Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (10 Marks)

The Indian economy has witnessed a gradual transition from a period of high and variable inflation to a more stable and low level of inflation along with steady GDP growth in the past five years, according to the Economic Survey 2018-2019. Low inflation contributes towards economic stability which encourages saving, investment, economic growth, and helps maintain international competitiveness.

How Steady growth rate and low inflation has been good for a country?

  • Low inflation has helped to promote stability, confidence, security and therefore encourages investment.
  • High inflation robs the earnings of the poor.  Low inflation increased disposable income and therefore increases demand and investment in the economy.
  • Low inflation and High GDP growth made Indian exports more competitive.
  • Low inflation helped in keeping interest rates in check, which in turn helped the corporate sector.
  • Steady growth rate made possible for the government to introduce reforms such as GST.
  • Steady growth also provided for better revenue prospects which assisted the government to increase the contribution in various social sector schemes for example 17 per cent hike in allocation to Women and Child Development Ministry.

How steady GDP growth and low inflation were not sufficient:

  • Low inflation means a high real interest rate that, in turn, tends to crimp investment activity.
  • When companies see profits decline, they tend to scale back expenses by firing some workers or, leads to an increase in the unemployment rate.
  • Tax collections depend on nominal GDP growth — lower the latter, the higher the chance of missing tax collection targets forcing GoI to slash expenditures to meet fiscal targets.
  • Low inflation signalling economic problems because it is associated with weakness in the economy in the future.
  • High Economic growth has not resulted in employment generation. Higher the unemployment lowers the demand or consumer confidence which further impact investment.
  • As both investments and consumption slow, economic growth suffers. This causes revenues to decline even more, and the economy is pushed into a negative spiral. Tax revenues fall. There are more bad loans. It strains bank balance-sheets even more. India has experienced all of these symptoms since the late-2014, when inflation hit 4% level.
  • Low inflation has resulted in reduced returns for farmers. This has adversely affected the rural economy and resulted in agrarian distress. In the extreme, when an economy’s inflation rate turns negative, it raises additional concerns and the prospect that the economy slips into deflation.

There can be a conflict between economic growth and inflation. In periods of rapid economic growth, inflation is likely to rise. However, it is possible to have both low inflation and positive economic growth – so long as the growth is sustainable and productive capacity increases at a similar rate to aggregate demand.

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Theertha Vijayan
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