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The
Indian
Economy
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State of economy pre-1991
•
• Socialistic thinking
• Resource poor economy; investment role for Govt.
• 5 yr plans – License Raj – Quota Restrictions
• Sellers market; No pressure on manufacturer to
improve quality
• Ready market – no price for innovation
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Pre LPG
• Sellers market led to corruption, inefficiency
• Inward looking economy
• Conserve forex; Import substitution
• Few luxuries; Feeling of shortage in the economy
• Huge trade deficit; Forex reserves - $ 1 bn
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First Generation Reforms• De-License; Liberalization of import norms
• Taxation Reforms– Direct & Indirect
• Forex norms –FII & FDI allowed
• Dividend repatriation allowed
• Banking sector reforms; RBI relaxes controls
• Stock market reforms – SEBI
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Second Generation Reforms
• Infrastructure
• Telecom reforms
• Insurance – GIC & LIC
• Labour law reforms
• Disinvestment
• Power sector reforms
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Part 2: Some Statistics
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India: Basic Info
5.5% Inflation rate
$160 billionForex Reserves
65% Literacy Rate
45.33%Working Age Population
7.80%Unemployment rate
$3,700 Per capita income (PPP)
9%GDP growth rate (2005-
06)
$4 trillionGDP (PPP)
$796 billionGDP (nominal)1.38% Population growth rate
1.095 billion Population
Source: CIA Factfile and Wikipea,
2006 estimates
510 mn Employed
127 HDI Rank
22% below PL
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INDIA: Basic Info
• Low per capita income
• High population growth rate (1.38% growth)
• Dependence on primary production
• 72.25% live in villages
• High density of population – 324/sq.km
• High rate of un employment
• Improper distribution of wealth
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India: Some facts
• High Illiteracy (Literacy – 64.8%; 75.3% male and
53.7% female literates)
• Low level of technology and productivity
• Poverty; 46% of children suffer from malnutrition.
• High savings but low capital formation
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Core Sectors• Coal
• Cement
• Power• Steel
• Petroleum
• Petroleum refinery products
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THE 3 SECTORS OFECONOMY
• Primary – agriculture, forestry, fishery, animal
husbandry
• Secondary – mineral, power, mining, manufacturing industries
• Services – transport, trade, communication, banking,
other services
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Part 3: India and the World
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Our main export partners ($112 b)
17%
9%
7%
5%5%4%
53%
USA
UAEChina
Singapore
UK
Hong Kong
Others
Source: CIA Factfile, 2006 estimates
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Our main import partners($188 b)
7%6%
5%
82%China
USA
Switzerland
Others
Source: CIA Factfile, 2006 estimates
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Part 4: Budget Basics
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TAXES
• DIRECT TAXES: Direct incidence of tax on the person who pays the tax; liability to pay tax is
NOT passed on to someone else. Examples: IT,
gift tax, corporation tax, wealth tax, land revenue, etc.
• INDIRECT TAXES: Levied on goods and
services; traders / producers pay it. Liability
passed on to end customer. e.g. VAT, excise
tax, customs duty, service tax, etc.
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For the previous financial year • Economic Review of the country
• Assessment of budget: targets v/s actuals
For the coming financial year • Economic Forecast for the country
• Government revenue and expenditure targets
• Components of government revenue and expenditure
• Miscellaneous financial measures
Union Budget: What is it?
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STRUCTURE OF UNIONBUDGET
REVENUE SIDE
1. Revenue receipts
(a) Tax Revenue: Central excise, customs duty,
corporation tax, IT, service tax, VAT (b) Non-Tax Revenue: Interest receipts on loans,
dividends from PSUs.
2. Capital receipts include principal repayment from debtors, market borrowings,disinvestment proceeds
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STRUCTURE OF UNION
BUDGET
EXPENDITURE SIDE
1. Plan expenditure(a) Incurred in central development schemes.Costs around 25% of total expenditure.
(b)Types: Revenue and Capital
2. Non-plan expenditure(a) Interest payments, defense, subsidies, salary
of govt. employees.(b) Accounts for approx. 75% of total expenditure.
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DEFICITS
• Revenue deficit
Revenue expenditure (interest+subsidy+ defense +police) - Revenue receipts ( tax+non tax)
• Budget deficit
Total expenditure - total receipts
• Fiscal deficitBudget deficit + borrowings from banks & public
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Part 5: Important Terms Decoded
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INDICATORS OF ECONOMY
INFLATION
• Steady rise in prices, resulting in decline inpurchasing power of the money.
