Biggest Threats to India's Sinking Economy

The current economic scenario in India is no better than a sinking ship. The continuous fall in rupee, the slow growth rate of a decade and the inflation are signs to a dooming economy. Rupee has touched all time low of 65 against dollar and there have been speculations that it might cross the 70 mark soon if the pressure continues. Traders are skeptical about the bottom price of rupee and the inability of government to reassure domestic and foreign investors, reports Bhaskar News.

The Prime Minister, The Finance Minister and the Finance Ministry itself are trying to find out a way to curb the situation from going bad to worse. The Finance Minister is heard saying that there are good chances of the Indian economy improving by the third and fourth quarters.

The challenges in front of the Indian economy are many and needs to be worked upon immediately before it reaches a state of irreversibility.

1. Credible Fiscal Policy

The ever increasing fiscal deficit as a result of the imbalance between Indian government’s revenue and expenditure is a major threat. The foreign exchange reserves, that were sufficient to serve imports for one and a half year during 2007-08, are now estimated to serve imports for only about seven months. The fiscal deficit figure also shot up from 3.5 percent in 2007-08 to 5.8 percent for the financial year 2011-12.

Expenditures on wages and subsidies should be minimized and instead directed towards productive investments such as education, infrastructure, health and other areas which could enhance growth.

2. Providing food to a large population

If the Food Security Bill is made a law in India, it will only increase problems of the exchequer and add to the already swelling subsidy bill. Under this bill, the Indian Government tries to cater the need of large population by providing them grains at subsidized rates, which are actually bought at high market prices.

Although the Central Government is trying to bring down the fiscal deficit to 4.8 percent of GDP, keeping the current scenario in mind, this seems to be a farfetched dream.

The bill aims to benefit one-third of India’s population by providing the beneficiaries with 5 kg grains every month at a price of 1-3 per kg.

3. Elections are on the horizon

In an attempt to please the voters, the incumbents are expected to release few more proposals like the FBS(Free Basic Services), as elections are approaching. However, such proposals will act as a fatal blow to economy. This will also cost the country’s GDP heavily.

Although an interim budget will be announced by the government in February 2014, the investors will have to wait for a long time to invest in markets since as per laws the government can submit a vote on account before the scheduled elections only.

4. Hike in oil prices

The hike in oil price is acting like ‘fuel to fire’ for the current scenario. About 80 percent of the total oil consumed in India is imported. The falling rupee and huge oil imports has a direct impact on Current account deficit. According to the Director-Finance of Indian Oil Corporation, P.K.Goyal, the company has undergone a loss of 840 crore during the April-June quarter due to the depreciation in rupee. Further fall in rupee will accentuate the losses of oil companies since crude oil is bought at an exorbitant price.

5. Global economy and Liquidity crisis

Investors are not feeling confident enough to take risks in the face of Global Economic crisis. RBI, however, insists that to bring back economic equilibrium and to keep inflation under control, investment is an utter necessity. The diminishing Indian foreign currency reserves due to global economic crisis leads to liquidity crisis which in turn triggers inflation. Other factors propelling inflation are minimum support price and steady increment.

6. Balance of Payment crisis

Many view the current economic crisis as similar to the 1991 balance of payment crisis. But on examining the different aspects of the Indian economy in 1991, one could say that India was in a better position during the BOP crisis. The country did not have capital account convertibility which was the main cause of heavy cash outflows of the Southeast Asian countries. The functioning of interbank foreign exchange was under control of RBI and also the domestic business saw an admirable growth due to rise in local demand. The debt to GDP and external debt was low and also the foreign currency reserves were sufficient to serve imports for almost three years.

7. Unskilled labour

Although every year about 12.8 billion people join India’s workforce, only 20 percent of that workforce is skilled. Skilled workforce is required to open new business ventures which in turn help in developing the economy. Highly trained workforce can work in foreign companies and earn India foreign currencies. Hence, the government should take measures to train the unskilled workforce and turn them into productive units of the economy.

8. Corruption and Black money

The foreign banks are loaded with Indian black money and has cost a lot to the economy during the last decade. According to Global Financial Integrity, a Washington-based research organization, India stands at 8th position among the countries to route out most illegal funds. The black money is acting like a termite, weakening the economy. Some large international private sector banks does not follow the regulations laid down by central banks and cash in a lot of black money in gold and other assets.

9. Investments in unproductive assets

Heavy investments in unproductive assets like gold do not help improve economy in any way. They sit idle and suck liquidity out of market. Huge gold imports leads to import losses and a way of using it for the benefit of the economy is to collateralize its gold and globalize economy.

10. Lack of investments

RBI is trying to encourage lenders and borrowers to increase investments, but neither of them seems ready to take risks. The only ways to help the falling economy is either to convert the import-oriented economy to export-oriented economy or to encourage foreign investors to invest in India leading to increased liquidity. The measures announced by RBI such as capital control is only demoralizing industrialists and according to some economists, they are not instrumental in improving the current economic crisis.

Source: Siliconindia