Role of GDP in developing India

Role of GDP in developing India

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This report gives the different aspects

relating the GDP growth of India. GDP

rate since independence, reasons for

fluctuation in GDP, role of Indian

government in growth of GDP, role of

public, privet and government in growth

of GDP and finally reasons of devaluation

of devaluation of rupee in comparison to

dollar are outlined in a nutshell.

Role of GDP

in developing

India Journey since Independence

Mr. Divakar Kumar London School of Economics and Political Sciences (LSE)


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ACKNOWLEDGEMENT

I would like to thank “Ashray for Everyone” for providing me this

wonderful opportunity to work as an intern on the project ‘Role of

GDP in Developing India’. I would be failing in my duty if

I do not thank Mr Sandeep Kumar Mahto who showed enough

confidence in me and handed me this challenging task.

I would also take this opportunity to thank various representatives

Ministry of Human Resource Development (MHRD),

Data Portal of India, Central Statistics Office (CSO) of

India, Ministry of Finance, and Planning Commission of India

for providing me with data and information at right time. Without

their constant and informative support my work would be incomplete.

I would thank my elder brother Mr Ranjeet Kumar for his

continuous encouragement and support. I would like to thank my

mother and father for their constant support and guidance for my work.

Further, thanks to my siblings Prabhakar, Simpi and Pammi for

their help in making my project a grand success. Thanks to my dear

friend Deepshikha for her guidance towards my work.


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Contents

Page Number

Acknowledgement 1

Contents 2

Preface 4

Definition of Gross Domestic Product (GDP) 6

1. GDP – Defined in three ways

2. GDP explained more

3. GDP- A long definition by World Bank

4. Development relevance

5. Statistical concept and methodology

6. Limitations and exceptions

GDP Rate from 1947-2012 11

1. GDP of India in current US$ since 1960

2. Line graph of Indian GDP in Billions of US dollars

3. Annual growth rate of Indian GDP since 1960

4. Line graph of Growth of Indian GDP in annual %

5. GDP of India per capita in current US dollars since 1960

6. Line graph of GDP per capita in current US$

Reason for fluctuation in GDP 17

1. High Inflation – Enough to keep Growth on check!

2. Slow Reform Movement – Stalling Growth Prospects!

3. Earnings Slowdown – Impacted by higher Operating costs!

4. Current Account Deficit – Signs of Growing Concern!

5. Industrial Growth – A bit too volatile to Digest!

6. Rising Interest Rates – Renders Working Conditions Costly!

7. Fiscal Deficit – The Unbudgeted woes!

8. FII Selling – Moving back to the West!

9. Global woes – India still not decoupled yet!

10. Unforeseen Events – The Nature’s Fury

11. Politics and policies are deterring investments:

12. Power outages are impacting growth:

13. Consumer confidence is low and could impact consumption:

14. The weakness in the rupee isn't helping exports, and exports are impacted by global

demand:


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Role of Indian Government in Growth of GDP 23

1. Pre-liberalisation period (1947–1991)

2. Post-liberalisation period

3. Agriculture

4. Research and development

5. Industrial output

Role of Public, Private and Government Companies in growth of GDP of India 27

1. Public and private sector employment in India

2. Employment in the public sector in 1998

3. Share of public sector in GDP

4. Share of Public and Private sector in Gross domestic savings and Gross domestic capital

formations

5. Performance of Public sector (at current prices)

Reason for devaluation in rupee in comparison to dollar till 2013 30

1. JOURNEY SINCE INDEPENDENCE

2. PRESENT SCENARIO

3. Dollar on a Horse Ride

4. Recession in the Euro Zone Is Back On the Table

5. Bleak Fundamental Outlook

6. No Balance at Balance Of Payments

7. Basic law of economics

8. Price of crude oil

9. Performance of dollar with respect to other currencies

10. Volatility in the equity market

11. Effects of equity market problems on investors

12. Poor current account deficit

13. Withdrawal of investors

14. Downgrading of Indian stocks

15. Condition of import bill

16. Contraction of Indian economy

17. Future prospects of INR

Conclusion 38


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Preface

The economy of India is the ninth-largest in the world by nominal GDP and the third-largest

by purchasing power parity (PPP). The country is one of the G-20 major economies and a

member of BRICS. On a per-capita-income basis, India ranked 141st by nominal GDP and

130th by GDP (PPP) in 2012, according to the IMF. India is the 19th-largest exporter and the

10th-largest importer in the world. The economy slowed to around 5.0% for the 2012–13

fiscal year compared with 6.2% in the previous fiscal. India's GDP grew by 9.3% in 2010–11;

thus, the growth rate has nearly halved in just three years. GDP growth rose marginally to

4.8% during the quarter through March 2013, from about 4.7% in the previous quarter. The

government has forecast a growth rate of 6.1%-6.7% for the year 2013-14, whilst the RBI

expects the same to be at 5.7%.

The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy

combining features of capitalism and socialism, resulting in an inward-looking,

interventionist policies and import-substituting economy that failed to take advantage of the

post-war expansion of trade. This model contributed to widespread inefficiencies and

corruption, and the failings of this system were due largely to its poor implementation.

In 1991, India adopted liberal and free-market principles and liberalised its economy to

international trade under the guidance of Former Finance minister Manmohan Singh under

the Prime Ministry of P.V. Narasimha Rao, prime minister from 1991 to 1996, who had

eliminated Licence Raj, a pre- and post-British era mechanism of strict government controls

on setting up new industry. Following these major economic reforms, and a strong focus on

developing national infrastructure such as the Golden Quadrilateral project by former Prime

Minister Atal Bihari Vajpayee, the country's economic growth progressed at a rapid pace,

with relatively large increases in per-capita incomes.

The combination of protectionist, import-substitution, and Fabian social democractic-inspired

policies governed India for some time after the end of British occupation. The economy was

then characterised by extensive regulation, protectionism, and public ownership of large

monopolies, pervasive corruption and slow growth. Since 1991, continuing economic

liberalisation has moved the country towards a market-based economy. By 2008, India had

established itself as one of the world's fastest growing economies. Growth significantly

slowed to 6.8% in 2008–09, but subsequently recovered to 7.4% in 2009–10, while the fiscal

deficit rose from 5.9% to a high 6.5% during the same period. India's current account deficit

surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The

unemployment rate for 2010–11, according to the state Labour Bureau, was 9.8% nationwide.


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As of 2011, India's public debt stood at 68.05% of GDP which is highest among the emerging

economies. However, inflation remains stubbornly high with 7.55% in August 2012, the

highest amotrade (counting exports and imports) stands at $606.7 billion and is currently the

9th largest in the world. During 2011–12, India's foreign trade grew by an impressive 30.6%

to reach $792.3 billion (Exports-38.33% & Imports-61.67%).

This report gives one a journey through the post-independence era in context of GDP and its

components. This report is particularly India’s GDP journey. First section of this report

defined GDP its components and definition by World Bank. Further it gives the limitations of

GDP. Second section deals with GDP rate of India from 1947-2012. The summary is given in

the form of Data Table and Line graph. All data have been collected through World Bank and

Data Portal of India. Third section deals with reasons for fluctuation in GDP. Fourth and fifth

section is a summary of role of Indian Government, Private, and Public companies in growth

of GDP. Finally the last section is a summary of causes of devaluation of Indian Rupee in

comparison to Dollar till 2012.


