Despite the fact that the government continues to spend more than it earns, there seems to be some ray of hope in the expenditure numbers. The growth in plan expenditure, which can loosely be associated with capital spending (infrastructure etc) has been growing consistently. The government seems to be making a conscious attempt to pursue its plan expenditure even as it takes measures to cut down on the non plan expenditure – which includes spending on defence, subsidies, administration and debt servicing (interest).
If this trend persists, it would surely result in the quality of government spending improving dramatically. Financing the CG deficit The government continues to rely on market borrowings as a primary source of deficit financing. This has resulted in high demand for funds, which in turn has caused stickiness in interest rates at higher levels. The government’s large debt programme has probably led to a crowding out of investment in recent years, as the high borrowing requirements put upward pressure on interest rates.
Higher rates, which lead to a higher cost of capital, can adversely affect the viability of a project.
The RBI (Central Bank) has however been absorbing a large part of government paper and releasing it in markets at favourable times to insure against a rise in interest rates. This has reduced pressure in money markets and helped lower interest rates in recent months. Balance of payment During the past few years, there was a clear trend in the current account- rising exports and declining imports.
This led to an improvement in the current account position of the country. In the Capital account, FDI continued to grow even as FII flows were volatile. The issue of IMD bonds in the international markets boosted loans.
India’s external position continues to improve steadily. The fact that a sharp spurt in oil prices, due to the war on Iraq, failed to trigger crises, like during the first Gulf war, only underscores this fact. A part of this resilience has come from the software sector, which has continued to growth at a fast pace. However, in FY02 there has been a slowdown in the software sector. Whether in such a scenario, India’s external position continues to remain comfortable needs to be seen. India also needs to increase its own internal Aggregate Demand and Aggregate Supply.
It can do so by spending more, which can be done by including more people in the tax brackets, which will create more employment and consequently give more people more money to spend, thereby boosting consumer demand. Aggregate Demand internally for India can therefore be achieved and must be achieved as being a country with over a billion people, it must not solely rely on exports. Aggregate Supply can also be increased as the consumers demand more and are willing to pay more, leading to producers producing more, thereby shifting the position on the curve upwards. Bank Deposits
Deposits in the banking system continue to grow at a steady pace. However, what is noted is that the growth is coming from time deposits even as demand deposits decline or record a very marginal growth. Another factor to note is that bank’s continue to deploy their funds in investments rather than as credit. This is largely due to the absence of lending opportunities in the market. RBI’s most recent cut will probably trigger much needed investment activity Interest Rates With the Reserve Bank of India affecting a cut in the CRR and the Bank rate, interest rates have markedly reduced.
This should be good for the economy in the medium to long term as the reduced cost of money encourages investment and consumption activity. Inflation/ Index Numbers of Wholesale Prices Inflation has come off from the highs it touched early this year. Two sub components of the index have witnessed a decline in growth in prices. The most pronounced decline is in the case of the fuel group. It is imperative that inflation in India remains at a low level. This is largely because higher levels of inflation limit the ability of the central bank to cut interest rates, even when required in response to a sluggish economic climate.
In September, the Reserve Bank of India announced an unprecedented cut in CRR and Bank Rate. The move was triggered off by the sluggish growth in economic activity and the threat of a global recession affecting India. One of the main reasons why RBI could embark on such a course was the fact that inflation was relatively subdued. Inflation rates in India have reduced dramatically to just 3.6% (YoY-FY02). This is largely due to the slow growth in prices of manufactured products and the decline in crude prices. Primary articles too registered modest inflation.
Social Indicators Ultimately, the objective of economic growth is to provide better living standards for all the inhabitants of the country. It can be a good indicator of how the country is faring and what needs attention. A look at the statistics reveals a huge 35% of people below the poverty line i. e. living on less than a dollar a day. Just 28% of its people live in urban areas while 3/4 of its population live in rural areas. Life expectancy is just 64 years of age, which is low even by the standards of other developing countries in the region.
Infant Mortality too is very high at 71 per 1000 births while Sri Lanka has it at 14 and Malaysia at 11! All these are because Expenditure on health as a percentage of GDP is just 1% while on Education is at just 3% that requires urgent attention. Increase on expenses on these areas will not dramatically but surely and steadily improve the quality of life for everyone in the country and reduce the unemployment levels indirectly. Increased expenses on these areas would also increase the Aggregate Demand in the Economy. Employment/ Unemployment
With over a billion people and a huge 60% of its population in the age group of 15-59, India has a formidable work force. Only about 20% of its population is under 15 and just 10% over 60 as the life expectancy is just at 64. According to the table in the following page, 60. 7% of the population in rural India and 47. 8% in urban India are classified as workers. It classifies the complete picture of people who call themselves as working in India according to their education levels as well as segregated in to rural and urban India. It also gives a gender wise segregation.
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