A macroeconomic analysis of Indian economy in te late 1990s

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    A macroeconomic analysis of Indian economy in te late 1990s - Presentation Transcript

    1. The macroeconomic analysis of India during the late 1990s using the aggregate demand and supply model
    2. Historical Background
      • Before 1991 – Mixed Economy
        • Public – Private Co-existence
        • Private controlled by quota permit system
        • Administered Price Regime / High Subsidies
        • High Tax Rates (Direct – 50 to 60%; Indirect – 30 to 300%)
        • High Interest Rates
        • Fixed Exchange Rate
        • Nationalized Banks – High CRR
        • Developing Regulatory Institutions – Money, Capital and Financial Markets
        • Rigid Labour Laws
    3. Historical Background
      • 1991
        • Forex Reserves dropped sharply
        • BOP Crisis
        • Political Instability
      • Action Taken (1991-1995)
        • Economic Liberalization – quota system abolished
        • Currency Devaluation – fixed to floating (current account)
        • Administered Prices withdrawn ( large no. of goods)
        • FDI permitted (in certain sectors like steel, telecom, energy)
        • Improving Regulatory Institutions (RBI, SEBI )
        • Process for setting up TRAI, IRDA; overhaul DCA
    4. Analysis for FY 1995-96, 1997-98 & 1999-2000 1.58 1.47 1.40 1.30 1.28 1.13 1.067 1.17 1.18 1.30 1.31 1.45 output price
    5. Theoretical Framework
      • Recessionary gap can be reduced by increasing Aggregate Supply and Aggregate Demand
      • Increasing aggregate demand :
      • Fiscal Policy
        • Decrease tax rate (  ) leading to increased propensity to consume (  )
        • Increase  (=G+I+C+NX) through fiscal expansion i.e.
          • Increase Government Expenditure (G)
      • Monetary and Exchange Rate Policy
        • Increase Money Supply by decreasing Interest rate, CRR or bond market operations
        • Exchange Rate intervention can increase Net Exports (NX) due to local currency devaluation
    6. Theoretical Framework
      • Increasing aggregate supply
      • Price Policy
      • Wage Policy
      • Labor Market Reforms
      • Strengthening of institutions dealing with
      • Law and order, financial institutions, public sector
      • Increase expenditure on Education, Technology, Health
      • Environmental Policy as natural resources are factors determining the output in economy
    7. Analysis for FY 1995-1996 Policy Recommendations
      • Increase the Aggregate Demand through
      • Fiscal measures
        • Reduction in tax rates - Direct and Indirect
        • Simplification of Tax Regime
        • Increase in Government Expenditure
        • Infrastructure development
      • Monetary Policy
        • Increase in money supply
        • Necessary Exchange rate adjustments
    8. Analysis for FY 1995-1996 Policy Recommendations
      • Increase the Aggregate Supply
        • Strengthen the institutions
        • Increased expenditure on health, education, technology
        • monitor Environmental degradation
        • Alterations in Administered Price Regime
          • Revamp and improve Public Distribution System
          • Reduce Subsidies
    9. Analysis for FY 1995-1996 Policies Adopted by Government
      • Fiscal
          • Tax rates reduced
            • Direct Taxes
              • Corporate Tax – from 50% to 40%
              • Personal Income Tax – from 40% to 30%
            • Indirect Taxes
              • Peak rate of customs duty –reduced to 50%
              • Peak rate of excise – reduced to 50%
              • Simplification and rationalization of indirect tax structure
              • Excise – rates to 4 from 11
    10. Analysis for FY 1995-1996 Policies Adopted by Government
        • Fiscal Contd.
          • Government Expenditure-
          • increased from Rs1460b to Rs1720b.
        • Monetary
          • Interest rate – 12 to 10.5%
          • CRR - 12.5 to 10.5%
    11. Analysis for FY 1995-1996 Policies Adopted by Government
        • Institution strengthening: TRAI and IRDA
        • Disinvestment Commission
        • Human Capital: Increased expenditure on
          • education from Rs. 98 b to 122.3 b
          • Health & Family Welfare from Rs 39.3 b to 45.6 b
          • Technology: Increased spending on ICT research and development
        • Environmental Capital:Control on CO2 and BOD emissions
    12. Analysis for FY 1995-1996 Outcome
      • Economic growth at the rate of 7.5% (GDP)
      • Savings reduced from 25.1% to 23.2% of GDP
      • Investments reduced from 26.9% to 24.5% of GDP
      • Credit to commercial sector reduced
      • IIP decelerated, trade deficit enlarged
      • MPC reduced from 0.8 to 0.74
      • Annual growth rate of goods and services turned negative from 6.3% to –2.34% which contributed to decelerated GDP growth
      • Inflation declined to 4.6%
      • Unemployment increased marginally
    13. Analysis for FY 1995-1996 Reasons for Increase in Output Gap
      • General Elections
      • Lower investor confidence due to political uncertainty
      • Tax collection targets - not met due to inefficiencies in administration
      • Rise in Oil Prices due to lower domestic production
      • Poor Infrastructure
      • Sluggish Exports
    14. Analysis for FY 1997-1998 Policy Recommendations
      • The recessionary gap has increased, GDP growth rate and IIP has declined, fiscal deficit has increased and GDS, GDI and trade deficit has stagnated which indicates economy slowdown
      • Actions for increasing Aggregate Demand through fiscal & monetary policy ( same pattern as 95-96)
      • Actions for increasing Aggregate Supply - human capital, technology, environmental capital
