India macroeconomy

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  • 1. INDIA
  • 2. IN A world economy as troubled as todays, news that Indias growth rate has fallen to5.3% may not seem important. But the rate is the lowest in seven years, and thesputtering of Indias economic miracle carries social costs that could surpass the pain inthe euro zone. The near double-digit pace of growth that India enjoyed in 2004-08, ifsustained, promised to lift hundreds of millions of Indians out of poverty—and quickly.Jobs would be created for all the young people who will reach working age in the comingdecades, one of the biggest, and potentially scariest, demographic bulges the world hasseen. But now, after a slump in the currency, a drying up of private investment andthose GDP figures, the miracle feels like a mirage.Below is the analysis of the Macro economic factors:- 1. National Income:From 2011, India is facing a stiff challenge between managing the growth and stabilizingthe prices.The Indian economy has grown at a rate of 6.9% in 2011-2012, after having grownabove 8% for the previous two years and now it is still declining.This decline is majorly due to the turmoil in Euro zone and the uncertainty in USmarkets.Indian economy is expected to grow at 7.6 % for the fiscal 2012-2013. However, leadingfinancial organisations and economists expects still a slower growth.Services sector growth is also downgraded because of the lack of demand.Growth of the industry sectors seems to be very less due to high interest rates.Policy paralysis is another factor, finally we can conclude that the growth of NationalIncome is a seriously concern and it is dipping down.
  • 3. 2. Policy Initiatives: a) Fiscal PolicyFiscal policy deals with the revenue [in terms of taxation and profits from public sectorunits] and expenditure decisions of the government. Indian fiscal policy has beenimpacted by the economic downturn in 2008-2009. However, there was slight revival ineconomic activity in India in 2010-2011, wherein the economy grew at 8.4%. Thisrevival was short-lived and economic growth spiralled down due to Euro zone crisis andexogenous shock like rise in crude oil prices.Rise in crude oil prices led to oil marketing companies [OMCs] to peg their prices atinternational levels which led to a rise in the price of petroleum products. Thegovernment of India tried to lower the tax on these products to reduce the pass throughof international prices to retail and to curb the already high levels of inflation. This taxreduction led to losses to the government.The government increased food subsidy, fertiliser subsidy and input prices to farmerswere kept low keeping in mind the already high levels of inflation persistent in Indianeconomy. These subsidies added to further 1.1% of GDP slippage.The Indian economy showed slowdown in growth from 8.4% in 2010-2011 to almost6.9% in 2011-2012. This economic slowdown impacted the tax collection and led to ashortfall of Rs. 32000 crore during 2011-2012.We are seeing a constant decline in the tax to GDP ratio over a period of time andgovernment is extending subsidies which are no longer effective for economic growth.Taking all the above issues into considerations, fiscal policy of India for 2012-2013 isfocussed on reducing the fiscal deficit and to aid revival of economic growth. The fall ininternational oil prices also helped in containing the inflation to some extent.The government plans to reduce the subsidies to be provided to 1.75% of GDP andprovide a maximum of 2% of GDP subsidy for food.The government in an attempt to cover the shortage of taxes has also planned toincrease indirect taxes while reduce direct taxes. However, in India only about 3% ofpeople pay direct taxes whereas indirect taxes have to be borne by everyone.The government has also introduced amendments to FRBM [Fiscal responsibility andbudget management Act] in order to bring the fiscal deficit to a more sustainable leveland to concentrate government expenditure on priority sectors like health, education,irrigation with added focus on infrastructure related activities and investments.
  • 4. 3. INDUSTRY a) FDIFDI in India declined sharply for the second month in a row in May with inflows down to$1.32 bn (71.6% down) from $4.66 bn a year-ago, indicating slowing global economyimpacts.Foreign investors are reluctant due to adverse tax laws and economic reforms. Lack offoreign funds inflow also puts the rupee value into question.This contraction is attributed to global and domestic economic problems. Global investorconfidence must be restored by government reforms (such as allowing FDI in multibrand retail, allow foreign airlines to buy stake in domestic carriers etc).Contraction in FDI will put pressure on balance of payments and in turn impact therupee. If commodity and oil prices increase, and rupee gets weaker, inflation will becomeworrisome.Sector wise distribution of FDI inflows:As in April 2012, services sector involved 19 per cent of the total FDI equity inflow intoIndia, while Telecommunications attracted 7 per cent share. Construction activities werealso at 7 per cent of total inflows followed by Computer software and hardware (7%) andHousing and real estate sectors (6%).
  • 5. Country wise distribution of FDI inflows:April 2012, Mauritius was the top investing country for India with 38 per cent of the totalinflows. Singapore was second with 10 per cent share, U.K stood third with 9 per centshare. Japan and U.S.A were on fourth and fifth places with 7 per cent and 6 per centshares respectively.
  • 6. SERVICES
  • 7. Around 60% of India’s GDP and growth is attributed towards the services sector. Thissector is also a significant employment generator.
