ICFAI UNIVERSITY

DEHRADUN

Name: Gopal Krishan

Section: A

Enrollment No. 09BS0002792

IUD No. 0901202792

Course Name: Macro Economics and Business Environment

Course Code: SLEC502

Submitted to: Dr. Ashish Dash

Submitted on: 17th November

Title of Assignment: Growth rate, inflation and unemployment analysis of Indian Economy

Student Sign Faculty Sign

ContentsMethod used to calculate the GDP:............................................................................................3

Factors affecting the GDP:.........................................................................................................3

1950-1955..............................................................................................................................3

1956-1960..............................................................................................................................3

1961-1970..............................................................................................................................3

1971-1980..............................................................................................................................3

1990 Onwards:.......................................................................................................................4

Calculation of Inflation:.............................................................................................................4

Reasons for inflation in the Indian economy:............................................................................7

1990-2000..............................................................................................................................7

2000 onwards.........................................................................................................................7

Reasons for unemployment in India:.........................................................................................8

Measures taken to eliminate unemployment in India:...............................................................9

EMPLOYMENT GENERATION IN INDIA........................................................................9

Correlation between growth and unemployment:....................................................................10

Method used for establishing correlation.............................................................................10

Sources.....................................................................................................................................10

Macro Economics is a subject which deals with the behavior of the economy as a whole, with boom and recession, the economy’s total output of goods and services, the growth of output, the rates of inflation and unemployment, the balance of payment, and exchange rates.

The three major aims of macro economics are:

1. Stability of prices2. Growth of output3. Reducing unemployment

Over the period after independence there have been a number of changes in the Indian economy and all have contributed some role or the other in making the economy what it is today and where it stands in the global market.

Growth

1951-52

1954-55

1957-58

1960-61

1963-64

1966-67

1969-70

1972-73

1975-76

1978-79

1981-82

1984-85

1987-88

1990-91

1993-94

1996-97

1999-00

2002-03

2005-06

2008-09

-10

-5

0

5

10

15

20

25

Growth Rate In India 1950-2009

Growth Rate

The growth rate of an economy is the rate at which the GDP of the country is growing. GDP (Gross Domestic Production) consist consumption of goods in the boundaries of the country, all the expenditure made by the government in the economy and investments made in the economy. This gives us an equation:

GDP = C + G + I

Reasons which causes the increase in GDP overtime:

1. Increase in the sources of the economy that is the labor and investment in the fixed assets like buildings and machines

2. If the productivity of the factors of production increases it results in the increase in GDP

Method used to calculate the GDP:GDP has been calculated by taking the growth rate of the economy over the previous year all across the period of 1950 to the year 2009.

Factors affecting the GDP:

1950-1955After independence, India was facing a severe crisis of food for the population and in the first 5 year plan India leader Jawaharlal Nehru concentrated on the agriculture sector that gave a boost to the Indian economy to grow as well as it made available food for the citizens of the country.

Still there were a lot of problems in the system of the Indian economy and there was a severe food crisis in Bihar because there was license raj prevailing at that time in the country and farmers were victim of that system.

1956-1960Till 1960, India was having balance of payment problem and because of that India could not borrow money from other countries. In the second 5 year plan concentration was more on the industrial growth so that people get more jobs and production of the country increase.

1961-1970In the year 1962, the growth rate of Indian economy declined because of the war with China.

Then in the year 1965 there was another dip in the growth rate due to the Indo-Pak war. Also USA became familiar to Pakistan and thus withdrew the foreign aid from the country and it resulted in further dip in the growth in the decade 1960-1970.

Moreover the droughts in the years 1965 and 1966 added to the problem of the economy.

1971-1980Further in the year 1971, there was another war with Pakistan which jolted the economy and resulted in steep decline in the growth rate of the economy.

In the year 1975 there was emergency declared by the Prime Minister Indira and that again led to drop in GDP.

By the end of the decade there was considerable growth in the GDP and it covered the drop it faced during the first half of the decade.

1990 Onwards:India’s merchandise trade grew rapidly during this period due to the economic reforms adopted. India’s merchandise exports have grown at a 12.5% annual rate since the start of its reform period in 1991, lifting its share of total world trade from 0.5% (to which level it had declined, after 43 years of the deliberate pursuit of autarchy by Nehru and his successors, from 2.2% in 1948) to 0.9% (and 1.4% of world trade excluding intra-EU and NAFTA trade)

by 2004. India ranked 24th among the world’s 25 largest economies in terms of its share of world trade. India started exporting goods like jewellery, textiles, garments, etc.

Tariffs were also reduced as per the MRTP act in function and India started earning foreign exchange with all this.

IT sector also grew at a very high pace in India and that became one of the major components to the growth of GDP of India.

