If you have any information on this topic please mail it to us at email@example.com and help us to help other students like you.
Economic Growth Of India In 2011
The India economy grew at a rate of 6.9% in the last financial year (per Press note: Advance estimates of national income, 2011-12 released by the Central Statistics Office [CSO press release]). This figure falls short of the initial target of 8.2%. This essay will examine the reasons behind the decline in the growth rate. Next, the issue of sustainability of/ improvement from the current growth rates will be examined; this issue entails an inquiry into the problems ailing the economy at present and an assessment of the response to those problems.
Fall in the growth rate are due to both internal and external factors. Internal factors include monetary tightening in the economy and a slack in investments. Monetary tightening, as evident from thirteen rounds of increase in interest rates from March to December 2011, increased the cost of borrowing money in the economy. This is bound to affect the Aggregate Demand in the economy by affecting Consumption and Investments. Consumption of interest rate sensitive goods like houses and cars will rise at a slower rate with such a move. Such a result may, however, by offset by a rise in consumer confidence witnessed by India in 2011 (Seventh Round of Consumer Confidence Survey, conducted by RBI).
A rise in interest rates also reduces the profitability of investments, consequently reducing investment levels. Declining business expectations and confidence (per NCAER Survey on Business Confidence) and persistent inflation are additional factors exacerbating the problem relating investment rates. That the investment rates are falling is evident from the Reserve Bank of India's statement that there has been a sharp decline in new corporate fixed investment since H2 of 2010-11 and this trend continues. (RBI, Macroeconomic and Monetary Developments, Third Quarterly Review, January 23, 2012). Reduced investment levels, in turn, adversely affect the aggregate demand and the long-run aggregate supply. A stagnation of the long-run aggregate supply not only has ramifications for growth rates, but also for inflation levels. This problem is acutely apparent in the agriculture sector, which is plagued with low productivity. The growth rate in the sector has been fluctuating over the years in response to the weather. 2.5% growth was registered in the sector over the last year. The dependence on weather can be reduced and higher growth rates can be achieved through technological and institutional investments in the sector. Other internal sectors, including mining, manufacturing, construction etc. also registered lower growth rates than previous years (per CSO press release, p7). The slack in investments characterizing the various economic sectors needs to be pulled.
External factors affecting the growth rates are a global slowdown, reducing the demand for exports and rising import expenditure. While there was a growth in export revenue of 24.9%, the growth in import expenditure was 32.2% (CSO press release, p7). Turbulence in the Euro-Zone and the uncertain economic outlook of the US are possible factors affecting the demand of exports. Increase in imports of price-inelastic crude oil is a factor causing an increase in import expenditure. The price of crude oil has remained consistently high over the year. Import expenditure outstripped export revenue; the net export revenue was thus negative in 2011 and this put a downward pressure on the Aggregate Demand in the economy, thus resulting in lower growth rates. The next issue that will be discussed is the sustainability of the 2011 growth rates. This will be discussed in light of the following problems: inflation, fiscal deficit and current account deficit.
High and persistent inflation rates will deter investments and, as has been established above, this will adversely affect growth levels. As purchasing power of money falls, consumption is also likely to fall, also affecting growth. Aside from purely economic considerations, inflation is likely to cause public outcry, especially given India's socio-economic fragmentation since inflation will hit the poor the worst. This brings in the question of inclusive growth- are we willing to have high growth figures benefiting the privileged few, and the rest languishing with crippling inflation? India has been facing inflation rates near 8%. The monetary policy response has contained inflation, while sacrificing the year's growth figures. Expected inflation rate in March 2012 is 6.5%. The response was apt given the pressing need to contain inflation. In the long run, however, we need to identify other fundamental, structural weaknesses and eradicate them. Supply side policies, which increase the full-employment level in the economy, will be more appropriate in the long run since they can address the problem of inflation without compromising growth. In this respect, investments in infrastructure and technology are paramount. Investing in the labour force through skills and education programmes are also helpful steps in this direction.
India's fiscal deficit (estimated at 5.6% for the financial year ending in March 2012) is problematic in that it limits the government's ability to invest in infrastructure projects in the future. Such investments may prove to be crucial in providing the economy an impetus for growth. The economically inefficient yet politically attractive option of subsidies and handouts should be done-away with in favour of government spending on infrastructure/ labour force development projects to sustain growth in the long run. An alternative to subsidies worthy of consideration is social business (can be entirely public or public-private or wholly private ventures). A successful example of a private venture into social business is the Grameen micro-finance scheme in Bangladesh. Such a venture is preferable to subsidies, which breed dependence, fail to provide adequate incentives for skills improvements and solve the symptom instead of the disease. There is a need to rebalance public spending from consumption to investment to ensure a more sustainable growth.
The current account deficit for the past financial year is expected to be 3.6%. There is a need to balance the current account to ensure that the consequent depreciation of the rupee does not hinder growth significantly through inflation and rise in import expenditure, which may offset any gains accrued from increased price competitiveness of exports. The growth rate of the economy in 2011 was affected by both internal and external factors. The underlying problems characterizing the economy in 2011 need to be addressed to ensure sustainable growth rates.
- economic growth sustainable 2011 abhinav
- economic growth sustainable 2011 bharath
- economic growth sustainable 2011 priya
- Economic growth sustainable priya