Policy Recommendation

The Reserve Bank of India has been very active in the last year. They have been passing out surveys to banks and business trying to get an idea of what they want. This year the RBI is trying to increase the credit flow to agriculture and small/medium enterprises. This will increase growth in smaller business. Lately the Reserve Bank has invested mass amounts of money into physical capital. The reason for these policies was because India experiencing a major decline of exports, this was the worse since 1972. This policy has severely increased the number of exports in the last couple months. The RBI has taken a survey and the industrial sector seems to have an optimistic view for the economy. During a speech on October 27, 2009 Mr. Raghuraj acknowledges the global climate of this year and stated that they have made changes to prevent this from happening to India. Three policies they implemented first to strengthen the regulation of the banking system. To do this the RBI would put more employees on this task. Next to make sure the supervision of the economy is more effective and adds something of value. Last to improve skills in risk management.(RBI)

India has just experienced a loss of productivity in the last month or two this was due to poor credit flow and weak physical capital. My first goal for the future would be to increase investment in physical capital. The government would investment some of this money, but primarily it would come from factory owners. The Indian government would give tax breaks for the factory owners that increase productivity by a set amount. These goods would include an increase the production of consumer goods such as clothing. This would help in increase exports because they may gain comparative advantage in a good. This would increase GDP because one of GDP’s components is net exports. This policy should take around 4 to 5 years to take effect and have major changes in exports.

Inflation has also been a large issue for India in the past ten years. In September alone the inflation rate was at 11.7%. (CIA World Fact Book) This makes the rupee seem very shaky. My goal would be to decrease inflation by taking money out of the economy. The government would have to start selling bonds at somewhat of an attractive interest rate to increase demand for these bonds. They would make these bonds last for 5-10 years so this would decrease the money supply for a long period of time hopefully slowing down inflation and create optimism in the rupee which would prevent drastic measures to be taken like switching to commodity money. This would happen if the country felt that the rupee wasn’t stable enough and so they would change to something more stable like the gold standard.

One thing that makes a country flourish is the strengthening of human capital. Most under developed countries don’t require children to go to school. If India implements a program which makes school mandatory until the end of high school the literacy rate would increase and with a better education your society becomes more productive. An example of this their literacy rate hit 87.5% and they have been prospering ever since.(Global Security) This plan would affect the next generation of workers. This would take around 20-25 years to take effect on the general population but this is worth it because more people would be to continue their education so they can survive in the new economy. This would eventually increase productivity and make India a very strong country. This could lead to higher GDP per capita because families would have less incentive to have more kids.

The flow of capital through the financial system is very important for an economy to survive. The RBI acknowledged that capital flow has been a problem when it comes to small/medium firms. My solution to this would be to decrease mandatory reserve rates for banks so they can offer loans at lower interest rates. This would encourage savings in the general population and would increase capital flow. Since there would be more money in the financial system banks can loan out so this increases the flow of capital through the economy.. With the lower interest rates business would be more inclined to invest into physical capital which would increase productivity. This policy would take 5-7 years to help capital flow. FDI recognized this as a path out of poverty and in areas such as Europe and Asia it took about 5-7 years.(My Web FSU)

AHLQUIST, John S. "Economic Policy, Institutions, and Capital." My Web. N.p., n.d. Web. 9 Dec. 2009. http://myweb.fsu.edu/jsahlquist/ isq_final.pdf.

"United Arab Emirates." Global Security. N.p., n.d. Web. 9 Dec. 2009. http://www.globalsecurity.org/military/world/gulf/uae-intro.htm.

Reserve Bank of India. Reserve Bank of India, n.d. Web. 2 Dec. 2009. http://www.rbi.org.in/home.aspx.

"India." CIA World Fact Book. Central Intelligence Agency, 11 Nov. 2009. Web. 22 Nov. 2009. .