[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

Rok SPRUK
International Economist,
Slovenia
Going For Growth Through
Economic Reforms: The Case Of India
"A more innovative economy tends to devote
more resources to investing of all kinds--in new
employees and customers as well as new offi ce
and factory space. And although this may come
about through a shift of resources from the
consumer-goods sector, it also comes through
the recruitment of new participants to the labor
force. Also, the resulting increase of employeeengagement
serves to lower quit rates and,
hence, to make possible a reduction of the
“natural” unemployment rate. Thus, high dynamism
tends to bring a pervasive prosperity to
the economy on top of the productivity advances
and all the self-realization going on. True,
that may not be pronounced every month or
year. Just as the creative artist does not create
all the time, but rather in episodes and breaks,
so the dynamic economy has heightened highfrequency
volatility and may go through wide
swings. Perhaps this volatility is not only normal
but also productive from the point of view of
creativity and, ultimately, achievement."
-Edmund S. Phelps,
Nobel Laureate in Economics, 2006
The purpose of this article is to
highlight some of the increasingly
important issues regarding
India’s economic prospects. In recent
years, the operating capacity of India’s
high-growing economy has been reflected
by a surge in real GDP growth and a slight
downturn in inflation pressures. By the
end of 2007, India’s GDP is estimated to
rise by 8.9 percent and 8.4 percent in 2008
while consumer price index increased by
6.2 percent in 2007 and is expected to decrease
to a mere 4.4 percent rate of overall
price increase. 2 Growth estimates differ
respectively subject to different
methodological evolution of the real GDP
growth measurement. It also depends on
how the engines of growth are estimated,
especially the importance of those factors
in driving growth. There are, in an academic
economic literature, two main economic
paradigms regarding the philosophy,
theory and policy perspective of
economic growth. Keynesian economic
analysis supports the view that the aggregate
demand 3 is a primary source of economic
growth, claiming that an increase
in the government spending per unit of
output, increases investment activity and
drives growth onto a stable trajectory.
Keynesian emulation of the evolution of
economic growth is based on false assertions.
For example, Keynesian interpretation
of economic growth neglects the
impact of aggregate demand on inflation.
As public spending and fiscal outlays increase,
there is a growing probability of
higher inflation. In the short-run, such
policy features boost the economic activity
through an expansionary monetary
incentive, but in the long-run, the negative
impact of government spending surpasses
the short-run effect of government
spending subject to a persistent inflationary
pressures, falling growth rates and
tight grip on capital markets. Notably,
when government spending increases
whereas fiscal expenditure is anchored in
budget deficit, government borrowing reduces
the supply of available monetary
means and thus, increases the interest
rate balance which investors have to bear.
146 THE IIPM THINK TANK