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Introduction

Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. his includes national, regional, and global economies.!"#!$# %ith microeconomics, macroeconomics is one of the two most general fields in economics. &acroeconomists study aggregated indicators such as G'(, unemployment rates, and price indices to understand how the whole economy functions. &acroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. )n contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and *uantities in specific markets. %hile macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline+ the attempt to understand the causes and conse*uences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). &acroeconomic models and their forecasts are used by governments to assist in the development and evaluation of economic policy.

&,-./0-/1/&)- (./230&4+ 5ndesirable situations that exist in the macroeconomy, largely because one or more of the macroeconomic goals are not satisfactorily attained. he primary problems are unemployment, inflation, and stagnant growth. &acroeconomic theories are designed to explain why these problems emerge and to recommend corrective policies. &acroeconomic problems arise when the macroeconomy does not satisfactorily achieve the goals of full employment, stability, and economic growth. 5nemployment results when the goal of full employment is not achieved. )nflation exists when the economy falls short of the stability goal. hese problems are caused by too little or too much demand for gross production. 5nemployment results from too little demand and inflation emerges with too much demand. 4tagnant growth means the economy is not ade*uately attaining the economic growth goal. 0ach of these situations is problematic because society is less well off than it would be by reaching the goals.

5nemployment 2y 4tephen 4impson 3abor is a driving force in every economy 6 wages paid for labor fuel consumer spending, and the output of labor is essential for companies. 3ikewise, unemployed workers represent wasted potential production within an economy. -onse*uently, unemployment is a significant concern within macroeconomics. "/fficial" unemployment refers to the number of civilian workers who are actively looking for work and not currently receiving wages. Given that official unemployment statistics specifically exclude those who would like to work but have become discouraged and ceased looking for employment, the true unemployment rate is always higher than the official rate. %ithin the unemployment number are several sub-types of unemployment.

7rictional unemployment results from imperfect information and the difficulties in matching *ualified workers with 8obs. , college graduate who is actively looking for work is one example. 7rictional unemployment is almost impossible to avoid, as neither 8ob-seekers nor employers can have perfect information or act instantaneously, and it is generally not seen as problematic to an economy. -yclical unemployment refers to unemployment that is a product of the business cycle. 'uring recessions, for instance, there is often inade*uate demand for labor and wages are typically slow to fall to a point where the demand and supply of labor are back in balance. 4tructural employment refers to unemployment that occurs when workers are not *ualified for the 8obs that are available. %orkers in this case are often out of work for much longer periods of time and often re*uire retraining. 4tructural unemployment can be a serious problem within an economy, particularly in cases where entire sectors (manufacturing, for instance) become obsolete. (7or more on unemployment, read The Unemployment Rate: Get Real.)

%hile high unemployment is undesirable, full employment (meaning 9ero unemployment) is neither practical nor desirable. %hen economists talk about full employment, frictional unemployment and some small percentage of structural unemployment are excluded. 0conomists do not generally believe it is practical or desirable to have "::; employment in an economy. )n particular, the (hillips curve highlights why this is so. Generally there is a relationship between inflation and unemployment 6 the lower the rate of unemployment, the higher the rate of inflation. %hile a variety of factors can alter the curve (including productivity gains), the essential take-away is that neither a 9ero-unemployment or 9ero-inflation scenario is viable on a

long-term basis. here is also a tradeoff between employment and efficiency. 2usinesses maximi9e their profits when they produce the largest number of goods possible at the lowest price possible. )n some cases, though, labor is more expensive (less efficient) than capital e*uipment. -onse*uently, there is always a trade-off between the cost and productivity of labor and that of laborsubstituting capital e*uipment and that effectively reduces the number of 8obs available. 3ikewise, structural employment is a recurrent problem as technology progresses 6 workers find their skills no longer match the needs of the employers and must update their training as industries adopt new technologies. ( o learn more about the (hillips curve, check out Examining The Phillips Curve.)

