The Recent Development of India by Komilla Chadha

India has performed consistently well in relation to developed countries like UK so

far as GDP is concerned. In the last five years the lowest GDP India has ever
experienced was 5.8% (2009), this is spectacular given the ongoing global
recession in this period. However, factors limiting India’s economic growth still
exist and in this report we will look at two strategies used to promote growth and
counteract these factors.
!
One of the most common problem with all developing countries not just India, is
poor infrastructure. Developing countries aren’t typically able to afford new
machinery or invest in other forms of infrastructure e.g. roads. India is one of the
countries more adversely affected ranking 86th out of 139 for quality of overall
infrastructure below China (50th) and Brazil (62nd). According to one source, the
agricultural industry itself loses 500,000,000,000 Rupees (£6,846,690,915) a year
due to a lack of adequate post harvest infrastructure. Unless India meets its needs
it will struggle to achieve above 9% GDP if infrastructure is not improved.

As a result, the Indian government has opened ‘Infrastructure Debt Fund’ which is
created using contributions from insurance companies, pensions funds, foreign
funds, sovereign wealth funds and big banks. This will allow money to be spent on
infrastructure over a long period and meet the USD $500 billion infrastructure
needs of the country. The fund will provide money to firms to pay their debts to the
banks and open a tide of fresh loans to businesses. However, it seems that many
large domestic agencies are reluctant to participate in this scheme and given that
the funds will only be provided to PPPs (Public Private Partnerships) who have been
under operation for a year, the effects may be limited as it seems that small
businesses are the ones who struggle the most. Furthermore, trying to regulate
where the funding goes to implies that there will be bureaucracy involved which
means further money and time will need to be spent to put this operation into
optimum action.

Like many of the ‘tigers’ of our global economy, India too has a strong export
culture, in December 2010 its exports reached a grand value of USD $22,500
million. Yet even after attempting to implement outward-looking policies and
achieving large export rates, India still had a trade deficit (USD $2,600 million in
Dec’10) . If we take China, which is supposedly economically similar to India, we
can see a stark difference, China has a trade surplus of $13.1 billion (Dec’10). This
is hindering economic growth in India because demand-led growth is made up of
four factors: consumption, investment, government spending and net ex/imports
and a trade deficit acts as a negative in this formula subsequently hindering
economic growth. One of the reasons which has been suggested for this problem is
India’s growing middle class. India’s middle class (50 million people) is
exponentially growing all the time and this pushes demand for imports such as
expensive cars and fancy handbags which are produced in countries like China and
Germany.

Rather than tackling this problem of a trade deficit (which in turn hinder growth) by
!using protectionist policies, India seems to be moving towards outward-looking
policies. Just yesterday news was released that the Indian government is setting an
export target of $450 billion by 2013. The government plans to do this by
implementing four strategies: retaining market share in developed countries,
diversifying into new markets, investing more in the R&D of new technologies and
improving India’s reputation in the global market by raising domestic standards,
promotional campaigns and quality enforcements. In the last week we have already
seen some evidence of these strategies proposed by the government. India has
signed a trade agreement with Japan where by tariffs on particular products such as
pharmaceuticals will be eradicated and Japan will contribute to India’s
Infrastructure Debt Fund. This will help India diversify by tapping into new markets
and promote export-led growth. This agreement has been endorsed by the World
Trade Organisation saying that not only will it help India but help Japan too.

Conventional wisdom tells us that one of the best ways for an economy to grow is
through supply-side policies such as improvement in education, reducing income
tax and many more. The reason why these are so popular not only because they
increase aggregate supply, which means that the country can experience growth
with the risk of high inflation, and increase aggregate demand as a result due to the
positive multiplier effect. The big problem though for developing countries like
India is to be able to fund these policies and this is not easy when the country is
laden with debt which makes up 82% of GDP (Feb 2010).

One of the most common ways in which to reduce debt in developing countries has
been to seek debt relief. However, for India it appears to be a different story and
this may be because India relies more on government bonds than loans from
developed countries. As a result the government is utilising fiscal policies to reduce
the debt which has created a budget deficit in the country. In last year’s budget
India’s Finance Minister Pranab Mukherjee proposed to increase excise duties on a
range of items including automobiles and an increase in import duty on gold from
Rs 200 per gram to 300 per 10 grams as a means of raising tax revenue. Gold is a
mineral which is very important to the people in India, it not only holds cultural and
traditional significance but now for many is used as an economic asset. This means
that demand for gold is inelastic and by raising import duty not only is India
 encouraging the production of gold in its own land but creating more tax revenue
!without any significant loss of demand. I believe this is one of the best strategies
India included in its plan to reduce their budget deficit because the opportunity
cost of this policy does not seem very large.

Without a doubt there are a wide variety of other factors which cripple India’s
economic growth but I felt these three were the most important. This is because the
first problem of infrastructure deficiency is one which has been with us since the
study of economics began, this is one problem that countries find difficult to solve
and I feel that the creation of the ‘Infrastructure Debt Fund’ although not perfect or
one I admire it is one which is innovative. The second limiting factor was a trade
deficit and this I think is one which is the most important factor without a doubt
because it is one which up till today affects the growth of developed countries and
developing. If India can manage to control this now then only will they be to
maintain it at a stable rate and look to a prosperous growth-filled future. The third
factor discussed was the debt which has caused a budget deficit in India and this is
a problem which we in the UK are all too familiar about and therefore I felt
examining another country’s take on this would help us to evaluate our own budget
plans put forward by the coalition.
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