economics term paper1

8/14/2019 Economics Term Paper1

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ON

(INVESTMENT ON INFRASTRUCTURE IN POST LIBERALIZATION)

SUBMITTED BY:- GUIDED BY:

Name- Mohammad Abbas MR.MANDEEP SINGH

Regd. No- 10906034

Roll. No.- RS1904A24

SUBMITTED TO

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Department of management Lovely Professional University Phagwara

ACKNOWLEDGEMENT

I take this opportunity to present my vote of thanks to all those

guidepost who really acted as lightening pillars to enlighten our way

throughout this project that has led to successful and satisfactory

completion of this study.

I am really grateful to our COD Mr.Devdhar shetty for providing us with

an opportunity to undertake this project in this university and providing

us with all the facilities. We are highly thankful to Mr.MANDEEP SINGH

for his active support, valuable time and advice, whole-hearted

guidance, sincere cooperation and pains-taking involvement during the

study and in completing the assignment of preparing the said project

within the time stipulated.

Lastly, I am thankful to all those, particularly the various friends , who

have been instrumental in creating proper, healthy and conductive

environment and including new and fresh innovative ideas for us

during the project, their help, it would have been extremely difficult for

us to prepare the project in a time bound framework.

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Name - MOHAMMAD ABBAS

Regd.No 10906034

Roll no. RS1904A24

ABSTRACT:-

Investment and output in the model are disaggregated

In to four sectors,

(a) Agriculture including forestry & fishing,

(b) Manufacturing,

(c) Infrastructure, which includes power, transport, communication and construction

(d) services sector, covering all other activities.

The model emphasizes the interrelationships between internal and external

balances and also relation between money, output, prices and balance of payments.

A unique feature of model is that it incorporates the savings-investment identity. The

model also tries to link economic growth with poverty reduction. Annual time series

data for the period 1978-79 to 2002-03 are used for this purpose. Three-stage least

squares method is used to estimate the model. The model is validated for its in-

sample forecasting ability. A few counter factual policy simulations relating to public

investment in infrastructure are undertaken to illustrate the usefulness of model for

analyzing the policy options in a simultaneous equations framework. A preliminary

trend analysis has shown slowing down of the economy during 90s and thereafter.

There are also significant structural shifts in production from agriculture to

infrastructure and services in the Indian economy. The estimated model indicated

significant crowding-in effect between private and public sector investment in all the

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sectors. Counter factual policy simulations of sustained increase in public sector

investment in infrastructure, financed through borrowing from commercial banks,

shows substantial increase in private investment and thereby in this sector. Further,

due to increase in absorption, real output in the manufacturing and services sectors

also seem to increase, which sets-in motion all other macroeconomic changes. Due

to rise in sectoral (and aggregate) output, price level and money supply seem to

decline in the short-run. Due to sustained nature of policy change, the impacts get

strengthened over time and benefit the economy. A 10% sustained increase in public

sector investment in infrastructure, which is less than 0.4% of GDP, can accelerate

macro economic growth by nearly 2.5% without causing any inflation. Further, this

increase in income will lead to nearly 1% reduction in poverty in India. This assures

the potential for achieving the much debated 10% aggregate real GDP growth in the

Indian economy.

1. Introduction

There has been lot of public debate in recent months, particularly after the

presentation of annual central budget for 2008-09 by the Finance Minister,

(a) Need for achieving 10% GDP growth and its feasibility,

(b) The role and potential of infrastructure sector in achieving the desired GDP

growth

(c) Ways and means of raising resources for public investment in infrastructure

sector and particularly the use of accumulated foreign capital inflows for this

purpose. The tool of counter factual policy simulation, using a macro econometric

model. A macro econometric model is as a system of simultaneous equations,

seeking to explain the behaviour of the key economic variables in the economy at

aggregate level, based on the received theories of macroeconomics. Macro

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econometric modelling, in general, pursues two objectives: forecasting and policy

analysis. The latter objective is the focus of this study. Fiscal and monetary policies

are the foremost policies that are virtually analysed in macro econometric models

from their inception. The tool of an aggregative, structural, macro econometric model

to analyse macroeconomic effects of changes in selected exogenous variables for

India. Before we give details of selected model, its estimation etc., it would be useful

to briefly look at literature on this topic pertaining to India. A detailed review of macro

econometric models built for Indian economy is beyond the scope. Since we analyse

the economy from a monetary framework, it would be worthwhile to look into how

monetary sector was modelled in the Indian context.

Modelling monetary sector and its links with fiscal and external sectors became a

challenging task in India after 1970s. Modelling money and monetary policy for the

determination of real output and price level has increased considerably in India (e.g.

Rangarajan and Arif, 1990; Rangarajan and Mohanty 1997). In these models, stock

of money varies endogenously through feedback from reserve money, which

changes to accommodate fiscal deficit and changes in foreign exchange reserves.

