Economy of India-

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Filed Under: Uncategorized Tagged With: Business Travel

Looking at Tourism in India

July 28, 2011 By admin Leave a Comment

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Every year, travellers set out on holidays and vacations, breathing new life into the economy of the places they visit. In India, the largest service industry is tourism. More than five million foreign visitors make their way to India annually to experience the rich culture of one of the economical giants of the world.
The impact of tourism on India’s national gross domestic product is estimated at US$275.5 billion by 2018. In fact, the World Travel and Tourism Council declares India as a travel hotspot from now until 2018.  People are not only drawn to India for cultural history, but they also travel for business, medical purposes, and sports such as the 2010 Commonwealth Games.
Medical tourism is on the rise in India. Travellers can receive high-quality treatments at a fraction of the prices they expect. Surgery costs average thirty percent lower than other well-known medical tourism destinations such as Thailand. Procedures people come to undergo include bone marrow transplants, cardiac surgery, orthopedic surgeries and liver transplants. India is best known for heart surgery. Access to leading medical technology at alluring rates is not the only place tourists spend their money on. Many people come seeking a taste of the unique culture and history India possesses.
India’s 5,000 year old history promises to deliver an unmatched travel experience to tourists.  The Taj Mahal is one of the most familiar sights of India. Millions of travellers visit the historical site each year. Other sites that draw people in include the Mahabodi Temple, skiing in Shimla, and the stunning Lotus Temple in Dehli.

Filed Under: Economic Growth, Imports & Exports Tagged With: India, Lotus Temple, World Travel and Tourism Council

India’s Place in the Agricultural Landscape of the World

July 15, 2011 By admin Leave a Comment

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Both the World Bank and the CIA World Fact Book rank India’s economy fourth worldwide.  A country’s gross domestic product is  a good indicator of the standard of living within that country. Among India’s economical make-up, agriculture plays an important role in the fabric of society.
With a population of 1,189,172, 186 and counting, one of the biggest challenges for the Indian agricultural industry is the population grows faster than farm production. The CIA World Fact Book lists India as the second most populated country in the world. Food items such as rice and wheat rise demand to keep up with the population boom. For many years, India has been an autarky, or self-sufficient economy. But since the 1990, it continues to develop an open-market policy. Agricultural output for India ranks second among the world economies.
Agricultural policy is focused on improving self efficiency of food production to combat hunger issues. India is among the world’s highest producers of rice, cow milk, sugar cane, buffalo milk and wheat. The Sugarcane Breeding Institute of Coimbatore, India was established in 1912 to improve sugarcane production. It is one of the oldest crop research institutes worldwide. Indian stock of the sweet crop is used in 26 other countries across the globe.
The institution is now conducting a research project to help the about 35 million farmers who cultivate and rely on the crop. The project is focused on creating a website where information can be shared easily. It’s main goals are to aid farmers and support sugarcane reasearch.

Filed Under: Imports & Exports, Industries Tagged With: Agriculture, Sugarcane, World Bank

Investing in India Worth Looking At

July 5, 2011 By admin Leave a Comment

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It is no secret that India grows quickly each year. This country, with the second highest population globally, possesses a thriving world economy that is on the increase.  As India expands in the world market, windows for foreign investment open wider to those who would step inside. Here is why you should look into investing in India.
In March of this year, investment icon Warren Buffett stated he was looking to invest in economic powerhouses like India. Asian Development Bank reports that the equity market in India ranks third in the world. With about US$600 billion in market capitalization, it sits right behind China and Japan as one of the major equity markets in the Asian region. India is expected to boost economic growth by at least nine percent annually within the next ten years. India’s economy offers investors a variety of opportunities. India’s service sector forms fifty percent of its economy. Other industries include pharmaceuticals, energy and consumer goods.
Domestic industry is on the rise in India. Last July, New Delhi opened a 3 billion dollar addition to the Indira Gandhi International Airport. Terminal 3 (T3) took 37 months to complete. Prime Minister Manmohan Singh, who dedicated the new terminal, stated its creation was a global benchmark for India. India’s government has worked to strengthen its country’s infrastructure.
The Bombay Stock Exchange is the fourth largest stock exchange in Asia. It’s also the second oldest in the world, with a history dating back to the 1850′s. With a youthful demographic and a solid work ethic, the global economy will see more from India in years to come.

