broad profile of the indian economy & macro

7/31/2019 Broad Profile of the Indian Economy & Macro

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BROAD PROFILE OF THE

INDIAN ECONOMY & MACROECONOMIC SCENARIO


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India- An Underdeveloped

Economy Underdeveloped economy - primarily anagricultural economy, more than 50 % of thepopulation employed in agriculture

Per capita income is low Rate of capital accumulation is also low

Demographically backward, as life expectancy

at birth is low and the population grows rapidly. Widespread unemployment


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Low Per Capita Income

Compared with developed countries of theWest, Indian economy was appallingly poor inthe early 1950s

After Independence the government wanted togive a 'big push' to the standstill economy andso it employed technique of 'democraticplanning

Some development has during the sixdecades of planning

Still remains one of the most underdevelopedcountries in terms of per capita income


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Low Per Capita Income

Only countries like Nigeria, Kenya, Tanzania,Zambia, Ethiopia, Bangladesh and Nepal arepoorer than India

Per capita income in the rest of the ThirdWorld is higher than that in this country

In 2007 India's per capita income was as low

as $ 950. It was only one-fiftieth of the USA's per capita

income.


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Inequitable Distribution of Income andPoverty

The distribution of income and wealth in India isinequitable

In 1999-2000 lowest 20 % households accounted

for 8.9 % of the aggregate household expenditure Share of top 20 % in it was as large as 41.6 %

In the middle category 60 % households at modest

level of living accounted for 50.5 % of the aggregatehousehold expenditure

The lowest 40 % households with their meagrepurchasing power & middle category are notrelevant for business


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Mass Poverty

The problem of mass poverty due to income inequalities Population below the poverty line in 1979-80 was as

high as 48.44% Declined to 36% in 1993-94 2004-05 poverty ratio was 27.5% Since the late 1970s there has been a decline in

incidence of poverty. Nevertheless, the percentage of population below the

poverty is still quite high. Alarming situation from the point of view of the business Even after years of Independence, about one fourth of

India's population neither has much capacity to

contribute to capital accumulation nor to create largedemand for industrial goods


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Predominance of Agriculture

Occupational distribution of population in Indiais not satisfactory and clearly reflectseconomic backwardness of the economy

In 1951 about 70% of the population of thecountry was dependent on agriculture

In 1991 around 66.9 % of the working

population was absorbed in agricultural


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During 1990s, there was a decline in employmentin agriculture

In 2001, 56.9 % were employed in agriculture andallied activities

Despite this decline, agriculture continues toremain the biggest employer in India

In developed countries importance of agriculture

is much less. For instance, only 2 % of the USA's working

population is engaged in agricultural operations.


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A second indicator of the predominanceof agriculture in the Indian economy isthe proportion of national income

originating in this sector In 2007-08 agriculture and allied

activities contributed 17.8 % of the Gross

Domestic Product. This is less than the share of agriculture

in Gross Domestic Product in 1950-51 -

contributed more than 55 %


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Not a big achievement - about six decades ofplanning were devoted to reduce workingpopulation dependence on agriculture

Reliance on agriculture in India is far greaterthan in some other Third World countries suchas Argentina, Malaysia, Thailand, Mexico,Brazil, and Republic of Korea.

In these countries agriculture now accounts for10 % of the GDP or even less.


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The Indian economy thus is essentiallyagrarian.

In the agricultural sector productivity is low

and, as a result, a large number of farmershave virtually little purchasing power to buyindustrial goods

Failure of the agricultural sector even nowcauses recession in the industrial sector


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Rapid Population Growth

Life expectancy at birth in India was 64 yearsin 2006 as against 73 years in middle incomeeconomies.

Population in India has been growing at a fastrate

In 2007, India's population was 1,123 millionas against 361 million in 1951.

Over the 50 years period the rate of populationgrowth was over 2.0 % per annum

Since 2000-01, it has been at the rate of 1.5%per annum.


