the economy of india

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!!!!!!Prepared by: !

Lindzay Daye Sarah Olewinski

Christian Hernandez Jose Valencia

The Economy of India ECO 201 - Macroeconomics

THE ECONOMY OF INDIA

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!Executive Summary !In Asia, there is a country that is home to a peninsula that separates the Arabian Sea and Bay of Bengal. With a thriving economy that has made one of the best comebacks in history, India rose to the occasion when the world was aected by recession in 2008. The Republic of India is located just southwest of a major economy known as China, and just Southeast of some troubling territory known as Pakistan, Afghanistan, and Iran. India currently inhabits over 1.2 billion people, and is the second most populated country in the world (CIA, 2013). !!!!!!!!!!!!!!!!!!!!!Some of the major challenges in India are more than just economic, but also political and ethical. Not only is the countrys economy stagnating - with a slowing GDP growth rate of 4.7 percent, high inflation, and high unemployment rates reaching almost 14 percent this year, but the government is plagued with

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bottleneck ocials (CIA, 2013). The Infrastructure project completion rate is about 25 percent currently, and politicians will not make any moves due to upcoming elections (Rupee dive, 2013). The countries citizens are also suering with issues such as an inadequate sanitation system, over-regulated agriculture and extreme income inequality. !Indias economy is stronger in terms of the GDP growth rate, but the United States has a stronger labor force, lower inflation rates, as well as unemployment rates. In terms of poverty the United States also beats out India but this can be unfair because of the population dierences, with India having 1.2 billion inhabitants compared to roughly 300 million in the US. The US also dominates in terms of corruption in politics, and business (CIA, 2013). !For the first key question, it is more than safe to say that the overall risk level of Indias economy is between moderate to relatively high. The conclusions drawn were based on several areas of concern such as corruption within politics, slow implementation of policies, the alarming amount of suering citizens, and an unskilled labor force. Other areas of concern included the unemployment rate and high inflation. !The second key question involves an analysis of Indias monetary and fiscal policies. Since India has both a high unemployment and inflation rate, the focus fell upon the greater issue. Fixing the unemployment would involve an increase in the economys money supply. In terms of the fiscal policy, we determined there was a need for emphasis on several issues through a side-by-side comparison of Indias actual spending and our recommendations. These issues involved the improvement of the well-being of Indias citizens as well as the countrys overall productivity.

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India Country Overview !A landmass sub-continent in the South of Asia, India (formally known as the Republic of India) is filled with a diverse selection of religions, languages, cultures and people. Ranked as the worlds second-most populated country, it holds over 1.2 billion people as of 2012 and has become a central part of the global economy today (World Bank, 2012). !The country follows a federal political system in which the government consists of a central body and numerous states. Although discrimination on the basis of caste is now illegal in India, these tensions continue to influence Indian politics, which can act as a deterrent from its vast potential in overall growth and expansion. !United States Country Overview ! The United States of America, commonly referred to as the U.S., is widely renowned for holding one of the top spots in fields such as medicinal innovation and military powers. It is almost appalling to hear that the U.S. budget for military expenditures is higher than the next top ten countries combined (Koba, 2014). The U.S. is also home to one of the most diverse populations in the world today. Due to numerous waves of immigration, the U.S. boasts ethnical and racial diversity with its so-called melting pot ideology at the core of its identity. Unfortunately, the U.S. is plagued in categories such as a high national crime rate, energy consumption, cost of living and obesity - all of which can greatly aect the growth of the economy. However, the U.S. holds boundless potential from its vast amount of natural resources and skilled labor force. !India Economic Overview !Several decades after India gained independence from the United Kingdom, Indias economy was kickstarted into a boom in 1991 after leaning towards a more capitalistic market. India also shortly began pushing for a self-sucient system

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Figure 1 - Retrieved April 7, 2014 from The EIU


imposing higher taris on imported goods to promote local production and spending (Shilling, 2012). Today, the economy of India continues to expand at such an alarming rate. The workforce is plentiful and highly skilled - particularly in areas such as technology and agriculture - but is plagued with widespread poverty. !With one of the most diverse cultures in the world, some consider India to be a continent rather than a country itself. Putting aside Indias alarming population, it has 16 ocial languages, with English as the means of communication for most written media, and Hindi as the language most widely used verbally (CIA, 2001). Dealing with the internal economy of India requires both patience and a firm understanding of how all of its cultures influence work, function, and influence society. !United States Economic Overview The United States has one of the most diverse economies in the world. Reflecting a laissez-faire persona, the free enterprise that is the U.S. economy is relatively unregulated by the government. The U.S. boasts one of the most competitive and innovative markets which is the fuel that drives the constantly growing and changing environment that businesses take place in. Unfortunately, the economy has been struggling through a dragging recession for the past decade, which has become one of the primary issues being addressed by its leaders today. Other pressing issues that the U.S. is currently facing include its colossal long-term debt, unemployment, increasing reliance on imports that decreases sustainability, and its detrimental dependence on oshoring and outsourcing. !Indias Gross Domestic Product (GDP) !Arguably one of the most important indicators of the health of a countrys economy, the Gross Domestic Product (GDP) is a representation of the total dollar value of all goods and services that are domestically produced by a country over a specific time period (Koba, 2011). It can be determined by a combination of goods and services including public consumption, government expenditures, investments, and net exports - found by subtracting the countrys gross imports from the gross exports. As of 2013, Indias GDP (PPP) was ranked fourth in the world at approximately $4.962 trillion and its GDP per capita (PPP) ranked 168th at $4,000 (CIA, 2013). The GDP per capita can be calculated by evenly dividing its GDP by the total population at that time. !!

