Report On Indian Economy And GDP Growth

Current Economic Situation

Discuss about the Report on Indian Economy and GDP Growth.

According to the International Monetary fund (2015), India is among the fastest growing major economies globally. Notably, this stable growth is expected to continue steadily this year to more than 7 percent despite the uncertainties of the global market. In terms of GDP, the country is ranked as the sixth largest economy in the world. Additionally, it is ranked as one of the largest economies with regards to measurement of purchasing power parity. Remarkably, the country’s growth on average is approximated at 7 percent over the last 20 years (Central Intelligence Agency 2016). For this reason, the long term prospects of the Indian economy is positive, and the economy is expected to continue improving over time.

By and large, India has a diverse economy that comprises of modern agriculture, traditional farming, handicrafts, a diverse service industry and various modern industries. It is worth noting that although the country participates extensively in agriculture, the service industry dominates the economic activities in the country. Particularly, the nation service sector is constantly growing. At the moment, the agriculture sector makes up 16.5 percent of the GDP, industries 29.8 percent, and the remaining 45.4 percent is occupied by the service sector (Central Intelligence Agency 2016).  India is moving towards an open economy market. Initially, the economy was predominantly characterized by autarkic policies. For this reason, foreign investors’ perception of the country’s prospects has improved over time, resulting in an increase in investments in the country.  

According to forecasts, the outlook for the country’s long term growth is moderately positive. Specifically, this can be attributed to the vibrant young population and corresponding low dependency ratio within the economy. What is more, the country is increasingly opening up its markets and integrating with the global economy. In turn, this increases the country’s prospects for trade and economic growth. Besides, the citizens have adopted healthy savings and investment habits, thereby increasing the level of aggregate economic activity within the country.

Over the years, the nation’s GDP with regards to purchasing power parity (PPP) has been increasing steadily since 2014. Particularly, the level of PPP increased from $7.534 trillion in 2014 to approximately $8.103 trillion in 2015. Last year, the figure increased further to about $8.721 trillion (BBC 2016). In comparison to the world, the country has the fourth largest GDP with consideration of the PPP. It is also worth noting that the nation’s official exchange rate in 2015 was estimated as $2.25 trillion (“India” 2017).   In this regard, the economy is constantly improving and increasing its performance.

Major Macroeconomic Problems

Furthermore, India has been experiencing a significant rise in the level of real growth rate. As such, the GDP real growth rate increased by 0.4 percent between 2014 and 2015. Since then, the level of growth has stabilized at 7.6 percent.  With regards to the GDP per capita, the economy has been performing sufficiently well. Just like PPP and real growth, the country’s GDP per capita has also been rising significantly in the last three years. Markedly, the per capita GDP rose from $5900 in 2014 to approximately $6300 in 2015. In 2016, the value further increased to $6700. In terms of this measure, India is ranked at position 159 globally (“India” 2017).   

The level of unemployment has been relatively constant at 8.4 percent since 2015. For this reason, almost 29.8 percent of the Indian population lives below the poverty line. As at 2015, the nation’s public debt was about 52.3 percent of the economy’s GDP (“India” 2017).  Last year, the consumer price inflation was approximated at 5.6 percent. Conspicuously, this was an increase from 4.9 percent in the previous year. Regardless, the level of exports increased $272.4 to $271.6 billion between 2015 and 2016. In contrast, the amount of imports decreased between the 2 years by approximately 6.8 billion.  For this reason, the net exports in the country increased, thereby boosting the level of GDP (IMF 2016).    

Inflation has become a major macroeconomic problem for the Indian economy. Typically, the high levels of inflation in the country arises because the economy falls short of its stability growth. Normally, inflation arises when there is too much aggregate demand in the economy which creates pressure on prices to rise (“Indian Economy” 2016). Today, the Indian economy is characterized by rising wages, food prices inflation and increasing property prices. Notably, the high inflation rates have been a constant problem in the country despite the periods of economic slowdown.

The level of inflation increased between 2014 and 2015, from 4.9 percent to 5.6 percent. It is worth noting that the level of inflation has been notoriously high for a long period of time. In 2013, for instance, the level of inflation reached 11 percent, despite a 4.8 percent decline in economic growth (“Indian Economy” 2016). By and large, this occurrence ascertained that the high levels of inflation in the country cannot be exclusively attributed to excess demand but also to cost push factors within the economy. Particularly, the supply constraints in agriculture brought about increases in food prices, which in turn led to inflation. Unfortunately, this type of inflation is difficult to control and mitigate within the country. Regardless, the government is making an effort to reduce the levels of inflation in the country.

Budget Deficit

It is imperative to note that India has a significantly high budget deficit. Mainly, this is because the past years have seen the level of exports declining while imports increase. As such, India is a net importer of services and goods. In 2016, for instance, the total amount of imports was approximately worth $401.4 billion while the exports were worth $271.6 billion only (“India” 2017). Likewise, the level of imports exceeded the exports in 2015. In that year, the value of total exports exceeded the value of imports by approximately $136.8 billion. In 2015, the country’s current account deficit was around 5.4 percent of the country’s GDP (Asia Development Bank 2016). 

