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8/3/2019 Current Indian Macro Economic Situation
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Current Indian Macro Economic
Situation
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Brief summary of the past decades
Average rate of growth was
3.6% in 1950s
4% in 1960s
2.9% in 1970s
5.6% in 1980s
5.7% in 1990s
In 1980-81 the economy broke the Hindu rate ofgrowth of 3.5% (low level equilibrium trap for indianeconomy)
Growth trajectory shifted still higher in the decade2000-01 to 2009-10.
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in the decade 2000-01 to 2009-10. Real GDP
growth averaged 7.3% catapulting the Indian
economy to the status of the second fastest
growing economy amongst the G-20members.
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Indias problem is primarily in the area of revenue deficits. From 1950 to 1980 thenational budget was usually characterized by revenue surpluses and capitalaccount deficits . However, after 1980, all (democratic) governments for politicalreasons had willingly allowed the revenue deficit to rise over the years todangerously high levels, and had found it increasingly difficult to
reduce.
The capital account deficit does not pose long-term problems as investment in productive capital made in the present, if prudently carried out, will
generate an adequate income stream to pay for capital costs incurred andgenerate positive returns in the future.
These have focused on: (i) expanding the tax
base by including services (not previously taxed); (ii) reducing rates of direct
taxes for individuals and corporations; (iii) abolishing most export subsidies,
(iv) lowering import duties
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Real GDP Growth rate Bric
-6
-4
-2
0
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008 2009 2010 2011e
India
Germany
United States
United Kingdom
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Real GDP growth rate
-10
-5
0
5
10
15
20
2003 2004 2005 2006 2007 2008 2009 2010 2011e
Brazil
China
Russia
India
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Sectoral share in GDP
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005-06 2006-07 2007-08 2008-09P 2009-10Q 2010-11
Services
Industry
Agriculture & allied activities
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Share in the world total export %
0 5 10 15 20 25
2005
2006
2007
2008
2009
China
India
United Kingdom
United States
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Gross Domestic savings
0 5 10 15 20 25 30 35 40
2005-06
2006-07
2007-08
2008-09P
2009-10Q
Household
Private Corporate sector
Public sector
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Gross Capital Formation
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2005-06
2006-07
2007-08
2008-09P
2009-10Q
public sector
private
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Gross National Savings as a % of GDP
0
5
10
15
20
25
30
35
2005 2006 2007 2008 2009 2010
United Kingdom
United States
France
Germany
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Gross Investment as a % of GDP
-12
-10
-8
-6
-4
-2
0
2
4
2005 2006 2007 2008 2009 2010
United Kingdom
United States
France
Germany
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2005-06
10%
2006-07
13%
2007-08
21%
2008-09
17%
2009-10
19%
2010-11
20%
Forex Reserves (US$ bn)
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Foreign Investment Inflows
9
22.8
34.837.8 37.8
30.4
9.9
3.2
20.3
-15
29 29.4
21.5
29.8
62.1
24
70.1
61.9
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Chart Title
FDI (US$ bn) FIIs (net) (US$ bn) Foreign Investment Inflows (US$ bn)
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Exports & Imports % Change
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Imports
Exports
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Economy after Crisis
Growth in 2009-10 estimated at 8 percent byquick estimates (31st Jan 2011) and 8.6 % Turnaround fast and strong.
In 2010-11 rebound of agriculture, continuedmomentum in manufacturing , howeverdeceleration in services mainly due todeceleration in community, social andpersonal services reflecting the base effect offiscal stimulus in previous two years.
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The estimated level of growth in GDP at
constant 2004-05 prices at factor cost in 2010-
11 was comprised of growth of 5.4% in
agriculture which rebounfded from adownturn in the previous year growth of 8.1 %
in industry which a had a growth of 8% in
2009-10 and a decelerated growth of 9.6 % inservices cas against 10.1% in 2009-10
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Inflation
Headline inflation year on year measured by WPIremained at elevated levels from Dec 2009 eventhough it has been on a downward trajectory sinceApril 2010, when WPI inflation peaked at 11% (YOY).
