The Good & Bad of Fiscal Stimulus Packages

The concept of Fiscal Stimulus Packages is essentially a Keynesian concept that states that governments, if need be can help revive the economy out of a recessionary phase. The responsibility of steering the economy need not necessarily be on the private businesses. The advantage in a slowdown that the government has over the private businesses is money: unlimited amounts of it. So does it mean that the government can keep pumping in money whenever the economy needs it? The answer to that is invariably no. We can only attempt to trace the effects that a stimulus package will have on the economy but can never be sure about it.

Stimulus packages are thought to have multiplier effects on the economy. More investment by the government means job creation. When employment rises, it means that the income of the people in the economy is rising. A rise in income leads to a rise in consumption which instigates the producers to bring more to the market. And this cycle continues. If this process works well, it instills the confidence needed to restore economic growth. But it all comes down to where this money is being spent. The economy will take the aforementioned path only if the government invests in productive activities. Spending on social welfare programs provides temporary relief to the citizens but doesn’t create any multiplier effects for the economy.

It would seem that during a recession all the government has to do is invest in employment generating activities which have inter linkages with other economic activities. So where lays the problem? The biggest concern is the cost to the exchequer. Spending on a stimulus package would be funded by additional government borrowing. The burden of that borrowing would fall on future taxpayers.

Stimulus packages are thus only a temporary adjustment procedure. The timing of the withdrawal of the stimulus is very critical. Another concern with the short term measures is that they tend to delay the reform process. If an economy needs institutional restructuring, stimulus packages revive the economy in the short run, thus postponing that essential process. Government’s action to fix short term problems often creates long term damage.

If the businesses know that they will be bailed out whenever in trouble, they will be more likely to make irresponsible choices that produce another fiscal crunch. Thus, today’s fiscal challenges can be taken by policymakers as an opportunity to restructure.

Nevertheless, in times of recession, private businesses also need to restore their faith in the economic institutions of the country. To revive faith, it becomes necessary that the government invests. When that happens, government is in a way sending the signal that it’s not all bad and if these investments help stir the economy, private corporations would also catch the hint and look at expansion plans.

 

Contributed by:

Prerna Banga

Section A, Economics

Batch of 2013-15

Sen versus Bhagwati

SEN:

If you want to go fast, go alone. If you want to go far, go together! 

The idea of inclusive development is the one advocated by the Argumentative Indian, none other

than Mr. Amartya Kumar Sen, an Indian Economist and a Nobel Laureate. Mr. Sen says, "I was

born in a University campus and seem to have lived all my life in one campus or another; born in

Santiniketan, on the campus of Rabindranath Tagore's Visva-Bharati." A highly educated and

revered economist and a philosopher, we advocate his views for a prosperous economy and its

unhindered continual growth. 

No nation has grown out of poverty to prosperity without taking care of the basic needs of its

people. Sen argues that growth of an economy is sustainable only if the grass-root level issues

are addressed. He emphasizes on public provision of subsidized food, education and health for

the masses from the very beginning, instead of waiting for the high growth phase to ensue. Sen

believes that public investment in education and health for the masses, apart from their

immediate redistributive effects, would help broad-based sustained economic growth in the

longer run by producing a better quality work force. Not just focusing on the GDP but also on

the social indicators is imperative. The impact that an individual’s contribution has, on the

economy, is formidable.

Presenting the facts, Kerala following the Sen Model has a literacy rate of 95.5%, sex ratio of

1084, greater life expectancy and 16.2 per thousand infant mortality rate as compared to the

statistics from the state of Gujarat which is widely accepted to be predicated upon the Bhagwati

Model which has a literacy rate of 82.2%, sex ratio of 918, lesser life expectancy as compared to

Kerala and 60.9% infant mortality rate. 

The way ahead is the Sen way, one of inclusiveness, rather than focusing on making the rich

richer and proclaiming that there will be prosperity, without paying attention to that section of

the society that needs these propellants of economic growth. The narrow-sightedness that has

made home in the political wills of the Governments need to change. An eye on the horizon, a

vision for sustainable growth is what can make the future of India look promising in the days to

come.

