Friday, March 15, 2013

INDIAN ECONOMY AND THE CHALLENGES

The Union Budget was presented on 28th February, 2013 in the Parliament. It was being touted as a
good mix of growth and reform. The major challenges outlined by the Economic Survey, RBI as well as by the FM were in respect of considerably reduced estimated growth of GDP, increase in fiscal deficit, mounting current account deficit and high inflation rate. The FM expressed his concern on lower GDP growth that was estimated between 5%-5.5%, which is much below India's potential growth rate of 8% and narrated that getting back to that growth rate is the major challenge which the country is facing. The FM has plans to restrict fiscal deficit by restricting government spending and cutting subsidies. He has plans to control current account deficit by inviting FDI, FII and ECB. The plan allocation for different sectors was covered in detail in the budget speech of the FM. The various tax proposals and policy initiatives were also announced. There is a need to analyze areas of major concern and to consider appropriate initiative at the level of government and all other stake holders to achieve the desired results

Power Sector

The power sector is the biggest sufferer of lukewarm policy initiatives and the absence of strong initiative on the fronts of coal linkages and financial closure. A large number of projects are incomplete, or stuck at advanced stage of implementation, due to poor availability of funds and apprehension among lenders about future of the power sector. State level electricity distribution and transmission companies are bleeding and have substantial dues to be paid to various power producers.

Infrastructure

The Infrastructure Sector consisting of roads, housing and urban development as well as rural infrastructure development have also faced new challenges in the absence of adequate policy initiative and the problems being faced by BOOT or public private partnership models. The National Highway Authority of India have also developed several contentious issues with various road developers, which have resulted into slow completion of projects, delay in financial closure or disbursement and similar other issues.

Port Development

The development of ports by the government as well as under the PPP model has suffered due to security concern and policy bugs.

Telecom

Telecom sector latest round of 2G auction failed miserably, in the absence of response, due to heavy reserved price. Even the 3G licenses have not been made fully operational due to heavy license fee payable to the government. The expectation of the government to earn Rs. 40 to 50 thousand crores per annum as license fee from the telecom sector is resulting into a heavy financial burden on the sector creating price pressure and is affecting the growth.

Watershed Development and Irrigation

The government has not been able to initiate any major watershed development program, river linkage program or other irrigation projects except minor plan allocation, without any visionary plan for a galloping growth of agriculture and water supply.

Education

Although the allocation to education sector has been increased significantly, the need of Indian society in respect of higher education and employable education including technical training, vocational training and high-end professional skills require much deeper initiative and a larger framework of government led institutions in addition to major thrust in private sector.

Research and Development

The private sector initiatives as well as the government sector initiative in this field are lack luster. A major initiative is mandatory for sustained high growth of industrial sector, service sector as well as agricultural sector. The government announcement of their desire of achieving a high level of inclusive growth is required to be brought to deeds by policy initiatives. The Financial sector, capital market as well as industrial growth require a very comprehensive plan and their seamless implementation. The dream of being the 3rd largest economy in the world and to be reckoned as a developed country will otherwise take much longer time in getting accomplished.

SOME IMPORTANT TERMS

Definition of 'Fiscal Deficit'


  • When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings).
  • Definition of 'Current Account Deficit'

Occurs when a country's total imports of goods, services and transfers are greater than the country's
 total export of goods, services and transfers. In other words, the current account is simply a measure of how much money is flowing out of the country compared with how much is flowing in from 
foreign sources.
  • Definition of 'Trade Deficit'
An economic measure of a negative balance of trade in which a country's imports exceeds its exports

  • Definition of 'Gross Domestic Product (GDP)'

The total market value / monetary value of all the finished goods and services produced within a country's borders in a specific time period. GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as
total exports minus total imports. (NX = Exports - Imports)

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