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Rapid Population Growth

Requirement of feeding additional numberscompels the use of resources in low returnagriculture rather than higher return

manufacturing Rapidly growing pressure of population in the

period of slowly growing employmentopportunities restricts the freedom to adopt themost sophisticated production technologies


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Unemployment

Unemployment increased between 1993-94and 2004-05

Unemployment rose by 5-7 % between 1993-

94 and 1999-2000. Unemployment situation worsened during the

period 1993-94 to 2004-05

Thus employment situation did not improve inthe period of liberalization.

Economic growth was mostly jobless


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Unemployment

The nature of unemployment in India is not thesame as in developed countries.

Most of the unemployment to be found in the

developed countries of the West is cyclical. Unemployment in India is chronic and results

from the structural defects in the economy.

People in a large number in the countryside donot have adequate work throughout the yearand many of them suffer from open

unemployment for long periods.


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Unemployment

According to Ragnar Nurkse, in underdevelopedcountries like India, people suffer from disguisedunemployment in agriculture.

Presently the problem of urban unemployment in

India has assumed two forms. First, the failure of the industrial sector to grow at a

fast enough rate to absorb the growing urban

population has resulted in industrialunemployment.

Secondly, expansion of general education hascreated unending demand for white collar jobs

which the country's urban economy has failed to

S it f C it l


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Scarcity of CapitalAccumulation of capital can help a country to

overcome its economic backwardness.

Kuznets remarked, "Low capital formationproportions means low rates of growth of nationalproduct

In India both saving and investment rates have risensince Independence at a low rate.

In 2001-02 the rates of gross domestic saving andgross domestic capital formation were estimated to be23.5 and 22.8 % respectively.

Enough to realize only a modest rate of growth.

South Korea, Malaysia, Thailand, Singapore andChina have excelled most countries in this respect due

to high S & I rates


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Scarcity of Capital

High rates of saving and investment allowbusiness to grow at a fast rate, introduce latesttechnologies and become internationally

competitive. Saving and Investment ratios were as high as

37.7 and 39.1 % of GDP respectively in 2007-08.

This shows that there has been a spectacularincrease in both saving and investment in theperiod since 2001-02.


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Technological Backwardness

Technological progress is at the heart ofdevelopment process

Over a wide range of productive activity,

techniques of production are backward in IndiaAgriculture which provides subsistence to

about two-thirds of the population is even nowcharacterized by highly backward techniques.

Except in the green revolution beIt of thecountry everywhere else farmers are persistingwith outmoded production techniques


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Technological Backwardness

Modern technology is scale neutral, but is notresource neutral

Therefore, the small and marginal farmers (majority)due to poverty failed to adopt new technology which

has kept agricultural productivity low So the domestic market for industrial goods has not

grown rapidly enough

In large scale industries, energy, transport and

communications modern production techniquesintroduced

Wide gap between the sophisticated productiontechniques of the developed countries and ourtechnology


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Lack of Entrepreneurs

Require aptitudes that are present only in a smallfraction of the population.

A society that possesses people who are gifted withentrepreneurial skill is bound to grow rapidly.

The presence of this class in England, Germany and theUSA had a major role in their development

Even after Independence Indian business class did notshow much entrepreneurial skill as it operated under aprotective umbrella

This situation however, changed since 1990-91 due toeconomic liberalization

Consistent pursuit of neo-liberal policy created scope forthe emergence of a new class of entrepreneurs.


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ECONOMY

Economic development in India has broadly twofacets:

a) Quantitative b) Structural

From the point of view of the business enterprisesboth are relevant.

For assessing the development process inquantitative terms national income trends are to

be examined. But still more necessary is to take note of the

structural changes in the economy.

The two together, in fact, broadly indicate the

business prospects in the country.


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National Income Trends

Immediately after Independence, India wasbogged down in problems created by thepartition of the country.