BHAGWATI:

Jagdish Bhagwati is an Indian American Economist and Professor of Economics and law at

Columbia University and an advocate of free trade and Growth. Recently over past two-three

months, there is an ideological debate between Amartya Sen, the Noble Indian Economist and

Jagdish Bhagwati on redistribution and State intervention versus Growth in a free market

economy to resolve all economic problems. This debate is popularly known as Sen vs Bhagwati.

Prof. Jayati Ghosh from Centre for Economic Studies and Planning, Jawaharlal Nehru University

said for this debate, "Media has tended to make it into a gladiator fight between two celebrity

economists."

Amartya Sen believes that growth depends on creating a dynamic workforce capable of learning

on the job which needs health and education whereas we (Jagdish Bhagwati supporters) believe

on laizzez faire that growth will raise incomes sufficiently for the workforce to be able to invest in

their own health and education which we feel that it is capable of creating faster and effective

growth rates. Hence we support Jagdish Bhagwati that it is growth which is vital for the Indian

Economy to develop and Growth should precede redistribution and not the other way round.

History is the proof of this. Indira Gandhi became the Prime Minister of India after Lal Bahadur

Shastri’s death for two reasons – Firstly, the electoral benefits which she had achieved because of

her being Nehru’s daughter. Secondly, they felt that her lack of political base would allow the

Syndicate to rule by proxy. They all were proved wrong when Indira Gandhi joined hands with

the Leftist group, gained control of the party and showed how shrewed a politician she could be.

The 1971 elections were fought with a slogan of "Garibi Hatao", but at the end the actions led to

"garibi badao" that even led to emergency in 1975 suspending fundamental rights from its

citizens. Our Indian Industry was under "lisence Raj" during this epoch where even to produce

more, add machines required Government permission. By the late 80s India was caught under a

great fiscal trap and mounting Current Account Deficits which led the Government to open the

stop gates and liberalize its Economy in 1991. With this it created new jobs, new industries, new

aspirations, new careers, new salaries and packages, emancipation of various classes of our Indian

Society. So we behold that it is Growth that has always been the engine of living-standards of

households plus the development of an economy.

Further we have also found that rapidly growing economies such as South Korea, Taiwan,

Singapore and Hong Kong in the 1960s and 1970s shows that growth pulls the poor into gainful

employment and automatically reduces sustained poverty reduction. Even our superpower US has

also grown into giant because of growth which has made them a developed nation. US poverty

reduced from 50% in 1900 to 30% in 1950 to 12.1% in 1969. It was economic growth that

eliminated child labor possibly well in US. The living standards of the poor in America today are

equivalent to the living standards of the middle class 35 years ago (Source : Stephen Moore and

Julian L. Simon , "It’s all Getting Better All the time : 100 Greatest Trends of the last 100
Years."). Redistribution alone claims that it is effective and a sure shot policy. But one should

even scrutinize the redistributive programmes that were implemented. Public distribution system

shows that 10 % of the food subsidy actually reaches the poor, ineffective NREGA Programme

because of corruption and funds getting transferred to multiple layers of bureaucracy, failure of

"Sarva Siksha Abhiyan". 

 

Hence we believe that India or any developing countries needs high economic growth rates which

would generate requisite revenues to deal with poverty. We feel that growth is the only way to

increase the overall income of a community. If the treasury is empty, all promises are slogans and

there will be no redistribution of resources. Hence that to happen it is very important that there

should be growth first and redistribution will follow. And we would end up with a quote said by

Chanakya , "Economic Growth is the backbone of a nation’s strength".

India versus China

INDIA:

The race between India and China is an amazing race between China’s hare and India’s tortoise.

