The below post is a comment made by me on one of my friend’s Facebook wall in reply to why Indian economy is sinking and what could we do to arrest it.
People’s Mistake:
I would say, we are saving too much on Gold. According to BBC[1], Indian House wives have 11% of the total world’s gold reserve. You have to note this 11% does not comes under India’s Gold Reserve (which is owned by the Reserve Bank). Majority of this 120 billion$ worth gold is sitting useless either in bank lockers or in house holds. This money must be put into some useful investments, either by buying government bonds or investing in private equities.
How it affects[2]:
With this much Rupee Idling, we have created a demand for Rupee within India, The government cannot print more Rupee like what Zimbabwe did, so they had to borrow externally. Borrowing outside, increases our already high fiscal deficit (Fiscal Deficit = Exports – Imports, wherein India; Imports >> Exports). To add up to it, few people ask relatives returning from outside India to buy gold since it is comparatively cheaper outside, what they don’t realize is, it increases our Imports, thereby the Deficit as well.
Possible Aftermath:
If Fiscal Deficit Increases beyond a certain percentage of our GDP, then rating agencies will downgrade our already low rating to Junk[3], and then all these FDI investments will be pulled out just like that.
Falling Rupee is not bad always:
When Rupee gets devalued against dollar, it means foreigners can buy Indian goods for a cheaper price and this gives an edge for our exporters in the global market. So countries often devalue their currency to gain market [Japan Yen few months ago which led to a huge gain in Toyota’s sales [4]]. But clearly what we have now is not this.
Problems/Solutions:
* Corruption: Our politicians are so corrupt that, they get bribes from companies that wants to invest in our country. So, many mid-sized manufacturing companies which doesn’t has much lobbying power circumvents Investing in India [But now our FM is literally begging investors[5][6] to invest in India during major economy summits, but that’s a different story].
* Bad Start: We are more of a reactive country than a proactive one. Our economy was liberalized only in early 90’s. Thanks to Nehru and his BS (No Offence) Licence Raj[7], the policy makers then thought that, if they allow Foreign companies to setup bases/invest in India, then it will become the story of English East India Company again. Then in 1991, when we were close to default, we let the shores open[8]. Had we did this so early, we could have been more richer than the likes of Singapore and Malaysia.
* Quality of Products: Most of our high quality goods (from tirupur) are being exported to global co’s[9] (like H&M) and local manufacturers don’t give a damn about the quality. So we people start buying products from those global co’s who bought their raw materials in India.
* The so called Freebies: First of all, nothing is free. The TV, Grinder and all the crap you got are bought out of yours or someone’s hard earned tax money. The government could have used that money to a more useful purpose like to set up more of these restaurants or in some infrastructure projects, instead of bribing you to get your votes.
* Education: This is one of the important thing, there must be some sort of school for giving a crash course to Politicians or make them hire a bunch of goddamn MBAs for each and every Ministry.
[1] http://www.youtube.com/watch?v=IpdoRUMeshw
[2] http://articles.economictimes.indiatimes.com/2012-03-25/news/31234318_1_gold-imports-gold-demand-import-bill
[3] http://www.hindustantimes.com/business-news/WorldEconomy/S-amp-P-warns-India-of-rating-downgrade/Article1-1061685.aspx
[4] http://www.businessweek.com/articles/2013-04-25/japan-needs-more-than-a-devalued-yen
[5] http://timesofindia.indiatimes.com/business/india-business/Chidambaram-promises-fair-transparent-regime-for-foreign-investors/articleshow/21016727.cms
[6] http://www.moneycontrol.com/news/economy/chidambaram-arrivesus-to-pitch-for-investmentindia_914799.html
[7] http://en.wikipedia.org/wiki/Licence_Raj
[8] http://en.wikipedia.org/wiki/1991_India_economic_crisis
[9] http://articles.economictimes.indiatimes.com/2013-06-30/news/40286848_1_knitwear-exports-crore-worth-rs
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