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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.

1. Japan + India’s trade deal 2. Next Big Spenders: India’s Middle Class for BusinessWeek mginews/bigspenders.asp 3. ‘Govt sets export target of $450 b by 3013-14’ for The Hindu mginews/bigspenders.asp 4. The Wall Street Journal - ‘Who is India’s Common Man?’ 2011/02/24/who-is-indias-common-man/ 5. The Economic Times ‘Budget 2011: Commerce Ministry favours tax sops for doubling exports to $450bn’ 6. Trading Economics - used for statistics 7. India’s Balance of Payments (2008-2009) balanceofpayments/economy-macro-balance%20of%20payments.htm 8. SME Times ‘India looking forward to export led growth’ smetimes/news/top-stories/2008/Sep/12/india-looking-forward-to-export-led-growthgovt.html 9. Foreign Affairs ‘India in the world: Neither Rich, Powerful, nor Principled’ http:// 10. The Hindu ‘Growth and other concerns by Amartya Sen’ 11. Overdrive Economy ‘What is the India Infrastructure Debt Fund all about?’ http:// 12. BBC ‘Emerging markets lose billions as investors pull out’ business-12401237 13. The Hindu ‘Infrastructure push vital to achieve growth target’ 2011/02/21/stories/2011022156631500.htm 14.iGovernment ‘Poor infrastructure costs India RS 50,000 crore agri loss every year’ http:// 15.The Economist ‘Reading the tea leaves’ 16. Bloomberg ‘Mukherjee Cutting Debt Sales Drives Flattest Curve Since ’08: India Credit’ http:// 17. Economy Watch ‘India’s Debt Situation’ 18. Asian Correspondent ‘Debt by country map and India’s national debt’ http:// 19. The Economist ‘India’s financial system remains inefficient’ 12581192 20. Market Watch ‘India vows to tighten budget deficit’ 21. Brookings ‘Time to Tackle India’s Budget Deficit’ 2010/0222_india_budget_prasad.aspx