ECONOMIC ISSUES AND

TRENDS IN INDIA

INTRODUCTION• India is increasingly becoming a strategic player on the global

platform and is playing a vital role in shaping-up the international economy’s dynamics. The country is making its mark as one of the fastest growing economies.

• The economy of India is the tenth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP)

• Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time

• GDP 2011- $1.710 trillion• GDP 2012 - $1.842 trillion• Est. GDP growth rate 2013– 5% to 5.5%

• The per capita income at current price during 2012-13 is Rs. 68,747 as compared to Rs. 61,564 during 2011-12.

• Net national income-Net national income encompasses the income of households, businesses, and the government.NNI = Consumption +Investments+Government spending +net exports (exports minus imports) +net foreign factor income - indirect taxes - manufactured capital depreciationRs.47,64,819 crore (2012)

• Exchange rate1 Indian Rupee equals=0.016 US Dollar1 US Dollar=63.24 indian rupee

• Bank Rate is 8.75% (w.e.f. 29/10/2013)• Cash Reserve Ratio (CRR) 4.00% (wef 09/02/2013) -announced on

29/01/2013• Statutory Liquidity Ratio (SLR) is 23%(w.e.f. 11/08/2012)• Agriculture: In the GDP for 2012-13, the growth was at a three-year

low of 1.8 per cent against 2011 3.6 per cent.

• Unemployment rate- 9.9% (2012) 9.8% (2011)

• Population below poverty line-29.8%• Labor force - by occupation:agriculture: 53%

,industry: 19% ,services: 28%.• Imports-$500.3 billion (2012 ) • Exports-$309.1 billion (2012 ) • Literacy: Total population: 74.04 per cent (data-2011 census)

Male:82.14 per cent Female:65.46 percent• Foreign Direct Investment (FDI): FDI have declined during 2012-

13 for the period April to December of the current fiscal, the inflows have been $16,946 million which were $29, 277 million during April to December 2011

• Budget: revenues: $171.5 billion expenditures: $281 billion (2012)

India - GDP - composition by sector

• 2013 Januaryagriculture: 17.2% industry: 26.4% services: 56.4%

• 2012 januaryagriculture: 19% industry: 26.3% services: 54.7%

A case for Producer Price Index:•A Producer Price Index (PPI) measures the average changes in prices received by domesticProducers for their output.

•Former Governor of the RBI ,D.Subbarao proposed the need to develop a series of PPI thatWould help gauge how price momentum builds up in the economy.

•The Wholesale Price Index(WPI) is the price of a representative basket of wholesale goods.•Some countries (like India and The Philippines) use WPI changes as a central measure ofInflation.•The WPI focuses on the price of goods traded between corporations ,rather than goods bought by consumers , which is measured by the Consumer Price Index.

We can use Nominal GDP and Real GDP to calculate the Price Level (A measure of the average prices of goods and services in the economy.)

We can use the growth rate formula to calculate the Inflation Rate (the Inflation Rate is The percentage increase in the price level from one year to the next.)

INFLATION

The WEO report expects annual average consumer price inflation at 10.9% (compared to 10.4% in 2012-13).

India’s Current Account Woes

•The trade balance is the difference between exports and imports of goods and services. Add “net income from abroad” (like transfers) and we have the current account.

•Alternatively, the gross domestic product (GDP) less total expenditure by all the sectors (consumption investment and government expenditure on currently produced goods) gives us the trade balance.

•Add net income from abroad to both the sides to get gross national product (GNP) less total expenditure as the current account of the balance of payments.

•A slight manipulation of this gives us total savings minus investment which is identically equal to the current account.

•A current account deficit is then our negative saving vis-à-vis the rest of the world.

•Currently, CAD is 4.9% of the GDP ($92.7 billion),expected to be lowered to 4.4% for the full year.

Fiscal Policy: This refers to revenue and expenditure policy of the Govt. to achieve desiredobjectives of the society.

Fiscal Deficit can be simply said as the total borrowings of the Govt.

Total Borrowings = Borrowings from Market/Public + Borrowings from RBI

Budget Deficit = Borrowings from RBI = Fiscal Deficit -- Borrowings from MarketMonetized Deficit: It is a part of budget deficit that the RBI gives the Govt. by printing currencies.

Interest Payment is a very big public expenditure. Interest paid in a particular year is dueto borrowings of the previous year. They form a part of debt. Currently, Debts form a massive 82% of the RGDP.

Fiscal Deficit

NATIONAL FOOD SECURITY BILL•Aims to give right to subsidized food grain to 67 percent of India’s population, roughly82 crore people.•Up to 75 percent of the rural population and up to 50 percent of the urban population willhave uniform entitlement of 5kg of food grain per month, at Rs 3, Rs2 , Rs1 for rice, wheatand coarse grain respectively.•The poorest of poor households would continue to receive 35 kg of food grain per month under AAY.•Identification of eligible households has been left to the states/UTs ,which may frame theirown criteria or use Socio Economic and Caste Census.

