indian economy overview ........vssyhkas

8/7/2019 Indian Economy Overview ........VSSYHKAS

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Indian Economy Overview

India is a South Asian country that is the seventh largest in area and has the second

largest population in the world. The land covers an area of 3,287,240 square km (Indiageography) and the population stands at 1,202,380,000 people (India population) . India

has great plains, long coastlines and majestic mountains. Thus, the land has abundant

resources. India shares its borders with China, Bangladesh, Pakistan, Nepal, Sri Lanka

and Myanmar.

Understanding the Indian Economy

Large, dynamic and steadily expanding, the Indian economy is characterized by a

huge workforce operating in many new sectors of opportunity.

The Indian economy is one of the fastest growing economies and is the 12 th largest in

terms of the market exchange rate at $1,242 billion (India GDP). In terms of purchasing

power parity, the Indian economy ranks the fourth largest in the world. However, poverty

still remains a major concern besides disparity in income.

The Indian economy has been propelled by the liberalization policies that have beeninstrumental in boosting demand as well as trade volume. The growth rate has

averaged around 7% since 1997 and India was able to keep its economy growing at a

healthy rate even during the 2007-2009 recession, managing a 5.355% rate in 2009

(India GDP Growth). The biggest boon to the economy has come in the shape of



outsourcing. Its English speaking population has been instrumental in making India a

preferred destination for information technology products as well as business process

outsourcing.

The economy of India is as diverse as it is large, with a number of major sectors

including manufacturing industries, agriculture, textiles and handicrafts, and services.

Agriculture is a major component of the Indian economy, as over 66% of the Indian

population earns its livelihood from this area.

However, the service sector is greatly expanding and has started to assume an

increasingly important role. The fact that the Indian speaking population in India is

growing by the day means that India has become a hub of outsourcing activities for

some of the major economies of the world including the United Kingdom and the United

States. Outsourcing to India has been primarily in the areas of technical support and

customer services.

Other areas where India is expected to make progress include manufacturing,

construction of ships, pharmaceuticals, aviation, biotechnology, tourism,

nanotechnology, retailing and telecommunications. Growth rates in these sectors are

expected to increase dramatically.



Despite the liberalization the economy still largely controlled by the government and the

500+ major companies it owns, which together are worth around US$500 billion, or

around 40% of GDP at current exchange rates. Thanks to past profligate spending,

government debt is running at around 80% of GDP. Servicing the interest payments on

that debt is now the single largest component of the federal budget. Fiscal discipline

and deficit reduction is therefore vital for India's future prospects.

It is also crucial to understand that India is driven primarily by domestic (consumer)

consumption. This stands in marked contrast to Japan, the Asian Tigers and now China,

all of whom have followed the export-oriented model.

With the massive growth of the Indian middle class, this vast country may become

Asia's first major 'buy' economy.



Indian Economy: Statistics

In 2009, India's PPP Gross Domestic Product stood at $3.548 trillion, and was the fourth

largest economy by volume.

The services sector, backed by the IT revolution, remained the biggest contributor to the

national GDP, with a contribution of 58.4%. The industry sector contributed 24.1% and

the agriculture sector contributed 17.5% to the GDP.

The employment scenario was dominated by the services sector, creating 62.6% of the

jobs for the 467 million workforce. The industry sector contributed 25.8% to the GDP

and employed 20% of the workforce. The agriculture sector contributed 15.8% to the

GDP and created 17.5% jobs (India Labor Force). The unemployment rate remained

around 10% in 2009. However, rising inflation became a major concern, and measures

to check it are being implemented. In 2009, the rate of inflation was around 10.7% (India

Inflation Rate Change).

The Poverty Challenge

One of the major challenges for the Indian economy and those responsible for

operating it, is to remove the economic inequalities that are still persistent in India after

its independence in 1947. Poverty is still one of the major issues although these levels

have dropped significantly in recent years. Over 25% of the working Indian populace is

living below the poverty line (India Poverty Line and Gini Index).



Poverty is a challenge that¶s becoming increasingly important in relationship to the

alarming rate of new births. This implies that ever more rapid change, or birth control

policies like the µOne Child¶ policy in China, are needed to reduce the numbers affected

by poverty in the vast Indian economy.

