Free Custom «Economic Situation in India» Essay Paper

Dear Prime Minister/President here is my report on the state of the Indian economy. What I recommend to deal with the situation is contained in the report that I will present here today. India has been experiencing a steady economic growth for the past few years. The country has recorded an average economic growth rate of 7% since 1997. The country’s GDP in the year 2011 was estimated to be about $1.7 trillion, which is about 3 %of the total world’s economy. This is also the highest GDP value the country has ever recorded. Additionally, this value expanded by around 8% as compared to last year. All these indicators suggest that the country faces a brighter future in the short term. The graphs below show the trends of GDP variation and annual GDP growth of India.                                                                                                                                                    

 

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The country has also experienced growth in GDP per capita. However, there are some important factors that showed negative growth. Industrial production and export activities fell while inflation and unemployment rates rose which suggests that the economic boom was not felt across the board. India’s stock market also experienced downfall while there was an increase in interest rates (Trading Economics). These indicators suggest that the government has to put forth policies that will help arrest the slide of such crucial factors if the people of India are to enjoy the benefits of economic growth. Such policies may include playing a leading role in the stabilization of prices, promoting industrial output by availing cheap capital commodities, enhancing transport facilities and fostering international trade. The country’s central bank should also strive to stabilize the commercial banks’ interest rates. The country’s currency, the rupee, has weakened, especially against the dollar. The government should prevent further weakening by encouraging international trade, foreign investments and tourism. On the positive side, looking at the general trend of GDP and past economic growth figures, India’s economy will continue to grow in the long run.

Consumer confidence in India has increased from 73 in 2010 to 75.2 in 2011. Consumer confidence can be described as the peoples’ (consumers’) feelings and hopes towards the economic situation for the coming half year. Therefore, the increase in confidence implies that most Indians are very optimistic about the country’s economic prospects. This is essentially true, given the high value of GDP posted this year. Most of them perceive the country to be moving in the right direction in terms of economic growth. Hence, the people’s purchasing power and willingness to spend increases. This promotes greatly the business environment and government revenues as a result of more taxation. On the contrary, business confidence level fell from 145.3 in early 2011 to 145.2 in mid 2011. Business confidence is measured according to businesses’ perception of the economy, their respective financial positions, investment environment and maximization of capacity in the short term, like the next half year (Trading Economics). The decrease in this level perhaps indicate that the businessmen had very high hopes regarding the country’s economic growth at the start of the year, a level that the country will not probably reach this year. However, it must be taken into account that the decrease was very small, a drop of 0.1. Therefore, while some businesses view the economic conditions as unfavorable, a majority of them are very optimistic about the economic prospects of the country as their hopes have yet to fade. The country should use this confidence to create an even better business-friendly environment.

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The government of India has been trying to enhance the country’s economic position by increasing its revenues while at the same time reducing expenditure. These plans are crucial for all governments as they set economic goals that will guide their approach towards economic matters and improving the citizens’ well being. The next section looks at some of the measures the government of India is putting in place to improve the country’s economy.

India’s Fiscal Policy

The government of India has put forth measures to improve the economy by mobilizing financial resources at its disposal. This is done by increasing taxes and imposing direct or indirect taxation. For example, it has raised the personal income tax exemption from 160000 rupees to 180000 rupees and increased the service tax charged on hotels, pubs and some hospitals (Times of India). As is the case with most developing countries, taxes are the main source of government revenues (Akrani). By increasing the number of institutions to be taxed, the government hopes to generate more revenue. The government has also been engaged in issuing its bonds to the public and getting loans from both local and foreign entities. It has also put effort to reduce its expenditure by cutting down on unnecessary expenses.

India has one of the world’s widest gaps between the rich and the poor. As a result, the government is trying to bridge this gap as part of its fiscal policy. This means that the rich people have to pay more income tax than the poor people. Additionally, luxurious appliances and items are taxed more while the basic ones are taxed less (Akrani). This ensures that the poor are protected from even more misery as they can afford essential goods and services.

India has experienced economic growth over the past few years but the level of inflation has been rather high, almost negating the country’s economic achievement. Therefore, the government of India has made efforts to stabilize the prices of essential commodities. This is done through the reduction of fiscal deficits and establishing schemes to save taxes (Akrani). Keeping the rate of inflation low will enable the people to afford necessary goods like foodstuffs and they will have even more confidence in the economy. This will increase their current spending power while at the same time boosting the economy.

As it has already been noted, the unemployment rate in India has increased in the past few years. The latest report by Trading Economics put the rate of unemployment at around 9%. This high level can slow down economic growth as people have very limited resources to spend. Additionally, the government is forced to offer such people extremely subsidized services.  To address this situation, the government is investing systematically in the infrastructural facilities, which not only improves the country’s facilities but also provides employment for a section of the population. The government has also enforced measures to alleviate the tax burden for small scale enterprises which will eventually lead them to employing more people (Akrani). When a vast majority of people in a country are employed, their purchasing power is increased. This leads to more business activities, investments, increased industrial production and the government has a wider tax net. This in effect will increase the government revenues. The government has also launched a program aimed at reducing poverty in the country.

 The government has tried to boost export trade by offering tax exemptions to exporters. For example, taxes are not charged on export earnings. Excise duties are also reduced for the exporters (Akrani). The VAT charged on goods and services has also been maintained at 12.5%. Such policies foster international trade and are very attractive for foreign investors. An increase in exports will provide the country with much needed foreign currency resources for stabilizing the local currency. A strong rupee will eventually reduce the value of its imports.