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United States Gross Domestic Product (GDP) !The United States holds a confident spot at the top of the world in terms of its Gross Domestic Product (GDP) at approximately $15.684 trillion, with almost twice the GDP of China and over six times that of the United Kingdoms (Trading Economics, 2012). !

Similar to most economies in the world, the GDP of the U.S. is dominantly composed of the countrys consumption, which pertains to public spending. Consumption takes up $11.1 trillion (over 70 percent of the GDP), investments $2.1 trillion (13.5 percent), government spending $3 trillion (19.2 percent) and net exports of $0.6 trillion (Vo and Francis, 2012). The negative net exports value indicates that the U.S. consumes more of its imports than it makes out of its exports to other countries around the globe. The high amount of consumption within the economy of the U.S. reflects a high quality of life within the country. !Indias GDP Annual Growth Rate Within all of the countries in the world, there is a sound, universal numerical value that reflects the changes in the value of all the goods and services that are domestically produced in India. This value is referred to as the GDP Annual Growth Rate. Currently down from a GDP Annual Growth Rate of 11.4 percent several years ago (seen in Figure 3 above), India now sits at only 4.7 percent in the fourth quarter in the fiscal year of 2013

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Indias Quarterly GDP Growth Rate in 2008 - 2013

GD

P G

row

th R

ate

0

3

6

9

12

2008 2009 2010 2011 2012 2013

Figure 3 - Numerical values retrieved April 9, 2014 from Trading Economics

Top GDP Countries in USD BillionG

DP

in U

SD B

illio

n

0

4,000

8,000

12,000

16,000

United States China Uk Russia India

Figure 2 - Numerical values retrieved April 18, 2014 from Trading Economics


according to the Ministry of Statistics and Programme Implementation (Trading Economics, 2014). !GDP and The Quality of Life!Overpopulation: !As mentioned earlier, with over 1.2 billion people, India sits at the top two most populated countries in the world. With its current rate, according to a study by the United Nations (UN), the population of India is set to surpass the population of China (currently the most populated country in the world) in the year 2028 at a high of over 1.45 billion people and counting (United Nations, 2013). Other possible factors would include the culture and literacy in the nation, both of which are also discussed in this report. Indias literacy rate for the entire population is at a low of 62.8 percent, with women at a concerning rate of about 50.8 percent (CIA, 2013). There is also the inevitable phenomenon of the correlation between family size and social status. For most countries, it is definitely a trend for families in impoverished areas to be larger than families in well-to-do parts of the nation. !Overpopulation can be a serious issue in India for the following reasons: the depletion of natural resources, a rise in unemployment and a possibly higher cost of living. A larger number of people in a nation would require more of its resources to be consumed at a faster rate to sustain its masses, depleting its natural resources such as food, water, coal, oil, etc. faster than it should. An overpopulated country would also develop larger unemployment rates when handled poorly, which means more people means a tighter competition for specific jobs. Also, as the demand for resources such as food, water and other necessities increases when the supply remains constant, a higher cost of living would develop, leading to a larger problem for the overall population of India. These issues can easily be prevented by educating the people about modern contraceptive measures and eective family planning. !Sanitation: !With a glaring population of 1.2 billion people, India faces a severe lack of access to the sanitation facilities based on the standards of The United Nations Childrens Fund or UNICEF (formerly the United Nations International Childrens Emergency Fund) - a United Nations Program that provides lasting humanitarian and developmental aid to both children and mothers in the developing countries of today (UNICEF, 2011).

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According to UNICEFs numbers, over 35 percent of Indias total population has access to proper sanitation, seen in Figure 4 (UNICEF, 2011). This issue can be translated into about 778.8 million people in the country without access to clean drinking water and adequate

methods of sewage disposal. According to these numbers the number of people in India without access to proper sanitation is over double the amount of people in the United States itself. !Indias Consumer Price Index !The consumer price index deals with the average price of basket consumer goods and services. According to Investopedia The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. The cost of living is very important, it aects directly to Indias consumers. When the cost of living increases it aects society in many dierent ways. !The price of bread has recently increased in India because of high demand of bread in the United States and Europe. The reason is these two countries are looking to negotiate with Indias grain suppliers because of the recent drought that has prevented and limited their production of wheat.

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Access to Improved Sanitation Facilities in 2011 Pe

rcen

t With

Acc

ess

0

25

50

75

100

Rural Urban Total

India USA India USA India USA

Figure 4 - Numerical values retrieved April 6, 2014 from UNICEF

Indias Consumer Price Index (CPI) 2013 - 2014

Con

sum

er P

rice

Inde

x (C

PI)