The per capita income of India is 4,542 US Dollars in the context of Purchasing Power

Parity. This is primarily due to the 1.1 billion population of India, the second largest in

the world after China. In nominal terms, the figure comes down to 1,089 US Dollars,

based on 2007 figures. According to the World Bank, India is classed as a low-income

economy.

Current Economic Situation

It is being increasingly realized that the Indian economy, which had been treading the

high growth path during the first two quarters of 2004-05, has begun to show faint signs

of fatigue at the close of fiscal 2004-05 thereby raising concern on whether the growth

momentum is losing steam. What has emerged is that while the economy is still in the

high growth orbit, there are overall crucial weaknesses which, if allowed to continue,

could hold back further growth and would act as a drag on India·s march towards

progress.



Industrial Growth

A noteworthy feature of current economic scenario is the momentum displayed

by the industrial sector. In fact, latest figures show that Index of Industrialproduction (IIP) has notched up an annual growth of 8.0% per cent during April-

March 2004-05 over and above a cumulative increase of 7.0% registered during

the corresponding period of the preceding year. This makes the fiscal year

(2004-05) the best since 1995-96 when industry grew at 13%.

Within industry, the manufacturing sector recorded a ¶shining· performance. The

manufacturing index rose by 8.8% during the fiscal year 2004-05 against 7.4% in

the corresponding period of 2003-04. Experts contend that such a sustained

growth in manufacturing sector is reminiscent of the boom period of 1993-96

period when the manufacturing performance was at its zenith.

At the sectoral level as many as 14 of the 17 two digit industry groups have

shown positive growth during March 2005 compared to the corresponding

period last year.

A further break up shows that the textile sector (including wearing apparel) has

shown a highest growth of 29.4% followed by 22% in leather and leather & fur

products and 18.1% in beverages, tobacco and related products. On the other

hand, wood and wood products, furniture and fixtures have shown a negative

growth of 11.6% followed by a decline of 4.9% in food products and 0.9% in

metal products and parts except machinery and equipment. The chemicals

sector has also continued to show a lackluster performance with growth rates

falling to 4.5%.



Furthermore, the other sub sectors of IIP, namely the core sector of mining and

electricity have not been able to keep pace and have showed some

slackening of growth during the year. The growth in electricity production, at

5.2% in April-March 2004-05, was only marginally higher than the 5.1% evidenced

in the last fiscal, while mining growth slowed down to 4.3% in April-March 2004-05

against 5.2% in the same period of 2003-04.

Though the industrial performance at the cumulative level for 2004-05 has been

commendable, it is disconcerting to note that the month of March has

witnessed a deceleration in industrial performance. The index of industrial

production has recorded a growth of 7.2% in 2004-05 against 8.1% in the samemonth in the previous year. The lower growth in March 2005 has been on

account of a distinct slowdown in manufacturing growth, which slipped to 7.8%

during the month compared to 8.1% in March 2004 as well as in the fall in growth

of the electricity sector which has plummeted to 3.0% in March, 2005 as

compared to 10.6% in March, 2004. The output growth in the mining sector,

however, has increased to 5.6% in March, 2005 as against 5.1% in March, 2004.

As per use based classification, the growth index of capital goods has improved

to 14.2% in March 2005 (as compared to a meager 4.5% growth in February,

2005) and 12.6% during April-March 2004-05 although it is considerably lower

than the corresponding year on year growth rates of 25.2% for March 2004 and

13.6 per cent for April-March 2003-04. The figures for March 2005 show that the

expansion in capital goods industry, representing investment activity in the

economy, has been lower over the year raising concerns about the

sustainability of our nascent investment revival.

What is more, a recent CMIE study on capital expenditure, shows that

investment outstandings have touched an all time high of Rs.18,95,211 crore or



60% of India·s GDP. Steel, aluminium, cement and infrastructure as well as

automobile and consumer goods sectors are planning capacity expansion.

