Submitted by:

Hrishikesh Das PGP05020

Harsh Parmar PGP05035

Manish Gupta PGP05026

Chiranjit Das FPM02003

Kapil Kukreja PGP05022

Indian Economic Analysis

Submitted to

Dr. Sarat Dhal

Index

INTRODUCTION

DECADE WISE ANALYSIS OF INDIAN ECONOMY (GDP).........................................................................................3

GOVERNMENT EXPENDITURE TREND ANALYSIS...................................................................................................5

CONSUMPTION TREND ANALYSIS...................................................................................................................... 12

INVESTMENT TREND ANALYSIS.......................................................................................................................... 12

EXPORT IMPORT TREND ANLYSUS..................................................................................................................... 12

SHARE OF EACH CONSTITUENTS OF AGGREGATE DEMAND FROM 1950-2014.....................................................13

INFLATIONARY ANALYSIS.................................................................................................................................. 13

SWOT ANALYSIS................................................................................................................................................ 13

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Indian National Income Analysis

GDP is the Market Value of all Final Goods and Services Newly Produced on Domestic Soil during a Given

Time Period”. GDP (Y) is the sum of Consumption (C), Investment (I), Government Spending (G) and

Net Exports (X – M).

The Indian economy is the tenth-largest in the world by nominal GDP and the third-largest by purchasing

power parity (World Bank Ranking 2013). According to CSO’s India’s GDP at current and constant prices

stood at 94.6 and 55 trillion, respectively ion 2012-13. Per capita GDP at current and constant prices

were $1436 and $829. Inflation rate 5.52% on CPI. India's current account deficit narrowed to $1.2

billion, or 0.2 per cent of gross domestic product, in the January-March quarter 2014, according to

Reserve Bank of India.

From 1950 -1980 Indian gross

domestic product (GDP) grew at

annual average rate of 3.6

percent (1.5% per capita GDP

growth) from 1990 to 2007 the

growth rate averaged 6.4 percent

( 4.1 % per capita gdp growth).

The shift referred to as Indian

growth turn around. Recent past

2003-04 to 2007-08 GDP growth

rate increased further averaging 8.8 percent.

The low growth rate first is pejoratively referred to as Hindu growth rate of growth, a period in which

import duties were among the highest in the world ,Foreign direct 9investment (FDI) was prohibited in

many sectors of the economy and there is extensive regulation of the interest rates.

The upward shift in Indian growing path 1980 is the effect of more export of manufacturing goods, some

levied on interest rate and Service sector income begin to increase and some liberation pertaining to the

industry.

However India face crisis of balance of payment in 1990-91 for the unsustainable fiscal regime and

unviable banking sector. India adopted reform in liberation measure for reforming real sector, especially

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Figure 1: Growth rates of each component

industry and service sectors foreign trade and exchange markets money government bonds and capital

markets. As result Indian GDP growth jumped to 6.4 percent.

For compiling the estimates of GDP of the economy is divided into three broad sectors, agriculture,

industry and service. In the decades of 1950s Indian GDP majorly based on agricultural sectors (53.1% of

GDP) and presently major

contribution of Indian GDP is Service

sectors (around 67.4% of GDP).

Indian gross domestic saving

predominated by household saving

although Private corporate sector

saving has been significant

improved after the reform of early

1990 and public sector saving

declining the trend. Consumption

pattern has been more balanced by trend.

Decade wise Analysis of Indian Economy (GDP)

Figure 3: Growth Rate

1950-60The recession struck the Indian economy during 1957-58. The reasons mainly were:

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Figure 2: Weighted contribution Share

India was experiencing a severe drought condition during 1956-57 resulted a drop in agricultural production which led to increase in the amount of imports.

Imports rose by more than 40 percent to Rs 1100 crores along with exports registering a small fall.

The drought condition also resulted in the trade deficit to triple from Rs 130 crores to Rs 465 crores during 1956-58.

The deficit resulted a fall from Rs 902 crores to Rs 681 crores in exchange reserves.

