To evaluate the India macroeconomic environment, it is enough to look at the government’s budgeting spending, creating taxes, deciding on interest rates and making policy decisions. These factors directly influence employment, the currency’s purchasing power, bank lending practices, and consumers’ disposable incomes.
The three main economic indicators that tell us about the overall health of the economy are: national output (measured by the GD), employment and inflation. These may not necessarily be indicative of good economical prospective, though.
In India, the national output is very high over the last decade – more than 8%. The employment level is considerably low. The inflation rate, though, has been on the surge this year. while these three factors are interdependent, let’s analyze what’s not on the surface. If, referring to GDP, you use real GDP that does not take into account inflation you get a distorted picture. For example, the real GDP in India was 9.2% last year, but this reflects only changes in prices. Nominal GDP, according to The Economist, is much lower. That same year when the GDP was more than 9 %, the annual inflation rate was overwhelmingly high – 6%. Why the RBI bank has not responded to this increased inflation rate and established the lending rate at 7.5% only is not understandable. Besides, according to The Economist, in recent years “interest rates have risen by less than the rate of inflation.” The underlying problem is clear – India has no genuinely independent central bank to regulate the lending policy.
The menacing problem for India is, according to The Economist, rise of inflation rates, and financial imbalances. The article says, “demand is outpacing supply.” Can we say that production rates are lower than the market is consuming in India? In a certain sense, demand is always greater than a person can afford, and probably than supply. The demand cannot possibly be greater than supply if 60% of the population is engaged in the low productivity farming sector. What in fact is happening is a demand for workforce. There is a huge imbalance in India’s distribution of workforce in economic sectors. Aggregate supply is targeted by government "supply side policies" which are meant to increase productivity efficiency and national output. Education and Training, Research and Development, Breaking Trade Union Powers, Benefits Reform, Welfare Reform, Labour Market Reform are all to be reformed. Any increase in demand and production induces increases in prices, therefore, there’s no indication that the inflation in India is the result of demand outpacing supply. According to neo-Keynesian theory, it is necessary to raise prices to motivate profit-seeking firms to increase output.
The booming investment and consumption rates in India are indicative of the fact that “few production processes have unemployed fixed inputs.” The AS curve is flat if, at low levels of demand, there are large numbers of production processes that do not use their fixed capital equipment fully. Thus, production can be increased without much in the way of diminishing returns and the average price level need not rise much (if at all) to justify increased production. The article India On Fire says, the gap between domestic demand and supply is even bigger if you exclude worker’s remittances from abroad. Remittances included, India’s deficit is not 3%, it is in fact 5% of GDP. This sad statistics is compensated by the fact, though, that India has low external debt, and is away from a financial crisis by 180 million of foreign exchange reserves.
The credit boom encouraged by low interest rates, can be the cause current account deficit. It must not necessarily be related to the supply and demand circle, and on the fact that India is dependent on short-term portfolio capital inflows. There are few foreign direct long-term investments, but it might be the right thing for the government to do. The economy must develop from within, and not be diluted by the foreign donations.
Some facts are indicative of poor use of the gears in the government’s hands. High domestic debt as compared to GDP is 80 % of GDP. The government’s low expenditures on the infrastructure, very restrictive labour laws, poor quality of public services: water supply, health care, and education (50% of health and education sectors is privatized) are the factors that influence the economic growth. Since the extent to which aggregate demand can increase and thus lead to increases in real output is only liited, the government’s fiscal, monetary, and incoems policy has to be revised and changes have to be implemented quickly. The article recommends how to boost supply and put on the brakes on demand: improve fiscal policy, improve education of workers, limit the budget expenditures, lower appetites for consumption by increasing interest rates, limit generous tax exemptions to exporters in special economic zones, increase the pay in the public sector, expand the high-productivity sectors by re-qualifying workforce engaged in low productivity farming and by government investing in high productivity sectors, invest in the country’s infrastructure: electricity and raods sectors, ports, speed up urbanization by improving public services in cities.
A lot of articles compare the two most populated countries, India and China, probably out of the spirit of betting. Each country develops its own way, and while some coefficients and statistics coincide, they are totally different.
The spirit of competitiveness makes some economists provide comparative statistics related to economic figures in China and India. “India does not have a one-child policy, which has quickly made China's workforce old. India has 450 million people under the age of 20, compared to 400 million in China.” – they say. The Economist retorted to this claim that “60% of India’s labour force is engaged in low productivity farming.” Farmers are unwilling to move to cities where health care and education are of dreadful quality, labour laws are crippling, and public services like toilets, water and electricity supply are said to be unacceptable. It is the reason why farmers are not moving to urban areas as in China. The labour market is not likely to respond to the supply-side formidable problems in the nearest five years that are expected to be economic growth years for one more reason – the government has not ensured they are trained to shift to more productive sectors. Another imbalance allowed by the government was bubbling of assets prices. “house prices in many big cities have more than doubled over the past two years.” – says The Economist. So, while the small middle class group is enjoying salary growth in India, 60% are close to or below the poverty line. 20% of the population live on less than 1 dollar per day. This is the same as LICUS countries – some of them, too, can grow up to 4% per annum. India has been heralded as “the world’s largest stable democracy,” while China is labeled as “authoritarian regime,” this causing growing anxiety over political stability in it (in 2005, there were 75 000 protests). The type of rule, however, does not determine the type and the development of economy. the current government does. The Economist clearly showed that the government that took office in 2004, has failed to successfully implement the reforms it outlined. Besides, many of the government institutions are badly governed. According to Business Week, Indian companies are earning more value on their capital than the Chinese companies: the average Indian firm posted a 16.7% return on capital versus 12.8% in China. But government investments remain lower. While India spends 4% of its GDP on infrastructure investments, China spends seven times as much.
There are two factors that will allow India’s PPF (production possibilities frontier) to shift outward over time. The first is an increase in India’s resources. The second is due to improvements in technology. While, the latter can be made without the government’s intrusion, the first can only be achieved by implementing government policies.