Macroeconomic and Account Balances
India is seen to react rapidly to volatility in the global economic environment as concurred in the modifications of the macroeconomic policies when the North Atlantic financial crisis occurred (Kapur and Mohan, 2014, p.1). However, India’s policy changes is perceived by Kapur and Mohan (2014, p.1) to be temporarily stimulating to the local economy since the expected growth will gradually slowdown. But the additional effect is that inflationary and BoP pressures remain constant, which can either by improved or worsened by the domestic policy bottlenecks (Kapur and Mohan, 2014, p.1). This was seen during the financial market volatility in 2013 where it was countered through fiscal consolidations and the modifications in domestic oil prices (Kapur and Mohan, 2014, p.1). Kapur and Mohan (2014, p.1) disclosed that fiscal consolidation will decrease inflationary effect so that the current account deficit and the foreign currency exchange rates will become more favorable for India.
Monetary and Fiscal Policies
Fiscal discipline was seen to have been maintained despite the economic volatility effect of the Brexit (Economic, 2016). This was due to an expected cut in the local interest rates in order to bolster the potential decline in the country’s economic growth, which was worsened by the continuing challenges encountered in the national budget (Economic, 2016). Minister of State for Finance Jayant Sinha revealed that in order for the macro economy to remain stable the government must tighten its fiscal policies (Economic, 2016). This is expected to be achieved by developing the rural areas through infrastructure investments but the constant problem is a lack in funds in the current national budget (Economic, 2016). Sinha (Economic, 201) plans to improve the national budget through numerous initiatives such as controlled spending, fiscal consideration, and a higher focus on public services.
National Debt
The World Bank (2017) revealed that India’s national debt when compared to the GDP decreased from 52.2% in 2010 to only 50.1% in 2013 while other Asian markets increased. The implication is that India is weathering the downturn in the global economy better than its neighbors due to the faster recovery of the domestic equity market (Anand, 2016). But the national debt had already increased to $485.6 billion by March 2016 due to the effect of the Brexit on the financial markets, which is expected to have a lasting effect (Anand, 2016). But the Brexit effect is primarily seen to affect the global currencies since each country will need to devalue its currency in order to improve the economic growth (Anand, 2016). This was already seen in the falling of the China renminbi by 1% while the US dollar increased by 2% (Anand, 2016). In order to prevent the currency wars Reserve Bank of India Governor Raghuram Rajan asked other central banks to not depreciate their currencies in order to retain their competitive advantage (Anand, 2016).
Foreign Direct Investments (FDI)
The IBEF (2016) considers the FDI as a non-debt source of improving the economic development of India. But foreign investors also benefit in the form of lower wages and better tax exemptions but are required to share technical knowhow while improving the local employment rates (IBEF, 2016). This was due to the favorable economic policies implemented by the government resulting to the constant flow of foreign investment in the telecom, oil, power industries (IBEF, 2016). This was seen in the increase of the FDI equity inflow by 30% in April to September 2016 at US$21.6 billion, which will improve the compound annual growth rate to 20-24% (IBEF, 2016). A close examination revealed that this was primarily from companies based from the countries of Mauritius, Singapore, Japan and the United States (IBEF, 2016). But Roy and Purcell (2016) revealed that it was due to the recent easing of the FDI restrictions that was implemented by the government on June 2016 for the purpose of increasing inflows.
Foreign Exchange
The number of companies who have fallen victim to unscrupulous business practices implemented by the local government has led to a number of withdrawals by foreign investors (Bhakta, 2016). One of the effects is that the local financial institutions have seen an increased number of FCNR(B) redemptions from the equities market as well as the debt markets (Bhakta, 2016). The outcome of the massive pullout in December 2016 alone was seen in the slide of the Indian Rupee against the dollar, which was further worsened with the intervention of the central bank (Bhakta, 2016). The resulting effect is that India’s perceived economic growth was seen to have declined and thus requires an increased inflow in investments (Bhakta, 2016) as reflected in the difficulty of tourists to exchange foreign currency to and from India due to the encashment limit (Chowdhury, 2016).
References
Anand, K. (2016). With $485 billion external debt, can India weather currency storm. Economic Times. Retrieved from http://economictimes.indiatimes.com/markets/stocks/news/with-485-billion-external-debt-can-india-weather-currency-storm/articleshow/53017673.cms
Bhakta, P. (2016). India’s Foreign exchange reserves go down by 1.4 billion. India Times. Retrieved from http://economictimes.indiatimes.com/news/economy/finance/indias-foreign-exchange-reserves-go-down-by-1-4-billion/articleshow/55897244.cms
Chowdhury, A. (2016). Foreign tourists trip on India’s cash crisis. India Times. Retrieved from http://economictimes.indiatimes.com/news/politics-and-nation/foreign-tourists-trip-on-indias-cash-crisis/articleshow/55628808.cms
Economic Times Bureau. (2016). Budget 2016: Fiscal policy puts ball in Raghuman Rajan’s court now, says Jayant Sinha. Retrieved from http://economictimes.indiatimes.com/news/economy/policy/budget-2016-fiscal-policy-puts-ball-in-raghuram-rajans-court-now-says-jayant-sinha/articleshow/51247568.cms
IBEF - India Brand Equity Foundation. (2016). Foreign direct investment. IBEF. Retrieved from http://www.ibef.org/economy/foreign-direct-investment.aspx
Kapur, M. and Mohan, R. (2014). India’s recent macroeconomic performance: An assessment and way forward. IMF Working Paper, p.1-65. Retrieved from https://www.imf.org/external/pubs/ft/wp/2014/wp1468.pdf
Roy, R. and Purnell, N. (2016). India relaxes foreign direct investment rules. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/india-relaxes-foreign-direct-investment-rules-1466434994
World Bank. (2017). Central government debt, total (% of GDP). The World Bank. Retrieved from http://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS
