Current economic situation in India

While the situation of inflation is quite common for the developing economies and most of the people
are well versed with problem of inflation and know its implications in general, the situation of deflation
is rare. In developing countries, deflation has entirely different connotations than those of the inflation.
In the common parlance deflation is an economic situation of falling prices, but in economic theory
there is much more to it than just the reducing price level.

In economic terms, deflation can be termed as a situation of declining prices, often caused by a
reduction in the supply of money or credit. It can also be caused by the direct contraction in
expenditure, including the public expenditure, personal spending or the investment expenditure. This is
opposite of inflation and often leads to lower effective demand and increasing unemployment rate in
the economy.

According to economic theory, price level is the result of functional relationship between demand and
supply. To put it simply, the supply being constant, if the demand of the goods and services increases in
an economy, the prices are likely to go up and the economy is likely to encounter a situation of inflation.
On the other hand, if the supply increases with demand being constant, or the supply increases more
than the demand, the prices may fall and such a situation may be referred to as deflation.

In addition to the above demand supply dynamics, the inflation or deflation can also be caused by the
reasons of the adequacy or lack of money supply in the country. If the money supply is less, it is a
situation of more money chasing lesser goods and services, leading to general rise in prices. On the
other hand, if the money supply is more than the supply of goods and services, the situation of fall in
prices is generally experienced and is referred to as deflation.

Deflation caused by rapid growth of production and manufacturing in the country, causing the supply to
go up is good for the economy, as with abundant availability of all goods and services in the economy,
the prices go down, resulting in increase in the real income and wealth of all the consumers. Such a
situation does not harm the producers also, as they gain by increasing sales volumes.

The Great Depression of 1930s was associated with deflation and it is said that the recession coupled
with deflation leads the economies to suffer. It is this very concern which is causing anxiety among the
economists and the policy makers. But it must be clearly understood that deflation and depression are
two different words and situations and should not be taken as synonymous.

Effects on the Economy
Temporary fall in prices is not deflation and it is the sustained fall for a considerably long period of time
which is a matter of serious concern. It causes the aggregate demand to fall, as due to the falling prices
the consumers try to delay the purchases, which in turn reduces economic activity in the economy,
thereby accentuating the spiral effect of deflation. The result is that the existing manufacturing capacity
of the economy becomes idle, leading to further reduction in aggregate demand and even more
reduction in economic activity. If the process continues without any interventions from the government,
the economies may move in to a situation of recession.

Theoretically speaking, the situation of deflation may also lead to a peculiar economic condition known
as the liquidity trap. Generally, the rate of interest in an economy is linked to the rate of inflation. But
the situation of deflation may necessitate the interest rates to go down as low as zero. Deflationary
times and zero interest rates reduce the economic viability of most of the projects due to tremendously
reduced demand and the investors also tend to postpone their new projects. This worsens the situation
further.

Generally, the deflationary situation encourages people to hold on to their money, mainly because of
the reasons like lower aggregate demand for newly produced goods and very low interest rates that
discourage the people from keeping money in bank deposits. This causes substantial reduction in the
velocity of money i.e. reduction in the number of transactions, dramatically reducing the money supply
in the economy, as one mans expenditure is the income of another. Reduced velocity of money results
in reduction of incomes.

Deflation results in fall of availability of hard currency per person. This further results in increasing the
purchasing power of each unit of currency, as the average price level goes down. Increase in purchasing
power may sound beneficial to a layman but actually it may cause hardship to those people whose
majority of wealth is kept in non-liquid assets such as real estate, land and buildings.

It is thus evident that sustained deflation is a serious cause of worry to the policy makers, as it may lead
the economies to recession and, more seriously, to a situation of depression.

Indian Fears
In India, the rate of inflation or deflation is measured on the basis of Wholesale Price Index (WPI) on
weekly basis and then computed for the fiscal years for the purpose of policy monitoring, appraisal and
decisions. WPI is an indicative and representative index of the wholesale prices of various commodities
produced in the economy. Consumer Price Index (CPI), on the other hand, is an index of the consumer
prices that give 46 per cent weightage to the food items, 15 per cent weightage to the domestic
facilities, 6.4 per cent to lighting and fuel and 6.6 per cent to apparel and shoes.

