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Economy: Engineering sustainable growth... - Views on News from Equitymaster
 
 
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  • Nov 22, 2005

    Economy: Engineering sustainable growth...

    The Indian economy has witnessed strong growth in the past two years and is in line of repeating the performance in FY06 as well. Now, while this strong growth momentum has been much helped by stellar performances of the industrial and services segments and a decent growth in agriculture, when one considers the past, certain policies of the Indian government (unlike the general belief) 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. These tools are of - output or GDP growth, employment and inflation control. Let us understand them one by one.

    Output/GDP growth
    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. While there has been volatility in the growth of Indian economy (on account of several factors like poor monsoons, government policies and poor investments), the trend is positive. 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 (courtesy the Left!).

    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. India's unemployment rate stands at over 9% currently, which means that one out of every eleven 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 benefit 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/Inflation control
    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.

    Concluding remarks
    In today's globalised world, the Indian government has no choice but to meet these abovementioned objectives through the right policy instruments (as mentioned 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. A right mix of these tools shall also go a long way in showcasing India as an attractive investment destination.

     

     

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