Category Archives: economics

The Story of Indian Economics (part 2)

The Reform Period:

The main effect of the balance of payments crisis was the loss of India’s position on the global scale especially in the eyes of the World Bank. India had huge debts to repay and could not do so without the aid of the World Bank and such financial institutions. Also, due to the closed door policy of the government foreign trade was meagre and the foreign investments into the country were well below required levels. The rupee now valued 25.79 against the USD which was a massive devaluation. Like all conventional tales, when all hope is lost, the people need a hero to come to their rescue. Manmohan Singh has very often been criticized for his nonchalant stance as prime minister of India but back then he was the finance minister or “the hero” of India. Under PV Narasimha Rao and Manmohan Singh’s leadership Indian policies were reinvigorated and major changes were made. The World Bank agreed to give India financial support but in return India had to globalize and liberalize. India agreed to do so and slowly the situation started improving. Some key policies were implemented such as a more capitalist approach by disinvestment of public sector and privatization. Import substitution was removed and taxes were reduced to encourage foreign investments/trade into the country. Importance was given to industrial growth and development of the tertiary sector. All the heavy licensing procedures were abolished and the government trimmed the role of the RBI in regulating the financial sector which resulted in the emergence of various financial institutions. Also, during this time various small scale industries emerged which formed an integral part of the economy in terms of GDP and employment. By the end of Narasimha Rao’s term India was look at the end of the millennium with hope of better things to come.

The Growth Period:

When the hero marks his victory over the villain, the story still has an unfinished part that is the hero and heroine getting together and having a happy ending. Almost a decade later, Manmohan Singh became the prime minister of India. Although, between 2000-2010 India did not see the growth which met its potential but substantial improvement was there.  India’s trade as a proportion of GDP rose from 13.1 per cent in 1990 to 20.3 per cent in 2000. Economic reforms picked up pace in 2000-04 and fiscal deficits trended down after 2002 and there was a based upswing in Indian industrial output and investment from the second half of 2002. India’s Tenth Five-Year Plan (2002-07) targeted an annual growth rate of eight per cent. Along with this growth target, the government also laid down targets for human and social development. A reduction of the poverty rate by five percentage points by 2007; providing gainful employment to at least those who join the labor force during 2002-07; education for all children in schools by 2003; and an increase in the literacy rate to 75 percent by March 2007. The GDP too saw a huge upward growth.

At the present, it is the NDA government which is in full swing and India is en-route to becoming an influential and key player in the world economy and continues to improve in the Na Mo era.

The Story of Indian Economics (part 1)

When the British left India and the nation witnessed independence after several decades, the economy was crippled and people were impoverished with the GDP crashing down at staggering rates. The GDP then was a meager 93.7 billion rupees as compared to the present GDP which is 7.376 trillion rupees. This can be attributed to the de-industrialization policy of the colonial government which led to the absence of the secondary sector and reduced India’s status to a mere supplier of raw materials. Also, the tertiary sector in India was almost non-existent, which was another major setback to India’s economic growth.

At this point Indian leaders had to decide which type of economy India was to adopt and in the end although with India’s living conditions and economic situation in a bad shape a socialist economy would have been more ideal, on a long term basis a mixed economy was probably the best option. However, this decision would change India forever. A mixed economy demands a rigid and clear constitution to draw a line between the capitalist and socialist aspects of the economy which in my opinion was one failure of the new government.

Indian economics since independence can be divided into four stages:

  • The Nehruvian and post-independence period (1950-1985)
  • The crisis period (1985-1993)
  • The reform period (1993-1998)
  • The growth period (1998-present)

The Nehruvian period:

This key feature of this era was the closed door policy viz. foreign trade was minimized through import substitution which gave birth to domestic industries and various small scale industries. Although this established an industrial foundation in India the economic growth was less and the aggregate supply went down. At this time India’s economy had a share of 3.8% of the total world income. The government’s aim during this period was recovering from the losses incurred during colonial rule and it emphasized on addressing serious problems such as poverty and unemployment. The government introduces the five year plans to provide a comprehensive strategy to address all the economic problems and aim at economic growth.  Nehru wanted to create a balance between the rural and the urban sectors in his economic policies. He stated there was no contradiction between the two and that both could go hand in hand. He denied to carry forward the age old city versus village controversy and hoped that in India, both could go hand in hand. Nehru was intent to harness and fully exploit the natural resources of India for the benefit of his countrymen. The most distinctive, and often debated feature of Nehru’s economic policies, was the high level of state and central control that was exercised on the industrial and business sectors of the country. Nehru emphasized that the state would control almost all key areas of the country’s economy, either centrally or on a state-wise basis. His Socialist emphasis on state control somehow seemed to undermine his stress on industrial policies. The rigorous state laws and License rules put a great degree of restrain on the free execution of industrial policies. Even the farmers, along with the business personnel, found themselves to be at the receiving end of rigorous state control policies and high taxation. Poverty and unemployment were widespread throughout Nehru’s governance.

