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A walk on the Wild Side

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In order to understand how the world economy functions, it is always wise to look at the specific countries in different parts of the globe. Asian economy has always been a significant player in the international arena, especially with the rapidly developing China and India. However, the recent article from The Economist titled “A walk on the wild side” illustrates that the Indian economy is experiencing financial difficulties. The country has huge amounts of national debt and serious problems with fiscal policy that, coupled with decreased growth rate, threaten to send the state into further indebtedness. The government needs to address the issues by reviewing the fiscal policy and upgrading the tax system that would bring black economy to the formal sector.

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The new budget will be presented on February 28 by the current finance minister who seems to understand the problems the county is in. According to his plan, the budget deficit has to be reduced to by 5.3% of GDP within a year and further up to 4% till 2015. This is not an easy task because the Indian officials are used to generous spending. While some of the areas, like education, deserve the fair amount of government funds some other expenses like the election campaign are not justified. The budget deficit is not a problem in itself. It is known that a country can have either a budget surplus or a deficit depending on the type of the economy and the leading industries that it has. However, the Indian case is alarming for couple of reasons. First of all, as the experts estimate, the countries at the level of development India currently has usually tend to borrow much less. Moreover, while the economy of the country slows down the revenues can no more balance out the governmental borrowing. That is why India has to look carefully for viable solutions.

One of the obvious steps to take is increasing the revenues generated by the economy. As suggested in the article, India has to reform its burdensome tax system. This is rather logical because complex tax regulation along with high tax rates discourage the businessmen from operating in the formal sector. A large share of Indian economy operates outside the formal sector, which causes immense budget losses. Lots of transactions are completed in cash and many small businesses fall under the category of personal tax that makes tax evasion easier. The shockingly small amount of 2.5% of Indian population pays the income tax. Another option discussed by the author is selling the state-owned firms that are currently an impediment for the economy rather than the facilitator of growth. Large areas of Indian land are now without any use. Selling them will generate a lot of income and possibly utilize the resources more efficiently. Together with increasing the revenues the spending has to be regulated. A thoughtful decision making process has to precede every expenditure.

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All the proposed solutions look quite progressive but one should be careful not to accept them blindly. For example, the idea of selling state firms and land is controversial. In a country like India, where capitalist ideals may not be so strong, there might be suspicion and even outright public protest against giving the factories in the private hands. Moreover, the new owners may be tempted to increase their own wealth and not improving the long-term productivity of the factory. The issue with land is similar, since it may fall into the wrong hands. One can only imagine the consequences of land misuse, which might include soil erosion, difficult conditions for wildlife, use of pesticides, etc.

Form the discussion above one can draw a conclusion that careful approach is the key to any successful problem resolution. The economic policy aspects can only be efficiently implemented if the wider context is considered. Indian officials would act wise if they learned from the experience of the developed countries and also took into account their unique historical and present realities.

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