1961-1970India saw a series of events which resulted the recession of 1965-66. The events and there impacts were:

The Indo-China conflict of 1962. The Indo-Pakistan war of 1965. Moreover, a severe drought condition during 1965-66 struck the Indian economy. The Indo-China conflict and The Indo-Pakistan war resulted in increase of Government

Expenditure which severely affected the Indian economy.

1971-1980During 1973 and 1979, both oil shock and severe drought affected the Indian economy resulting in economic recession during both the years. Moreover, the formation of Bangladesh resulted in economic distress in the country. All these factors led to call for an emergency by the president of India during 1975.

1981-1990During 1981, severe drought condition prevailed in Indian soil. Moreover, oil prices were also high. The Government also had to spend on oil imports which accounted for about two-fifths of imports during 1982. To meet the demands, the extra commercial borrowings and NRI deposits increased resulting in increase in debt borrowings.

1991-2000The recession during 1991 can be mainly accounted to the Gulf War Crisis following a series of events which affected the Indian economy:

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Increase in the oil prices resulting increase in cost of import. Increase in fiscal deficit due to increase in oil prices. Fall in foreign exchange reserve led to problems in maintaining the required amount of

import.The crisis of Indian economy in 1991 made the Government to introduce Liberalization, Privatization and Globalization during the economic reform

2001-2014Recession hit US causing an impact on Indian Economy during 2008. The impacts on Indian economy were as follows:

Indian Companies were affected as they have major outsourcing deals from the U.S. India’s export to U.S. has grown over the years but the recession severely affected it. Foreign investors pulled out from the Indian Stock market.

Government Expenditure Trend analysis

Figure 4: Government Expenditure Trend

1950-60 Government of India attempted to stimulate balanced economic development while correcting

imbalances caused by World War II and partition. Agriculture along with irrigation and power generation projects were given priority. The Government also emphasized on industrialization, particularly basic, heavy industries in the

public sector, and improvement of the economic infrastructure.

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1961-70 When a war was fought with China in 1962, agricultural output was stagnating, industrial

production was considerably below expectations, and the economy was growing at about half of the planned rate.

Defense expenditures increased sharply, and the increased foreign aid needed to maintain development expenditures eventually provided 28 percent of public development spending.

1971-80 During 1973, Government called for a 24 percent increase over the third plan in real terms of

public development expenditures.

The public sector accounted for 60% of plan expenditures, and foreign aid contributed 13 percentage of plan financing.

Agriculture, including irrigation, received 23% of public outlays; the rest was mostly spent on electric power, industry, and transportation.

During 1978, rise in oil prices made Government to follow a series of revisions in their spending.

1981-1990

The Government allocated its expenditure in different percentage among different sectors to achieve a healthy GDP Growth.

Public-sector development spending would be concentrated in energy (29 percentage), agriculture and irrigation (24 percentage) industry including mining (16 percentage), transportation (16 percentage), and social services (14 percentage).

But, the rise in oil price and severe drought condition affected the planned expenditure pattern of the Government.

1991-2000

Total spending by Government was planned at Rs 8.7 trillion, of which 94% would be financed from domestic resources.

The Indian economy was affected by changes of government and by growing uncertainty over what role planning could usefully perform in a more liberal economy.

2001-2014

The major of the Government expenditure can be allocated to the following reforms:

During 2002-2003, the Government brought of the FRBM act resulting in the fall of the government expenditure as compared to previous year.

Allocation of national food for work programme and high increase in the allocation for defence.

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Consumption Trend analysis:

Figure 5: Consumption Trend Analysis

The consumption after independence was mainly on food products. But after certain years with improvement in technology people’s consumption to different items other than food products have increased. The increase in nonfood products increased to 51.6 percentages in 1990-91 as compared to 1987-88. It reached 64.6 percent in 2004-2005.On the whole, in the pre reform period, gross rent, fuel and power was the major nonfood component in the total final consumption. Some series of events in between the period from post-independence like severe drought, Indo wars had affected the consumption pattern hence affecting the overall GDP.