Clearly India has many advantages—
1.      More Balanced Growth—India is a domestic consumption driven economy which is very less susceptible to shocks from international economy. Domestic consumption in India is 57% of the GDP.
2.      More Rational Companies—India’s companies are more focused on profitability. There are more than 6000 companies listed on the stock exchange and only 100 of them are state owned. India’s return of investment on various companies is almost double as compared to China.
3.      Democracy- India has proved the world that dictators are not needed for rapid development and the same can be achieved by democracy. It has shown incredible economic growth for decades.
4.      Property Rights—In India, article 31A protects the right to property as a fundamental right. The government is working day and night for the improvement of land and labour laws.
5.       Rule of law—India’s legal system has been in place for more than 100 years. The legal system is internationally respected. There are more than 150 top global multinational companies have established R&D base in India. According to US Food and Drug administration, India has more certified companies in the world after US.
6.      Banking Sector—India’s banking sector has always had a sustainable growth. Various policies like credit giving, interest rates, etc have always been regulated in accordance with the welfare of the economy. This sector did not face any crisis during the 2007-08 financial crisis which had gobbled up the US financial sector.
7.      Inclusive Growth—Owing to democracy and historical traditions, India’s growth has always been in consideration with the people. The overall growth of the country is at an average rate but inclusive.
Winston Churchill said, “Democracy is the worst form of government except for all those other forms that have been tried from time to time"

CHINA:
The rest of the world looked on in disbelief, and then awe, as the Chinese economy began to take off in the 1980’s at what seemed like lightning speed and the country positioned itself as a global economic power. China, a socialist market economy, is the world’s second largest economy with the GDP of $8.6 trillion. It is the world’s fastest growing economy with growth rates averaging 10% over past 30 years.

China is the largest exporter and the second largest importer in the world. It is also the second largest manufacturing economy in the world outpacing its world rival in this category, USA.China has implemented reforms in a gradual fashion. It has achieved what it has because of structural strength of its institutions. It is following a developmental path.
For nearly 30 years China has indeed been growing thrusting citizens into prosperity and its goods across the world. Between 1978 and 2013, China’s per capita income had grown from $153 to $9100. Its current account surplus had also increased over twelve fold between 1982 and 2004, from $5.7 billion to $71 billion.
It transitioned from being an agrarian economy to a manufacturing one, and is now concentrating on the development of service sector. China in year 2003 fed 20% world’s population with only 7% of world’s arable land. In 2011, china was largest producer of steel in the world producing 45% of the world’s steel. Even in current slowdown the Chinese economy is being able to manage a decent growth rate. It is also predicted that by 2016, China became the largest economy of the world overtaking USA.

Even though India and China occupy the same continent, they do not inhibit the same strategic realities. Geography, governance, culture, economy and diplomacy all play a huge role in making a big difference in strategic outcomes of the two countries. China’s geopolitical advantage can be summed up like this: (i) first mover advantage- China borders 14 nations more than any country in the entire world. (ii) It has settled borders with all of its neighbours. (iii) China has also built up very deep infrastructural linkages, commercial ties with its neighbours exporting goods while importing raw materials. So, in a way it has built a trans-national empire of resources already.

China is two decades ahead of India in terms of its economic size, infrastructural base and social indicators ,which probably indicates that Dragon has already reached the 21^st century whereas the Elephant is still lurching towards it.  

De-Jargonize

1. Liquidity trap
Liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand.

From household’s side

A situation in which prevailing interest rates are low and savings rates are high that is consumers choose to avoid bonds and keep their funds in savings. Bonds have an inverse relationship to interest rates; many consumers do not want to hold an asset with a price that is expected to decline.

From firms’ side

It usually arises when expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. Businesses continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap.

2. Seigniorage

Seigniorage is defined as revenue for a government when the money that is created is worth more than it costs to produce it. This revenue is often used by government to finance a portion of their expenditures without having to collect taxes. It is the value the government generates by adding its stamp to an ordinary piece of paper, piece of metal or nowadays an electronic bank entry.
Seigniorage =the face value of the money - the cost of printing/ minting it.
For example, it costs the Indian government Rs 2 to produce a note of Rs 10, the seigniorage is Rs.8

3. Repo rate 

Whenever a bank has a shortage of funds they can typically borrow it from the central bank based on the monetary policy of the country. Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks for meeting shortfalls in their reserve requirements against securities. Repo rate is used by monetary authorities to control inflation.

