For India to try to get back on the growth path the following may need to happen | ||||
| ||||
| ||||
| ||||
For this to happen, the reform process needs to be re-kindled. People are talking about renewing reforms but why are reforms vital? Let's say there is a small factory that is manufacturing goods and services. The population of the town buys everything from this factory. As the population grows, the demand for goods also grows. Naturally, the factory raised prices because of the excess demand. This is how inflation steps in. So how does one fight inflation and bring prices down? One way may be to reduce the amount of money people have so that they buy less. To make this happen the Central Bank will increase interest rates. This way, money is less and prices are controlled. But people may not be satisfied because they cannot buy much. But if money is supplied cheaply, prices could go up and inflation could be back. So what does the government do? The government may need to make it easy for people to set up more factories and increase supply. To set up more factories, entrepreneurs would need | ||||
| ||||
| ||||
| ||||
| ||||
In order to make the above available the government has to initiate reforms as explained:- | ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
So when we have reforms in place, more factories will come up. When more factories come up, the country will produce more goods. When more goods are produced, more money can be printed without losing value. When more money is printed, the interest rates can be reduced. When interest rates are reduced more entrepreneurs jump into the fray creating more production and more jobs. With more jobs, people have more money and are in a good position to consume the additional production. This gives rise to more investment and thereby a virtuous cycle kicks in. With adequate supply, inflation is kept at bay even as people have cheap money for investment and for consumption. With interest rates low, inflation low, value of rupee stable, high production, the GDP of the country improves. With higher GDP, more jobs and prosperity in place, the tax collection increases. With higher taxes from higher GDP the situation turns win – win. People don't mind paying more taxes because they are earning more. Higher taxes help the government keep its fiscal deficit in check. In the meanwhile, the government is in a good position to invest in bigger infrastructure projects and improve the productivity of the nation. The moot point of the above explanation is that if the country wants to get a glimpse of utopia, it must reform its policies to infuse efficiency and productivity in the system. |
This blog is for the students of BFSI sector.The contents published in this blog are seldom original and are mostly taken from other sources. This blog is an attempt to present a collection of basic information to the students.
Wednesday, July 25, 2012
Why Reforms are so important to a nation
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment