Indian Economy-Move With Prudenc
The recent rapid economic slide of Sri Lanka leading to a political chaos is a caution for all emerging countries. Total economic bedlam in that country is the result of reckless policies of successive governments and corruption of Rajpaksa’s clan. A severe shortage of foreign exchange reserve has left Rajapaksa’s government unable to pay for essential imports. The root cause of the crisis lies in economic mismanagement of sustaining twin deficit – a budget shortfall alongside a current account deficit. To add misery to the crisis was the President’s decision in 2019 of tax cut as a populist measure. No wonder Sri Lanka is having an inflation rate of 54% hitherto unknown in Asia.
The present Indian economic situation has its own dark side. Unemployment is beyond the tolerance level. Inflation in the month of May 2022 was 7% and may rise to 8% in near future. RBI’s upper limit of inflation is 6%. Due to increase in import, the current account deficit in 2021-22 had been 1.2% of GDP as against a surplus of .9% in 2020–21. Fortunately India has $593 billion foreign exchange reserve. But sustained current account deficit, unpredictable global situation and depreciating value of rupee may erode the reserve to a vulnerable level. However, there is no reason to panic. The foreign Capital has already fled as much as it could and nothing worse can happen. Moreover, domestic investors have been net buyers of stocks in recent quarters. There is some recent trend of decline in prices of commodities in international market. Euro and Chinese Yuan have depreciated more than what rupee has against dollar. This in effect means that Indian rupee has appreciated against these currencies.
We should not forget that Russia-Ukraine war has destabilised even the developed world. The inflation in US and other developed economies is higher than in the emerging markets. The total government debt of India is 74% of its GDP as against the government debt in the US and other developed markets has risen to 120% of GDP.
The target before India should be to increase its foreign exchange reserve. For this some attempts have been made by RBI to attract foreign capital inflow. These efforts should be intensified. Secondly, and more vital, India needs to increase its foreign exchange by more exports by Increasing manufacturing. The supply chains are shifting from China giving an opportunity to India to step in. Robust manufacturing can help in employment. India has to keep its political climate stable to achieve these goals.