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Definition of Gross Domestic Product (GDP)

The monetary value of all the finished goods and services produced within a country's

borders in a specific time period, though GDP is usually calculated on an annual basis. It

includes all of private and public consumption, government outlays, investments and exports

less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy

"G" is the sum of government spending

"I" is the sum of all the country's businesses spending on capital

"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX =

Exports - Imports)

GDP – Defined in three ways

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures

of national income and output. GDP can be defined in three ways, which should give

identical results.

Defining Gross

Domestic Product (GDP)


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First, it is equal to the total expenditures for all final goods and services produced

within the country in a specified period of time (usually a 365-day year).

Second, it is equal to the sum of the value added at every stage of production by all

the industries, plus taxes and minus subsidies on products.

Third, it is equal to the sum of the income generated by production like compensation

of employees, taxes on production and imports less subsidies, and gross operating

surplus

GDP explained more

GDP is commonly

used as an indicator of

the economic health

of a country, as well

as to gauge a

country's standard of

living. Critics of using

GDP as an economic

measure say the

statistic does not take

into account the

underground

economy -

transactions that, for whatever reason, are not reported to the government. Others say that

GDP is not intended to gauge material well-being, but serves as a measure of a nation's

productivity, which is unrelated.

GDP- A long definition by World Bank

GDP at purchaser's prices is the sum of gross value added by all resident producers in the

economy plus any product taxes and minus any subsidies not included in the value of the

products. It is calculated without making deductions for depreciation of fabricated assets or

for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar

figures for GDP are converted from domestic currencies using single year official exchange

rates. For a few countries where the official exchange rate does not reflect the rate effectively

applied to actual foreign exchange transactions, an alternative conversion factor is used.

GDP per capita

The GDP per capita given on this page shows the GDP at purchaser's prices

in constant 2000 U.S. dollars divided by midyear population. GDP at

purchaser's prices is the sum of gross value added by all resident

producers in the economy plus any product taxes and minus any subsidies

not included in the value of the products. It is calculated without making

deductions for depreciation of fabricated assets or for depletion and

degradation of natural resources. Dollar figures for GDP are converted

from domestic currencies using 2000 official exchange rates. The term

Constant Prices refers to a metric for valuing the price of something over

time, without that metric changing due to inflation or deflation.


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Development relevance

An economy's growth is measured by the change in

the volume of its output or in the real incomes of its

residents. The 2008 United Nations System of

National Accounts (2008 SNA) offers three

plausible indicators for calculating growth: the

volume of gross domestic product (GDP), real gross

domestic income, and real gross national income.

The volume of GDP is the sum of value added,

measured at constant prices, by households,

government, and industries operating in the

economy. GDP accounts for all domestic

production, regardless of whether the income

accrues to domestic or foreign institutions.

Statistical concept and methodology

Gross domestic product (GDP) represents the sum

of value added by all its producers. Value added is

the value of the gross output of producers less the

value of intermediate goods and services consumed

in production, before accounting for consumption of

fixed capital in production. The United Nations

System of National Accounts calls for value added

to be valued at either basic prices (excluding net

taxes on products) or producer prices (including net

taxes on products paid by producers but excluding

sales or value added taxes). Both valuations exclude

transport charges that are invoiced separately by

producers. Total GDP is measured at purchaser

prices. Value added by industry is normally

measured at basic prices.

Growth rates of GDP and its components are

calculated using the least squares method and

The components used to

calculate GDP

Consumption:

-- Durable goods (items

expected to last more than three

years)

-- Nondurable goods (food and

clothing)

-- Services

Government Expenditures:

-- Defence

-- Roads

-- Schools

Investment Spending:

-- Non-residential (spending on

plants and equipment),

Residential (single-family and

multi-family homes)

-- Business inventories

Net Exports:

-- Exports are added to GDP

-- Imports are deducted from

GDP

The GDP report also includes

information regarding inflation:

-- The implicit price deflator

measures changes in prices and

spending patterns.

-- The fixed-weight price

deflator measures price changes

for a fixed basket of over 5,000

goods and services.

http://www.investinganswers.com/financial-dictionary/economics/durable-goods-2323

http://www.investinganswers.com/financial-dictionary/economics/net-exports-2424


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constant price data in the local currency. Constant price U.S. dollar series are used to

calculate regional and income group growth rates. Local currency series are converted to

constant U.S. dollars using an exchange rate in the common reference year.

Limitations and exceptions

Gross domestic product (GDP), though widely

tracked, may not always be the most relevant

summary of aggregated economic performance for all

economies, especially when production occurs at the

expense of consuming capital stock.

While GDP estimates based on the production

approach are generally more reliable than estimates

compiled from the income or expenditure side,

different countries use different definitions, methods,

and reporting standards. World Bank staff review the

quality of national accounts data and sometimes

make adjustments to improve consistency with

international guidelines. Nevertheless, significant

discrepancies remain between international standards

and actual practice. Many statistical offices,

especially those in developing countries, face severe

limitations in the resources, time, training, and

budgets required to produce reliable and

comprehensive series of national accounts statistics.

Among the difficulties faced by compilers of national

accounts is the extent of unreported economic

activity in the informal or secondary economy. In

developing countries a large share of agricultural

output is either not exchanged (because it is

consumed within the household) or not exchanged

for money.

Each industry's contribution to growth in the

economy's output is measured by growth in the

industry's value added. In principle, value added in

The Gross Domestic

Product (GDP) in India

was worth 1841.70 billion

US dollars in 2012. The

GDP value of India

represents 2.97% of the

world economy. GDP in

India is reported by the

The World Bank Group.

India GDP averaged

485.65 USD Billion from

1970 until 2012, reaching

an all-time high of

1872.90 USD Billion in

December of 2011 and a

record low of 63.50 USD

Billion in December of

1970. The gross domestic

product (GDP) measures

of national income and

output for a given

country's economy. The

gross domestic product

(GDP) is equal to the

total expenditures for all

final goods and services

produced within the

country in a stipulated

period of time.


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constant prices can be estimated by measuring the quantity of goods and services produced in

a period, valuing them at an agreed set of base year prices, and subtracting the cost of

intermediate inputs, also in constant prices. This double-deflation method requires detailed

information on the structure of prices of inputs and outputs.

In many industries, however, value added is extrapolated from the base year using single

volume indexes of outputs or, less commonly, inputs. Particularly in the services industries,

including most of government, value added in constant prices is often imputed from labour

inputs, such as real wages or number of employees. In the absence of well-defined measures

of output, measuring the growth of services remains difficult.

Moreover, technical progress can lead to improvements in

production processes and in the quality of goods and

services that, if not properly accounted for, can distort

measures of value added and thus of growth. When inputs

are used to estimate output, as for nonmarket services,

unmeasured technical progress leads to underestimates of

the volume of output. Similarly, unmeasured improvements

in quality lead to underestimates of the value of output and

value added. The result can be underestimates of growth and

productivity improvement and overestimates of inflation.

Informal economic activities pose a particular measurement

problem, especially in developing countries, where much

economic activity is unrecorded. A complete picture of the

economy requires estimating household outputs produced

for home use, sales in informal markets, barter exchanges,

and illicit or deliberately unreported activities. The consistency and completeness of such

estimates depend on the skill and methods of the compiling statisticians.

