Widening Wealth Gap in Asia

As per the recent study conducted by Asian Development Bank (ADB) the wealth gap is widening in Asia. This means that the rich are getting richer and poor getting poorer. The only countries which are exception to this are Indonesia, Malaysia, Armenia, Mongolia, and Kazakhstan. The country leading in widening of Wealth gap is China followed by India, Sri Lanka and Cambodia.

The reasons for this gap to widen are:

- Development being concentrated in the metros
- Lack of infrastructure development in rural area
- Low literacy percentage in rural area
- Lack of awareness among rural people
- Government’s concentration towards metros and neglect of rural areas
- No proper development plan for the country

This has a major impact on the future of the country. The main setback’s which the country will face are:

- Weakening of Social cohesion
- Social unrest in the country
- Large number of rural population moving towards metros
- Improper distribution of countries population
- Irregular growth of the economy
- Financial impact on the countries economy

I’ll mainly try and analyze the financial impacts which the country as a whole may face.

1. Social unrest will reduce the amount of foreign investment coming into the country.
2. Widening of the gap could result in higher inflation in the economy.
3. The countries currency will weaken against the countries where this gap is strengthening Large amount of government funds will be utilized for uplifting the weaker section of the society which results in sacrificing on the development.
4. Low growth of income of the poor is reflective of the bad financial growth of the country
5. High dependence on foreign borrowings for bridging this wealth gap

Overall a skewed economic growth will result in downfall of the countries’ financial health and unrest within the economy.

Effect of RBI's intervention in appreciating INR v/s USD

The Indian Rupee (INR) has seen a tremendous apprecation against the US dollar (USD) in the last 6 months. The INR has appreciated approx. 9.32% against the USD comapred to begining of this year. India has seen a large inflow of FII's and FDI's moving into the country, leading to large inflow of foreign currency reserves. This has forced the centeral bank to intervene in the forex market to get it stabilized.

There has been a interest rate hike three times in the last one year and now the RBI is trying to control the amount of ECB's getting into the country to control the use of forex. Let us look at the pros and cons of this decesion:

Pro's

- Crubs the current inflation rate in the country in the medium term
- Keeps the interest rate in the economy stable in the short term
- Helps the exporters to cover up the profit margins and makes export favourable
- Stabilize the forex markets in the short term
- Helps in short term policy making
- Discourages improper utilization of forex

Con's

- Could put a break in the growth of the economy if, it continues for a long time
- Increases the risk factor component when an investment analysis is being conducted
- Reduces the liquidity in the market
- Leads to un-fair trade practices

The question which remains to be seen is how long the pro's of this decision going to hold a upper hand.