However, analysts estimate, projects actually under implementation account for

only about 26% of GDP. And what is worrisome is that only a quarter of the

intentions are likely to see implementation in near future. However, despite this

finding, it may be too early to say that a cyclical down trend has started. The

situation needs to be watched carefully before arriving at any particular value

judgement in this regard.

Within consumer goods, consumer durables industry showed a healthy growth of

14.0% during April-March 2004-05 against 11.6 per cent during the previousperiod while non-durables surged to 10.4% in April-March 2004-05 as against

5.8% in the corresponding year indicating an overall buoyancy in demand in the

economy. The performance of basic goods (5.5% in April ² March 2004-05 versus

5.4% in April-March 2003-04) has been steady while intermediates continued

their decline to achieve 5.8% growth as against 6.4% achieved during April-

March 2003-04.

In the month of March 2005, the manufacturers of consumer goods scaled up

production to 7.5% as against 6.3% in March 2004. The reason for the up trend

has been a 7.2% growth in consumer non- durables in March 2005 against a

growth of 1.6% in the corresponding month last year. Consumer durables grew

by 8.2% in March 2005 as against 23.3% in March, 2004. Basic goods output

grew 6.9% in March 2005 against 6.4% in the same time last year and

intermediate goods by 4.1% compared to 5.3% in March 2004.



Corporate Performance

Business reports show that the Corporate Sector has posted excellent results during the

last quarter of 2004-05. Profits have surpassed all expectations and there is a surge in

business confidence. The results reported by 280 companies in the January-March

quarter show a 29 percent rise in sales and a 74 percent jump in net profits. This is

despite the slight slowdown in GDP numbers in the October-December quarter, high oil

prices and downtrend in commodity prices other than metals. The sectoral break-up

shows that engineering, shipping, steel and information technology have recorded a

healthy growth in profit while cement, fertilizer, paper and pharmaceutical companies

have reported an erosion in their bottom lines.

Bank Credit Growth

The signs of a step up in industrial activity is apparent from a sizeable increase in total

financial assistance rendered by scheduled commercial banks to the commercial

sector in fiscal 2004-05. In this context, the annual policy statement of the RBI observes

that credit off- take from commercial banks increased by about 26 percent during

2004-05 compared to 15 percent in the last fiscal. Non-food credit registered a 26

percent growth in 2004-05 and fund flow to the commercial sector rose by about 24

percent as against 15 percent recorded in the previous year. Not surprisingly, the

incremental non-food credit to deposit ratio i.e the ratio of non-food credit disbursed



during the current fiscal to the total deposits added during the same period - was over

100 percent. This implies that banks have lent more in non-food credit than what they

have collected as deposits during the year.

The strong growth in bank credit is essentially due to robust demand from all sectors of

the economy. Furthermore, corporate lending by banks received a fillip in 2004-05 as

companies started to move out from overseas markets as interest rates abroad started

to inch up. Sharp increases were seen in credit flow to sectors like infrastructure, power

and telecommunications. Strong credit flows were also witnessed in sectors such as

food processing, pharmaceuticals, gems and jewellery and automobiles.

However, gross bank credit to the food and non-food sector decreased by Rs. 9427

core to Rs. 11,32,274 on crore for the fortnight ended April 15,2005

M3, the conventional measure of money supply, has increased by 13.3% in

March, 2005 as compared to 16.5% in the same period in the previous year.

Against this backdrop the question is whether the tempo of industrial growth,

evidenced so far, would be sustained over time. This would depend on the

performance of our ¶core· sector.

Infrastructure Industry



It is distressing to note that the performance of the infrastructure industries continues to

be out of sync with the overall buoyancy experienced by the corporate sector thereby

raising concerns about the sustainability of high growth rates in the industrial sector.

The annual growth rate of the index of Infrastructure industries - which constitutes six

core sectors and has a combined weight of 26.68 percent in the index of Industrial

production-has slipped to 4.4 percent in 2004-05 against 6.2 percent recorded in 2003-

04. The index for the month of March, 2005 is a meager 3.7 percent compared with the

8.3 percent growth logged in the previous year. The poor growth performance of the

core sector during the month of March, 2005 has mainly been on account of a decline

in production of petroleum refinery products and a sharp fall in the growth rates ofindustries like finished steel and electricity.

