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 a extent.

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

Current Macroeconomics Issues and Policies in India By Tejas Fulmali, Roll Number 122030 March 2, 2013 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 articles resulting 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.

Current Macroeconomics Issues and Policies in India By Tejas Fulmali, Roll Number 122030 March 2, 2013

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.