Global Crisis & India

Currently the global economy is undergoing the state of crisis. The recent eurozone second recession coupled with very slow growth in US are a matter of great concern for the growth in future. Amidst such situation, the world is looking up to the emerging economies like that of China, India to provide momentum of growth which would help the total global economy grow at a moderate rate of ~3.5% in future. Also it is expected that by the end of 2050 China would be the world’s largest economy followed by US and India at #3. The developed nations like UK, Japan etc will be surpassed by those of the BRICS economy along with the growing economies like Indonesia, Singapore etc.

If we talk about the Indian economy particularly we see that the economy currently managed a growth of ~5.5% which is far better than the other economies globally. Indian economy, post independence, was characterized by features such as closed economy, agriculture based economy where over 70% of the GDP was contributed by agriculture. No proper financial policies were defined by the policy makers and their main objective was constraint to initiate a process of development which could raise living standards.

Fiscal Deficit – Burning Problem of today’s India

Moving to the current status of the economy, we see India is facing one of the burning problems due to the rising fiscal deficit. The country recorded an all time high fiscal deficit.

i) India is an import driven economy with the maximum share of import being captured by gold and other manufacturing goods.

ii) The country lacks in the manufacturing sector which is yet to be developed. The country exports the raw materials and imports the final goods, which only add to the problems of the country by raising the costs.

iii) The rising fiscal deficit is also leading to the devaluation of rupee in the international market.

iv) Adding fuel to the fire, the fossil fuel subsidy which is provided by the government is only adding to the burden for the economy.

If we look at the GDP of the economy we see a major chunk of contribution coming from the services sector. In order to grow, relying on a risky sector is not a viable option. Hence India needs to move towards development of manufacturing sector so as to develop a strong foundation for itself. It is undoubtedly true that the services sector is providing the economy with enormous growth but owing to its robust nature, the fate of the entire economy cannot be left upon it. Outsourcing is always not a feasible solution for an economy to prosper.

So it is very important that India curbs down its fiscal deficit to the level of ~4%, if it’s looking to implement capital account convertibility sometime soon.

We can say India is again on its development path as she was in 1991, however her steps are big ie. magnitude of growth expected is much higher than it was decades ago in 1991.

India in 1991

In 1991, India faced a balance of payments crisis where it had to pledge 67 tons of gold to Union Bank of Switzerland and Bank of England, as part of a bailout deal with the International Monetary Fund (IMF). Also new neo-liberal policies were implemented so as to make the Indian economy open for international trade and investment. Some of the other policies implemented were those of Deregulation, Initiation of privatization, Tax reforms and Inflation-controlling measures.

Recent Developments

Let’s now take a quick overview of the recent developments taking place in the economy:

i) We saw some policy making pertaining to the FDI in sectors like Aviation, Retail where in the government allowed Foreign Direct Investment in the sectors so as to invite the foreign investment in the economy. This will help in the improvement of the cash inflow in the economy.

ii) De-regulation of diesel price was a major move to help the oil and gas sector.

iii) The rate cut by the central bank (reserve bank of India) was a much awaited move which would lead to some boost in the economy.

iv) De-regulation of industries like sugar, etc is on the cards in the coming year.

v) As far as the 12^th five year plan is considered a huge investment for infrastructure development is set aside by the government.

vi) Focus on the public private partnership to develop infrastructure, power sectors etc. is one of the key move by the government.

The environment for sustaining the business is being created by the government. This would help the country achieve its GDP growth to a much higher level as per its potential. So we can say the with the changing reforms taking place in the economy (financial, energy and retail sector) the country is moving on the line of further development through broadening the reach of the economy for investors. Thus we can very well say its 1991 all over again.