2. IN A world economy as troubled as today's, news that India's growth rate has fallen to
5.3% may not seem important. But the rate is the lowest in seven years, and the
sputtering of India's economic miracle carries social costs that could surpass the pain in
the euro zone. The near double-digit pace of growth that India enjoyed in 2004-08, if
sustained, 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 coming
decades, one of the biggest, and potentially scariest, demographic bulges the world has
seen. But now, after a slump in the currency, a drying up of private investment and
those 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 stabilizing
the prices.
The Indian economy has grown at a rate of 6.9% in 2011-2012, after having grown
above 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 US
markets.
Indian economy is expected to grow at 7.6 % for the fiscal 2012-2013. However, leading
financial 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 National
Income is a seriously concern and it is dipping down.
3. 2. Policy Initiatives:
a) Fiscal Policy
Fiscal policy deals with the revenue [in terms of taxation and profits from public sector
units] and expenditure decisions of the government. Indian fiscal policy has been
impacted by the economic downturn in 2008-2009. However, there was slight revival in
economic activity in India in 2010-2011, wherein the economy grew at 8.4%. This
revival was short-lived and economic growth spiralled down due to Euro zone crisis and
exogenous shock like rise in crude oil prices.
Rise in crude oil prices led to oil marketing companies [OMCs] to peg their prices at
international levels which led to a rise in the price of petroleum products. The
government of India tried to lower the tax on these products to reduce the pass through
of international prices to retail and to curb the already high levels of inflation. This tax
reduction led to losses to the government.
The government increased food subsidy, fertiliser subsidy and input prices to farmers
were kept low keeping in mind the already high levels of inflation persistent in Indian
economy. These subsidies added to further 1.1% of GDP slippage.
The Indian economy showed slowdown in growth from 8.4% in 2010-2011 to almost
6.9% in 2011-2012. This economic slowdown impacted the tax collection and led to a
shortfall of Rs. 32000 crore during 2011-2012.
We are seeing a constant decline in the tax to GDP ratio over a period of time and
government 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 is
focussed on reducing the fiscal deficit and to aid revival of economic growth. The fall in
international 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 and
provide a maximum of 2% of GDP subsidy for food.
The government in an attempt to cover the shortage of taxes has also planned to
increase indirect taxes while reduce direct taxes. However, in India only about 3% of
people pay direct taxes whereas indirect taxes have to be borne by everyone.
The government has also introduced amendments to FRBM [Fiscal responsibility and
budget management Act] in order to bring the fiscal deficit to a more sustainable level
and to concentrate government expenditure on priority sectors like health, education,
irrigation with added focus on infrastructure related activities and investments.
4. 3. INDUSTRY
a) FDI
FDI 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 economy
impacts.
Foreign investors are reluctant due to adverse tax laws and economic reforms. Lack of
foreign funds inflow also puts the rupee value into question.
This contraction is attributed to global and domestic economic problems. Global investor
confidence must be restored by government reforms (such as allowing FDI in multi
brand 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 the
rupee. If commodity and oil prices increase, and rupee gets weaker, inflation will become
worrisome.
Sector wise distribution of FDI inflows:
As in April 2012, services sector involved 19 per cent of the total FDI equity inflow into
India, while Telecommunications attracted 7 per cent share. Construction activities were
also at 7 per cent of total inflows followed by Computer software and hardware (7%) and
Housing 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 total
inflows. Singapore was second with 10 per cent share, U.K stood third with 9 per cent
share. Japan and U.S.A were on fourth and fifth places with 7 per cent and 6 per cent
shares respectively.
7. Around 60% of India’s GDP and growth is attributed towards the services sector. This
sector is also a significant employment generator.
8. The service sector has been growing at the fastest pace in 3 months, in May 2012, as
the business outlook seems optimistic to firms, as new orders came in faster and
employment increased. The HSBC Business Activity Index for services sector increased
from 52.8 in April to 54.7 in May.
Due to robust growth in the services sector (9.4%), India was shielded from global
recession to a large extent.
State wise performance in services sectors show highest growth in the north eastern
states 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-average
growth rate.
