ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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India’s Slowdown

Investments in industry have slowed down considerably in the recent years, as has agricultural growth. Falling levels of capacity utilisation, building up of food stocks and the state of liquidity in the economy sufficiently prove that the problem today is the lack of demand. Rural distress, rising inequality and falling real wages are driving down demand. The government’s response to the slowdown has been woefully inadequate. The biggest impediment to policymaking is not the lack of ideas, but the blinkered vision of economics.

Economic Policy Uncertainty and Growth in India

A measure of economic policy uncertainty or EPU for India is constructed to study its impact on the economy. It is found that gross domestic product growth and fixed investment are negatively related to EPU in India. For instance, if the economic uncertainty were to decrease to the level observed in 2005, India's GDP growth would increase by 0.56%, and fixed investment growth would increase by 1.36%. Additionally, a negative correlation between the Bombay Stock Exchange index and EPU in India is observed, suggesting that increases in EPU lower expectations of future growth or increase perceived risk of listed stocks. Lastly, it is found that firm-level capital expenditure rates are lowered when EPU increases.

Slowdown of the Economy:Which Way Out?

In the panic that has gripped Indian business and government policy circles, it is easy to recommend measures which can be best described as quick fixes. But it is important that quick fixes be avoided if long-term development is not to be compromised. The main reasons for the current slowdown are structural and must be addressed as such. This calls for boosting not any kind of government expenditures, but expenditures that will raise productivity. Alongside must be tackled the institutional impediments that continue to obstruct private investment. Ten years after the initiation of economic reforms it is urgently necessary now that we recognise the important role that the institutional environment plays in development.
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