The price level is determined by money supply and production. The output supply is

determined as a function of real money balances and net capital stock. Some

models attempt to link the real, monetary and fiscal sectors. Models by Krishnamurty

and Pandit (1985), Rangarajan and Arif (1990), and Soumya and Murty (2005)

exhibit this form of linking. Modelling the external sector was not a major concern in

the earlier models, because of restrictions on trade. But, in the recent years, several

models emerged with detailed emphasis on the external sector and its interlinks with

the monetary and fiscal sectors.

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Krishnamurty and Pandit (1996) modelled the merchandise trade flows in supply

demand framework and include disaggregated output, prices and investment

behaviour.

Macroeconomic impact of fiscal deficit on balance of payments in India is an

emerging issue in recent years since the inception of stabilization program. These

issues were modelled by Rangarajan and Mohanty (1997). It is postulated that fiscal

deficit increases the absorption in the economy relative to output and the output

effect of deficit.

1. ECONOMIC GROWTH AND GDP

Indian economy has been witnessing a phenomenal growth since the last decade.

The country is still holding its ground in the midst of the current global financial crisis.

In fact, global investment firm, Moodys, says that driven by renewed growth in India

and China, the world economy is beginning to recover from the one of the worst

economic downturns in decades.

The growth in real Gross Domestic Product (GDP) at factor cost stood at 6.7 per

cent in 2008-09. While the sector-wise growth of GDP in agriculture, forestry and

fishing was at 1.6 per cent in 2008-09, industry witnessed growth to 3.9 per cent of

the GDP in 2008-09.

The Prime Minister, Dr Manmohan Singh, on August 15, 2009, in his address to the

nation on its 63rd Independence Day, said that Government will take every possible

step to restore annual economic growth to 9 per cent.

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The World Bank has projected an 8 per cent growth for India in 2010, which will

make it the fastest-growing economy for the first time; overtaking Chinas expected

7.7 per cent growth.

A number of leading indicators, such as increase in hiring, freight movement at major

ports and encouraging data from a number of key manufacturing segments, such as

steel and cement, indicate that downturn has bottomed out and highlight Indian

economy's resilience. Recent indicators from leading indices, such as Nomura's

Composite Leading Index (CLI), UBS' Lead Economic Indicator (LEI) and ABN Amro'

Purchasing Managers' Index (PMI), too bear out this optimism in Indian economy.

Industrial output as measured by the index of industrial production (IIP) clocked an

annual growth rate of 6.8 per cent in July 2009, according to Central Statistical

Organisation.

Significantly, among the major economies in the Asia-Pacific region, India's private

domestic consumption as share of GDP, at 57 per cent in 2008, was the highest,

according to an analysis by the McKinsey Global Institute.

Meanwhile, foreign institutional investors (FIIs) turned net buyers in Indian market in

2009. FIIs inflows into Indian equity markets have touched US$ 10 billion in the April

to September period of 2009-10.

Foreign direct investments (FDI) into India went up from US$ 25.1 billion in 2007 to

US$ 46.5 billion in 2008, achieving a 85.1 per cent growth in FDI flows, the highest

across countries, according to a recent study by the United Nations Conference on

Trade & Development (UNCTAD).

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According to Asian Development Bank's (ADB) 'Asia Capital Markets Monitor' report,

Indian equity market has emerged as the third biggest after China and Hong Kong in

the emerging Asian region, with a market capitalisation of nearly US$ 600 billion.

The Economic scenario

Indian investors have emerged as the most optimistic group in Asia, according to the

Quarterly Investor Dashboard Sentiment survey by global financial services group,

ING. As per the survey, around 84 per cent of the Indian respondents expect the

stock market to rise in the third quarter of 2009.

With foreign assets growing by more than 100 per cent annually in recent years,

Indian multinational enterprises (MNEs) have become significant investors in global

business markets and India is rapidly staking a claim to being a true global business

power, according to a survey by the Indian School of Business and the Vale

Columbia Center on Sustainable International Investment.

In its optimistic report on Macroeconomic and Monetary Development of the

economy in 2009, the Reserve Bank of India (RBI) said overall business sentiment

was slated for a sharp improvement from that in the April-June 2009 quarter.

India will soon emerge as the preferred destinations for foreign investors, revealed

Economy.com, the research arm of global rating agency Moody's.

The country's foreign exchange reserves rose by US$ 1.28 billion to touch US$

277.64 billion for the week ended September 4, 2009, according to figures released

in the RBIs Weekly Statistical Supplement.

Net inflows through various non-resident Indians (NRIs) deposits surged from US$

179 million in 2007-08 to US$ 3,999 million in 2008-09, according to the RBI. The

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most recent World Bank update on migration and remittances reveals that the

remittances of US$ 52 billion by overseas Indians in 2008 makes it India's largest

source of foreign exchange. India, along with China and Mexico, retained its position

as one of the top recipients of migrant remittances among developing countries in

2008.

