Increasing Inflation & Corruption in the Indian Growing Economy - Research Paper Example

India, has witnessed phenomenal growth in the last two decades. In the year 1992, then finance minister of India Mr. Manmohan Singh ( now Prime Minister ) heralded a well thought-out approach to liberalization. Initiated in the year 1992, Indian reform policy was considered to be conservative & invited criticism by developed countries,. India was a closed economy, till then. Journey, embarked by this great nation, largest democracy by virtue of population, has fueled the growth of World Economy, as more developed nations are coming to a stand-still. It was a tumultuous decade for Global Economy, may many European economies shrink USA was in the grip of worst recession since the great-depression, however Indian economy did not have much of a rough ride as we shall see later in this document, along with few other developing economies, viz Brazil & China. In this paper, we will attempt to understand & analyze Macroeconomic factors and their affect on Indian diaspora, positive & negative both included. While discussing, the fiscal & monetary policy, we shall examine sequence of events, that eventually led India to follow the path of economic reforms. Also, interestingly Government shifting its stance from an investor, to being an efficient regulator attracting huge amounts of foreign money in investments. It is also important to understand, the influences of key factors that define India, such as huge population, an increasingly educated workforce, & a conscious shift to services sectors from agriculture, that is helping India to script a growth story of its own. There is increasingly huge demand for investments in Infrastructure, Education & Healthcare. Briefly, this paper will also attempt to examine increasing inflation & corruption in this growing economy, followed by concluding remarks. As we discuss, macroeconomic policy in detail, let us review few key aspects of Indias story : 1. GDP growth rate : ( figure: 1 ) If one were to look at the GDP growth rate, in the decade of 1970s, India had a dismal growth rate of less than 3 %. It started to show early signs of improvement in the decade of 80s, with GDP increasing at a rate of 5.6 % to 5.8%. However during the post liberalization era, that is in the decade 1992-2001, India grew at 6.1%. Last 5 years have seen a phenomenal growth as shown in the graph above, except for the small dent of 6.7% in the year 2008-09, while the world at the brink of deep-recession. India is expected to grow by at-least by 6% for next 45 years . 2. Population : (figure :2) Indias population is growing at a burgeoning speed. It currently hosts to 1.16 Billion people, second only to China. It is expected that between 2010-2030, India will add 241 Million people to working-age population , Brazil will add around 18 million, while China will add a meager 10 million people during the same time. While countries like Russia & Japan will spiral downwards with decrease in working-age population by 17 Million & 13 Million respectively . 3. Foreign Institutional Investors : India is seeing a huge amount being invested by foreign investors in Stock Market, Banking, Infrastructure, Energy & other high growth areas. In the year 1993, the very first year Indian markets were opened to FII, investment was US$ 827 Million . The very next year in 1994, investment increased thrice to US$ 2.16 Billion. During January to June 2010, FIIs have already invested US$ 6. 9 Billion. Thus, proving the fact that there are many growth opportunities in India, in the coming years. 4. Foreign Debt : Despite of its growth trajectory, Indian economy is highly in debt. In the year 2007, India was fifth most indebted country, as per an international comparison of 20 most indebted countries. India’s external debt, as at end-March 2009, was at US $ 229.9 billion (22.0 per cent of GDP) recording an increase of US $ 5.3 billion. The debt service ratio has declined steadily over the years, and stood at 4.6 per cent as at end-March 2009. Shifts and Price Elasticity of Supply & Demand Let us examine, shifts and price elasticity of supply & demand considering select food items for the purpose of our discussion . Projected domestic supply of selected food items Supply-Demand gap for selected food items ( figure : 3) ( figure: 4 ) Figures above present supply and demand trends of select food items, viz, rice, wheat, total cereals, pulses, edible oil and sugar & provides projections for food items during 2011, 2021 and 2026. These projections have been based on change in productivity levels, changes in price, growth of population and income growth. Due to growth in population and per capita income, India will see an increase in total demand. Consumption patterns too vary with income level, as increase of income is inversely proportional to consumption of cereals. On the production side, low yield growths are constraining the supply . This is more specific in context of total cereals and sugarcane. While there might be surplus of cereals in the country in the