Bangladesh's Economic Crisis

Is Bangladesh going  Sri Lanka's Way ?

Bangladesh a fast growing economy was in news in recent past for its improvement in economic growth of around 6.94% in fiscal year 2021-22. A country whose Poverty reduction model was praised by the World Bank stating that countries can learn from Bangladesh's model. Even some economists believed that Bangladesh will be a developed economy by 2041 because of its stable economic momentum. Recent news headlines stated that India falls behind Bangladesh in per capita income by $280. In the year 2020 Bangladesh's economy grew by 3.4%. Bangladesh also moved up two notches to 133rd in HDI rank. Many news articles even praised Bangladesh for its improvement in reducing gender gaps.

All these are the indicators of good economic growth of a country.

But the question is  how did they get here? How did the country get to a crisis situation in a year? Following are the reason that is leading Bangladesh towards an economic crisis.

• Corruption, Scams, mismanagement of data worsened the country' situation.
• Russia's invasion of Ukraine caused food security threat and food and energy crisis in Bangladesh.
• Rising import bill widening trade deficit, sky rocketing inflation rates around 7.5% and hike in fuel prices by 52% which is very high in the history.
• The country is known for its garment imports but the garment industry has been hit hard because of recession in Europe.
• Shrinking Foreign Reserves from $45 billions in 2021 to $39 billions in 2022, the country became third after Pakistan and Sri Lanka seeking loan from IMF.

However, IMF says that with a debt to GDP ratio of 39%, Bangladesh is not in a crisis like situation but is vulnerable to the uncertain global economic ups and downs

 LAFFER CURVE

Have you ever wonder that when a government of a country raises the tax rates, then this results in decline in the tax revenue collected, Laffer Curve explains this.

The concept of Laffer Curve was coined by a supply-side economist Arthur Laffer to illustrate the relationship between Tax rates and Tax Revenue collected by government.

The concept of Laffer Curve can be expressed mathematically as 

                                                                    TR= t X Tax base         

 Here, TR means Tax Revenue           

           t means   Tax Rate                              

This hypothetical data helps to understand the concept of Laffer curve

Tax Rates (in %)	Tax Revenue (in $)
10	$500
20	$1000
30	$2000
40	$3000
50	$4000
60	$3500
70	$3000
80	$2500
90	$1000
100	$400

Inverted U shape Curve

Here, tax rate and tax revenue are measured along the horizontal and vertical axis respectively.

From the data it can be observed that, initially the revenue rises with an increase in tax rate. Sometimes, a decrease in tax rate leads to an increase in tax revenue. Laffer Curve is inverted U shaped curve indicating that after a optimum revenue point (here that optimum revenue point is $4000) the tax revenue falls as now the tax rates has risen up.

This implies that 

1. People's incentive to work becomes low as now they have to pay more part of their income earned as tax to the government.
2. There will be an increase in tax evasion as people will try to evade from paying tax in order to maintain a stable consumption level they will not pay increased taxes.
3. More emigration will happen.

What makes Indian economy special ?

What makes Indian Economy distinctive from other developing economies ?

In order to understand what makes India's economy so special in terms of a developing economies, first we need to understand what is a developing economy. 

A developing economy is characterized by

•  low standard of living
• less developed infrastructure and 
• developing economies tend to have high birth rate, high death rate, shorter life span, low HDI, poor per capita income, more inclination towards agriculture sector than the industrial and service sector. 

A Developing economy is called an emerging economy that shows a steady and rapid growth. India and china are the best examples of emerging economies.

DEVELOPING ECONOMY	EMERGING ECONOMY
Less Industrialized	More engagement with global market
Inclination towards Agriculture sector	Inclination towards service and industrial sector
Low per capita income	Per capita income tends to rise

This table helps to distinguish between a developing and emerging economy.

Now, lets compare the data (2022) of some developing and emerging economy and see why Indian economy is distinctive from developing and emerging economies.

ECONOMY	HDI	BIRTH RATE (per 1000 people)	UNEMPLOYMENT RATE (%)	GDP PER -CAPITA
INDIA	0.645	17.163	7.80	$1850
CHINA	0.761	10.902	18.4	$21,364
TURKEY	0.820	15.151	11.3	$12,600
BRAZIL	0.875	13.059	11.1	$11,200

From the above data its clear that India compared to other economies ain't that better, but the following points advocates why India's economy is distinctive from others.

1. By the end of 2022 India's GDP is estimated to be $3.25 trillion which makes it an emerging economy.
2. More focus on Make In India and
   Atmanirbhar Bharat (Self Reliant India) to boost economic growth and generate more employment opportunities.
3. More push for Digital India.
4. Increment in Forex Reserves
5. Improvement and Development in Infrastructure
6. According to a Economic survey by Bloomberg, US and Europe have around 40% and 50-55% chances of going into recession but 0% chances of India because of strong agriculture sector and momentum in service and industry sector.
7. IMF projects a 7.4% growth rate for India (2022) which is high for any emerging economy.

India's Rollercoaster ride from 1947-2022

 Journey of
Indian Economy from 1947 to 2022

From a third world country to one of the largest economies in the world the Indian Economy had a rollercoaster ride from 1947 to 2022. Celebrating 75th Independence Day this 15th August, lets have a look from where we were and where are we now.

1. Independence Phase 

 After the independence, India's GDP stood at around ₹2.7 lakhs crores. In 1949 the total foreign Investments stood at around ₹256 crores, Forex Reserves in 1950s were at around ₹1,029 crores. During 1950 and 1960 India emerged as a net exporter of food grains with total food grain production of around 54.92 million tonnes.

2. 1969

India witnessed its worst droughts in the 1960s resulting in an increased dependence on west for the supply of food grains. This crisis led India to be self sufficient in food grains with the help of green revolution. During this phase the Indira Gandhi government nationalized 14 commercial banks including  Bank of Baroda, Allahabad Bank, Canara Bank, Central Bank of India, and the Punjab National Bank, with the aim of boosting the agriculture sector.

3. 1991 (LPG reform)

Without the Liberalization Privatization and Globalization (LPG)  reform Indian economy's journey is incomplete. With rising fiscal deficit ( from 9% of GDP in 1980-81 to 10.4% in 1985-86 and 12.7% in 1990-91) and devaluation of currency and having the foreign exchange reserves that could barely finance 3 weeks worth of imports,  the situation was so grim that Indian government has to mortgage some 20 tonnes of gold for $240 million. Then the Indian government introduced the LPG reform to bring the economy back on track by opening new doors for more opportunities. This resulted in inflow of foreign finance and thus leading to a boom in the stock market.

4. Great Recession (2007-08)

During the period of Great Recession when the largest economies of the world were hit very bad the impact on India's economy wasn't much because the exports accounted for just 15% of GDP. But the government in December 2008 infused about ₹3 trillion into the system that resulted in inflation at 14% and as a result the indian rupee lost its value.

 
5. 2016 Demonetization

 On November 8, 2016 the Indian government declared that ₹500 and ₹1000 rupee notes will not be legal tender anymore. This decision affected even the small vendor and high profile businessman. Sensex crashed nearly 1689 points and Nifty plunged by over 541 points 

6. 2020 Covid-19 Pandemic

Covid-19 was another challenge when all the economies were collapsed with nearly zero production. The 1st wave of the pandemic rose poverty in rural and urban areas by 15% and 20% respectively and nearly 23 crore people were pushed below the poverty line. Though compared to other economies, the recovery of Indian economy was quite stable and witnessing a V shaped recovery.