Problems such as inflation and food shortages Country caught in 'the low level equilibrium

trap' during the British period had no easy way

out to tread on a high growth path. This was a dismal situation


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The government thus adopted economic planningin the capitalist framework.

The Indian plans did transform India's stagnanteconomy into a developing economy.

The rate of economic growth, however, remainedlow in the first three decades of economicplanning.

During this period, the net national productincreased at a modest rate of 3.4 % per annum

Increase in per capita income in this period wasas low as 1.2% per annum


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1980s - rate of growth picked up and for ten yearsthe NNP increased at 5.6 % per annum.

In the two years 1990-91 and 1991-92 thecountry was caught in a deep economic crisis -

growth rate declined steeply. The new economic policy which was adopted in

1991, temporarily put the Indian economy on ahigh growth path.

During the Eighth Plan period the rate of increasein the NNP was 6.7 % per annum. The per capita income - an impressive growth rate

in this period : 4.5 % per annum.


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Slowdown during the Ninth Plan period and rate ofincrease in the national income had come down to5.3 % per annum.

Rate of increase of national income improved over

the Tenth Plan period (2002-03 to 2006-07) andstood at 7.8 % per annum.

The rate of growth of NNP in 2007-08 (which was

the first year of the Eleventh Plan) was as high as9.1 %

Fell considerably to 6.7 % in 2008-09 due toeconomic slowdown following global recession.


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Structural Changes

There have been significant changes in India'seconomic structure since Independence.

These structural changes indicate that theprocess of development which began in the early

1990s is still continuing. Importance of agriculture in Indian economy has

declined since Independence Occupational distribution of the population has

improved Basic and capital goods industries havedeveloped

Infrastructure and the financial sector have grown


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Structural Changes

Significant changes in sectoral distribution ofdomestic product.

An important index of development is a steadydecline in the importance of agriculture and allied

activities in the economy in terms of theircontribution to gross domestic product.

In 2008-09 the share of agriculture and allied

activities in the gross domestic product (GDP)was 17.0 % as against 55.1 % in 1950-51 and31.4 % in 1990-91.


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Structural Changes

The share of the output in the industrial sectorwhich was 10.6 % of GDP in 1950-51 rose to19.8 % of GDP in 1990-91 and stood at 18.5 %of GDP in 2007-08.

Services sector includes construction, trade andtransport, finance, insurance, and communityand personal services.

The share of this sector in GDP was 34.3 percent in 1950-51. This rose to 48.8 per cent ofGDP in 1990-91 and further to 64.5 per cent ofGDP in 2008-09.


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Structural ChangeSignificant change in sectoral distribution of domestic

productContribution of Agriculture & allied activities to GDP

1950-51: 55.1%

1990-91: 31.4%2008-09: 17%

Output in industrial sector (comprising mining &

quarrying, manufacturing, electricity, gas & watersupply) 10.6% of GDP in 1950-51, rose to 19.8% in1990-91 & 18.5% of GDP in 2007-08

Services34.3 % share in GDP in 1950-51, rose to

48.8% of GDP in 1990-91 & 64.5% in 2008-09


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Structural Change

No longer a subsistence agrarian economy- amore congenial environment now

Primary sector accounted for 57.3% ofworkforce in 2001, 67.4% in 1991 & 72.7% in1951

Occupational distribution of workforce not

changed significantly


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Structural Changes These facts clearly indicate significant

changes in the structure of the economy The Indian economy is no longer a

subsistence agrarian economy.A more congenial environment for business

activities as compared to about twodecades ago.

In India, where primary sector accounted for57.3 per cent of the workforce in 2001 asagainst 67.4 per cent in 1991 and 72.7 percent in 1951, the occupational distribution ofworkforce had not changed significantlyduring the 50 years period from 1951 to

2001.


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Growth of basic capital goods industries

At the time of Independence, India's industrialstructure was underdeveloped & there wasabsence of basic capital goods industries

Since Independence, pattern ofindustrialization has been determined by thepolicies of the State.