4. Sectoral Growth
a) Agriculture
Agriculture including allied activities accounted for 13.9 per cent of GDP at 2004-5 prices
in 2011-12 as compared to 14.5 per cent in 2010-11. In terms of composition, out of a
total share of 14.5 per cent in GDP in 2010-11, agriculture alone accounted for 12.3 per
cent, followed by forestry and logging at 1.4 per cent, and fishing at 0.7 per cent. The
average annual growth in agriculture and allied sectors realized during the Eleventh Plan
Period was 3.3 per cent against the targeted growth rate of 4 per cent. The sector
recorded slightly lower average growth than targeted in the Eleventh Plan period due to
severe drought experienced in most parts of the country during 2009-10 and
drought/deficient rainfall in some states, namely Bihar, Jharkhand, eastern UP, and West
Bengal in 2010-11. Rainfall continues to influence crop production and productivity in a
substantial way. Notwithstanding the declining trend in agriculture’s share in GDP, the
importance of the sector to the economy is best understood with reference to its share in
employment and in terms of its criticality for macroeconomic stability. Hence, growth in
agriculture 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 & Infrastructure
Industrial growth, measured in terms of the index of industrial production (IIP), shows
fluctuating trends. Growth had reached 15.5 per cent in 2007-8 and then started
decelerating. Initial deceleration in industrial growth was largely on account of the global
economic meltdown. There was, however, a recovery from 2.5 per cent in 2008-9 to 5.3
per centin 2009-10 and 8.2 per cent in 2010-11. Overall growth during April-December
2011 reached 3.6 per cent compared to 8.3 per cent in the corresponding period of the
previous year. Growth moderated in the manufacturing sector, from 9.0 per cent in
April-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 cent
in January 2012 as compared to 6.4 per cent in January 2012. Cumulative growth in
April- January 2011-12 has been 4.1 per cent as compared to 5.7 per cent during the
corresponding period of the previous year. the cumulative growth of coal during the
current year so far continues to be negative, there has been an increase in production in
the last three months.
Manufacturing, construction, elect
ricity, gas, water supply
15
10
5
0
-5
5. Price wage Productivity
a) Inflation
Inflation happens to be a determinant in the functioning of any economy. There are two
basis system of measuring inflation present today. The Wholesale Price Index is used in
India while several other developed countries adopt the Consumer price index to
calculate inflation.
The major driver of inflation during the current financial year is food inflation comprising
of milk, eggs, meat, fish and edible oils. Within food articles, the major areas of concern
have shifted from food grains to other commodities.
In comparison with last year when cereals, vegetables, and sugar were the main
contributors to food inflation, 2011-12 witnessed higher contribution from manufactured
food products especially edible oils due to higher global prices of soya bean oil, palm oil,
10. etc. India's edible oil requirement is estimated at 16-17 million tonnes, about 50 per
cent of which is met through imports of crude palm oil, sunflower oil, soya bean oil, and
Refined, Bleached and Deodorised (RBD) palmolein. As a result, a spurt in global prices
has led to higher domestic prices of these commodities.
Although supply shocks can trigger sudden and sharp inflationary pressures, the
pressures diminish when supplies revive. Persistence in inflation stemmed, instead, from
government policies that stimulated consumption demand by increasing wages and
salaries but did not do enough to remove supply-side bottlenecks. Under fiscal policies
that boosted consumption, the supply shocks had a more lasting effect, reinforcing
inflationary pressures. All the categories of the WPI contributed to inflationary pressures.
However, food inflation was the most stubborn.
Inflation in India (based on WPI)
20
15
Primary articles
10
Fuel & power
Manufactured products
5
0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
-5
6. Balance Of Payment
However much India's policymakers may want the external sector to behave the way
they want it to, it is clear that the sector's patterns of behaviour are no longer simply the
outcome of domestic policies but of the whims and caprices of international trade and
finance movements.
That seems to be the case today, more than ever before, when we consider India's
balance of payments position in the light of the fluctuating fortunes in India's most
important destinations and sources of trade and capital respectively.
Domestic policies work most effectively when the external environment is by and large
favourable to trade. When the environment encourages the free flow of goods and
services then for policymakers to take a more laid back position may prevent exporters
from exploiting the advantages available in the situation. That had been the case when
India's capital controls and forex restrictions had not allowed exporters the elbow room
needed to evolve strategies for exports. Then it changed for the better and India was
able to ride the horse to its advantage because its policies segued into the environment
for trade
The end-of-century turnaround in India's exports and balance of payments came
because of services exports and specifically IT exports.
11. India's telecommunication policy changes, that ushered in the most effective changes in
communications ever, created the grounds for India's growing IT sector to become
global. That event, with the top five Indian companies becoming known names in IT
throughout the world, had wide repercussions on the overall organised economy,
boosting demand for goods and services of other sectors such as manufacturing. This in
turn boosted capacities, encouraging a re-engineering of extant practices to align with
global ones.
