Economic analysis Essay Example | Topics and Well Written Essays - 1500 words

Economic synopsis - Essay ExampleStructural constraints faced by the economy have also been highlighted in the economy. 2.0 world The GDP growth in India has been below potential in the last financial twelvemonth (2012). accepted GDP in the terra firma has grown at the respect of 6.5 portion (according to 2012 estimate) (CIA, 2013). In 2011, the rate has been 6.8 percent (CIA, 2013). Hence there has been a 0.2 percent fall in the real GDP growth. According to a report from a leading newspaper of the country, the manufacturing sector is the major factor that is pulling the countrys growth rate downwards. This sector accounts for almost 17 percent of the countrys GDP. In the tercet quarter of the last year, the manufacturing sector grew by a meagre 0.8 percent. While India is mainly an agrarian economy, cultivation has grown at the rate of 1.2 percent in this quarter. This is definitely a gloomy picture that suggests that the presidency has a role to play to push the countrys growth status. The government of India has taken expansionary financial insurance policy to spur economic activities in the country. 3.0 Analysis 3.1 Monetary policy In the last year (2012) the government of India had increased pursual range to control lumpary pressure since evaluate of consumer price inflation fluctuated around 7.5 percent in the first two quarters of 2012 (Trading Economics, 2012). However, this policy failed to reduce inflation rates to the desirable extent. The most undesirable side effect has been felt on the level of private investiture activities refreshing investment (as measured by the Gross fixed capital formation (GFCF)) was found to be only 33 percent of the GDP (Choudhury, 2012). GDP forecast for FY2013-14 has been scaled down from 6.2 percent to 6 percent by international brokerage firm Barclays (Economic Times, 2013a). The government has therefore taken expansionary fiscal policy to boost up investment activities in the country. The reserve ba nk of India has cut stakes rates by 0.25 percent in May 2013, thereby reducing the repo rate from 7.5 percent to 7.25 percent (BBC, 2013). India is the third largest country in Asia and the government has cut interest rates in order to stimulate a fresh wave of economic growth (BBC, 2013). This policy has been adopted in an endeavour to swell money tote up in the economy. Thus banks would possess more money for lending out to borrowers (NASDAQ, 2011). Rate of interest is the opportunity cost of holding money (Boyes and Melvin, 2008, 339). Low interest rate can be interpreted in this way there is little opportunity cost of holding money. Money request has negative affinity with rate of interest (Walsh, 2003). Therefore the money demand curve has a downward slope. As interest rate shrinks quantity of money demand rises. It is illustrated by the following figure Figure Money demand is a negative function of rate of interest (Source Authors Creation) As interest rates are reduced, supply of loanable funds increase. This increases investment and consumption activities in the country. Figure Lowering of interest rate supply of loanable funds rise (Source Authors Creation) Higher availability of lendable funds reduces interest rates from i1 to 12 and quantity of money demanded rises from L1 to L2. Downward trend of inflation in mid 2013