BUSINESS ECONOMICS PROJECT

TOPIC- Why India needs supply-side economics

NAME- Vaishnavi chaudhary

DIVISION- C

ROLL NO.-
INSTITUTE NAME- Kishinchand chellaram College Mumbai

S.Y.B.COM (Bachelor of commerce)

YEAR OF SUBMISSION- 2021

NAME- Vaishnavi chaudhary

TOPIC- Why India needs supply-side economics.

EXECUTIVE SUMMARY

Supply-side economics is a macroeconomic theory that postulates economic growth can be

most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade.
According to supply-side economics, consumers will benefit from greater supplies of goods
and services at lower prices, and employment will increase. Demand-side economics is often
placed as a contrasting theory.

A basis of supply-side economics is the Laffer curve, a theoretical relationship between rates

of taxation and government revenue. The Laffer curve suggests that when the tax level is too
high, lower tax rates will boost government revenue through higher economic growth, though
the level at which rates are deemed "too high" is disputed. A 2012 poll of leading economists
found none agreed that reducing the US federal income tax rate would result in higher annual
tax revenue within five years. Critics also point out that several large tax cuts in the United
States over the last 40 years have not increased revenue.

The term "supply-side economics" was thought for some time to have been coined by the
journalist Jude Wanniski in 1975, but according to Robert D. Atkinson, the term "supply
side" was first used in 1976 by Herbert Stein (a former economic adviser to President Richard
Nixon) and only later that year was this term repeated by Jude Wanniski. The term alludes to
ideas of the economists Robert Mundell and Arthur Laffer.
ACKNOWLEDGMENT

I would like to express my special thanks of gratitude to my economics teacher who gave me
the golden opportunity to do this wonderful project of Economics. Who also helped me in
completing my project. I came to know about so many new things I really thankful to them.
CONTENT

S.NO TOPIC PAGE

1. Introduction 6

2. Why India needs supply-side economics? 7-8

3. Examples 9

4. Three pillars 10-11

5. bibliography 12
INTRODUCTION

India needs huge investments in infrastructure, energy and skills before it can step into the
void. It needs more efficient markets for factors of production such as capital, land and
labour. ... Economic reforms will boost investment activity. These will help shift the
aggregate supply curve to the right. Agriculture, manufacturing and services are the three
pillars of any economy. In India’s context, despite the majority of people live in rural areas,
agriculture contributes well below 20% to the GDP. Same is the case with manufacturing,
that has not much to offer to the economy. The growth of these two sectors has been the
lowest lately. The slump in recent times has hit these two sectors even harder. Despite an
excellent harvesting season and a lot of harvested crops, farmers in the country do not have
access to markets to sell their crops. COVID-19 has further hit the automobiles sector, which
was in decline. In India, motor vehicles attract taxes as high as 28% and additional levies up
to 22%. These figures are some significant factors for the decline in automobiles sales.

Short term and long term reforms to increase the supply- Farmers must be provided loans at
low-interest rates or the rates subsidized by the central and the state governments. Proper
infrastructure for them to supply their harvests to give farmers an instant relief. Along with
these, better MSPs for the farmers will help them sustain this battle in a more significant
manner. Manufacturing sectors needs a substantial boost, for the automobiles sector, in order
to encourage the producers, relaxes on high taxes will act as a catalyst for an improved
supply of motor vehicles. The increase in production will also positively affect the services
sector, where a considerable number of layoffs are done recently. Adding to this, the
government should make a clear stand on the future of electric vehicles, as the ambiguity is a
hurdle in front of the manufacturing companies to reduce the supply.
Why does India Needs Supply-Side Economics
The broad contours of the next government should be clear by the end of this week. It will
take charge of a weak economy that has lost momentum while being ravaged by high
inflation.

The two major national parties have been selective in their competing claims. The Bharatiya
Janata Party has pointed out that Manmohan Singh will leave behind an economy that
compares poorly with what he inherited from Atal Bihari Vajpayee almost exactly a decade
ago. The Congress prefers to focus on the average economic performance of its governments
since 2004.

United Progressive Alliance cannot escape responsibility for the mess that it leaves behind. It
made several strategic errors during its tenure. It hubristically misread the economic boom to
assume that India can continue to grow rapidly on autopilot.

The economic reforms agenda was thus put on the back burner while the Reserve Bank of
India came under attack whenever it tried to cool down an overheated economy. The massive
tax revenue pouring into government coffers during the boom meant that all sorts of spending
plans were frontloaded on the public exchequer; the government is now struggling to fund
them. The cumulative spending on subsidies since 2004 has been close to 12 trillion. Demand
was stimulated while a string of policy errors choked supplies. It is but natural that the excess
domestic demand fed inflation as well as spilt over into the trade account.

