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1. Inflation
Fuelled by rising wages, property prices and food prices inflation in India is an
increasing problem. Inflation is currently between 8-10%. This inflation has been
a problem despite periods of economic slowdown. For example in late 2013,
Indian inflation reached 11%, despite growth falling to 4.8%. This suggests that
inflation is not just due to excess demand, but is also related to cost push
inflationary factors. For example, supply constraints in agriculture have caused
rising food prices. This causes inflation and is also a major factor reducing living
standards of the poor who are sensitive to food prices. The Central Bank of India
have made reducing inflation a top priority and have been willing to raise
interest rates, but cost push inflation is more difficult to solve and it may cause a
fall in growth as they try to reduce inflation.
2. Poor educational standards
Although India has benefited from a high % of English speakers. (important for
call centre industry) there is still high levels of illiteracy amongst the population.
It is worse in rural areas and amongst women. Over 50% of Indian women are
illiterate. This limits economic development and a more skilled workforce.
3. Poor Infrastructure
Many Indians lack basic amenities lack access to running water. Indian public
services are creaking under the strain of bureaucracy and inefficiency. Over 40%
of Indian fruit rots before it reaches the market; this is one example of the supply
constraints and inefficiencys facing the Indian economy.
4. Balance of Payments deterioration.
Although India has built up large amounts of foreign currency reserves the high
rates of economic growth have been at the cost of a persistent current account
deficit. In late 2012, the current account reached a peak of 6% of GDP. Since
then there has been an improvement in the current account. But, the Indian
economy has seen imports growth faster than exports. This means India needs to
attract capital flows to finance the deficit. Also, the large deficit caused the
depreciation in the Rupee between 2012 and 2014. Whilst the deficit remains,
there is always the fear of a further devaluation in the Rupee. There is a need to
rebalance the economy and improve competitiveness of exports.
5. High levels of private debt
Buoyed by a property boom the amount of lending in India has grown by 30% in
the past year. However there are concerns about the risk of such loans. If they
are dependent on rising property prices it could be problematic. Furthermore if
inflation increases further it may force the RBI to increase interest rates. If
interest rates rise substantially it will leave those indebted facing rising interest
payments and potentially reducing consumer spending in the future
6. Inequality has risen rather than decreased.
It is hoped that economic growth would help drag the Indian poor above the
poverty line. However so far economic growth has been highly uneven benefiting
the skilled and wealthy disproportionately. Many of Indias rural poor are yet to
receive any tangible benefit from the Indias economic growth. More than 78
million homes do not have electricity. 33% (268million) of the population live on
less than $1 per day. Furthermore with the spread of television in Indian villages
the poor are increasingly aware of the disparity between rich and poor. (3)
7. Large Budget Deficit
India has one of the largest budget deficits in the developing world. Excluding
subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past
year. It still allows little scope for increasing investment in public services like
health and education.
Macroeconomic Methodology
Here is the draft introduction and conclusion to my chapter on economics as history rather
than physics.
Economists love to dress up as physicists. We like to put theories into the form of equations.
However, there are important differences between physics and economics, and these
differences are particularly pronounced in the case of macreconomics
1. Politicians and journalists want answers to questions such as, How many jobs will (or did)
a certain stimulus proposal create? However, it is not possible to give reliable answers to
such questions. Economists who purport to do so are misrepresenting the state of knowledge
that actually exists.
2. Economists would like to know which theories are ruled out by the data and which theories
are supported by the data. However, our ability to make statements along these lines is quite
limited.
3. I believe that the study of macroeconomic events is going to have to be comparable to the
study of revolutions, wars, or other historical events. There will be many plausible causal
factors per event.
4. It will not necessarily be the case that the best explanations for macroeconomic events will
be a single model that uses the same causal factors for every event. Instead, each important
macroeconomic event may have important idiosyncratic elements involved.
5. Many very different explanations for an event will be consistent with the data.
6. Neither the use nor non-use of equations will ensure clarity or logical consistency.
Confusion may be embedded in verbal descriptions of macroeconomic theories. Confusion
also may be embedded in equations.
7. Neither verbal descriptions nor equations express verifiable relationships. Macroeconomic
hypotheses will contain assumptions that will be highly contestable.