The inflation rate in India has suddenly fallen to a level of less than half a per cent and closer to zero in
March 2009 onwards and the fears of the Indian economy slipping into a precarious situation of
deflation have been expressed by many. But despite extremely lower inflation rate, the prices of food
items are still experiencing reasonably higher increase in prices. This, while putting the economically
vulnerable sections of society in a disadvantageous position, has also given a glimmer of hope to the
policy makers because this phenomenon may gradually stabilize the economy and help it come out of
the deflationary pressures early.

The economists are in a fix and do not know whether to call this economic situation in the country as
deflation or disinflation. While the deflation is persistent fall in price level, disinflation is a situation
where the inflation rate goes down. The economic theory provides separate sets of solutions for both
the situations and unless the situation is clearly identified and diagnosed, it would be difficult to resolve
it.

Government agencies in India vehemently deny that there is any fear of deflation in the near future. The
International Monetary Fund has projected the annual inflation rate of 1.7 per cent for the Indian
economy for 2009-10. This implies that for some part of the year, the economy may experience a
brief spell of deflation. Whether or not to call such a situation a deflationary situation, is a matter of
argument.

As per Mr P.K. Padhy, Economic Advisor in the Ministry of Commerce and Industry, the current
economic situation is that of disinflation in India. The basis for such a belief is that the economy has
grown at the rate of 5.3 per cent in the third quarter of the previous fiscal. Economists like Suresh
Tendulkar and Pranab Sen also argue on the same lines. In one of its reports on the Indian economy, the
Citigroup has said that the deflationary patch in India is due to high base effect and supply side issues
and is likely to be temporary and short-lived in nature. But persistence of such a situation may increase
the problems of the economy in the months to follow.

Many economists believe that the current situation can be termed as demand deflation. Both
production and the prices are falling down. This would require more targeted fiscal measures, along
with stepped up direct government purchases and increased scope of public distribution system.