• 2 types - cost push & demand pull.
• Normally measured in terms of WPI, on
YoY basis.• Moderate inflation is good for economy.
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INDICATORS OF ECONOMY
WPI - WHOLESALE PRICE INDEX
• Measures increase / decrease in industrial, commercial
prices of commodities under 3 broad categories.• Primary articles - 98 items
• Fuel, power etc. - 19 items
• Manufactured products - 318 items
• Certain weight to each category of commodities
• Base year - 1993-94• Used for calculating INFLATION.
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INDICATORS OF ECONOMY
CPI—CONSUMER PRICE INDEX
• Calculates increase / decrease in retail price.
•Direct bearing on consumers.• Diff. types of CPIs for various consumers.
►for agricultural laborers.
►for industrial workers.
►for urban non-manual employee.
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Factors behind Inflation
• Heavy non-plan expenditure by Govt.
• High fiscal deficits and deficit financing
• Govt.’s attempts to bridge deficits by higher indirect
taxes → rise in costs.
• Large parallel economy
• Fluctuation in agricultural output
• Increase in Money Supply
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Fiscal Policy: What is it?
The government’s policy of achieving economicobjectives (employment, per capita income…)
through government earning and spending.
Government sources of funds: Taxes and duties,government businesses,fines, borrowing from public,investments
Government uses of funds: Infrastructure, mining, publicwelfare, defence, power generation, research anddevelopment
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(a)(a) M1M1 == currency in circulation - cash with bankscurrency in circulation - cash with banks
+ demand deposits with banks (also+ demand deposits with banks (alsocalled narrow money – most liquid )called narrow money – most liquid )
• M2M2 == M1+ small saving depositsM1+ small saving deposits
(c)(c) M3M3 == M1+ time deposits with banks (also called M1+ time deposits with banks (also called
broad money)broad money)
If M3 > GDP growth rate → Inflation.If M3 > GDP growth rate → Inflation.
Money Supply
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Monetary Policy
The government’s policy of achieving economic objectives (employment, per capita
income, balance of trade, economic parity…) through
controlling money supply.
• Decrease in supply: Deflation or decrease in prices
• Increase in supply: Inflation or increase in prices
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MONETARY POLICY
Regulates the money supply in the economy
(c) Bank Rate: Official rate of interest charged by RBI as the
lender of last resort. Current rate – 6%
(b) Open Market Operations: RBI buying & selling securities to
regulate money supply. Repo rate - 6%; Reverse Repo - 7.25%
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MONETARY POLICY
(c) CRR: All commercial banks should keep a certain percent of its demand & time deposits with the RBI (5.5%).
(d) SLR: Commercial banks keep a fixed percentage of their
demand & time deposits in liquid assets (securities, gold )currently at 25%.
(e) Priority sector lending
(f) Differential Interest Rates ( PLRs )
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TRADE CYCLE
Refers to fluctuation in economic activity which forms a
regular pattern.
• Expansionary phase characterized by increase in income,
output, employment & inflation.
• Contraction phase is characterized by drop in income,
output, employment & deflation (sustained fall in prices).
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TRADE CYCLE
• BOOM: Refers to a particularly sharp upwards turn indemand and output.
• RECESSION: Two consecutive quarters of falling GDP in
an economy. Beginning of slump or depression. Occurs dueto over-production during earlier phase, rise in fuel andraw material prices, etc.
• SLUMP: Severe down-turn phase. Opposite of boom, e.g.,
the great U.S. slump
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Current A/c Convertibility
• Free flow for purposes other than for capital purchases
and loans
• Exports, Imports
• Travel, Study abroad, Employment abroad
• Medical treatment, Gifts
• Consultancy, International credit cards
C it l A/ C tibilit
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Capital A/c Convertibility• The freedom to convert local financial assets into
foreign financial assets & vice versa at marketdetermined rates of exchange
• Indicator of a developed economy, gives confidence toinvestors
• However, leaves the country at risk
• Tarapore Committee (1997) recommends that there is a
need for fiscal consolidation, low inflation, & financesector reforms
Di i t t
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Disinvestment
• Period under consideration: 1991-92 to 2004-05
• Achievement – Rs. 47,646 crore as against a target of Rs. 96,800crore (14 companies privatized)
•Controversial Issues – Loss making units, Social responsibility
– Method - Public issue, strategic sale
– Valuation
– Creating monopolies – (IPCL, VSNL)
– Job loss, loss of govt. control
– Use of sale proceeds
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T IME
Thank You and ALL THE BEST!