Concerns:•The program is projected to push up India’s fiscal deficit to 5.1% of GDP in the currentfiscal year. The Govt. has promised to keep that deficit under 4.8%.•Extending the PDS may provide another channel for leakages.•Political controversy after claims that the bill makes state governments equally responsible for implementing scheme.

•Elsewhere: South Africa, Nepal, Brazil

Current issues Capsule

•India and Japan decided to treble their currency swap arrangement from$15 billion to $50billion in a move seen as sending an important signal for the Rupee.

•In its release of Trade and Development report 2013 , the United Nations Conference onTrade and Development said the Indian economy is expected to grow at 5.2% in calendar year 2013.

•Operators of illegal money-pooling schemes (like Ponzi) will soon face penalties of up to 3 times the Profit made by them ,as against the current provision of a meager fine of Rs.1 crore.

•Companies can use the External Commercial Borrowing(ECB) for general corporate purposes.

•Himachal Pradesh and Karnataka have been given consent to implement the FDI policy on multi-brand retail trading,12 more states in line.

Contd…

•The Reserve Bank of India kept the repo rate unchanged at 7.25% and CRR at 4% ,signalingits determination to quell volatility in the foreign exchange market, while announcing thefirst quarter review of monetary policy for 2013-14.

•Rajya Sabha ratified The Companies Bill,2012 ,as passed by the Lok Sabha about 8 months ago New features:Companies need to earmark 2% of their net profits towards CSR every year.One woman board seat mandatory

•India Overseas Investment Corporation to function as a development finance institution with the specific mandate to provide equity and debt to Indian PSEs for securing national sources abroad.

Phoney financial inclusion• Come January 2014, if the Reserve Bank of India (RBI)

sticks to its timeline for the award of new bank licences, then a couple of entities of the country’s big corporate houses, for instance, Tata Sons, Aditya Birla Nuvo and Reliance Capital, could well be floating commercial banks.

• RBI governor D Subbarao argued that the circumstances had changed – the financial sector, the corporate sector, “our understanding of regulation”, regulatory capacity, etc – and so the guidelines had to be revised.

Continued…

• The evolving nexus of politics and business, the public sector banks (PSBs) soon became accountable to a business-oriented elite that was (and remains) antithetical to democratic control of the financial system.

• The RBI is presently accountable to a business oriented elite that is linked to powerful sections of the polity. The changes in banking policy that we are suggesting can only come about with democratic control of the central bank by the public, for which a political movement has to take shape.

Shadow Banking

• According to the Financial Stability Board (FSB), it is “A system of credit intermediation that involves entities and activities outside the regular banking system, and raises systemic risk concerns and regulatory arbitrage concerns” (2011).

• The shadow banking system depends on wholesale funding, which is extremely unstable and renders the system very fragile, as evidenced by the crisis. (By –UNCTAD reports 2011)

• The shadow banking system is a web of specialised financial institutions that channel funding from savers to investors through a range of securitisation and secured funding techniques (by Adrian and Ashcraft in 2012).

Features of shadow banks

• They primarily borrow short-term funds from market institutions rather than from the public, to lend long, creating a liquidity mismatch.

• There is no government guarantee for funds raised.• They have no access to central bank liquidity in times of

severe distress.• They are usually highly leveraged.• They are interconnected and interdependent financial

entities, and this makes regulating them very complex and difficult.

Shadow Banking in India

• Shadow banking in India primarily consists of non-banking financial companies (NFBCs) and a network of informal financial institutions such as nidhis, chit funds, commodity trade financiers, gold saving companies, gold loan companies, and money lenders.

Growth Enablers: Policy Thrust

Parliament Moves Reforms ForwardThe Winter Session of Indian Parliament has passed 17 pieces of legislation. Decisions included under this are:

• Nod for FDI in multi brand retail.

• Lok Sabha passes Companies Bill, 2011 paving the way for a new company law,

including improving corporate governance practices and making CSR mandatory

for certain companies.

• The Prevention of Money-Laundering (Amendment) Bill, 2011, passed.

• Passage of Banking Laws (Amendment) Bill 2011 which permits voting rights in

proportion to shareholding

Government Moves on Reforms• Cabinet Committee on Investment set up to fast-track infrastructure projects worth

over Rs 1,000 crore.

• Union Cabinet clears Land Acquisition Bill, which provides for higher compensation

while removing the clause requiring consent of land losers for government

projects.

Securities & Exchange Board of India (SEBI) Tightens Norms• Strict oversight mechanism for brokers and other market intermediaries to prevent

cover risks posed by their business activities on investors & market.

