Dr Ashwani Mahajan
The two fastest growing economies- India and China are gradually coming under the grip of economic slowdown. It is important to note that China after achieving the economic growth rate of 10 to 14 per cent in the last two decades has set a record of being the fastest growing economy. Though India could not achieve economic growth as fast as China could, yet it achieved the average economic growth rate of around 8 per cent during the ten years of the Tenth and Eleventh Five Year Plan. Economic slowdown gripped the entire world after the recession period in America and Europe. However, the economic slowdown in India and China has been the cause of worry not just for India and China but also for the entire world.
A few days back, International Monetary Fund (IMF) for the year 2012 reduced the probable economic growth rate of India and China to 4.9 and 7.8 per cent respectively. Before this, the estimated economic growth rate was 6.1 and 8 per cent respectively. The agency has also reduced the estimated figures for world economic development to 3.5 per cent. Although the economic advisor of the Prime Minister, Dr. Raghu Rajan said that the growth rate for India would not be less than 5 per cent yet the reduced estimations of IMF has caused disappointment in the world scenario. It is believed that the fall in the economic development of India and China has resulted in the atmosphere of depression in the economic development of the world as well.
However, Economic growth is also misleading
The policy makers of India and the rest of the world give too much importance to economic growth. They say that economic growth means more production and consumption of goods and services. This means economic welfare and increase in the comforts for people. Nevertheless, economic growth is no guarantee for increase in the economic welfare of the people. In case of India, we see that though our rate of economic growth has been around 8 per cent in the last ten years, yet the decrease in the poverty rate has been quite less than this. As per the data of the year 2009-10, 30 per cent of the population of India is still reeling under poverty. The major cause of the deceleration in the reduction of poverty rate is the rapid increase in disparities in India. On the one hand, the incomes of upper class and upper middle class are increasing but on the other hand, the incomes of the poor are not increasing in the same proportion. It is important to note that based on the prices of the year 2004-05, the per capita income had reached rupees 38527 in the year 2009-10, but the income of the poor, who comprise 30 per cent of the population, was less than rupees 10308 per year in the urban areas and rupees 8074 per year in the rural area. Thus, it is important that along with economic development, disparities also decrease and there is very little improvement in the condition of the poor and the underprivileged.
Still economic growth is important
Though economic growth does not guarantee economic development and betterment of people adequately, yet its importance for the same cannot be denied. Increase in GDP generally implies increased income, more availability of goods and services and more demand. The increase in the demand is an important condition for production and capital formation. According to the principle of trickle down, the increase in the production and GDP percolates down as well. It means that common people get profit generated from the increase in production, in the form of increased incomes. Increased income also plays an important role in controlling prices in the market. In case, the production exceeds the demand in the country, the same could be exported, which helps in getting the required foreign exchange. The increase in GDP may also lead to increase in employment opportunities.
Why is the economic environment disturbed?
The policymakers of India and China are trying to blame international economic scenario for the slowdown in their economic growth. They say that recession in USA and Europe has reduced the possibility of exports to these countries as well as investments from them. The policymakers of India blame the drastic increase in the prices of crude oil yet another reason for the slowdown in their economic growth. The increase in the prices of crude oil results in increased transport and production cost in industries, which in turn caused inflation.
However, apart from these, many other factors are responsible for the slowdown in the economic development in India and China. It is important to note that until now, China was able to achieve high economic growth by capturing international markets. However, there is a limit to increase in exports. Due to the increasing inflation and losses of public sector undertakings, the government of china is not in a position to give any significant subsidy on exports. That is why the products of china are getting more expensive and their demand is stagnating. In addition to this, the model of economic growth of China has been based on heavy investments. There is a slowdown in the development of infrastructure, which has resulted in the slowdown in their economic growth. Also, the increasing rate of interest in China is also proving to be harmful for investments.
Apart from the economic recession in Europe and increased prices of crude oil, there are a number of other reasons behind the slowdown of the economic growth of India. Some of the primary reasons are increased trade deficit, fiscal deficit, and high rate of inflation and high interest rates. The Reserve Bank of India is finding it difficult to reduce interest rates due to the continued high rate of inflation. That is why investment climate is deteriorating and the rate of industrial growth is adversely affected. The increasing fiscal deficit is one of the main obstacles in the reduction in inflation. On the other hand, the weakness of Indian rupee is continuing due to rising balance of payment deficit. All these factors combined together are making the atmosphere disappointing and depressing.
Ensure that disappointment does not turn into hopelessness
Deceleration in economic growth is making it difficult to lessen the disappointment about the economic atmosphere of India. Earlier, the expected rate of economic growth was estimated to be 7.5 per cent; however, the IMF has recently reduced it to 4.9 per cent that has made the economic atmosphere highly depressing. It is imperative to ensure that this disappointment does not turn into hopelessness, and thus, we need to do something about it. We need to end the economic mismanagement of the economy. Balance of trade needs to be brought by limiting the imports especially the imports from China and imports of gold. We need to stop corruption, increase the revenue of the government and decrease fiscal deficit. Prices need to be controlled with the help of efficient economic management and the production and availability of food items; and the climate of investment need to be improved by reducing the interest rates.
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