Jun 3, 2020 in Economics

Economics
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A Slowdown in India

A large population of India mostly resides in the rural areas. A number of factors - for instance, high inflation levels, low employment in the urban environment, and the government offering rural programs – are facing the country and contributing to this trend. For example, the government offers a 100-day program the aim of which is to provide non-farm-related jobs, including construction. Furthermore, it also offers food subsidies to poor families in the rural locations by buying food at the above-market prices from the farmers. Therefore, their income increases and supply shops are able to sell food to the poor at low prices. In addition, the service sector in the rural areas is just as excellent as in the urban areas. As Mr. Singh’s neighbor claims, rural hospitals are about just as good as those in the cities. However, the GDP produced by agriculture is relatively low compared to service sector, which produces about half of total GPD. Nonetheless, the service sector employs half of the country’s workforce. India’s manufacturing and service industries do not provide sustainable jobs to the unskilled workforce from the villages. A case of Mr. Singh and his brother who moved to the city to look for improvement, but later opted for the rural life, supports this claim.

An economist Himanshu once said: “Urban growth in India is not planned growth. It is something happening on its own.” He suggests that growth is the major factor influencing India’s growth and market economy expansion. The government is not controlling the development - that is why unemployment and inflation remain high. In market economy, the companies are very efficient; for example, the service industry in India produces nearly half of the country’s GPD.

 

The level of unemployment in India’s economy is high. The government has little control over the country’s allocation of resources. Fairness and equity are not observed causing the unskilled workers to fail to sustain themselves in the employment field and choosing self-employment and  farming. Mr. Singh opted to work in the country rather than getting low returns in the city. In a market economy, individuals choose who to produce for and how to produce. For example, Mr. Singh was not satisfied with the urban lifestyle - so he went back home.

India’s households provide raw materials from their farms to the companies who process them and produce finished goods. The firms also provide employment to households. However, the government buys factors of production from households so as to provide these materials at lower prices to the disadvantaged Indian population.

 

Indian households, firms, and government agencies play various roles of eradicating poverty, reducing inequality, providing employment, and promoting economic sustainability. 

Households 

The main role of households is to produce enough agricultural output to feed the population of India. Furthermore, these entities are supposed to provide workforce to work in such cities as Delhi. They hold the responsibility of raising an educated generation who will provide skills needed to fuel the industrialization in India.

Business Firms

 Their main role of firms is to provide employment to both skilled and unskilled workers to reduce unemployment in India. In addition, they provide sustainable salaries to their employees and improve living conditions. Business firms need to venture into the untapped manufacturing industry to increase employment.

Government

The government provides food subsidies to poor families in rural areas. These people buy food at reduced prices. The government also offers non-farm-related jobs to the rural citizens. Proper healthcare is its other responsibility.

Some of the actions taking place in the Resource and Products Market include the resource market supplying the majority of the agricultural produce. There is production of corn, mustard potatoes, milk, rice, wheat, and sugar on small-scale farms. The government buys staple foods from farmers at a high price and sells them to shops at lower prices. In such a way, income in places these crops are grown is improved. 

On the other hand, the product market comprises of the manufacturing industry. Most of the firms there are small, such as the one Mr. Singh worked for. The service industry is well ahead. However, it offers low employment, especially to the unskilled workers.

The Sugar Scandal

 The protectionist argument suggests that a trade barrier is good for the economy, as it protects sugar producers from foreign competition by imposing quotas and tariffs on imports. Therefore, Americans would pay higher prices for sugar. Doing away with the trade barrier would lead to unrest. Sugar processors would go bankrupt because they would not be able to repay their loans. The government gives processors a special loan agreement. When the price of sugar is lower than the agreed price, the government’s subsidy allows them to pocket the advance money given to them in form of a loan and exchange their produce to the businessmen who sell it at a loss. This system prevents sugar prices from falling.

Trade barriers offer various benefits. They protect local sugar producers allowing them to thrive, because income is guaranteed irrespective of market prices. Moreover, the trading barriers ensure there is no dumping of sugar. If the quantity of sugar in the country is low, the government will increase the quota, but they have to be careful not to lower the price too much hurting local farmers.

Trading barriers may cost the taxpayers approximately $115 billion in the next 10 years. Some studies suggest that the trade barrier is not fair to the manufacturing industry. The sugar prices in the country are double compared to the rest of the world. Therefore, they do not compete on the same level. Many jobs are lost when companies relocate to other countries for the sake of competitive advantage. In trying to help the sugar farmers, the policy protectionists end up hurting them.

 The impacts of trade barriers varies among the markets. The firms provide the product - in this case, sugar - to the households at high prices in order to repay the government subsidies. The households provide the money to subsidize sugar in the form of taxes. 

Research suggests that protecting the domestic sugar market does not make sense. The farmers are protected, but the rest of the taxpaying population has to purchase sugar at high prices. The subsidies for the other crops have already been cut in the last farm bill, and so it is not fair for sugar farmers to remain subsidized. By protecting the domestic sugar market, the state is blocking other manufacturing industries that could offer jobs. The situation is mostly political, since that sugar producers are the largest funders of campaigns. 

China’s Currency Move

The rattling of the Chinese currency has greatly impacted many African countries. Angola, Zambia and South Africa have been affected negatively, while the Eastern African countries, such as Kenya, Ethiopia and Mozambique, have benefited. Countries that export products to China are worried that China is going to lose interest because of deprecating currency. It could lead to lower buying power. For instance, Angola, who exports oil to China and heavily relies on oil revenue, has been greatly affected by China’s slackening demand. In Zambia, copper mine employees have been to bear the cost or closing down because the demand from China has not matched the production cost. China’s demand for wine from South Africa has also been waning leading to slow growth of the already weakened economy.

On the other hand, East African countries such as Kenya would benefit from China’s cut costs on imports. Kenya would benefit the most, as China is its second biggest source of imports. Kenyan entrepreneurs were even considering purchasing goods from China in Yuan instead of dollar. This decision would help them reduce the trade deficits.

The depreciation of the rand has multiple consequences for South African consumers. To begin with, there will be a heightened demand for exports from South Africa, because exports will appear cheaper to foreigners. For example, Kenya experiences a boost in demand for goods from China because of devaluation. Thus, imports of raw materials and petrol will become more expensive therefore reducing the demand. Expensive imports will lead to inflation in the country. When exports become cheaper, the manufacturers will lose interest. Therefore, over time, the prices of goods will increase.

The current strength of dollar may have negative effects for its economy. For instance, the dollar may start facing stiff competition from other currencies considering that African countries such as Kenya are considering using China’s Yuan instead of the dollar. When the dollar is too strong, the trade partners will cut exports, because they can get them from elsewhere at lower prices. However, the strength of the dollar might prove to be resourceful for the economy, as the country can get imports at low prices from countries with weaker currency. A strong dollar will ensure that it remains the reserve currency. 

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