MACRO-ECONOMIC
INDICATORS
Macroeconomic Indicators
Our analysis has been based on the study of following Macro-economic indicators.
Gross Domestic Product
Unemployment
Fiscal Policy
Monetary Policy
Exchange Ratio
Fiscal Policy
The Five year plans are an important indicator of government's fiscal policy and the direction
ahead for the growth of the country. This is the reason we have started the analysis by doing a
study of the 11th Five year plan.
Infrastructure:
Ensure Electricity connection to all villages and BPL households by 2009 and round - the clock power by the end of the Plan.
Ensure all - weather road connection to all habitation with population 1000 and above (500 in
hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015.
Connect every village by telephone by November 2007 and provide broadband connectivity
to all villages by 2012.
Provide homestead sites to all by 2012 and step up the pace of house construction for rural
poor to cover all the poor by 2016 - 17.
The other major areas of focus are education, health, woman and children, environment.
indirect taxes in order to insulate the vulnerable sections of the economy from the impact of
economic slowdown. This resulted in reduced revenue receipts. The increased spending
against reduced revenue receipts has resulted in increase of fiscal deficit to 6.8 %.The gross
tax to GDP ratio decreased from 12% to 10.9% and 10.3% in 2008 - 09 and 2009 - 10. The
total expenditure to GDP ratio increased from 14.4% in 2007 - 08 to 15.9% and 16.6% in
2008-09 to 2009-10.
Post July 09 the focus was shifted to the path of fiscal consolidation with emphasis on
structural fiscal reforms and prudent fiscal management with improvement in the economic
situation. Without putting at risk the revival process, the Government is looking at exit
strategies with improvement in economic conditions. The fiscal budget of 2010 - 11 has been
presented against this backdrop. Accordingly fiscal deficit in 2010-11 has been reduced to 5.5
per cent of GDP. The gross tax revenue is increased by .4% (10.8% for 2010-11) and the total
expenditure is reduced by .6% (16% for 2010-11). Also the non-plan expenditure as
percentage of GDP has been reduced from 11.3 per cent in 2009-10 to 10.6 per cent in 201011. At the same time, adequate resources for plan expenditure have been provided at 5.4 per
cent of GDP in 2010-11 as against 5.3 per cent in 2009-10. The correction in composition of
expenditure would translate into deployment of borrowed resources largely for plan
expenditure (97.8 per cent in BE 2010-11 against 81.1% in 2009-10). Also it is estimated that
subsidy expenditure as percentage of GDP would decline from 2.1 per cent in 2009-10 to 1.7
per cent in 2010-11.
Greater emphasis has been laid on increasing revenue. Direct tax code has been introduced
with widened tax slabs, reducing the burden on the lower income groups but has also resulted
in increased revenue due to the Laffer curve principle (Exhibit 5). The policy for indirect
taxes in recent years has been to achieve fiscal consolidation through an improvement in the
tax-GDP ratio. This is sought to be achieved through the widening of tax base and removal of
exemptions coupled with moderation in the rates of tax. The revenue from central excise duty
is set to increase due to increase in standard rate from 8% to 10%. Steps are being taken to
move to a comprehensive Goods and Services Tax (GST) both at the Centre and in the States.
By addressing the problems of cascading and double taxation, this key reform in the realm of
indirect taxation is expected to contribute significantly to efficiency and growth in the
economy which, in turn, would augment the buoyancy of tax collections.
Though the revenue base has not yet increased to the level of 2007-08, still, by doing
expenditure reforms and with the help of disinvestment proceeds, the Government is able to
bring down the fiscal deficit.
Pre Global Slowdown: Inflation is high and RBI has been increasing all the three rates
During Global Slowdown: Inflation is still high and RBI has decreased the three rates
drastically
Post Global Slowdown: RBI is increasing the rates gradually and trying to curb the inflation
through its monetary measures.
The monetary policy is controlled by Reserve Bank of India (RBI). The primary focus of the
policy makers has been to maintain a balance between the growth of the economy and the
inflation.
