Macroeconomic stability in India
The real tragedy of the poor is the poverty of aspirations.— Adam Smith.
The concept has gone through a transition phase over the course of time. Macroeconomic stability was considered as full employment and stable economic growth along with low inflation during the post-war era ruled by Keynesian thinking. As time passed fiscal balance and price stability took the center stage as key components of macroeconomic stability. Macroeconomic stability means the position of an economy having sustainable economic growth, the sustainable balance of payments position (BOP), low and stable inflation, low and stable unemployment. These parameters are measured by key macroeconomic indicators such as GDP growth rate, the balance of payments, inflation rate and unemployment rate.
The need for macroeconomic stabilization for an economy
Macroeconomic stabilization is vital for the growth of the country as only if the economy is stabilized government could focus on social issues such as sanitation, education and medical facilities. In order to achieve this condition, the government need to align currency to market levels, establishing a foreign exchange, managing inflation, developing a national budget, generating revenue, preventing predatory acts from controlling country’s resources and creating a transparent system of public expenditure. It also requires a framework of economic laws and rules that will look after the budgetary process, central bank operations, international trade, economic governance institutions and domestic trade.
Economic growth has a direct relation with job creation and research shows that job creation and investments can reduce the likelihood of violence and crime. India has faced microeconomics instability in the ’90s where India’s economic status has reached to the detracting situation where foreign reserves could hardly stand for 3 weeks, there was a lot of international borrowings from IMF and world bank, gold reserves were dropped and Indian rupee was dis valued. To cope up with alarming situation India went for transformation in economic regulations and rules. India removed all the different barriers on foreign trade and investments and applied the concept of “global economy” in the country. This landmark change was known as liberalization, privatization and globalization(LPG) of the Indian economy.
The macroeconomic scenario in present India
High oil prices are definitely have set up a negative impact on the Indian economy which is evident in rupee volatility. It is unfair to judge India’s macroeconomic strength only on the basis of currency. In the last five years, India has improved its macro strength through a range of structural and institutional reforms. Thus, we are going to look at various macro indicators
to analyze the Indian economy
Economic growth: As per projection by the organization for Economic Co-operation and Development (OECD) India’s economic growth will boost and touch 7.5% by 2020. Fiscal and quasi-fiscal stimulus including new income support and loan waiver for farmers, recent structural reforms and higher domestic demand would be a reason behind this. Lower oil prices and the recent appreciation of the rupee will decrease pressure on current account and inflation. India is witnessing highest GDP growth rate among G-20 nations. Capacity utilization started picking up, production momentum remains strong and according to channel checks some private sector capex activity is most likely to come on stream over the next few quarters. Earning recovery has improved and India continues to be a key focus nation for medium & long term investors.
Inflation: India has witnessed a sharp improvement in its inflation dynamic after the reserve bank of India (RBI) opted the flexible inflation-targeting framework. Consumer price index (CPI) has also halved in the last four years. But retail inflation has hit badly it touched five months high in March 2019 with 2.86%. The inflation rate remained within the target range of the reserve bank of India (RBI). The average food inflation rate of 0.14% during 2018 – 19 fell to the lowest level after 1991.
Unemployment: India has witnessed the highest unemployment rate in the past 45 years during January 2019. Government of India has failed in the past five years to improve the situation of Unemployment in the country. Labor force have seen a steep decline by 25.7 million since September 2016 and employed workforce have declined by 18.3 million in the same period. The labor participation rate (which indicates the proportion of working age population comprising above 15 years of either employed or unemployed but looking for a job) has been falling. (At 7.2%, India’s unemployment rate in Feb worst in 29 months; labor force down
Balance of payments (BOP): India’s current account deficit (CAD) stood at US$16.9 billion which is 2.5% of GDP it has increased by US$3.2. Private transfer receipts amounted to US$18.7 billion mainly due to remittances by
Indians employed abroad. It increased by 6.3% from the previous year.India’s Forex reserve increased by $1.368 billion according to data released by RBI. The overall Forex reserve of the country rose to $420.055 billion from $418.687. India’s Forex reserve consists of foreign currency assets (FCA’s), gold reserves, India’s reserve position with the international monetary fund(IMF) and special drawing rights.
How to achieve macroeconomic stability?
Monetary stability: Most important step for the achievement of monetary stability is an assessment of current and past monetary conditions which includes debt, state of money supply and inflation, currency use and budget deficit. This assessment also should cover the reasons behind inflation, money in circulation, the effect of informal finance and remittances and
condition of the NBFC’s (non-banking financial institution).
Stabilization of domestic currency: an unstable domestic currency can cause a sense of fear among domestic investors and it is inflationary in nature and can cause scarcity and depletion of resources which may force individuals to convert their savings into foreign currencies.
Inflation rate: In order to get higher foreign investment, restore public faith in the value of the domestic currency and provide businesses with a guide for what good and quantity to produce,inflation rate has to be stabilized. But, it is important to not go too far. Focus on reserves and debt management may be realistic and highly effective. The focus should not be given on developing a sophisticated financial system. An economy just needs an effective mediator between surplus and deficit units. Therefore, the banking system should strive for developing a relevant, transparent and effective system.
Fiscal policy refers to the proper utilization of the state budget to ensure early payment of goods and services & revenue collection. Fiscal authority is required to implement policy and programmers, managing fiscal operations. Simplifying legal procedures: there is often complexity experienced by new or existing business ventures because of legal formalities and rigid rules. The government should consult both the private and public sector in order to identify those barriers and remove those including restrictions on import licenses and onerous business registration process.
The private sector should also be consulted during policy formulation as it ensures a broader section in the dialogue process to achieve economic recovery. But we need to be cautious with predatory business owners who would suppress the “greater good” and would think for their own profit.
Microeconomics stability is a condition of having sustainable economic growth, sustainable balance of payments position (BOP), low and stable inflation, low and stable unemployment. Microeconomics stability is a prerequisite for longer and sustaining the economic growth of any country. India has faced microeconomics in stabilization in 1991 and came bravely out of it with landmark changes in an economy. Monetary stability, stable domestic currency, efficient fiscal policy, low inflation rate are required in order to achieve macroeconomic stability.
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