Indias Growth Policies and Strategies - Case Study Example

India’s Growth Policies and Strategies Name Institution Date India’s Growth Policies and Strategies Introduction It is the context and circumstances prevalent in any nation that should determine its policies and strategies of growth. This is supported by practical situations in countries and context of their operations as illustrated by researchers and analysts. According to Mahtaney (2010), China and India illustrate how policies and strategies in both developing and industrialized countries change with time. The Economic, political and social situations in a country affect its policy formulations and also change with the changing technology. The country’s context influences the kind of growth policies and goals it sets. A country whose operations are mainly in the global context is likely to implement strategies and policies that are in line with the general international policies and international trading policies. India reports an increasingly improved policies and performance over the years since 1980s when it gained independence. The current nutritional standards, education levels, literacy, per capita incomes and mortality rates are not the same in India compared to five years ago. As a result, the strategies and policies have also changed to cater for the future. This paper illustrates how the context and circumstances prevalent in India determines its policies and strategies of growth over the years. Strategies and policies after independence India as a country has long been known for outsourcing its services to other global companies especially in the clinical research sector. Krueger and Chinoy (2001) state that the economic situation in India after its independence led to the Indian government stressing on restricting imports while supporting other substitutes of imports so as to attain industrialization in the country. The trading system during that period involved more restrictions and lethargic growth in the country’s exports. Prevalent regulations by the government and extensive controls on the private sector threatened economic growth and efficiency attributed to the 1980s critical problems on the economic structure. After independence, policies and strategies implemented in India aimed at attaining a higher living standard for citizens and fast growth of the economy. According to Nehru (1958), India was below the standards of a developing country in terms of its per capita income. Policies and strategies aimed at attaining economic development were to be centralized as a matter of precedence. Leaders chose to implement Fabian socialism which recognized the need for faster development achieved through government’s economic activity and planning. The policies worked well since the economy was agricultural and three quarters of India’s population practiced agriculture, contributing to about 50% of the country’s Gross Domestic Product (GDP). Strategy in the first planning included a twenty five year strategy which tackled the low saving rate among many Indians. This targeted a 5% economic growth rate of the Indian economy which was appropriate and would be attained through increased saving rates to 20% (Chakravarty, 1987). Another strategy formed by the Indian government was a the 1957 to 1962 strategy which was meant to cater for five year period and applied through to the 1990s India’s economic development. Due to the state of the economy, the country’s context and situation, the plan aimed at development of education and infrastructure sectors. Rapid industrialization was still amongst the main targets for growth, mainlyin capital goods production. Policies were passed by the government for leading industries in the economy to be operated by the government while some were jointly owned and developed by both the government and the private sector. Policies governing private sector in the economy also provided for some industries to be developed by the sector towards industrialization. Government policies and strategies are also likely to be influenced by availability of externalities and demerit goods. In this case, the government implements policies to discourage consumer option of demerit goods and to correct the externalities by discouraging production processes from which the externalities arise. Demerit goods are goods that are viewed to be socially harmful such as cigarette and addictive drugs. For such goods government takes measure to discourage consumption especially through levy of taxes or legislation to discourage consumption. These measures institute policies of control. On the other side, merit goods are goods whose provision the society is encouraged most. Provision of such goods helps the economy to attain a high level of efficiency and contribute to achieving basic objectives of the society such as health and education. They have an overriding importance like precious lives may be lost, if health services are left to the forces of the market only. The state must supplement their availability. Encouraging production of merit goods means that policies are formulated and implemented. Therefore, change in policies and strategies. The 1991 Economic Crisis Another situation that influenced formulation of policies and strategies in India is the 