Factors Affecting Economic Growth in India

Sample Essay on Factors Affecting Economic Growth in India

India is the most populous nation on earth. This puts it on the limelight. Its economy faces an array of challenges ranging from social inequalities to high interest rates, which discourage investors locally and from other countries. In this Essay, we take a look at Factors Affecting Economic Growth in India. We shall discuss in details the major factors, which affect India’s economic growth.

The first issue that hinders economic development in India are the ever-rising interest, which create unfriendly working conditions. Holding cash has its serious challenges and breeds inflation in the end. The point of inflation happens when you release more than enough money into the market, making it lose its value. However, an economy can only survive this scenario if there are higher returns from the investment sector. Thus, depositors earn higher revenue for holding their money in through fixed deposits for banks. India is experiencing high interest rates charged by financial institutions, mainly banks, which make the working environment unfavorable for most investor. For instance, the RBI raised repo by 6.5% while reverse repo rates shot to 5.5%. This was in a bid to curb the looming inflation. Economists however argue that another 50 bps increment could be in offing. India therefore is walking on a tight rope since the measures have the potential to tame inflation or choke the country’s economy.

The second issue affecting India is the fiscal debt. This emanates from the unbudgeted woes of the government. Fiscal deficit occurs when its expenditure surpass the revenues. It is not always a negative aspect of an economy, especially in cases where there are measures to deal with the issue. In India, it is hard to curb inflation through financial policies if there are no efforts to deal with the government’s fiscal debt. In recent years, the government of India has adopted 4.8% of the GDP as its deficit target. However, experts opine that there are other factors, which are likely to weigh negatively on the economy and hamper fiscal consolidation. Some of these factors include delayed reform, like the enactment of the GST and passing of the food security bills among others. It would be a tall order to contain the 4.8% deficit target in India with rising wage bill and the emergence of the entitlements to right to basic human needs like food. This is likely to affect the economic growth of India.

Another important issue in India’s economic environment is turning back to Western economies. For example, in 2010, India registered $29 billion net equity inflow. However, it has emerged that India earns high revenues from foreign investors through FII and not FDI, which is common with other economies around the world. This is risky for India as FII inflow can reverse and hamper development of the nation in case macroeconomic conditions in the market deteriorate. FDI inflows are highly preferred since they are stable and offer long-term integration with the economy.

Global woes further cripple India’s economic growth. Many people believe that India is yet to be decoupled, even though the story has maintained the script for decades now. In fact, India has become more attached to the world economy like never before thwarting the efforts to decouple it. For example, the market trends in the U.S. market directly affects India’s economy, demonstrating how intertwined with other economies India has become.

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