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Kerala PSC Indian Economy Book Study Materials Page 184Book's First Page
7.20 ndian onom especially) and growth was sacrificed at the altar to price rise.57 For any government deficit if the of lower inflation (which was politically more Central Bank (RBI) is purchasing primary issues justified).53 Thus, the supply-side mismatch of the Government securities or creating fresh remained a long-drawn problem in India for advances to the government, the combined effect higher inflation. After some time even if the has to be higher inflation, lower savings rates and government managed higher expenditure, most lower economic growth58—the vices of unsound of it went to the non-developmental areas, which fiscal policy. The higher fiscal deficit tends to bring did show low growth with higher inflation—signs about higher interest rates as demand for funds of a stagnating economy. rise, excess demand raises expected inflation and 2. Cost-Push Inflation expected depreciation of the currency.59 Once the foreign exchange (Forex) reserves started Due to ‘inflation tax’ the price of goods and increasing with a faster pace by the early 2000–01 services in India have been rising as the government fiscal, its cost of maintenance has been translated took alternative recourse to increase its revenue into higher prices, as the RBI purchases the foreign receipts.54 We see it taking place due to higher currencies it supplies into equivalent rupees into import duties on raw materials also.55 The non- the economy, which creates extra demand and the value-added tax (non-VAT) structure of India in the past was also having cascading effect on prices go up.60 the prices of commodities in the country.56 The The higher revenue deficits (driven by high government needed higher revenues to finance interest payments, subsidies, salaries and pensions, its planned development, thus the above given basically) and fiscal deficits make the government factors looked inescapable. supply more money which push the inflation in the upward direction. Once the Fiscal and Budget 3. Fiscal Policy Management Act came into force in 2003, the To finance the developmental requirements of the scenario improved in the coming times. Though economy, the governments became trapped in the the period from 1999 to 2003 did show high cyclical process of over-money supply. At first it was growth with low inflation and the lowest interest done by external borrowings, but by the late 1960s rates in India. onwards (once deficit financing got acceptance 57. . . ande ar, orty ears After ndependence , around the world) the government started taking (New Delhi: Penguin Books, 1992), pp. 81–88. in the recourse to heavy internal borrowings as well as Bimal Jalan (ed.), Indian Economy: Problems and printing of fresh currency too. A major part of the Prospects. government’s internal borrowing is contributed 58. Y.V. Reddy, Lectures on Economic and Financial Sector Reforms in India (New Delhi: Oxford University by the Reserve Bank of India (RBI) which leads Press, 2002), pp. 176–77. 59. Ashima oyal, u les in ndia erformance eficits 53. Jalan Bimal, India’s Economic Policy, (New Delhi: without iaster in irit S. ari h and . adha rishna Penguin Books, 1992), pp. 52–58. (eds), India Development Report, 2004–05 (New 54. C. angara an, evelopment, n ation and onetary Delhi: IGIDR and Oxford University Press, 2005), olicy , in . . Ahluwalia and . . . ittle eds , pp. 191–208. India’s Economic Reforms and Development, (New 60. Kaushik Basu, India Emerging Economy: Delhi: Oxford University Press, 1998), pp. 56–57. Performance and Prospects in the 1990’s and 55. Jalan, India’s Economic Policy, pp. 191–203. Beyond (New Delhi: Oxford University Press, 2004), 56. Chelliah Committee Report, 1993. pp. 89–103.