Problems of

Indian
economy –
Inflation &
hdi
 PESTEL
Analysis
of
Indian Economy
 PESTEL of Indian economy

Political Economical
• India's economy has been relatively steady since the
• Dispute with Pakistan over Kashmir has been an issue of
unveiling of industrial reform programs, in 1991.
grave political uncertainty. Political reforms and new acts
• Industrial obligatory licensing was reduced from 12 to 6,
have led to unrest in many states of the country.
• public sector firms were divested, foreign capital was
Indian economy is also influenced by Privatization and
liberalized, authorization was granted for foreign
Nationalization.
• technology agreements, and the FIBP (Foreign
Government encourages free business through a variety of
Investment Promotion Board) was established
programs. But imposes various taxes on the other hand,
(Chakranarayan 2009).
including GST and VAT.
• After pandemic Indian economy is set to become fastest
growing economy in the form of V shape recovery.
 PESTEL of Indian economy

Social Technological
• India is a popular destination for IT outsourcing. With
• In India, the country's ageing population has resulted in
its huge IT workforce, it provides good chances for
increasing pension expenses for businesses as well as greater
entrepreneurs to start on technical initiatives such as
employment of older workers.
• software creation, business solutions, and many more.
Economies profit from the country's population. Because of
• More and more foreign tech companies are investing in
low unemployment rate(6.86), as majority of population is
India thanks to its technological advancement.
employed, it is simpler for industries, including international
• India is seeing rapid installation of optic fiber cable.
organizations, to get employees at reasonable wages.
• This has facilitated innumerable projects in technology
India is a multi-ethnic, multi-lingual, and multi-religious
which can prove to be a big boon for Indian economy.
country. Community cohesion is a tremendous asset for
Indian economy.
 PESTEL of Indian economy

Environmental Legal
• Foreign brands can benefit from the country's flexible
• Over the years, India has made significant technological and
policies surrounding foreign commerce.
economic growth, but at the expense of the environment.
• In India, a variety of legal reforms have been introduced,
• Polluted rivers due to consumer waste, declining biodiversity,
including recycling, raising the minimum wage,
depletion of resources such as water and forests, floods, and
prohibiting handicap discrimination, and international
water and air pollution are only a few of the country's major
trade restrictions, all of which have had a direct impact
environmental issues.
• on companies.
Climate: India's climate, with its long monsoons and equally
• Changes in recycling, employment, and discrimination
long dry seasons, is a difficulty for organizations.
laws may have an impact on the company's pricing and
Infrastructure must be able to support businesses in such a
labor costs.
diversified environment.
Inflation

1. Erodes Purchasing
Power
• Inflation is a decrease in the
purchasing power of currency due to
a rise in prices across the economy.
• Inflation requires prices to rise
across a "basket" of goods and
services, such as the consumer price
index (CPI).
• The prices of non-discretionary and
non-substitutable goods—food and
fuel—rise affect inflation directly.
Common Effects of Inflation
2. Encourages Spending,
Investing
• During inflation the Cash loses its
value, which encourages spending on
things that probably won't lose value.
• Many investors buy gold and other
precious metals when inflation takes
hold, but these assets' volatility can
cancel out the benefits of their
insulation from price rises, especially
in the short term.
 Common Effects of Inflation

3. Causes More Inflation 4. Raises the Cost of

Borrowing
• The urge to spend and invest in the
• Central banks raise interest rates to deter
face of inflation tends to boost
people from borrowing extensively.
inflation in turn, creating a
• When such a situation comes to be, better to
potentially catastrophic feedback
put some money in the bank, where it can
loop.
• earn some interest if the rates are higher
As people and businesses spend
than the rate of inflation.
more quickly, the economy finds
• Banks keep a check on interest rates from
itself awash in cash no one
either direction to maintain inflation close
particularly wants.
• to a target rate (generally 2% in developed
The supply of money outstrips the
economies and 3% to 4% in emerging
demand, and the price of money—
ones).
the purchasing power of currency—
falls at an ever-faster rate.

5. Lowers the Cost of Borrowing
• When there is no central bank, or when
central bankers are beholden to elected
politicians, inflation will generally lower
borrowing costs.
• When levels of household debt are high,
politicians find it electorally profitable to
print money, stoking inflation and
whisking away voters' obligations.
• If the government itself is heavily
indebted, politicians have an even more
obvious incentive to print money and use
it to pay down debt.
Common Effects of Inflation
6. Reduces Unemployment
• Inflation can push down unemployment. Wages
change slowly in response to economic shifts
• There is an inverse correlation between
unemployment and inflation represented as
Phillips curve.
• As unemployment falls, employers are forced to
pay more for workers with the skills they need.
As wages rise, so does consumers' spending
power, leading the economy to heat up and spur
inflation; this model is known as cost-push
inflation.

