Re-Engineering of Indian Economy Opportunities and Challenges

Transcription

1 October, Volume: III,Special Issue: X Re-Engineering of Indian Economy Opportunities and Challenges AUTHORS Abstract Mr. Harish N, Mr. Manjunatha K N, Mr. Venkatesh S Lecture of MBA Department, Shirdi Sai Engineering College This article offers an analytic overview of India's achievements to date, what its future prospects are, what its rise means to the global economy in the next fifteen years and what challenges India faces in terms of future reforms. The article begins by presenting a summary of the country's growth experience during the last sixty years and relating it to the policies and political economy factors behind the adoption of those policies. It then discusses medium-term prospects of the country. Based on a set of key factors relevant to growth, it argues that India is likely to become the third largest economy in the world and an even bigger contributor to the global workforce than it is today. The article then turns to the study of the impact the growth has had on poverty alleviation during India's sixtyyear history. The remainder of the article outlines the key challenge India faces today and the reforms it needs to undertake to sustain and accelerate both growth and poverty alleviation. The article argues that India needs to walk on two legs manufacturing and services and requires reforms that would help strengthen both. Key Words: Re-Engineering, Indian Economy, GDP,Inflation

2 October, Volume: III,Special Issue: X Introduction to Indian Economy: The India economy, the third largest economy in the world in terms of purchasing power, is going to touch new heights in coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy of the world just after US and China. It will grow to 60% of size of the US economy. This booming economy of today has to pass through many phases before it can achieve the current milestone of 9% GDP. The history of Indian economy can be broadly divided into three phases: Pre- Colonial, colonial and Post Colonial. Pre Colonial: The economic history of India since Indus Valley Civilization to 1700 AD can be categorized under this phase. During Indus Valley Civilization Indian economy was very well developed. It had very good trade relations with other parts of world, which is evident from the coins of various civilizations found at the site of Indus valley. Before the advent of the East India Company, each village in India was a self sufficient entity and was economically independent as all the economic needs were fulfilled within the village. Colonial Indian Economy: The arrival of the East India Company in India caused a huge strain to the Indian economy and there was a two-way depletion of resources. The British would buy raw materials from India at cheaper rates and the finished goods were sold at higher than normal price in Indian markets. During this phase India's share of world income declined from 22.3% in 1700 AD to 3.8% in Post Colonial Indian Economy: After India got independence from colonial rule in 1947, the process of rebuilding the economy started. For this various policies and schemes were formulated. First five year plan for the development of Indian economy

3 October, Volume: III,Special Issue: X came into implementation in These Five Year Plans, started by Indian government, focused on the needs of the Indian economy. Global Economic Situation and Prospects As per The United Nations World Economic Situation and Prospects (WESP), report, four years after the eruption of the global financial crisis, the global economy is still struggling to recover. During 2012, growth of the world economy has weakened further. The global economy is expected to grow at 2.2 per cent in 2012, at 2.4 per cent in and 3.2 per cent in Weaknesses in the major developed economies are at the root of the global economic slowdown. The report stresses that most of them, but particularly those in Europe, are trapped in a vicious cycle of high unemployment, financial sector fragility, heightened sovereign risks, fiscal austerity and low growth. Several European economies and the euro zone as a whole are already in recession, and euro zone unemployment increased further to a record high of almost 12 per cent this year. The US economy slowed significantly during 2012 and growth is expected to remain meager at 1.7 per cent in. Deflationary conditions continue to prevail in Japan. The economic woes in Europe, Japan and the United States are spilling over to developing countries through weaker demand for their exports and heightened volatility in capital flows and commodity prices. Economies in developing Asia have weakened considerably during 2012, as the region s growth engines, China and India, have shifted into lower gear. While a significant deceleration in exports has been a key factor behind the slowdown, both economies also face a number of structural challenges that hamper growth. Given persistent inflationary pressures and large fiscal deficits, the scope for policy stimulus in India and other South

4 October, Volume: III,Special Issue: X Asian countries is limited. China and many East Asian economies, in contrast, possess much greater space for countercyclical policy. According to the report, present policy stances fall short of what is needed to spur economic recovery and address the jobs crisis. While policy efforts have been significant, especially in the euro zone, in trying to redress sovereign debt distress, the combination of fiscal austerity and expansionary monetary policies has had mixed success so far in calming financial markets and even less so in strengthening economic growth and job creation. It is essential to change course in fiscal policy, the UN report says, and shift the focus from short-term consolidation to robust economic growth with medium to long- term fiscal sustainability. Premature fiscal austerity should be avoided and, while necessary, fiscal consolidation should focus on medium-term, rather than short-term adjustment. The report stresses that the reorientation of fiscal policies should be internationally coordinated and aligned with structural policies that support direct job creation and green growth. It further recommends that monetary policies be better coordinated internationally and regulatory reforms of financial sectors be accelerated in order to stem exchange rate and capital flow volatility, which pose risks to the economic prospects of developing countries. There is also a need to secure sufficient development assistance to help the poorest nations accelerate progress towards poverty reduction goals and invest in sustainable development. As per the report, the prospects for the next two years continue to be challenging. A worsening of the Euro area crisis, the fiscal cliff in the USA and a hard lending in China could cause a new global crisis. Status of Indian Economy

5 October, Volume: III,Special Issue: X India is developing into an open-market economy, yet traces of its past autarkic policies remain. Economic liberalization, including industrial deregulation, privatization of stateowned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country's growth, which has averaged more than 7% per year since India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Slightly more than half of the work force is in agriculture, but services are the major source of economic growth, accounting for nearly two-thirds of India's output, with less than one-third of its labor force. India has capitalized on its large educated English-speaking population to become a major exporter of information technology services and software workers. In 2010, the Indian economy rebounded robustly from the global financial crisis - in large part because of strong domestic demand - and growth exceeded 8% year-on-year in real terms. However, India's economic growth began slowing in 2011 because of a tight monetary policy, intended to address persistent inflation, and a decline in investment, caused by investor pessimism about domestic economic reforms and about the global situation. High international crude prices have exacerbated the government's fuel subsidy expenditures, contributing to a higher fiscal deficit and a worsening current account deficit. In late 2012, the Indian Government announced reforms and deficit reduction measures to reverse India's slowdown. The outlook India's medium-term growth is positive due to a young population and corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy. India has many long-term challenges that it has not yet fully addressed, including poverty, inadequate physical and social infrastructure, limited non-agricultural employment opportunities, inadequate availability of quality basic and higher education, and accommodating rural-to-urban migration.