How repo rate affects the economy?

In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in controlling inflation.

4. Reverse repo rate

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is mostly done when there is surplus liquidity in the market. It is a monetary policy instrument which can be used to control the money supply in the country.

How reverse repo rate affects the economy?

An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.

5. Statutory Liquidity Ratio (SLR)

SLR is the amount a commercial bank needs to maintain in the form of cash, gold, or government approved securities before providing credit to its customers. SLR is determined and maintained by RBI in order to control the expansion of bank credit. In simple words, it is the percentage of total deposits banks have to invest in government bonds and other approved securities. A SLR bond also qualifies for the portfolio maintained by banks to meet the liquidity requirement.

Contributed by:

Shreya Jain
Economics, Section A
Batch 2013-15

Top 5 News Feed

RBI hikes REPO RATE by 25 basis points, reduces MSF by 75 basis points:

The Reserve Bank of India increases Repo Rate from 7.25% to 7.5% and reduces Marginal Standing Facility Rate (MSF) from 10.25% to 9.5%. The RBI Governor has focused on inflationary expectations and currency management strategies. The MSR was reduced to tighten up the liquidity and arrest volatility in FOREX market. The intent has also been to alter the path of Current Account Deficit (CAD) and improve prospects for its stable funding in future. The RBI has also reduced Cash Reserve Ratio to 95% from 99%. These measures will certainly give long term benefits and have been taken to improve the scenario of external financing as well as to focus on valuation on rupee, fiscal deficit and inflation. There has been a positive impact overall and the bears are rejoicing as Sensex and Nifty has also ended the week with gains, Nifty - above 6,000, with a gain of about 160 points, and the Sensex above 20,000.

SME’s to get listed on BSE:

Now Small and Medium Scale Enterprises will get listed on Bombay Stock Exchange, to avail benefits. It is the first stock exchange to provide this platform. Any company whose post-issue face value capital is less than Rs.250 million is eligible to get listed on this platform, subject to other applicable provisions. Till now 32 companies have been listed and 70 are waiting to be listed.   The MSME sector contributes to around 40% of India's exports and employs about 80 million people. BSE will also guide the investors and various intermediaries in this respect.

 In my opinion this is a very positive step as it will not only help them in raising effective equity capital but will also cater to their to growth and expansion. There will also be a scope of wealth creation for these enterprises and an open opportunity for investors to identify and invest in a profit making SME.

                                                                                                                                
No Power Takers:

Many States of India suffer blackouts while power plants remain idle. Consumers are forced to face the problem of power cuts, which may even last for six to eight hours, due to artificially created shortage of power. The main reason behind this load shedding is the wide difference between the price realized and cost procured of electricity.

Due to increase in the fuel prices the price of long term power has increased by 50%. Over two years only three states-Uttar Pradesh, Tamil Nadu and Rajasthan have invited bids. The distribution companies (discoms) are avoiding buying power, as they are facing losses due to high cost, non-recovery, pilferage etc. If this problem is not solved, a loan of Rs.72000 Crore on power sector may turn into a non-performing asset.

A price check and proper facilitation of Fuel Supply Agreements (FSA) may help the government and the discoms in solving this issue. 

TATA Sons and SIA to fly together:

The sons are all set to come up with a second airline in India but in partnership with Singapore Airlines (SIA). It is a $100 million investment where the Tatas will own 51% of the joint venture. As per FIPB approvals the airline will be based in New Delhi, the initial board will have three members, two nominated by Tatas and one by SIA. The experts have welcomed the entry of a new financially strong and highly moral player in the Indian Aviation Industry. Whereas the Air Asia Partner, Mr. Arun Bhatia has coined the tie up to be unethical. There seemed to be certain agency problems involved as the Tatas had informed Air Asia but not taken its other partners into confidence. However the Tatas and SIA are quite sure of getting their stamp of approval. The government also allows investment up to 49% by foreign airlines. Looking at the past records of the Tata Group which gave India its first airline, this tie up seems to be fruitful for the country.