Rebasing of national accounts can alter the measured growth rate of an economy and lead to

breaks in series that affect the consistency of data over time. When countries rebase their

national accounts, they update the weights assigned to various components to better reflect

current patterns of production or uses of output. The new base year should represent normal

operation of the economy - it should be a year without major shocks or distortions. Some

developing countries have not rebased their national accounts for many years. Using an old

base year can be misleading because implicit price and volume weights become progressively

less relevant and useful.

GDP was first developed

by Simon Kuznets for a

US Congress report in

1934. In this report,

Kuznets warned against

its use as a measure of

welfare. After the Bretton

Woods conference in

1944, GDP became the

main tool for measuring a

country's economy.

http://en.wikipedia.org/wiki/Simon_Kuznets

http://en.wikipedia.org/wiki/United_States_Congress

http://en.wikipedia.org/wiki/Welfare

http://en.wikipedia.org/wiki/Bretton_Woods_conference

http://en.wikipedia.org/wiki/Bretton_Woods_conference


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To obtain comparable series of constant price data for computing aggregates, the World Bank

rescales GDP and value added by industrial origin to a common reference year. Because

rescaling changes the implicit weights used in forming regional and income group

aggregates, aggregate growth rates are not comparable with those from earlier editions with

different base years. Rescaling may result in a discrepancy between the rescaled GDP and the

sum of the rescaled components. To avoid distortions in the growth rates, the discrepancy is

left unallocated. As a result, the weighted average of the growth rates of the components

generally does not equal the GDP growth rate.

GDP of India in current US$ since 1960

Year 1960 1961 1962 1963 1964 1965

GDP (current

US$)

NA NA NA NA NA NA

Year 1966 1967 1968 1969 1970 1971

GDP (current

US$)

NA NA NA NA 63517181

993.61

68532271

313.33

Year 1972 1973 1974 1975 1976 1977

GDP (current

US$)

72716595

886.08

87014945

188.13

10127148

9825.57

10019951

4361.01

10451811

8780.15

12361783

7579.07

Year 1978 1979 1980 1981 1982 1983

GDP (current

US$)

13970868

8959.48

15567433

7009.82

18959412

1347.88

19688347

4526.44

20423436

6470.42

22209028

3349.14

Year 1984 1985 1986 1987 1988 1989

GDP Rate From

1947-2012


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GDP (current

US$)

21587823

3652.14

23658910

0978.44

25335244

4883.55

28392697

7522.35

30179095

1202.89

30123372

8790.86

Year 1990 1991 1992 1993 1994 1995

GDP (current

US$)

32660801

4285.82

27484234

8144.40

29326235

2360.49

28419371

6755.32

33301446

3391.51

36659964

5609.10

Year 1996 1997 1998 1999 2000 2001

GDP (current

US$)

39978688

8515.03

42316041

9439.98

42874103

0147.28

46434439

5616.42

47469162

7708.13

49237857

9615.66

Year 2002 2003 2004 2005 2006 2007

GDP (current

US$)

52279845

7731.02

61757257

8402.85

72158529

3250.32

83421689

7836.72

94911676

9619.22

12387001

95643.90

Year 2008 2009 2010 2011 2012

GDP (current

US$)

12240966

25885.47

13653729

12989.09

17109172

18018.04

18728454

06804.92

18417173

71769.71

Source: World Data Bank

Line graph of Indian GDP in Billions of US dollars


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Annual growth rate of Indian GDP since 1960

Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969

GDP

growth

(annual

%)

NA 3.722

743

2.931

128

5.994

353

7.452

95

-

2.635

77

-

0.055

33

7.825

963

3.387

929

6.539

7

Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979

GDP

growth

(annual

%)

5.157

23

1.642

93

-

0.553

3

3.295

521

1.185

336

9.149

912

1.663

104

7.254

765

5.712

532

-

5.238

18

Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

GDP

growth

(annual

%)

6.735

822

6.006

204

3.475

733

7.288

893

3.820

738

5.254

299

4.776

564

3.965

356

9.627

783

5.947

343

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

GDP

growth

(annual

%)

5.533

455

1.056

831

5.482

396

4.750

776

6.658

924

7.574

492

7.549

522

4.049

821

6.184

416

8.463

071

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

GDP

growth

(annual

%)

3.975

053

4.944

226

3.907

534

7.943

995

7.848

792

9.284

882

9.263

965

9.801

36

3.890

957

8.479

784

0

2E+11

4E+11

6E+11

8E+11

1E+12

1.2E+12

1.4E+12

1.6E+12

1.8E+12

2E+121

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05

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08

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11

GDP (current US$)

GDP (current US$)


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Year 2010 2011 2012

GDP

growth

(annual

%)

10.54

639

6.330

518

3.236

943

Line graph of Growth of Indian GDP in annual %

GDP of India per capita in current US dollars since 1960

Year 1960 1961 1962 1963 1964 1965

GDP per capita

(current US$)

NA NA NA NA NA NA

-8

-6

-4

-2

0

2

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6

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12

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20

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20

02

20

04

20

06

20

08

20

10

20

12

GDP growth (annual %)

GDP growth (annual %)


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Year 1966 1967 1968 1969 1970 1971

GDP per capita

(current US$)

NA NA NA NA 114.4041

94

120.6968

307

Year 1972 1973 1974 1975 1976 1977

GDP per capita

(current US$)

125.2010

15

146.4422

33

166.5642

458

161.0323

114

164.1086

371

189.6167

729

Year 1978 1979 1980 1981 1982 1983

GDP per capita

(current US$)

209.3518

951

227.9164

288

271.2495

839

275.3210

064

279.2208

778

296.9175

881

Year 1984 1985 1986 1987 1988 1989

GDP per capita

(current US$)

282.2862

435

302.6455

85

317.1100

126

347.8095

84

361.9319

056

353.8203

909

Year 1990 1991 1992 1993 1994 1995

GDP per capita

(current US$)

375.8907

93

310.0837

677

324.4951

264

308.5347

869

354.8548

761

383.5509

262

Year 1996 1997 1998 1999 2000 2001

GDP per capita

(current US$)

410.8183

568

427.2361

968

425.4452

943

453.0124

208

455.4437

732

464.7269

155

Year 2002 2003 2004 2005 2006 2007

GDP per capita

(current US$)

485.5537

094

564.6188

086

649.7103

643

740.1159

323

830.1632

213

1068.678

519

Year 2008 2009 2010 2011 2012

GDP per capita

(current US$)

1042.083

832

1147.239

088

1419.112

674

1533.665

574

1489.235

167

Line graph of GDP per capita in current US$

The Gross Domestic Product per capita in India was last recorded at

1106.80 US dollars in 2012. The GDP per Capita in India is equivalent to

9% of the world's average. GDP per capita in India is reported by the

World Bank. India GDP per capita averaged 448.91 USD from 1960 until

2012, reaching an all-time high of 1106.80 USD in December of 2012 and

a record low of 228.34 USD in December of 1960. The GDP per capita is

obtained by dividing the country’s gross domestic product, adjusted by

inflation, by the total population.


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0

200

400

600

800

1000

1200

1400

1600

18001

96

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GDP per capita (current US$)

GDP per capita (current US$)


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High Inflation – Enough to

keep Growth on check!

Inflation has shot up to

8.43% in December 2011 as

against 7.48% in November

2011. Food inflation

remains stubbornly high at

16.91%. Needless to say,

markets have already felt

jitters based on concerns

emanating from this prime

culprit.

Slow Reform Movement – Stalling Growth Prospects!

