Major Macroeconomic Challenges For India
According to a Morgan Stanley report, irrespective of growth indicators of Indian economy showing cues of stabilization, the macroeconomic conditions have deteriorated. For a country to attract large institutional investors, it must grow at a faster pace and have low government deficits, interest rates, and inflation.
Investors lay high emphasis on aspects including inflation, fiscal deficit, and current account deficit, balance of payment and investor growth, while investing in a country.
Key macro- economic challenges for India, at present, include:
- Inflation: Rising Wages, property prices and food prices have all surged inflation in our country, manifesting a bleaker outlook. The RBI has often spoken about the imminent problems that the country may face, owing to inflation. RBI Governor Subbarao has stated that while the wholesale price inflation has fallen to 7.18% for December 2012, it is comparatively higher and needs to be lowered. The government has been unable to bring down borrowing rate as it may further trigger inflation with money becoming cheaper.
Credit rating agency, Crisil in a note mentioned that there are high chances of inflation booming in 2014, owing to overspending during the upcoming election and the rise in the price of commodity and oil.
- Current Account Deficit: India’s present current account deficit stands at 5.4% of the GDP, since we have been a net importer of goods and services. Throughout the past years, exports have been declining and imports are on the rise. We have been constantly banking on foreign capital flows to keep up with the pace of rising US dollar demand. In order to continue foreign portfolio inflows, the Government has postponed the enforcement of GAAR.
- Fiscal Deficit: The Government ‘s expenditure has been more than its earnings with respect to tax revenues and other such means , resulting in a high fiscal deficit. Hence, the borrowings from the RBI, have been rising sharply. A recent report has mentioned that the government has not taken any constructive step in cutting down the fiscal deficit wherein it has to curtail the expenditure and strengthen its reserves. Apart from that, the report also mentions that the government has to spend around Rs. 3,00,000 crore to eke out and provide job opportunities, food, fertilizer and reasonably priced fuel by 2013-14 that could further put a dent in the country’s reserves, resulting in high demand for money and interest rates.
- Balance of Payment: India has to bank on external finances, extensively for the huge amount of imported goods and services that it has to cater. The debts have increased two- fold in the last five years as the country’s current overall fiscal debt is being reported to be $ 36 bn for 2012-2013, leading to a slowdown in the capital inflows. The situation can turn out to be volatile owing to the repercussions of the balance of payment crisis. In order to grapple with the problem and pull the plug, India must endeavor to boost its exports.
- Investment growth: India’s gross fixed capital formation has fallen to around 2%, showing no signs of recuperation, since the last four quarters. RBI stated that this is the lowest rate, the country has seen since 2008-2009, exhibiting the reluctance of investors.
Gross fixed capital formation represents the rate at which new assets are created and investments are made by businesses and the government.
Experts consider the country’s rising gold imports as the triggering factor for its macro- economic stability. Kotak Mahindra, in its report, mentioned that India has invested around $ 124bn in gold assets between 2004 and 2008. On the contradictory, the government‘s planned expenditure in the 11th five year plan for infrastructure was 25% of the same.
The country’s growth potential could be severely affected if the government does not take any constructive step to address the macroeconomic imbalances.
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