Government Spending and Income

In the 2011-2012 fiscal years, the government projected its expenditure to reach 12.58 million rupees. Of these, the government allocated more than 10% (1.6 trillion) to the defense sector. This implies that the government regards the country’s security very seriously. This is true as the business environment is greatly fostered if the country is secure. This is justified given that India is prone to terrorist activities due to its location in the volatile Middle East. The government also located 180 billion rupees to improve rural infrastructure. This in essence will promote business in rural areas and enhance transportation of raw materials to the industries. This will also promote the development of small scale firms and enterprises. The public banking sector was also allocated 201.5 billion rupees. This in essence stabilizes the banks’ interest rates and encourages borrowing by the public and businesses. This may lead to more investments due to the extra capital borrowed. The government also allocated 520.5 billion rupees to the education system. For a country that is still developing, education is vital as the country benefits more from academic research and innovations. It also reduces the unemployment rate and incidences of insecurity as more people are occupied. The country also benefits as skilled workforce is being produced in large numbers. The budget for the country’s health sector was 267.6 billion rupees. This is very crucial for the people as a healthier society implies a more effective workforce. Additionally, mortality rates can be reduced if the people have easy access to health facilities. Other sectors which received substantial amounts of funding included the national skill development, general infrastructure and Mahatma Gandhi employment scheme (Times of India).

The Indian government projects that in the fiscal year 2011-2012, it will generate 9.32 trillion rupees exclusively from taxation. This is almost 75% of the projected expenditure. It also projects 1.25 trillion rupees earnings from non-tax revenues. Tax revenue collected from the corporate sector is estimated to be around 3.6 trillion rupees in the fiscal year. Other important revenue avenues are customs revenue (1.52 trillion), gate duties charged at factories (1.64 trillion) and service tax -820 billion- (Times of India). Other revenue generators are indirect tax proposals (113 billion rupees) and service tax proposals (40 billion rupees). The projected total revenues amount to around 20 trillion rupees.

Comparing the proposals for expenditure and income, it can be concluded that the government won’t have any problem aligning expenditures to income. This is because the projected income generated is higher than the projected expenditure in this year. However, this has not always been the case. For example, in the last fiscal year the government spent more than it earned and faced a budget deficit. The budget deficit was 5.10% of the country’s GDP (Trading Economics). This year the government has indeed acknowledged that there will be a 4.6 % budget deficit (Patel). This indicates that the government is falling short in its revenue collection or spending more than it allocated. Therefore, the government has to be more realistic, rather than optimistic, in its income projections. It has also to minimize spending on projects that it has not allocated funds to. The budget deficit may also be due to misappropriation of government funds or corruption. Thus, the government has to be more prudent in its approach when it comes to ministerial expenses.

Taxation Regime

For the past few years, the government of India has maintained a 30% tax rate on wages. The country is ranked 48^th among ninety nine countries of the world that have the lowest tax rate on wages. Considering the fact the country has maintained this percentage, the government is more than happy with this taxation rate. In this fiscal year, the government has raised minimum alternate tax from 18 to 18.5%, iron ore export to tax rate was also increased to 20%. In general, the previous taxation rates have been maintained. These tax rates are relatively low when compared to other countries (Bedell).

Taxing the people more may lead to the government generating more revenues. However, this is counterproductive as it will undermine the country’s workforce’s morale. Cutting a portion of their salaries will also reduce their spending power which may be detrimental to business activities. Reducing the tax rate may benefit businesses in the short run but will reduce the government revenues a great deal. Therefore, the government should just maintain the current taxation level. The government has also been systematically increasing the taxes for businesses, especially those that offer luxurious goods and services. This practice should continue as the economy grows and expenses increase. However, steps should also be taken to protect these businesses so that they are encouraged to provide these goods and services.

Banks play a major role in economic growth. Therefore, they should be protected at all costs by the government. This is because commercial banks offer investment loans to individuals and businesses who may invest the borrowed money which will ultimately improve the economy and offer job opportunities to the people. The banks also play an important role in the stabilization of the national currency which is crucial in international trade. Hence, the taxation rate for the commercial banks should be kept to a minimum.

India’s current sales tax is 12.5% excluding essential commodities, precious minerals like gold, industrial inputs and capital commodities and services (Tax 4 India). This value is quite low when compared to other countries. Since the country has been experiencing steady economic growth, it can be argued that this low sales tax has played a part in the growth. Hence, it should be maintained for further economic growth. This is because the sales tax is business friendly and attractive to foreign investors. This not only increases the government revenues but also creates employment. Increased international trade also promotes tourism in the country and fosters international peace.

Conclusion

India as a country is heading towards establishing a robust economy. This is evident through its consistent annual economic growth and its recording of the highest GDP in the country’s history. However, there are some areas where the country has to make improvements. For example, the high unemployment rate should be of concern to the Indian government. Therefore, the government has to actively engage itself in activities that will provide employment to the people of India. This can be done by encouraging private organizations to employ more people by promising them some tax leverages. The government has also to promote Indian small scale industries so that people won’t rely too much on the government for employment. It can also actively employ the people in the government institutions. The government has to bridge the gap between the poor and the rich. This can be done by making policies that will favor both the small scale and large scale firms. The government also has to apprehend corrupt officials that misappropriate public funds. Lastly, it has to put forth measures to minimize corruption in the public sector.