Filed Under: Economic Growth, Imports & Exports Tagged With: Asian Development Bank, India, Indira Gandhi International Airport

Industries and Investment in the Economy in India

June 8, 2011 By admin Leave a Comment

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The population of India is estimated at over 1 billion, and continues to grow every year. It has the third largest economy in Asia, and has plenty of industries that help push the growth. There have been reforms put into place over the last twenty years, which have helped the country to become more prominent in importing and exporting, and other forms of overseas business.
More than 10% of those employed work in industrial fields, and these include manufacturing and production of textiles. This industry was part of the reform, which was altered by reducing costs of the factories in order to sell the materials at a lower cost and stay competitive with the materials produced in China and other nearby countries. Another sector of business in which India’s economy has grown drastically over the years is process outsourcing for large companies which are often located in the United States. Since many residents of India are fluent in English, they are able to telecommute and answer calls for customer service, tech support, and other similar service industries. In fact, seven of the large firms located in India make up almost half of the top fifteen outsourcing companies across the globe. India also produces a good amount of agriculture, including logging, fishing, and forestry. Investment is increasing as banks become more stable and secure, which was also part of the economic reform.
India’s growth rate is approximately 7% on average, and has greatly reduced the amount of poverty among its residents over the years. The main industries continue to grow, which has given more individuals the opportunity to have stable employment and provide for their families.

Filed Under: Business Culture Tagged With: Asia, China, India

Issues and Trends in the Indian Economy

June 6, 2011 By admin Leave a Comment

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In the past 15-20 years, India has seen some excellent growth and progression in its economic situation. Current affairs point to continued growth, and has been the second fastest rising large economy. However, there have been a few changes in the past few months that could lead to a dip and cause a struggle for those employed in this country.
It isn’t too big of a surprise that importing/exporting and automobile sales have been on the decline, since the economy worldwide is struggling and many individuals are choosing to buy locally to support their economies. Inflation in India has increased more rapidly than it has in years past, making it more difficult for families to be able to afford groceries, clothing, and other necessities. The Prime Minister of India is trying to take matters into his own hands, especially after suffering backlash from scandal, corruption among the government agencies, and contentment with the current situation. Many residents of India are frustrated with their government, who seems unwilling to make the necessary reforms in an attempt to boost the economy. Such reforms have been seen in the United States, such as tax credits for homebuyers and those who were employed for the whole year, and helped increase the amount of money received on many tax returns. However, without sufficient funds to pay for such programs, it can be difficult to upswing an economy that is spiraling downward.
There is hope that the Indian economy is simply encountering a speed bump in its growth. Some predict that it will turn around, but only time can show what the future holds for those living and working in India.

Filed Under: Economic Growth Tagged With: Economy of India, India, United States

Current Affairs – India

June 2, 2011 By admin Leave a Comment

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India’s economy has gone through some ups and downs throughout the past few years, as it has grown to the third largest in Asia. There are beautiful buildings and hotels within its cities, appealing to tourists and visitors, as well as fancy car dealerships and high rise office buildings lining the streets. However, there is a great divide among the very rich and very poor in India, which makes it difficult to have a society that is on equal footing.
It is interesting to note the stark differences among those residing in India; in 2010, it was estimated that the economy grew more than 8%, but the investment rate dropped by over 30%. The restrictions on business make it very difficult to start a company; certain cities require as many as 37 licenses obtained over seven months in order to open a warehouse. Even once it has been properly built, it can be difficult for trucks and workers to get to the doors due to rough and crowded roads, limited water, and power outages. While on the other hand, businesspeople are hopeful that it will rise to be one of the strongest economies within the next twenty years. Before this can happen, however, India will need to find some level ground among its residents. This may require assistance from the government, but the political scene has been writhe with scandal and corruption.
Once India is able to strengthen its monetary system, those who are returning to the country and investing in local businesses can help increase the stability of the economy. This might mean a very promising future for those residing in the beautiful country.

