Question Paper from: IBPS Clerk Mains 2016

The Indian economy is currently passing through ƒ a phase of relatively slow growth. However, this should not cloud the fact that over the nine-year period beginning 2005-06, the average annual growth rate was 7.7 per cent. Against this background, the relevant question is whether India has the capability to grow atͺ to ͻ per cent in ƒ a sustained way. In short, what is the potential rate of growth of India? Normally, potential growth is measured using trends with some filters. In one sense, these are backwards-looking measures, since they depend on historically observed data. In the case of measuring capacity utilisation in manufacturing, the maximum capacity is very often taken as the maximum output achieved in the recent period. Perhaps, in the case of determining the potential rate of growth of the economy also, one can take the maximum growth rate achieved in the recent past as the lowest estimate of the potential. However, this assumption will be valid only if there is the reason to believe that the maximum growth rate achieved in the recent past was notƒa one-off event and that the growth rate achieved was robust and replicable. India achievedƒa growth rate of 9.5 per cent in 2005-06, followed by 9.6 per cent and 9.3 per cent in the subsequent two years. After declining ƒ bit in the wake of an international financial crisis, the growth rate went back to 8.9 per cent in 2010-11. In many ways the growth rate achieved in the high phase period of 2005- 06 to 2007-08 was robust. The domestic savings rate during this period averaged 34.9 per cent of GDP. Similarly, the gross capital formation rate averaged 36.2 per cent. The current account deficit (CAD) remained low with an average of 1.2 per cent of GDP. Agricultural growth during this period averagedͷper cent and the annual manufacturing growth rate was 11 per cent. The capital flows were large but as the CAD remained low, the accretion to reserves amounted to $144 billion. Inflation during the period averaged 5.2 per cent. The combined fiscal deficit of the Centre and States was 5.2 per cent of GDP, well below the stipulated ͸ per cent. Thus in many dimensions, the growth rate was robust.Three sets of reasons are attributed for the slowdown. First, the external environment had deteriorated sharply. The recovery from the crisis of 2008 was tepidǤ One country after another in the developed world came under pressure. Strangely, however, international commodity prices including crude oil prices remained high until ƒ a couple of years ago. All this had an adverse impact on developing countries, including India. However, it would be wrong to attribute the slowdown in India primarily to external factors. The domestic factors are the key. Second, there were severe supply bottlenecks. Agricultural production fell sharply in 2009-10 because of ƒ severe drought. This triggered an inflation which lasted for several years thereafter. Coal output fell. Iron ore output fell, partly because of court decisions. The third set of reasons is basically non-economic which led collectively to ƒ a weakening of investment.  the multitude of issues relating to scams and perceived delays in decisionmaking created an element of uncertainty in the minds of investors. New investments began to fall. The rise in investment rate must be supported by ƒ rising in the domestic saving rate. An increase in investment rate supported by ƒ widening current account deficit is not sustainable and is fraught with serious consequences. Onlyƒcurrent account deficit in the region of ͳ to 1.5 per cent is sustainable. The incremental capital-output ratio is ƒ a catch-all variable which is influenced by ƒ the host of factors. Obviously, it depends on technology. It also depends upon the skill of the labour force which in turn depends on the quality of the education system. Another catch-all expression “ease of doing business” is also relevant (i.e.) bureaucratic hurdles which impede the speedy execution of projects need to be removed. Thus improving the productivity of capital needs action on several fronts. Making ƒ a prediction about the future is always hazardous. Many things can go wrong. The Indian economy in the recent past has shown that it has the resilience to grow at ͺ to ͻ per cent. Therefore achieving the required investment rate to support such ƒhigh growth is very much in the realm of possibility. However, we need to overcome the current phase of declining investment rate. Investment sentiment is influenced by non-economic factors as well. An environment of political and social cohesion is imperative. Equally, we can get the incremental capital-output ratio (ICOR) to ƒ lower level. Raising the productivity of capital will require policy reforms including administrative reforms as well as firm-level improvements. The “potential” to grow at ͺ to ͻ per cent at least for ƒ decade exists. We have to make it happen. (The topic of the Passage asked in the exam was based on the economic changes in the last 50 years) Unlike in the 1980s when the pick-up in growth was accompanied by deterioration in fiscal deficit and current account, the sharp increase in growth between 2005-06 and 2007-08 happened with the stability parameters at desired levels. Also, ƒ booming external environment provided good support. To assess whether the high growth phase can be replicated, we need to understand the factors that led to the slowdown since 2011-12. Complicating the analysis of this period is the revision of national income numbers with ƒ new base. The two sets of numbers presentƒ somewhat differing picture. According to the earlier series, the growth rate of the Indian economy fell belowͷper cent in 2012-13 and 2013-14. But the new series shows ƒ decline below ͷ per cent only in 2012- 13. For 2013-14, the new series recordsƒgrowth rate of 6.6 per cent, as against 4.7 per cent according to the earlier estimate. For 2014-15 and 2015-16, there is only one set of numbers, that is, according to the new series. For both the years the growth rate is above͹per cent. These are good growth rates under any circumstance, let alone the current global situation. Anyway, we have come down from the growth rate of 9-plus per cent which we had seen earlier.

On what factors does incremental capital-output ratio NOT depend?




Skilled labour


Better education system


Low fiscal deficit


It depends on all the given options

Chapter Name: Reading Comprehension
Difficulty Level: Moderate

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