Under the Second Plan, a high priority was

accorded to capital goods industries, as theirdevelopment was considered a prerequisite tooverall growth of the economy.


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Growth of basic capital goodsindustries

This strategy of development was at the heartof India's economic planning for about two anda half decadesbeginning from 1956.

Large number of basic industries whichproduce capital equipment and useful rawmaterials set up making the country's industrialstructure pretty strong

These industries now account for more thanfifty per cent of the industrial production.


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Development of infrastructure

Infrastructure includes transport facilities,energy and telecommunication system.

Their development creates favorable

conditions for business growth and also forbetter human living.

The World Development Report 1994 aptly

remarked, "Infrastructure represents, if not theengine, then the 'wheels' of economic activity

D l t f


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Development ofinfrastructure In India, infrastructure is a major constraint on

business growth, but over the years animpressive growth.

The transport system over the past fourdecades has grown both in terms of capacityand modernization.

There has been a massive increase in

installed electricity generating capacity in thecountry.

With more than 300 million connections inMarch 2008, the Indian telecommunication

network is now third largest in the world


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Progress in the Banking and Financialsector

Since Independence progressive changes in thebanking and financial structure of India.

In this period, organization of money and capital

markets has improved, specialized industrialfinancing institutions were set up, banking serviceshave increased and modern banks have reachedsmall towns and villages.

The growth of commercial banks and cooperativecredit societies has been really spectacular.


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Progress in the Banking and Financialsector

The process of nationalization was initiated after Independence.

First, the Reserve Bank was nationalized in 1949.

In 1955 the Imperial Bank of India, a leading commercial bankof the time, was nationalized and converted into the State Bankof India.

In 1969, fourteen big commercial banks were nationalized.

This act undermined the control of big capitalists on the financecapital.

Since nationalization, these banks changed their credit policy,more funds were to priority sectors - agriculture, small-scaleindustries, transportation etc.

However, the directed credit and investment programs eroded

the profitability of the banks


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Sum UP

Indian economy, though economically still backward,is no longer caught in a 'low level equilibrium trap'

Since Independence it has recorded a not too

insignificant increase in the national income and percapita income,

Not sure of the trickle down effects of growth.

Indian economy progressed structurally - the growth

of capital goods industries, expansion of theinfrastructure, performance of the public sector,changes in the financial organization and theprogressive transformation of the agrarian scene

INDIA A MIXED ECONOMY


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INDIAA MIXED ECONOMY

The Indian economy is a mixed economy.Adoption of economic planning and growth of a

large public sector since Independence.

Second Five Year Plan summed up theobjectives of planned economic development -"socialist pattern of society" , "the basiccriterion for determining lines of advance mustnot be private profit, but social gain

Nationalization of banks, setting up a numberof enterprises in the public sector and suchother measures towards socialism

F t f I di th t k it


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Features of Indian economy that make it aMixed Economy

Private ownership of the means of production: Theshare of the public sector in the total national output is lessthan 25 per cent.

Predominance of the market:Market holds apredominant position in the Indian economy.

At present this country has markets for commoditiesas well as productive factors.

Prices determined by demand and supply forces. Business firms guided by the product prices usually

decide as to what commodities they will produce.

Even the choice of inputs depends on their prices.

Features of Indian economy that make it a


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However, the market mechanism in India has notbeen completely free from the State control.

In 1951, Industries (Development and Regulation)Act was passed to provide a regulatory system for

industrial activity in the country. Apart from the licensing system, the government

also introduced certain other controls and incentivemeasures for influencing the markets.

Import controls, distribution of essential goods at fairprice shops and government purchase ofagricultural products at support prices.

Features of Indian economy that make it


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Features of Indian economy that make ita Mixed Economy

Growth of private sector monopolies:SinceIndependence, monopoly houses have grown rapidly -concentration of economic power

Grip of big business on the economy increased

Public sector: In India, a large public sector co-exists

with the private sector , character of the economy asmixed.