Filed Under: Industries Tagged With: Asia, China, India

Land Value at a Great Place

May 22, 2011 By admin Leave a Comment

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Land Value at a Great Place
Thanks to a difficult economy there are many changes made regarding the value of the properties across the world. This includes properties fully built and land value. While a short time ago the value of property dropped extremely low making it difficult for sellers to get what they had invested in property, the value has started a steady increase. Purchasing land today is a great way to invest money since it is not at the same rate it was recently but appears to be on the rise. This means buyers will be increasing their property value after purchase fairly quickly. Clearly this changes based on the location of the property and the marketability of it in general.
Finding the right property for your situation can be a challenge given the many obstacles you might find regarding financing today. This having been said, there are some great options available all over the world that will easily have you purchasing your next property in no time at all at a rate that is well within your range. With some basic guidelines, understanding what you are looking for and knowing what your limitations are you can easily find property that at will easily increase in value. It is a great time to invest in new property regardless of your future goals for the property. There are great properties to be had with a little research and planning ahead. Having a plan before you get started is the key to a successful hunt for the right property with the right land value for your needs. You want to be sure the property increases in value as fast as possible.

Filed Under: Economic Growth Tagged With: Business and Economy, Property, Real estate

New Auto Plant in India

May 15, 2011 By admin Leave a Comment

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New Auto Plant in India
In an effort to increase the competition between BMW, Daimler and Audi, Jaquar Land Rover opened their first plant today in India. This plant is opened in Pune and will start to build Freelander 2 sport utility vehicles from the ground up from kits shipped to them from the Liverpool plant. This is great news for both India and for Jaquar Land Rover as it will open up new business in both. The company will be afforded the ability to put together more vehicles, quickly and at a decent price keeping the prices of the vehicles affordable in comparison to the competitors.
This will also bring great employment opportunity to the area of Pune and will give them a boost economically that they are much in need of. Taking this step is great for all involved on several levels and offers the company the chance to keep on producing the quality vehicles they have always built. These steps for the community will produce additional employment and will also cause an increase in other economic areas within the community. The future for the company and the area look bright with the prospect of turning out large numbers of vehicles. Barring an unexpected issues they are well on their way to creating a great income with the help of India. The next year will bring signs of the success or demise of this plan for the auto manufacturer and the area. Through great efforts they will do the best to create a new advantage to the competitors.

Filed Under: Workforce Tagged With: India, Land Rover, Pune

Protecting Yourself Financially

May 2, 2011 By admin Leave a Comment

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Current economics are tough all around. It is vital that those in a difficult economy use the opportunity to reassess how they are spending their money. This is both true in business and personally. There are a few basics that work for nearly anyone in assessing the current status of your finances and deciding where you can cut back on spending to make a difference for your future. You can easily find the flaws in your current budget if you just do a bit of review of the current situation. Taking time to understand that the economics are difficult all over the world will help you to make the tough decisions to reduce the spending.
Reducing the spending is something that needs to be done in order to stay in line with the current trends of the economy. This means that you need to really think about what you need to be spending money on and what you can easily do without. If you are spending too much money on entertainment or eating out you may want to reassess your line of thinking. Take money to pay your savings account first and foremost to ensure that you are not stuck in a terrible situation. You might be surprised to find how much money you are spending on things you simply do not need in your life. It is important to protect yourself in the event of financial difficulty. Taking steps to plan ahead for the worse could be what saves you in the long run.