1.4 Issues in Macroeconomic Policy and Poverty he gradual but steady reform process since "<<" in a large democracy with high incidence of poverty naturally led to a wide debate on the effects of liberalisation. here is consensus that trend growth in G'( has improved to about = per cent per annum. 2ut, attempts to *uantify change of poverty in the post reform period have not led to general agreement on magnitude of poverty reduction. 4ome ma8or macroeconomic policy issues emerging in the context of poverty reduction relate to+ 0ffects of changing structure of production and income generation process on poverty and ine*uality. ,de*uacy of social sector expenditure by the state governments who have primary responsibility for education and health sectors. -hanging labour market conditions and casualisation of labour. .ole of public investment in infrastructure and irrigation. 0ffectiveness of credit delivery system to underdeveloped regions after liberali9ation of the financial sector. %hether macro policies affect poverty primarily through growth or they play additional role in addition to the growth effects. 4ome states have made substantial progress in poverty reduction while others continue to stay on almost where they were a decade ago. %hich forces have contributed to this situation+ structural factors, inade*uacy of resources or governance issues> 1.5 Approach of this Study )n this case study of )ndia on ?&acroeconomics of (overty .eduction@, we have attempted to analyse some of the above issues. Given )ndia@s si9e, diversity and federal structure, experiences at the state level are as important as those at the national level. he state governments in particular have ma8or responsibility for agricultural development and provision of services in the social sectors like health and education. he )ndia .eport consists of two parts+ (a) national level overall report and (b) study of four selected states. he selected states are+ (i) amil 1adu in southern part of the country which has low

A incidence of poverty compared to the national average and has undertaken effective social sector programmes in the past, (ii) two poorest states 2ihar and /rissa in the eastern part, and (iii) .a8asthan in the north which is emerging out of high poverty during the last decade. able ".$ gives basic statistics about area, population and per capita income of various states in )ndia. (overty refers to deprivations in human well being below a critical minimum level. o set the boundary of our analysis, two points on the concept of poverty might be mentioned at the outset. 7irst, poverty is a multidimensional concept and deprivations in areas such as income, health and education are all important facets of human welfare. he &illennium 'evelopment Goals (&'Gs) of the 5nited 1ations as well as development policy frameworks of national governments recogni9e the multidimensionality of poverty. ,lthough we discuss some issues related to education and health, our focus in the national level report has been mostly on income poverty which relates to the first of the &'Gs. he selected state reports have examined income as well as non-income dimensions at greater details in their respective states. 4econd, in our analysis of impact of various policies on poverty, we have mostly used the notion of ?absolute poverty@ widely used by the government and policy analysts in )ndia. Bowever, it was not always possible to *uantitatively link macroeconomic policy with trends in incidence of absolute poverty. %e have used a general notion of poverty in such cases and tried to examine policy issues with respect to their impact on level of living of low-income groups. )ncidence of absolute poverty in a community depends on the growth factor and the distribution factor. )mpact of macroeconomic policies on poverty operates through these two primary channels. )f the distribution factor were invariant, an increase in mean income would reduce poverty. /n the other hand, given the same mean income, more e*ual income distribution would reduce poverty provided mean income is greater than the poverty line. %hen mean income growth is accompanied by more une*ual income distribution, poverty effect depends on which of the two effects dominate. )f positive growth effect dominates over adverse distribution effect, poverty would fallC otherwise, it would rise. )f mean income grows with a drop in ine*uality, both growth and distribution factors are favourable to the poor and poverty falls fast.

India's inflation: A macroeconomic mess


Comment Share Text size: A A A June 27, 2008 10:04 IST

Des, we have a global inflation problem because world demand, especially for commodities, is
running ahead of world capacity. he phenomenon is global but policy responses will be national. 4o, which countries are going to act decisively to curtail demand> /f the three economically significant global players -- the 54, 05, and -hina -- it is only the 05 that has kept demand in check through relatively tight monetary policy. he 54 and -hina have not. he 54, in order to preserve its financial system and avoid a slowdown, has followed expansionary monetary and fiscal policies, aggravating global price pressures, and while -hina has tightened, it has been small in magnitude and done with reluctance because any serious slow down to the -hinese growth 8uggernaut is anathema to the (arty. %hat does this imply for )ndia> %hile it is convenient, but no less accurate for that reason, to ascribe the origins of recent problem to external forces, )ndian policy-makers have to move on. 7irst, these external inflationary impulses are not going to be corrected externally+ for reasons described above, neither the 54 nor -hina is going to act forcefully and *uickly enough to provide relief for the average )ndian consumer. &oreover, we have moved to the second round, where the initial external supply shock has started affecting domestic prices across the board. )n other words, we now have a domestic inflation problem which re*uires domestic policy action.