During fiscal 2004-05, except for a marginal increase in production of cement,

electricity and crude oil, all other sectors posted lower growth rates than those in the

previous fiscal. Annual coal production in 2004-05 has increased by only 3.9 percent

compared to 5.8 percent in 2003-04. This in turn has also affected the rate of growth of

the electricity sector which has grown by 5.2 percent which is almost the same as last

year.

The sharpest drop has been in the case of finished steel which has risen by only 3.7

percent against 9.8 percent in 2003-04. The reason ascribed for the slump is the

slowdown of the Chinese economy which had, in the past, fuelled demand for the

product.

Against this backdrop, experts contend that there is an impelling need to address the

factors inhibiting the performance of infrastructure sector in order that the economy

rebounds to achieve at least 7 percent growth in 2005-06.



External Sector

Our external sector has continued to remain on the high growth trajectory with our

foreign trade having touched $186 billion during 2004-05 as compared to $141 billion in

the previous financial year. The additional trade of $45 billion comprises $17 billion

increase in exports and $28 bill ion rise in imports.

Our exports have shown a salutary performance during the last three years ² an

acknowledgement of the growing efficiency and competence exhibited by our

industrial sector. During the year 2004-05, the country·s merchandise exports touched a

whopping $79.59 billion registering a record growth of 24.41 percent over the last year·s

figure of $63 billion. Our country has hence exceeded the export growth target of 16

percent originally set for 2004-05 (corresponding to a value of $73.4 billion). The

resurgence in exports has been fuelled by sustained overseas demand for traditional

and non-traditional items due to global economic recovery as well as productivity

changes and growing competitiveness of Indian exports.

The commodity composition of exports suggest that petroleum, crude and products,

gems and jewellery, machinery and instruments, drugs and pharmaceuticals and fine

chemicals and readymade garments, cotton including accessories have emerged as

big ticket items of exports. Similarly, the geographical distribution suggests that during

fiscal 2004-05 (first seven months) USA remained the most important export destination

followed by United Arab Emirates, China and Hong Kong.

However, despite the above, there has been some slackening in exports during

March 2005. In fact, export during the month was just $8513 million which is only

8.28 percent higher than $7862 million accrued during March, 2004. This below



average growth could be attributed to the high base effect as export growth in

March, 2004 had zoomed to a resounding 52 percent. Nevertheless, the present

scenario also makes us aware of the mounting challenges that are likely to be

faced in pushing export growth during 2005-06. In this context, it is felt that a

major thrust would be required to sustain the high growth rate of merchandise

exports which have materialized after the slowdown of 2001. This would require

a diversification of our exports away from low value added labour and resource

intensive exports like plantation or farm products towards knowledge intensive

exports which have high value addition.

In the meanwhile, imports during the year were valued at $106 billion during the fiscal

representing an increase of 35.62 percent over $78 billion in 2003-04. During the month

of March, 2005 imports registered a buoyant growth of $10 billion recording a 25.52

percent rise over the previous period. At the sectoral level, oil imports have escalated

sharply to register 41.19 percent growth at $29 billion as compared to $20 billion in the

corresponding previous period. On the other hand a spurt in domestic demand has

also pushed up non-oil imports which are estimated at $ 77 billion i.e 33.62 percent

higher than $ 57 billion clocked earlier.

One reason for a sharp pick-up in non-oil imports may be the continued acceleration of

growth in the manufacturing sector. But such a large imbalance between growth of

exports and imports is something unusual, especially because export growth which is

import intensive in many cases has slackened in the more recent period. Hence it is

quite likely that the appreciation of the rupee exchange rate in terms of the dollar may

also have contributed to the unexpectedly large pick-up in non-oil imports.

However, the strong growth in both imports and exports in recent times has led to an

increase in India·s share of global trade propelling the government to hike its targets for

the concern year.



The surge in imports over exports has left trade deficit at an all time high during fiscal

2004-05. Our trade deficit has burgeoned to touch $ 26.52 billion which is around 86

percent higher than $ 14.27 registered in 2003-04. The previous highest merchandisetrade deficit ever recorded was $ 17.8 bill ion in 1999-2000.