short and medium term, these prospects are likely to diminish in the years to come. This situation is more alarming for edible oil, sugarcane and pulses. To meet the future food requirements, India will have to either increase agricultural production, or depend on imports. In this light, policy focus needs to be laid, towards productivity enhancement in agriculture, through public investment in irrigation, development of roads, research and extension. Fiscal Policy of India : our phase During the 1950s and 1960s, the objective of economic policy was mainly to increase the growth rate of the economy through increased public investment . Government used taxation as an instrument to reduce private consumption, while Government undertook large-scale public investment in an effort to spur economic growth. The objective of fiscal policy during the 1970s was focused on achieving greater equity & social justice. Hence, income tax rates were raised to very high levels, with income tax moving up to 97 % for maximum rate, & by adding wealth tax, it even crossed 100 %. Indian public finances were in a state of chaos & confusion during 1980s. A state of destabilization existed between the economy and the budget. Resulting in heavy deficits . Though the growth rate was rising considerably due to increased in public investment in infrastructure, however growth became unsustainable due to fiscal deterioration that took place during the 1980s. Deteriorating fiscal situation, necessitated a sense of urgency in reforming Government administration & fiscal policy, to arrest the steady increase of financial deficit. Thus, since beginning of 1992, Government slowly & steadily reformed Indian economy, leading to its current state of stability & growth. Monetary Policy of India : As a recognition & response of the payment crisis due to the fiscal imbalance in the year 1990-91, fundamental changes were made to monetary policy in India. Adjustments were made to the operating framework & choice of instruments, clearly recognizing the hierarchy of objectives . Phases of INR Exchange Rate Regime For-ex Reserves in last few years ( figure: 5 ) ( figure : 6 ) During the early years of transition & transformation in 1990s, monetary policy performed the role of anchor. Tight monetary control set the stage for fiscal stabilization and consolidation and a wide range of reforms encompassing the real, financial and external sectors of the economy. In addition, the setting of monetary policy had to adapt to the new challenges being thrown up by the reform process. First, the diffusion of financial sector reforms was altering the processes of financial inter-mediation and the channels of policy transmission. Second, progressive international integration of the economy as a part of reforms was increasingly subjecting the conduct of monetary policy to exogenous influences from the external environment. Income Distribution : Decline in poverty was witnessed in 1980s, due to modest growth. Immediately, after introducing reforms in 1990s, there was a slight increase in poverty levels, albeit temporary. However, post-reforms period have witnessed a significant growth & poverty has subsequently declined as suggested by research carried out by Shatakshee Dhongde. Decomposition of the Change in Poverty Levels for All-India ( figure : 7 ) In the post-reform period, it is important to note that not only did the head count ratio decline but the poverty gap and the squared poverty gap also declined. In fact, the percentage decline in the poverty gap (40% in the rural sector and 36% in the urban sector) and the squared poverty gap (47% in the rural sector and 45% in the urban sector) was larger than the percentage decline in poverty as the head count ratio (30% in the rural sector and 25% in the urban sector). This indicates that growth promoted by the reforms did reach the poorest of the poor. A rise in the mean income level pulled the poor closer to the benchmark poverty line income level. Labor Markets : As we have seen, India has a large working-age population. Skilled, Semi-Skilled & also Non-Skilled labor is hugely available. Thus availability of labor has not impacted growth rate. However, other factors such as high inflation rates, migration of families from rural areas to cities have warranted increase of wages. Due to flocking of rural & semi-urban population to Metro & Non-Metros, Cities are carrying a huge burden of permanent & floating population. This has caused sharp increase in the rise of real estate prices & also subsequently increased cost of livings. There is also a huge demand for English-speaking , technology skilled man power to work in Information Technology companies & other services companies. It will be safe to say, currently there is no dearth of labor, however there is hardly any regulation & control of labor, payment of wages & safety of employees, though there is minimum wage policy . Economic Affects on India 1. Occupation : ( figure: 8 ) ( figure: 9 ) India primarily is an agrarian country. 