The Indian Economy Essay Example for Free

The Indian Economy Essay1. IntroductionThis paper leave behind gamylight economic issues facing the Indian Government andits aptitude to oblige uplifted levels of growth by outlining the current conditions of the sparing. Policy dilemmas and logic to address these dilemmas will be explored. Analysis of cay indicators and statistics as well historic reference and the theory behind their execution will underlay chosen policies which will be followed by a brief conclusion.2. The Indian EconomyThe Indian Economy is listed as the fifth largest in the world at . 538 trillion US (CIA 2010) and has been able to continue steep GDP growth despite the global Financial Crisis. The country has also moved along a steady path of economic reform and liberalisation since 1990 including privatisation and foreign enthronisation. India is a planned economy which follows a series of targets for each five dollar bill year period, the Eleventh Five-Year plan (Planning Commission (Government of India) 2007) ending in 2012 aimed to increase and maintain growth at 10% (to double by 2017), create new employment for 70 million people, raise real wages for unskilled workers and consider education and infrastructure.The next five year plan needs to consider economic factors below that may restrict the high levels of growth. There is also an emergence of a two-speed economy emanating among the service sectors employed eye and high income earners with those in gardening and manufacturing (FitzGerald 2011). Figure 2.1 (TradingEconomics.com 2011)Figure 2.1 shows Indias strong trend for growth since 2002 and despite a meek decrease in growth rate following the Global Financial Crisis in 2008, a major indemnity issue therefore is maintaining strong economic prosperity. The administration has to consider several factors that are a risk to this aim such as a large budget deficit, high inflation and unemployment, all in all shown in figure 2.2. Percentage Government Debt 55 .9 of GDP pretentiousness 11.7 Increase per YearUnemployment 10.8 of Labour ForceFigure 2.2 Key Indicators 2010 (CIA 2010)Sustainable growth squeeze out be achieved by the Indian Government if it can address these issues both in the short and long term. Therefore the focus is toconsider reducing and stabilise inflation, restructure and increase employment and return the budget to surplus. DebtThe current Government Debt in India is around 60% of GDP (TradingEconomics.com 2011 CIA 2010) which puts debt near $1 trillion US. This is an all crucial(predicate) consideration as it affects the ability of government to embark on public spending necessary to address improvements in infrastructure, education and manufacturing which can help maintain the high growth levels in the long run.High debt and exchange order can also affect foreign investment which is rich in the work sector, attributing 55.3% of GDP and only when 34% of the Labour market (The World Bank 2009 CIA 2010), a focus on improving education and shifting employment into the operate sector therefore becomes an important direction for both decrement of unemployment and maintaining supply of labour.Wage worths would be kept at a competitive level compared with separate outsourcing countries and overall GDP levels. Debt can also create a lower credit rating and the ability to pay back adds, defaulting on a loan can have widespread negative implications to sustaining growth in the economy. InflationInflation is the reduction in the value of funds and is 11.7% in India(CIA 2010). High Inflation is a concern because it breads uncertainty in the economy for business, consumers and other investors. This is explained as money being the scale by which an economy can be measured, if the system of measurement of the measurement is uncertain different ideas are formed about how and where money is spent or even if it is spent at all. It also affects the distribution of money across society which is an ec onomic concern in India, high levels of inflation are notable in Food, Manufacturing Prices and Fuel(BBC 2011). UnemploymentUnemployment estimates in 2010 of around 10% (TradingEconomics.com 2011 CIA 2010) become an important policy consideration. In straight off the economy is burdened with the costs such as health and crime so far more direct issues include social welfare, breathing out of production and therefore taxable income.India has one of the worlds largest labour forces of around 480 million (CIA 2010) full employment would aid the ability to match sum of moneydemand increases with aggregate supply in the long terms. India could continue growth and manage sustainable inflation in the long term to reach the potential drop GDP levels. Figure 