Last year, the economy had a budget deficit of around $83 billion. Specifically, the reported revues for the year were estimated as $200.1 billion whereas the total expenditures were approximated as $283.1 billion (OECD 2016).  What is more, the country is constantly banking on foreign capital flows to maintain the pace given the increase in demand for the US dollar. The government was forced to postpone the implementation of GAAR in a bid to continue with the foreign portfolio inflows.

In order to achieve stability in the economy and to attain a balance in the current account, the government must assume an active role and implement strategies that will mitigate and control these macroeconomic problems.

The inflation in India is largely driven by consumption and high aggregate demand. For this reason, the central bank has tried using high-interest rate regimes. However, this action has proven to be fruitless over time. Mainly, this is because the government maintains huge subsidies which encourage consumption in the country, leading to high aggregate demand. Therefore, instead of the high-interest rates, the government should implement other policies that will work effectively towards reducing the level of aggregate demand in the economy.

The government can use contractionary fiscal policies to reduce the flow of income into the Indian economy. First, the government can lower its level of spending to reduce the level of economic activity in the country. It may also introduce high levels of direct taxes to reduce the amount of disposable income among consumers in the country (“Controlling Inflation,” 2010).  In turn, this will lead to a reduction in the level of aggregate demand, thereby resulting in a fall in demand pull inflation by slowing economic growth.

The government, through the central bank, can implement strict contractionary monetary policies to reduce the level of inflation in India. Instead of offering huge subsidies that offset the effects of high-interest charges in the country, it should shrink them. This way, households, and firms will feel the effects of high-interest charges in the country. Typically, an increase in interest rates will discourage individuals and firms from borrowing, thereby reducing the amount of money supply in the economy. Consequently, this brings about a decline in aggregate demand, thereby reducing inflation.

In order to reduce its budget deficits, the Indian government must resolve to cut down on the levels of its expenditure. As such, a reduction in the level of government spending will result in lesser strains on the country’s revenues to pay for the expenditures. In other instances, the government may opt to increase the tax rates in the country (Labonte, 2012). Primarily, high tax rates translate to higher government revenue, which in turn results in a decline in the budget deficit (Pettinger, 2016). Additionally, the government may try to stimulate the level of economic growth in the country. Consequently, if the economy grows, the government will be able to raise more revenues to offset any deficit balances in the economy.

Reference List

Asia Development Bank (2016) India: Economy. [Online] Asia Development Bank. Available from: https://www.adb.org/countries/india/economy  [Accessed 19/01/17].

BBC, (2016) India: Country Profile. [Online] BBC. Available from: https://www.bbc.com/news/world-south-asia-12557384  [Accessed 19/01/17].

Central Intelligence Agency (2017) the world fact book-India. [Online] Central Intelligence Agency. Available from: https://www.cia.gov/library/publications/the-world-factbook/geos/in.html  [Accessed 19/01/17].

Congressional Budget Office (2011) Reducing the Deficit: Spending and Revenue Options. [Online] Congressional Budget Office. Available from: https://www.cbo.gov/publication/22043 [Accessed 19/01/17].

Economy Watch (2010) Controlling Inflation. [Online]  Economy Watch. Available from: https://www.economywatch.com/inflation/controlling.html [Accessed 19/01/17].

India Brand Equity Foundation (2016) Indian Economy Overview. [Online]  India Brand Equity Foundation. Available from: https://www.ibef.org/economy/indian-economy-overview [Accessed 19/01/17].

International Monetary Fund (2015) IMF Survey: India’s Economic Picture Brighter, but Investment, Structural Reforms Key. [Online]  International Monetary Fund. Available from: https://www.imf.org/external/pubs/ft/survey/so/2015/car031115a.htm [Accessed 19/01/17].

Labonte, M (2012) reducing the Budget Deficit: Policy Issues. [Online]  Congressional Research. Service.  Available from: https://fas.org/sgp/crs/misc/R41778.pdf   [Accessed 19/01/17].

OECD (2016) India – Economic forecast summary (November 2016). [Online] OECD. Available from: https://www.oecd.org/economy/india-economic-forecast-summary.htm [Accessed 19/01/17].

Pettinger, T (2016) Policies to reduce a budget deficit.  [Online] Economics Help. Available from:  https://www.economicshelp.org/blog/6011/economics/policies-to-reduce-budget-deficit/ [Accessed 19/01/17].

The Economist (2017).  India. [Online] The Economist. Available from https://country.eiu.com/India [Accessed 19/01/17].

The World Bank (2016) Indian Overview [Online] The World Bank. Available from https://www.worldbank.org/en/country/india/overview [Accessed 19/01/17].