Current Macroeconomics Issues and Policies in India –

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Current Macroeconomics Issues and Policies in India By Tejas Fulmali, Roll Number

122030

March 2, 2013

Indias GDP had been growing at a rate of 9 % during the period of 2008-2011 and it was a

path of competing with China to become one of the super powers in the world. Indias

economy was thriving propelling it in the league of the few developing nations. But over the

period of few years, Indias growth has reduced and reached to a low of 6.5 % in the year

2012 and as per the CRISIL Research is expected to grow at 6.7% in the current year.

One has to ask questions as to why there was a drop in the Indias GDP rate. Whether this

was the effect of the international crisis in 2008 or whether the drop in the GDP was due to

internal reasons. What happened in these two years that impacted the economy to such aextent.

One of the reason key reason for the slowdown in the economy was the leadership crisis faced

at the centre. The government was not ready to take strict reforms to make the atmosphere

conducive for the economy to grow. It lacked any power to influence the other players in the

situation nor was it determined to take the economy ahead. It was under the coalition politics

that the whole blame game was directed towards. The party at the centre was unable to form

an opinion of its own resulting in no tough reforms being passed. Also people are not engaged

when it came to decision making so that there was some sort of paralysis. Also with the spur

in the corruption cases were on the rise resulting in a poor image of the centre in front of the

world. As a result, the government concentrated on savings its face than concentrating on the

activities for the over all development of the economy.

The second key problem that Indias economy faced was of high fiscal deficit. Fiscal deficit

arises when the government spending is more than the revenues it earns over a period of time.

The government had a been given a fiscal defecit target of 5.3 % in the year 2013. In the year

2012, the fiscal deficit increased to a great extent due to the continue subsidy to diesel and

unability to attract foreign investors as well as its various policy for economic and social

development. These policies ensured that the fiscal deficit was on a rise throughout the first

three quarters. Owing to the pressure from the rating companies that would threatened to

downgrade Indias rating from stable to negative, Mr. P. Chidambaram took many measures

and turned around the deficit to surplus in the last quarter of the financial year 2012. Foreign


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direct investment in retail and civil aviation was introduced to attract new capital inflow in the

country. Also subsidy on diesel was reduced giving the state government a say to increase the

price of diesel. The finance minister also cut the expenditure of the government when it came

to travelling and conference. This being a short term decision, the impact of this on the fiscal

deficit cannot be considered seriously. Also, during the same period the government has

reduced the subsidies and payments it issues in the social and government schemes to bring

about the surplus.

(India's Fiscal defecit a pleasant suprise)

The third key problem that the Indian economy face during the current period was high

inflation. The period was dominated with high prices of pulses, fruits and food articlesresulting in the inflation touching double digits. Also the increase in the price of the diesel

further aggravated the inflation. The rise in the prices of food inflation was due to fact that

there were draught like conditions in India and also, government procured the food grains

aggressively in order to implement the food security bill in the future. This two reasons, the

lower production along with heavy procurement drove the food prices up.

The fourth key problem that the Indian economy is facing is Rupee depreciation. Indian

Rupee has devalued by more than 20% in a short span of time owing to a huge trade deficit,

low capital inflow, high current account deficit, devaluation pressure, low growth and high

inflation and rupee speculation. The huge trade deficit was owing to the fact that the imports

outweighed the imports. The rise in the crude prices did not Indias case further. Also since

the exports couldnt match up with the imports resulting in a trade deficit. The low capital

inflow was owing to fact that the foreign direct investments were not coming in the country

even though the country was considered an attractive destination. The policy paralysis and

Indias commitment to economic reforms were considered as one of the factors because of

which foreign direct investment was not willing to come in India. Also, because of the

devaluation pressure further pushed the rupee down. The importers scrambled for dollars

whereas the exporters couldnt bring in more dollars as the rupee was expected to fall. This

led to a continuous pressure on the rupee. Also, the low growth and high inflation rates and

economic crisis in the investors countries have resulted in money being pulled out of the

economy fuelling the fall in the rupee. Also, the failure of the Reserve Bank of India to crub

the fall in rupee has resulted in the devaluation of the rupee to a further extent.


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The area of improvement to increase the investment and economic efficiency is by opting for

Goods and Service Tax on all tradable goods and services. India currently has an indirect tax

system, which sometimes results in the double taxation and divides the country in 35 states

and union territories, which do not have uniform taxation system, giving the players in the

state benefit that have low taxes. The introduction of Goods and Service tax would not only

increase the competiveness and growth but also would reduce the cost of production of goods

and services. It would also increase the government revenue of the central and state

government helping the company in its deficit.

Therefore, with bold reforms in the field of foreign direct investment and civil aviation and

also the introduction of Goods and Services Tax would definitely encourage the foreign

players to pump in money in the economy that would not only ease some pressure on the

currency but will also help it sustain in the long run.

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Current Macroeconomics Issues and Policies in India –