India’s economy is in dire shape, and the solution leads through rural India.

India’s economy stinks. Let’s admit it. No amount of chest beating is going to help, and though I’m not trying to place blame, the current government does need to get its priorities straight. Increasing corporate social responsibility (CSR) isn’t going to help, because if things stay the way they are, there might not be that many corporates left.

India posted its lowest GDP numbers in seven years at 5 percent this past August, and it doesn’t seem like the numbers are going to improve anytime soon. Manufacturing growth seems sluggish, while Gross Capital Formation (GCF) which measure investment expenditure has remained stagnant. India has a $150 billion bad debt problem, close to 10 percent of India’s GDP that isn’t going away anytime soon. The NPA problem has severely depressed lending in India, hurting construction and especially rural demand.


To truly understand, the NPA issue you have to go back to the start of PM Modi’s first term. Even though most of the bad debts were lent out before 2014, the true nature of the problem wasn’t discovered until after. Wages for example had started turning negative around 2013, followed up by two consecutive drought years in 2014, 2015 that exacerbated the issue with rural demand. Commodity prices fell soon after with the fall in oil prices, and even though it was a boon for an energy importer like India, the shock to the agriculture sector precipitating a downfall in the commodity sector wasn’t. But the downfall in the construction sector, which outside of agriculture remains the major driver of employment has significantly depressed demand overall. Rural retail inflation for example came in at 2.14 percent compared to urban areas where it was almost double at 4.2 percent. Lower retail inflation in rural areas conjoined with high inflation in services has depressed wages in the agriculture sector while increasing the cost of living.

The NPA mess though does say a lot about India’s culture, political and otherwise. The issue started primarily because politicians used India’s banks, a majority of those who remain under government control to curry favor with corporates they favored relaxing compliance standards in general. Ignoring every iota of compliance rule that would’ve stopped many of these deals at private banks. The government has tried pumping in more capital into these banks to shore up their positions hoping to jumpstart loan growth, but that move still remains to bear fruit.

The solution though starts first with the government easing its fiscal deficit target. Government investment has been one of the reasons why the country isn’t going through a full blown recessions right now, but it’s unsustainable in the long term without breaching the fiscal deficit. Private investment is at historic lows, and as we’ve seen in the automobile sector, consumption is taking a beating as well. The other solution could be with the government focusing less on welfare programs in the rural sector and provide a fillip into investing in the area. Some of that’s being done with the Mudra yojna but maybe reinvigorating the moribund smart cities project, expanding two-tier cities, could be a better idea.

India’s economy has missed opportunity after opportunity to become a middle income country. Not being ready for the manufacturing boom that helped other Asian countries still haunts us. With the advent of automation right around the corner, we have very little time left to employ the almost million people that want to join the workforce every month but can’t find anything. The economy is in dire shape. At a time when we should be closing the gap on countries like China, going through their own economic woes, we’ve somehow still managed to outdo ourselves- The gap as it stands is increasing. Nothing defines India more than that.

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