Economy of India is comparatively less energy consuming as most of the population of the country resides in villages and there the means of living are not that much and energy consumption is very less. But at the same time India is 6th largest consumer of oil and that’s why the GDP of the country dipped in the year 2001 to 2003 because of the rise in oil prices during that period.

FDI flows in India are modest rising from $2.2bn in 2000 to $4.3bn in 2003.

Overall seeing in the past few years the growth rate of GDP in India has been increasing and it has increased very rapidly in the beginning of the decade 2000-2010.

Inflation:In an economy there are prices rising or decreasing every year or month. Or in other sense if we say we can buy less goods and services with the same amount of money that we have now and after a year. This effect is termed as inflation.

Calculation of Inflation:GDP at factor cost can be calculated in 2 ways, one is at the current price and other is at the market price. The GDP at the current price which is also known as the Real GDP and the GDP at the constant price which is also known as the nominal GDP are used to calculate the inflation rate in an economy.

Inflation rate = Nominal GDPReal GDP

In this method, the inflation is calculated as Nominal GDP being divided by the Real GDP because the Nominal GDP is calculated at the current prices and the real GDP is calculated at

the constant prices. Thus we can find out what will be the ratio of the prices that we have to pay today for the same quantity for what we had to pay years back.

GDP Deflator is a means of calculating the inflation rates and it eliminates the problem of the shifting bases as it is in the case of calculating the inflation using the Consumer Price Index or the Producer’s Price Index. These are the other two methods used to calculate the inflation rate but in this case due to the non availability of the data from any of the reliable source we have to go for the GDP deflator as the measure of inflation.

0 10 20 30 40 50 60 700.0000

20.0000

40.0000

60.0000

80.0000

100.0000

120.0000

140.0000

160.0000

f(x) = 2.29567171094596 x − 28.150964744772R² = 0.821143567564466

Inflation

Inflation

Linear (Infla-tion)

The above graph shows the inflation rate in Indian economy which is continuously rising over the period since 1950 to 2009. But when we look at the cumulative average growth rate over the decades for the periods we observe that the inflation rates are increased at a very high average rate in the decade 1951-1960. It has grown more or less constantly in the 4 decades from 1961 to 2000.

1959-60

1969-70

1979-80

1989-90

1999-00

2008-09

0123456789

10

Inflation Growth Rate Over decades

Inflation Growth Rate Over decades

In the current period starting from the year 2001 the inflation has been declining at an average of 4.5% per annum.

0 20 40 60 80 100 120 140 160 1800

5

10

15

20

25

4 214 2224 834 544 354 164 274 284 294 1104 3114 2124 2134 2144 1154 1

If we make a frequency distribution table and graph we see that for maximum period the GDP Deflator was between 14 and 24 and rest all the time it was more or less than this. Observing the data we see that GDP deflator was growing at a very less rate for 4 decades and now its growth has declined in this decade.

The increase of demand of goods over the supply causes inflation. One of the major causes of inflation in economy is the money supply which increases liquidity in the market and raises prices of goods causing inflation.

Thus the central bank and the government always look to it that the inflation is under control and for this they uses different measures namely monetary and fiscal policy.

Under monetary policies RBI increases or decreases the money supply in the market to control the flow of the money in the economy.

In fiscal policy, government imposes taxes and gives subsidies to control the prices and inflation.

Reasons for inflation in the Indian economy:

1990-20001. Exceptional economic growth in the period 1991-19982. Genuine supply shortage in agricultural growth due to lack of irrigation facility and

irregular climate change caused due to Afghan war.3. High liquidity of money during this period

2000 onwardsThe growth rate of inflation during this period has gone down but the inflation has been still rising. Major reasons of inflation change during this period in India are:

1. Reduction in fuel subsidies in the country2. The price of basic goods such as lentils, vegetables, fruits and poultry were expected

to slow their rise in this period. The price of various manufactured goods also fell in 2007, and this contributed to a reduced inflation rate.

Unemployment

Unemployment rate measures the fraction of work force who are out of work and are looking for a job to do.

Unemployment in rural and urban areas with gender difference  Rural UrbanYear Male Female Male Female1973 1.2 0.5 4.8 61978 2.2 5.5 6.5 17.81983 2.1 1.4 5.9 6.91988 2.8 3.5 6.1 8.51990 1.6 0.8 4.4 3.91992 1.6 1.2 4.6 5.51993 1.8 1.3 4.55 6.11994 2 1.4 4.5 6.7

1995 1.2 0.5 3.7 4.11996 1.5 0.8 4 3.61997 1.6 0.9 3.9 5.1

1998 2.4 2 5.3 8.12000 2.1 1.5 4.8 7.1

2001 1.6 0.6 4.2 3.82002 1.4 2 4.2 4.92003 1.9 1 4.3 4.42004 2.4 2.2 4.6 8.92005 2.1 3.1 4.4 9.12006 2.5 2.2 4.8 7.9

NOTE: The data for unemployment is available only in the different rounds done by NSSO and is available for only a certain number of years. Therefore to understand the

unemployment trend in India interpolation method has been used to fill the gaps in the data available over a period of 1973 to 2006.

