Learning Unit English 3Module 1. Every action has consequences

Integrated Activity. Investigation about Economics Problems of the Actual World

Teacher: Roberto Castillo Name:Jesús Adolfo Flores Carbajal 1810030Class room: 121 Group: 4J1 Specialty: Industrial electronicsSemester: 4th Shift: Morning

City of Monterrey, Nuevo León to 2 February 2017Economics Problems of the Actual World

Introduction

In this documentary research, discuss current problems presenting the world that surrounds us, in specific will try the theme economy arising in this environment, which has attracted the attention of all experts and analysts of the economy, and that was that we decided to talk about this issue.

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Development

Economic surveys assess the performance of the economy in the financial year. They identify the problems faced. They also give some inkling as to what the official thinking is about how these problems may be tackled in the following year and especially via policies in the Budget that is to follow. However, it is often the case that the Budget does not address these problems, or not in the way that may be presented in the survey.

Real rate of growth

The Economic Survey 2016-17 needs to ask and answer some crucial questions about the year that has just passed in which a major economic event occurred, namely, demonetization. Field reports suggest that the wholesale trade is even now down by 20% to 30% which suggests that retail deem and is still slack two and a half months after demonetization was announced. Immediately after the announcement, wholesale trade was reported to have declined by anywhere between 60% to 80%. Such a sharp decline in trade and other reports from the field from industry suggest that the economy is facing recessionary conditions. Output and investment are reported to have contracted and unemployment has increased especially in the unorganized sector. While the organized sector is less affected the unorganized sector has been hit badly. The latter employs 94% of the workforce and produces about 45% of the output.

Yet, the Economic Survey projects a growth rate for 2016-17 of 6.5%. How is this arrived at if there has been negative growth in large parts of the economy since November 2016? The survey itself admits that the unorganized sector data are not directly captured in the Index of Industrial Production (IIP) because it does not directly measure this sector’s contribution and assumes it to be in proportion to that in the organized sector. Demonetization has led to a delinking of the growth rates of the two sectors, so that IIP does not anymore reflect the growth rate of industry.

Irreversibility have set in

It is suggested by the survey that the situation of the economy would reverse quickly once cash shortage is over in a few months’ time. However, it is not taking into account the irreversibility that the economy encounters whenever there is a large shock. An economy is about society and people and not about some science experiment where one can replicate conditions for an experiment.

When employment falls, profits fall and investments are cut back. That is when irreversibility arise. After November 8, 2016, demand was hit all round, production slowed down, profits fell and all of that led to unemployment and decline in investments which leads to long-term effects. Even if the note shortage becomes less, as it is bound to happen, demand does not revive on its own and the cycle does not reverse.

A conservative fiscal stance

The survey has talked of a cautious fiscal stance. What is forgot ten is that in 2008, when the economy was hit by the global recession, what saved the day for India was a rapid increase in the fiscal deficit and massive expenditures in rural areas under various schemes. India was not alone in that. All the countries in the world boosted their public expenditures by boosting the deficit in the budget. China in fact went in for a $600 billion rural infrastructure program and so on. In the present situation of recessionary conditions, a cautious stance would

lead to a decline in demand since tax revenue would not be buoyant given the slowdown in the economy.

The survey also talks of giving tax concessions to the corporates by accelerating the promised cut in their tax rates. There has also been talk of giving concessions to the middle class and the rich by lowering income tax rates. These would lead to a fall in the tax collection in the present situation of slowdown. This would mean that either the fiscal deficit would rise or there would be cut back in expenditures. The former is ruled out by the survey under the rubric of a fiscally conservative stance and the latter can only deepen recessionary conditions. The Budget therefore is in a pincer. The government has to make bold choices but the survey rules that out.

The black economy, if tackled effectively, could have given additional resources for the Budget. However, the Survey does not give a lead as to how that could happen. Demonetization has not managed to unearth any major chunk of the black economy or make it come into the formal economy.

How long will the pain last?

The pain related to cash shortage maybe getting less (although rural areas are still hurting more) but the bigger problem now is the recession. The public is curious to know how much black money demonetization unearthed but the government is not providing any answer to this as yet. The irony is that those who never generated black incomes have faced all the pain while those who generate black incomes and have black money have escaped through various devices. They have largely managed to recycle their old notes into new notes in connivance with the corrupt in the system. No wonder according to unofficial reports, most of the old notes have come back into the banking system.

It also needs to be kept in mind that cash does not automatically mean black money. A lot of cash is used in the white economy for purposes of transactions, working capital by businesses and also as precautionary motive for any illness or

an emergency. The banks cannot declare the money deposited with them as black. The income tax department has to do that but after following procedures. They can ask for the source of the cash deposited in a bank and that may lead to some past concealed income but it is usually difficult to establish that.

Often, the cash is explained away by businesses as working capital. If the money is in the account of poor persons and if they claim it to be their money, there is little that the income tax officer can do. Most of these sums are so small that they would be below the taxable limit and not worth pursuing for the department. Those who have misused the accounts of the poor usually have them under their thumb so they cannot double cross without facing social consequences or losing their job. The cost would not be worth the double cross.

Conclusion

The survey does not lift the mist of confusion on the macro situation of the country and does not provide clarity on what happened due to the big shock to the economy on November 8, 2016. It is in a state of denial and that is what is creating a problem for the economy. The conservative fiscal stance being proposed will only lead to an aggravation of the problems confronting the economy. The government and the country are trapped because demonetization was ill-advised. It does not check the black economy but the government pretends that it does. It is causing the Indian economy to slip into a recession and that is hurting everyone and especially the poor who had nothing to do with black income generation. But the pain of the marginalized (not captured by the Index of Industrial Production) is far greater than can be ameliorated by the few sops that are offered to them.

Bibliography

http://www.forbes.com/sites/steveodland/2012/02/01/my-top-10-economic-worries/#23d70aa21bbc

https://thewire.in/104631/economic-survey-2017-there-can-be-no-solution-without-admitting-the-problem/

http://www.spiked-online.com/newsite/article/the-real-problem-with-the-us-economy/19339