6 October, Volume: III,Special Issue: X Factors that affecting Indian economy Interest Rates Interest rates can impact the growth of an industry in several ways. In large-ticket industries such as vehicle manufacturers or cruise companies, an increase in interest rates can prevent customers from borrowing to finance the purchase of these types of products and services. High interest rates also deter companies from investing in new capital and expansion. On the other hand, falling interest rates can stimulate industries to grow, which can lead to innovation and higher employment levels. Currency Strength The value of the U.S. dollar compared to other foreign currencies such as the yuan, yen and the pound is important even for companies that do not import or export goods. Consumers have a choice to purchase goods or services originating in the United States or in other countries. If the U.S. dollar strengthens, companies in the industry that purchase inputs from other countries are able to be more competitive in pricing. In industries that are heavily reliant on foreign raw materials and processing, such as the clothing industry, the entire sector can be lifted or depressed with a strengthening or weakening of the dollar. Government Intervention Many industries are regulated by the government in one form or another. Government agencies such as the Environmental Protection Agency, the Food & Drug Administration or the U.S. Department of Agriculture maintain standards that all operators in an industry must follow for the safety of consumers, employees, or natural resources. Some industries are more heavily regulated than others and new laws and rules

7 October, Volume: III,Special Issue: X can shake up an entire industry and depress growth. For example, new child toy safety laws implemented under the Consumer Product Safety Improvement Act in 2009 threatened to wipe out many small toy producers as the requirements to test and certify the toys were cost-prohibitive to all but large toy manufacturers. Proposed changes to the Act may help alleviate the burden on small manufacturers and resellers. Environmental Impact Economic growth in an industry can be impacted not only by the environmental effect the products or services have but also by consumers' perceptions of that impact. For example, the market for fur apparel declined drastically over the course of a few years in the 1990s when consumers perceived that raising and killing small animals for their fur was both inhumane and a poor use of land. Although the industry is once again picking up with international demand, the number of fur farmers in the country has substantially declined. If the public views an industry's products or services as being harmful or unsafe, most companies within the sector can experience a marked decline in sales quickly. Overall Economic Health The economic state of the country and consumer confidence can also spur growth and development or harm it. In recessionary times, consumers begin limiting their purchases to the essentials, foregoing luxury or big-ticket items. Companies also scale back production, hiring and the development of new products and services to ensure that their finances can weather the storm. In periods of overall economic growth, these companies once again expand. The opposite is true in industries that deal in basic consumer goods that everyone needs regardless of the economy: food, diapers, and staple goods. Demand picks up for these necessities as consumers stock up on them and substitute basic goods for luxury goods (example: people buy more groceries to eat in rather than go to a

8 October, Volume: III,Special Issue: X restaurant). In inflationary times, the demand for staple goods declines as consumers can afford more luxury substitutes. Capital flows and the stock market of India This is important to note that in spite of suffering depression, an economy can grow if the capital inflow is constant or incessantly rising. In India even if the GDP rate is less, the currency can still get overvalued due to great capital inflows made by the FII s in the Indian economy. Global currency trends Like many other money Indian rupee have also tied its knot with some of the big economy of the world as well as the names of UK, US, Japan and Canada. The depreciation or approval in the currency any of these, especially in the US dollar, influences the valuation of the Indian currency in one way or the other. RBI Intervention The assessment of the Indian currency highly depends on RBI that manages the balance of payments, slight modification in which can define the over or the under assessment of the Indian currency. Oil factors India is a major importer of oil and the valuation of Indian money gets with no trouble exaggerated by the increase in the prices of the crude oil. Other factors growth rate of national income Inflation Budgets Infrastructure facilities Monsoon and agriculture

9 October, Volume: III,Special Issue: X Economic and political stability Savings and investment The tax structure Demographic factors like education, occupation, income level of people Challenges before Indian economy: Population explosion:the rising population is eating into the success of India. According to 2011 census of India, the population of India has crossed one billion and isgrowing at a rate of 2.11% approx. Such a vast population puts lots of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population. Poverty:As per records of National Planning Commission, 36 crore people are living below the poverty line in India in Unemployment:The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean. Rural Urban Divide:It is said that India lies in villages, even today when there is lots of talk going about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in pace of rural and urban growth. Unless there isn't a balanced development Indian economy cannot grow. Conclusion

10 October, Volume: III,Special Issue: X The Indian economy has entered a difficult phase of development. Whether one considers the immediate problems of the next financial year or the problems related to the rest of the plan period, the crucial task is to raise more resources, both internally and externally. Over the last two years, economic policies have been oriented more and more to the furtherance of this end, and the need is for a steady strengthening of this orientation. A developing economy has to reckon with a continuance of stresses and strains, and while adjustments in the plan have to be made in order to ensure stability and balance in the system, the essential objectives of the plan have to be safeguarded and pursued with unremitting vigour.