Nothing captures the mismanagement of the economy as well as the fiscal numbers do. India
has by far the highest fiscal deficit among the major economies even though the burden of
public debt has declined because of a high rate of nominal economic growth. A more precise
measure of the public finance mess is the cyclically-adjusted combined fiscal deficit of the
national and state governments as a percentage of the potential gross domestic product
(GDP). India is a clear laggard. Much of the problem emanates from New Delhi rather than
state finances. Primary fiscal balances are lead indicators of meaningful fiscal correction.
India continues to report a large primary deficit.

Some sceptics dismiss the importance of high structural fiscal deficits. They are wrong.
Fiscal profligacy has led to several economic problems in India. The Indian central bank has
often pointed out the inflationary impact of high fiscal deficits. The large borrowing by the
government to fund that deficit reduced the domestic funds available to the private sector.
The policy response to this was to encourage companies to borrow from the global markets
flooded with cheap credit by Western central banks; that has increased corporate vulnerability
to global shocks (though company managements are also to blame for the dollar borrowing
spree). High fiscal deficits fanned inflation as well as led deterioration in the trade account.
Households poured money into gold as a hedge against rising prices as a result of which

financial savings needed to fund economic activity have shrunk.

Supply Side Policies

Supply-side policies are government attempts to increase productivity and increase efficiency
in the economy. If successful, they will shift aggregate supply (AS) to the right and enable
higher economic growth in the long-run.

There are two main types of supply-side policies.

Free-market supply-side policies involve policies to increase competitiveness and free-market

efficiency. For example, privatisation, deregulation, lower income tax rates, and reduced
power of trade unions.

Interventionist supply-side policies involve government intervention to overcome market

failure. For example, higher government spending on transport, education and
communication.
In theory, supply-side policies should increase productivity and shift long-run aggregate
supply (LRAS) to the right.

1. Lower Inflation

Shifting AS to the right will cause a lower price level. By making the economy more
efficient, supply-side policies will help reduce cost-push inflation. For example, if
privatisation leads to more efficiency it can lead to lower prices.

2. Lower Unemployment

Supply-side policies can contribute to reducing structural, frictional and real wage
unemployment and therefore help reduce the natural rate of unemployment. See: Supply-side
policies for reducing unemployment

Examples of Supply-side Economics

Understanding Supply-Side Economics

Like most economic theories, supply-side economics tries to explain both macroeconomic
phenomena and—based on these explanations—offer policy prescriptions for stable
economic growth.

In general, the supply-side theory has three pillars: tax policy, regulatory policy, and
monetary policy. However, the single idea behind all three pillars is that production (i.e. the
"supply" of goods and services) is most important in determining economic growth.

The supply-side theory is typically held in stark contrast to the Keynesian theory which,

among other facets, includes the idea that demand can falter, so if lagging consumer demand
drags the economy into recession, the government should intervene with fiscal and monetary
stimuli.

This is the single big distinction: a pure Keynesian believes that consumers and their demand
for goods and services are key economic drivers, while a supply-sider believes that producers
and their willingness to create goods and services set the pace of economic growth.

Three Pillars

The three supply-side pillars follow from this premise. On the question of tax policy, supply-
siders argue for lower marginal tax rates. In regard to a lower marginal income tax, supply-
siders believe that lower rates will induce workers to prefer work over leisure (at the margin).

In regard to lower capital-gains tax rates, they believe that lower rates induce investors to
deploy capital productively. At certain rates, a supply-sider would even argue that the
government would not lose total tax revenue because lower rates would be more than offset
by a higher tax revenue base—due to greater employment and productivity.

On the question of regulatory policy, supply-siders tend to ally with traditional political
conservatives—those who would prefer a smaller government and less intervention in
the free market.

This is logical because supply-siders—although they may acknowledge that the government
can temporarily help by making purchases—do not think this induced demand can either
rescue a recession or have a sustainable impact on growth.

The third pillar, monetary policy, is especially controversial. By monetary policy, we are
referring to the Federal Reserve's ability to increase or decrease the quantity of dollars in
circulation (i.e. where more dollars mean more purchases by consumers, thus creating
liquidity).

A Keynesian tends to think that monetary policy is an important tool for tweaking the
economy and dealing with business cycles, whereas a supply-sider does not think
that monetary policy can create economic value.
While both agree that the government has a printing press, the Keynesian believes this
printing press can help solve economic problems. But the supply-sider thinks that the
government (or the Fed) is likely to create only problems with its printing press by the
following:

 Creating too much inflationary liquidity with expansionary monetary policy, or

 Not sufficiently "greasing the wheels" of commerce with enough liquidity due to a
tight monetary policy.

A strict supply-sider is, therefore, concerned that the Fed may inadvertently stifle growth.
BIBLIOGRAPHY-

1. www.economicsdiscussion.net

2. www.livemint.com

3. www.investopedia.com