2018-CGS-29: Mains Revision-17: Secondary Sector of Economy
Various initiatives have been taken by the government to address this high cost of logistics like introduction of goods and service tax and infrastructure status to logistics sector. It has aided significantly in increasing the India’s ranking from 54th to 35th in logistics performance index. But no significant measures have been taken to address the non-conventional challenges mentioned above. Concentrating on these non-conventional factors will aid in making further improvements. [Mint]
Relationship between Growth And Interest Rates
Interestingly most schools of economics agree on one hypothesis “Interest rates are negatively correlated with economic growth”. That is, higher interest rates lead to lower growth and lower interest rates lead to higher growth. This lies at the heart of the modern monetary policy practiced by central banks around the world.
There are vital findings which contract conventional hypothesis
- In Japan, interest rates have been falling for more than two decades without a significant impact on economic growth.
In a recent paper titled “Reconsidering Monetary Policy: An Empirical Examination of the Relationship between Interest Rates and Nominal GDP (Gross Domestic Product) Growth” also contradicts the most popular hypothesis. It states
- That the nominal interest rates are consistently positively correlated with growth. The correlation between GDP growth and the three-month interest rate was as high as 0.8 for Japan over the 50-year period.
- It is GDP growth which affects short-term and long-term interest rates in all four countries i.e. interest rates follows GDP growth, not the other way round.
- Federal Reserve Bank of New York’s Economic Policy Review, titled The Monetary Transmission Mechanism: Some Answers and Further Questions, reported that the correlation between federal funds rate changes and subsequent quarters’ real GDP growth in the US from 1984-2000 was almost zero. The US department of commerce considers the prime lending rate as a “lagging” indicator.
Equilibrium, Growth and Interest rates
- The answer to the divide between the economists on a key issue lies in one of the fundamental concepts in economics: equilibrium.
- According to the theory “When a market is in equilibrium, prices become the key variables since there are no quantity constraints. Price movements bring about equilibrium in the market and problems in achieving equilibrium are usually attributed to sources of price rigidity.” This focus on prices is the reason why most of the research and policy discussions in modern monetary economics are centered on interest rates.
- The hypothesis that interest rates are always negatively correlated with economic growth only holds in such a general equilibrium set-up. The problem with general equilibrium is that it takes several unrealistic assumptions to show that a market can achieve and remain in equilibrium.
- In reality markets are constantly in a state of disequilibrium. When markets are in disequilibrium non-price factors like the quantity of money and credit become important.
- The short side principle suggests that in a supply-constrained market (like India), suppliers of credit have market power and get to decide whom to transact with. Since such markets are in disequilibrium, lower interest rates need not always lead to higher economic growth. [Mint]
Revisiting Export Strategy Of India
India needs to move on from merely focusing to becoming obsessed with rejuvenating our exports. India’s exports are facing the fear of contraction
- This slowdown in exports is across all sectors, led by the scandal-plagued gems and jewellery sector, whose exports fell sharply by 16.6% from a year ago.
- Garment exports too have suffered and have now fallen behind Bangladesh and Vietnam in absolute dollar terms.
Vietnam’s garment exports grew by 10% last year and are expected to continue at that pace this year too. Most notably, the Vietnam Textile and Apparel Association (VTAS) has now tapped into newer markets like Russia and China, in addition to traditional markets like the US and European Union (EU). VTAS chairman said the heat of competition is from China, Bangladesh, Sri Lanka and even Myanmar. The country not mentioned in this list is India.