The situation in India may not be as grave as that of sustained deflation. The CPI is still positive and at
around 10 per cent; the rural demand for FMCGs is robust and food items are in great demand. The
resilience of our economy may not allow the typical deflationary situation to emerge and the current
phase may turn out to transient and temporary. Despite the above, the situation needs to be tackled by
the Government very carefully.
ECONOMIC HEALTH CHECK
India: Economy Stabilizes, but High Inflation, Slow Growth Key Concerns
IMF Survey
February 20, 2014
Recent policy actions have reduced India's vulnerabilities
Growth projected at 4.6 percent in 2013/14, with modest pick up to 5.4 percent in 2014/15
Sustained reduction in inflation requires a tightening of the monetary stance
India has restored macroeconomic and financial stability, but structural impediments to growth and
persistently high inflation remain key concerns, the IMF says in its annual report on the state of the
Indian economy.
Over recent months, India has taken substantive measures to narrow external and fiscal imbalances,
tighten monetary policy, move forward on structural reforms, and address market volatility. This has
reduced its vulnerability to shocks, says the recent IMF report.
Although spillovers from global financial market volatility continue to pose a significant risk, the Indian
economy is now better placed to handle financial shocks than it was last summer.
The current account deficit has contracted, the fiscal deficit target has been met, and investment project
approvals are accelerating.
The report said that India has significant foreign exchange reserves to deploy in the event of external
financing pressures. It also said that exchange rate flexibility, a tightening of liquidity conditions, and
limited foreign exchange interventions had served India well in responding to the volatility of mid-2013.
Handling external pressures
The report stressed the need to foster an environment conducive to foreign direct investment to finance
Indias current account deficit. In the event of a resurgence of market volatility, the IMF stressed the
importance of a well-communicated package of policy measures to minimize disruptive movements in
the currency and bolster market confidence.
This would involve continued flexibility in the rupee, complemented by the judicious use of reserves,
tightening of monetary conditions, additional fiscal consolidation efforts, and further easing of
constraints on capital inflows.
Growth eases
Indias growth, although among the highest in the world, has slowed in the last two years, the IMF said.
Growth is projected at 4.6 percent in 2013/14, but with a modest pick up to 5.4 percent in 2014/15,
helped by slightly stronger global growth, improving export competitiveness, a favorable monsoon, and
a confidence boost from recent policy actions.
Indias growth is expected to rise to its medium-term growth potential of about 6 percent once
recently approved investment projects are implemented and as global growth improves.
Several important policy decisions have been made that should help revive investment activities, said
Paul Cashin, IMF mission chief for India. We are confident that India can easily go back to an 8 percent
growth trajectory if further structural reforms, particularly in the fields of energy, agriculture, the labor
market, are implemented quickly, he added.
Inflation remains elevated
The report noted that persistently high inflation is a key macroeconomic challenge for India. Over the
past several years it has induced double-digit inflation expectations, and given rise to a high demand for
gold. It has also eroded households financial savings and undermined the stability of the rupee.
Achieving a sustained reduction in inflation requires a tightening of the monetary stance, possibly over
a protracted period, Cashin said. It will also be critical in achieving sustained, robust, and inclusive
growth, he added.
The report also highlighted the need to use headline consumer price index inflation as the principal
nominal anchor for monetary policy. Food and fuel price shocks propagate rapidly into core inflation,
and inflation expectations and wage formation are closely linked to CPI inflation. Therefore focusing on
headline CPI is the right call, said Cashin.
Challenges and policy priorities
The report commended the authorities resolve to meet the budget deficit target for 2013/14, despite
slowing growth, but highlighted the need to improve the quality of fiscal consolidation and make it more
growth friendly. While the medium-term fiscal targets and resulting pace of consolidation are broadly
appropriate, measures still need to be articulated and implemented to underpin the targeted fiscal
adjustment, the IMF said.
The report praised the progress made in tying Indias social safety net to theAadhaar (Indias Unique
Identification program). The report said that achieving durable medium-term fiscal adjustment will
require more efficient taxation (including through the introduction of the goods and services tax), and
better allocation of spending (including through reforms to fuel and fertilizer subsidies).
Raising the tax-to-GDP ratio to the pre-crisis level and reforming fuel and fertilizer subsidies will help
reorient spending toward social priorities in health and education, said Cashin.
According to the IMFs assessment, Indias financial system remains well capitalized and supervised, but
slowing growth is highlighting corporate vulnerabilities and leading to deteriorating bank asset quality.
The report welcomed the Reserve Bank of Indias recent initiatives to increase provisioning and capital
requirements for bank lending to firms with sizeable foreign currency exposures, and for improving the
recognition of restructured advances on bank balance sheets.
Although no firm has come under severe stress so far, there is a key information gap about the extent
of unhedged foreign currency exposure of large firms, which needs to be rectified, said Cashin.
Improvements in the legal and institutional insolvency framework will also help deepen domestic capital
markets, the report noted.
Swot Analysis of Indian Economy
By sidzday | Jan. 2012
Zoom In
Zoom Out
Page 1 of 3
SWOT Analysis of various sectors of Indian Economy.
The India economy, which is the 9th largest in the world in terms of nominal GDP, can be broadly
classified into three sectors: 1) Primary Sector or Agriculture Sector, which contributes about 15% to the
GDP and employs around 57% of the total workforce. 2) Secondary Sector or Industry sector, which
contributes about 28% to the DP and employs around 14% of the workforce. 3) Tertiary Sector or Service
Sector, which contributes the maximum of 57% to the GDP and employs around 29% of the workforce.

SWOT analysis of Agriculture Sector:
Strengths : -
* The favourable Climate and terrain of the Indian sub-continent makes it suitable for producing a
variety of crops. * As it employs majority of population, it enjoys a competitive labour force. * The
agriculture sector in India is competitive and hence evolving, produces a large variety of crops, and
enjoys a well demanded market as Indians prefer fresh farm produce over the processed food items.
Weaknesses:-

* As the majority of workforce is uneducated, they are not able to make the most out of the
government policies. Moreover, though the government spends enough over the agricultural reforms,
but due to the low level of execution on their part, it does not produce the desired results. * Due to the
lack of proper storage facilities and road connectivity of the farms with the respective market, around
60% of the fresh farm produce like vegetables, fruits etc get wasted. * Since only 40% of the land under
cultivation gets irrigated through canals, tube wells etc., the farmers depend heavily upon the annual
monsoons.

Opportunities:-
* A growing population, availability of modern agricultural techniques, easy availability of banking
finance, variety of pest resistance crops, coming up of retail chains and various government schemes
and policies, would make both the demand and the production go up. * Rise in demand of pulses...