The development of India economy
Posted by: Jenny | 2016-08-26 16:15:00
In the wake of a global stock market selloff driven by worries over slower growth in emerging markets, the head of India's central bank, Raghuram Rajan, criticized the U.S. Federal Reserve as it pressed on with plans to dial back its monthly bond purchases: "International monetary cooperation has broken down," said Rajan, who added that "the U.S. should worry about the effects of its polices on the rest of the world."
Rajan later backtracked, but his remarks highlight the vulnerabilities of India's economy.Theoretically, the Fed's taper, and investors' expectations of a rise in interest rates would cause capital to leave India for the U.S. With higher returns available abroad, investors' demand for India's rupee would fall, further weakening the currency and raising inflation. Already, India's economic growth has declined to 4.5% in 2013 from an average of 9% over the past decade;inflation is high at 9.9%. If India's central bank has to keep raising interest rates to prop up the rupee, it could further impair the nation's economic progress.
India's Catch-22, however, is of its own making.
While economic growth has been robust, its national infrastructure is severely underdeveloped.From crumbling roads, traffic congestion, and poor public transportation to unreliable electricity and water supply and declining educational standards (Microsoft's new CEO SatyaNadella being the exception, not the norm), India's national foundation has failed to keep pace with the financial prosperity of its private sector.
Part of this is due to overpopulation and a strain on resources, but the rest is due to a lack of interest both in public and private spheres for developing infrastructure. Industries such as telecommunications and information technology continue to grow, but the benefits of that growth accrue to a small subset of the population, leaving the bulk of the country in poverty and rural limbo. (India's per capita income is the lowest of the BRICS nations. and three out off our people in rural areas live in poverty.)
China's income per capita isn't that much better, but its small towns have become thriving manufacturing hubs that have allowed the country to maximize the use of its resources and labor force. (The recent contraction in Chinese manufacturing is the result of a tightening in credit markets, not an indictment of the country's growth strategy). Without such critical investments, India's long-term growth could be jeopardized.
As for inflation, India's rapid growth has caused prices to soar, but since that wealth is concentrated in very few hands, average Indians cannot afford the higher prices. In response,the central bank has raised interest rates, but that will only lower the tide for all boats. Higher borrowing costs hurt business profitability but won't stop inflation as long as price hikes are also being fueled by another source: corruption.
Last year, India ranked 94th out of 176 countries in Transparency International's Corruption Perception Index. An even bigger problem is that while the business community complains bitterly about government corruption, it also exacerbates it through its willingness to pay bribes to bypass the law. Large corruption scandals involving major companies intelecommunications, construction, coal mining, and other industries are commonplace, and a2011 study conducted by KPMG suggests that the private sector actually induces corruption in India, at least to some degree.
The result is a culture of venality that affects even basic government services and increases the cost of doing business. This raises the price of everything, including produced goods, services,electricity, water, and telephone service to create defacto inflation. It also discourages foreign investment, especially from institutions in the U.S. and Europe, who dislike paying bribes and worry about violating anti-corruption laws in their home country. All this, in turn, puts even more pressure on the currency.
The Indian economy will certainly keep growing, if for no other reason than pent-up demand,and Indian companies will continue to compete aggressively on the world stage, but if Rajan wants to curtail inflation and maximize that growth at the same time, then his government must address the problem of corruption properly, invest in the infrastructure of the nation,and expand the utilization of its workforce. Monetary policy alone -- in India or in the U.S. --cannot solve these problems.
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