing a declining trend, which is not at all satisfactory news for India’s economic growth.

Structural Reforms and the Example of Ukraine

  • Structural reforms are the means of long-term measures through which the efficiency of an economy is enhanced and its competitiveness is enhanced by removing the inefficiencies of all sectors of the economy. Several efforts have been made so far in India in terms of structural reforms, among which the LPG (Liberalization, Privatization and Globalization) reform of 1991 is notable.
gdp growth rate
  • In simple words, it can be said that structural reforms mean a change in the way the government works. Ukraine can be a great example to understand this type of reform. It is a well-known fact that the state of Ukraine’s economy is in great trouble at present.
  • Ukraine is one of the most corrupt countries in the world, although the government of Ukraine is doing its best to improve the country’s economic condition. For example, recently the government made it mandatory for all ministers to declare their financial position. This move will make it difficult for those politicians to benefit such companies in which they have invested.
  • As a result, all government contracts will be available to qualified companies and prices will come down with improvement in the quality of public services.
  • Apart from this, the government has taken some other important decisions. For example, to save government money, the government will reduce the huge amount of subsidy given on gas. Many experts see the reforms being carried out in Ukraine as structural reforms, because the government has changed the way it works here.

Importance of structural reform

  • Structural reforms help build trust among investors, both domestic and foreign, which can result in increased demand.
  • Also, increase in investment also increases employment in the economy.
  • It is known that the benefit of such reforms can only be seen in the long term, while the result of fiscal and monetary policies, on the contrary, comes in relatively short period.
india's gdp growth rate

Work should be done on three policies with priority

IMF Chief Economist Geeta Gopinath has urged the government to work on three major policies on priority.

  • According to Geeta Gopinath, firstly the government should speed up the work of improving the balance sheets of banks and other financial institutions. Cleaning the balance sheet means identifying suspects or assets whose recovery is not possible and separating them at the primary level. He has also suggested to improve the functioning of public banks to revive their credit capacity.
structural reforms
  • He has asked to continue the policy of fiscal consolidation at both the Center and State levels. In addition, he has supported measures such as increasing tax compliance as well as improving fiscal transparency.
  • Lastly, improving investment in infrastructure as well as improving the labor, land and product markets should be India’s priority so as to create more better jobs for the rapidly growing labor force.

The conclusion

Prime Minister Narendra Modi has set the goal of making India a $ 5 trillion economy by the year 2024-25 and to achieve this goal it is necessary to boost the country’s economic growth rate. Given the current economic situation of India, the need for structural reforms cannot be ruled out. Experts believe that if we really want structural reform, then we have to make economic freedom the guiding principle of policy making.

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