    15. Analysis for FY 1997-1998 Policies Adopted by Government
      • Increase the Aggregate Demand
      • Fiscal
          • Tax rates reduced
            • Direct Taxes
              • Corporate Tax – 35%
              • Personal Income Tax – 30%
            • Indirect Taxes
              • Peak rate of customs duty – reduced to 40%
              • Peak rate of excise – reduced to 18%
          • Simplification and rationalization of indirect tax
          • Launched Black Money unearthing scheme VDIS’97, mopped up Rs 105 b
    16. Analysis for FY 1997-1998 Policies Adopted by Government
      • Increase the Aggregate Demand
        • Fiscal Contd.
          • Government Expenditure- increased from Rs 2140b to 2510b
          • National Highway Project launched – Golden Quadrilateral
        • Monetary
          • Interest rate from 8 % to 7 %
          • CRR – 10% to 9%
    17. Analysis for FY 1997-1998 Policies Adopted by Government
      • Increase the Aggregate Supply
        • TRAI set up
        • Disinvestment of PSU’s – Raised Rs. 50 b
        • Increased expenditure on
          • education from Rs. 128.7 b to 151 b
          • Health & Family welfare from Rs 49.1b to 59b
          • Police from Rs. 385.5 b to Rs. 490.3 b
        • spectacular increase in the expenditure on ICT since 1998
        • Power sector - increased infusion of technology
    18. Analysis for FY 1997-1998 Outcome
      • Economic growth picked up to the rate of 6.5% (GDP)
      • Fiscal Deficit reduced from 6.34% to 5.29%
      • Savings reduced 21.7% of GDP (due to interest rate reduction)
      • Investments reduced to 22.7% of GDP
      • IIP decelerated to 4.4%, trade deficit reduced
      • MPC reduced to 0.96
      • Inflation increased to 5.95%
      • Unemployment decreased marginally
    19. Analysis for FY 1997-1998 Reasons for Increase in Output Gap
      • The East Asian crisis
      • Domestic uncertainty arising from non-economic factors
      • Weather related aberrations (drought/floods)affected agricultural production  
      • Post-Pokhran II sanctions
      • Government wage and pension bill rose after 5 th Pay Commission Report
      • UTI Scam breaks out shaking Investor confidence
    20. Analysis for FY 1999-2000 Policy Recommendations
      • Increase the Aggregate Demand
      • Fiscal
        • No further reduction in direct tax rates as price level low
        • Tax reduction in Customs
        • Widen tax base – Income tax and Service tax
        • Increase in Government Expenditure
      • Monetary
        • Increase in money supply/ reduction in interest rate
        • Reduction in CRR
    21. Analysis for FY 1999-2000 Policy Recommendations
      • Increase the Aggregate Supply
        • Alterations in Administered Price Regime
          • Revamp and improve Public Distribution System
          • Reduce Subsidies on Oil, Kerosene. LPG Cooking Gas & Fertilizer
        • Increase flexibility in Labor Market; Control Trade Unionism
        • Accelerate Deregulation and Disinvestment of - PSUs
        • FDI incentives in new sectors
        • Increased expenditure on health, education and law & order
    22. Analysis for FY 1999-2000 Policies Adopted by Government
      • Increase the Aggregate Demand
      • Fiscal
          • Tax rates reduced only in Indirect Taxes
              • Peak rate of excise – reduced to 16%
          • Simplification and rationalization of tax structure
          • New Services brought under service tax net
          • Government Expenditure- increased from Rs 2640b to 2840b
      • Monetary
          • Interest rate reduced from 7 to 6.5 %
          • CRR – reduced
    23. Analysis for FY 1999-2000 Policies Adopted by Government
      • Increase the Aggregate Supply
        • Disinvestment of PSUs
        • Increased expenditure on
          • Education from Rs. 238.9 b to 255.4 b
          • Health & Family Welfare from Rs 90.6b to 94.3 b
          • Police from Rs. 636.1 b to Rs. 683.1 b
        • Increase in the expenditure on ICT
        • Good Governance
    24. Analysis for FY 1999-2000 Outcome
      • Economic growth dropped to the rate of 4.4% (GDP)
      • Savings increased 23.4% of GDP
      • Investments increased to 24% of GDP.
      • Credit to commercial sector increased
      • Trade deficit reduced
      • Inflation increased to 7%.
    25. Analysis for FY 1999-2000 Reasons for Increase in Output Gap
      • Substantial increase in Oil Prices
      • Dot Com bubble bust - Collapse of stock market
      • Erratic monsoon affected agriculture
      • General Elections, Kargil War, Gujarat Earthquake, Rising Wage &Pension Bill
    26. GDP Growth Rate ( in %)
    27. Fiscal Deficit ( as % of GDP)
    28. Trends in Inflation & Unemployment
    29. G.D.Savings/ Investments (as % of GDP)
    30. FOREX Reserves
    31. Expenditure on Education ( as % of GDP)
    32. Expenditure on Health ( as % of GDP)
    33. Expenditure on ICT ( as % of GDP)
    34. Limitations
      • Y* is based on unemployment rate which means that output gap can never be bridged since natural rate of unemployment will always be present.
    35. CONCLUSIONS
      • Recessionary Output gap shows increasing trend in absolute terms
      • The gap as a percentage of the GDP is constant
      • The suggested and adopted policy measures have been successful in increasing the GDP of the economy
      • Many domestic and world events affect the outcome
      • Besides fiscal and monetary policies, role of institutions, labor, price, education, technology, environment etc affect the output
      • THANK YOU
      • ________________________________________________________
      • Sources: http://indianbudget.nic.in
      • www.frost.com
      • www.finmin.nic.in

    + miniverma1miniverma1, 4 years ago

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