19731978

19831988

19901992

19931994

19951996

19971998

20002001

20022003

20042005

20060

1

2

3

4

5

6

Unemployment with gender in Rural India

Male Female

19731978

19831988

19901992

19931994

19951996

19971998

20002001

20022003

20042005

200602468

101214161820

Unemployment with gender in Urban India

Male Female

As the graphs show us, the unemployment in India has increased for women in both the areas that is rural and urban in the period 1973-1978 and after that is has declined again in the year 1983.

Unemployment is lowest for women in the year 1973 in rural areas and in the year 1995 in urban areas

Reasons for unemployment in India: 1. Lack of Self Awareness: People are not clear about their own talents, skills and

passion. Hence they try things which don't fit them - imitate and fail.

2. High Risk Aversion: People don't want to fail. Hence they do not try new things. If software is demanded; we find IT Engineers; if Electrical Electronic Sector seems to have a growth we find EEEs.

3. There are lot of people working on one single field and there is over production from one field. Therefore the field gets quickly saturated and will be unable to support additional people.

4. Limited demand for unskilled and semi skilled labour5. Problems in maintaining the continued employability of labor force 6. Demand for multi skilling 7. Increase in demand for skilled labor on account of technological development and up

gradation and changes in the organization of work

Measures taken to eliminate unemployment in India:1. Employment planning in India2. Poverty alleviation and employment generation program

EMPLOYMENT GENERATION IN INDIA 7% of the total employed are in the organized sector i.e., unorganized sector

dominates in the employment scenario. Additional employment generation in the organized sector is not significant

i.e., scope for additional wage employment in the organized sector continued to be less.

Significant employment generation took place in the tertiary sector particularly in services industries.

Substantial employment growth was observed in the small and unorganized sector, i.e., in small and tiny enterprises.

Self-employment and casual labor continued to play a pivotal role in rehabilitation of the unemployed.

3. Considering the problems of employment and unemployment situation in the country Planning Commission set up a Task Force under the chairmanship of Dr. M.S. Ahluwalia to go into the details of the employment generation taking place in the economy and suggest measures for creation of 100 million jobs (10 million per year) in a period of 10 years.

4. A special group in the Planning Commission was constituted under the Chairmanship of Dr. S.P.Gupta, Member, Planning Commission to suggest strategies and program in the Tenth Plan for creating gainful employment opportunities for one crore people per year during each year of the Tenth Plan. The special group has also submitted its report in May 2002.

Correlation between growth and unemployment:

Method used for establishing correlationAs we correlate the two terms, we get that when the GDP grows, there is a reduction in unemployment in the economy. Because the GDP can be increased by better utilization of the resources in the economy, the GDP will grow when the labor in an economy get more employment. To find out the relationship between the growth and the unemployment the data above about the rural and urban areas male and female unemployment is filled for the remaining years also through interpolation and then a correlation is found between the unemployment rates and the growth rates calculated by using the CORREL function in EXCEL.

This gives us a negative correlation in the growth of GDP and the unemployment rate.

Rural UrbanMale Female Male Female-0.224 -0.339 -0.167 -0.265

Thus we can see that there is stronger correlation between the work force of rural areas unemployment and growth rate of GDP. This is because 70% of the population lives in rural areas and they are the biggest contributors to the GDP. So if their income goes down, GDP also goes down. Also the rural areas people are more affected by the GDP change than the workforce of the urban areas. The statistics here give us the clear picture of the above fact.

Sources1. http://unstats.un.org/unsd/demographic/products/indwm/

statistics.htm#PopulationData available

2. http://www.mospi.gov.in/ Data available for unemployment but it is available in different rounds report which has to be read and downloaded separately. Data taken for all the rounds available and put in together. Gaps filled through interpolation.

3. www.unescap.org/Stat/meet/keyindic/ india _current_manpower.pdf Data available for manpower in the country

4. Status of Gender-Differentials and Trends in India Population, Health, Education and Employment by Barun Kumar Mukhopadhyay and Prasanta Kumar Majumdar

5. Status Of Employment And Unemployment Statistics In India, Dr. R.N. Pandey,

Joint Director, C.S.O, Ministry of Statistics & Programme Implementation, New Delhi

6. China and India in the world economy, Paper presented to the international conference of commercial bank economists, Marriott Resort, Costa do Sauipe, bahia, Brazil, 7th Juky 2005

7. Economic Growth and Convergence in India by Kshamanidhi Adabar

8. Politics of Economic Growth in India, 1980-2005 Part II: The 1990s and

Beyond9. http://en.wikipedia.org/wiki/Economic_history_of_India10. Macro Economics by Dornbusch, Ficher and Startz, 9th Edition, 2009