Economics Assignment 2
The Indian Economy
The Indian Economy is currently experiencing strong growth adverse to difficulties witnessed after the global financial crisis. Current GDP levels at approximately $1.5 US Dollars as the fifth largest economy in the world. The aim of this paper is to address macroeconomic conditions that may affect India’s ability to maintain high levels of growth. Monetary and Fiscal policy have been analysed and recommendations made to manage inflation, employment and debt. Tax increases on higher earners and other possible consumption taxes would slow aggregate demand but allow government to increase its spending. Inflationary pressures are as a result of the economy not being able to meet supply requirements and investment in agricultural practise and increase in the manufacturing sector should assist in reducing inflation which is 11.7%. This will also have positive effects on employment which will allow India to reach higher levels of GDP in the long term. Other areas of long term planning will be for improved and widespread access to education and move people into the services sector which currently employs only 34% of people compared with 52% in agriculture and 14% in manufacturing. In the short term the migration of workers from agriculture into manufacturing is a possibility. Diversion of higher taxes to reduce debt levels sitting at 55.9% and long term increase in employment would also fund the ability to service debt. Exchange rates are also a focus for government. If the economy is to generate more manufacturing it should be able to export higher levels and encourage further growth in the sector. Services such as IT exports are also extremely important as a large employment base and a significant portion of private consumption is generated from the middle and high income brackets. Keeping the Rupee at globally competitive levels to keep exports attractive is therefore important.
This paper will highlight economic issues facing the Indian Government and its ability to maintain high levels of growth by outlining the current conditions of the economy. Policy dilemmas and logic to address these dilemmas will be explored. Analysis of key indicators and statistics as well historical reference and the theory behind their execution will underlay chosen policies which will be followed by a brief conclusion.
2. The Indian Economy
The Indian Economy is listed as the fifth largest in the world at $1.538 trillion US (CIA 2010) and has been able to continue high GDP growth despite the Global Financial Crisis. The country has also moved along a steady path of economic reform and liberalisation since 1990 including privatisation and foreign investment. India is a ‘planned’ economy which follows a series of targets for each five year period, the Eleventh Five-Year plan (Planning Commission (Government of India) 2007) ending in 2012 aimed to increase and maintain growth at 10% (to double by 2017), create new employment for 70 million people, raise real wages for unskilled workers and consider education and infrastructure. The next five year plan needs to consider economic factors below that may restrict the high levels of growth. There is also an emergence of a two-speed economy emanating between the service sectors employed middle and high income earners with those in agriculture and manufacturing (FitzGerald 2011). Figure 2.1 (TradingEconomics.com 2011)
Figure 2.1 shows India’s strong trend for growth since 2002 and despite a small decrease in growth rate following the Global Financial Crisis in 2008, a major policy issue therefore is maintaining strong economic prosperity. The government has to consider several factors that are a risk to this aim such as a large budget deficit, high inflation and unemployment, all shown in figure 2.2.
| of GDP
| Increase per Year...
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