1. Inflation2. Unemployment and Poverty3. Maintaining High Rate of Economic Growth4. Preventing Business Cycle5. Budgetary Deficit
Unemployment Is enforced Idleness of the workforce who are able andwilling to work but cannot find jobsUnemployment is often used as a measure of the health of the economy.The most frequently cited measure of unemployment is the unemploymentrate.This is the number of unemployed persons divided by the number of peoplein the labor force.
1) In a slow or diminishing economy, consumers begin reducing their consumption, causing businesses to lay off workers2) Employers expenses start rising, so to cut costs they lay off workers3) Hazardous, discriminatory practices, domestic violence victimization, or toxic working conditions cause people to leave4) Spouses get re-located causing a working spouse to quit their job to follow the spouse, etc.5) Companies out-source their work to other locations (even out of the country)6) Natural attrition, without hiring to fill the vacancies, etc.
1) There aren’t enough jobs.2) Fewer new jobs & Youth Unemployment In India3) Shifting Industry Priorities Have Exacerbated the Problem of Unemployment in India4) Unemployment Problems in India as a result of the commoditization of the green revolution5) Educated Unemployment in India – Can read and write but unable to find a stable job6) Rural-Urban Migration And Figuring Out why Indian Agriculture Can Solve India’s Unemployment
In the set up of a modern market economy, there are many factors, which contribute to unemployment. Causes of unemployment are varied and it may be due to the following factors:Rapid changes in technologyRecessionsInflationDisabilityUndulating business cyclesChanges in tastes as well as alterations in the climatic conditions. Thismay in turn lead to decline in demand for certain services as well asproducts.Attitude towards employersWillingness to workPerception of employeesEmployee valuesDiscriminating factors in the place of work (may include discriminationon the basis of age, class, ethnicity, color and race).Ability to look for employment
The factors discussed may be categorized into the following:Cyclical UnemploymentStructural UnemploymentAgricultural ActivitiesHard Core UnemploymentDisguised UnemploymentSeasonal Unemployment
Stabilization Policy A macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by Gross Domestic Product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well.
Adoption of Labour Intensive TechniquesPopulation Control Rapid Industrialization Re-orientation of Education System Guiding Centers and More Employment Exchanges Rural Development Schemes Extension of Social Services Encouragement to Small Enterprises Decentralization
Economic or Social factor Units China India Total Area (out of which water) millions of sq km 9.60 (2.8%) 3.29 (9.5%) Arable Land millions of sq km 1.48 1.79 Irrigated Land millions of sq km 0.53 0.61 Railways - length in km 000 71.9 63.23 Roadways - paved - length in km 000 1447 2411 Waterways - length in km 000 123 14.5 Natural Gas - Proved Reserves in billion cu m 2530 854 Oil - Proved Reserves billion bbl 18.6 5.7 Coastline in km 14500 7000 Steel Production million tons/year 280 45 Food grain production million tons/year 418 210 Cement Production million tons/year 650 150 Crude Oil production million tons/year 180 40 Coal Production million tons/year 1300 300 Electricity generated Billions of Kilowatts 2190 557 Transmission & distribution losses as % of total power 6.8 23.4 Electricity tariff US$ / 100 KW 4 to 5 8 to 10 Cost of commercial borrowing as % interest/ year 41096 42583 Telephone lines connected millions 311 67 TV sets in households millions 500 85 Mobile/cellular phones millions 400 100 Internet users millions 111 51 Foreign trade (China+HongKong) US$ billions/year 1038+923=1961 260 External debt (China+Hong Kong) US$ billions 242+416= 658 120
Economic or Social factor Units China India Exports (China+HongKong) US$ billions/year 752+286= 1038 120 Imports (China + HongKong) US$ billions/year 632+291= 923 138 Tourist Arrivals millions/year 87 4 TV broadcast stations numbers 3240 562 FDI inflow (China + Hong Kong) US$ billions/year 106 8 Forex Reserves (China+Hong Kong) US$ billions 1017+122= 1,139 175 GDP (China+Hong Kong) US$ billions 2102+179= 2,281 750 GDP Growth (2006) in % rate over last year 9.3 7.9 Labour Composition Agriculture %/Industry %/ Services % 49/22/29 60/17/23 Population millions 1314 1095 Population increase per year millions 7.2 15.3 Birth rate Numbers per 1000 13 22 Per Capita income US$ per year/person 1498 658 Life expectancy Years 74 64 Investment % of GDP 44 25 Poverty line - numbers %/Numbers in millions 10/131 25/273 Inflation Rate % 1.9 4.6 Median age Numbar of years 33 25 Population Growth Rate % of population 0.59 1.38 GDP (PPP) US$ billions 8182 3699 GDP (PPP) per person US$ per person/year 6300 3400 Fertility Rate children born/woman 1.73 2.73Literacy Rate - Definied as age 15 and over can read & write - % of Pop 91 60 Death Rate Rate per 1,000 pop 6.97 8.18 Public Debt % of GDP 29 82 Unemployment rate % of workforce 20 30 Labour force in millions 797 496
