{"id":34909,"date":"2018-10-31T14:23:04","date_gmt":"2018-10-31T08:53:04","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=34909"},"modified":"2018-10-31T14:23:04","modified_gmt":"2018-10-31T08:53:04","slug":"indias-imminent-economic-crisis","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/indias-imminent-economic-crisis\/","title":{"rendered":"India\u2019s imminent economic crisis:\u00a0"},"content":{"rendered":"<p><a href=\"http:\/\/www.livemint.com\/Opinion\/qGkDXHLGfDCP1EjoVCx3rJ\/Indias-imminent-economic-crisis.html\"><span style=\"font-weight: 400;\">India\u2019s imminent economic crisis<\/span><\/a><span style=\"font-weight: 400;\">:\u00a0<\/span><\/p>\n<p><b>Context<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">There is a need to undertake meaningful structural reforms and loosen monetary and exchange rate policy. We need not have a tighter fiscal and monetary policy.<\/span><\/li>\n<\/ul>\n<p><b>Need for macroeconomic management<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Poor macroeconomic management, both by the central bank and political regimes over the past several years, is leading India toward an imminent vicious cycle of low growth and high inflation, making it exceedingly vulnerable to emerging domestic and geopolitical risks.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The low growth-high inflation scenario will lead to higher fiscal and current account deficits, consequent capital outflows, a weaker currency and a lack of confidence in the economy among investors.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The authorities need to undertake meaningful structural reforms and loosen monetary and exchange rate policy at the earliest to arrest the decline before it culminates in an external and financial crisis.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A loose fiscal policy (increased government expenditure) at this juncture with a likely low fiscal multiplier would be counterproductive and accelerate the pace of economic decline.<\/span><\/li>\n<\/ul>\n<p><b>Economic growth in India: Statistics<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Economic growth in India has likely been lower than the 7% rate that has been estimated by the Central Statistical Authority for the past two-three years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A sustained 7% gross domestic product (GDP) growth has been inconsistent with other major indicators, including credit, investment, index of industrial production, and exports growth slowing for at least the past four years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A slower 5.7% official GDP growth in 2QFY18 is therefore not surprising.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Amongst other flaws, value added in manufacturing, which has been consistently significantly higher than other indicators would suggest, is arrived at from a corporate financial database maintained by the ministry of corporate affairs.<\/span><\/li>\n<\/ul>\n<p><b>Real measure of Economic growth<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Economic output and growth depend mainly on productivity growth and on increases in labor and capital; most commentators mistakenly tend to focus instead on the uses of this output &#8211; consumption, investment and exports.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Productivity growth, the main driver of growth, depends on structural reforms that would require better institutions and improving human skills.<\/span><\/li>\n<\/ul>\n<p><b>Need for structural reforms<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Structural reforms are reforms aimed at changing the structure of the economy to make it more market-oriented, and consequently efficient and productive.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">India needs to focus on reforms in several areas &#8211; liberalizing markets, legal, civil service, tax structure, financial sector, education, and labour, amongst others.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">In competitive markets, any price different from the market-determined one (e.g. controls such as minimum or maximum prices) leads to a decline in output, ensuring reduced GDP.<\/span><\/li>\n<\/ul>\n<p><b>How to foster higher economic growth and job creation?<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">To foster higher economic growth and job creation, the authorities need to focus on productivity enhancing structural reforms that would encourage the private sector\u2014domestic and foreign\u2014to invest in India.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The innumerable controls on markets and administered prices need to be freed up, including food and agricultural prices, water, electricity, pharmaceuticals, fertilizers, seeds and railways, amongst others that reduce output and lead to a misallocation of resources.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The direct tax structure needs to be simple and transparent with retrospective taxes eliminated.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Public sector banks need to be recapitalized and privatized.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The education system needs to be opened up to investors\u2014domestic and foreign\u2014as a profit-making sector, both at the school and higher education levels. These are minimal measures to attract investments.<\/span><\/li>\n<\/ul>\n<p><b>Role of RBI<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The tight monetary policy of high interest rates and overvalued exchange rate have been damaging to the economy.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The insistence of the Reserve Bank of India (RBI) to engage in foreign exchange market intervention to maintain an overvalued currency has encouraged further volatile debt inflows.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">This has increased India\u2019s external vulnerability and inhibited financial markets development.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">RBI\u2019s high interest rate and overvalued exchange rate policy has hurt credit growth, especially to industry, hurt firm-level debt sustainability and in turn bank balance sheets, and damaged exports and domestic industry further via cheaper imports.<\/span><\/li>\n<\/ul>\n<p><b>Misguided fiscal policy<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Fiscal policy has been unimaginative and a tighter fiscal policy with tight monetary policy has meant no policy support for growth over the past several years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Tax policy has mainly been one of raising tax rates &#8211; excise duties on petrol and diesel mainly and service tax rates that have increased from 12% to 18% over the last three years.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Little effort has been made to simplify tax rules; indeed, the new goods and services tax structure with multiple rates is the most complicated globally. This structure with a smattering of controls has kept money out of India.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Statistics: The fiscal multiplier is low; around 0.3 for emerging economies, according to some estimates. This means an increased fiscal expenditure of Rs40,000 crore (0.3% of GDP) being mentioned in the press would yield a negligible additional growth of 0.1% to GDP, raising growth from 5.7% to 5.8%.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The costs of this misguided fiscal expansion (government expenditure) could be significantly high.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">It would not lead to sustainable growth or increased investments from the private sector.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The larger fiscal deficit, along with slowing growth reducing tax revenue, and a consequent worsening fiscal situation would lead to more borrowing from the RBI.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The deteriorating economic situation would lead to capital outflows, slowing the economy further, and draining liquidity from the system and raising interest rates, further dampening economic growth.<\/span><\/li>\n<\/ul>\n<p><b>Way forward<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The government needs to undertake structural reforms on a war-footing to encourage investments to grow the economy and increase revenue growth.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Interest rates need to be reduced by the RBI.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Misadventures such as expansionary fiscal policy will not be sustainable and will lead to low growth, higher fiscal deficit, high inflation, less competitiveness which would trigger capital outflows and lead to an external and also a financial crisis if financial sector weaknesses are not addressed.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>India\u2019s imminent economic crisis:\u00a0 Context There is a need to undertake meaningful structural reforms and loosen monetary and exchange rate policy. We need not have a tighter fiscal and monetary policy. Need for macroeconomic management Poor macroeconomic management, both by the central bank and political regimes over the past several years, is leading India toward&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/indias-imminent-economic-crisis\/\">Continue reading <span class=\"screen-reader-text\">India\u2019s imminent economic crisis:\u00a0<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-34909","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704816860},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34909","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=34909"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/34909\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=34909"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=34909"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=34909"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}