India's Economic Problems: Difficult Road Ahead?

Abstract:

The case discusses the major economic problems faced by India in 2012-2013 and how these problems were caused. The major economic problems included: rupee depreciation; widening current account deficit; falling investment levels; fiscal deficit; and inflation. In the first quarter (April-June) of the fiscal year 2013-14, India's economy grew at its slowest in the previous four years and recorded a growth rate of 4.4%. As a result of India's slowest economic expansion since 2009, BNP Paribas, France's biggest listed bank, sharply cut India's GDP forecast to 3.7% for fiscal 2014, from an earlier estimate of 5.2%.

In the fiscal year 2012-2013, the rupee depreciated by roughly 10% against the dollar. By August 2013 the slide of rupee intensified with it loosing 20% of its value against the dollar. Increasing oil prices as a result of the Syria conflict, widening current account deficit, and capital outflows intensified the rupee's fall in August 2013. Apart from it, India's current account deficit, swelled to 4.8% of GDP during 2012-2013, from 4.2% of GDP in 2011-2012. The reason behind India's swelling current account deficit in 2012 was lower exports and higher imports of oil, coal, and gold.

In 2012, on the investment front, several projects were reportedly stalled due to policy bottlenecks. The investment climate in India was not seen as encouraging by corporates. The FDI inflows to India decreased by 29% y-o-y to USD26 billion in 2012. The reason for this significant decline was India's slowest growth in a decade and high inflation which increased the risks for foreign investors. Along with declining investments, another major economic problem which India faced was its increasing fiscal deficit. India's fiscal deficit widened to 5.7% of GDP in 2011-12. Analysts were skeptical that government would be able to contain its fiscal deficit, as it continued to rollout populist policies giving out huge subsidies, like the Food Security Bill (FSB) in September 2013.

High inflation since 2009 had been the most challenging issue for policymakers in India. In the fiscal year 2012, food inflation remained an area of concern as it was contributing to an average of one third of total inflation. The case study goes into details of as to why India was facing such wide-spread economic problems and what steps the Indian government had initiated to combat these problems.

Issues:

The case has the following objectives

» Understand the major economic problems which an economy faces.
» Study the concept of currency (rupee) depreciation and also the pros and cons of currency depreciation.
» Understand the reasons behind India’s falling investment levels and its correlation with economic growth.
» Discuss why India’s current account is widening.
» Understand the reason’s behind India’s ballooning fiscal deficit.
» Examine the concept of inflation and discuss how harmful it is for the Indian economy.
» Study the steps taken by the Indian government to overcome its economic problems and analyze whether they were appropriate.
» Discuss ways in which India could combat its major macroeconomic problems.

Contents:

Keywords:

Indian economy, India’s economic growth/GDP, India's economic problems, Mergers and acquisitions, Central Statistics Office (CSO), Food Security Bill (FSB), Rupee Depreciation, Current Account Deficit, Falling Investment, Foreign Direct Investment (FDI), Fiscal Deficit Inflation, WPI inflation, CPI inflation, Fiscal policy, Monetary policy, Reserve bank of India, Cabinet Committee on Investment (CCI), Fiscal Deficit, Revenue Deficit, Macro Economic Policy

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