Gold, Silver losing their Glitter:

The prices of both the precious metals plunged down in the bullion market, gold by Rs 280 to Rs30, 500 for ten gram, bearing a loss of Rs 30, whereas silver by Rs1,600 to Rs49,500. An odd time phase and a low demand of the metals in domestic as well as overseas markets is the main reason behind this price fall. Recovery in the rupee, making dollar quoted precious metals prices puts a pressure on their prices. The low price may encourage the domestic investors to invest in this asset but it will give losses to traders on selling in the global markets. According to analysts a small increment in prices is expected next month.

 

Contributed by:

Sunayana Tandon

Economics, Section A

Batch 2013-15

The Concept of Monetarism

Monetarism is an economic theory that focuses on the macroeconomic effects of the supply of money and central banking. Formulated by Milton Friedman, it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.

Monetarism is a macroeconomic theory born out of criticism of Keynesian economics. It gets its name because of its focus on the role of money in an economy. This differs significantly from Keynesian economics which emphasizes the role that the government plays in an economy through expenditures, rather than on the role of monetary policy. To monetarists, the best thing for the economy is to keep an eye on the money supply and let the market take care of itself. In the end, the theory goes; markets are more efficient in dealing with inflation and unemployment.

Quantity Theory of Money:
The approach of classical economists toward money states that the amount of money available in the economy is determined by the equation of exchange:

MV=PY

M = the amount of money currently in circulation over a set time period V = the "velocity" of money (how often money is spent or turned over during the time period) P = the average price level Y = the value of expenditures or the number of transaction

Economists tested the formula and found that the velocity of money V increases, the whole of (PY) increases. As PY increases, transaction increases and transaction is a proxy for economic activity.  

The Vietnam War had several effects on the U.S. economy. The requirements of the war effort strained the nation's production capacities, leading to imbalances in the industrial sector. The funds were transferred overseas, which contributed to an imbalance in the payments and a weak dollar, since no corresponding funds were returning to the country. Despite the success of many, Kennedy and Johnson's economic policies, the Vietnam War was an important factor in bringing down the American economy from the growth and affluence of the early 1960s to the economic crises of the 1970s.

RISE OF R&D:

At that time US Economy was established to such an extent that they shifted their focus towards improving the standard of living and they recognized that standard of living comes with innovation which in turn is only through R&D. So at that point of time they started to invest more in R&D Department, such as the insulin strip.

CAUSES OF INFLATION:

Cost Push: A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials. As the cost of input increases, the wage rate also increases and there is a wage push. Wage push inflation is an inflationary spiral that occurs when wages are increased and the business must, in order to pay the higher wages, charge more for their products and/or services

Demand Pull: This type of inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull inflation

Head line v/s Core: Headline inflation also called as WPI inflation, It is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy (petrol) because of their high price volatility.

CPI: A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because huge rise in CPI during a short period of time typically denotes periods of inflation and huge drop in CPI during a short period of time usually marks periods of deflation.

WPI: An index that measures and tracks the changes in price of goods in the stages before the retail level. Wholesale price indexes (WPIs) report monthly to show the average price changes of goods sold in bulk, and they are a group of indicators that follow growth in the economy. It is mainly from the producer’s perspective.

Index of Industrial Production (IIP) in simplest terms is an index which details out the growth of various sectors in an economy. E.g. Indian IIP will focus on sectors like mining, electricity and manufacturing. Present IIP for 2013 comprises of 8 core industries.