2.3 shows the overall break down of employment sector with its contribution to GDP. % Labour Force % GDPAgriculture 52 16.1Industry 14 28.6Services 34 53.3Figure 2.3 Economic Sectors Labour/GDP (The World Bank 2009) The policy cons ideration for Government should be to increase the efficiency of the agriculture sector and move employment into the Industry and Services sector in the long run, including a focus on self-employment which is becoming an unattractive option for junior generations (AZAD India Foundation 2010).3. Policy DirectionPolicy recommendations for the Government of India have one overall aim, to maintain strong growth. Three major economic conditions for this focus on, reduction of Government Debt, stability of inflation and addressing high unemployment.4.1 Monetary PolicyMonetary Policy has recently been engaged by the Central Bank and Government in a contractionary manor in an attempt to slow down the inflation growth that has been gripping India. The long term establish of increase to interest rates is to reduce aggregate demand. Figure 3.1 highlights an inflationary hike trend since 2008 which peaked in January 2010.Figure 3.1 India Inflation (TradingEconomics.com 2011)Identifying the ca use of inflation is a primary agenda before deciding how effective Monetary will be. While India is experiencing increased AD, interest rates are aligned to but not an overall effect of price increases and in the long run reduce the sustained high growth levels. As seen in Figure 3.2, Interest rate increases are not correlating directly with longterm inflationary decreases.Figure 3.3 Interest Rates (TradingEconomics.com 2011)There are three cost-push inflation causes that could explain the peaks and sustained recent high inflation levels of around 11% (CIA 2010).Brent Crude fossil oil IndexOil is a highly utilised commodity for India and its price can directly affect aggregate supply figure 3.2 Shows a correlation to hikes in Oil price compared with inflation. In January 2008 oil prices began to climb however as the GFC began to lot obligate, global demand for reduced and prices fell. As India was maintaining strong local pith Demand however inflation was still high.Figure 3.3 B rent Crude Oil (TradingEconomics.com 2011)Domestic Food and Manufacturing PricesSecondary inflation hikes noticed in 2010 do not directly correlate to oil prices. During a poor Food harvest home in 2009 as a result of a poor monsoon season (The Economic Times 2009) compounded by international food supply contractions and price rises in the manufacturing sector (BBC 2011) supply side shocks and marginal rise in oil prices can attribute to high inflationary levels.The effects of the supply shocks would be noted in the shift from AS1 to AS2 with prices rising in the short term. However as India GDP has continued to increase year on year, this can only be explained by an increase in Aggregate Demand from AD1 to AD2 shown in Figure 3.3 of a dynamic AS/AD model for India. Point C is Indias potential GDP in 2009 and Point D for 2010, the economic policy should be aimed towards reaching these targets. Monetary policy, in the short run would assist the reduction of AD to curve inflation how ever to reach LRAS2, other policies must be considered. Interest rate rises should be put on hold and decreased if the economy can recover from supply shocks allowing AS/AD to shift towards potential GDP.Figure 3.3 Dynamic AS/AD for India (figures from (TradingEconomics.com 2011))(McTaggart, Findlay, and Parkin 2010 Hubbard et al. 2011 Misistry of Statistics and Progamme Implementation 2011) 4.2 fiscal PolicyUnderstanding the complexities of the supply side issues for India is a must for Government to address long term inflation and employment. Investment in agriculture, manufacturing and infrastructure will most likely form the basis of the Twelfth Five-Year plan (2point6billion.com 2011).Agriculture can increase and sustain output by advancements in farming coiffure and technology which is also true of the manufacturing sector. In order for the government investment not to compound Aggregate Demand and multiply into further inflation, gross of the middle and higher income tax br ackets is an option. Already highlighted is the disparity between the size of each sector and the share of its GDP, these expenditures would therefore shift demand from the higher earning service sector into agriculture and industry, with a positive knock on effect of an increase in employment in these areas. % Labour Force % GDPAgriculture 52 16.1Industry 14 28.6Services 34 53.3Figure 3.4 Economic Sectors Labour/GDP (The World Bank 2009) Investment in education, fundable by higher taxation levels can also be aimed to assist the long term shift away from agriculture and into the industry and services sector. Infrastructure is also a key investment consideration to reduce costs of production to all sectors of the economy and sustain ever increasing energy needs. This is also required to avoid the siding of the two-speed economy and should be avoided as not to become reliant on one sector of the economy, addressing the balance and disparity can help create a diverse, shock absorbent Indian future. Why would this help stabilise inflation and reduce unemployment?