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Smashed Up Indian Economy - Will It Be A Shining Star Again? The Real Mccoy

Posted in Finance Articles, Total Reads: 5556 , Published on July 20, 2014

Indian Rupee has broken every record and continues to plummet, Inflation is at its peak, economic growth is showing no propitious sign and Current Account Deficit has widened. Altogether, Indian Economy is in jeopardy. But the question is how long this situation will remain same? This is just a transitory problem or a permanent sign of sickness of economy?

From last few years, the ruling parties are promising for economic recovery and expecting it to happen in next quarter. But the wait has not yet get over. Indian economy has lost its path and is not moving towards positive direction. Inflation targeting has become the objective of India. India once a, shining star, is now in a phase of darkness. It is an alarming situation and the government should take measures to stabilize the darkening scenario. Not only, a single factor is responsible for this breakdown. The US Quantitative easing after the 2008 crash benefited almost every emerging market. India has also enjoyed the flow of easy money but it has misapprehended the boom as its own and in that period of boom also India hardly did any productive enhancing reform. The best time to repair roof is when the sun is shining bright. But Government missed the opportunity and now the dark clouds are looming over our economy.

Image Courtesy: freedigitalphotos.net, xedos4

Another factor contributing to breakdown of Indian economy is its dependence on FDI and FII to correct Current Account Deficit and on the other had foreign investors are pulling their money out because of fear of Indian equity market. There lies another fact that to import oil and gold, the demand for dollars is increasing day by day. As the CAD is increasing it is hitting the currency directly. On the other hand, the weakening of rupee is bringing smile to some faces, the sectors which have earnings in foreign exchange.

It is very shocking to notice that a nation whose more than half of the population is dependent on Agriculture is facing Agrarian crisis. Once the sector which was a major contributor in GDP is now losing its share. But on contrary, IT which contributes to India’s export has shown some positive sign and has also appreciated BSE IT by 38%.

India has currently some options to bring the economy back to the track but its not a surety that these measures will work. The first way is to make the government borrowings low so that CAD can also be reduced. Second is to let the currency decline further which can encourage export and brings the CAD down. But it will result in increased inflation and increased government borrowings. India can also attract foreign investments by increasing interest rates. But it can negatively hammer Indian industries. Country is on verge of collapse and the policy makers can only bring reform.

RBI has decided to ban currency notes prior to 2005.This decision will make a strong check on the currency hoarders of notes published before 2005.It will indirectly give a boost to GDP as people who have notes before 2005 will spend that money before 31st March 2014 and the black money present in the form of currency will also come out.

Indian economy is showing a positive momentum:

 Robust foreign exchange inflows.

 Strong regulated capital market.

 CAD has decreased.

 Key sectors contributing to economic growth have shown strong credit demand.

 Rupee has recovered from 68/dollar to 63/dollar.

 General elections will be over in first half of 2014.

 Interest rates are gradually coming off and it results in easing of financial condition.

 The recent decline in the Oil and Gold’s prices will also support recovery.

 RBI has raised repo rate by .25% in the third quarter monetary policy. As slowing down inflation is one of the best ways to promote growth.

“Equity market is the best mirror of economy of any nation” The Countries like USA, Russia, India, China and Brazil seemed to be in similar stage of economic development. From October 2008 to October 2013:

USA (Dow Jones Industrial average Index):35.81% appreciation

INDIA (CNX Nifty Index) 45.04% appreciation

CHINA (CSI 300 Index):7.37% appreciation

BRAZIL (BOVESPA Index): 4.55% appreciation

RUSSIA (MICEX Index):35.02% appreciation.

Apart from all negative indications, Nifty was anyhow sustained these conditions.

India need to stabilize its economy and it is still doing better than significant number of economies in the world.

“We invented money and we use it, yet we cannot understand its laws or control its actions. It has a life of its own.”

-Lionel Trilling, American Literary Critic.

This article has been authored by Ms.Komal Taneja, Asst. Prof. from JSSGIW-FOM,Bhopal



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