Comparative Study on Sources Of Public Finance In Islamic Economy And Capitalist Economy: Applicability Of Islamic Public Finance To Preset Trend

Comparative Study on Sources Of Public Finance

In Islamic Economy And Capitalist Economy: Applicability Of Islamic Public Finance To Preset Trend

INTRODUCTION:-

            Since interest is prohibited in Islam, the Govt in an Islamic economy cannot issue interest based credit instruments like Trade bills/bonds or obtain interest based sovereign debt. Where in general economics interest rate is reward for saving, the govt issues various debt instruments to raise funds from  general public, foreign nationals , banks to fund projects and for deficit financing on the basis of interest rates. Apart from different sources of Non-tax revenues viz fines, fees, revenue generated from Public sector enterprises, revenue including interest or profit from the investments, user fee etc.,

            Based on the literature review, of Islamic economy no taxes levied other than Zakah.Accordingly; this study explores the sources of revenue for a government in Islamic economy. In discussing sources of tax revenue it is maintained that zakah is the only tax the government in an Islamic economy can levy. Where e in general economics taxation is the central part of modern public finance, its objective is to raise revenue necessary in a welfare state to fulfill its obligations. There are various sources of taxes mainly personal income tax, corporate income tax, wealth tax, Value added tax, service tax etc.,

            One thing is found common in both the institutes as govt can charge service/performance based fees, duties, surcharge etc in providing public goods. Furthermore, the profitable operations of state owned enterprises form of important part of non-tax revenues.

            This study discuss that how the  government can finance its deficit keeping in view that low taxation and  low interest in general economics  as like that of interest rate is prohibited in islam & zakah rate are very low.

BACKGROUND OF THE STUDY:-

            The role of government in a economy has always been important issue , economist and policy makers since from the evolution of political economics by Adam smith  in wealth of nation to Keynesian frame work has been accepted government as a not only a regulator of a economy but also as an active economic player.

            In the midst of great recession, the role and importance of government has once again reappeared as an important issue. Like bailout package of US govt to financial sector in Dec 2008, providing huge subsidies to its agricultural sector. So one cannot ignore the role of a state as a regulator and as a active economic player.

            In this backdrop, this study takes an important issue in public finance in a Islamic economy and general economics, more specifically, it put a glance at sources of tax revenue, how it is raised and utilized for public finance in Islamic point of view. Also to see does this applicable to present trend.

PROBLEM OF STATEMENT:-

            This study analyses public finance literature in general economics and Islamic economy on the other hand source of revenues to the governments for funding ever increasing public expenditure , reduction in budgetary deficits and applicability of Islamic ideology of public finance to present trends.

OBJECTIVES OF THE STUDY:-

The study sets the following important objectives.

·         To suggest the different sources of  revenue for the state in Islamic point of view

·         To explore the ground rules for zakatable assets and zakatable income fund in the study of Islamic faith.

·         To estimate the potential of tax revenues that can be collected in zakah.

IMPORTANCE OF STUDY:-

            The study has significance in academics as well as in public policy making in respect to Islamic faith could be a alternative to policy making and adds to the literature of contemporary developments in both literatures and public finance practice of general economics. To discuss the means of revenue and sources of public finance through and beyond zakah in an Islamic economy.

RESEARCH METHODOLOGY:-

            This study is conceptive and theoretic in nature. It clarifies various charges in the institution of zakah as like taxation in general economics.

SCOPE OF THE STUDY:-

            Comparative study of sources of revenues in Islamic economics (Zakah) and General economics (Direct & Indirect taxation). This study sets to contribute in public policy making as well as add to the academic literature of general economics as a alternative system.

LIMITATIONS OF THE STUDY:-

            The study is purely theoretic and comparative in analyses the sources of public finance (taxation and zakah only)

LITERATURE REVIEW:-

            In conventional economics, the government has following sources of revenue: general sales tax, excise duty, customs duty, Import& export duty, Property tax , development surcharge, personal income tax, corporate income tax. Apart from that non-tax revenue by way of earning through profitable operations of state owned enterprises, fines and activity based charges & duties are also important sources of revenue to state. In general economics, if government needs to finance deficit it can issue treasury bills/bonds or obtain loans from domestic as well as international sources.