However the consumption over the period has been declined as the share of GDP from 82% to 60%.

Investment Trend analysis:Investments or capital formation is perhaps one of the keys to realizing India’s dream of high economic growth. Through the years there has been structural change in Indian investment portfolio. There are many factors that have aided rise in investments, particularly increase in savings and the process of de-licensing, among others. Savings improved due to rise in incomes and also due to factors such as spread of branch banking that extended the reach of banking to the remotest parts of country. As bank branches proliferated, financial savings saw a consistent rise since the 1980s.

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Figure 6: Investment Trend

1950-1960 During early 1950s, the focus of the government was on fiscal policy, aimed to raise

domestic savings. The objective was to raise domestic savings to the degree required by the projected

investment levels that result from planned income expansion and the estimated marginal capital output ratio. It is reflected in the graph, where investment is negative in first 3 years.

These years (1956-60) there is more focus on industrial targeting and licensing and exchange control over all current transactions, resulting in the licensing of imports of capital goods, intermediates and consumer goods

However to overcome the above crisis some improvement steps were taken like significant growth of PSU investment, the inflow of private foreign capital and technology into the economy.

1960-1990 The Indo-China war of 1962 and Indo-Pak was of 1965 exposed weaknesses in the economy

and government expenditure was increased due to which private investment was crowded out. And, Average consumption growth was 6.1 for this decade.

In 1969, Fourth Five-year (1969-1974) plan was implemented. Positive sign of investment was seen but again India had war with Pakistan in 1971. This was the reason for sudden change in investments in the country and the investment graph went down to negative value.

In 1973 the economy was subjected to oil shocks when there was sharp increase in oil prices and again the investment graph reflected negative values.

In 1981-82 this pick up was interrupted by the second oil shock.

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1990- PresentNew Economic Policy, the number of restrictions has been reduced to a considerable extent in order to attract more FDI inflows. The major policy shifts included the removal of licensing policy, restrictions on FDI, Foreign Exchange Regulatory Act (FERA), Monopolies and Restrictive Trade Practices (MRTP) Act of 1969. Foreign firms prefer to invest to the agricultural sector (primary sector) is mostly capital

intensive and the scope and linkages between foreign companies and the rest of the economy is often limited.

These projects have limited linkages to domestic economy as they usually use few local intermediate goods and are mostly export-oriented. These leads to high volatile investment rate in initial post reform period (1990-1997).

With liberalization of the economy and a favorable business environment, private sector now leads in investments in the economy. Private investments are largely funded by household savings. Over the years, private savings have also improved, which have further aided private sector capital formation. Public investments have declined as government lacks enough resources to boost investment in a big way.

Between 2004 and 2008, business confidence acquired a swagger and investments increased at a rapid pace Planners wanted to push growth rate beyond 10%, citing positive demographics and investments that India was attracting. Indeed, India did find a sweet spot between 2004 and 2008, with investments driving growth India too has experienced a slowdown in capital flows, such as foreign direct investment, and savings and investment rates have also faltered.

In 2008 after the global economic crisis the investment rate falls down.

EXPORT-IMPORT:Not much attention to foreign trade since India had built up substantial foreign exchange reserves during World War II.

Figure 7 : CAD and Net Export trend

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1951-60 The average level of exports remained constant, except the year 1951-52 where there was a

high export turnover due to Korean War. Limited quotas in respect of essential commodities were granted to importers on the basis of their actual imports.

There was emphasis on import substitution and lack of attention to export stimulation measures. Also, this was on account of heavy emphasis on industrialization.

1961-70 Govt. of India made attempts to promote exports to overcome the damage created due to

Indo-China conflict of 1962. However, severe drought conditions in the country and increasing requirements for goods increased imports.

During 1965, growth in export was higher than that in Imports because of devaluation of Indian rupee in 1966, which led to increased rupee earnings.

1971-80 The first oil shock in October 1973, led to a jump in import bill. There was a subsequent

recession in 1973-75. India’s trade policy heavily relied on quotas rather than on tariffs. Government policies focusing on import substitution and export promotion, led to trade surplus in 1975-80.

