Economic analysis


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Economic analysis

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Economic analysis

  1. 1. ECONOMIC ANALYSISEconomics experts and various studies conducted across the globe envisage India and China torule the world in the 21st century. For over a century the United States has been the largesteconomy in the world but major developments have taken place in the world economy sincethen, leading to the shift of focus from the US and the rich countries of Europe to the two Asiangiants- India and China. Here we will focus on Indian economy as the growth hasGDP : The strengthening of economic activity in the recent years has been supported by persistentincrease in gross domestic investment rates from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in2005-06. It may also be noted that over 95 per cent of investment in the country during this period wasfinanced by the domestic savings. The expected real GDP growth in 2007-08 is around 8.5 per cent.Agricultural GDP growth doubled to around 4 per cent in 2006-07 and is particularly important in Indiancontext.Interest Rates : In an open economy, the domestic interest rate is influenced by international rates, whichin case of India has been on the upswing since 2004. Indias interest rates are expected to go up in themedium term. A higher interest rate may be needed to control the anticipated higher inflation. Withindications of a further hike in the US and the European Central Banks interest rates, it is more likely thatIndia will follow suit. Because if Indias economic growth is to keep up with that of other countries in aderegulated market environment, it has to adopt the interest cycle of the global economy.Inflation : Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upwardtrend with intermittent decreases. However, average inflation in the 52 weeks ending on February 3,2007 remained at 5 per cent. A spurt in inflation like in the current year has been observed in the recentpast in 1997-98, 2000-01, 2003-04 and 2004-05.
  2. 2. Inflation, with its roots in supply-side factors, was accompanied by buoyant growth of money and creditin 2005-06 and 2006-07 so far. While GDP growth accelerated from 7.5 per cent to 9.0 per cent between2004-05 and 2005-06, the corresponding acceleration in growth of broad money (M3) was from 12.3 percent to 17.0 per cent. Year-on-year, M3 grew by 21.1 per cent on January 19, 2007. The industrialresurgence and upswing in investment was reflected in, and sustained by, growth of gross bank credit (asper data covering 90 per cent of credit by scheduled commercial banks), for example, to industry(medium and large) at 31.6 per cent and for housing loans at 38.0 per cent in 2005-06. It was alsoobserved in year-on-year growth of gross bank credit at 32.0 per cent in September 2006, albeitmarginally down from 37.1 per cent in 2005-06. Reconciling the twin needs of facilitating credit forgrowth on the one hand and containing liquidity to tame inflation on the other remained a challenge. RBIput a restraint on the rapid growth of personal loans, capital market exposures, residential housing beyondRs. 20 lakh and commercial real estate loans by more than doubling the provisioning requirements forstandard advances under these categories from 0.40 per cent to 1.0 per cent in April 2006.Simultaneously, it increased the risk weight on exposures to commercial real estate from 125 per cent to150 per cent.Fiscal Policy : Managing fiscal discipline in the midst of competitive demands on public resources andtax expenditures vis-à-vis varied and often conflicting expectations of stake holders is a complex exercise.The last three years’ fiscal results, particularly measured against the deficit targets, demonstrate theeffectiveness of managing resources. It is reassuring that deficits have been contained within themandated limits. The upswing in growth has appeared to have propelled the economy to ‘take-off’, and ithas been accompanied with a reduction in fiscal deficit from a level of 5.9 per cent of GDP in 2002-03 to3.7 per cent of GDP in 2006-07. During the same period, revenue deficit has declined from 4.4 per cent ofGDP to 2.0 per cent of GDP. Tax-GDP ratio which was 8.8 per cent in 2002-03 has go up to 11.4 per centin 2006-07. The improvement in deficit indicators has been achieved through improvement in tax-GDPratio.Investor’s Confidence : Indian economy has achieved what it has been hoping for quite some time.Perhaps at no time during the post-liberalization period, Indian economy has shown such kind ofoptimism. It is poised to enhance its real economic growth rate in the current year, holding a huge reserveof foreign exchange that is rather unprecedented, interest rates at an all time low and inflation very muchunder control, increasingly robust corporate performance, strong operational performance from thebanking sector, surge in the stock prices and a whole range of reforms right from new norms for issuancein the primary markets to the setting up of a central listing authority to benchmarking Indian stockexchanges with the international best practices. All these factors have boosted investor confidence in theeconomy.Employment : Both growth of population and labour force have shown substantial decrease. This is apositive signal. Little Growth in the organised sector employment has been noticed in the private sector.Public sector has shown a negative growth. Significant employment generation took place in the tertiarysector particularly in services industries. Substantial employment growth was observed in the small andunorganised sector, i.e., in small and tiny enterprises. Self-employment and casual labour continued toplay a pivotal role in rehabilitation of the unemployed.
