Abstract
ac With the complexity of these three factors (trade, debt and investment); it calls for support from all quarters for a country to be able to effectively drive them to the nations benefit. As far as trade and investment are concerned, the country has identified the best way to run them in such a manner that the local employment and labor conditions remain competitive, the environment remains protected, development and diversification of local technologies is kept up. Regarding debt, that the nation owes international financial institutions, it has reduced its dependency and consequently, the national economy as well as minaimizes political vulnerability and dependence (Bhagwati, 1993, p.14). This paper will look at the concept of trade, debt and investment policies in India.
The Policies’ Effects
Trade has had varying effects to India; both good and bad; for instance it is through effecting the policies that were put in place to guide trade that has enabled transfer of technology and skills in the country, availability of goods that are not locally produced in the nation, sparking innovation as well as promotion of efficiency through adoption of international set standards. The policies have also made it possible for India to compete well with developed nations in the international market. But on the other hand, trade has also been reported to be the chief cause of political instability in the country; by opening its boarders, Indian has lost its sovereignty regarding taxation, employment, inflation and tariff policies. There is also fear that embracing unilateral environmental protection initiatives will jeopardize their competition economically, the local culture and in a more complex note, force India to increase foreign debt to fund the course (Aziz et al, 2006, p.411).
There is the free trade policy which seeks to achieve a closer integration within the Asian continent, but research indicate that “India needs is not the FTA, but liberalization which is broad based which seems to have more economic benefits and less risks” (Aziz et al, 2006, p.413). Intentions of respecting the policies defining trade, debt an investment were objected to acquire harmonization and cooperation among different states and locally among banking and custom departments. It would have been a great benefit for the country if the priorities were got right; for instance improvement of nation wide infrastructure, the infrastructure at boarder customs posts, facilitating customs clearance and defecting protective tariffs. India has encouraged most of its industries to promote FDI (Foreign Direct Investment) and non debt flows. Policies guarding this effect give free allowance to foreign investment in the country without any restriction or limitations of the degree of ownership. FDI enjoy a 100% automatic rout for manufacturing goods (Dunbar, 2000, pp.27-29).
According to research findings presented in (Gupta, 2007, p.27) globalization and liberalization strategies that the country carried in the year 1991 brought many changes in the microeconomic sector. The policies that got associated with the move led to massive economic growth and subsequently rise in direct foreign investment, though not as fast as other Asian states. The debt policies saw the government establishing funding programs to aid putting up of structures within major cities in the country; it also made it easier for the cities to access capital markets. One notable move that the country made as far as debt policy was concerned was with Basel II move which was targeted to affect banks by raising their capital position. Further to this, the move was also targeted to ensure that the South Asian market and capital position are harmonized. The Basel II accord is made up three pillars. Pillar I sets minimum capital requirements, Pillar II oversees the operations in the risk management within the institution and finally, Pillar III establishes the market disciplines (Gupta, 2007, p.29-31).
The debt policies were geared to sustain the debt-deficit margin and determine a compromise position for the short and medium stance in the fiscal policy. The Indian government has achieved many positive steps through the FRBMA (Fiscal Responsibility and Budget Management Act), especially by defining the debt-GDP ratio that has to be maintained. The country has been struggling to lower ratio from its current standing which is almost exceeding GDP by 80 percent. From the time that a discovery was made that the debt issue was of national concern, the government set itself to adjust the debt situation to reflect a stable economic status. There are two ways to achieve this goal presented by Gupta; the first is by reducing fiscal deficit every year until it reaches a point where government dis-saving is completely done away with. The second move is to stabilize the fiscal deficit at 6% of GDP. This has the ability to bring down the debt-GDP ratio to 56%. The Indian government defined their debt policy to take the path of the second move which has so far had very good outcome. Within a decade, the revenue receipts have significantly fallen allowing the state to a larger percentage of primary revenue in the social sectors (Gupta, 2007, p.32). The move is however being faulted with its critics saying that it stands no chance to sustain the country in the end. It only got has short term benefits before letting the country drift back to financial oblivion.
The implications that the move has had to the external and internal public debt is so complex that and is causing concern across the entire nation; government and the public. “The debt amount was reported to be standing at $50 billion by 2008” (Gupta, 2007, p.33). That was the highest ever in over 18 years. With the Indian rupee receding in value against the dollar, the debt increase is said to persist for along time. In line with this, weakening of the dollar against other major currencies was pointed to be causing some increment to the Indian external debt.
The critics are justifying their stands by stating the latest development in the financial sector. For instance; they say that it took India 15 years to increase their external debt by $54.3 billion before the new policy was put in place, while after the new debt policy, a combination of non-governmental and government debt rose by a whooping $83 billion. With the reduced interest rates charged on external commercial borrowings saw overseas debt shoot up by over 32% (Gupta, 2007, p.35). The policy has therefore been revised to bring up more control and avoid the risk of running into further inflation. The revised policy regulates foreign inflow into India; the restriction is said to be limiting domestic money supply thus cushioning the country against inflation.
Conclusion
The policies have elicited and sparked economic growth to India; the country’s position in the global in turn moved to 4th place in 2001 from 8th in the year 1991 (Aziz et al., 2006, p.416). If the trend continues as planned, then it will not be long before India becomes fully developed nation. Thanks to the policies which have brought about fiscal consolidation, great FDI, rise in foreign exchange and relative control of inflation. “Controlled borrowing rate has saved the country from being too dependant on aid; hence promoting their financial sovereignty” (Bhagwati, 1993, p.21). Since the new policy was gazette, the India’s total debt to government ration declined by 2.8% indicating a high share in private burrowing. In an overall sense, Indian policies on debt, investment and trade has been within manageable levels and is revised according to the situation of the world market, and financial position. Among the developing world, India is placed second and only four places behind China regarding their debt service ratio.
References
Aziz, J., Prasad, E. and Dunway, S. (2006). Reforms and policies for a sustained growth. Renouf Publishing. 92 (2). Pp.411-416.
Bhagwati, J. (1993). India in Transition: Freeing the Economy. (First Edition). Oxford University Press. Pp.14-21.
Dunbar, N. (2000). Investing Money: The Story of Long-Term Capital Management. John Wiley & Sons. Pp.27-29.
Gupta, J. R. (2007) Public Economics in India: Theory and Practice. Atlantic Publishers: New Delhi. (2007). pp.27-35.