• Stops mini futures and options based on indices to protect small investors

• Looks forward to boost corporate bond market to bring liquidity in the secondary

market

INVESTMENT TRENDS IN INDIA

• The Foreign Direct Investment (FDI) policy rationalization and liberalization measures

taken by the Government have resulted in increased inflows of FDI in more and more

industries under the automatic route.

• In the year 2000, the Government of India allowed FDI up to 100 per cent for most

activities. Since then, the policy has been gradually simplified and rationalized and

more sectors have been opened up for foreign investment.

• Amount of FDI inflows for the financial year 2012-13 for the month of December 2012

was US$ 1.1 billion. Amount of total FDI equity inflows into India (equity inflows + re-

invested earnings + other capital) for the financial year 2012-13 was estimated at US$

27.19 billion.

• Cumulative Amount of FDI Equity Inflows (excluding, amount remitted through RBI’s-

NRI Schemes) was recorded at US$ 187.80 billion.

Top 10 Sectors attracting highest FDI inflows were:

• Services Sector (19 per cent),

• Construction development: Townships, housing, builtup infrastructure (12 per cent),

• Telecommunications (7 per cent),

• Computer Software & Hardware (6 per cent),

• Drugs & Pharmaceuticals (5 per cent),

• Chemicals (other than Fertilizers) (5 per cent),

• Power (4 per cent),

• Automobile Industry (4 per cent),

• Metallurgical Industries (4 per cent),

• Hotel & Tourism (3 per cent).

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metals tourism

EMPLOYMENT TRENDS IN INDIA• The findings of the Employment and Unemployment Survey 2011-12

reveal that over nine million persons found employment between 2009-10 and 2011-12.

• But the average growth in employment between 2004-05 and 2011-12 remains low at 2.5 million per year.

• As the policymakers struggle to deal with the twin problems of unemployment and debt, their reliance on harsh fiscal measures, with no offsetting effort to foster growth and job creation, has typically failed to induce growth, create jobs, raise incomes and restore investor confidence.

• The findings also reveal that a growing proportion of the workforce is moving to non-farm activities, and a falling proportion is engaged on a casual wage.

INDUSTRY TRENDS IN INDIA• The Eight core industries have a combined weight of 37.90 per cent in the Index of

Industrial Production (IIP).• During April-January 2012-13, the cumulative growth rate of these core industries

was 3.2 per cent compared to their growth at 5.0 per cent during the corresponding period in 2011-12.

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INCLUSIVE GROWTH

• Private Sector company, GMT, is setting up rural business

process outsourcing units in Kakinada in rural Andhra

Pradesh to provide employment to rural youth in the region.

• Bihar & Chhattisgarh likely to have the highest average

growth rate during 2012-17*. Bihar & Chhattisgarh likely to

grow at 9.1 percent. Uttarakhand, Maharashtra and

Madhya Pradesh are expected to grow at 9 per cent, 8.9

per cent & 8.8 per cent, respectively.

• Bihar has the best average growth figure for the five year

period ended March 31, 2012 at 21.9 percent.

*Curtsey: National Development Council

TRENDS IN AGRICULTURAL PRODUCTION

• Since 2002-03: The Eleventh Five-Year Plan witnessed an average annual

growth of 3.6% in GDP from the agriculture and allied sectors. Even then the foodgrain production in the country had

improved remarkably and registered an average annual growth of 3.8% as compared to 1.3% in the Tenth Plan.

In 2011-12, production crossed the target of 254.24 million tons (mt).

• Advance estimates (2012-13) As per the fourth advance estimates(AE), the country’s grain

output is expected to have fallen in 2012-13 by 1.5% to 255.36 mt as against 259.29 mt in 2011-12.

Curtsey: Trends in Agricultural Production, by Bipin K Deokar, Shruti J Pandey, Nishigandha R Lokhande

Curtsey: Trends in Agricultural Production, by Bipin K Deokar, Shruti J Pandey, Nishigandha R Lokhande

STATES MOVING FORWARD

• Andhra Pradesh is developing Madhurawada along the north east of Vizag as an important IT hub in the state. The district is also being developed as an important destination for sports, education and business.

• Vibrant Gujarat show in Ahmedabad moots the idea of “Made in Gujarat-India” brand. MoUs between state and companies focus on building affordable housing.

• Global Investors Summit in Madhya Pradesh leads to MoUs worth around US$ 5 billion in sectors like integrated steel, food processing, urea production, hospitals and auto components.

A macroeconomic crisis has to be tackled as a macroeconomic one. Increasing capital inflows may provide temporary relief but will aggravate the lack of competitiveness over time. Taking resort to aggressive mining, apart from the disastrous social and environmental consequences, also does not attack the problem at its source. In this context it is very disheartening to see the politicians from the two major alliances saying that they would take the reform process forward.

“Reforms” are not a holy book of a revealed religion. These have to be debated and whatever is found wanting has to be jettisoned.

Concluding Remarks