Domestic Factors as Problems in Indian Economy

The Indian economy may proudly boast of being the eighth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP). The economy developed slowly in its initial stage due to the socialist approach of the government as well as blocking foreign investment and import substitution, it took its pace after the era of Liberalization, Privatization and, Globalization.

After the introduction of free market principles in the year 1991 which saw major economic, market and banking reforms, the country’s economic progress is consistently on rise. The economy of the country is now able to support a large foreign reserves and better utilization of capital inflows coming in the form of foreign investments and domestic savings. The conducive government policies provided favourable conditions for domestic industries to grow and increase their shares in the world trade.

However, in recent years, the economy has seen a steady downfall especially in comparison to its developing world counterparts such as China, Brazil, and Indonesia etc. The foreign investment which at times was flowing freely, has found other avenues for better return on investment. There could be many factors behind this slow performance of the economy and the solution lies in correcting the same. Several indicators such as high inflation, unsustainable Current Account Deficit (CAD) and high interest rates are some of the pointers telling the gravity of the situation.

High Inflation

High inflation is one of the primary causes of concern of the economy as it erodes the savings which have its negative repercussions on the capital inflows. The higher inflation also reduces the demand which affects the industries producing the goods. It results into less production, more employment, less export, high CAD and so on. The inflation if unchecked for longer time period, may severely affect the economy which has other political, and Law & Order hiccups as well.

Polity Logjam

Policy logjam may be considered the next prominent factor affecting the economy which is stalling the growth prospects. Several proposed reforms such as Tax simplification proposals (Direct Tax Code and Goods and Services Tax), Land reforms, bills related to foreign investment promotion, banking reforms etc are continuously being delayed resulting into eroding the trust of probable foreign investors as well as little chance of growth to the domestic industries. The recent verdict of the Supreme Court to cancel the spectrum licenses of many operators and the government proposal to amend the law retrospectively in order to receive capital gain tax further makes the investors anxious and reluctant. The law passed by one government in Foreign Direct Investment (FDI) in retail is ignored by the next government is an evidence of instability of the policy regime in the country.

Infrastructure Bottlenecks

Infrastructural bottlenecks are another major factor which coupled with difference in tax structure across states is impacting the competitiveness of the country in the global market. The port, road and rail along with energy infrastructure is not apt to the demands and lacks in providing efficient and cheap transportation facility. The domestic infrastructural problems ultimately affect the Indian export to a large extent. An initiative of building suitable infrastructure especially for manufacturing Industry is the concept of Special Economic Zone (SEZ) which promotes export activities by providing incentives and reliefs in the form of taxes and availability of raw materials. However, more reforms are required to make it achieve its objectives.

Higher Operational Costs

Higher operational cost is another impediment in the faster growth of the economy owing its roots from higher inflation due to which interest rates are increased. High operational cost reduces the profit margin of the corporate and the final burden comes to the consumers. Manufacturing companies are more vulnerable to such impact of interest rate rising and higher cost of raw materials.

The Global scenarios may have created much of the woes the country’s economy is facing today. The aftermath of Global financial crisis saw heavy reductions in export and foreign money deserting the Indian market. The major countries of export such as EU, US etc are still recovering from the shocks which are preventing our IT, Pharmaceuticals, machinery, jewelleries and other prominent export related industry to flourish. In this globalized world, India can’t avoid the repercussions of the negative impact on other economies in the world.

The Indian economy though progressed very well in the recent past, a comparative analysis also reveals the fact that its contemporaries are doing much better. It gives us reasons to critical analyze the factors effecting the economy and the curative measures. It is observed with various arguments that the current economic state is the culmination of factors both domestic as well as International. However, domestic factors responsible for the economic problems are more in number which is a matter of concern. The domestic factors are completely in the hands of the incumbent government and banking institutions unlike Global factors. Hence, more efforts are needed to be paid in order to bring parity in the economic development with our neighbours and other developing countries.