MacroEconomics Of India - Fiscal & Monetary Outlook 2007 - SPJCM

Indian EconomyDeepti Ramanujam

Mohit Agarwal

Navneet Dubey

Rahul Ghelli

Rajesh Joshi

Sagar Mewada

Tejas Deshmukh

Compiled by students of SP Jain – Singapore / Dubai for Educational Purpose

Sept - 2007

Agenda

• Introduction

• Growth Indicators

• Significant Industries

• Monetary Policy & Fiscal Policy

• Foreign Exchange Policy & BoP

• India v/s China

• Future projections

Introduction

• 2nd fastest growing major economy

• Diverse economy – agriculture, handicrafts, textile, manufacturing, and a multitude of services

• Population-1.17bn & Labor Force-509.3 mn

• Exports ~ $125 bn

• Imports ~ $188 bn

• M&A

Key Economic Indicators

2001 2002 2003 2004 2005 2006

Total population (millions) 1038 1051 1068 1085 1101 1118

GDP 5.8 3.8 8.5 7.5 8.4 9.4

Per capita GDP 21976 23299 25773 28684 32224 36771

Unemployment rate ... ... ... ... 3.1 ...

Interest rates (12 months) 7.10 5.75 5.00 5.50 6.00 8.25

Composition of GDP

2001 2002 2003 2004 2005 2006

GDP 5.8 3.8 8.5 7.5 8.4 9.4

Agri.

6.3 -7.2 10.0 0.0 6.0 2.7

Industry 2.7 7.1 7.4 9.8 9.6 10.9

Services 7.2 7.4 8.5 9.6 9.8 11.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2001 2002 2003 2004 2005 2006

Services

Industry

Agriculture

GDP

Price Indices

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2001 2002 2003 2004 2005

GDP DEFLATOR

FPI

CPI

2001 2002 2003 2004 2005

CPI 3.8 4.3 3.8 3.8 4.2

FPI 2.2 2.5 3.5 2.8 3.3

GDP Deflator 3.1 3.9 3.8 4.4 4.4

Monetary & Fiscal Policy

Overview of the Monetary & Fiscal Policy (2002-07)

• Maintaining Price stability and ensuring adequate flow of credit to the economy

• Inflation around 4.4 - 6.0%

• M3 at about 21.3% when projected was 17.3%

• Consistent objectives of price & financial stability

Policies (contd…)

• Liquidity through LAF & MSS

• Cash reserve Ratio – 6.5% TO 7.0%

• Flexible reverse Repo Rate

• Lifted a cap of Rs. 30bn on daily Repo transactions

• Rupee has risen considerable to 10% against dollar

Policies (contd…)

• Huge government deficits : 8-9% of GDP (central & state fiscal deficits)

• After 1991- economic policy shifted towards long-term domestic debt

• Constrained public infrastructure crowded out private sector

• Undermines reforms- concerns on funding debt

• Tax Revenue to GDP ratio – 10% GDP

Foreign Exchange Policy

• Prevention of destabilization speculation

• The foreign reserves have risen from $ 5 Bn in 1991 to around $ 200 Bn in 2007

• The increase in foreign reserves is due to FDI, Net FII investments and NRI deposits.

• FX reserves protects the market against exchange rate volatility.

• Increase in FX reserves can cause inflationary pressures.

Balance of Payments

• Fiscal 2004-05 marked a turn around

• Appreciating rupee, imports rising and exports slowing

• Widening CAD due to trade deficit

• Increase in FDI/FII liabilities

Items 2004-05 2003-04 2002-03 2001-02 2000-01

Trade Balance -38,130 -15,454 -10,690 -11574 -12460

Invisibles Net

31,699 26,015 17,035 17,035 9,794

Current Account Balance

-6,431 10,561 6,345 6,345 2,666

Capital Account 32,175 20,542 10,840 10,840 8,840

Overall Balance 26159 31,421 16,985 16,985 5,868

Foreign Exchange ReserveIncrease (+) /Decrease (-)

-26,159 -31,421 -16,985 -16,985 -5,842

G-Effect

• Present day world

• Appraisal of public policies

• Financial Integration

S# India China

1 Trade amounts to 31% of GDP Trade amounts to 52% of GDP

2 Takes about 88 days to start business and 176 to close

Less by around 50%

3 Proportion of population over the age 15 with no schooling was 44% in 2001

18%

4 Cargo transit times to US is 8-12 weeks

Cargo transit times to US is 2-3 weeks

5 Contribution to world growth –0.4%

Contribution to world growth –1.2%

6 Proportion of population in the productive cohort is 60%

66%

7 Overseas Indians account for only 9% of country’s FDI

Above 50%

8 6 times of India

9 Average investment rate 22% 36%

Striking future projections

What Goldman Sachs says - India likely to show the fastest growth

over the next 30 to 50 years Growth could be higher than 5% over

the next 30 years and close to 5% aslate as 2050

India’s GDP will exceed Italy’s in 2016,France’s in 2019, Germany’s in 2023and Japan’s in 2032

India to become the world’s 3rd largesteconomy by 2032

References

• BRIC Report

• CRISIL report

• www.rbi.org.in

• www.forbes.com

• www.frsb.org

Thank You

Compiled by students of SP Jain – Singapore / Dubai for Educational Purpose