The reformist movement started off well during the phase 1 of UPA ruling. Though, the pace

of reforms was mired by obstructive policies of Left-coalition partners, the seeds were sown

for a fast-paced reformist movement in the ensuing phase which bypassed the Leftists

altogether.

Further, the 2nd

phase started off with the big-bang reform initiatives such as the Women’s

Reservation Bill, the GST structure which intends to swallow all sundry taxes and biggest

ever indirect tax reform in the form of DTC.

While DTC just managed to get the appointment of the Finance Minister by 2012, the GST

reform got stuck in the mess of outstanding issues between the States and the Centre. To add

to the woes, the emergence of the top scandals and frauds further mired the prospects of

timely roll-out of GST, as opposition parties are in no mood to entertain any discussion in the

Parliament until Manmohan Singh government ratifies a JPC probe in the matter. The scandal

Reasons for

fluctuation in GDP

Watch before you buy!!!!

http://trak.in/tags/business/2010/07/22/gst-goods-services-tax-structure/

http://trak.in/tags/business/2010/06/16/direct-tax-code-update/


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debate has paralyzed the Parliamentary proceedings adding thousands of crore to tax-payer’s

wealth erosion.

Earnings Slowdown – Impacted by higher Operating costs!

High inflation and rising interest rates scenario does not impact individuals and tax-payers

alone. It also affects corporate profitability. Higher input costs leads to squeeze in corporate

margins at operating level or a spill-over to generalized inflation if the same is passed on to

final consumers.

While the pure commodity players are likely to benefit from the demand and supply

mismatch, others involved in processing of raw-materials and turning them into finished

goods might see an impact on the cost of goods sold and operating margins of the company.

In such a scenario, companies that rely on high volume growth and master cost efficiency

techniques, can weather the crisis through strategic planning or sometimes even by passing

on the rising input burden to the final consumers.

The commodity cycle has yet again turned bullish. Manufacturing companies are more

susceptible to such impact of rising raw material

prices. The tremors of the same shall be felt in next

few quarterly performances.

Current Account Deficit – Signs of

Growing Concern!

India’s current account deficit has surged to

4.1% of GDP during second quarter of the fiscal as

against 3.2% the previous year. Merchandise trade

deficit widened to $35.4 billion during Q2 FY11 as

against $31.6 billion in previous quarter as growth

in imports far outpaced the progress in exports.

In its policy review, the RBI had warned that high

current account deficit – 3.5% of GDP for the fiscal 2010-11 – is not sustainable. The central

bank had also indicated that soaring oil prices could have negative impact on the trade

balance going forward.

The high current account deficit coupled with large fiscal deficit could play havoc for India in

sustaining in its dream run amongst other emerging market economies. According to DGFT,

India’s trade deficit for the year is likely to range between $115-125 billion.

Am I getting stronger?

http://trak.in/tags/business/2011/01/11/jpc-2g-scam-probe-1000s-crore-rupees-lost/

http://trak.in/tags/business/2011/01/11/jpc-2g-scam-probe-1000s-crore-rupees-lost/

http://trak.in/search/high%20inflation%20india

http://economictimes.indiatimes.com/news/economy/finance/indias-likely-trade-deficit-in-2010-11-at-115-125bn-dgft/articleshow/7334122.cms


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Ground Reality: High current account deficit could seem even more inflated in a likelihood

of a reversal in foreign capital flows covering it.

Industrial Growth – A bit too volatile to Digest!

The volatility in the industrial output numbers announced over the last few months has left

economists high-and-dry with regard to arriving at any type of conclusion on growth figures

for the economy.

In latest, the core growth (country’s

infrastructure sector output) registered a smart

comeback in December with 6.6% growth.

These core sectors – crude oil, petroleum

refinery products, coal, cement and steel –

accounts for almost a quarter of the country’s

IIP. Thus, it raises hopes of robust December

overall IIP data.

However, in November the slowdown in

industrial production had hit an 18-month low

of 2.7%, raising questions on the veracity of an

index data. Further, lower growth in

manufacturing and electricity has pulled down

IIP growth in August 2010.

Ground Reality: FM Pranab Mukherjee has gone on record saying high inflation and weak

IIP data were cause of concern and that the government was examining ways to shore up

industrial production.

Rising Interest Rates – Renders Working Conditions Costly!

One thing for sure – Cash is King! Logically, holding cash reserves acts as a liability. Hold

cash in one hand and inflation in another – wipe

both the props in your hand against each other.

Outcome: your cash gets eroded in its value and

inflation reigns.

However, your cash can survive this onslaught of

inflation in the rising interest rate scenario on the

back of higher returns on investment. Thus,

depositors get rewarded for holding the sheer cash

A bit too volatile to Digest!

http://timesofindia.indiatimes.com/business/india-business/Core-sector-grows-66-in-December/articleshow/7400825.cms


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liquidity in high-yielding investment avenues such as bank fixed deposits.

But, the opposite also holds true. If you’re a borrower, you are standing on the wrong side of

the system. A borrower could be a corporate entity looking to expand the business or even an

individual looking to raise a loan for buying home or a car.

Thus, rising interest rate scenario can directly impact the growth prospects of a nation as it

sums up to costly working conditions and operating environment.

RBI raised repo (6.5%) and reverse repo rates (5.5%) by 25 bps in a bid to tame inflation.

Moreover, bankers believe another 50 bps hike could well be in the offing soon. So, will

these measures actually tame inflation or choke the growth rate?

Fiscal Deficit – The Unbudgeted woes!

When a government’s expenditures exceed the revenue that it generates, it is a case of fiscal

deficit. Though, fiscal deficit is not necessarily a negative economic event, a controlled fiscal

situation points towards a balanced budget policy of a country.

More recently, RBI had indicated that managing inflation through monetary policy becomes

more of a challenge if the fiscal deficit goes unguarded. The government had set a deficit

target of 4.8% of GDP for FY12.

Analysts are of the opinion that delay in reform rollover such as implementation of GST,

adoption of food security bill, pass on of the oil subsidies to the final consumers could affect

growth and delay fiscal consolidation.

FII Selling – Moving back

to the West!

Calendar year 2010 has seen net

equity inflow to the tune of $29

billion, or Rs.133, 000 crore in

rupee terms. In a major trend

developing off late, the preferred

route of investment for overseas

investors to pump money into

India has been FII inflow rather

than FDI inflows.

http://trak.in/tags/business/2011/01/25/rbi-rate-hike-25-bps/


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This is of bit concern as some noted economists point out that FII inflow can reverse on signs

of even slightest deterioration in the macro-economic indicators of the country. On the other

hand, inflows routed through FDI are more stable and long-term integrating with the

economy. FDI inflows have been decelerating since last 4 quarters in 2011.

Take, for example, the FII outflows in January 2011 totalled at Rs. 4813 crore on the back of

growing concerns of untamed inflation eating away growth prospects. These FII outflows

hardly amount to a fraction (1/29th

) of the humungous $29 billion inflows witnessed in 2010.

Yet, the volatility in the equity markets is unprecedented – stock markets have already

corrected by almost 15% from its recent peak.

Global woes – India still not decoupled yet!

Market analysts have a tendency to repeatedly use this vague

axiom – decoupling story of India. They use this phrase time

and again to support their theory of a Buy rating on

emerging India growth story. But,

ever since the last decade, the

decoupling theory has never lived

up to its expectations.