1991 crisis in Balance of Payment where the exchange rate significantly depreciated. This resulted from overvaluation of Indian currency. This affected the interest rates, employment, GDP and economic growth just like the effects global financial crisis had on India in 2008 to 2009. To reform from the crisis, India government was forced to implement reforms so as to address the prevailing structural matters. Although there still exists a gap in the Indian economy to be filled by future initiatives after a slow implementation of structural reforms, they have also played a role in transforming the structural issues. Indian economy is characterized by faster growth, less controls on its economic activities and more liberalization in trade as a result of reforms implemented by the government (Bajpai, 2011). Economic and financial crisis affects the economy of a respective country and other countries globally. Such economic conditions might result to intervention of international organizations such as the International Monetary Fund (IMF) which influence the adjustment of a country’s policies thus solving the tragedy. IMF, World Bank and other international financial institutions play a major role in reviving such economies. India recorded a period of economic crisis in the year 1991 which posed a threat of possible economic meltdown to the economy of its states and globally. The financial crisis affected the exchange rates, employment and different economic sectors internally and externally (Jain, 1992). Maximum Social Advantage In implementing the principle of social advantage, governments adjust policies and strategies in different ways to attain it goal of achieving the functional role. The Principles of The principle is concerned with the level at which the government should operate which in turn is determined by its activities.The purpose is to design the policy and operations of the government so as to achieve maximum welfare for the economy.The principle assumes that all taxes drain away the economy’s resources, all public expenditures restore these resources of the economy and that the government revenue consists of only taxes and the government has no surplus or deficit budgets. According to the principle of social advantage, public expenditure is subject to diminishing marginal social benefit and the taxes are subject to increasing marginal social disability (cost).This implies that the government expenditure will be first directed towards those uses which are the most beneficial to the society and the taxes will drain away resources from those lines where they are least useful.As the government increases taxation and expenditure activities, the social benefit from each additional shilling spent falls while the dissatisfaction from each additional shilling taxed increases. A state is reached at which the rising marginal dissatisfaction of taxation becomes equal to the falling marginal social benefit of expenditure.At this stage, the government should stop expanding its activities. It is no longer beneficial to further expand the state activities because the social benefit of the marginal unit of public revenue operations is no longer larger than the corresponding social dissatisfaction.When this happens, restrictive economic policies must be employed. Reduce in government expenditure & increase in taxation leads to a decrease in purchasing power resulting in fall in effective aggregate demand(Bajpai, 2011). Fiscal instruments of Distribution Policy Fiscal and monetary policies are tools used by the government and a country’s central bank, implemented in the economy to correct economic conditions in case of changing economic variables such as employment, exchange rates and income level. Redistribution involves Employing a tax transfer scheme. Here a vertically progressive tax system is used to collect more taxes on income of high income households and using the money to subsidize low income households. The government can also institute a progressive tax system to finance public services such as medical, education, water or implement a sales tax, where taxes are collected on goods and services used by high income classes and funds raised are used to subsidize goods used by low income classes (Langdana, 2009). Fiscal policies play the role of stabilization where macro-economic policies are employed to maintain and achieve the goals of high employment, acceptable price stability, favorable balance of payment position, acceptable rate of economic growth and development.Economic policies are necessary because high rates of employment and low rate of inflation do not come up automatically in a free market economy. In fact changes in inflation rate are inversely related to rate of unemployment. Policies and strategies implemented during recession differ from those implemented during boom or depression. Venugopal (2007) states that during a recession period, supply of more money for use in demand should be increased so as to increase production (output) hence rise in employment.For any given period the level of expenditure or aggregate demand may not be sufficient to secure full employment of labor and other factors of production. When this happens expansionary economic policies must be made to stimulate the economy such as increase