  3. 3. TRADE POLICYIndia’s economic performance has continued to be impressive since 2001-02 and growth hasbeen particularly rapid since 2003-04 averaging over 8.5% with around 9% in 2006-07. Thisperformance is largely due to unilateral trade and structural reforms, in particular in servicesprovided by India. Rapid economic growth has also resulted in an improvement in socialindicators such as poverty and infant mortality.India is preparing herself for becoming an economic superpower, and it must expedite socio-economic reforms and take steps for overcoming institutional and infrastructure bottlenecksinherent in the system. Availability of both physical and social infrastructure is central tosustainable economic growth.Since independence Indian economy has thrived hard for improving its pace of development.Notably in the past few years the cities in India have undergone tremendous infrastructure upgradation but the situation in not similar in most part of rural India. Similarly in the realm ofhealth and education and other human development indicators Indias performance has been farfrom satisfactory, showing a wide range of regional inequalities with urban areas getting most ofthe benefits. In order to attain the status that currently only a few countries in the world enjoyand to provide a more egalitarian society to its mounting population, appropriate measures needto be taken.All these issues show that India is growing and it still has tremendous opportunity to grow evenat a faster rate.MONETARY POLICYThe RBI is the central bank of India and decides on the monetary policy. Monetary policies arerelated to the rules framed by the RBI to control the liquidity, inflation and interest rates. It usesdifferent types of tools such as Cash reserve ratio, statutory liquidity ratio, Repo rate etc. tocontrol the inflation and liquidity in the economy.The liquidity in the economy has increased sharply in the year 2004 that is why the inflationduring that time period also increased with a higher rate. To miyigate the inflation RBIeffectively used the CRR tool and has been increasing the CRR since then. At a value of lessthan 5% during 2003, CRR now stands at 7%. The RBI is now able to restrain the inflationwhithin 4%.Liquidity conditions remained fairly comfortable up to early September 2006 with the unwindingof the Central Government surplus balances with the RBI and continued intervention in theforeign exchange market to maintain orderly conditions. During 2006-07, up to September 8,2006, RBI had not received any bid for repo under Liquidity Adjustment Facility (LAF) and thecontinuous flow of funds under reverse-repo indicated a comfortable liquidity position. In 2005-
  4. 4. 06, the reverse repo rate had been raised by 25 basis points each time on April 29 and October26, 2005, and on January 24, 2006 to reach 5.50 per cent. In 2006-07, it was raised again by 25basis points each time on June 9 and July 25, 2006. There was some tightness with the onset ofthe festival season and due to high credit expansion and outflows on account of advance taxpayment. From mid-September through October, 2006, while RBI had to provideaccommodation to some banks through repo facility, with reverse repo operationssimultaneously, in net terms, RBI absorbed liquidity from the system. CRR 8.00 7.00 6.00 5.00 4.00 3.00 2.00 CRR 1.00 0.00Exchange RateIndian Rupee against the USD remained stable between Rs 40.00/41.00. Indian Rupee tradedmostly below Rs 41.00 in June 2007. Throughout the month Rupee gained against the USD butremained volatile and crossed Rs 41.00 exceptionally in only one trading session. The rupeeranged between Rs 40.47/41.01 averaging at Rs 40.8 in June 2007, showing weakness towardsthe last trading sessions of the month. The central bank continues to maintain its limitedintervention in the forex market until the inflationary pressures are minimized. In June 2007 INRagainst the Euro demonstrated less volatility than it did against the USD. It peaked at Rs 55.09and remained above Rs 55.00 level in the penultimate trading sessions before attaining a levelbelow Rs 55.00. However it averaged at Rs 54.7 in June2007.
  5. 5. Challenges faced by Indian EconomyCurrently Indian economy is facing these challenges: Sustaining the growth momentum and achieving an annual average growth of 7-8 % in the next five years. Simplifying procedures and relaxing entry barriers for business activities. Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China as Indias land area is almost half of Chinas total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (world bank figures). Boosting agricultural growth through diversification and development of agro processing. Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. Developing world-class infrastructure for sustaining growth in all the sectors of the economy. Allowing foreign investment in more areas Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Empowering the population through universal education and health care. India needs to improve its HDI rank, as at 127 it is way below many other developing countries performance. The UPA government is committed to furtering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance. Government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the future.