THREATS TO THE INDIAN ECONOMY

Insights on the threats and risks to the Indian Economy that thwart its growth.


Risk is an outcome of the uncertainty of future events. They play an important role in determining the final outcome of a situation. In the context of an economy, not only the financial risk, but other risks, such as political risk, play a significant role in determining the growth rate, and, with the Indian Economy in question, it becomes more complex to assess risk, due to its structure and political divisions.


Let's have a look at the various risks that become a major factor in thwarting the growth of the Indian economy.


Financial Risk

To describe financial risk, one could say that it is the risk concerning the financial stability of an economy in the near and the far future. Financial risk is one of the most important factors that determine the standing position of an economy in the world. The entire banking and financial system of an economy are dependent on financial risk and its management. This decides the fate of the nation and its citizens. The better the financial risk management of a nation, the better the growth of its economy and the better the life of the citizens will be.


Factors Influencing Financial Risk

There are many factors constituting and affecting the overall financial risk in the economy. Major ones being listed below.

1. Budget Balance:

The budget balance is the difference between the Budget Revenue and Budget Expenditure of the government. It is one of the most important factors that influence the overall financial risk in the economy and its development. It is analyzed as a percentage of GDP and is a key factor governing the majority of economic indices. In the context of the Indian economy, the budget was always a deficit one and fiscal deficit management is one of the key concerns of the government.


2. Inflation:

Inflation refers to an increase in the general price level in an economy. Inflation is a result of the major macroeconomic decisions of the government and the central bank. The Reserve Bank Of India along with the Indian Union government sets the target range of inflation and the majority of the macroeconomic decisions are taken keeping in mind the concern of inflation

3. Public Debt:

Public debt is the total money owed by the government (both central and state). It is often analyzed as a percentage of the GDP. Public Debt is an Indicator of the current obligations of the government and its capacity of further raising Public Debts.

The Government of India has three sources of Public Debt. These are: -

  1. Reserve Bank Of India

  2. General Public

  3. Government Companies

  4. Rest Of The World

All the factors above do not have an independent effect on the overall financial risk in the economy but have an interplay. The budget deficit determines the total public debt and the level of inflation in the economy. While drafting the annual union budget, the budget committee keeps in mind the overall level of inflation in the economy and the previous balance of the public debt. The Public Debt is in term directly dependent on the budget deficit, and the financing of this debt depends on the level of inflation in the economy.


All these factors work simultaneously and policymakers set the tolerance range for all the above factors. Then, different combinations of targets are set for all the above factors to optimally minimize the overall risk in the economy and boost its development.


The interplay of factors Hampering Growth

The 2020-21 financial year was one of the most challenging for the regulators and the financial planners. The nationwide lockdown has created pressure on the demand and supply and has led to increase in the level of inflation above the set tolerance level and has bounded the hands of the Reserve Bank Of India, leaving them incapable to conduct rate cuts which are needed in order to aid economic package and revival of the economy from depression as a rate cut in such situation would further increase inflation level.


Other Risks

Other than the financial risk, there are other risks that play an important role. One of the major risks other than financial risk is political risk. The political administration of the nation is the main authority of rules and regulations and any uncertainty in the political administration raises the risk level in the economy and hurt’s the business sentiments which leads to the decline of economic growth.


Another major risk is the one posed by natural or man-made disasters. Such risks cannot be predicted in advance but have the ability to make a deeply negative impact on the economy. The best and the most recent example is the COVID-19 pandemic, which came without any warning and impacted the world economy.

There are other risks too, which sometimes make up a significant portion of the total risks to an economy, however, they depend on different situations.


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