In fact, ever since the India story

has bloomed – it finds itself more

and more attached to the global

economy. It is now more coupled

than ever before. Moreover, this can be sensed from the fact

that even with a slightest of positive data from the US

economy, the hot money has deserted from the Indian shores

to seek safety in undervalued American stocks.

The European economy is still in doldrums. During the

2008-crash, Indian IT sector had made a conscious effort to

diversify their outsourcing business away from America, to

other geographical locations such as Europe. But, to their dismay, the recession has widely

spread its wings across the Europe.

Unforeseen Events – The Nature’s Fury!

The global warming is the biggest issue for the environmentalists today. Every few days we

get to hear the news of either an earthquake or tsunami or a volcano erupting and damaging

life and trade across the world.

Neither India, nor

China has ever

decoupled from global

markets. With

increasingly

globalization, no

country can avoid

negative impact of

trade and business

with overseas

partners.

http://trak.in/tags/business/2010/10/15/fii-inflow-india/

http://trak.in/tags/business/2010/11/19/friday-finance-european-crisis-round-ii/


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Nature has its own way of taking revenge against the man-made destruction of environment.

In this new century, the magnitude of such natural occurrences is so huge that it can devastate

the whole of village or district where it strikes. It severely affects the logistics and trade in the

area and alienates the location for days together which can hurt the economic activity for a

prolonged period.

Politics and policies are deterring investments:

The last 1.5 years markets have become "increasingly disillusioned with the pace of reform,

with a number of investment projects stalled and corruption allegations tainting the

incumbent government." And the emergence of regional parties and Congress' dismal

performance in state polls means they're starting to play it safe with their politics and

economic policies.

Power outages are impacting growth:

The recent power outage that left 50% of the country in darkness, and "anecdotal evidence of

worsening power shortages" are all impacting growth. What's more notified power cuts are at

record highs and do not cover a massive chunk of the country that isn't connected to the

power grid.

Consumer confidence is low and could impact consumption:

Unlike the slowdown in investment which is well recorded, declining consumer confidence

shows that consumption which has been stable could slow too.

The weakness in the rupee isn't helping exports, and exports are

impacted by global demand:

The share of exports in GDP has increased and while the weakness in the rupee would be

expected to boost exports, the composition of India's exports is dominated by high-value

goods, so the weaker rupee is unlikely to have a major impact. Rather exports will be affected

by global demand. Export growth is expected to be soft in coming months.

http://www.businessinsider.com/indias-power-outages-2012-7

http://www.businessinsider.com/jefferies-india-investment-cycle-2012-3


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Role of Indian Government in Growth of GDP

Pre-liberalisation period (1947–1991)

Indian economic policy after independence was influenced by the colonial experience, which

was seen by Indian leaders as exploitative, and by those leaders' exposure to British social

democracy as well as the progress achieved by the planned economy of the Soviet Union.

Domestic policy tended towards protectionism, with a strong emphasis on import substitution

industrialisation, economic interventionism, a large public sector, business regulation, and

central planning, while trade and foreign investment policies were relatively liberal. Five-

Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine

tools, telecommunications, insurance, and power plants, among other industries, were

effectively nationalised in the mid-1950s.

Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta

Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of

the country's independence. They expected favourable outcomes from their strategy,

involving the rapid development of heavy industry by both public and private sectors, and

based on direct and indirect state intervention, rather than the more extreme Soviet-style

central command system. The policy of concentrating simultaneously on capital- and

technology-intensive heavy industry and subsidising manual, low-skill cottage industries was

criticised by economist Milton Friedman, who thought it would waste capital and labour, and

retard the development of small manufacturers. The rate of growth of the Indian economy in

the first three decades after independence was derisively referred to as the Hindu rate of

Role of Indian

Government in Growth

of GDP


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growth by economists, because of the unfavourable comparison with growth rates in other

Asian countries.

Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved

irrigation facilities collectively contributed to the Green Revolution in India, which improved

the condition of agriculture by increasing crop productivity, improving crop patterns and

strengthening forward and backward linkages between agriculture and industry. However, it

has also been criticised as an unsustainable effort, resulting in the growth of capitalistic

farming, ignoring institutional reforms and widening income disparities.

Subsequently the Emergency and Garibi Hatao concept under which income tax levels at one

point rose to a maximum of 97.5%, a record in the world for non-communist economies,

started diluting the earlier efforts.

Post-liberalisation period

In the late 1970s, the government led by Morarji Desai eased restrictions on capacity

expansion for incumbent companies; removed price controls, reduced corporate taxes and

promoted the creation of small scale industries in large numbers. However, the subsequent

government policy of Fabian socialism hampered the benefits of the economy, leading to

high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which

was India's major trading partner, and the Gulf War, which caused a spike in oil prices,

resulted in a major balance-of-payments crisis for India, which found itself facing the

prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from the

International Monetary Fund (IMF), which in return demanded reforms.

In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan

Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence

Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic

approval of foreign direct investment in many sectors. Since then, the overall thrust of

liberalisation has remained the same, although no government has tried to take on powerful

lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws

and reducing agricultural subsidies. By the turn of the 21st century, India had progressed

towards a free-market economy, with a substantial reduction in state control of the economy

and increased financial liberalisation. This has been accompanied by increases in life

expectancy, literacy rates and food security, although urban residents have benefited more

than agricultural residents.

While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been

raised to investment level in 2003 by S&P and Moody's. In 2003, Goldman Sachs predicted

that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK


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25

and Russia by 2025 and Japan by 2035, making it the third largest economy of the world,

behind the US and China. India is often seen by most economists as a rising economic

superpower and is believed to play a major role in the global economy in the 21st century.

Agriculture

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry,

logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the total

workforce and despite a steady decline of its share in the GDP, is still the largest economic

sector and plays a significant role in the overall socio-economic development of India. Yields

per unit area of all crops have grown since 1950, due to the special emphasis placed on

agriculture in the five-year plans and steady improvements in irrigation, technology,

application of modern agricultural practices and provision of agricultural credit and subsidies

since the green revolution.

India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric

and black pepper. It also has the world's largest cattle population (193 million). It is the

second largest producer of wheat, rice, sugar, groundnut and inland fish. It is the third largest

producer of tobacco. India accounts for 10% of the world fruit production with first rank in

the production of banana and sapota.

The required level of investment for the development of marketing, storage and cold storage

infrastructure is estimated to be huge. The government has implemented various schemes to

raise investment in marketing infrastructure. Amongst these schemes are Construction of

Rural Go downs, Market Research and Information Network, and Development /

Strengthening of Agricultural Marketing Infrastructure, Grading and Standardisation.

Research and development

The Indian Agricultural Research Institute (IARI), established in 1905, was responsible for

the research leading to the "Indian Green Revolution" of the 1970s. The Indian Council of

Agricultural Research (ICAR) is the apex body in kundiure and related allied fields, including

research and education. The Union Minister of Agriculture is the President of the ICAR. The

Indian Agricultural Statistics Research Institute develops new techniques for the design of

agricultural experiments, analyses data in agriculture, and specialises in statistical techniques

for animal and plant breeding. Prof. M.S. Swaminathan is known as "Father of the Green


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Revolution" and heads the MS Swaminathan Research Foundation. He is known for his

advocacy of environmentally sustainable agriculture and sustainable food security.