220

225

230

235

240

245

Jan 13 Mar 13 May 13 Jul 13 Sep 13 Dec 13 Feb 14

Figure 5 - Data retrieved April 6, 2014 from Trading Economics


According to India Times, The Cabinet Committee on Economic Aairs (CCEA) decided to export 2 million tons of wheat from its overflowing stocks to create storage space for the new Kharif crop. Exports are currently attractive because of the drought in the US and lower or poor quality crops in other locations like Europe have raised international wheat prices substantially this year.This was an excellent move for Kharif because it allows them to produce grains. If the CCEA did not export 2 million tons of wheat there would have been an abundance of wheat in storage meaning the cost of wheat would decrease because of the high supply of wheat. This was a great business maneuver because it benefited the United States, Europe and Kharif. !In reality, it resulted in driving the cost of wheat and flour, aecting millions of consumers that will pay for rising cost of these goods that are found in everyday items. Indias government deserves to take the majority of the responsibility because they do not have anyone appointed to look over this sector. Other major corporations like Kharif are going to take advantage of this opportunity and raise the consumer price index. When the cost of goods rise it will still make an impact on (CPI) driving the cost of living enough to hurt the cost of living. !According to Trading Economics, India recently reached an all-time high in index points in November of 2013 (refer to Figure 5 on previous page). As of February 2014, the index points of India reached 238. From December 2013 to February 2014 India's index points have remain steady and have fluctuated vary slightly. With the recent price increase in flour and wheat we expect the (CPI) to return to its all-time high of November of 2013. If other consumer goods also increase we project that Indias CPI to continue to increase and be a significant amount. !The United States Consumer Price Index !According to trading economics, the Consumer Price Index for the United States has fluctuated over 2013 and 2014. Due to the price of consumer goods and services fluctuating in 2013 there have been increases and decreases through the year. In January of 2013, the United States consumer price index was at 231.198 and by January of 2014 it was at 234.594. That is an increase 3.396 increase during that time period. !Inflation in India !India's consumer price inflation has slowed to a 15-month low (refer to Figure 6 of the next page for an in-depth look at Indias inflation). According to Trading

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Economics, the inflation rate has decreased 8.31 percent. The significant decrease was due to lower food prices, which had a significant impact that brought down inflation rapidly from what it was before. Lower food prices allow people to buy more with their income therefore increasing the eects of their income. Food prices are not the only factor that contributes to inflation consumer price index. The consumer price index is also aected by fuel prices, cost of electricity, sugars and other oils. !The consumption of edible oils has risen in India drastically. According to Solvent Extractors Association of India, Indias consumption of edible oil has risen to around 17.5 million metric ton (mmt) in 2012-13 from 11.6 mmt in 2003-04, compounded annual growth rate (CAGR) of 4.6%. The significant growth of the consumption in edible oil means how important cooking oil is to consumers in India. With inflation decreasing, more consumers should be able to buy more high quality cooking oil. According to FnBnews, Apart from population growth, another significant factor that is impacting edible oil demand is the increase in disposable income amongst the growing middle class. This has led to change in the lifestyle, which has increased the consumption of edible oils. Instead of the middle class buying higher quality or healthier cooking oil they could change their lifestyle in

order to adapt to the rise and decrease of inflation. !Inflation in the United States !The United States Inflation rate has been unpredictable during 2013. According to Trading Economics, it has reached up to 2.0 percent and has reached its low of 1.0 percent. Plenty of key factors can change the inflation

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Indias Inflation Rate 2013 - 2014

Infla

tion

Rate

8

9

10

11

12

Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14


US Inflation Rate 2013 - 2014

Infla

tion

Rate

0.5

1

1.5

2

Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13



rate from the cost of food to the cost of energy. Inflation varies through each month. In November 2013 the Inflation rate was at 1.0 percent. In the months of March and August they reached a yearly high of 2 percent (refer to Figure 7 of the previous page for more information). !Indias Real Interest Rates !According to BBC "The Reserve Bank of India (RBI) raised the benchmark repo rate - the amount at which it charges to lend to commercial banks - to 8% from 7.75%. The Reserve Bank of India has also projected interest rates to double and continue to rise. Although India's manufacturing sector is the key to their economic growth it has significantly slowed over the past two years. The cause of their recent slowdown is due to the high interest rates for borrowing currency from banks. India's central bank has refused to lower the interest rate because of the unpredictable inflation. The Reserve Bank of India believes that keeping interests rates the same will end up stimulating businesses and consumers but due to high interest rates it has decreased the amount business and consumers are borrowing. For instance, BBC News reported that "higher inflation causes consumers to spend less, and its impact is felt most by India's poor. According to the World Bank, nearly two-thirds of India's population live on less than $2 a day. When households can live on very low wages they are less likely to consider taking out a loans especially when interest rates are high and on the rise. With an inconsistent inflation rate, consumers and entrepreneurs shy away from borrowing from banks. The average consumer is spending less, knowing that they can live without the luxuries they can't aord while still enjoying their day-to-day lives. !The United States Real Interest Rates !In the United States interest rates were at an all-time high between January of 2006 through January of 2007. Interest rates instantly dropped when the stock market crashed in 2008 (Trading Economics). Society was not prepared and millions of Americans were aected. Interest Rates fluctuate based on inflation. The lower the interest rate, the higher inflation. !Worker Productivity in India !According to Business Standard, worker productivity is extremely important when manufacturing goods because the lower the worker productivity is the more labor hours are involved in producing items. The goal is to be very ecient in producing