What is Inflation?Inflation is when the prices of most goods and services continue to creepupward. When this happens, your standard of living falls. Thatsbecause each dollar buys less, so you have to spend more to get the samegoods and services States of Inflation : Deflation Hyperinflation Stagflation Disinflation
Causes for Inflation Factors Causing an Increase in Demand Factors Causing a Decrease in Supply Factors Causing an Increase in Demand Increase In Public Expenditure Increase In Private Expenditure Increase in Money supply Rise in disposable income Increase in consumer spending Deficit Financing Black Money Increase in Exports Repayment of Public Debt
Causes for Inflation Factors Causing an Increase in Demand Factors Causing a Decrease in Supply Factors Causing a Decrease in Supply Shortage supply of FOP Industrial Disputes Natural Calamities Hoarding by Traders Hoarding by Consumers Increase in Exports International Factors Lop-sided production
Effects of Inflation Poor Educational standards Poor Infrastructure Balance of Payment deterioration High levels of debt Demand for pay hikes and wage increases Social tensions Exchange rate falls Interest may rise
MEASURES TO SOLVE INFLATION MONETARY FISCAL OTHER MEASURES MEASURES MEASURES Credit control Decrease in Public expenditure Increase in production Increase in Savings Price Control Increase in taxes Rationing Surplus Budgets Public Debt
Achieving and Maintaining high rate of economic growth Economic growth- An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Measured in 2 ways: i) conventionally – percent rate of increase in GDP, ii) real terms – adjusted inflation. A measure of economic growth from one period to another in percentage terms is rate of economic growth.
Factors affecting economic growth in India 1) Capital flows and the stock market 2) Global currency trends 3) RBI Intervention 4) Political factors 5) Oil factors
Achieving high rate of economic growth1) Accountable governments2) Open and effective markets3) Infrastructure4) Capable human capital5) Equality of opportunity6) Sound environmental management
Maintaining high rate of economic growth Identifying viable opportunities and key challenges limitingeconomic growth Effective policies and institutions, political stability, transparentand adequate enforced laws, sound public financial systems andreduction of corruption. Good infrastructure- Adequate transport systems, availabilityof reliable energy and communication technologies. A skilled workforce with good education to men and women both. Investments in all the facets of agriculture. Environmental management.
Benefits Higher living standards Employment effects Fiscal dividend The investment accelerator effect Growth and business confidences
India today Two years ago, the global boom, the ITrevolution, and all round optimisms led many to believe thatIndia can gain a rate of 9 to 10% growth..but India’s currentrate of economic growth is 6.5%
Case study17 % of the national income of India comes through theagricultural sector In 1980’s the Green Revolution had gained momentumenabling 3.77% annual growth in agricultural production but itgradually degraded to 2.72% in 1990’s owing to reduction inpublic investment in agriculture and agricultural research. Indianeeds to sustain a growth rate of 4 to 4.5% for achieving andmaintaining high rate of economic growth. Such an achievement is well within reach, provided there is 2.7requisite commitment in areas such as greater public investmentsin research and development andcommercialization, infrastructure like transport facilities andmarkets, improved farmer education etc.
MeaningBusiness Cycles are the recurring, but irregular, expansions andcontractions of economic activity in the macro economy. Whilebusiness cycles are frequently measured by real gross domesticproduct, they show up in many aggregate measures of economicactivity, including the unemployment rate, the inflationrate, consumption expenditures, and tax collections, to name just a few.A cycle consists of:• Expansions• Contractions• Recessions• Revivals which merge into theexpansion phase of the next cycle.
Economics Causes: Change in Government Policies such as: Tax Rates Interest Rates effecting Capital Investment High in military expenditure by Govt. especially during war-time Change in Foreign trade due to trade barriers Non-economic Causes: Natural Disasters like Drought, Weather conditions Man-made Disasters like shock of 09/11 at U.S., War, Structural Changes (technology), etc. Political Elections
• Economic Policies are undertaken by governments to counteractbusiness-cycle fluctuations and prevent high rates of unemployment andinflation.1) The two most common stabilization policies are:• Monetary Policy• Fiscal Policy2) The other policies include:• Physical Controls• Miscellaneous measures
• Monetary Policy is employed by the Government as an effectivetool to promote the economic stability and achieve certainpredetermined objectives.• It deals with the total money supply and its management in aneconomy.• Monetary Policy is an action undertaken by the monetaryauthorities generally the Central Bank to control and regulate thesupply of money with the public and the flow of credit with a viewto achieving economic stability.
