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Do the government’s reform measures mark an important policy shift?
There are mixed reactions from various industry players on the government’s reform measures and their implications on the policies in India. For example, HSBC reduced its growth forecast for India from 5.7 percent to 5.2 percent for the current fiscal year.
And Fitch Ratings highlighted its negative viewpoint about India’s sovereign credit rating that there could be a further decline in the next 12 to 24 months. On the other hand, there are some industry players, including Moody’s Investors Service, Angel Broking and Anand Rathi Financial Services, that believe that the reform measures undertaken by the government will help to improve India’s economy.
Few years ago, India was considered a fast-growing economy with expectations that the economic growth will reach 10 percent. However, in light of the high inflation rate and the increase in the current account deficit, the International Monetary Fund brought down the target for economic growth to 4.9 percent last year, which is the lowest in the decade.
Under the pressure of international and local agencies, the Indian government introduced a number of reforms since September 2012, including increasing the price of diesel and fertilizers, and opening doors to more investors.
According to Arvind Mayaram, Secretary at the Department of Economic Affairs at the Finance Ministry, these policies will help to boost the economic growth of the country. The government is confident that by attracting more investors into India, the current account deficit will automatically reduce.
Current account deficit occurs when the value of imports is higher than the value of exports. So, with more companies investing in India, the productivity levels will increase and this will enhance the value of exports in the long run.
The government’s reform measures definitely mark an important policy shift, which is focused on making the business climate more attractive for investors. The government needs funds for infrastructure development projects that it has planned out in the Union Budget. With the government funds drying up because of the current account deficit, the government is left with no choice but to get funds from international investors.
This will help to address the high unemployment rate in India too. Instead of giving financial aid and subsidies to poor farmers and the lower classes in the society, the Indian government is looking into ways to increase the number of job opportunities in the agricultural and manufacturing sectors.
The Reserve Bank of India has reduced the interest rates from 8 percent to 7.75 percent, in an attempt to boost foreign direct investments (FDIs) in India. By lowering the borrowing cost for investors, the Indian government is creating an environment that is favorable for the setting up of factories, manufacturing plants and multi-national corporations.
The focus of the policies formulated by the government has shifted from within the country to outside of the country. The governor of the Reserve Bank of India also made it clear that the agency will reduce the interest rates further if the rate of inflation declines in the coming months. This is a clear indication that India wants to tap on the funds of foreign investors.
Although there are some industry players that have doubts on the potential success of the government’s reform measures, majority of the sectors and companies in India are optimistic that the new reform measures undertaken by the government will help to shift the focus from imports to exports, and create more employment opportunities in the future, ultimately boosting the economy. This is what economists call outward looking development policies.