 

Contributed by:

Venkata Rajeswari

Economics, Section A
Batch 2013-15

Protectionism versus Free Trade

PROTECTIONISM:

Protectionism is a form of government activity that restricts for restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. It is a deliberate attempt to limit imports or promote exports by putting up barriers to trade.

Historically, protectionism was associated with economic theories such as mercantilism i.e. believed it is beneficial to maintain a positive trade balance and import substitution. According to Cambridge University professor Ha-Joon Chang, virtually all developed countries today successfully promote their national industries through protectionism.

Methods of Protectionism are:

·         Import Tariffs:  Which are taxes, or duties, on imported goods designed to raise the price to the level of, or above the existing domestic price.

·         Quotas: It a non-tariff barrier method, a quota is a limit to the quantity coming into a country and in turn increases the market price of the imported goods.

·         Subsidies or tax cut to local business: Governments may also give subsidies to domestic firms, which can then be used to help reduce price and deter imports.

·         Anti-Dumping laws: Prevent dumping of cheaper foreign goods that would cause local firms close down.

·         Exchange rate manipulation: Monetary protection involves countries deliberately devaluing their exchange rates to stimulate exports and deter imports.

·         Red Tapism: Excessive bureaucracy associated with the process of importing and exporting may also restrict trade. For example, goods may be deliberately held-up at ports and airports, and there may be unnecessarily complex and lengthy paperwork associated with international transactions.

·         Preferential Government spending: By American government act federal legislation which called upon the US government prefers US made products in its purchases.

Motives for Protectionism are:

Protectionism keeps the domestic economy flowing since there is decrease in imports, domestic firms have less competition and so are able to continue.

·         Protect Infant industries: It allows green, fledging firms to function and develop at a decent rate; these firms are not pressurized by more experienced & foreign firms.

·         Protect strategic industries: It protects industries such as energy, water, steel, armaments and food.

·         Dumping: This is where foreign, ground economies enter an economy and sell their goods at a lower price.

·         Curbs Unemployment: Domestic firms are able to sell and productive more goods with less difficulty, giving firms less incentive to decreasing cost by decreasing workforce.

·         Help the environment: It helps protect environment by decreasing the foreign trade hence decreasing the use of transport.

Protectionism essentially means refraining from international trade in order to protect domestic industry providing infant industries enough time to learn how to produce goods efficiently and develop their own competitive advantage. It also temporarily creates jobs for domestic workers, helps in narrowing the balance of payment deficit and in turn ensures survival of domestic firms in the long run. However, it is believed that in the long run, protectionism weakens the industry as without competition companies won’t innovate and improve their products and services.

 

FREE TRADE:

For more than two centuries economists have steadfastly promoted free trade among nations as the best trade policy.

Political Economist ADAM SMITH said: "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."

Free Trade is the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas. Free trade is a win-win proposition because it enables nations to focus on their core competitive advantages, thereby maximizing economic output and fostering income growth for their citizens.

Free trade occurs when there is no protectionism. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows.

Advantages:

Increased production

Free trade enables countries to specialize in the production of those commodities in which they have a comparative advantage. With specialization, countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production.

Production efficiencies

Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.
 

Benefits to consumers

Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods, services and inputs, are supplied at the lowest prices.

Foreign exchange gains

When a country sells overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports that are produced more cheaply overseas.

Employment

Trade liberalization creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment.

Economic growth

The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, efficiency and production levels.

Thus, for a better economy, we need to increase innovation and human capital in different sectors. Free trade is the best policy to increase the competition in any market. Free trade will bring more markets and employment and the standard of living thus increase the purchasing power and consumption. This will increase the market of other domestic sectors leading to higher GDP of economies.

Manufacturing versus Services

THE MANUFACTURING INDUSTRY:

Manufacturing work places entail lot more sweat and grime as compared to the services sector.

