31 03 2021
In 1991, there was a new economic reform in India that adopted the LPG system. This measure was praised a lot to overcome the problems of the economy during the 1990s. International Monetary Fund (IMF) also posed this condition in India to overcome the Balance of Payment Crisis. Thus, this LPG system proved a boom for us, and our economy started coming at the track. We were globalised but not completely dependent on other countries. Therefore, we were resisting the 2008 economic crisis. But the recent upheaval and trajectories in our economy is unprecedented. We cannot cope with this problem where there is low demand and savings are increasing, especially after the post-lockdown period. So, after discussing the problem, can you adjudge what the reasons behind this problem are? Why are we facing this problem, and what could be the possible solutions to this crisis?
Let’s discuss the causes of deteriorating economic conditions in India. Firstly, pre-lockdown period, there was a slowdown in the economy, and it was claimed that this slowdown was a part of the business cycle, and it would boost after a stipulated period. The problem started with the increasing number of Non-Performing Assets of the banks. As the NPAs increased, banks were unable to lend money to the people, due to which there was a reduction in the money supply, which indirectly decreased the aggregate demand of the economy. If the aggregate demand decreases, the supply automatically decreases, leading to the vicious cycle of slowdown in the economy. To solve this problem, the government started infusing money into the corporates’ hands so that they can increase production and employment, which can lead to the increase in demand. But this proved to be a failure, and it was not that much successful as expected.
As we have seen about the increasing NPAs, we can move ahead with the next cause which further deteriorated our condition was the Lockdown period. During this lockdown period, every country faced the economic problem, but India had a backlog of a slowdown in the economy, which further enhanced it. The economy was still, and people generated no income. During this period, people started saving more money, and there was less circulation of money. To solve this problem, monetary policy was adopted by the Reserve Bank of India. It reduced the policy rates so that banks can help in circulating more money into the market. Even India’s government took several steps to enhance the condition of MSMEs, corporates and other sectors in the economy, but still, the economy was in the negative condition.
The third reason we can see for the deteriorating condition is that people have lost faith in the system, and they feel that saving the money at their homes could be a better way for survival. After lockdown, almost all the sectors are facing this issue of low circulation of money. The tourism industry, real estate and various other industries are in their worst condition. So, after discussing these reasons we could say that there is less circulation of money in the economy due to which today we are facing so many problems.
After discussing the economy’s problems, the question is what could be the prospects of the economy. Let’s take some viewpoints in which we can find some ways to solve our problems. Firstly, there is a need to create faith among the people about the economic system like banks to deposit again their money that will enable them to increase the circulation in the economy. Secondly, RBI can take some monetary measures to solve this crisis.
So, to sum up, we can say that though there are some problems in the economy, we can be optimistic and solve the issues in our economy to again be on track.