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goods so that labor hours don't go to waste because workers could be manufacturing other good or be producing more otherwise. !India has recently made enormous strides in trying to revive their economy by investing in their infrastructure. The Indian government believes that this will stimulate the economy and stop the high inflation rates. According to Reuters, "India's government has set a five year target of investing $1 trillion infrastructure by 2017, with half coming from the private sector, in a bid to lift economic growth to 8.4 percent. Investing in infrastructure employs thousands of workers while opening the way for more ecient manners of transporting goods throughout the country. If implemented correctly, this will benefit the economy and consumers. Redi Business reports, "Indias Average growth in productivity in 2008 through 2012 is 5.1 percent. India wants to improve their infrastructure, but without the workers who are skilled enough to perform the labor, it's going to take additional time to actually to improve infrastructure by 2017. India is going to end up spending more funds than what they expected due to this lack of skill. According to Teach for India, "In India today, 4% of our children never start school. 58% dont complete primary schools. And 90% dont complete school. At Teach For India, the fact that only 10% of our children go on to college both saddens and angers us." This plays a key role in whether India is able to contribute to the labor force with educated and skilled workers. This issue also needs to be addressed in order to increase worker productivity and improve infrastructure that will benefit India overall. !Worker Productivity in the United States !Worker productivity is measured by how much a worker can create or manufacture in an hour, in terms of goods and services. The higher worker productivity is, the more likely it will improve the development of a country's economic growth. This is because the country will be able to produce more goods and increase revenue. A key component to worker productivity would be the advancement of technology and skilled laborers. According to Trading Economics, the United States worker productivity in January 2008 was at 96.087, and by January 2014, worker productivity increased to 106.922. That is a significant percentage improvement. !Indias Unemployment Rate !Unemployment in India has slightly increased over the three-year period by about 0.1 percent. According to The Times of India, "The Unemployment rates in India

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are showing an increasing trend since 2011 when it was 3.5%. The same rose to 3.6% in 2012 and climbed to 3.7% last year. Additionally, economists have predicted that the increase will carry over into 2014 according to Global Employment Trends 2014. In reality, these statistics have been underestimated because of the recent elections that are taking in India. Public ocials are trying to keep the general public unaware of what issues are going on in India. T. S. Papola, a well-known economist, was quoted saying that a memorial lecture "against the ocial estimate of 3-4%, the actual unemployed labor force in India comprises 13-14%. According to The Times of India, T. S. Papola spoke during the annual conference of Indian Association of Social Science Institutions. He brought some key points to the table on how unemployment actually has not been researched or explored in depth and can drastically change or be miscalculated. Speculations are that the public ocials are underestimating the unemployment rate because of elections. Unemployment is a serious issue especially when public ocials try to cover it up by using catering statics to needs of campaign just to keep the public content. If the rate of unemployment rate was underestimated, this may lead to some skepticism from people on whether other major issues have been closely looked at or are yet to be exposed. !India's unemployment rate is a serious issue that needs to be addressed. India needs to act fast and fix this issue. The reason the unemployment rate is so high is because of the number of unskilled labors who can't fill the job openings that are available. Consequently, India needs to fix their education system in order to have a decrease in its unemployment rate. !The United States Unemployment Rate !According to Trading Economics, the United States unemployment rate has significantly decreased from 2012 to 2014. This is a step in the right direction in terms of the labor force. The lower the unemployment rate is, the more workers can contribute to mass production of goods and services. Therefore increased worker productivity as whole will lead to a decrease in the unemployment rate. The United States unemployment rate has steadily decreased over the years which means the economy is heading into a positive direction. !Government Budget Surplus or Deficit !A budget deficit occurs when the government spends more than it is taking in, and the opposite would occur for a surplus to be true (Trading Economics, 2014).

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The US and India are both currently in a deficit and are facing some of the same issues. !Indias Deficit !In India, the current deficit is at about 5.3 percent of the total GDP. The Ministry of Finance is responsible for the record of such deficit. (Trading Economics, 2014). As you can see in Figure 8 on the right, India, along with the rest of the world, was hit hard in 2008 - 2009 which created the largest deficit India has seen in over 10 years. In 2011, India slowed its rate of investment due to very high interest rates and inflation. The government later implemented some reforms and deficit reduction measures (CIA, 2013). Today, India is showing a push on infrastructure, and foreign investment, and has a GDP of 3.8 percent. However, India does face some challenges with its economy and deficit due to slow regulation passing from the government, crime, corruption, discrimination against women, and limited job opportunities that do not involve agriculture (CIA, 2013). !United States Narrows the Gap, for Now !There has not been a surplus in the government budget of the United States in many years. During the 2009 to 2012 span, the U.S. governments deficit was the largest in the world relative to the population of the country since 1946 (CBO, 2013). The U.S. is slowly bouncing back, with a GDP growth rate of 1.6 percent and has gotten the current deficit down to 4 percent (World Fact Book, 2013). This recovery can be mainly accounted to the changes in taxes and spending within the countrys government. Some of the tax provisions that helped narrow the gap would be the expiration of tax rates to high-income families, Social Security payroll tax, and new taxes (CBO, 2013). Federal debt held by the public is now about 73 percent of the economys annual output, or gross domestic product (GDP) (CBO, 2013). Under current laws it is inevitable that the deficit will rise again

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India Government Budget as a Percent of GDP

-8

-6

-4

-2

0

2005 2006 2007 2008 2009 2010 2011 2012 2013



though due to the increased amount of spending on Social Security, and Health Care such as Medicare and Medicaid (CBO, 2013). !Economic Policy !In recent years, like many other countries India was experiencing hard times with a GDP growth rate of -1.90 percent in 2009 (TE.com, 2014). After this record low, India bounced back with a vengeance putting the economy on a fast track at the end of that year into 2010, and then finally tapering o around 2 percent for the last three years. Today, India is showing some promising turnarounds, as well as some that need to be monitored. With the growth rate slowing down, some are very skeptical about where the country is going and some see nothing but opportunity, it depends on the perspective. In this section, some of the major issues that need to be monitored will be covered, as well as various economic indicators that indicate an improvement in the Indian economy. !Things to Monitor !Few parts of Indias economy are gaining the attention of the government with a dire need to create change. Examples of these areas include the lack of initiative in government, the countrys infrastructure, and the major inequality and poverty that millions of citizens are facing in India. !Policy Paralysis !In the past years, Indias government has been known to start things and not finish them in many aspects. Some examples include infrastructure, foreign direct investment, and high interest rates (The IMF Blog, 2014). Last year, India was supposed to bring in the Walmart Chain through FDI, and the government later stalled (CNBC, 2014). Manmohan Singh, Indias government leader has acquired the title of having policy paralysis, and he is also known for flip-flopping on policies after they start (CNBC, 2014). An uncertainty of Economic Policy has fallen over the country dealing mainly with fiscal and monetary concerns, as well as regulatory ones (IMF direct 2014). This uncertainty is spilling over in the papers and this brings up major concern within the citizens of India (IMF Direct, 2014). !Crumbling Infrastructure Image !Indias track record when it comes to infrastructure is low with only one in four projects being completed on time (Financial Times: Rupee dive.., 2014). Investors

