Problems in Indian Economy

               In last couple of years we hear about corruption,inflation,oil price hike,LPG price hike and reducing subsidies in India very frequently. We saw most of these problems directly affect common man and which initiated some strong agitations and later Indian Middle Class took the leadership of this protest against UPA-2 Government. In general elections new government came into power and had a fresh look at Indian Economy and said it needs to do some strong corrective actions to bring back the economy. But what is the reason behind the poor performance of Indian Economy for last 9-10 quarters?

              There are multiple micro and macro economic reasons behind the slowdown of Indian economy. Inflation, Poor Policy Making, Poor utilization of resources and Poor Investment Environment are major reasons behind this slowdown. 

Inflation: 

               Inflation in 2012 based upon Consumer Price Index was 11.17% and in 2013 it was 9.13%. This rate is very high because comfort level of inflation rate for Reserve Bank of India is below 5%. Price for food items and other consumer goods are very high for last two years which forced RBI to increase the rate of interest for all loans from Bank. RBI took all measures to reduce the availability of cash in market to reduce inflation. Even then inflation rate is above 5%. It is normal to have high inflation for an economy which is growing at high rate but Indian Economy has very low growth rate and high inflation rate which is a challenging situation for RBI and Government.

Poor Policy Making:

             Governments usually overcome recession or economy slowdowns by introducing new policies to revive economy and investor sentiments. Last government failed to do so and waited for a natural reversal of economic cycle. According to classical economic principles during slowdown of an economy wages of employees will go down and companies will get more workers with less wages. It will reduce the production cost and reduce the price of consumer goods. In India it never happened. Wages never came down and production cost was same or high which induced high inflation. Due to high inflation RBI reduced the cash flow to markets which reduced the overall GDP growth and investor sentiment. Government miserably failed to find a way to tackle this unique situation in Indian Economy. 

Poor Utilization of Resources:

               India is rich in Iron Ore and Coal but unfortunately we are not producing enough coal and Iron Ore in India due to poor governance issues. Iron ore production in India fell significantly during the course of past few years i.e. from a level of 218 million tonnes (MT) in 2009-10 to only 144 MT in 2013-14 which is further expected to drop to 100 MT in FY 2014-15 against the demand of 140 MT. There has been a sharp decline to 77% in capacity utilization in Indian steel industry due to shortage of iron ore in FY 2013-14 from 88% in 2010-11. India misses coal production targets and depend more on imported coal last year. The government's decision to de-allocate several coal blocks in past couple of years to private firms had an impact. The production of coal and iron ore had been affected by scams,corruption and environmental issues. 

Poor Investment Environment:

         Low GDP growth, High Inflation and Policy Paralysis killed investors confident to invest in Indian Economy. Both Foreign investors and domestic investors hesitated to spend money which widened the problems in Indian economy.

   The new government is facing challenges to improve GDP and control inflation as soon as possible. Government needs to take solid actions to control unnecessary government spending and control Fiscal Deficit. More policies should be introduced to improve investor confidence and attract more investments to Indian Economy.