Are Economic Policies of India Better Than That of China, Japan or Usa? Essay

Are economic policies of India better than that of China, Japan or USA? When we talk about the economic policy, USA and China forms the two extreme ends of a curve. USA has a free and liberal market where government interference is negligible and believes that market forces will cater to all needs of people in optimum quantity and price, as per Adam Smith’s theory. While, couple of decades ago China was a firm communist country. Though now, it has liberalized market, government has significant say and control over each and every activity. In comparison, India has balanced market where government interferes when needed. This kind of policy is way better than that of USA and China as it takes care of people along with market. Also, it stops the companies if they indulge into cartel or monopoly. Economic policy of a country consists of mainly two policies viz. a) Fiscal Policy – is determined by government and decides government expenditures, taxes, and debt. It is long term in nature and determines the progress path of economy. b) Monetary Policy – is generally determined by central bank of that country and uses instruments like Repo Rates and OMOs to control liquidity. It is short term in nature and used for controlling vital market rates. Fiscal Policy of USA: Till date the driver of US economy was high capital expenditure and Exports. However, after 2008 crisis there had been fall in exports. Also, there was cut in tax rate till 31st December 2012, tax rates cannot be increased as it might trigger recession. So due to increase in government borrowing, Fiscal deficit for the year 2007-08 was increased to 5.3% of the GDP. Before 2008 crisis fiscal deficit was controllable on account of revenue earned by capital expenditure and export in the economy. However, after crisis there has been very low investment in the economy of the country with very high Fiscal Deficit. Fiscal deficit for the year 2011-12 was 8.7 percent of GDP. Fiscal Policy of Japan: Japanese economy, of $ 5.86 trillion is third largest in the world, suffers from very high government debt. It has debt/GDP to ratio of 229.77% for the year 2010-11 which is very high with a debt of $13.64 trillion. Although, there had been attempts to reduce public debts by fiscal consolidation but they have never succeeded yet and debt continued to increase. Further, Japanese economy is under recession due to fall in its currency which had hit its exports. Also, the biggest markets for Japan exports are UK and US which had been hit by global slowdown. Fiscal Policy of China: China is the world’s second largest economy GDP of $ 8.20 trillion with growth rate of 7.8%. Chinese fiscal policy has been based mostly on manufacturing and exports but there is very low domestic consumption. Government spend highly in infrastructure and other capital expenditure projects to boost economy, But some of them failed due to lack of demand and results in â€Å"Ghost cities†. Being an export driven economy, it got affected by global slowdown as it depends highly on demand from western countries. Fiscal policy of India: In contrast, Indian direct tax rates are stable. Budget outlay by government has been increased from Rs.4.16 lacs crores for the year 2008-09 to Rs.5.92 lacs crores for the year 2011-12 which is very high considering that post 2008 world was suffering from crises. Indian Fiscal policies are changing in conformity with the current global requirement – FDI in retail, Aviation, Reforms in banking sector, proposing GST. Although, fiscal deficit of India is very high currently targeted at 5.3% of the GDP for the year 2012-13, fiscal consolidation measures have been planned to bring it down to 3% of the GDP for the year 2014-15. Following graphs show the trend in GDP and Fiscal deficit of different economies and how India is faring way better than with its economic policies. Graph 1: GDP growth Rates(in %) Data: worldbank.org Graph 2: Fiscal deficits (% of GDP) Data: worldbank.org Monetary Policy Currently the interest rate in USA is kept at 0.25 percent by Federal Reserve. Similarly in Japan, Bank of Japan is keeping the interest rate at 0 percent. Now as you can see both economies are developed one, but bank rates are lowered to minimum extent, hence they can’t be lowered more. So according to Keynesian theory these economies are in â€Å"liquidity trap†. Liquidity trap is a condition in which lower rates do not inspire borrowing for investments etc. Here by getting trapped in liquidity trap both countries lose one of the main weapons to fight against the recession and inflation. Now coming to developing countries like China and India. In China current interest rates is at 6%. Rates are controlled by The People’s Bank of China. Similarly in India interest rate is averaged at 6.55 percent for last decade, now standing at 7.50 percent. As Reserve Bank of India(RBI) has a sufficient cushion to work on, RBI used it very well first to increase liquidity by lowering it to 4.25% in Jan 2010 and then to curb inflation in later part of 2011 and early part of 2012 by increasing it to more than 8 percent. Clearly, India is using its economic tools efficiently and scores way above USA and Japan and if not above then at par with China. Though India has smaller economy than that of USA, Japan and China, it is more people oriented. Even if China is growing faster than India, you’ve to take into account the democracy in India vis-a-vis rule of communist party in China. It is performing well, by growing at one of the highest speed and keeping vital parameters in check. Also the India’s policy is of inclusive growth, and now even lower class is enjoying fruits of implementation of new economic policies rolled out in 1991 by trickledown effect. Thus economic policies of India are better than that of China, Japan or USA.