7. Increases Growth
• Unless there is an attentive central bank on
hand to push up interest rates, inflation
discourages saving, since the purchasing
power of deposits erodes over time. That
prospect gives consumers and businesses an
incentive to spend or invest.
• At least in the short term, the boost to
spending and investment leads to economic
growth.
• Inflation's negative correlation with
unemployment implies a tendency to put
more people to work, spurring growth
Common Effects of Inflation
8. Weakens or Strengthens Currency
• High inflation is usually associated
with a slumping exchange rate,
though this is generally a case of the
weaker currency leading to inflation,
not the other way around.
• Economies that import significant
amounts of goods and services, must
pay more for these imports in local-
currency terms when their currencies
fall against those of their trading
partners.
 Inflation in India

• Inflation rate in India was 5.5% as of May 2019, as per the Indian Ministry of Statistics and Programme
Implementation. This represents a modest reduction from the previous annual figure of 9.6% for June
2011. Inflation rates in India are usually quoted as changes in the Wholesale Price Index (WPI), for all
commodities.
• In India, CPI (combined) is declared as the new standard for measuring inflation (April 2014). India
uses changes in the CPI to measure its rate of inflation.
• The WPI measures the price of a representative basket of wholesale goods. In India, this basket is
composed of three groups: Primary Articles (22.62% of total weight), Fuel and Power (13.15%) and
Manufactured Products (64.23%). Food Articles from the Primary Articles Group account for 15.26%
of the total weight. The most important components of the Manufactured Products Group are, Food
products (19.12%); Chemicals and Chemical products (12%); Basic Metals, Alloys and Metal Products
(10.8%); Machinery and Machine Tools (8.9%); Textiles (7.3%) and Transport, Equipment and Parts
(5.2%).
 Issues

Optimal inflation rate

• It arises as the basic theme in deciding an adequate monetary policy. There are two debatable proportions for an effective
inflation, whether it should be in the range of 1–3 per cent as the inflation rate that persists in the industrialized economy
or should it be in the range of 6–7 per cent.
• The problems that occur regarding the measurement of inflation :
• The measurement bias has often calculated an inflation rate that is comparatively more than actual.
• Secondly, there often arises a problem when the quality improvements in the product are in need to be captured out,
hence it affects the price index.
• The consumer preference for a cheaper goods affects the consumption basket at costs, for the increased expenditure on
the cheaper goods takes time for the increased weight and measuring inflation.
 Issues

Money supply and inflation

• Quantitative Easing is done by the central banks to increase money supply in an economy. This helps to increase or
moderate inflationary targets. There is a puzzle formation between low-rate inflation and a high growth of money supply.
• When the current rate of inflation is minimal, a high worth of money supply is needed to tighten liquidity, increase
interest rate for a moderate aggregate demand and the avoidance of any potential problems. Additionally, in the event of a
low output, a tighter monetary policy would have a considerably more severe impact on production.
• The supply shocks have known to play a dominant role in the regard of monetary policy. The bumper harvest in 1998–99
with a buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further driving their prices from
what they were in the last year. The increased import competition since 1991 with the trade liberalization in place have
widely contributed to the reduced manufacturing competition with a cheaper agricultural raw materials and the fabric
industry.
• These cost-saving-driven technologies have often helped to drive a low inflation rate. The normal growth cycles
accompanied with the international price pressures has several times being characterized by domestic uncertainties.
 Issues

Global trade
• Inflation in India generally occurs as a consequence of global traded commodities and the several efforts made by the
Reserve Bank of India (RBI) to weaken rupee against the dollar. This was done after the Pokhran Blasts in 1998.
• This has been regarded as the root cause of inflation crisis rather than the domestic inflation. According to some experts
the policy of RBI to absorb all dollars coming into the Indian economy contributes to the appreciation of the rupee.
• When the U.S. dollar has shrieked by a margin of 30%, the RBI had made a massive injection of dollar in the economy
make it highly liquid and this further triggered off inflation in non-traded goods. The RBI picture clearly portrays for
subsidising exports with a weak dollar-exchange rate. All these account for a dangerous inflationary policies being
followed by the central bank of the country.
• Further, on account of cheap products being imported in the country which are made on a high technological and capital
intensive techniques happen to either increase the price of domestic raw materials in the global market or they are forced
to sell at a cheaper price, hence fetching heavy losses.
 Factors

