Many economists argue that even India should follow US economic model and we should also adopt market-driven model but in the current scenario is that really viable option. I am not an economist or have any economic knowledge / background so I don’t have any right to criticize anyone. My whole idea is to simplify all the arguments without using any formulas as even I don’t understand any of them.
First of all we need to understand that whole US economy is market driven, so when I say market driven, in a layman term we can say that everything is linked with stock market. Let’s take an example of US housing market and I would like to quote Zacks.com. The housing and stock markets are interconnected in multiple ways. Major home builders’ shares are traded in the stock market. Home improvement companies tied to home building also trade on the stock exchange. The housing sector dips deep into the economy as furniture manufacturers, plumbers, electricians, landscapers and more are all dependent on housing. Housing starts and the stock market are both leading indicators of economic activity. So we can say that if stock market crashes tomorrow than even housing market will be crashed and this is true for almost every industry / market.
Now considering the above arguments one need to think that how safe is US economy. Also now consider one more argument, US GDP is $18 Trillion but if I am not wrong their total debt is around $108 Trillion. US have borrowed money from countries like Saudi Arabia, China, Japan and also India. Saudi Arabia have invested more than $700 Billion, Japan have invested more than $350 billion and country like India have given more than $250 Billion. Now let say if tomorrow Saudi Arabia pulls back its investments what could be the consequences.
Now let’s discuss Indian economy. My most basic argument would be that our GDP is around $2 Trillion but our external debt as of 31st March is only $456.1 Billion which is only around 25% of total GDP. If we see total savings deposits in India, it is around $1.4 Trillion, kind of neck to neck with our total GDP. While it is not the same case with US, as of Q1 2015 their total deposits were around $10 Trillion much less than their total GDP.
I will admit that this is not the parameter to determine the efficiency of any economy but my argument is if government creates a well-oiled mechanism than I don’t think we have to borrow much from outside for infrastructure development or any other purpose. Now we may also argue that if government use our deposits and unfortunately something goes wrong that it could negatively disrupt our economy and also our savings. But government bonds are the major instruments which could take care of our savings and yields good returns in long term. Also our cash economy is around $270 Billion and I don’t think the whole country uses more than $400 Billion annually for our day-to-day expense purpose. So $1 Trillion is huge amount.
From stock market perspective, we Indians have invested only 3% of our savings in stock market and on top of that our market is not interlinked for everything. So even if market crashes tomorrow it does not make any huge difference for us.
Next time I would like to discuss about savings in India as a culture as this topic has not been highlighted properly.