In islamic economy, the problem comes in the issuance of debt( due to prohibition of interest) and imposition of taxes beyond zakah is not recommendable. Zakah is a combination of a net worth tax and production tax.

            In islamic thought zakah is a religious obligation to pay a part of wealth and production to the government. However, in most countries, zakah is not collected by the government and is not considered a compulsory payment. Eminent Muslim scholar Ab-ul-ala Maududi (1970) reasoned that zakah is a religious obligation and not a substitute for tax. Taxes other than zakah can be imposed in an Islamic economy if these taxes are levied by the legislative council and used for public welfare. He reasoned that the taxes discouraged in a hadith are those which were imposed by autocratic kings for their own lavish consumption and this kind of usurpation of public property was discouraged.

            Disucssing the issue of distributing zakah, islahi(185) and Qardawi (2000) explained that it is not necessary to make some living  person the owner of the zakah. Zakah can be given to any person or cause or an organizaiton working for a cause, not necessary to make some living person the owner of the zakah. Zakah could be distributed on the welfare of the people as well as given to people themselves. If a policy of full employment requires high MPC; then, a progressive taxation like zakah could help in boosting aggregate demand and increasing employment.

            As modern day problems in estimation of zakah, Usmani(2003) asserted that zakah on shares would be paid on the net liquid assets/share i.e. by excluding from the total assets, the value of assests used as means of production. And the liabilities owed to the business are deductable. Then, the zakah can be paid on the value of net liquid assets/share multiplied by number of shares held by the investor.

ESTIMATION OF ZAKAH ACCORDING TO THE EXPENDITURES:-

            Haque & Mirakhor (1998) classified government expenditure into i) asset creating and ii) non-asset creating. Non asset creating activities can be financed through tax revenues. But, in asset creating activities, equity modes of financing can be used whereby financing would be generated by way of an instrument. As per their recommendation, this instrument would be priced using the formula.

I=w1 WI+W2PPI+W3LSI+W4 ROG

Where

WI = worked index

LSI=Stock index, a measure of market performance index based on ROE.

PPI=index representing average returns on commercial participation papers

ROG=return on government investments and project

W1 W2 W3 and w4 are weights assigned to each variable.

INSTITUTION OF ZAKAH: AN IMPORTANT SOURCE OF PUBLIC FINANCE IN ISLAMIC ECONOMY

            Zakah is a religious obligation to pay a part of wealth and income to the government.

For calculation of zakah, people used the cross rate between gold and silver and determined their nisaab in gold as well. This cross rate has changed historically; that is why, we will have to resort to the original base i.e. 612 grams of silver when there is no bimetallic monetary standard in operation. One important implication of this principle is that tax exception amount in silver is much lower than gold using current cross rate and hence taxable assets will increase in magnitude. Zakah would be as per the ceiling rates defined for each category of wealth or production.

The classification is as follows:

a) 2-½% on cash, wholesale value of held for trade inventory and capital in excess of need payable once a year at a particular set date.

b) 5% on production using both labor and capital. It is charged at the completion of the production process.

c) 10% on production using either labor or capital. It is charged at the completion of the production process.

d) 20% on production using neither labor nor capital. This is applicable on treasure or any other natural Gift obtained without using neither labor nor capital.

To estimate Zakah on wealth, the following model is established:

ZR = 0.025 [ZA - (MNA x PMNA]

Where

ZR = Potential Aggregate Zakah Revenue

ZA = Potential Aggregate Zakatable Assets

MNA = Minimum Nisab Amount i.e. market value of 612 grams of silver

PMNA = People with Minimum Nisab Amount

Zakatable assets include all assets above the value of nisab except the assets in personal use and

means of production. Minimum Nisab Amount is the market value of 612 grams of silver. Population with minimum nisab amount is to be estimated looking at wealth distribution of population.On the surface, it can be seen that as Zakatable assets increase, Zakah revenue increases. Minimum nisab amount in silver terms would remain constant, but its value in currency would change. But, the effect of inflation would impact almost all endowments of an individual overtime.