government expenditure and reduce taxes. During boom period, when aggregate demand is greater than aggregate supply (level of output) employment level is high in boom period and inflationary pressure is also high. In an economy with depressed growth due to less development, the government increase money supply to boost growth through investment and reduced hoarding. This can be attained through reduced discount rates, purchasing of government assets through open market operations and setting a minimum reserve ratio. Discount rate of interest Central Bank charges for the loans that it issues to commercial banks when the latter approach it as a measure of last resort. A decrease makes it cheaper for the banks toborrow from it and results to money supply expansion. Commercial banks hardly utilize this tool for fear of being audited by the Central Bank. Open market operations involves buying and selling of government securities by the Central Bank. To expand the money supply, the bank buys bonds whereas to contract the money supply the Central Banks sells bonds. Minimum ratio of reserves to deposits requires that a bank must have reserves earn no interest and hence banking hold as little as possible, yet the objective of these commercial institutions is to maximize profits. By changing reserve requirements, the central bank can increase or decrease the money supply. If increased money supply, contracts and vice versa. The reserve requirement ratio influences the bank money multiplier and hence the process of credit creation (Langdana, 2009). Price Policies Circumstances in a country alsoinclude the economic demands of different items. For example in a perfect market, prices of commodities and services are set by forces of demand and supply. The economic situation in Pradesh India led to formulation of supply adjusting policies by the government. According to an article in The Economic times published on 2nd July 2013, the demand for solar power by companies in Andhra Pradesh, India has recently increased. The article indicates that the government received a bid from a total of thirty five companies in the country. This indicates that more companies are willing and able to buy solar power. Increase in demand however leads to an increase in price level (The Economic Times, 2013). Policies and strategies formulated and implemented in this case will aim at increasing supply so as to cater for the increased demand.Increased prices will also attract suppliers who are attracted by increasing supply in the market. The bidders have agreed to purchase at Rs 6.49 per unit so as to bridge the existing gap between demand of the solar power and its supply. Increase in demand results to effects on price and quantity. In order for the gap to be filled, supply has to be increased to meet the raised demand. Andhra Pradesh government has instituted plans to accelerate the installation process so as to meet the increased demand of solar power. When the government plan is executed and supply increases, it will also have effects in the general market (Chauhan, 2009). The changes will occur as shown below. Price S0 S1 P1 P0 D1 D0 Q0 Q1 Q2 Quantity Conclusion It is true that the context and circumstances prevalent in any nation should determine its policies and strategies of growth. The situations, strategies and policies in India are an illustration of the statement. Control policies and a nation’s strategies are targeted to a prevailing situation in the economy so as to encourage or solve the problem. Fiscal and monetary policies are a major tool for controlling supply of money in the economy and economic growth IMF serves as the bull dozer for the nations suffering financial crisis by developing strategies to revive them. Many countries learn from the India economic crisis and as a result, they have developed strategies to void overvaluation of currency. References Piya, M., & Institute of Southeast Asian Studies. (2010). India, China and globalization: The emerging superpowers and the future of economic development. Singapore: Insitutute of Southeast Asian Studies (ISEAS. Nehru, J, l958, Toward Freedom (first published in l94l), paperback edition, Beacon Press, Boston Organization for Economic Cooperation and Development (OECD) Development Center, (1967) Population of Less Developed Countries, OECD, Paris, August. Chakravarty, Sukhamoy, l987. Development Planning.The Indian Experience. Oxford University press. Oxford The Economic times. (2013). Demand and supply: Andhra Pradesh receives 35 bids for solar power projects. Retrieved from: http://articles.economictimes.indiatimes.com/keyword/supply-and-demand/featured/3 Chauhan, S. P. S. (2009). Microeconomics: An advanced treatise. New Delhi: PHI Learning. Venugopal, K. R. (2007). Fiscal and monetary reforms in India.S.l.: I.K. International Publ. House. Jain, P. C. (1992). India's economic crisis: Diagnosis and treatment. New Delhi: Concept Pub. Co. Bajpai, N. (2011). Global Financial Crisis, its Impact on India and the Policy Response. Colombia global centers Krueger, A. O. and Chinoy, S. (2001). Center for research on economic development and policy reform. Stanford university press Langdana, F. K. (2009). Macroeconomic policy: Demystifying monetary and fiscal policy. New York: Springer. Read More