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worry about the lack of initiative from the bottlenecks as they call it which pertain to many of the government ocials and policy makers of India (Financial Times: Rupee dive.., 2013). A big concern when talking about infrastructure in India deals with land. In India, according to the World Banks competitive index, it takes about 295 days to obtain a lease on public land, and 99 days for private land. The global average is only 61 days (Financial Times Rupee dive.., 2013). This sluggish process can easily turn away foreign investors because time is money. !Suering Citizens !India is one of the fastest growing economies in the world, and in turn the citizens are paying the price. There is so much push for development in India that the government is taking over farmers land to use for resources and expansion. This leaves many farmers without any income, and with many citizens without a supply of food (Todhunter, 2013). For example, bigger corporations are moving into agricultural areas and polluting the soil. As a result, the structure for agriculture has changed and has become so regulated that India faces bad food supply, health, water, and soil. To highlight the severity of this problem, over 250,000 farmers have committed suicide in India since 1997 as a form of protest (Todhunter, 2013). This issue is even flowing over into the countrys child mortality rate and underweight babies. According to UNICEF, 28 percent of the children born in India between 2006 and 2010 were born underweight, and 48 percent of children under five years old suered extreme growth stunting due to malnutrition (Childfund, 2014). However, there has been some improvement regarding this issue in recent years thanks to the Child fund and several other organizations. The Childfund has been in India since 1951 (Childfund, 2014). As of 2008, UNICEF reported that 88 percent of the population living in rural areas had access to good drinking water (Childfund, 2014). The Dream Bike Campaign was also created for the cause of promoting education for children all across India. !Income Inequality !India has never been so plagued with inequality than it is today. It is estimated that almost 42 percent of the population is living under the poverty line as of this year according to the OECD (Childfund, 2014). In 2011, the richest 10 percent of the population was making almost 12 times as much money as the poorest 10 percent, as opposed to in 2006 when the gap was only 6 times as much (Childfund, 2014). !!!

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Promising Turnarounds !India has implemented some recent initiatives to attract foreign capital and strengthen the economy (CNBC, 2014). Some could say their eorts are a little late, as many had written India o, but o-shore investors still see the vast amount of opportunity in the country (CNBC, 2014). John Luke, chairman of MWV a U.S. packaging group that sells pharmaceutical and consumer goods packaging says Were excited by what we see happening and were excited by the longer-term prospects(Financial Times: Bright Eyes 2013). This became obvious after MWV bought a company in Gujarat and invested millions of dollars into India (Financial Times: Bright Eyes.. 2013). !Foreign Capital/Foreign Direct Investments !India used to operate as a closed economy back in the 90s. At the time taris went above 200 percent and there were also strict restrictions on any foreign investments, but since then India has loosened its grip. In September 2013, the Indian Government decided to open up to foreign investment markets such as retail, aviation, and broadcasting. The government also cut taxes on overseas borrowing, and raised the price of fuel (CNBC, 2014). Quantitative restrictions have been eliminated on imports and the customs of foreign investments have settled in numerous sectors (WorldBank, 2014). India has recently signed many trade agreements with countries, both near and far, in an eort to increase exports and to continue the growth of the economy. Examples of which include Bangladesh, China, South Korea, and the United States. Some the these agreements include the India-Sri Lanka Free Trade Agreement, The Comprehensive Economic Cooperation Agreement with Singapore, and the India-Nepal Trade Treaty. There have also been Preferential trade agreements with Chile, Afghanistan and Mercosur (Worldbank, 2014). The country has made a shift towards the benefits of consumers when addressing trade and investment policies protection. In the Foreign trade policy for 2009, it states, For India to become a major player in world trade, we have to also facilitate those imports which are required to stimulate our economy (Worldbank, 2014). !Infrastructure in India !India has put up over $1 trillion for spending on infrastructure for the next five years (Financial Times: Rupee dive.., 2013). This eort for development benefits companies in India and also becomes a source of attraction for many foreign investors. In 2013, India created the Cabinet Committee on Investment (CCI) to