FDI inflows into India in April-May 2009-10 have surged by 13 per cent at US$ 4.2

billion as against the previous two months driven by recovery in the global financial

markets. Cumulative FDI in India from April 2000 to March 2009 stood at about US$

90 billion.

FIIs inflows into the Indian equity markets have touched US$ 10 billion in the April to

September period of 2009-10.

Venture Capital firms invested US$ 117 million over 27 deals in India during the six

months ending June 2009, according to a study by Venture Intelligence in

partnership with the Global-India Venture Capital Association.

The private equity (PE) investment into the country reached US$ 1.03 billion during

April-June 2009registering an increase of 17 per cent sequentiallyaccording to

data compiled by SMC Capitals, an equity research and analysis firm.

The year-on-year (y-o-y) aggregate bank deposits stood at 21.2 per cent as on

January 2, 2009. Bank credit touched 24 per cent (y-o-y) on January 2, 2009, as

against 21.4 per cent on January 4, 2008.

Since October 2008, the RBI has cut the cash reserve ratio (CRR) and the repo rate

by 400 basis points each. Also, the reverse repo rate has been lowered by 200 basis

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points. Till April 7, 2009, the CRR had further been lowered by 50 basis points, while

the repo and reverse repo rates have been lowered by 150 basis points each.

Exports from special economic zones (SEZs) rose 33 per cent during the year to

end-March 2009. Exports from such tax-free manufacturing hubs totalled US$ 18.16

billion last year up from US$ 13.60 billion a year before.

India Inc's order book has more than doubled to an all-time high of US$ 15.32 billion

in the second quarter of the current financial year, compared to the first quarter. On a

year-on-year basis, the increase is 21 per cent.

Advance tax collections for the second quarter of the current financial year (2009-10)

have shown robust growth of 35 to 40 per cent across industries.

The domestic mutual fund industry registered a moderate growth of 5 per cent in its

assets under management (AUM) in August 2009 at US$ 15,702, due to good

performance by debt funds.

India exported a total of 230,000 cars, vans, sport utility vehicles (SUVs) and trucks

between January and July 2009, a growth of 18 per cent owing to its liberal

investment policies and high quality manufacturing that stems from its growing

prowess in research and development.

India's gems and jewellery exports regained momentum and aggregated to US$ 1.9

billion in July 2009 as compared to US$ 1.7 billion in June 2009.

The rural India growth story

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The Indian growth story is spreading to the rural and semi-urban areas as well. The

next phase of growth is expected to come from rural markets with rural India

accounting for almost half of the domestic retail market, valued over US$ 300 billion.

Rural India is set to witness an economic boom, with per capita income having

grown by 50 per cent over the last 10 years, mainly on account of rising commodity

prices and improved productivity. Development of basic infrastructure, generation of

employment guarantee schemes, better information services and access to funding

are also bringing prosperity to rural households.

Per Capita Income

Per capita income of Indian individuals stood at US$ 773.54 in 2008-09, according to

Central Statistical Organisation data. The per capita income in India stood at US$

687.03 in 2007-08 and has risen by over one-third from US$ 536.79 in 2005-06 to

US$ 773.54 in 2008-09.

The total Merger and acquisition (M&A) deals registered during the first seven

months of this year stand at 158 with a value of US$ 5.91 billion, while PE deals

stand at 114, totalling a value of US$ 4.89 billion, according to consulting firm, Grant

Thornton.

Investments in the Indian stock market through participatory notes (PNs) crossed

US$ 20.65 billion-mark in May 2009.

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Sustainable energy investment in India went up to US$ 3.7 billion in 2008, up 12 per

cent since 2007, according a report titled 'Global Trends in Sustainable Energy

Investment 2009'.

Advantage India

According to the World Fact Book, India is among the world's youngest nations with

a median age of 25 years as compared to 43 in Japan and 36 in USA. Of the BRIC

Brazil, Russia, India and Chinacountries, India is projected to stay the youngest

with its working-age population estimated to rise to 70 per cent of the total

demographic by 2030, the largest in the world. India will see 70 million new entrants

to its workforce over the next 5 years.

India has the second largest area of arable land in the world, making it one of the

world's largest food producersover 200 million tonnes of food grains are produced

annually. India is the world's largest producer of milk (100 million tonnes per annum),

sugarcane (315 million tonnes per annum) and tea (930 million kg per annum) and

the second largest producer of rice, fruit and vegetables.

With the largest number of listed companies - 10,000 across 23 stock exchanges,

India has the third largest investor base in the world.

India's healthy banking system with a network of 70,000 branches is among the

largest in the world.

According to a study by the McKinsey Global Institute (MGI), India's consumer

market will be the world's fifth largest (from twelfth) in the world by 2025 and India's

middle class will swell by over ten times from its current size of 50 million to 583

million people by 2025.

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India, which recorded production of 22.14 million tonne of steel during April-August

2009, is likely to emerge as the world's third largest steel producer in the current

year.

India continues to be the most preferred destinationamong 50 top countriesfor

companies looking to offshore their information technology (IT) and back-office

functions, according to global management consultancy, AT Kearney.

