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India’s Economic Disaster

December 16, 2013
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India's Economic Disaster.

India is presently facing a major problem: Economic Disaster.

I think we all know about what is happening. It has been making big news recently! Even though Mr. Raghuram Rajan's ways have contributed to the rupee gaining slowly, we cannot be sure how long that relief will last! We have read countless reports and analyses by people across the world as to how the rupee and the Indian economy will recover.

But let's go through my personal analysis about why this is happening in the first place.

So this is how we will be proceeding forward:

A few facts:

Inflation and Currency depreciationhave contributed to enormous pitfalls where the Indian economy is concerned

INR actually touched the 68.85INR/1USD mark.This is a phenomenon that hasn't been seen by anyone, for the past eighteen years

For yourGK purposes, inflation is how the prices of goods and services increase on a yearly basis. Inflation rate is CPI(consumer price index) . The levels of inflation are presently increasing in India right now at an alarming rate. This does no favours whatsoever to the Indian economy.

Graphical Representation of CPI Average Inflation Rates since 1995:

If inflation is observed to be increasing in a country, the central bank needs to take steps through various monetary policies to control it. To control the inflation and deflation cycle in the Indian economy, the Reserve Bank of India increased 25 basis points, and Raghuram Rajan increased the repo rate by 25 basis points (to 7.50%). However, he reduced the Margin standing facility rate by 75 basis points (to 9.50%) in mid-July to stabilise the declining currency.

So how does the Central Bank react to inflation and deflation?

When inflation takes hold of the economy, prices increase. So people who have more money will also spend more on goods and services, and as a result of this, the Central Bank will increase rates to control this situation.

Find below the steps that they follow:-

When tackling deflation, the Central Bank does exactly the opposite.

The second lag is currency depreciation, which is also extremely predominant right now.

If we think about the pattern of positive and negative growth of the Rupee, we are left quite astonished. At the time of independence, 1INR = 1 USD. Presently, 65INR = 1 USD. Because the rupee has depreciated, imports will increase and exports will decrease. You can observe this currency depreciation in the graph below.

India is a developing country, which implies that India needs to be very focused on all the issues highlighted above to ensure that the economy runs faster and smoother. Currency depreciation ought to be a major part of the government's agenda because the Indian economy is mostly dependent upon import and export as sources of income.

Why is this happening?.

There are several reasons that can be enumerated in such a scenario. Keep in mind that this is just a hypothesis:

What are the future prospects of INR?

In spite of all that has been said above it is unwise of us to write off the INR completely and say it shall not rise from the mire. Experts are of the opinion that the government needs to undertake a combination of some short and medium term steps that will help the economy get back on its feet yet again. It is only through continued efforts that the Indian government will be able to retrieve the situation. However, it will take a phenomenal effort to help the INR get back to the 55 mark.

We can only hope that the party that comes to power in 2014 will bring about the change that is greatly required by India to flourish!

If you want to contribute to this discussion, feel free to post your comments below!


About the Author

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