Not been inspired by any ideological considerations.

At the time of Independence the private enterprise

lacking both resources and will to make heavyinvestments

Government to develop infrastructure and basic capitalgoods industries.

The government's intervention in the form of expansion


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Economic planning: Economic planning hasbeen an integral part of the Indian economy since1951.

The nature of economic planning in India hasalways been different

This country adopted planning while retaining itscapitalistic structure, former Soviet Union and

other East European countries had transformedtheir economies into socialist economies

The Indian experience shows that the mixedeconomy framework is a feasible for a

developing country


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MACROECONOMIC SCENARI

Fl t ti i E i


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Fluctuations in EconomicGrowth

GDP rose at the rate 6.5 per cent per annum over theEighth Plan Period (1992-97). Fell to only 5.5 per cent per annum during the Ninth

Plan (1997-2002). This slipped to 3.8 per cent in 2002-03 because of

setback to the agricultural sector. In fact, the agricultural sector had grown at an annual

rate of 3.5 per cent during the early 1990s. Since 1995-96 agricultural growth has been both slow

and erratic. 0.2 per cent in 1995-96 and negative in 1997-98.

2000-2001 and 2002-03. Average growth of agricultural production for the 1990s

(1992-2001) was 2.5 per cent compared to 3.5 per

cent in the 1980s (1981-90).

uc ua ons n conom c


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uc ua ons n conom cGrowth

However, economic growth picked up during theTenth Plan period (2002-07) and the rate ofincrease in national income was as high as 7.8per cent per annum.

The rate of growth of GDP rose further to 9.0 percent in 2007-08. This created a conducive business environment

and there was an all round optimism. However, following global recession, these was a

marked slowdown in the economy during the year2008-09

Rate of growth: 6.7 per cent 2008-09

Erratic Industrial Growth


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Since 1996-97 industrial growth in this country has beenerratic.

It was 6.7 per cent in 1999-2000

Decline to 5.0 per cent in 2000-01 and to 2.7 per cent in 2001-02.

Some recovery in 2002-03.

In 2002-03, the industrial production increased by 7.0 per

cent. During Ninth Plan as a whole, the rate of growth of industrial

production averaged just 5.0 per cent.

This rose to 8.2 per cent per annum in the Tenth Plan


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2007- 08- recorded 8.5 per cent growth in industrialproduction.

However, this growth slipped to just 2.7 per cent in2008- 09.

It seems that a deceleration in exports, reduction inconsumer demand due to growing income inequalitiesand low growth of rural incomes, slow down in industrialinvestment and infrastructural bottlenecks contributed

most to the erratic nature of industrial growth. The last few years have witnessed a sharp fall in

exports of manufactured goods due to both domesticand external factors


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Since 1996-97 industrial growth has been erratic

1995-96: 12.2%

1996-97: 5.6%

1999-2000 : 6.7%

2000-01: 5%

2001-02: 2.7%

2002-03: 5.8%

2002-03: 7%

Ninth plan as a whole: 5%

Tenth plan: 8.2%

2007-08: 8.5%

2008-09: 2.7%

Savings and Investment


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Savings and InvestmentGrowth The gross domestic savings rate failed to increase

during the 1990s.

It was was 23.5 per cent in 2001-02

However, since 2002-03 it registered a spectacular

increase Gross domestic savings rate was as high as 29.8 per

cent in 2003-04 and this rose further to 37.7 per centin 2007-08

Rate of investment was 32.1 per cent in 2004-05 andas high as 39.1 per cent in 2007-08.

Rise in the rate of investment due to thetransformation in the investment climate, coupled with

an optimistic outlook for the growth prospects of theeconom ."

Prices and Inflation


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Prices and Inflation

During 2005-06, the average annual rate ofinflation (based on WPI) was 4.4 per cent while itwas 5.5 per cent in 2006-07.