The Indian stock markets have risen to be amongst the best performers globally

across the emerging and developed markets in 2009 year-to-date, according to an

analytical study by MSCI Barra indices.

India has reclaimed its position as the most attractive destination for global retailers

despite the downturn, according to the Global Retail Development Index (GRDI)

brought out by US-based global management consulting firm, A T Kearney.

Growth potential

According to the CII Ernst & Young report titled 'India 2012: Telecom growth

continues,' India's telecom services industry revenues are projected to reach US$ 54

billion in 2012, up from US$ 31 billion in 2008. The Indian telecom industry

registered the highest number of subscriber additions at 15.84 million in March 2009,

setting a global record.

A McKinsey report, 'The rise of Indian Consumer Market', estimates that the Indian

consumer market is likely to grow four times by 2025, which is currently valued at

US$ 511 billion.

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India ranks among the top 12 producers of manufacturing value added (MVA)

witnessing an increase of 12.3 per cent in its MVA output in 2005-07 as against 6.9

per cent in 2000-05according to the United Nations Industrial Development

Organisation (UNIDO).

In textiles, the country is ranked fourth, while in electrical machinery and apparatus it

is ranked fifth. It holds sixth position in the basic metals category; seventh in

chemicals and chemical products; 10th in leather, leather products, refined

petroleum products and nuclear fuel; twelfth in machinery and equipment and motor

vehicles.

In a development slated to enhance India's macroeconomic health as well as energy

security, Reliance Industries (RIL) has commenced natural gas production from its

D-6 block in the Krishna-Godavari (KG) basin.

India has a market value of US$ 270.98 billion in low-carbon and environmental

goods & services (LCEGS). With a 6 per cent share of the US$ 4.32 trillion global

market, the country is tied with Japan at the third position.

PE players are planning to raise funds for the infrastructure sector. Presently, around

US$ 1.42 billion is being raised by India-dedicated infrastructure funds, according to

data released by Preqin, a global firm that tracks PE and alternative assets.

Infrastructure, including roads, power, highways, airports, ports and railways, has

emerged as an asset class with long-term growth that can provide relatively stable

returns, said an Assocham-Ernst & Young survey on Private Equity in Indian

Infrastructure: Strengthening the Nexus.

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NASSCOM has estimated that the IT-BPO industry will witness an export growth of

4-7 per cent and domestic market growth of 15-18 per cent in 2009-10. Further, it

has projected that around 40,000 students will be absorbed by IT companies this

fiscal.

With the availability of the 3G spectrum, about 275 million Indian subscribers will use

3G-enabled services, and the number of 3G-enabled handsets will reach close to

395 million by 2013-end, estimates the latest report by Evalueserve.

. INDUSTRIAL POLICY OF INDIA;-

Main features

Objectives of the Industrial Policy of the Government are

1. To maintain a sustained growth in productivity;

2. To enhance gainful employment;

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3. To achieve optimal utilisation of human resources;

4. To attain international competitiveness and

5. To transform India into a major partner and player in the global arena.

Policy focus is on

1. Deregulating Indian industry;

2. Allowing the industry freedom and flexibility in responding to market forces and

3. Providing a policy regime that facilitates and fosters growth of Indian industry.

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Policy measures

Some of the important policy measures announced and procedural simplifications

undertaken to pursue the above objectives are as under:

i) Liberalisation of Industrial Licensing Policy

The list of items requiring compulsory licensing is reviewed on an ongoing basis. At

present, only six industries are under compulsory licensing mainly on account of

environmental, safety and strategic considerations. Similarly, there are only three

industries reserved for the public sector. The lists of industries reserved for the public

sector and of items under compulsory licensing are at Appendix III and IV

respectively.

ii) Introduction of Industrial Entrepreneurs Memorandum(IEM)

Industries not requiring compulsory licensing are to file an Industrial Entrepreneurs

Memorandum (IEM) to the Secretariat for Industrial Assistance (SIA). No industrial

approval is required for such exempted industries. Amendments are also allowed to

IEM proposals filed after 1.7.1998.

iii) Liberalisation of the Locational Policy

A significantly amended locational policy in tune with the liberalised licensing policy

is in place. No industrial approval is required from the Government for locations not

falling within 25 kms of the periphery of cities having a population of more than one

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million except for those industries where industrial licensing is compulsory. Non-

polluting industries such as electronics, computer software and printing can be

located within 25 kms of the periphery of cities with more than one million population.

