Friday, 12 June 2015

How External Environment affects Indian Economy


The Economic Survey said that India has reached a sweet spot. It could finally be launched on a double-digit medium-term growth trajectory.

What external factors are being considered:
  • Falling Oil prices ---> Positive effect
  • Falling Global demand and Capacity utilisation ---> Negative effect
Positive effects of: 
collapse of the prices of oil, related refined products as well as manufactured items based on them
  1. Short run growth rate increase
  2. CAD - since low imports
  3. Dramatic decline in inflation - since low price of commodities - coz low expenditure in mfr, transport, import, etc.
  4. Lowering fiscal deficit
Negative impacts of: 
Post recession developments esp in developed countries - first money was pumped by lowering interest rates --> capacity increased --> but demand didnt grow -- so low capacity utilisation
  1. Impact of low global demand and excess capacity - prolonged U-shaped bottom in IIP for manufacturing 
    1. Actually IIP has two parts = 1.Globalised(did poorly) + 2. Non-globalised (did well)
      1. part 2 did well (like electricity grew at over 6%)
      2. but part 1 of mfr grew at <0.5% 
        1. So - overall decline in IIP
  2. the fluctuating fortunes of the corporate sector
    1. Because - employees earning from abroad - not getting salaries or work or both --> low income tax collection from employees + low excise revenue ---> low revenue tax recovery

Conclusion:
On balance, the effect of external factors on the Indian economy in 2014-15 has been positive on the current account, mildly positive on the fiscal account and negative on corporate growth. The net overall effect is positive, but not as large as most analysts have assumed. 

Source: Indian Express

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