X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Economy: Tool-kit for growth! - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Oct 4, 2004

    Economy: Tool-kit for growth!

    The Indian economy witnessed robust growth in the first quarter of FY05, much helped by strong growth in the industrial and services segments and a decent growth in agriculture. However, when one considers the past, certain policies of the Indian government have also helped the growth of the Indian economy (now, let us not deny them their share of credit!). Going forward as well, there are some tools that the Indian government can use to pursue its aim of a high and sustainable growth of the Indian economy. But, what are those tools?

    In this article, we will try and understand the tools that the Indian government (or for that matter, any government in the world) can use to pursue its economic goals.

    Objectives & instruments of economic policy
    Objectives Instruments
    Output / GDP growth Fiscal policy
    High and sustainable growth of GDP Government expenditure
      Tax policies
    Price stability / Inflation control  
       
    Employment Monetary policy
    High level of employment with
    low involuntary unemployment
    Controlling the money supply through
    adjusting interest rates

    Let us understand the objectives in detail.

    Output

    The definitive objective of a government is to grow the economy's output or GDP at a strong and consistent rate. To do this implies that the government is able to provide goods and services that the population desires. In fact, what could be more important for an economy than to produce ample shelter, food, education and recreation for its populace?

    Despite short-term fluctuations in business and economic cycles, economies, especially the developing ones like India, have shown steady long-term growth in GDP. For instance, the graph above indicates that while there has been volatility in the growth of Indian economy (on account of several factors like poor monsoons, governments' policies and poor investments), the trend is positive. This means that when we consider the 5-year rolling average of the Indian economy's growth, the momentum is on an upward move, indicating increasing strength and resilience of the economy.

    However, to carry on with this upward move, the present government and those to come in the future need to make sure that their policies are both pro-market (aligning with the global economy and opening up to foreign markets) and pro-business (improving internal business climate). While the present government, like those in the past, has been loud on announcing policies for economic growth, the implementation remains a big issue.

    Employment

    Economic growth matters only when its benefits reach the poorest of the poor of the country. This is to say that economic growth without development has no meaning. And, for economic development of the society, high employment is the key. As per the US Central Intelligence Agency's World Factbook for 2003, India's unemployment rate stands at 9.5%, which means that one out of every ten people seeking employment is unemployed in the country. While this is lower than the unemployment rates for China (10.1%), Bangladesh (40%, including underemployment), Brazil (12.3%), it is much higher than that of other developing countries like Malaysia (3.6%) and Thailand (2.2%). This is probably the reason that while India has grown consistently on the GDP front, our per capita GDP still lags many a developing nations.

    High employment and low unemployment is the ultimate fruit of a steady economic growth and progress. Of all the macroeconomic indicators, this factor most directly affects individuals. People want job security and benefits from the same for improving/maintaining their standard of living. In India's case, achieving the tenth plan's targeted 8% annual GDP growth rate is no option. Rather, to provide jobs to additional 10 m people every year, the economy 'has' to grow by this rate.

    Stable prices

    Stability in prices, or inflation control, is the third objective of any government's economic policy. Price stability is of utmost importance because, for a smooth functioning market system, it is necessary that prices accurately convey scarcities. This is to say that if demand increases in relation to supply, prices ought to go up. This is possible only when an economy maintains price stability. Both high and low inflation have costs attached to them. While high inflation results in increased cost of living and erosion of people's wealth, low inflation leads to reduction in the aggregate demand in the economy. This is because when people expect prices to decline or go down further in future, they postpone spending, thus affecting industries. This is the reason most central banks around the world work towards controlling inflation or maintaining a stable rate of inflation.

    The Indian central bank, the RBI, stated in its annual report for 2003-04 that a rate of 5% is the stable inflation rate in the Indian economy. Off late, however, spiraling commodity and crude prices have led to increased levels of inflation in the economy. The present rate of 7.8% is far above the benchmark rate of 5% that the RBI had earlier stipulated.

    To summarise the above discussion, the goals of a country's macroeconomic policy are -

    1. Growing and sustainable level of national output/GDP growth,

    2. High employment with low unemployment, and

    3. Stable or slowly rising price level.

    In today's globalised world, the Indian government has no choice but to meet these abovementioned objectives through the right policy instruments (as mentioned in the table above). Apart from these, to attract the 'very much' sought after foreign capital, the government also has to work towards improving the institutional framework, reducing trade barriers and making the overall business environment more suitable for domestic and foreign investors in the country.

    While the Indian economy is relatively more resilient to global uncertainties as compared to its Asian peers, we still have a long way to go. While a steady and strong economic performance is likely to bring in more opportunities for growth and development, investors need to believe that it is a long drawn process and would take some time to fulfillment. To that extent, we would reiterate our advice of a long-term approach towards investing in equity markets. Returns 'will' follow!

     

     

    Equitymaster requests your view! Post a comment on "Economy: Tool-kit for growth!". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS