Table of Contents
The articles from the Economist (March, 2011) suggest that 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. Recent years many investors leave India because of unfavorable social and economic conditions.
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. Nominal GDP, according to The Economist, is much lower. 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, "CORRUPTION is dreadful in India" (the economist, March 24, 2011). Also, 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. 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.
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 labor 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 limited the government's fiscal, monetary, and strict anticorruption policy has to be revised and changes have to be implemented quickly.
The articles recommend how to boost supply and put on the brakes on corruption policy. India should, 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 sectors, ports, speed up urbanization by improving public services in cities. 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.