Permission to other industries is granted in such locations only if they are located in

an industrial area so designated prior to 25.7.91. Zoning and land use regulations as

well as environmental legislations have to be followed.

iv) Policy for Small Scale Industries

Reservation of items of manufacture exclusively for the small scale sector forms an

important focus of the industrial policy as a measure of protecting this sector. Since

24th December 1999, industrial undertakings with an investment up to rupees one

crore are within the small scale and ancillary sector. A differential investment limit

has been adopted since 9th October 2001 for 41 reserved items where the

investment limit upto rupees five crore is prescribed for qualifying as a small scale

unit. The investment limit for tiny units is Rs. 25 lakhs. 749 items are reserved for

manufacture in the small scale sector. All undertakings other than the small scale

industrial undertakings engaged in the manufacture of items reserved for

manufacture in the small scale sector are required to obtain an industrial licence and

undertake an export obligation of 50% of the annual production. This condition of

licensing is, however, not applicable to those undertakings operating under 100%

Export Oriented Undertakings Scheme, the Export Processing Zone (EPZ) or the

Special Economic Zone Schemes (SEZs).

V) Non-Resident Indians Scheme

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The general policy and facilities for Foreign Direct Investment as available to foreign

investors/company are fully applicable to NRIs as well. In addition, Government has

extended some concessions specially for NRIs and overseas corporate bodies

having more than 60% stake by the NRIs. This inter-alia includes (i) NRI/OCB

investment in the real estate and housing sectors upto 100% and (ii) NRI/OCB

investment in domestic airlines sector upto 100%.

NRI/OCBs are also allowed to invest upto 100% equity on non-repatriation basis

in all activities except for a small negative list. Apart from this, NRI/OCBs are also

allowed to invest on repatriation/non-repatriation under the portfolio investment

scheme.

vi) Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP)

scheme:

For building up strong electronics industry and with a view to enhancing export,

two schemes viz. Electronic Hardware Technology Park (EHTP) and Software

Technology Park (STP) are in operation. Under EHTP/STP scheme, the inputs are

allowed to be procured free of duties.

The Directors of STPs have powers to approved fresh STP/EHTP proposals and

also grand post-approval amendment in respect of EHTP/STP projects as have been

given to the Development Commissioners of Export Processing Zones in the case of

Export Oriented Units. All other application for setting up projects under these

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schemes, are considered by the Inter-Ministerial Standing Committee (IMSC)

Chaired by Secretary (Information Technology). The IMSC is serviced by the SIA.

vii) Policy for Foreign Direct Investment (FDI)

Promotion of foreign direct investment forms an integral part of Indias economic

policies. The role of foreign direct investment in accelerating economic growth is by

way of infusion of capital, technology and modern management practices. The

Department has put in place a liberal and transparent foreign investment regime

where most activities are opened to foreign investment on automatic route without

any limit on the extent of foreign ownership. Some of the recent initiatives taken to

further liberalise the FDI regime, inter alia, include opening up of sectors such as

Insurance (upto 26%); development of integrated townships (upto 100%); defence

industry (upto 26%); tea plantation (upto 100% subject to divestment of 26% within

five years to FDI); Encenhancement of FDI limits in private sector banking, allowing

FDI up to 100% under the automatic route for most manufacturing activities in SEZs;

opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways;

electronic mail and voice mail to 100% foreign investment subject to 26% divestment

condition; etc.

The Department has also strengthened investment facilitation measures through

Foreign Investment Implementation Authority (FIIA).

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. CONTRIBUTION OF VARIOUS SECTORS IN GDP

The Indian economy is the 12th largest in USD exchange rate terms. India is the

second fastest growing economy in the world. Indias GDP has touched US$1.25

trillion. The crossing of Indian GDP over a trillion dollar mark in 2007 puts India in the

elite group of 12 countries with trillion dollar economy. The tremendous growth rate

has coincided with better macroeconomic stability. India has made remarkable

progress in information technology, high end services and knowledge process

services.

However cause for concern would be this rapid growth has not been an inclusive in

nature, in the sense it has not been accompanied by a just and equitable distribution

of wealth among all sections of the population. This economic growth has been

location specific and sector specific. For e.g. it has not percolated to sectors were

labour is intensive (agriculture) and in states were poverty is acute (Bihar, Orissa,

Madhya Pradesh and Uttar Pradesh).

Though India has the second highest growth rate in the world, its rank in terms of

human development index (which is broadly used has a measure of life expectancy,

adult literacy and standard of living) has gone down to 128 among 177 countries in

2007 compared to 126 in 2006.

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Indian GDP Trend Of Growth Rate

1960-1980 : 3.5%

1980-1990 : 5.4%

1990-2000 : 4.4%

2000-2009 : 6.4%

Contribution of Various Sectors in GDP

The contributions of various sectors in the Indian GDP for 1990-1991 are as follows:

Agriculture: - 32%

Industry: - 27%

Service Sector: - 41%


Agriculture: - 20%

Industry: - 26%


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Agriculture: - 17%

Industry: - 29%


It is great news that today the service sector is contributing more than half of the

Indian GDP. It takes India one step closer to the developed economies of the world.

Earlier it was agriculture which mainly contributed to the Indian GDP.

The Indian government is still looking up to improve the GDP of the country and so

several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI

investment have been framed to give a push to the economy and hence the GDP.

