Published on September 3, 2013
Role of GDP in developing India 0 0 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)
Role of GDP in developing India 1 1 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.
Role of GDP in developing India 2 2 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:
Role of GDP in developing India 3 3 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
Role of GDP in developing India 4 4 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.
Role of GDP in developing India 5 5 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.
Role of GDP in developing India 6 6 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)
Role of GDP in developing India 7 7 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.
Role of GDP in developing India 8 8 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.
Role of GDP in developing India 9 9 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.
Role of GDP in developing India 10 10 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.
Role of GDP in developing India 11 11 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
Role of GDP in developing India 12 12 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$) 12240966 25885.47 13653729 12989.09 17109172 18018.04 18728454 06804.92 18417173 71769.71 Source: World Data Bank Line graph of Indian GDP in Billions of US dollars
Role of GDP in developing India 13 13 Annual growth rate of Indian GDP since 1960 Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 GDP growth (annual %) NA 3.722 743 2.931 128 5.994 353 7.452 95 - 2.635 77 - 0.055 33 7.825 963 3.387 929 6.539 7 Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 GDP growth (annual %) 5.157 23 1.642 93 - 0.553 3 3.295 521 1.185 336 9.149 912 1.663 104 7.254 765 5.712 532 - 5.238 18 Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 GDP growth (annual %) 6.735 822 6.006 204 3.475 733 7.288 893 3.820 738 5.254 299 4.776 564 3.965 356 9.627 783 5.947 343 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 GDP growth (annual %) 5.533 455 1.056 831 5.482 396 4.750 776 6.658 924 7.574 492 7.549 522 4.049 821 6.184 416 8.463 071 Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP growth (annual %) 3.975 053 4.944 226 3.907 534 7.943 995 7.848 792 9.284 882 9.263 965 9.801 36 3.890 957 8.479 784 0 2E+11 4E+11 6E+11 8E+11 1E+12 1.2E+12 1.4E+12 1.6E+12 1.8E+12 2E+12 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 GDP (current US$) GDP (current US$)
Role of GDP in developing India 14 14 Year 2010 2011 2012 GDP growth (annual %) 10.54 639 6.330 518 3.236 943 Line graph of Growth of Indian GDP in annual % GDP of India per capita in current US dollars since 1960 Year 1960 1961 1962 1963 1964 1965 GDP per capita (current US$) 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 %)
Role of GDP in developing India 15 15 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.
Role of GDP in developing India 16 16 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$) GDP per capita (current US$)
Role of GDP in developing India 17 17 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!!!!
Role of GDP in developing India 18 18 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?
Role of GDP in developing India 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!
Role of GDP in developing India 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.
Role of GDP in developing India 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.
Role of GDP in developing India 22 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.
Role of GDP in developing India 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
Role of GDP in developing India 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
Role of GDP in developing India 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
Role of GDP in developing India 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.
Role of GDP in developing India 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
Role of GDP in developing India 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
Role of GDP in developing India 29 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
Role of GDP in developing India 30 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
Role of GDP in developing India 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.
Role of GDP in developing India 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
Role of GDP in developing India 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.
Role of GDP in developing India 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
Role of GDP in developing India 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.
Role of GDP in developing India 36 36 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
Role of GDP in developing India 37 37 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 he