Issues in Estimation of Zakah

Wealth/Assets subject to Zakah include Cash in hand, Cash in Bank, gold and silver not in daily usage (for women), gold and silver owned by men, held-for trade inventory, property/plot purchased for the purpose of resale. Production is not limited to agriculture nowadays, but the major part of it is coming from industries as well as services sector. Therefore, industrial production could also be taxed just like agriculture. Services income could also be taxed on the same principle.

Khan (2005) stated that investment in stocks should be interpreted as any other investment with some means of earning income. Stock is a means of earning dividend or capital gains. Just like means of production/income are exempt from Zakah, investment in stocks should be exempted from Wealth Zakah as investment in stocks means that the money is not kept idle rather it is invested and even its value could reduce to zero or increase by a long way theoretically. Therefore, any income arising from investment in stocks i.e. capital gains or dividend must be subject to Income Zakah. Similarly, this argument could be extended to introducing Income Zakah on mutual funds, investment in NSS, debentures, bonds etc. Furthermore, if land/building/house is leased, the land/building/house becomes the means of earning rent. Hence, income Zakah could also be introduced on rental income on houses, assets, buildings etc.

Non-Tax Revenues

Non-Tax Revenue can come from profitable operations of State Owned Enterprises (SOEs). State Owned Enterprises (SOEs) in postal services, railways, airline industry, steel industry, communication industry, public utilities, transportation industry, aviation industry etc can be run effectively and generate profits as they operate in industries which have significant potential for economies of scale, economies of scope and face relatively inelastic demand. With deficit financing not an option available, there will be an automatic check on government to run these State Owned Enterprises (SOEs) effectively and efficiently.

Fines and Penalties is another source through which government will generate funds. Ideally, this is not a source of revenue as the objective of fines and penalties is to enforce law, improve competition and put right market imperfections. But, this will materialize only when the good practices are rewarded and bad practices penalized.

Funding Non-Revenue Generating Activities

The real problem arises in funding operations of non-revenue generating activities like the operations of courts and police etc. It is to be noted here that in Muslim societies under the rule of Caliphates, there was no concept of jail which is a later invention. The Islamic punishments like Capital punishment on Murder, Forced Rape etc, monetary fines and physical punishment in extreme cases of stealing, fraud, robbery etc do not require people to be imprisoned. As a matter of fact, these prisons become the usuries for bringing societies even more seasoned criminals rather than a place for rehabilitation. Besides the convicted person, the family of the convicted also gets heavily affected by such imprisonment. Therefore, reforming the penal law based on Islamic principles will significantly reduce expenditure on making, developing and maintaining such prison cells. If we study the judicial system in Caliphates time, the judicial system did not have high cost of advocacy. Infact, there was no concept of 3rd party advocacy

As the law of the land was simple and its implementation enforced strictly. The society put huge emphasis on honest testimony. The judicial system was highly centralized and that too in Umar (rta) and Usman (rta) period when the Islamic state was spread all over Arabia and touching North Africa as well as Eastern Europe.

Alternative for Public Finance Other Than Zakah

Next, we discuss how the budget deficit could be financed in an Islamic economy. First of all, it is to be noted that sources of revenue (tax and no-tax) will be substantial enough to meet necessary development and non-development expenditure. Furthermore, if true Islamic values are adopted, non-development expenditure in providing perks to the government officials will also reduce. Looking beyond imposing more taxes, Usmani (2003) proposed issuance of GDP growth linked Instruments to finance public debt. In public finance, a Nominal GDP linked bond could be issued. In public projects valuation, this benchmark rate would be used to find PV of Cash Flows. This would be appropriate due to following:

i. It will not lead us into falling in time value of money as we are using an enterprise or output related

Benchmark rather than interest based benchmark.

ii. The Cash Flows are obtained using equity contractual modes like Mudarabah and Musharakah.

iii. In this case, we are calculating valuation models for the investor and not for the borrower. Borrower

or financee will be obliged to provide the returns based on these valuations. But, the investor can

Use this “indicative valuation” to rank investment alternatives.

