Economic Crisis- Are austerity measures the answer?

The prices are high. Rupee rate is low. Investments are the worse they could ever be. Let’s face it, it’s a crisis. Let’s scrutinize the situation.


The economic crisis had befallen upon the whole of Europe a long time ago. Obviously, the whole world was adversely affected by it. However India, had managed to, more or less distance itself from the crisis. And was growing at a rapid rate! It mainly began after 2003- 04, where in the growth rate shot up from 3% to 5-6 % to directly 8- 9%. However, now, (if you want to believe the government), the crisis seems to have caught up with India. The GDP is expected to grow at 7% in the year ending 2012 which is significantly lower than the 8.4% in year 2011. 


The manufacture growth reduced from 9% in 2011 to 3% in 2012. The trade deficit has increased to 10.6% of GDP(by 56%) between 2010-2011 and 2011-2012. The foreign investors, who used to consider India as one of the prime investing locations have been greatly discouraged and are gradually retreating, mainly due to the collapsing currency. I can just go on and on. But I don’t want to focus on the crisis, but the cause and the solution. 

The UPA attributes the crisis to the global one, specifically the European one In spite of the earlier economic growth, wherein India seemed isolated from the global crisis. Now, in an attempt to control the inflation, the finance minister of India, Pranab Mukherjee has announced that he will implement “austerity” (harsh) measures. Which include controlling inflation by increasing the prices instead of decreasing them. Now, even though these measures are currently being followed in countries like Spain, Portugal and Germany, they are hardly growing. 


What India needs to understand is that increasing the prices is not the answer! Increasing the prices will only fuel the inflation. This is because the rupee is falling, and the imports are getting more expensive. Basically the governments implement such measures to reduce govt expenditure so that they could balance the deficit accumulated over the years. However, if they implement the austerity measures, with costlier exports and more money supply due to raised prices, the inflation will only grow. Hence, the govt should increase the spending and use it for better growth and development. Then, they can earn through the taxes so received.