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keep investment projects more on task for success. The Project Monitoring Group was then created to assist in these same eorts (iMF direct, 2014). In January of 2013, the CCI cleared projects with infrastructure that represented about 5 percent of GDP (iMF direct, 2014). Although India has held a long record of incomplete projects and creating a surplus of unnecessary debt, these programs can be of great benefit to India, as it helps keep deadlines and create results. Conclusion !India is trying to keep its economy on the fast track, but the government is overlooking its citizens. This is a major issue flagged by the alarming size of the population that is suering today. Wage is high and labor opportunities are low. Although there are some positive policies that India has implemented to help the image of infrastructure and improve foreign capital and trade policies, the country still has a long way to go. If India plans to sustain the economy close to the level it was even at last year, the government needs to continue creating strong and lasting relationships for trade, and address the internal issues the country is facing, while also balancing its many goals in infrastructure. !Indias Roadblocks and Challenges !Corruption !Government Corruption !As of 2014, India is currently going through an election period. Unfortunately, Indian elections tend to be riddled with corruption as powerful government positions are both held in high status and with little legal oversight from an article titled Fifth of Indias election candidates face criminal charges, says study (The Guardian). This is saying that corruption is a problem for India. How can a government run smoothly when their own candidates that could possibly be elected have a criminal record? Almost a fifth of candidates in Indias upcoming elections are facing criminal charges including rape, murder and extortion (The Guardian). Its not like these candidates were accused of a petty crime or minor oense, they were accused of murder and rape, very serious crimes. The authority of a leader that has murder and rape attached to them cant be very trustworthy while in oce. The research looked at records of 1,492 candidates contesting more than 120 seats in Indias 545-seat lower house (The Guardian). This raises many questions about the criminalization of politics in the worlds largest

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democracy (The Guardian). The current Congress's tenure has been marked by high-profile cases of suspected or proven corruption (BBC). !Approximately 815 million voters will be eligible to vote for the upcoming election (The Guardian). This election period will focus on corruption, unemployment, raising inflation, a faltering economy, womens safety and national security as just some key issues for India (BBC). The election phased over six weeks to allow successive redeployment of security personnel- has been described by analysts as the most important in decades (The Guardian). Professor Jaydeep Chhokar of the association for Democratic Reforms said in the article you cant have lawbreakers making laws for society (The Guardian). One government ocial states heinous crimes are one thing, but a lot of the other charges are made just to defame someone. There should at least be a convection in a higher court before ending someones career (The Guardian). A problem with the Indian people according to Milan Vaishnav who is a specialist in Indian politics says that voters often support politicians with criminal records, rather than shunning them (The Guardian). He also said there are a lot of issues of corruption but that is distinct from criminality. Criminals may be broadly negative in terms of general society welfare but for one section of society can be very positive (The Guardian). I would not want to see my country driven by corruption. It is safe to assume that it would not run very smoothly like India. They are facing a lot of corruption and it needs to be fixed to give the Indian people a better place to live. !Economic Corruption !Another recent article entitled A Bad Boom looked at the serious issues of fighting economic corruption (The Economist). A massive scam was uncovered with hundreds of ocials and politicians in the state of Karnataka in the pockets of an illegal mining mafia (The Economist). Over five years the illegal mafia has made profits of 2 billion or more shipping illegal iron ore to China (The Economist). This is not the first time India has heard of a scandal like this. A lot of transactions that put public resources into private hands allocations of radio spectrum, for example, credit from state banks have come under suspicion (The Economist). !Before he became boss of the central bank in India last year, Raghuram Rajan worried publicity in India could start looking like an oligarchy along the lines seen in Russia: too many people have got too rich based on their proximity to the government (The Economist). In a recent poll 96% of Indians said corruption was holding their county back, and 92% thought it has got worse in the past five years (The Economist). A senior figure in the Congress party worries that the law for

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common people does not apply to the political princelings and industrials (The Economist). The relationship between companies and state is broken (The Economist). India needs the private sector to build roads, factories and cities but the relationship is not there (The Economist). Corruption produces bad decisions; concern over corruption produces indecision (The Economist). Private firms have been faced with the corruption. Private firms have been forced to cut investments (The Economist). A fall in investment from 17% of GDP in 2007 to 11% in 2011 is one reason why GDP growth had slumped to 5%, the lowest level for a decade (The Economist). It seems like in an eort to make things better; it has only made things worse. Indias cranky legal system, its overlapping investigative agencies and it raucous media have meant that responses to the problem may have done as much to paralyses business in general as the punish wrongdoers (The Economist). !Health Issues - Disease !Another problem in India is disease. In a recent article entitled India may be free of polio- but the disease hasnt be eradicated yet it explains that India is polio-free (The Guardian). A regional certification commission is expected to declare the World Health Organization south-east Asia region polio-free (The Guardian). This is a historic achievement for India (The Guardian). Last January India completed three full years without a new case of polio (The Guardian). This means the disease had finally stopped within its borders (The Guardian). !Other diseases that are causing problems in India are Tuberculosis and HIV. Every fifth new tuberculosis case in the world lives in the Indian subcontinent (healthissuesindia). India has been less severely aected by the HIV epidemic than many other countries, despite early predictions of disaster, but still has almost three million people living with the virus (healthissuesindia). !Education !The human capital of India is not very good and needs to be improved. About 4 percent of children that live in India never start school (Teach For India). 58% dont complete primary schools (Teach For India). 90% dont complete school and only 10% of children go on to college (Teach For India). With children not going to school at all or not completing school in India, it lowers the amount of skilled workers in India and skills needed to accumulate for people in the labor force. This can also be considered under technological knowledge. With Indian