65 % of Indian population was totally dependent on agriculture in the year 2005 , while that percentage has reduced to 58.5 % , as per the latest data made available by Government of India. It should be remembered that Indias population is 1.16 Billion , second largest in the world, only next to china. As suggested by figure 8, 65% of population contributed only 18% to the GDP growth, while figure 9, captures the generic shift happening in the occupation young Indians are choosing. Thanks largely to Outsourcing phenomena, more people are opting for the services sector compared to agriculture. It is a known fact that returns in agriculture, are minimalistic once compared with jobs in Technology companies & also with mushrooming of BPO (Business Process Outsourcing) , KPO (Knowledge Process Outsourcing). 2. Education : (figure :10) As India is maturing into a Knowledge Economy, education has gained a greater emphasis in post-reforms period. Though only 10.7 % of Government spending goes into education, private players have been encouraged in recent years to setup degree colleges & universities. (figure : 11) It is evident from figure 11, that literacy levels have increased considerably in past two decades. A comparison shows that 81.1 % of youth are literate as compared to 61.9 % in the year 1991, as per data available. However difference in literacy rates of male & female should be noted. Girls or female population is less educated, compared to Males. 3. Investment in Infrastructure : Indian Government has planned to spend an estimated US $ 567.2 Billion, over the course of 5 years , beginning 2009. It is critical for India to invest in Infrastructure developments, to keep up pace with the increasing demands of business & keep attracting foreign investments 4. Spending on Health : Healthcare, by & large has been neglected. However, with increasing income levels & awareness, an increased spending is visible in healthcare. Current growth in healthcare is 16%, with 80% spending in the private sector. Healthcare spending to increase to 22% by 2012, approximately 6% of Countrys GDP . 5. Inflation : With the positives of growth in GDP ,India also has high inflation rates. ( figure : 12) India traditionally has maintained inflation rates between 5 & 6. However in the past two years, inflation has increased owing to increased prices & subsequently deregulation of Gas and also owing to demand due to increase in purchasing power . 6. Rampant Corruption : India has been in thick of controversies in past few months due to alleged financial scams, involving federal & state ministers. As the size of economy is increasing, so is the amount of financial irregularities. As per an Central Auditors report, in a recent scam involving telecom minister, India lost US $ 40 Billion in exchequer, due to inconsistent policy in the allotment of 2G spectrum, to telecom service providers. Another state minister had to resign due to his alleged involvement in authorizing defense lands to construct illegal apartments, that were distributed to his family members. Similarly, reports of illegal mining, selling of government lands on minimalistic pricing to family members and other cases of cheating & irregularities are regularly reported in Indian Media. Conclusion : India is worlds largest democracy & second most populous country, that is fast emerging as a global power. It is the most stable nation in South Asia & commands respect from its neighbors. India has a strong military & robust government. As most of the development happens in Asian continent, India will continue to grow at astounding pace. In the coming years, India has to assert itself, not only as a economic power, but also as a responsible country, contributing to the Global Economy. There are many challenges India, as a country has to overcome, especially in infrastructure, effective corporate policy & efficient governance. References : 1. Pawar, Sharad. Financial Express : http://www.financialexpress.com/news/story/159383/ , 2005 2. National Portal Content Management Team. Indian Govt Portal http://india.gov.in/sectors/agriculture/index.php, Reviewed on: 16-09-201 3. World Bank, World Development Indicators . Google Public Data :www.google.com/publicdata 4. Unesco Statistics Institue . http://stats.uis.unesco.org/unesco/TableViewer/document.aspx?ReportId=121&IF_Language=eng&BR_Country=3560 . 2008 5. Healthcare in India 2007: Emerging market reports http://www.pwc.com/en_GX/gx/healthcare/pdf/emerging-market-report-hc-in-india.pdf 6. Prabhudesai, Arun. India’s Young Population: Its biggest asset ! http://trak.in/tags/business/2010/03/02/india-young-population/ . 2010 8. FII Investment Trends 1992-1998, http://www.sebi.gov.in/FIITrends1993.html 9. “India’s External Debt as at the end of March 2009” http://www.rbi.org.in/scripts/bs_pressreleasedisplay.aspx?prid=20940 10. Mohan, Rakesh . Asian Econonmy Policy Review Conference . April 2008 . http://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=405 11. Shatakshee Dhongde, “Measuring the Impact of Growth and Income Distribution on Poverty in India”. University of California , July 30, 2004. Read More