Output and Prices

Real gross domestic product at factor cost, an indicator of total economic activity,

grew by a moderate 5.7% p.a. during the entire study period 1980-2003. The real

output growth has accelerated from 5.4% during 80s to 6.2% during 90s. Between

1993-03, the post-liberalization decade, which is also our data period for policy

simulation analysis, the real output has grown at 6% p.a., a slight slowing down in

the economy compared to the 90s. Real per capita output (income) also shows

similar trends, after adjustment for population growth. The above aggregate growth

was made possible through differential sectoral growth: Agricultural output grew by

3%, manufacturing by 6.6%, infrastructure by 6.5% and services sector by 7.2%.

Clearly, manufacturing sector has slowed-down secularly, while infrastructure and

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services have accelerated by about 1-1.25% p.a. This is true with the post 1990

reforms period as well. The rate of growth in the wholesale price index, in other

words, rate of inflation, fluctuated between 6.6-7.8%, which declined to 5.5% during

1993-03. The national income deflator, shows similar trends but at 0.5-1% higher

level. The real GDP share in agriculture fell from 36.4% in 80s to 29.1% in 90s and

it stood at 26.5% during the recent decade (1993-03), a sizable decline of 10

percentage points. The non-agriculture exhibits the opposite pattern. Within the non

agriculture, share of the services sector is the largest, accounting for more than one

third of the GDP. The share has gone-up from 32.3% in 80s to 37% in 90s and

more recently to 38.8% of the GDP. The GDP share of infrastructure remained

stagnant around 14-15%, although the GDP level has roughly little over doubled.

The GDP share of manufacturing sector improved marginally from 17.6% in 80s to

19.4% in 90s and even subsequently. Thus, there is a structural shift in production

from agriculture to infrastructure and services in the Indian economy.

Investment and savings

During 1980-03, real public investment in agriculture and manufacturing sectors has

decelerated by 2.1% and 0.1% respectively, whereas real public investment in

infrastructure and services sectors grew by 3.9% and 3.7% respectively. These

investment trends are consistent with the production trends discussed above. The

public investment in all sectors put together grew by 2.5% in the study period. In fact,

the public investment growth has decelerated from 4.5% during 80s to 2.2% during

90s. In the post-liberalization period, the growth is only 1.1%. This is the result of

massive disinvestment of public sector units in the country during post-90s. To a

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certain extent, private investment has substituted for public investment. Private

investment in agriculture, manufacturing, infrastructure and service sectors grew by

4.2%, 7%, 5.9% and 6.3% respectively in the entire study period. Private total

investment in all sectors grew by 6.3% in the study period. Between 80s and 90s,

private investment accelerated in agriculture and manufacturing (substantially), but

nearly stagnant or decelerated in the other two sectors. In the post-93 periods,

except in agriculture, private investment slowed down in all the three other sectors.

The graphs depicting investment shares also confirm this.

Nominal gross domestic savings in the economy has been growing at an average

rate of 16.2% during 1980-03, which is 0.6% faster than the growth in nominal gross

investment (15.6%). However, both gross domestic savings and investment seem to

have decelerated by about 4% p.a. during the recent decades. These trends indicate

that there has been some disillusionment in the investment climate during post-93

period in India. The reasons could be fall in demand and recessionary conditions in

the Indian economy.

Fiscal and monetary variables

In developing countries, the economic policies of the government play an important

role in the growth of the economy. Govt. total expenditure consists of current and

capital expenditures. The nominal total govt. expenditure has decelerated from

16.2% in 80s to 14.1% in 90s. The govt. consumption expenditure, however,

accelerated from 15.4% to 16.3%. Therefore, the deceleration in govt. expenditure

can solely be attributed to the deceleration in investment. These trends continue into

1993-03 period as well. Although the nominal govt. direct tax collection has

accelerated, the total revenue seems to have decelerated. Some fiscal prudence has

led to deceleration in the fiscal deficit over the years. In fact, fiscal deficit decelerated

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from 18.7% in 80s to 15.8% in 90s. However, it seems to have picked-up

momentum again during 1993- 03. Money supply grew more or less steadily at about

17% during the study period. Nominal interest rate grew marginally during 80s by

0.8% p.a., but dropped significantly since then and the trend continued.

External sector

Real export growth from the country has accelerated rapidly from 4.2% in 80s to

12% in 90s, with an overall growth of 9.6% p.a. Exports seems to grow even faster

(12.6%) during 1993-03. The unit value of exports, proxy for export price, has

increased slower during 80s and 90s and slowed-down even further in the recent

decade. The export competitiveness was facilitated by significant depreciation of

Indian rupee (9.4%) against the US$, in addition to rise in unit value of exports.

Despite rupee depreciation, growth in real imports has accelerated very rapidly from

6.3% in 80s to 15.3% in 90s, mainly due to higher demand. A substantial part of

these imports could be POL imports, which have become essential both as inputs

and final consumption goods. The import growth however seems to have slowed

down to 10.7% during 1993-03. The nominal trade balance, as expected, has been

negative and highly volatile, particularly during the 90s and thereafter. The opening-

up of the economy must have been largely responsible for this.

