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Hindu Festivals
Adyar Gopal Parivar
An extended family of Adyar Gopal
Adyar Gopal Parivar Society
Public Importance
This website is a renovated website of Adyar Gopal Parivar. I am Dr. Mohan G Shenoy inviting you to visit and explore the website.
Hindu Festivals
Tourist Destinations
        Our economy is tied up with the economy of the world only to a certain extent, because our currency can not be easily remitted out of the country. The total amount of money remains unaffected by the changes in the amount of money in other countries because of this 'tap'. Suppose there are ten different containers of various sizes connected to each other with pipes at the bottom and each container represents a country. Larger economies like USA are represented by big containers and smaller economies are represented by smaller containers.

        When water is filled in these containers the level of the water stabilizes after a few seconds and remains at the same height in all the containers. Suppose a few glasses of water from any container is taken out then the levels in all the containers falls to a new level. This will not happen in those containers the pipes of which are fitted with taps on either side. India is such a container with taps for both inward flow and outward flow of money. The outward flow is more stringent than the inward flow. If water is added to one of the containers and the level of water in it rises then those containers with a tap fitted will not show increase in the water level. The foreign exchange regulations prevent any substantial changes in our economy by global upheavals.

        So long as we maintain our money level by maintaining a high volume Gross Domestic Product (GDP), by producing valuable grains, vegetables, flowers, cloth, machinery, and other consumer products as well as services then our Product will match or exceed the Consumption and there will be no need to borrow money from outside.

        However, the price rise of goods affects the Consumption and then also the Product within the country. Price rise affects the total assets in that we get a smaller amount of the goods for the same amount of money. Price rise therefore affects the value of our total capital as well as the liquidity. More money is needed to buy the same amount of goods. Or less amount of goods can be purchased with the same amount of money.

        It is important to note that it is not easy to reduce consumption. In fact increase in the population day-by-day increases the amount of goods consumed. Therefore the money required to fulfill the demand of goods increases two-fold, with the result that there could be shortage of cash. Shortage of cash encourages withdrawal of savings and thereby shortage of money available for loans. Loans are required for businesses, industries, farms, services sector and for every single source of GDP.
        Therefore the GDP might be affected by the price rise. The same thing happens with inflation, with increased impact. Price rise is a one-time phenomenon but inflation is continuous. Unless the GDP grows in the same proportion as the rate of inflation there will be a recession and then depression.

        By pumping in extra capital into the economy by drawing from the reserves, the government can make enough money available for loans to businesses, industries, farms, services sector and for every single source of GDP to offset the strain on production. The country becomes poorer to the extent that the reserves become reduced. The amount of reserves can dwindle very fast in an environment of price rise and high inflation. If our reserves are utilized to service the price rise of imported goods then the reserves will dwindle in a matter of days. A poor country is poor because its reserves are very low and it consumes more than it produces.

Mismanagement of income and expenditure by the government can produce a situation of dwindling reserves. If more money is drawn for travel abroad or remittances abroad then the reserves will fall to negative levels.

        There is nothing a common man can do in these circumstances except keep working in his appointed place. The fall in the stock market indices is just an early sign of the approaching recession. The capital assets of the companies lies in the stocks. As the stock prices fall the assets of the company too fall. When the stocks fall the companies will have less credit rating and can borrow only a reduced amount of money to run the company. With less money to spend for raw materials or pay the wages, reduces the capacity of the company to produce enough saleable goods. Thus, the GDP also may fall to levels that are uncomfortable to the nation.

        It is a vicious cycle and a large country like India can show cracks in its walls by price rise and high inflation, the latter more important than the former. The government can save the situation by reducing the unnecessary expenses. Farm loan waiver and other similar popular spending measures can tilt the balance for the worse.