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.

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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.


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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+12
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
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
4
6
8
10
12
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
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
1800 1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
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!!!!

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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?

19
19
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!

20
20
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.

21
21
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.


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22
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.

23
23
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

24
24
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

25
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

26
26
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.

27
27
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

28
28
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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29
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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30
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

31
31
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.

32
32
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

33
33
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.

34
34
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

35
35
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

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