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INDIAS CURRENT FIVE YEAR PLAN

Eleventh plan (2007-2012)

The eleventh plan has the following objectives:

1. Income & Poverty

o Accelerate GDP growth from 8% to 10% and then maintain at 10% in

the 12th Plan in order to double per capita income by 2016-17

o Increase agricultural GDP growth rate to 4% per year to ensure a

broader spread of benefits

o Create 70 million new work opportunities.

o Reduce educated unemployment to below 5%.

o Raise real wage rate of unskilled workers by 20 percent.

o Reduce the headcount ratio of consumption poverty by 10 percentage

points.

2. Education

o Reduce dropout rates of children from elementary school from 52.2%

in 2003-04 to 20% by 2011-12

o Develop minimum standards of educational attainment in elementary

school, and by regular testing monitor effectiveness of education to

ensure quality

o Increase literacy rate for persons of age 7 years or above to 85%

o Lower gender gap in literacy to 10 percentage points

o Increase the percentage of each cohort going to higher education from

the present 10% to 15% by the end of the plan

3.

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4. Health

o Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per

1000 live births

o Reduce Total Fertility Rate to 2.1

o Provide clean drinking water for all by 2009 and ensure that there are

no slip-backs

o Reduce malnutrition among children of age group 0-3 to half its present

level

o Reduce anaemia among women and girls by 50% by the end of the

plan

5. Women and Children

o Raise the sex ratio for age group 0-6 to 935 by 2011-12 and to 950 by

2016-17

o

Ensure that at least 33 percent of the direct and indirect beneficiaries of

all government schemes are women and girl children

o Ensure that all children enjoy a safe childhood, without any compulsion

to work

6. Infrastructure

o Ensure electricity connection to all villages and BPL households by

2009 and round-the-clock power.

o Ensure all-weather road connection to all habitation with population

1000 and above (500 in hilly and tribal areas) by 2009, and ensure

coverage of all significant habitation by 2015

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o Connect every village by telephone by November 2007 and provide

broadband connectivity to all villages by 2012

o Provide homestead sites to all by 2012 and step up the pace of house

construction for rural poor to cover all the poor by 2016-17

7. Environment

o Increase forest and tree cover by 5 percentage points.

o Attain WHO standards of air quality in all major cities by 2011-12.

o Treat all urban waste water by 2011-12 to clean river waters.

o Increase energy efficiency by 20 percentage points by 2016-17.

The ten-year period 1993-94 to 2002-03 is used for the policy simulations.

The scenario results are presented in Tables: 2-3.

(a) Sustained 10% increase in public sector real investment in infrastructure sector

financed through borrowing from commercial banks:

It is hypothesised that the govt. will raise the necessary investment resources

through borrowing from commercial banks. In the model therefore, both the

exogenous variables PCFINF and BCG are increased by 0.1 PCFINF each. This

may imply that there is liquidity crunch and the bank credit that is available to

commercial sector will be lesser by the amount borrowed by the govt. for investment

in the infrastructure sector. Such a policy will reduce the reserve bank credit to the

govt. And thereby reserve money and money supply. Changes in money supply will

trigger several other changes in the economy. A sustained 10% increase in public

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real investment in infrastructure8, envisaged as above, has both short- and long-run

impacts on all the sectors of the Indian economy.

Due to the opposite trends in public and private real investments in the agriculture

sector, we got a negative sign for the lagged public investment variable.

Normally, ceteris paribus, this should have meant crowding-out between private and

public investments. But, due to the presence of the public sector resource gap and

real interest rate variables, the net effect looks positive between public and private

investments in the Indian agriculture sector as well (like in all the three other sectors)

over medium to long-run. Further, agricultural sector exhibits cross-complementarily

with the infrastructure sector, both in production and private investment, with a lag.

This latter feature highlights the linkage between the private investment decisions of

the two sectors. Thus, any change in public investment in infrastructure will not only

affect private investment in that sector, with a lag, but also in agriculture and thereby

rest of the economy through macroeconomic linkages.

It can be seen that public investment in infrastructure can affect private investment in

that sector only with a one-year lag. This probably is due to gestation lags and

delays. However, there is another important channel namely the real interest rate,

which can bring about crowding-in or crowding-out depending on the magnitude of

the coefficient. Thus, in the present case, a 10% increase in public investment in

infrastructure in 1993-94 increased gross investment (savings) and hence the

nominal interest rate fell (0.1%). But, the rate of inflation declined faster, resulting in

a small increase in the real rate of interest. Hence, there was a very small crowding-

out effect on private investment in that year. A similar response was noticed in the

agriculture and services sectors. The aggregate private investment has therefore

decreased negligibly.