Inflation stood at 8.23 % in Jan 2011. Inflation inPrimary articles particularly food articles was the maincontributor to the elevated levels of WPI inflation.
On the basis of weekly data on prices inflation in food
articles remained in double digit for 76 weeks fromJune 5 2009. Between 15 January and 19 June 2010itwas ruling above 22 % in 22 weeks out of 23.
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Core inflation also moved up indicating thatinflation in food items might have spilled over inmore generalized forms. Inflation in
manufactured items with a weight of 65 % in theWPI has beenn above the 4% mark since january2010 and after reaching 6.4% in April 2010 hasevinced a moderating trend.
The rise in wage goods and levels of inflation inintermediates has implications for industrialoutput.
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Last year the main drives of food inflation were pulses,cereals and sugar due to monsoon deficiency, wherasthis year inflation seems to be driven vy demandfactors despite higher supply levels.
The real impact of the fiscal stimulus measures was feltin 2009-10 with a growth in government finalconsumption expenditure at 16.4%. Gross capitalformation was estoimated to have fallen sharply in
2008-09 and recovered equally sharply in 2009-10mainly attributable to the change in stocks.
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Savings rate
The savings rate for 2009-10 is estimated at 33.7%. the privatesector savings have been more or less staticit (between 30.1% to31.9% for last six years)was the savings of the public sector thatincreased from 0.5% in 2008-09 to 23.1 % in 2009-10.
On the demand side a rise in savings investment & pickup in private
consumption have resulted in strong growth of gdp. Givenincremental capital output ratio of 4 , indicates prospect ofsustained output growth.
There was deceleration in manufacturing and industry as indicatedby IIP on November 2010
But buoyancy in other indicators of industrial performance and
short run nature of the IIP slowdown is more of temporarydeceleration.
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The inflationary pressures on the domestic front are likelyto be exacerbated by higher levels of global commodityprices and easy industrial policy followed by severalindustrial nations.
Emerging market capital inflows
Fiscal stimulus packagres were central to recovery asattested by the demand side aggregates
The real impact of fiscal stimulus was felt in 2009-10 with agrowth in Government final consumption expenditure at
16.4% Gross Capital formation which fell sharply in 2008-09
recovered equally sharply due to the change in stocks in2009-10
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Final Consupmtion Expenditure
0
2
4
6
8
10
12
14
16
18
2005 2006 2007 2008PE 2009QE 2010AE
Total
Government
Private
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Gross capital formation as a proportion of GDP atcurrent market prices grew rapidly from 2004-05to 2007-08
The fall in investment rate in 2008 -09 was due tothe fall in the private sector ie is the corporatesector.
The rates of investment across sectors indicated
varying levels of impact of the crisis and recovery Growth in investmnent in agriculture was strong
2007-08 and 2008-09 but dipped in 2009-10
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Investment in mining quarrying and
construction picked sharply in 2009-10.
The following sectors witnessed a decelerating
trend after 2009-10: electricty, gas water
supply railways and communications. There
was decline in investment in trade, hotels and
restaurants.
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Estimates of CSO have placed the growth in agricultureallied sectors at 5.4% in 2010-11.
The growth of agriculture and allied sectors to be acritical factor in the overall performance in the Indian
economy. This sector has grown in excess of 5% onaverage annual basis in the previous three years ending2007-08 when real GDP grew in excess of 9%.
Agriculture sector in India is at cross roads with rising
demand for food items and relatively slower supplyresponse in many commodities resulting in frequentspikes in food inflation.
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IIP has decelerated sharply to a level of 2.7 % inNovember 2010 from 11.3% in November 2010
Within the manufacturing sector the capital goodssegment has been the main driver of growthit has
shown extreme volatality as it registered a growth of3.5% in the first quarter of 2009-10, surged upto 45%during the fourth quarter of the last financial year.
Post recovery industrial output growth has been largely
driven by a few sectors such as automotive along withrevival in cotton textiles, leather, food products andmetal products.
