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Economic condition of India going downhill, with the Government sitting by and letting it happen ..




Major economies such as countries in Europe and the United States are going through a major upheaval, with a strange combination of low rates of economic growth, low interest rates, as well as high deficits. These high deficits have prompted pushes for austerity measures and other means of reducing the debts; which is contrary to the conventional wisdom whereby Governments pump in huge sums of money for schemes so that they can try to force employment, and thus try to kick-start growth. However, with huge debts, Governments are not able to do such measures, and consequently, global economic growth is slow, with few exceptions – China and India are the notable exceptions, with China having the larger growth rate, but India also having a decent 8%+ growth rate. Well, make that 7%+ now.
And this is the main problem. The current Government has, over the past couple of decades, inherited an economy that just needs more decontrol and it will keep on growing. However, for all those who say that India is fast ahead on the path to a high degree of liberalization, a review of the past 2 years shows the extent of the impact that Government policies have on the market.
Inflation is a terrifying word, having a huge impact on politicians as well as the citizenry of the country. For normal citizens, or the ‘aam admi’ in Congress speak, a high rate of inflation means that items they have taken for granted suddenly become more difficult to get. This could mean that driving a car gets difficult for those who have to travel long distances because of higher fuel prices, or families have to suddenly start thinking whether they can afford to take the holiday (either domestic or international), or families have to start wondering whether they can still afford to enjoy fruit or meat to the same extent that they used to, and so on. Inflation, when you consider the high levels of inflation that have been ongoing for the past several years, wreak a tremendous impact on families, sending those on the edge right into the poverty line.

There is a lot of debate about what causes inflation. A lot of serious people claim that prices of food items are high the world over, so what can the Government do ? Well, inflation is due to either a high amount of money being pumped into the system, or a contraction in the food supply, or a combination of both. And it is true that the Government has been pumping a huge amount of money into the system, whether that be through job schemes or through loan waivers, or through the large number of subsidies that the Government keeps in place to support its various populist schemes. If the Government was able to ensure that these funds went to the required people, then it would not be so bad, since that would lead to the economic development of a large number of people.
However, ensuring that development reaches the targeted people requires a huge amount of effort, and it is the kind of work that is actual real work, not the new scheme launching work, or the other populist work. The Government does not really seem to be upto this kind of audit work to ensure that schemes reach the desired people; it is only NGO’s and some concerned officials who seem to be interested in ensuring that money reaches the right people. A lot of the money is diverted away, and a lot of this money finds its way into actually increasing the money supply in the economy, and stoking the fire of inflation. Diversion means that more funds are required, which in turn increases the amount of funds budgeted. Now, this is real money, not paper money. This real money puts pressure on inflation.
Now, on the supply side. India, for economies of this size, has one of the largest wastage in its agricultural industry, with vegetables and fruits getting rotten upto 1/3rd of total production (and these are one of the most impacted in terms of inflation). There has been not been much effort in setting up the logistics of an improved supply chain, which would reduce the amount of waste and get more money to the growers. And if the Government was serious about improving this, they would have started a discussion about FDI and let farmers union drive this discussion, since farmers recognize that they stand to benefit from FDI and would have managed to swing most political parties their way. Yet, they went through this in the most ham handed way. There are many other examples, but the net result is that the Government is seen to have lost its way, and stopped the process of reform altogether. Now, with genuine reform stopped, the Government will most likely start populist measures, again without a strong mechanism that would ensure that leakage is stopped.
And now where are we ? Inflation rates are still high, the high amount of corruption has incensed the citizenry and stopped a bureaucracy which takes the lead from its political masters. The RBI believed that only a continuous increase in interest rates would stifle inflation; but for the case where the inflation rate was also driven from supply side issues, the interest rate increases throttled industries of working capital and has led to a reduction in growth rates. The Government deficit is going to be much higher, which will lead to a downgrade of the economy, the inflation rate is mostly beyond the control of the Government, reform is almost down, and yet the Government believes that everything is fine. Not good times.




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