Conclusion

This study brings the sources of revenue for a government in an Islamic economy. Though Zakah rates are low, but Zakah base is very broad and can include all productive activities.

The government in an Islamic economy can manage its operations without resorting to interest based deficit financing.

Riba: The main cause of all recessions and depressions

Riba: The main cause of all recessions and depressions

General monetary economics (rate of interest is the reward for saving) Vs Islamic monetary economics (interest less banking)

According to classical and Neo-classical economists rate of interest is the reward for savings. Where in Islam interest is prohibited. The reasons are Interest rate made people manipulate poor people and interest made the rich richer and the poor poorer. On expectation of guaranteed return at the maturity period interest rate made people work less.

                As the world economy made the transition to a market economy after the industrial revolution, it is not hard to see when Riba applies and when it does not?

What is Riba?

                Riba is seen as an unjustified earning where a person could receive a monetary advantage in a business transaction without giving just a counter value. Technically it’s a premium that must be paid by borrower to the lender along with the principle amount as a condition for the loan or for an extension of maturity.

Riba (Rate of Interest) is a sin under Islamic law even those hired to write the contract or who witness (and then confirm) contract are a party to the sin. Here prohibition of Riba means that money can be lent lawfully only for either charitable purposes (without any expectation of return above the amount of the principle), or for the purpose of doing lawful business i.e.; investment on the basis of profit and risk sharing. i.e. an investment of the kind that seeks profit while sharing the risk is encouraged in Islam, indeed it is commended.

                Islam doesn’t consider money as a commodity such that there should be price for its use. Money is medium of exchange in asset oriented economy and a store of value. It has made clear distinction between trade and Riba ; where trading is welcomed and riba is prohibited. Trade is that the business risk in trading is allocated more evenly among all the parties involved, where as in Riba operations the business risk lies heavily, if not solely on the borrower.

Flaws in the Theory of Interest-The root cause of the crisis

The present global economic crisis as a result of interest rates; from the American recession in 2008-09 to the crisis in south East Asia and Euro debt crisis at present.

Huge budgetary imbalances, excessive monetary expansion, large balance of payment deficits, insufficient foreign aid and in adequate international cooperation can all be related to the flaws in the mechanism of theories of rate of interest and its working, which also the root cause of the crisis.

                The demand for Economic growth as parallel to inflated interest rates and global economic crisis. Most countries which make the transition to a market economy had developed some kind of crisis in the early stages .Inflation often occurs as  a result of a fast growing economy, hence contracting monetary policy is must to offset inflation. Increase in interest rates would only add to the unemployment level. Keynesian school has emphasized the problem of high interest as contribution to unemployment. Therefore, stressing the need of reducing interest rates to the lowest possible. But now the question is what the optimal rate of interest is? Or should exit?

Islamic economics an alternative to the current system:-

                Islam suggests an interest free system that heavily relays on profit sharing i.e. Mudarabeh.  Here profits are the substitutes for the interest. But one might ask, how banks would have the capital i.e. necessary to lend, when banks do not pay interest for savings A/c’s or capital providers.

                There is a triangle or three way systems where all participants are mutually beneficial.

Those are 1. Bank

                    2. The supplier of savings or funds

                   3. The actual user of capital of the Entrepreneur

Now it is clear that not only banks and entrepreneurs are exposed to risk but also the supplier of funds.

                The lender would be a venture capitalist who is interested in profit sharing, where as banks can study applications of borrowers and hence extend credit, offer portfolio investment for lenders and undertake forgone services.

Conclusion:-Finally a interest free system would  work and provide unlimited prosperity but certainly does not work under the current system, the whole economic system should be altered  and changed in order for the Islamic frame work to success. This system can survive only in Christian, Jewish or Islamic economy that abolishes interest.