During the month of March, 2005 our trade deficit increased by a resounding 824

percent - from $ 0.17 billion in March, 2004 to $ 1.57 billion in March, 2005 which is a

cause for concern.

Fiscal Trends : An overview

Gross tax revenue of the centre grew by 20.3 percent during fiscal 2004-05. However,

at Rs.3,03,856 crore, it is marginally short of the revised estimate of Rs.3,05,314 crore. The

shortfall in tax collection has been primarily on account of lowering of excise duty on

petroleum products and subsequently lower income tax owing to under recovery from

oil PSUs and banks.

The indirect tax collection witnessed a growth of 16.09 percent while there was

a 26.3 percent increase in revenue from direct taxes. In fact, for the first time,

direct tax collections as a proportion of GDP has crossed 4.25 percent

compared to 3.8 percent in 2003-04.

The highest growth of taxes was in service tax which grew by 79.12 percent though on a

lower base. This was followed by corporate tax at 31.50 percent and income tax by

16.76 percent. Similarly, in the area of indirect taxes, growth in customs revenue was

18.58 percent and excise 9.29 percent. Collection of all the individual taxes was

significantly higher than in the previous year.



Capital Inflows

Foreign Direct Investment has picked up to $ 4.2 billion during April-January 2004-05.

Total portfolio investments during the period were $ 4.9 bill ion taking up the total foreign

investment flows to $ 9.2 billion. The inflow of commercial bank deposits of the non-

resident Indians declined by $ 1.3 billion during April-January, 2004-05. This is in sharp

contrast to the net inflows of $ 3.7 billion during the corresponding period of the

previous year.

Stock Market Trends

After a relentless rise during the first week of March, 2005 ² when the sensex touched an

all time high at 6915.19, - there was a subsequent fall and by end March the sensex

was down by 3.29 percent. The fall in secondary equity markets have been

widespread with returns on almost all size deciles turning negative. Industry-wise returns

also reveal that the decline in March was broad-based. Nevertheless, despite a fall in

returns in March, trading volumes have remained considerably high.

Inflation

After rising for four consecutive weeks, the wholesale price-index (WPI) based

inflation level fell marginally to 5.67% for the week ended 30th April, 2005 as

against 5.91% in the previous week on account of cheaper food and some of themanufactured products like edible oils.



The inflation rate based on the consumer Price Index for Industrial workers (CPI-

IW) continued to remain at a moderate level in the range of 2-3% in early 2004-

05 before firming up to reach 4.8% in September, 2004. The point to point rate of

inflation, based on the CPI-IW has subsequently decreased to 4.2% in March,

2005.

Outlook for 2005-06

The ushering in of fiscal 2005-06 has motivated experts to come out with economic

forecasts for the year. Accordingly, the National Council of Applied Economic

Research has projected 7.2 percent economic growth rate has 2005-06 which is the

same as that estimated by the Economic and Social Commission for Asia and the

Pacific (ESCAP) in its latest survey.

The prospects for a robust GDP growth rate has also brightened an account of the

normal monsoon forecast by the India Meteorological Department. It is believed that a

normal monsoon would ensure a buoyant farm sector growth which had slowed down

considerably in 2004-05 due to a 13 percent deficient rainfall. An improvement in farm

sector growth would also favourably impact the manufacturing as well as the service

sectors of the economy.

However, experts also suggest that the business environment would get tougher in

2005-06. In fact, analysts contend that corporates would find it hard to maintain

profitability in the face of rising interest rates, firm input prices and possibly higher fuel

prices. Not surprisingly, the Institute of Economic Growth has forecast that IIP would

slow down to about 6.7% in 2005-06.



GDP of India

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

India is the second fastest growing economy in the world. India¶s 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 labor 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.

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%



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.

sources of Funds1. Profit from Operations2. Issue of Shares

3. Issue of Debentures4. Bank Loan (Long Term)

5. Sale of fixed Assets

Application of Funds



1. Expense for operations

2. Redemption of shares3. Redemption of Debentures

4. Payment of Loans

5. Purchase of Assets

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