1981-90 Global recession in 1981 and 1982 led recessionary trends in export markets and rise in import

prices. Also, Oil imports increased to about two-fifths of India’s imports during 1980-83. There is

growth in exports (3.5 times increase) and imports (4.5 times). There was a steady decline in the share of canalized imports. Between 1980—81 and 1986—87,

the share of these imports in total imports declined from 67 to 27 percent. Imports of petroleum, oil and lubricants imports declined increasing room for imports of machinery and raw materials by entrepreneurs.

1991-2014 Economic Crisis due to Gulf War and Inflation led to a sharp increase in the oil prices and to

overcome that, economic liberalization in 1991 and shift from govt. regulations to market forces, which increased imports and exports.

Decline in growth in exports in 1997 due to the East Asian Crisis and its central bank (RBI) refused new credit and foreign exchange reserves. Competitors devalued their countries reducing competitiveness of Indian exports in international market.

Global recession in 2008 led to decline in exports. The initial effect of the subprime crisis was, in fact, positive, as the country received accelerated Foreign Institutional Investment (FII) flows during September 2007 to January 2008. This had a knock-on effect on the stock market and the exchange rates through creating the supply demand imbalance in the foreign exchange market.

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Share of each constituents of aggregate demand from 1950-2014

Figure 8: Share contribution of each component

The above graph shows the trends of different components of aggregate demand from 1950 to 2014.

From the graph we can observe that the consumption constitutes the maximum share but it is gradually

decreasing since 1950. During 1950, it was around 80 per cent but now it has come down to 60 per cent.

Government expenditure shows an uneven trend due to the various economic crisis during different

decades. Investment has shown even trends till 1990 except in certain years. But, after the post reform

period, the investment pattern has been gradually increasing. The net export had been a prime factor

affecting the overall GDP. It has been negative since 1950 except some of the years.

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Inflationary Analysis

Figure 9: Inflation Trend

1950-60 The percentage change in prices varied from a negative value of 12.8 % in 1952-53 to the

highest inflation of 13.8 % in 1956-57. The deflation of 1952-53 is mainly attributed to the higher agricultural production in that year,

whereas Inflation rate went as high as 13.8% in 1956-’57, owing to the industrialization focused second – 5 year plan.

During the 1950s, two more years viz, 1954-55 (-6.71 %) and 1955-56 (-5.23 %) also witnessed negative price changes. Thus, notwithstanding low average inflation during 1950s, there was considerable volatility in the price movement.

However, inflation was in the range of 3 to 7 % during the last four years of this decade (1957-58 to 1960-61)

1960-70

During the sixties, the average decadal inflation edged up to 6.4 per cent. The inflationary pressures started mounting from 1962-63, on account of the Chinese War in 1962 and unsatisfactory supply position. The Pakistan war in 1965, and the famine conditions during1965-66 aggravated the situation further.

The sequence of wars that took place in the first half of 1960s and the famine conditions during 1965-’66, maintained the inflation rates high.

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In this decade, average inflation increased to 6.2 %.The maximum inflation at 13.9 per cent was recorded for the year 1966-67, but the minimum inflation rate of (-) 1.1 per cent was in 1968-69 attributed primarily to the bumper agricultural production in the preceding year.

It was highest at 13.95 % in 1966-67, followed by inflation of 11.56 % in the following year.

1970-80 The decade of the 1970s stands out as the most turbulent period in India in terms of inflationary

uncertainty, witnessing very high inflation mainly driven by the supply shocks emanating from agricultural and the international crude oil prices

Independent India’s highest inflation occurred in September 1974 when inflation recorded at 25.2 % was mainly attributed to the failure of kharif crops in 1972-73 as also to the hike in crude oil prices in 1973.

The average inflation rate during the seventies was still higher at 9.0 per cent. The minimum inflation rate for the decade at (-) 1.1 per cent was recorded in the following year, i.e. 1975-76, in response to the substantive anti-inflationary measures taken by the government.