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Trade Developments
Indias exports fell rapidly following the deepening of theglobal financial crisis through 208-09. rose in the secondhalf of 2009-10 and continued so until oct 2010 where itdecelerated and picked up to 36.4% in Dec 2010
Indias imports fell and recorded a negative growth of-5%in 2009-10
However the relatively higher import growth compared toexport growthin the first half of 2010-11 raised concerns ofunsustainable current account deficit levels.
Howeve with imports slowing down from Oct 2010 andexports picking up in November 2010 the concerns ontrade deficit have been allayed.
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During the period 1950-1951 until mid-December1973, India followed an exchange rate regime with theRupee linked to the Pound Sterling, except for thedevaluations in 1966 and 1971. When the Pound
Sterling floated on June 23, 1972, the Rupee's link tothe British unit was maintained-thus, paralleling thePound's depreciation and de facto devaluation. In1975, the Rupee's ties to the Pound Sterling weredisengaged. India established a float exchange regime,
with the Rupee's effective rate placed on a controlled,floating basis and linked to a "basket of currencies" ofIndia's major trading partners.
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The index of Industrial Production (IIP) is a
monthly composite of the value of industrial
production in various sectors of industrial
sectors of the economy. The current IIPincludes the mining, manufacturing and
electricity industries, each with different
weights. The mining and utility industries inIndia are especially worth watching
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Over the past five years, average growth of 8percent has made India one of the world'sfastest-growing economies.
The rapid growth has brought significant
dividends to the population at large: the povertyrate fell from 36 percent in 1994 to less than28 percent in 2005, inflation has remainedcontained, and the current account deficit is
moderate. This performance pays tribute toIndia's sound macroeconomic policies and paststructural reforms*
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India's favorable environment has attracted
the attention of foreign investors. Capital
inflows have surged over the past two years
(see Chart 1). In 2005, net capital inflowsamounted to $25 billion. By 2007 (January-
September), they had more than doubled, to
$66 billion.
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Although capital inflows are supplying much-needed financing to Indian corporates andbanks, they are also making monetary and
exchange rate policy more challenging. Capitalinflows caused the rupee to appreciate by 7percent in real effective terms last year (seeChart 2). This has raised concerns about
India's competitiveness, particularly in thelabor-intensive textile, garment, and leatherindustries.
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Capital inflows have also increased the money
supply, which then raises inflationary
pressure. In short, India is facing the policy
challenges of the "impossible trinity": whenthere is free movement of capital, it is
impossible to both target the exchange rate
and maintain an independent monetarypolicy.
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. It allowed exchange rate flexibility to absorb
pressures from capital inflows, as noted
above, although it has also intervened heavily
in the foreign exchange market: last year,reserves rose by nearly $100 billion, to abo
ut $275 billion.
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Since restrictions on capital inflows are not
likely to be effective, allowing greater
exchange rate flexibility and improving
liquidity management may be a better way todeal with continued capital inflows.
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To safeguard its inflation target, Brazil has fullysterilized its intervention in the foreign exchangemarket. Both China and India have undertakenpartial sterilization, and Russia has broadly
limited its sterilization to oil-related inflows. As aresult of these varied policy responses, the fourcountries' currencies appreciated to varyingdegrees in real effective terms between
December 2006 and June 2007: 4 percent inChina, 8 percent in India, 13 percent in Russia,and 17 percent in Brazil
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Capital flows affect a wide range of economic
variables such as
exchange rates, interest rates, foreign
exchange reserves, domestic monetary
conditions
as well as savings and investments.
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Boucher said the steps taken by advanced
countries, like the United States, to ease the
monetary situation in the country could trigger
capital flows to emerging economies. He said the recovery process in other parts of the
world are slowing and easing money supply is
essential to return to high growth. Also, the hugedemand in India's infrastructure and other social
projects would keep the money supply balanced.
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Pointing out that the current account deficit
(CAD) was likely to be 3 per cent of the Gross
Domestic Product (GDP) this fiscal, Rangarajan
had said, "This will mean something like $ 45-50 billion... (India) can also accommodate
comfortably upto $ 20 billion as additional
reserves. Therefore, capital inflows into thecountry up to $ 70 billion should not pose any
problem."
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