Industrial output

India is tenth in the world in factory output. Manufacturing sector in addition to mining,

quarrying, electricity and gas together account for 27.6% of the GDP and employ 17% of the

total workforce. Economic reforms introduced after 1991 brought foreign competition, led to

privatisation of certain public sector industries, opened up sectors hitherto reserved for the

public sector and led to an expansion in the production of fast-moving consumer goods. In

recent years, Indian cities have continued to liberalise, but excessive and burdensome

business regulations remain a problem in some cities, like Kochi and Kolkata.

Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old

family firms and required political connexions to prosper was faced with foreign competition,

including the threat of cheaper Chinese imports. It has since handled the change by squeezing

costs, revamping management, focusing on designing new products and relying on low

labour costs and technology. The Indian market offers endless possibilities for investors.


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One may look at the role of public sector in Indian Economy in terms of its share in providing

employment, its share in investment, its share in national generated and its share in saving

and capital formations.

Public and private sector employment in India

Since employment in the public sector is confined in the organised sector, public sector

employs 70% of the workers employed in organised sector of the Indian Economy.

From table we may note that 50 % of the total employment in the public sector was in the

government administration and community and personal services. The biggest chunk of

employment in economic enterprises was in transport, storage and in communications was of

the order of about 31 lakhs and next in importance was in manufacturing was 17 lakhs. 5.3

lakh persons employed in agriculture and other allied activities reflect employment under

employment guarantee scheme rather than any productive activity in the normal sense.

The share of public sector in total employment in organised sector – public+ private; reveals

that in transport and communications, electricity, gas, water, and constructions, the share of

public sector is in 95-98%, a total dominant situation. In manufacturing share of public sector

was 27% of the total since its entry is of recent origin. With the nationalisation of coal mines

Role of Public, Private and

Government Companies in

growth of GDP of India

Year Public sector Private sector Total 1 as % of 3 in

lakh

1971 71 121 192 55

1981 155 74 229 68

1991 190 77 267 71

1998 194 87 281 70


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and take-over of 20 commercial banks significant improvement has taken place in public

sector. Public sector is big employer, 70% of total as far as organised sector of Indian

Economy is concerned.

Employment in the public sector in 1998

Sectors Lakhs Per cent of total

Manufacturing 16.1 8.5

Transport, Storage and

Communications

30.8 15.7

Financing, Insurance, real

estate and business services

12.9 6.6

Government

administration, community,

social and personal services

97.4 50.0

Other sectors 37.0 19.2

Total 194.2 100.0

Share of public sector in GDP

During the last 5 decades share of public sector in NDP has steadily improved. Public sector

accounted for 7.5% GDP in 1950-51, 26.2% in 1995-96 at current prices. So, public sector

accounts for one fifth of national output due to rapid expansion of public sector enterprises.

Share of public administration and defence rose from 4.5% to 8.8% during 1950-51 and

1967-97. Share of public sector enterprise just rose from 3% in 1950-1951 to 14.7% in 1996-

97. But still private sector enjoys dominant position in economy. In agriculture and small

scale sector share of the state is almost zero.

Share of Public and Private sector in Gross domestic savings and Gross domestic capital formations

Averages for Plan

Periods

As % of GNP at Market price

Public sector Private sector Total

Gross Domestic

Savings

First Plan 1951-56 1.7 8.7 10.4

Second Plan 1956-

61

2.0 10.4 12.4

Third Plan 1961-66 3.4 10.9 14.3

Fourth Plan 1969-

74

3.0 14.4 17.4

Fifth Plan 1974-79 4.6 17.0 21.6

Sixth Plan 1980-85 3.6 16.5 20.1

Seventh Plan 1985-

1990

2.3 18.1 20.4


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Eighth Plan 1992-97 1.4 21.9 23.3

1997-98 1.4 23.3 24.7

1998-99 0.0 22.3 22.3

Gross Domestic

capital Formation

First Plan 3.5 7.2 10.7

Second Plan 6.6 8.8 15.4

Third Plan 8.4 8.3 16.7

Fourth Plan 7.2 10.9 18.1

Fifth Plan 9.5 11.7 21.2

Sixth Plan 11.1 10.5 21.6

Seventh Plan 10.7 12.1 22.8

Eighth Plan 9.2 15.4 24.6

1997-98 (P) 6.5 17.5 26.9

1998-99 (Q) 6.7 16.6 25.1

Performance of Public sector (at current prices)

Percentage share in total economy

Item 1980-81 1987-88 1994-95 1995-96

Gross domestic product 19.7 27.0 26.7 26.2

1. Administrative

Department

7.3 9.4 8.3 8.4

2. Departmental

Enterprises

3.2 4.4 4.0 3.8

3. Non Departmental

Enterprises

9.2 13.2 14.4 14.0

Gross Domestic capital

Formation 41.4 44.1 35.9 29.0

1. Administrative

Department

10.6 10.5 8.1 7.1

2. Departmental

Enterprises

11.4 9.4 7.5 6.9

3. Non Departmental

Enterprises

19.3 24.2 20.3 15.0

Gross Domestic Saving 16.2 10.4 7.1 8.9

1. Administrative

Department

8.9 -7.7 -10.2 -8.0

2. Departmental

Enterprises

0.9 3.0 4.0 3.7

3. Non Departmental

Enterprises

6.4 15.1 13.2 13.2


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The Indian rupee, which was on a par with the American currency at the time of

Independence in 1947, has depreciated by a little more than 65 times against the greenback in

the past 66 years.

The rupee touched its historic record low of below 65 (intraday) against the dollar last week

on sluggish local stocks and continued dollar demand from importers.

The currency has witnessed huge volatility in the past two years. This volatility became

severe in the past three months affecting major macro-economic data, including growth,

inflation, trade and investment.

Managing volatility in the currency markets has become a big challenge for policymakers.

Despite of a series of measures taken by the central bank as well as the government to curb

the volatility in the markets, the rupee continues to depreciate.

The trend is unlikely to reverse any time soon.

This rupee depreciation is badly hurting the Indian economy. It is fuelling inflation and has

hurt economic growth.

JOURNEY SINCE INDEPENDENCE

The Indian currency has witnessed a slippery journey since Independence. Many geopolitical

and economic developments have affected its movement in the last 66 years.

When India got freedom on August 15, 1947, the value of the rupee was on a par with the

American dollar. There were no foreign borrowings on India's balance sheet.

Reason of devaluation of Indian Rupee in comparison

to Dollar


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To finance welfare and development activities, especially with the introduction of the Five-

Year Plan in 1951, the government started external borrowings. This required the devaluation

of the rupee.

After independence, India had chosen to adopt a fixed rate currency regime. The rupee was

pegged at 4.79 against a dollar between 1948 and 1966.

Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965;

resulted in a huge deficit on India's budget, forcing the government to devalue the currency to

7.57 against the dollar.

The rupee's link with the British currency was broken in 1971 and it was linked directly to the

US dollar.

In 1975, value of the Indian rupee was pegged at 8.39 against a dollar.

In 1985, it was further devalued to 12 against a dollar.

In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its

currency. The country was in the grip of high inflation, low growth and the foreign reserves

were not even worth to meet three weeks of imports. Under these situations, the currency was

devalued to 17.90 against a dollar.

1993 was very important. This year currency was let free to flow with the market sentiments.

The exchange rate was freed to be determined by the market, with provisions of intervention

by the central bank under the situation of extreme volatility. This year, the currency was

devalued to 31.37 against a dollar. The rupee traded in the range of 40-50 between 2000 and

2010.