  • 8. The service sector has been growing at the fastest pace in 3 months, in May 2012, asthe business outlook seems optimistic to firms, as new orders came in faster andemployment increased. The HSBC Business Activity Index for services sector increasedfrom 52.8 in April to 54.7 in May.Due to robust growth in the services sector (9.4%), India was shielded from globalrecession to a large extent.State wise performance in services sectors show highest growth in the north easternstates of Arunachal Pradesh (34.9%), Sikkim (30.1%), followed by Goa (20.1%), Bihar(16.6%).Maharashtra, Kerala, Tamil Nadu and Mizoram also have a higher-than-national-averagegrowth rate. 4. Sectoral Growth a) AgricultureAgriculture including allied activities accounted for 13.9 per cent of GDP at 2004-5 pricesin 2011-12 as compared to 14.5 per cent in 2010-11. In terms of composition, out of atotal share of 14.5 per cent in GDP in 2010-11, agriculture alone accounted for 12.3 percent, followed by forestry and logging at 1.4 per cent, and fishing at 0.7 per cent. Theaverage annual growth in agriculture and allied sectors realized during the Eleventh PlanPeriod was 3.3 per cent against the targeted growth rate of 4 per cent. The sectorrecorded slightly lower average growth than targeted in the Eleventh Plan period due tosevere drought experienced in most parts of the country during 2009-10 anddrought/deficient rainfall in some states, namely Bihar, Jharkhand, eastern UP, and WestBengal in 2010-11. Rainfall continues to influence crop production and productivity in asubstantial way. Notwithstanding the declining trend in agriculture’s share in GDP, theimportance of the sector to the economy is best understood with reference to its share inemployment and in terms of its criticality for macroeconomic stability. Hence, growth inagriculture and allied sectors remains an important objective and a ‘necessary condition’for inclusive growth. Agriculture, forestry, fishing, minin g, quarrying 10 5 0 -5 -10
  • 9. b) Industry & InfrastructureIndustrial growth, measured in terms of the index of industrial production (IIP), showsfluctuating trends. Growth had reached 15.5 per cent in 2007-8 and then starteddecelerating. Initial deceleration in industrial growth was largely on account of the globaleconomic meltdown. There was, however, a recovery from 2.5 per cent in 2008-9 to 5.3per centin 2009-10 and 8.2 per cent in 2010-11. Overall growth during April-December2011 reached 3.6 per cent compared to 8.3 per cent in the corresponding period of theprevious year. Growth moderated in the manufacturing sector, from 9.0 per cent inApril-December 2010 to 3.9 per cent in April-December 2011.Within the manufacturing sector, Production in eight core industries grew by 0.5 per centin January 2012 as compared to 6.4 per cent in January 2012. Cumulative growth inApril- January 2011-12 has been 4.1 per cent as compared to 5.7 per cent during thecorresponding period of the previous year. the cumulative growth of coal during thecurrent year so far continues to be negative, there has been an increase in production inthe last three months. Manufacturing, construction, elect ricity, gas, water supply 15 10 5 0 -5 5. Price wage Productivity a) InflationInflation happens to be a determinant in the functioning of any economy. There are twobasis system of measuring inflation present today. The Wholesale Price Index is used inIndia while several other developed countries adopt the Consumer price index tocalculate inflation.The major driver of inflation during the current financial year is food inflation comprisingof milk, eggs, meat, fish and edible oils. Within food articles, the major areas of concernhave shifted from food grains to other commodities.In comparison with last year when cereals, vegetables, and sugar were the maincontributors to food inflation, 2011-12 witnessed higher contribution from manufacturedfood products especially edible oils due to higher global prices of soya bean oil, palm oil,
  • 10. etc. Indias edible oil requirement is estimated at 16-17 million tonnes, about 50 percent of which is met through imports of crude palm oil, sunflower oil, soya bean oil, andRefined, Bleached and Deodorised (RBD) palmolein. As a result, a spurt in global priceshas led to higher domestic prices of these commodities.Although supply shocks can trigger sudden and sharp inflationary pressures, thepressures diminish when supplies revive. Persistence in inflation stemmed, instead, fromgovernment policies that stimulated consumption demand by increasing wages andsalaries but did not do enough to remove supply-side bottlenecks. Under fiscal policiesthat boosted consumption, the supply shocks had a more lasting effect, reinforcinginflationary pressures. All the categories of the WPI contributed to inflationary pressures.However, food inflation was the most stubborn. Inflation in India (based on WPI)2015 Primary articles10 Fuel & power Manufactured products 5 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 -5 6. Balance Of PaymentHowever much Indias policymakers may want the external sector to behave the waythey want it to, it is clear that the sectors patterns of behaviour are no longer simply theoutcome of domestic policies but of the whims and caprices of international trade andfinance movements. That seems to be the case today, more than ever before, when we consider Indiasbalance of payments position in the light of the fluctuating fortunes in Indias mostimportant destinations and sources of trade and capital respectively. Domestic policies work most effectively when the external environment is by and largefavourable to trade. When the environment encourages the free flow of goods andservices then for policymakers to take a more laid back position may prevent exportersfrom exploiting the advantages available in the situation. That had been the case whenIndias capital controls and forex restrictions had not allowed exporters the elbow roomneeded to evolve strategies for exports. Then it changed for the better and India wasable to ride the horse to its advantage because its policies segued into the environmentfor trade The end-of-century turnaround in Indias exports and balance of payments camebecause of services exports and specifically IT exports.
  • 11. Indias telecommunication policy changes, that ushered in the most effective changes incommunications ever, created the grounds for Indias growing IT sector to becomeglobal. That event, with the top five Indian companies becoming known names in ITthroughout the world, had wide repercussions on the overall organised economy,boosting demand for goods and services of other sectors such as manufacturing. This inturn boosted capacities, encouraging a re-engineering of extant practices to align withglobal ones.