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people not having a good education, they cannot have a good understanding of technology and technological advances. !Natural Resources !India has many rich natural resources. The country produces as many as 87 minerals including fuel, metallic, non-metallic, and atomic minerals (Business Today). India is very rich in coal and investors want to expand their business to India. Investors say that the Indian mining environment is scaring them away (Business Today). There have been problems in acquiring land for new mines and delays in government approvals (Business Today). Increased judicial scrutiny following corruption scandals in the allotment of mining blocks and environmental degradation caused by illegal mining have made matters worse (Business Today). Again, we see the aspect of corruption. Anil Agarwal chairman of Vedanta Group says developing our natural resources and the resultant growth of manufacturing can generate enough funds for infrastructure, alleviate poverty and create employment (Business Today). Poverty, unemployment and bad infrastructure are major problems in India today. !U.S Connections with India !India has a strong relationship with the United States. The United States are working on a lot of projects with India. India U.S bilateral relations have developed into a global strategic partnership, based on increasing convergence of interests on bilateral, regional, and global issues (Indian Embassy). President Obama characterized India-U.S relationship as one of the defining partnerships of the 21 century (Indian Embassy). India is a strong resource to the United States as well. President Obama should utilize all that India has to oer. The bilateral cooperation is now broad-based and multi-sectoral, covering trades and investment, defense and security, education, science and technology, cyber security, high-technology, civil nuclear energy, space technology and applications, clean energy, environment, agriculture and health (Indian Embassy). All of these aspects listed above are important but the one that needs the most attention in particular would be Indias trade. !Trade !The trade between India and the United States is very strong. Indian exports accounted for USD 35.96 billion during the period January-October 2013, registering a growth rate of 4.11% over the same period last year and the growth

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was faster than the overall growth in bilateral trade in goods of 3.4%, enabling India to maintain a healthy surplus (Indian Embassy). In 2011 the total Indian exports to the United States was 26.60 billion (Indian Embassy). The United States exports to India accounted for 27.62 billion (Indian Embassy). Total trade services in 2011 were 54.42 billion which has a growth rate of 16.12% (Indian Embassy). There was a substantial growth in 2011, making trade for both India and the United States better. !A Ministerial Trade Policy Forum and a Ministerial level Economic and Financial Partnership was put in place to strengthen the bilateral engagement with the trade and economic issues (Indian Embassy). Also as of 2009, the two governments issued a joint statement to strengthen their bilateral agreement (US Embassy). The two governments outlined a Strategic Dialogue that will focus on five principal pillars: strategic cooperation; energy and climate change; education and development; economics, trade and agriculture; science and technology, health and innovation (US Embassy). The development of two way trading listed above have developed innovation, economic growth, and job creation for both nations (US Embassy). The last part of job creation is very important in both countries today considering their high unemployment rates. !Problems With Trade !With what is going on in Russia right now, it does have the United States concerned and it could be aecting trade. India is supporting Russia (The Diplomat). As the largest democracy in the world, a burgeoning capitalist economy and an increasingly important military power, India has been viewed as a counterweight to Chinas rise and an anchor of the U.S.-led international order (The Diplomat). Through the collapse of the Soviet Union India and Russia maintain deep cooperation on political, military and economic dimensions (The Diplomat). Russian trade with India rivals the latters trade with the United States, and Indian companies have made huge investments in Russian energy firms and energy projects in the Bay of Bengal (The Diplomat). Rather than using an American energy firm, India decides to use Russia. !From an India Today article, it talks about how the people of India think that trade between India and the US is not going very good. The circulation of trade will depend on the US, as the responsibility for the malaise aecting out ties rest mainly on its shoulders (India Today). The US misjudged their current US ambassador to India. A more serious political misjudgment by the US for which

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the ambassador cannot escape blame is the failure to mend political fences with Narendra Modi in a timely manner (India Today). !Key Question #1: What is the level of economic risk for conducting business in this country? !India is an economy that has been seen as a power house in terms of growth since 2008, but there are many issues facing India that make us believe that the growth rate will not sustain their economy for long. Through our research we rate Indias Economy at a moderate to high level of risk. !The Political System in India is very corrupt with many politicians obtaining a criminal record, and the citizens labeling them as bottlenecks meaning not much is being accomplished. The relationship between companies and the government is very disconnected and has led to decline in the amount of business done between the two. Having the whole country, and the world for that matter, openly knowing that conducting business in India is at risk for corruption and backhanded strategy forces international businesses to be hesitant in conducting business there. Furthermore, Indians are more willing to vote a politician that has a criminal record into oce versus a clean one. This raises more issues that go deeper than politics, but raises issues of ethics of the people. !The ability to do business in India is another issue. For a decades India had cut itself o from the rest of the world in order to regain stability and build the county up without any risk. This worked but it closed India o from international business. India has of course opened up to doing business with the world again, but the government still creates many challenges like high tari rates, local content requirements, and many other red tap strategies that push away foreign investment. !The labor force in India is very poor, and this has created a lag in productivity. A major issue within the labor force is the lack of skills and specialization to do high level jobs that will promote economic growth; one of these sectors is in Infrastructure. India is trying to boost their infrastructure industry to stimulate the economy but without skilled labor, the work is falling behind. This is another reason for the slowdown in GDP growth. !A major drawback in terms or natural resources is that because of corruption within the government in India, natural resources are being hoarded by government owned businesses and not being utilized with in the country. This