It was mostly at around 45 against a dollar. It touched a high of 39 in 2007.

The Indian currency has gradually depreciated since the global 2008 economic crisis.

Liberalising the currency regime led to a sharp jump in foreign investment inflows and

boosted the economic growth

PRESENT SCENARIO

In the week gone by, the Indian rupee extended falls to a new low of 65.50 to the dollar as

heavy demand from importers along with weak domestic equities continued to weigh on

sentiment.

Weakness was also seen after Federal Reserve minutes hinted that the United States was on

course to begin tapering stimulus as early as next month.

Moreover, continuing its slide, the rupee also made all time low against British pound and

breached the 102-mark on local bourses.


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With this, British pound has become the first major foreign currency to cross 100 levels

against rupee.

However, steps taken by the RBI and the government to curb volatility in the exchange rate

have had little effect so far.

The government is now exploring structural measures to narrow the current account deficit,

Finance Minister P Chidambaram said, adding that there is no plan to introduce capital

controls.

The Indian Rupee has depreciated to an all-time low with respect to the US Dollar. On 28th

August 2013, the Indian rupee had gone down to 68.825 against the Dollar but the situation

was somewhat revived by the Reserve Bank of India that decided to open a special window

for helping state owned oil companies – Indian Oil Corp Ltd., Bharat Petroleum Corp and

Hindustan Petroleum Corp.

The beneficiaries will be able to buy dollars through this window till further notice is

provided. These companies, together, require about 8.5 billion dollars every month to import

oil and it is expected that this will help them meet the requirements. This has had an

immediate effect as is evident from the fact that the INR has started at 67 against the USD at

the early proceedings in the Interbank Foreign Exchange Market. The question, however, is

why this is happening.

There are several reasons that can be enumerated in such a scenario:

Dollar on a Horse Ride

The main reason causing the rupee to fall is the immense strength of the Dollar Index, which

has touched its three-year high level of 84.30. The record setting performance of US equities

and the improvement in the labor market has made Americans more optimistic about the

outlook for the US economy, thereby spurring greater hopes of QE tapering.

The US dollar is looking like gold these days because the Federal Reserve is in a very

different position versus the ECB, BoJ and the RBA. The Federal Reserve is talking about

tapering asset purchases at a time when European officials are considering more aggressive

monetary easing measures such as negative deposit rates.

The fact that the Euro zone is in a recession is just another reason why investors are snapping

up dollars. The monetary policies of the ECB and the BoJ pose a threat to the value of the

EUR and JPY whereas the next move by the Fed should support the dollar. This divergence is

bringing the dollar more into the limelight as a 'safe haven'. Capital preservation is just as

important as capital appreciation in the present times and for this reason the direction of the

monetary policy and the consequent implications for the currency has become very

important.

Recession in the Euro Zone Is Back On the Table


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The rupee is also feeling the pinch of the recession in the Euro zone. The euro, which was

seen holding the key level of 1.30, has dropped lower to 1.28 levels on the back of

deterioration in the local economic data. For the past month, investors have been selling

Euros and buying dollars on the premise that the Euro zone is in a recession; and the ECB is

considering more stimulus at a time when the Fed is considering less. If the data shows a

deeper contraction in Europe and Mr. Draghi reminds investors that the Central bank is

watching the economic data carefully to see if additional action is necessary, the EUR/USD

could extend its losses.

Owing to the uncertainty prevailing in Europe and the slump in the international markets,

investors prefer to stay away from risky investments. The credit rating agency's downgrade of

India to BBB- with a negative outlook â€” the last of the investment grade â€” has not helped

its cause. Any outward flow of currency or a decrease in investments will put a downward

pressure on the rupee exchange rate. This global uncertainty has adversely impacted the

domestic factors and could lead to a further depreciation of the rupee.

Bleak Fundamental Outlook

The country with high exports will be happier with a depreciating currency; the same does

not apply for India. India, on the other hand, does not enjoy this luxury, mainly because of

increasing demand for oil, which constitutes a major portion of its import basket. The fall of

the oil price to US$90/barrel has helped India to fight the depreciating rupee up to some

extent but at the same time the Euro zone, one of India's major trading partners is under a

severe economic crisis. This has significantly impacted Indian exports because of reduced

demand. Thus India continues to record a current account deficit of around 4.3%, depleting

its Forex reserves in the bargain and thus depreciating the rupee.

From time to time, the macro-economic policy has to accord greater emphasis to one segment

or the other. At the present time the worry lines are multiple â€” high consumer price

inflation, a large fiscal deficit, poor growth, flat industrial production and a balance of

payments current account deficit.


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No Balance at Balance Of Payments

The Government of India was relaxed with respect to the CAD issue as there was a sharp fall

in the commodity prices (of gold and crude oil). A large part of the import bill is driven by

other resources as well. The facts show that fertilizer imports surged by 30% in the last two

years and coal imports have doubled. Therefore, the problem of CAD continues to persist.

The Indian economy needs to debug its structural reforms and the gap between the imports

and exports.

With the reduction in exports and an increase in imports, on one side the current account

deficit has increased while on the other, the fiscal deficit is also expected to be above the

comfort levels due to increased subsidy. A slowdown in the global economy has adversely

reduced the demand for Indian goods. The falling commodity prices on the other hand have

increased imports resulting in an imbalance between payments and receipts.

Basic law of economics

As per the rudimentary laws of economics if the demand for USD in India exceeds its supply

then its worth will go up and that of the INR will come down in that respect. It may be that

importers are the major entities who are in need of the dollar for making their payments.

Another possibility here could be that the Foreign Institutional Investors are withdrawing

their investments in the country and taking them elsewhere.

This can create a shortfall in supply of the dollar in India. In fact, of late, the FIIs have been

heading to greener pastures like Singapore owing to the greater operational efficiency and


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lesser bureaucratic problems that have unsettled the Indian business fraternity and hampered

its overall economic growth.

This situation can only be addressed by exporters who can bring in dollars in the system. If

somehow the FIIs can be wooed back, then this imbalance can also be addressed to a certain

extent.

Price of crude oil

The worth of crude oil has been a major bane for India since it has to bring in the majority of

its requirement from outside the country. The demand for oil in India has been going up

every year and this has led to the present situation. All over the world, the price of oil is given

in dollars. This implies that as and when the demand for oil increases in India or there is an

increase in oil prices in the global market, there also arises a need for more dollars to pay the

suppliers. This also results in a situation where the worth of the INR decreases significantly

in comparison to the dollar.

Performance of dollar with respect to other currencies

The central banks across Japan and countries in the Eurozone have been bringing out a lot of

money and this has meant that both Yen and Euro have lost their value. Compared to this the

US Federal Reserve is giving hints that it will end the fiscal stimulus so that the dollar

becomes stronger with respect to other currencies such as the Indian Rupee at least for the

time being. Till now in 2013, the US dollar index has become stronger by 1.91%.

In an interview with the Economic Times, the CO-CIO of Birla SunLife Mutual Fund,

Mahesh Patil has stated that the increase in worth of USD is the major reason behind the

depreciation of the INR. The Federal Reserve’s decision to reduce its Quantitative Easing has

also contributed to the present situation as every asset class has been affected by the decision.

Volatility in the equity market

The equity markets in India have been volatile for a certain period of time. This has put the

FIIs into a dilemma as to whether they should be investing in India or not. In recent times

their investments have touched an unprecedented level and so if they pull out then the inflow

will go down as well.

