A Study of the Indian Economy

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A Study of the Indian Economy

India has the 2nd largest population in the world. It is in a stable democracy, it has an excellent rail network and civil service courtesy of the British and it is well placed geographically to do business with the Far East. Yet in 1990 India was branded as “a backward country…with surprisingly little innovation thanks to the over excessive licensing and protection by the state.”(World Trade Organisation.). And still at the end of the millennium, even after nearly 7% trend growth in the decade, India still has a GDP of only $440 per capita – 112th on the list of countries. This is a poor state of affairs. Why is this happening?

For my coursework I have decided to study the Indian economy in the last 10 years, specifically those areas related to its excellent economic growth over the last 10 years. I will be comparing India’s growth with that of the UK and will be expressly looking at why it has taken so long for India, with its ample land and labour resources, to start to grow to something approaching its potential after 40 years of independence in 1992. I will be looking at the causes of such growth and asking the question that with India’s vast resources with 6% compound growth is really the best it can achieve. I will therefore be looking at how the Indian government can best maximise its economic growth. I wanted to study this topic as I have always wondered why some countries have grown economically at a higher rate than other countries that are better equipped with factors of production. There are of course good and proper reasons why this should happen. However we rarely study things beyond the theoretical and in this coursework I would like to look at the practical aspects of economics and how it is joined and affected by political decision making in a country. I realise that a country relies on its capital equipment formation to generate economic growth but I would also like to see what the effects of increasing quality of education has on economic growth.

   

Theory

In this topic I will be using different economic theories. I will be concentrating on supply side causes for economic growth rather than through eliminating the output gap by raising aggregate demand. I will be looking at the accelerator theory, the deepening of capital resources, and the increasing quality of resources using education. I will also be looking at different growth theories like the Harold Domar model and the Lewis model.

Accelerator Theory

This suggest that the level of net investment varies with the rate of change of national income i.e. the higher economic growth is the higher planned investment will be. This is because if spending does not change and remains constant there is no need to invest in new capital equipment. If spending increases firms need more capital equipment to cope with the influx. Investment expenditure correspondingly increases.

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The simplest form for the accelerator theory is:

It = a( Y1 – Y(t-1))

It is investment in a specific year t. Y1 – Y(t-1)  is the change in income during year t and a is the accelerator coefficient or capital output ratio. We will be looking in greater detail at the capital output ratio and its significance for India.

See graph for relationship.

This model has a number of limitations. First it assumes that capital will have the same level of productivity at all times. I.e. it cannot increase in ...

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