Last quarter of 2007-08, inflationary pressures

started building up and the inflation rate rose to8.02 per cent in March 2008.

The inflation rate touched the high level of 12.6per cent on August 9, 2008.

Last quarter of the financial year 2008- 09, theinflation rate started coming down due to decliningcommodity prices and crude oil prices.

Fiscal Imbalance


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Fiscal Imbalance

Fiscal imbalance has persisted over the yearsin the form of large government deficits. The gross fiscal deficit refers to the difference

between the revenue receipts (net) plus non-

debt capital receipts and the total expenditureincluding loans net of repayments. Non-debt capital receipts arise from the sale of

assets - arise from the sale of government

equity in public sector enterprises.


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Fiscal Imbalance

Gross fiscal deficit of the Central government was7.8 per cent of GDP in 1990-91.

As a result, gross fiscal deficit was brought downto 4.5 per cent of GDP in 2003-04.

The government adopted the FRBM Act in 2004(fiscal discipline) Brought down the gross fiscal deficit to 3.5 per

cent of GDP in 2006-07 and 2.7 per cent of GDPin 2007-08.

Gross fiscal deficit rose to as high as 6.2 per centof GDP in 2008-09 as government introducedmassive expenditure programs to tackle theproblem of economic slowdown.


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External trade position

India's external trade position lookedsatisfactory in the first half of the 1990s.

In fact, in the mid 1990s for three yearswhen exports registered an impressivegrowth (in the range of around 20 per centper annum) several policy makers arguedthat the strategy of export led growth wasgoing to put this country in the company of

Asian Tigers. However, all this changed during the three

years since the middle of 1996. The exporttrends for India were rather disappointing.


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External trade position

Exports have shown growth during the Tenth Plan period -rate of growth of exports during Plan 24 per cent

Both external and domestic factors have contributed to thissatisfactory performance.

Improved global growth and recovery in world trade aided

the strengthening of Indian exports. As far as domestic factors are concerned, the opening up of

the economy has enhanced the competitiveness of Indianindustry.

There has been increase in earnings from invisibles.

This has enabled the country to register surplus in currentaccount in three years in a row 2001-02, 2002-03 and 2003-04.

The net capital inflows have also increased considerably.

As a result, there has been a large build-up of foreignexchan e reserves

The Global Financial Crisis &


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The Global Financial Crisis &India

The global financial crisis surfaced around August2007.

Its origin lay in structured investment instruments(Collateralized Debt Obligations) created out of

subprime mortgage lending in the United States. The securitization process, however, was not

backed by due diligence and led to large-scaledefault.

The collapse of the Lehman Brothers in mid-September 2008 further aggravated the situationleading to a crisis of confidence in the financialmarkets.

A pronounced recession is believed to have

begun in mid-2008 in Europe, Japan and USA.



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The effect on the Indian economy was notsignificant in the beginning.

The initial effect of the subprime crisis was, infact, positive, as the country received accelerated

FII (foreign institutional investment) flows fromSeptember 2007 to January 2008.

This contributed to the debate on "decoupling",

where it was believed that the emergingeconomies could remain largely insulated fromthe crisis

The argument soon proved unfounded as the

global crisis intensified and spread to the



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Rate of growth in 2008-09 was 6.7 per cent (downfrom 9.0 per cent in 2007-08).

Rate of growth in agriculture in 2008-09 was 1.6 percent (down from 4.9 per cent in 2007-08).

Rate of growth of manufacturing in 2008-09 was 2.4per cent (down from 8.2 per cent in 2007-08). According to Economic Survey, 2008-09, the

slowdown in manufacturing could be attributed to thecombined impact of a fall in exports followed by a

decline in domestic demand, especially in the secondhalf of the year. The rise in the cost of inputs during the beginning of

the year and the cost of credit (through most of theyear) reduced manufacturing margins and profitability.

broad profile of the indian economy & macro

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