The general objectives of Monetary Policy are as under:• Price Stability• Exchange Rate Stability• Control of Trade Cycles• Full Employment• Inducement to Savings• Equilibrium in the Balance of Payments• Rapid Economic Growth• Creation and Expansion of Financial Institutions• Debt Management• Long Term loan for Industrial Development
• Reduce the aggregate spending. Monetary policy can help in reducingthe pressure on demand.• During Inflation, raise the cost of borrowing and reduce creditcreation capacity of the banks, thus making them more cautious intheir lending policies.• Rise the Bank rate, raising the interest rates, not only makes theborrowing costly but will also have an adverse psychological effect onbusiness confidence.
• Deflation is a matter of falling prices.• It arise when the total expenditure of the community is not equal tothe value of the output at existing prices.• Consequently the value of money goes up and prices fall down.• Deflation has an adverse effect on the level of production, businessactivity and employment.• The monetary Authority can only encourage the business enterprisesand the lower interest rate may only improve the state of liquidity inthe economy.
• Fiscal Policy is represented by the executive and legislativebranches of government and captures changes in Taxes andGovernment spending.• If the economy is in a recession, a combination of tax cuts andincreases in government spending can stimulate economic activity.
The general objectives of Fiscal Policy are as under:• Helps to formulate a rational consumption policy• Raise the rate of Savings• Break the vicious circle of poverty• Raise the volume of investment• Reduce economic inequalities• To control the operations of the Business Cycle• To control Inflation and Deflation• To create more job opportunities• To Raise living standard
• Unessential and unproductive expenses of the Government shouldbe cut down• Taxation as an anti-inflationary measure should be used carefully• Public borrowing from Non Banking lenders• Reduction in Personal Income tax and corporate tax• Increase in Public expenditure• Encouraging Investment in public work programs, social andeconomic overheads• Social Security Schemes, unemploymentinsurance, pension, subsidies should be provided.
• When monetary and fiscal measures are inadequate to controlprices government resorts to direct control.• During wars etc. when inflationary force are strong, price controlinvolve imposing ceilings in respect of certain prices and prices areto be stopped from rising too high• Price control is done by control of distribution of commoditiesthrough rationing.• Under certain circumstances government may even resort to dualpricing.
• Direct controls are imposed by govt. to ensure proper allocation of scarceresources like food, raw materials, consumer goods, capital goods etc.• Govt. can strictly forbid or restrict certain kinds of investments or economicactivity.• During the period of inflation govt. can directly exercise control over pricesand wages.• Monetary and fiscal controls will have a general impact on the economywhile physical controls can be employed to affect specific scarcity areas.
Control over consumption and distribution through price control and rationing. Control over investment and production through licensing and fixing of quotas etc. Control over Foreign Trade through import control, import quotas, export control, etc. Dual Pricing – Wherein two prices prevail in the market at the same timefor the same product, out of which one is the controlled price for the lowerincome group and the other is a free market price determined by theconditions of demand and supply. Administered Prices - Fixed by the Government for a few goods whichserve as raw materials for other industries.
MeaningWhen the government expenditure exceeds revenues, the governmentis having a budget deficit. Thus the budget deficit is the excess ofgovernment expenditures over government receipts (income). Whenthe government is running a deficit, it is spending more than itsreceipts The government finances its deficit mainly by borrowing fromthe public, through selling bonds, it is also financed by borrowingfrom the Central Bank.
MeaningRevenue Deficit takes place when the revenue expenditure is more thanrevenue receipts. The revenue receipts come from direct & indirecttaxes and also by way of non-tax revenue. The revenue expendituretakes place on account of administrative expenses, interestpayment, defence expenditure & subsidies.
Less Revenue Borrowing Leads to Loan from Revenue World BankExpenditure and IMF Interest Payment is High Rate a part of Revenue of Interest Expenditure
Financial Year % of GDP 2004-2005 2.4 2009-2010 4.6 2010-2011 4.3
MeaningFiscal Deficit is a difference between total expenditure (both revenue andcapital) and revenue receipts plus certain non-debt capital receipts likerecovery of loans, proceeds from disinvestment.In 1980, the growing burden of non-development expenditure causeddeterioration in the fiscal situation of India. Later this resulted in a fiscalcrisis at the beginning of 1991-1992.
1. Increase in Subsidies2. Payment of Interest3. Defence Expenditure4. Poor Performance of Public Sector5. Excessive Government borrowings6. Tax Evasion7. Weak Revenue Mobilization8. Huge Borrowings
1. Debt Trap2. Cut in Capital Expenditure3. No Increase in Expenditure on Education and4. Health5. High Interest Rates6. Slow Economic Growth7. Other Consequences o Inflation o Discourage Foreign Investment
Financial Year % of GDP 2001-2002 6.2 2009-2010 6.5 2010-2011 5.7 From the above table, it is clear that fiscal deficit is about 4.1% of GDP.Overall the revenue deficit has declined from 3.3% in 1990-91 to 2.7% of GDP in2005-06.