1980-90 During the eighties, the decadal average inflation moved down somewhat to 8.0 per cent. What

is more significant is that variation in prices was small as compared to any of the preceding decades.

A hike in oil prices and poor agricultural production led to reappearance of high inflation in 1979-80 (17.1 %) and 1980-81 (18.2 %).

The minimum inflation rate was at 4.4 per cent for 1985-86.and 10.1 percent in 1990-91

1990-2000 Between 1991 and, the Indian rupee depreciated by nearly 37% with respect to the US dollar.

Notwithstanding the limited openness of the Indian economy, this order of depreciation added to inflationary pressures during the first half of the 1990s

Four out of first five years of the 1990s registered double digit inflation. From 1995-96 onwards, there has been a continuous deceleration and the average inflation for the period 1996-97 to 2000-01 was the lowest since the mid-1950s in terms of the 52 week average.

In 1990-91, the WPI rose by 12.1% and got stuck up at double digits in the consecutive year. The anti- inflationary measures undertaken could provide only a temporary respite and again the

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prices started rising in the late 1993. Similar trends continued for some time until the inflation was brought down to 5% in 1995.

2000-10 In 2002-03 when the country faced a severe drought, inflation remained moderate at 3.4%.

Moreover, 2002-03 was also marked by the simultaneous impact of several others adverse developments such as border tensions and high international crude oil prices.

A hardening of international oil prices as well as domestic food prices responding to a deficient monsoon in the previous year fuelled a spurt in inflation in India during the first half of 2004-05.

Inflation began to ease in the second half of 2004-05 under the impact of a combination of fiscal and monetary measures and weakening of south-west monsoon. In 2005-06, WPI inflation eased to 4.3 per cent as compared to 6.5 per cent a year earlier.

The ten-year average of headline WPI inflation was around 5.4 per cent from 2000-01 to 2009-10.In this decade 2000-01, 2003-04, 2004-05, 2006- 07, and 2008-09 had higher inflation relative to the decadal average.

The ten-year average inflation in fuel was around 8.9 per cent. The major portion of that was contributed by the high inflation of 2000-01.

The year 2009-10 was an abnormal one due to global slowdown and unfavourable monsoon. Notwithstanding, the average inflation was 3.6 per cent backed by negative inflation in fuel.

2011 Onwards The year 2010-11 was marked by strong inflation exhibiting persistence on the back of elevated

inflation expectations, hike in vegetable prices with unseasonal rains post-monsoon and rising global commodity prices that resulted in significant cost-push and demand-pull pressures since 2010.

2011 stared with a headline inflation of 9.7 per cent which briefly touched double digit in September 2011 before coming down to 6.6 per cent in January 2012.

The increase in the WPI during the initial months of the year was driven by a host of factors that included an increase in food prices, a revision in the administered prices of fuel as well as an increase in manufactured product prices in the wake of significant pressure from high input costs as well as strong demand and pricing power

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SWOT Analysis of Indian Economy

Strengths Huge manpower base with skilled as well

unskilled labor force Good scope for agriculture due to 57.68%

cultivable land Diversified nature of Economy Abundant Natural resources Large domestic market for various sectors Rapid growth of IT and BPO for valuable

foreign exchange

Weakness Huge population leading to scarcity of

resources Unrecognized incomes because of non-

availability of bank accounts, housewives’ income

Very high percentage of workforce involved in agriculture which contributes only 18% of GDP

Corruptions :- Coal Block allocation, 2G scam

High illiteracy rate Huge gap between rich and poor due to

wide distribution of Income

Opportunities Scope for entry of private firms in various

sectors for business “Make in India” project Formation of NBC to increase U.S.

investment in India as well trade between the two countries

Contributions for development of economy by Indian origins at foreign soil

Reducing gap between rural and urban economies

Cleaner and efficient administration Steps towards reducing energy deficit

Threats High Inflation and Interest Rates High fiscal deficit Expand in Current Account Deficit Debt Crisis in Euro zone Rate of growth of population still high Agriculture excessively dependent on

monsoons

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