,nd yet, what have we seen> 3eave aside the obligatory and unhelpful tampering (trade and price controls) at the microeconomic level. /n the macro front, apart from the relatively modest hike in petroleum prices, the )ndian policy response has been, well, somewhere between poor and awful, meriting a grade of about $ out of ":. -onsider how fiscal, monetary and exchange rate policies have not 8ust been inade*uate, they have gone in the wrong direction. he fiscal position is deteriorating, and substantially, at a time of accelerating inflation. /ne estimate is that the true central government fiscal deficit could deteriorate this year by a whopping $.E-F (at a minimum) percentage points of G'( thanks to a combination of the loan waivers, pay hikes, fertili9er subsidies, and above all, our automatic destabilisers. 2y fixing retail prices for petroleum, government spending and the deficit automatically increase when oil prices rise, aggravating inflationary pressures. Bow sensible is that> , lot has been written about petroleum pricing policy. hree points, however, bear repetition. /ur petroleum pricing, like that of -hina, and the 54, acts to maintain high world oil prices, and to turn the terms-of-trade against us. his is self-inflicted harm, made worse by the fact that the beneficiaries of our policy are countries whose direct and indirect influence on us is far from benign. 4econd, fixed retail prices are implemented in the name of e*uity and end up being bad not 8ust for efficiency but also e*uity+ petroleum consumers are richer than the average )ndian, who pays for the consumption of the rich through a combination of higher taxes andGor inflation caused by oil subsidies. 2ut a third, and possibly important point as we look ahead relates to climate change. )ndia, like other developing countries, 8ustifiably rails against the rich world for having caused global warming. 2ut we will simply not be a credible or cooperative global partner in the fight against this problem, and our legitimate complaints against the rich risk being dismissed as hypocrisy, if our policy contribution is to encourage rather than discourage fuel consumption. &onetary and exchange rate policies in these last few months have both been mystifyingly inade*uate. )n late 7ebruary, a chorus of respected voices in )ndia unanimously rounded upon the .2) for not lowering interest rates when the golden opportunity of 54 rate-cutting presented itself. he .2) added considerably to its sheen by presciently citing the threat of inflationary pressures as the reason for its inaction. )t was right and the commentators wrong.

Baving displayed its anti-inflationary mettle then, it came as a surprise when in the period since mid-,pril, the .2) countenanced an exchange rate depreciation at a time of imported inflationary pressures. o be fair, there has been some tightening of the -.. and repo rates, especially in the last few days. 2ut+ (i) these have been small and delayedC (ii) the key reverse repo rate, which is arguably the real lever for the .2) to manipulate monetary conditions under conditions of excess li*uidity, has remained unchanged at = per cent compared to current inflation of "" per centC and (iii) above all, combining the tepid monetary actions with the si9able rupee depreciation yields the conclusion that overall monetary conditions far from having tightened may actually be looser at a time of accelerating inflationary pressures. he accompanying chart computes a simple monetary conditions index, and it is striking how prices and monetary policies have diverged in the recent past, and how even the most recent rate hikes may be inade*uate to counter price pressures. hus, from an inflation perspective, we have destabilising rather than stabilising fiscal and monetary policies. here is a real mystery here because electoral populism cannot easily explain these policiesC after all, high, especially double-digit, inflation is considered electorally fatal for incumbent politicians, and .2) policy-making has always reflected that political reality. )t is true that tightening will slow growth, but at "" per cent inflation and < per cent growth, the politically expedient trade-off would have been to sacrifice some growth for lower inflation, especially since there is a plausible case that at < per cent growth we are testing the limits of the economyHs capacity. %hy arenHt politicians behaving like politicians> %hy is the .2) not being true to its inflation hawk credentials> )n )ndia, political opportunism is ritually invoked to exonerate bad policies. )n the current circumstances, even this cynical explanation seems inade*uate. Good economics is proving elusive even when it is reasonable politics. The author is Senior Fellow, Peterson Institute for International Economics and Center for Global Development, and Senior Research Professor, ohns !op"ins #niversit$% !is boo", India's Turn: nderstandin! the "conomic Transformation &'(ford), has *ust been published

Inflation, the silent killer!


3.3. Inflation Rate India is an exce tiona! countr" in Asia in the sense that she has maintained ar!iamentar" democrac" #ased on $ree and $air e!ections since Inde endence% The &or!d's !ar(est democrac" is a roud $eature o$ the Indian o!itica! s"stem% In this res ect, &e can oint to the tentati)e !a& o$

o!itics that the incum#ent (o)ernment &i!! #e de$eated in the next e!ection &hen the rate o$ in$!ation the "ear #e$ore the (enera! e!ection is more than t&o di(its% *$ course, it is hard to consider it as +!a&, in the strict sense% -o&e)er, this tentati)e !a& is an im ortant $actor in considerin( the economic in$!uences o$ democrac" in India% Indian eo !e, es ecia!!" the oor &ho are dama(ed #" the short.term dec!ine in rea! income !e)e!s due to rice increases in $ood, are o!itica!!" sensiti)e to in$!ation% Indian o!iticians $acin( a com etiti)e o!itica! en)ironment are una#!e to i(nore the )oice o$ the oor% As a resu!t, restricti)e macroeconomic o!icies $or moderate in$!ation are o!itica!!" su orted%