We have tried to understand the various measures of RBI by applying the Complete
Keynesian Model. Another important concept which has helped us in our understanding is the
Philips Curve which suggests that the boom in the economy and the inflation are positively
correlated. The measures to increase the unemployment also tend to increase the inflation in
the economy.
buying and selling foreign exchange, to protect the economy from the dangers of volatile
foreign capital and sudden depletion of reserves.
CONCLUSION
Calling unemployment, inflation, the business cycle, foreign exchanges, and long-term
economic growth "problems" suggests a search for solutions. To some observers, the only
obvious problem-solver around is the government. And that suggests then that government
policy should be the focus of discussion. But of course the optimal government policy may be
to have no policy. In the long run a central question in macroeconomics is: What kinds of
policies, if any, should the government set to cure macroeconomic problems? Another, more
fundamental question, is: what is society's vision of the macroeconomic promised land?
SUMMARY
1) Macroeconomics is the study of the whole economy.
2) Unemployment is a waste of resources and a demoralizing human experience. Since it is
difficult to determine the number of unemployed, official unemployment figures must be
regarded cautiously.
3) Inflation and unemployment are the "twin evils" of the macroeconomy. Inflation is a rise
of prices in general. Inflation is especially hard on people who live on a fixed income, though
it helps others. Inflation causes uncertainty and there is the danger of inflation running away
to become hyperinflation.
4) Macroeconomic magnitudes (such as inflation and unemployment) move up and down, in
what is described as a "business cycle." The instability of the economy is a major
macroeconomic problem.
5) The value of the dollar vis a vis other currencies fluctuates causing fluctuations in imports
and exports.
6) Economies rise and fall from year to year, but the past two centuries they have grown.
Growth rates vary from country to country. The question that underlies much of
macroeconomic thinking, is: How to improve the growth rate of an economy?
7) Economic policies are the solutions that governments bring to the macroeconomic
problem. Yet good policies are hard to find. A bad policy may be worse than nothing at all.
References
1. Bloom, DE. 7 billion and counting. Science. 2011; 33: 562569
2. Organisation for Economic Co-operation and Development (OECD).
Pensions at a glance 2011: retirement-income systems in OECD countries.
Paris. http://www.oecd-ilibrary.org./finance-and-investment/pensions-at-aglance-2011_pension_glance-2011-en; 2011. ((accessed Aug 28, 2014).)
3. McKee, M, Suhrcke, M, Lessof, S, Figueras, J, Duran, A, and Menabde, N.
Health systems, health, and wealth: a European perspective. Lancet.
2009; 373: 349351
Macroeconomic objectives
Broadly, the objective of macroeconomic policies is to maximize the level of national
income, providing economic growth to raise the utility and standard of living of participants
in the economy. There are also a number of secondary objectives which are held to lead to the
maximization of income over the long run. While there are variations between the objectives
of different national and international entities, most follow the ones detailed below:
1. Sustainability - a rate of growth which allows an increase in living
standards without undue structural and environmental difficulties.
'Economic growth' will be studied later on in this book.
2. Full employment - where those who are able and willing to have a job
can get one, given that there will be a certain amount of frictional,
seasonal and structural unemployment (referred to as the natural rate of
unemployment).
3. Price stability - when prices remain largely stable, and there is not rapid
inflation or deflation. Price stability is not necessarily the same as zero
inflation, but instead steady levels of low-moderate inflation is often
regarded as ideal. It is worth noting that prices of some goods and
services often fall as a result of productivity improvements during periods
of inflation, as inflation is only a measure of general price levels. However,
inflation is a good measure of 'price stability'. Zero inflation is often
undesirable in an economy. ("Internal Balance" is used to describe a level
of economic activity that results in full employment with no inflation.)
4. External Balance - equilibrium in the Balance of payments without the
use of artificial constraints. That is, the value of exports being roughly
equal to the value of imports over the long run.
5. Equitable distribution of income and wealth - a fair share of the
national 'cake', more equitable than would be in the case of an entirely
free market. Like the other economic objectives, the distribution of income
is a partly subjective or normative issue
6. Increasing Productivity - more output per unit of labour per hour. Also,
since labor is but one of many inputs to produce goods and services, it
could also be described as output per unit of factor inputs per hour.
7. Thermal Equilibrium - equilibrium in the Balance of payments without
the use of artificial constraints. That is, exports roughly equal to imports
over the long run.