INDIA has some pressing problems...

INDIA has been the fastest growing economy in the recent times even after a slowdown in the other major economies like China and the UK which might affect the growth due to slowdown in the trading partners economies, that is basically backed by domestic demand and not much by exports, nonetheless the economy shows sign of overheating and inflation in the face of food-inflation which must be dealt with commitment to get results to strengthen growth. The Indian economy’s growth-potential is in double-digits but whenever we try to increase growth it also increases inflation which is unjust because it reduces demand and debases the currency, value of money and demand would go down and labor demand more wages. Moreover, higher inflation reduces the real GDP; real GDP equals nominal GDP minus inflation. Therefore, inflation also lowers the growth rate and we may try to increase real GDP by reducing the price-level which also depends on the supply-side. Inflation in INDIA is mainly a supply side problem that is we can improve the supply by adopting the right policies to remove the constraints; therefore INDIA has started liberalizing much of the investment space for foreign investors. More investment in the economy could improve supply and lower the price-level and interest rate which might also increase domestic investment. Foreign investment has become important for lower prices in the economy when the domestic investors are waiting for the demand to revive and the economy is in the middle of a recovery. There are many things which may affect the economy’s growth rate in the medium term including inflation when oil prices are rebounding with non-performing-assets (NPAs) of banks at an all time high, slowdown in China, the UK, Europe and Japan. Many are expecting from the RBI that it may increase liquidity in the case of worsening global outlook. Nonetheless, INDIA is likely to benefit from lower global demand because it is a net importer; lower prices would help lower CAD and demand for foreign exchange when oil-prices are still trading $50 and that is still the half way to go to reach pre-glut prices. Moreover, INDIA has ample of foreign exchange reserves. Most pressing of all, the NPAs has affected the credit creation power of the commercial banks and many investments have turned bad due to slow recovery in demand both agricultural and rural which remained subdued due to high inflation and high interest rate few years back despite increase in wages and incomes. The RBI is showing itself reluctant to the problem of NPAs and recapitalizing the public sector banks when it should take the lead by bailing-out the banks in the crisis which is a very low cost compared to slowdown in growth due to the NPAs. The commercial banks are not lowering the borrowing cost in an attempt to recover from the loss and moreover less funds are holding back the investment and credit take-off. The RBI can itself buy the debt that is down the drain.