* Cost push inflation and supply side shock impacts would be reduced in the long term * Investment in agricultural and manufacturing practice would allow for a closer match of Aggregate Supply with Aggregate demand * Shifting employment from Agriculture into Industry and Services sector would reduce unemployment *Long term government can divert funds from unemployment choice and taxation into reduction of the Government Debt4.3 Exchange Rate Exports and ImportsThe balance of trade is in deficit of 7.2% (see figure 3.5) however this may not be a major issue for the economic growth of India. The difficulty in policy decision remains the valuation of the Rupee and its impact on a flesh of variables.High rupee value impacts exportations and is approximately 44.6 rupee to $1 US a primary focus area is industry which could become a executable source of employment for the 10.8% of people not in work. Contin uing to increase interest rates will have two impacts direct foreign investment will be more attractive. Such things as new iron ore and petroleum mining ventures would become possible, however if the Rupee value is too high the export of this and other exportable goods becomes less attractive.Figure 3.5 Components of GDP as a Percentage (Misistry of Statistics and Progamme Implementation 2011)Focused on the aim of sustained high growth, export of services is only 6.6% of GDP however as the Services sector accounts for 55% of industry composition and consumption accounts for 58.3% of GDP, decrease of the ability to export services would reduce private consumption, a direct impact on growth. Export of Goods would also increase if the Rupee were to weaken and address the balance of trade. The government is strongly advised to allow mining and large manufacturing projects to begin and allow the export of these commodities to economies like China.Comparative cost of labour and productio n would give India a very competitive selling price in the global market and shift employment from agriculture (and the unemployed) into the manufacturing industry.4. ConclusionThe economy of India is very strong in the current global climate of uncertainty and the challenge for the Government is to maintain that level of growth. Managing economic uncertainties that can cause the economy tofail in its aims are extremely important. Understanding the supply side causes of inflation and the possible negative effect of monetary policy to combat it should be realised. Therefore fiscal policy to increase investment in the agriculture and manufacturing industries is recommended to remove disparity and level the two-speed economy.High levels of inflation and unemployment do not align to the Phillps principle of inflation (McTaggart, Findlay, and Parkin 2010) however at present there may be a need to absorb these pressures in the short term. To some degree the economy may be experiencing sta gflation as it has a much higher potential GDP threshold.In conclusion, there are other factors such as corruption and economic steering that if resolved could drastically reduce debt and disparity between all sectors of society.5. References2point6billion.com. 2011. Indias 12th Five Year Plan to Focus on Inclusive exploitation. http//www.2point6billion.com/news/2011/04/25/indias-12th-five-year-plan-to-focus-on-inclusive-growth-9151.html (accessed 02/07/2011). AZAD India Foundation. 2010. Unemployment in India. http//azadindia.org/social-issues/Unemployment-in-India.html (accessed 10/04/2011). BBC.2011. India wholesale inflation rate rises more than expected. http//www.bbc.co.uk/news/business-13761784 (accessed 26/06/2011). CIA. 2010. India. https//www.cia.gov/library/publications/the-world-factbook/geos/in.html (accessed 22/06/2011). FitzGerald, B. 2011. Two-speed economy killing industry, warns brand name maker. http//www.theage.com.au/business/twospeed-economy-killing-industry -warns-steel-maker-20110221-1b2k1.html (accessed 29/06/2011). Hubbard, G., A. M. Garnett, P. Lewis, and A. P. OBrien. 2011. Essentials of economics. McTaggart, D., C. Findlay, and M. Parkin. 2010. Economics. 6 ed. 6 vols. Vol. 6. Misistry of Statistics and Progamme Implementation. 2011. National Accounts Statistics.