Demand factors Supply factors

• The supply side inflation is a key ingredient for the rising
• It basically occurs in a situation when the aggregate demand in
inflation in India. The agricultural scarcity or the damage in
the economy has exceeded the aggregate supply.
• transit creates a scarcity causing high inflationary pressures.
It could further be described as a situation where too much
• Similarly, the high cost of labor eventually increases the
money chases just few goods. A country has a capacity of
production cost and leads to a high price for the commodity.
producing just 5,500 units of a commodity but the actual
• Further, the global level impacts of price rise often impacts
demand in the country is 7,000 units. Hence, as a result of
inflation from the supply side of the economy.
which due to scarcity in supply the prices of the commodity
• Consensus on the prime reason for the sticky and stubbornly
rises.
• high CPI, i.e., retail inflation is due to supply side
This has generally been seen in India in context with the
constraints; and still where interest rate remains the only tool
agrarian society where due to droughts and floods or
with the Reserve Bank of India. Higher inflation rate also
inadequate methods for the storage of grains leads to lesser or
constraints India's manufacturing environment.
deteriorated output hence increasing the prices for the
commodities as the demand remains the same.
 Factors

Domestic factors External factors

• The exchange rate determination is an important component
• Developing economies like India have generally a lesser
for the inflationary pressures that arises in India.
developed financial market which creates a weak bonding
• The liberal economic perspective in India affects the
between the interest rates and the aggregate demand.
• domestic markets. As the prices in United States rises, it
This accounts for the real money gap that could be determined
impacts India where the commodities are now imported at a
as the potential determinant for the price rise and inflation in
higher price impacting the price rise.
India. There is a gap in India for both the output and the real
• Hence, the nominal exchange rate and the import inflation
money gap.
• are a measures that depict the competitiveness and
The supply of money grows rapidly while the supply of goods
challenges for the economy.
takes due time which causes increased inflation.
• Similarly, hoarding has been a problem of major concern in
India where onion prices have shot high.
 Factors

Value
• The inflation rate in India was recorded at 6.2% (WPI) in August 2013. Historically, from 1969 until 2013, the inflation rate
in India averaged 7.7% reaching an all-time high of 34.7% in october 1974 and a record low of -11.3% in May 1976.
• The inflation rate for Primary Articles is currently at 9.8% (as of 2012). This breaks down into a rate 7.3% for Food, 9.6%
for Non-Food Agriculturals, and 26.6% for Mining Products. The inflation rate for Fuel and Power is at 14.0%. Finally, the
inflation rate for Manufactured Articles is currently at 7.3%.
 Methods to Control Inflation

Inflation is generally controlled by the Central Bank and/or the government. The main policy used
is monetary policy (changing interest rates). However, in theory, there are a variety of tools to
control inflation including:
1. Monetary policy – Higher interest rates reduce demand in the economy, leading to lower
economic growth and lower inflation.
2. Control of money supply – Monetarists argue there is a close link between the money supply
and inflation, therefore controlling money supply can control inflation.
3. Supply-side policies – policies to increase the competitiveness and efficiency of the economy,
putting downward pressure on long-term costs.
4. Fiscal policy – a higher rate of income tax could reduce spending, demand and inflationary
pressures.
5. Wage controls – trying to control wages could, in theory, help to reduce inflationary pressures.
However, apart from the 1970s, it has been rarely used.
 Methods to Control Inflation

Monetarism change currency

• In a period of hyperinflation, conventional policies may
• Monetarism seeks to control inflation by controlling the money
be unsuitable. Expectations of future inflation may be
supply. Monetarists believe there is a strong link between the
hard to change. 
money supply and inflation. If you can control the growth of
• When people have lost confidence in a currency, it may
the money supply, then you should be able to bring inflation
be necessary to introduce a new currency or use another
under control
• like the dollar (e.g. Zimbabwe hyperinflation).
Higher interest rates (tightening monetary policy)
• Reducing budget deficit (deflationary fiscal policy)
• Control of money being created by the government
 Methods to Control Inflation

Supply Side Policies Wage Control

• If inflation is caused by wage inflation (e.g. powerful
• Often inflation is caused by persistent uncompetitiveness and
unions bargaining for higher real wages), then limiting
rising costs. Supply-side policies may enable the economy to
wage growth can help to moderate inflation. Lower
become more competitive and help to moderate inflationary
wage growth helps to reduce cost-push inflation and
pressures. For example, more flexible labor markets may help
helps to moderate demand-pull inflation.
reduce inflationary pressure.
• However, as the UK discovered in the 1970s, it can be
• However, supply-side policies can take a long time, and
difficult to control inflation through incomes policies,
cannot deal with inflation caused by rising demand.
especially if the unions are powerful.
HDI
 HDI

• The Human Development Index (HDI) is a statistic composite index of life

expectancy, education (mean years of schooling completed and expected years
of schooling upon entering the education system), and per capita income
indicators, which are used to rank countries into four tiers of human
development.
• India’s HDI value for 2019 is 0.645 which puts it in the medium Human
Development category.
• The HDI was created to emphasize that people and their capabilities should be
the ultimate criteria for assessing the development of a country, not economic
growth alone.
• The HDI can also be used to question national policy choices, asking how two
countries with the same level of GNI per capita can end up with different
human development outcomes. These contrasts can stimulate debate about
government policy priorities.
 HDI