 

Manufacturing is the production of goods for use or sale using labor and machines, tools, chemical and biological processing, or formulation. Manufacturing industries help in modernizing agriculture, which forms the backbone of our economy. Manufacturing industries also reduce the heavy dependence of people on agricultural income by providing them jobs in secondary and tertiary sectors. Every job created in manufacturing has a multiplier effect, creating 2–3 jobs in the services sector. In a country like India, where employment generation is one of the key policy issues, this makes this sector a critical sector to achieve inclusiveness in growth. A big increase in the manufacturing work force will boost the income levels and make a dent in poverty level.

Industrial development is a precondition for eradication of unemployment and poverty from our country. It brings down regional disparities by establishing industries in tribal and backward areas. Export of manufactured goods expands trade and commerce, and brings in much needed foreign exchange.

Countries that transform their raw materials into a wide variety of furnished goods of higher value are prosperous. Manufacturing has long been a cornerstone of our national economy. As a sector, manufacturing firms are especially valuable to the economy because, when they export goods, they bring back to their communities much of the wealth earned from sales around the country and the world.

Deloitte has ranked India as the fourth most competitive nation today and believe that the country will rise up in the rankings to be the second most competitive manufacturing nation in five years. India’s workforce skills and cost advantages, improving policies and regulations, growing middle class, and ongoing investment in infrastructure will boost its competitive advantage and help maintain the country’s position as a strong contender on the global manufacturing front.

Rationalization of business regulations to reduce burden of procedural and regulatory compliance on businesses and the huge domestic market along with the opening up of the economy has created the right investment climate in the country.  India is now getting recognized for high value goods requiring engineering precision and quality. Be it mobile phone industry or automobiles, consumer durables or engineering products, luxury brands or aircraft industry major global players are all eyeing India. Nokia, Samsung and LG have already set up manufacturing plants in India. Skoda Auto has big plans for India. The cases of Ford India, Hyundai and Suzuki are no different. Airbus Industries will have a manufacturing base in India soon.                      

Therefore, we conclude by saying that growth in manufacturing fuels other sectors, creating jobs and investment in non –manufacturing sectors because of its both backward(mining ) and forward (warehousing, transportation) relationship with it. Also India needs a new manufacturing revolution for sustained development and growth. This can be ensured through restructuring of higher education, making it innovation-centered and pumping more investment in research and development, competitive scales of production and establishment of  more National Investment and Manufacturing Zones equipped with world-class infrastructure.

THE SERVICES SECTOR:

 

Makers of many things from aircraft engines to cars simply do not make and sell, but customers want advice design and maintenance.

The service sector  consists of the "soft" parts of the economy, i.e. activities where people offer their knowledge and time to improve productivity, performance, potential, and sustainability. Service sector encompasses a variety like information technology, tourism, consulting, hotel industry; healthcare, mass media, financial services like insurance and banking. In India, the service sector contributed 29.8% of the GDP in 1950 and has grown to contributing 56.5% of the GDP today.  It is also a significant employment generator, generating a quarter of the employment in the country. These have been growing at 28% over the last 5 years, which is remarkably higher than the GDP growth of 7%. 

India’s focus on the service sector began with New economic policy of 1991,and boomed into a fully fledged and a successful contributor to the GDP by 2000. Given that India as a country leaped from the agricultural phase to the service one, there are many schools of thought that believe that a country should focus on doing what its good at as in China’s case it is - manufacturing. A common misconception about the service sector that needs to be set right is that it is not about software alone. We are seeing broad brainpower-led growth. This is reflected in high-skill outsourcing in legal services, engineering services and film animation. Above all it is reflected in the increase in research and development.

 

Unlike the claims put forth by various studies , manufacturing jobs are shrinking. The organized sector today has only 27 million workers, Tata Motors produced 129,400 vehicles in 1994 with 35,000 workers. In 2004, it produced 311,500 vehicles with just 21,400 workers. Bajaj Auto produced a million vehicles in the mid-1990s with 24,000 workers. Today it produces 2.4 million vehicles with just 10,500 workers. Let nobody think that manufacturing has more job potential than services.

Contributed by:

Section A, Economics

Batch of 2013-15