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could be creating so many jobs, and promoting growth, but instead is creating a disconnect, and hindering job opportunities as well as underutilizing the natural resources of India. !Concerning issues such as the corruption in politics, an unskilled labor force, suering citizens as well as the slow implementation of new policies bring up the risk level of the economy in India from between moderate to relatively high. !Key Question #2: What Fiscal & Monetary Policies should India pursue to promote economic growth and development? !Monetary Policy !When deciding what would be best for India in terms of Monetary Policy, we struggled at first. The reason being is when a country is deciding whether to look at shrinking or expanding the money supply, you typically look at two things: Inflation and the Unemployment rate. If Inflation is high, the government should shrink the money supply to bring inflation down. When Unemployment is high, the government will normally expand the money supply to promote spending, and investment. Most countries have only one of these issues at a high level, but in India, both are extremely high. This made us feel that no matter which we choose the other is going to suer. Our only solution was to go with the one that had a higher rate, and focus our eorts towards bringing that one down, which ends up being the Unemployment rate which is currently resting at around 14 percent (CIA, 2014). For India, we decided the government will expand the money supply to help the more than 40 percent of Indias citizens living under the poverty line (Childfund, 2014). The goal is with more money circulating the country, more people will be able to supply for themselves, and be able to better their lives, and get a job. Also with more money circulating, businesses are more likely to hire, and invest back into the community which will also lower the unemployment rate. !Fiscal Policy !In economics, a countrys fiscal policy refers to the specific use of government spending for the development of the countrys ultimate well-being. In this section, Indias fiscal policy is recognized and compared to what we believe is ideal for the current state of the nation. The actual fiscal policy of India, portrayed in Figure 9 of the next page, is translated from indicators in the WorldBank. The recommended fiscal policy, based on the assessed needs of India from our studies, can be seen in Figure 10 on page 26.

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!Health !We chose to decrease the amount of spending on Indias Health Sector because it did not come across as a major issue through our findings in terms of the massive population. Any issues that arose could be fixed through other solutions besides the actual health system. Examples of such fell within the lines of sanitation, which was covered earlier under Indias Quality of Life. !Education !We wanted to raise the amount of spending on Education for a few reasons. One of the main reasons is because of the lack of skills in labor. If there is more money put into primary and secondary schooling, especially in the poorer areas of the country, our hope is this will increase individuals drive to continue their education. This will benefit the country with more educated and skilled workers, thus increasing overall productivity. !Research & Development !We were extremely surprised by how low this section was maybe because of the fact the India closed themselves o from the rest of the world for so long. Spending on research and development is the best way for a country to gain innovation and a competitive edge in areas other than technology, so we substantially raised the percentage. Some of the areas we felt specifically needed more attention in research and development would be labor training, and eciency in business, as well as sanitation systems, and health. !Industry & Employment !One of the main reasons that we wanted to emphasize this sector was the unskilled labor force in the country due to the lack of proper training available in most industries. With more money going into this sector, availability for more important training within the workforce would be more feasible for businesses

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Breakdown of Indias Fiscal Policy in 2011

Health 28%

Research & Dev. 8%

Other 22%

Defense 19%

Education 23%

Figure 9 - Data retrieved April 6, 2014 from WorldBank


which lead to a significant increase in productivity within Indias economy. !Infrastructure !When deciding what to change or add in terms of government spending we thought it was very important to create a specific infrastructure sector. We raised the infrastructure budget to 3 percent in hopes of having more money available; there will be less pressure on budget, and more emphasis on completing the numerous upcoming projects. The result of an increase in infrastructure will create many attractive opportunities for India through foreign investment, as well as through businesses within the country looking for room to expand, thus leading to a greater circulation of money. Local investment groups are looking at helping with infrastructure through the development of natural resources. This relates to some of the issues of the country dealing with disconnect between the government withholding natural resources to businesses. If this can be resolved, the benefits will spill over into the infrastructure sector. !Transportation !The reason we created a separate section for transportation is because of the extremely large population of India, and the fact that transportation wears down so quickly. Under this sector we thought trade would be interesting to touch on because it could directly aect transportation through how India ships their exports, and how they distribute those goods throughout the country, as well as the eciency of both. With many small communities lacking good roads, and infrastructure transportation measures need to be addressed so that people can receive goods and services. Currently India does and an extreme of amount of trade with the US and China, and this is done mostly by plane or overseas by ship. If India can invest in the eciency of these approaches to trade, as well as the

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Suggested Breakdown of Indias Fiscal Policy 2015

Transportation 2%

Health 30%Infastructure

3%

Research & Dev. 11%

Other 4%

Defense 18%

Industry & Employment 6%

Education 25%

Figure 10 - Numerical values recommended


distribution of the goods once in the hands of the country, the citizens will benefit through better goods, and services, in a quicker fashion. Also the economy will benefit because trade can be done faster and more eciently. !Indias government spending is currently stipulated with a lot of emphasis on sectors such as education, health and defense. It felt necessary to become more specific on sectors while improving health and education to address growing concerns within the country such as suering citizens and an unskilled labor force. Improvements on health and sanitation would greatly alleviate the countrys issues specifically with HIV and other easily contractable diseases seeing that over 42 percent of the countrys population live under the poverty line (Childfund, 2014). Added eorts within the Research and Development sector and the infrastructure of the country would not only significantly aect the overall development of India, but would also attract foreign investors. Such improvements combined with extra funding for proper training applicable to the workforce which in turn would lead to a significant increase in the countrys overall productivity and reflects a stronger economy. !Conclusion !In conclusion to this report, India is a country of boundless potential. Its high population and vast amount of natural resources can be an important source of the nations economical growth and success with a mix between timely and proper implementation of the right policies. As of now, the countrys economic risk is between medium to relatively high. India will have the capacity to take its proper place as one of the worlds economic powers after it addresses its major issues such as corruption, high unemployment and inflation rates, lack of health and sanitation facilities, and its large unskilled labor force. !The second part of this conclusion pertains to our deepest gratitude and highest acknowledgment for our instructor Elizabeth Manser-Payne. Her persistent and perpetual guidance for Indias representative team (along with the other teams representing countries such as Germany, Japan, Mexico, and Russia) was crucial to both the development and growth of each respective teams reports. Not only has her work and time been beneficial to the reports, but her constant chiding and strict policies have molded her students into fine individuals ready to take on what is thrown in the workforce.

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