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Further, there are other macro economic effects. Due to increased public investment,

govt. expenditure (1.3%) and fiscal deficit (4.3%) will rise. Since the govt. is

envisaged to borrow the required funds from the commercial banks, the govt. may

not require any support from the central bank (RBI). In fact, the RBI credit to govt.

has fallen (0.2%). This results in marginal decline in reserve money, money supply

(0.04%) and prices (0.1%). Due to one-period lag for net capital stock in the

production function for the infrastructure sector, the output also can increase only

with a lag. Due to increase in investment, aggregate demand (absorption) in the

economy will increase, thereby increasing total output negligibly (0.02%), mainly due

to small output growth in manufacturing (0.1%) sector. There will be a small

decrease in GDP deflator (0.1%), leaving a decrease of 0.1% in nominal income.

Nominal gross investment seems to increase by 1.6%, exceeding the growth in

nominal domestic savings (1.4%), necessitating adjustment with current account

balance from the external sector.

On the fiscal side also, the impacts in 1993-94 are small, except for govt.

expenditure and fiscal deficit. Higher public investment will increase govt.

expenditure (1.3%). Due to decline in nominal income, there will be a small fall in

revenue from indirect taxes (0.1%) and non-tax revenue (0.1%) of the govt., leaving

a large uncovered fiscal deficit (4.3%). Non-market borrowings that are linked to

nominal income also decline negligibly (0.1%). Demand for Indian exports will

however decline (0.2%), due to rise in relative export price. But, real imports into the

Country will rise (0.5%) due to cheaper import prices and higher absorption. The

Indian rupee appreciates marginally (0.1%) against the US$. As expected, nominal

trade balance and balance of payments will worsen (0.6%).

(b) Sustained 10% increase in public sector real investment in infrastructure

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Sector financed through foreign capital inflows:

In this scenario, we try to compare the earlier simulation results with an alternative

policy option that is very much in recent public debate, viz. Public investment being

financed through the accumulated foreign capital inflows. It can be seen that the

simulation results are similar, particularly in the long-run, with few differences in the

short- and medium-term, for monetary and external sectors. Specifically, when the

required funds for investment are borrowed from the capital inflows, as expected, the

macro economic effects work through the external sector and money supply will

increase via increased RBI credit to govt. and thereby reserve money.

Thus, in 1993-94, the year of the exogenous change, due to govt. Borrowing from

net capital inflows, the balance of payments will rise (1.4%) unlike in the earlier

scenario. This causes the Indian rupee to depreciate rapidly (1.3%) and encourage

exports demand (1.2%) from the country due to fall in relative price of exports.

Equivalently, exports rise due to rise in unit value of exports as well as nominal

exchange rate. Due to Rupee depreciation, real imports into the country will decline

(0.1%) despite higher demand (absorption), i.e. price effect dominating the income

effect. Since exports (as well as unit value of exports) rise faster than imports, the

trade balance will improve (1.4%). This pattern is continued into the future until

exchange rate becomes nearly stagnant and starts falling later. Unlike in the earlier

scenario, money supply seems to increase (0.6%) due to increase in RBI credit to

govt. to finance the investment. The general price level and inflation decline

marginally. The effects on poverty reduction are identical to the earlier scenario. The

long-run effects of the two scenarios are quite similar for all the sectors. Since the

required legal apparatus for the utilization of foreign capital inflows by the govt.

appears not in place yet, probably, it may be easier for the govt. to borrow the

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required funds from the commercial banks by selling the conventional govt. Security

bonds.

Conclusion

The quantified effects include the allocative and dynamic responses of the chosen

policy change on important macroeconomic variables relating to four broad sectors-

real, fiscal, monetary and external sectors of the Indian economy. The real sector

further decomposed into four sub-sectors, agriculture, manufacturing, infrastructure

and services. The sign and magnitude of the effects vary over time- immediate to

long- run.

Sustained increase in public investment in infrastructure was found to stimulate

substantial increase in private investment in all the sectors. Such a policy is

expected to result in wide spread benefit in the fiscal and monetary sectors of the

economy. Thus, public sector investment in infrastructure sector has the potential to

provide the much-needed push and accelerate the growth process of the Indian

economy. A 10% sustained increase in public sector investment in infrastructure

(about Rs. 3500-3800 crores p.a. at 1993-94 prices) will enable the Indian economy

to grow at an additional 2.5% p.a. and achieve the much debated 10% aggregate

real GDP growth per annum in the medium- to long-run. Further, such growth is non-

inflationary and welfare improving through higher govt. revenue and roughly about

1% reduction in poverty. The additional expenditure is less than 0.4% of the GDP

and about 2% of the tax revenue. We believe that such investment is quite feasible

and cost effective.

Public investment in infrastructure has a higher growth potential (and reduction in

poverty) than that of agriculture and even manufacturing. One important limitation of

this study is the absence of sectoral price determination.

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REFERENCES:-

http://www.ibef.org/economy/economyoverview.aspx

http://www.dipp.nic.in/evol1.htm

http://www.tradechakra.com/indian-economy/gdp.html

economics term paper1

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