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[Economic Survey Ch1] Introduction, GDP FC MC relation (part 1 of 3)

1. Introduction

2. Why Economic Survey = Boring?

3. Timeframe

4. Link between GDP FC/MC?

5. Why India can’t bounce back easily?

6. Crude oil prices

7. Forex Reserve

8. Mock questions

Introduction

Finally economic survey is released. (free download English click me for Hindiclick me)For UPSC, economic survey is important, because just like yearbook, this onealso provides you with truckload of facts for MCQs, and fodder fordescriptive/essay/interview.Even for SBI PO, this is important, because lot of MCQs come from currentbased economy + fodder necessary for GDPI stage.

Why Economic Survey = Boring?

On HBO, Star movies, they show movie for 15-20 minutes and advertisementfor 5 minutes.But on Zee Cinema, 9x etc. channels, they show advertisements for 20minutes and movie for 5 minutes.= movie is shown in betweenadvertizements. (advertisements are not shown in between movies.)That’s the first reason why economic survey is boring, because it givesfacts/fodder in between useless numbers and data.Second reason why economic survey is boring, because the authors assumethat you’re already aware of the basic economic terms, concepts and theconnections in between.Therefore, to enjoy the first chapter, make sure you already know followingterms and concepts, if not click on the given links

Current AccountDeficit

http://mrunal.org/2012/05/economy-current-account-deficit-how-to.html

Fiscalconsolidation

http://mrunal.org/2012/09/economy-fiscal-deficit-fiscal-consolidation-kelkar.html

Fiscal stimulushttp://mrunal.org/2011/04/economy-q-fiscal-stimulus-package.html

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Fiscal cliff, Subprime crisis

http://mrunal.org/2012/11/economy-fiscal-cliff-meaning-reasons-implications-on-us-and-indian-economy-explained.html

GDP calculationhttp://mrunal.org/2012/02/economy-iip-index-of-industrial.html

GDP @marketprice and Factorcost

http://mrunal.org/2011/04/economy-q-gdp-at-factor-cost-and-market.html

Inflationhttp://mrunal.org/2012/08/economy-inflation-demand-pull.html

Now let’s start with the gist of first chapter from Economic Survey. (I’ve furthersubdivided it into three articles, else it’ll lead to information overload= boredom +frustration.)

Timeframe

2007 Sub prime crisis in USA. Impact felt across the globe.

2008-10

Government of India injects fiscal stimulus.Leads to boost in consumption.

2010-11

Government of India partially withdraws the fiscal stimulus.Because Government wanted to start “fiscal consolidation”.+ rise in global crude prices etc. leads to inflation.

2011-12

RBI increases rates = Interest on EMI / Loans increased = demandfor consumer goods decreased. Businessmen find it hard to getloans.+ global prices of crude high as usual.Thanks to inflation, People start investing in gold. = less money forbusiness investment + crude price high = CAD = rupee’s valuedeclines.

Feb2013

Economic survey is released.

When there was global financial crisis, Government of India and RBI gavemonetary and fiscal stimulus (e.g. giving tax-soaps to industries, higherdepreciation on commercial vehicles, lowered interest on loans etc.)This lead to increase in consumption. => later inflation.Now to curb the inflation, RBI sharply raised the borrowing rates = againproblem, it slowed down the demand.

Link between GDP FC/MC?

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GDP at factor cost (FC)= GDP at market prices MINUS indirect taxes PLUSsubsidies.GDP (FC)=GDP(MP) – indirect taxes + subsidies.in years of sharply higher growth, GDP growth @MP >> GDP at FC.In the years of slowdown, GDP @MP << GDP @FC.Why? Because when there is slowdown, indirect taxes falldown and subsidyburden on Government increases.

Why India can’t bounce back easily?

Few years back, America faced the sub-prime crisis and recession. But now itseems to be slowly getting back on track.But if we look @India, it seems as if inflation and slowdown is going tocontinue forever!Why can’t India bounce back quickly? Reasons are followingFirst, International investors and their risk taking. Compared to AmericanEconomy, the Indian economy is more exposed this “shifts” of foreigninvestors. (the whole GAAR, Vodafone controversy, retrospective taxation,policy paralysis, environmental clearances ruined the mood of foreigninvestors.)If they pump in money, Indian economy quickly improves, when they pull outmoney suddenly, our rupee weakens against dollar = crude oil becomescostly.Second, India’s import bill is strongly tied to the price of oil.

Third, because of ongoing inflation, people prefer to invest in gold. Goldimport= CAD = rupee weakens = crude oil import becomes expensive =evenmore problems.

Rupee weakening?

Suppose on Jan 2012: $1= Rs.50 And on Feb 2012: $1=Rs.60

That means rupee has weakened and dollar has strengthened. But is it good or bad? Theoretically,

for Importers = bad. Because now they’ve to pay more money to import same quantity of goods. And

for Exporters, call centers= good. Because they get more rupee.(even if they’re paid same amount of

dollars.)

Ok so Rupee weakens = good for exporters. But here is the problem: US, EU still not fully recovered from

slowdown, so the demand of Indian goods and services, is not as high as it was few years back.

So export sector isn’t really doing great. On the other hand, imports are getting more and more expensive,

especially crude oil => petrol diesel become expensive= inflation.

Crude oil prices

In the global market, the price of crude oil have increased last year.

It could be because of two things

1. The demand of petroleum has increased globally. In a way this is good,because it shows the economy of USA/EU etc slowly getting better.(otherwise they wouldnot be importing so much). So in a few months, the

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demand of indian exports should increase. = this is a good Development.2. The crude oil price has increased due to geopolitical reasons (Iran blockade,

Libya crisis etc.) If this is the main reason for rise in crude oil price= this is abad Development.

Bottomline is that India cannot take the external environment (recovery of US/EUeconomies, crude oil politics of middle east) for granted.

Forex Reserve

India’s foreign exchange reserve, is made up of following components

1. Foreign currency assets2. Gold3. SDR and RTP in IMF.

As per Economic Survey, Forex reserve is:

March 2012 $294.4

January 2013 $295.5

As you can see, there is hardly any increase in Forex reserve during this time.Why?One reason is current account deficit (esp. gold+petroleum)second is that foreign investors are not pumping enough money due to ‘policybottlenecks’.

Mock questions

Q1. Which of the following is correct formula?

a. GDP (Market Price)=GDP(Factor Cost) + indirect taxes + subsidies.b. GDP (Market Price)=GDP(Factor Cost) – indirect taxes – subsidies.c. GDP (Factor Cost)=GDP(Market Price) + indirect taxes – subsidies.d. GDP (Factor Cost)=GDP(Market Price) – indirect taxes + subsidies.

Q2. Which of the following is correct statement?

1. In the period of high growth, GDP (Market Price) is greater than GDP (FactorCost)

2. During economic slowdown, GDP (Market Price) is less than GDP (FactorCost)

Choice

a. Only 1b. Only 2c. Bothd. None

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Q3. Which of the following is/are not a component of Foreign Exchange reserve ofIndia?

1. Gold2. Foreign currency assets3. Special drawing rights in IMF4. Diamonds

Choice

a. Only 1 and 3b. Only 2 and 2c. Only 3 and 4d. Only 4

URL to article: http://mrunal.org/2013/03/economic-survey-ch1-introduction-gdp-fc-mc-relation-part-1-of-3.html

Posted By Mrunal On 01/03/2013 @ 17:10 In the category Economy