Understanding India’s Stagflation
The Rupee has sunk by 20% in last 4 months, while India’s industrial growth rate is [minus] 3.5% year on year. What is going wrong?
Let us set up a simple equation based on standard definition of national accounts to understand what has been going on in the Indian economy since the financial crash of 2007.
Let all domestic private household and firms savings be S, the investments made by the domestic private firms in businesses be I. Then [S-I] represents the net incremental cash available in the economy from the private sector. Likewise, T represents the totality of all tax revenues available to the government while G represents the totality of all its expenditure. Thus [T-G] would then gives us the net incremental cash generated or used by the government in a year. The sum of [S-I] + [T-G] then represent…
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