Current Challenges Facing the Indian Economy

Despite fast growth, India still faces major development challenges, and the biggest is poverty. Poverty is a state in which a person cannot meet the basic minimum needs of life — adequate food, clothing, shelter, health and education.

To measure how many are poor, economists use the poverty line — a line that separates the poor from the non-poor, based on a minimum level of consumption (or income) needed to meet basic needs. In India it is usually fixed in terms of a minimum monthly per-capita consumption expenditure, originally based on a minimum required calorie intake. Those below this line are counted as below the poverty line (BPL). Over the years, expert committees (such as the Tendulkar and Rangarajan committees) have refined how the line is drawn. The good news is that the percentage of people below the poverty line has fallen substantially since independence, though the absolute number remains large.

The main causes of poverty in India are: low economic growth for much of the past (which limited jobs and incomes), high unemployment and underemployment, rapid population growth, deep inequality in the distribution of income and assets (especially land), and social factors. To fight poverty, the government runs many anti-poverty measures: a Public Distribution System (PDS) supplying cheap food through ration shops; employment programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA, 2005), which guarantees 100 days of wage employment a year to rural households; and schemes for housing, food, healthcare and self-employment. The best long-term cure, however, is rapid, employment-generating growth alongside investment in the people themselves.

The quality of India's people — their education, skills and health — is its greatest resource. The building of this quality is human capital formation, and its two main sources are education and health. Education raises productivity, incomes and awareness; India has expanded schools and colleges and raised literacy (to about 74% in 2011), but quality and access still need improvement. Health — through better nutrition, clean water, sanitation and medical care — keeps people fit to work and learn. Spending on education and health is an investment that makes the whole economy more productive, so a developing country must invest heavily in its people.

Closely linked is the challenge of employment. India must create enough good jobs for its huge and growing workforce. Unemployment exists in several forms:

• Disguised unemployment — more people work on a job than are actually needed (common in agriculture, where several family members work on a small farm but add little extra output).
• Seasonal unemployment — people are without work for part of the year (e.g. farm workers between harvests).
• Open unemployment — people are willing to work but find no job at all.
• Educated unemployment — qualified people unable to find suitable jobs.

To tackle unemployment, the government runs employment-generation schemes (such as MGNREGA for rural areas), promotes self-employment and skill development (Skill India, Start-up India), and supports small industries. The key long-term solution is fast, labour-using growth combined with better education and skills — so that a large young population becomes a productive workforce (a "demographic dividend") rather than a burden.

Most of India lives in villages, so rural development — improving the economic and social life of rural areas — is vital. Two parts of it are especially important:

• Rural credit — farmers need affordable loans for seeds, equipment and to tide over bad seasons. Earlier they were exploited by moneylenders charging very high interest. Now institutional sources — cooperative banks, commercial and regional rural banks, and NABARD (the apex bank for rural credit) — provide cheaper loans, helped by self-help groups (SHGs) that give small loans to the poor (micro-credit). Adequate, fair credit is the lifeline of rural development.
• Agricultural marketing — the process of getting farm produce from the farmer to the consumer at a fair price. Farmers often suffered from a lack of storage, exploitation by middlemen, and poor information. Reforms include regulated markets (mandis), government purchase at a minimum support price (MSP), better storage and warehousing, and recently the electronic e-NAM (a national online market) to give farmers better prices.

Finally, all development must be sustainable. Sustainable development means meeting the needs of the present without compromising the ability of future generations to meet their own needs. India's rapid growth has caused serious environmental problems — air and water pollution, deforestation, loss of soil, and overuse of resources like groundwater and fossil fuels. Sustainable development calls for conserving resources and protecting the environment: using renewable energy (solar, wind), reducing pollution, conserving water and forests, and following the path of "green" growth. The ultimate challenge for India is to grow fast and fairly and sustainably — lifting people out of poverty today while safeguarding the planet for tomorrow. That balance is the central task of India's development.