• LE: Life expectancy at birth

• MYS: Mean years of schooling (i.e.
years that a person aged 25 or older has
spent in formal education)
• EYS: Expected years of schooling (i.e.
total expected years of schooling for
children under 18 years of age)
• GNIpc: Gross national income at
purchasing power parity per capita
• The HDI uses the logarithm of income,
to reflect the diminishing importance of
income with increasing GNI.
 HDI

• World map representing Human Development

Index categories (based on 2019 data,
published in 2020).
HDI
 Quality of human development

• Lost health expectancy: Relative difference between Progress Made by India

life expectancy and healthy life expectancy, expressed • As the UNDP’s HDR Report 2020 notes, India’s gross national income per
as a percentage of life expectancy at birth. capita has more than doubled since 2005, and the number of
• Vulnerable employment: Percentage of employed “multidimensionally poor” people fell by more than 271 million in the
people engaged as contributing family workers and decade since 2005-06.
own-account workers • Additionally, inequalities in “basic areas” of human development have
. reduced. For instance, historically marginalized groups are catching up
with the rest of the population in terms of educational attainment.
 Life-course gender gap

India
 Environmental sustainability

India
 Socioeconomic sustainability

India

• India has done a seemingly great job in multiplying it’s economy multi-fold, but its HDI has not been very appealing. The HDI
data of the last three decades indicates that India has raised its HDI score at an annual average rate of mere 1.42%.
• Therefore, if India has to realize it’s the aspiration of becoming a superpower, it must invest to reduce the burden of social and
economic disadvantage to vulnerable sections of its population.
 Reasons For India’s Underperforming
HDI
• The 2019 HDI ranks India with a per capita income of $6,681 in the 131st position, which is a notch lower than its 130th rank
in 2018. The malefic effects of deep-rooted societal and economic disadvantages account for a low rank for an economy that
is in the global top 6 by size. Following factors can be dubbed as reasons for India’s dismal performance in HDI:

Increasing Income Inequalities Gender Inequality

• Income inequalities amplify failings on other Human
Development indices.
• Intergenerational income mobility is lower in countries with high-
income inequality. It manifests at birth and determines access to
quality healthcare, education, and opportunities. Further, there is
an increasing trend in income inequality. In India, the income
growth of the bottom 40% between 2000 and 2018 (58%) was
significantly below the average income growth for the entire
population (122%).
• Female per capita income in India was only 21.8% of
that of males, while it was more than double at 49% in
other developing countries.
• Only 20.5% of the women in the working-age group
were in the labour force, pointing to its dismal Female
Labour Force Participation Rate (LFPR).
 Way Forward

Fair Income Distribution Investing in Social Infrastructure

• Universalisation of education and health care could have
• While the size of economic resources is a key factor affecting pulled deprived sections out of the poverty trap.
human development, the distribution and allocation of these • Sustaining and improving the quality of life will also depend
resources also play a major role in determining the level of on policies crafted to handle major emerging challenges such
human development. as urbanisation, the housing deficit, access to power, water,
• Many global case studies show that high growth accompanied education and health care.
by more effective income distribution can help enhance
human development, even with moderate social expenditures. Streamlining of the Finances
• For Example, South Korea and Taiwan improved income
• Streamlining the traditional approach of generating new
distribution through early land reforms.
sources of revenue generation, steps like rationalised targeting
of subsidies, judicious use of revenues meant for social sector
development etc will probably meet the financial requirements
needed for improving HDI.
 Way Forward

Good Governance Reforms Gender Empowerment

• Government should invest in Gender equality and women’s
• Effective performance evaluation of the projects and activities empowerment, as they are integral to human development..
engaged in the social sector development through innovative
methods like outcome budgeting, social auditing and
participatory democracy has been known to yield positive
results.
 HDI

limitations
• The Human Development Index has been criticized on a number of grounds, including alleged lack of consideration of technological
development or contributions to the human civilization, focusing exclusively on national performance and ranking, lack of attention to
development from a global perspective, measurement error of the underlying statistics, and on the UNDP's changes in formula which can
lead to severe misclassification in the categorization of "low", "medium", "high" or "very high" human development countries.
• It does not reflect on inequalities, poverty, human security, empowerment, etc. The HDRO offers the other composite indices as broader
proxy on some of the key issues of human development, inequality, gender disparity and poverty.

conclusion
• India’s HDI scores can be substantially enhanced if a politically committed government rolls out inclusive policies that
strengthen public health, education and nutrition, and end gender discrimination to usher in a more egalitarian order.
THANK
S

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