The Crisis period:

Towards the end of 1980s, India was facing a Balance of Payments (BoP) crisis, due to unsustainable borrowing and high expenditure. The Current Account Deficit (3.5 percent) in 1990-91 massively weakened the ability to finance deficit. The causes of this crisis were:

  • Break-up of the Soviet Bloc:
  •  Iraq-Kuwait War:
  •  Slow Growth of Important Trading Partners:
  •  Political Uncertainty and Instability:
  •  Loss of Investors’ Confidence:

Thus, the balance of payments situation came to the verge of collapse in 1991, mainly because the current account deficits were mainly financed by borrowing from abroad. The economic situation of India was critical; the government was close to default. With India’s foreign exchange reserves at USD 1.2 billion in January 1991 and depleted by half by June, an amount barely enough to cover roughly three weeks of essential imports, India was only weeks way from defaulting on its external balance of payment obligations.

DEMONETIZATION IN INDIA

14th December 2016

 

Bangalore, India

 

Bonjour les amis,  its me again to publish an article about one of the ongoing debates in India – demonetization.

Before we start it is important to first clarify the precise definition of a broad term such as this. So what is demonetization?? Investopedia defines it as the act of stripping a currency unit of its status as legal tender in order to fabricate certain changes that the government wishes to make. This alteration in currencies consequently impacts the economic status of a country .

In India, this act was passed with a sole motive of eradicating black money stored in cash and take the first steps against money laundering as a whole. The issue of black money has been an arch rival to India’s economic growth ever since independence was first observed and this has only gone onto become a more sizeable issue over the passing decades. Economists have often introspected about their causes and removal but not many actions have been taken by governments majorly dominated by Congress leaders. Then ,why is there so much opposition to demonetization which can be looked at as a mere first step taken for combating  money laundering??? The answer to this is deep rooted and a diverse set of aspects must be considered before a conclusion is reached. In the following few paragraphs I will speak as an economist presenting facts rather than an Indian citizen supporting or criticizing the policy.

This policy has taken a serious toll on trade and the equilibrium of demand and supply in markets. With lesser monetary flow, demand has gone down due to which manufacturers have stopped creating more goods which in turn had brought down the supply. I personally feel that for a developing country like India these kind of situations can hamper economic growth and depreciate our economy. This ideology is heavily linked with the timing of imposing this policy and the government perhaps could have waited a few more years before doing so. In addition, black money is stored in other forms such as gold, properties and in bank accounts so demonetization does not address the major issue. When we observe the policy on a macro scale it offers quite less and has more drawbacks. When time period is considered; when we think of it on a long term basis it can be of great advantage but the short term consequences cannot be undermined. Also, the micro economical situation needs to be observed.

India has a rural population of a staggering 67% of the total population many of whom are not exposed banks and e-wallets. These people are heavily reliant on solid cash which is why the controversies surrounding demonetization have rose. In the eyes of a rural citizen every note of money carries a substantial significance and their deficit can have grave implications and can directly affect their lives. With a shortage of currency, people are  thronging banks to receive their share of cash. Due to this, some people are unable to pay for themselves even during emergency scenarios.

Taking advantage of this situation the opposition parties have sympathized with these people and have created raucous in the parliament and are desperately trying to turn this whole situation into a fiasco. This political battle have raised doubts in the minds of the people because of which the merits of this policy are overshadowed by their drawbacks and people no longer see the bigger picture. The prime minister has pleaded with the people to bear with him for a few months and promises a drastic improvement in the situation.

On one side, the government has announced that more policies will follow shortly to put a full stop to the long lasting crisis of money laundering and black money. However, on the other hand these policies affects the people in adverse ways and may have serious repercussions in the future. Also, there are various political parties who act as hurdles and stand between the government and the people to prevent them from achieving their goals.

It is challenging to decide what is right and what’s not but all that can be said is that no government in India’s history has taken such a stern decision and addressed a major problem such as this. There may be inconveniences but I feel it is the role of every Indian citizen to respect this decisions and believe in the government. If the policy is a success then his will go down as one of the best decisions probably in the history of Indian economics but for now a sense of hope is all that we people have.

 

signing off……….Akarsh