As per a report in Business Today, the international investors in India have withdrawn to the

tune of INR 44,162 crore during June 2013 and this is a record amount. This has also created

a current account deficit (CAD) that is only increasing, thus contributing significantly to the

depreciation of the INR.


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Effects of equity market problems on investors

Now if the INR becomes weak then it will affect the investors who are putting their money in

India. For the first time ever since 2012 the FIIs have been reduced to net sellers of debt

based securities. The main reason behind this is the present state of the INR. The expenses

incurred in hedging the unpredictable INR are reducing the yield differential that is the main

area of profit for these investors.

India, in fact, is not the only emerging market where the currency has taken a hit. The

situation is similar in countries like Indonesia, Brazil and Thailand. The bond markets in

several countries like India are also taking a hit as the FIIs are withdrawing en masse. The

exchange traded funds are also being redeemed as the global business fraternity is looking to

cut down on risks.

Poor current account deficit

One of the main reasons behind the Indian government’s inability to arrest the fall of the

national currency is the critical current account deficit. In the 2012-13 fiscal India’s CAD

was measured at 4.8 per cent of the GDP. The government has been unable to come up with

any new destinations for exporting its products and this has also hampered the growth in this

sector. There are other crucial reasons here like the lack of one window for clearance

purposes and procedural delays. Even areas where India has traditionally done well on this

front have fared badly this time around.

Withdrawal of investors

Recently ArcelorMittal and Posco decided to pull out from their projects in India. Posco did

not go ahead with a steel plant worth INR 30,000 crore that was supposed to be built in

Karnataka and ArcelorMittal withdrew from setting up a steel plant in Odisha that was

supposed to cost around 52,000 crore. There were lot of delays and problems related to

acquiring land for the project. In fact in 2012-13 the Indian companies have spent more

outside India compared to FIIs in India.

Downgrading of Indian stocks

Goldman Sachs, one of the leading banks in the world, has rated Indian stocks as being

underweight. It has also asked investors to be careful given the concerns surrounding the

recovery of the growth of Indian economy.

Condition of import bill


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India’s import bill has been going up of late and most of this can be attributed to gold. This

has also hampered India’s efforts to arrest the slide of the INR. Gold alone takes up more

than 10 per cent of India’s import bill – in April 2013, 141 tons of gold were imported and it

went up to 162 during May. The government took some measures that restricted gold imports

to 31 tons during June but once again in the first 25 days in July the imports went up to 45

tons.

Contraction of Indian economy

The various important sectors of Indian economy such as manufacturing, mining and

agriculture have seen poor growth in 2013 and this has made them less appealing

propositions for the investors. During June 2013, the aggregate industrial production in India

reduced by 2.2 per cent and in July 2013 the RBI predicted that in the present fiscal there

would be a growth of 5.5% which was lesser than its previous prediction of 5.7%.

Future prospects of INR

In spite of all that has been said above it will be foolish to write off the INR completely and

say it shall not rise from the mire. Experts are saying that the government needs to take some

short and medium term steps that will help the economy get back on its feet yet again. It is

only through continued efforts that the Indian government will be able to retrieve the

situation. However, it will take a Herculean effort to help the INR get back to the 55 mark.

Year `Exchange rate (INR per USD)

1948-1966 4.79

1966 7.50

1975 8.39

1980 7.86

1985 12.38

1990 17.01

1995 32.427

2000 43.50

2005 Jan 43.47

2006 Jan 45.19

2007 Jan 39.42

2008 Oct 48.88

2009 Oct 46.37

2010 Jan 46.21

2011 April 44.17

2011 Sep 48.24

2011 Nov 55.3950

2012 June 57.15

2013 May 54.73

2013 Aug 67


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When India secured independence from the British Empire in 1947, the economy, which had

just taken a beating from the Second World War, had to once again withstand the

repercussions of Indo-Pak partition. India had to deal with large scale refugee camps,

poverty, illiteracy, health hazards and many social and economic problems.

Keeping these problems in mind, the new government headed by Pandit Jawaharlal Nehru

adopted a socialistic economy for India. This saw the birth of large scale Public Sector

Undertakings (PSUs) foraying into capital intensive businesses such as transportation, road,

mining, steel, heavy electrical, among others that are crucial for economic growth. As these

businesses require large scale capital investment and would take a long time to break even, no

private investor would willingly invest into such businesses. So, there is no denying the fact

that the government of India took the right steps by laying a strong foundation for Indian

economy. But for these public sector investments, India would be no better than Pakistan or

Bangladesh as of today.

Today, we find many successful people criticizing the protectionist policies adopted by the

political leaders for many decades since independence. But, they forget the notion that like

any child needing hand holding during infancy, the new India full of poor, penniless people,

most needed such hand holding till they could start walking. The five year plans and the

support programs for the socially and economically weaker sections increased the per capita

income, literacy levels, and living standards of millions of Indians. During the 1980s, the

government planted the seeds of economic revolution by realizing the importance of modern

technology, market competition, and private entrepreneurship.

Besides the PSUs and the socio-economic programs, another good thing that happened to

India was the opening up of the economy also known as Liberalization, Globalization, and

Conclusion


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Privatization (LPG) in the 1990s as a result of the World Trade Organization (WTO)

agreements. Indian industry that was used to several years of protectionism initially protested

against LPG underestimating the industry's capability to compete with developed nations.

However, in few years, Indian industry proved itself wrong. This is evident from the statistics

available to us.

The GDP of India has grown from a merge 93.7 billion rupees in 1950 to about 410006.4

billion rupees in 2006. Right from 2003, India is growing at a rate more than 8 per cent.

Today, India is recognized for its quality of high technology software services capability

throughout the world. In 2005-06, the software industry grew by 33 per cent and the BPO

industry grew by 37 per cent. India has good foreign exchange reserves and fiscal deficit is

under control. BSE Sensex, which is the barometer of Indian economy, is soaring at about

15,000 points a growth of about 700 per cent from 2002 to 2007. Foreign Institutional

Investors (FIIs) are consistently pumping in several billion dollars into the Indian equity

market. Foreign Direct Investment (FDI) is a record high in India after the economy was

opened up during 1990s.

All these factors prove the strength and the confidence the entire world has in the Indian

economy. Multinational financial firms such as Goldman Sachs have forecasted that India

will be one of the developed nations by 2040. Research in economics has proved that one of

the traits that help a nation or a community prosper is trust. Indian government under the able

leadership of Nehru trusted the socio-economic model, and invested heavily in PSUs and

socio-economic policies despite being aware that the benefits are not immediate. And, during

1990s, the governmental policies toward opening up of the Indian economy to foreign

competition, allowing FDI in select sectors, privatizing some of the PSUs, among other large

scale measures led to India becoming one of the emerging economic giants in the world.


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Declaration

I, Divakar Kumar, hereby declare that the above project has been completed by

me. All the data, facts and figures used in this project are true to the best of my

knowledge. I take the sole responsibility of the above made project. Errors, if any

are regretted by me. Constructive suggestions and feedback is whole heartedly

welcomed.

Regards

Divakar Kumar

London School of Economics and Political Sciences (LSE)

Address for correspondence:

Divakar Kumar

S/O Ram Naresh Singh

Village & Post- Mano (Naughara Tola)

Lakhisarai

Bihar-811310

Role of GDP in developing India

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