INDIAN ECONOMY: FEATURES AND DEVELOPMENTS

GROUP MEMBERS

ROLL NO.19-SAIMA ARSHAD ROLL NO.48-NEKETA ADHIKARI

INTRODUCTION

• The Economy Of India is the ninth largest in the world by nominal GDP and the fourth largest by Purchasing Power Parity. The independence-era, Indian economy was inspired by the economy of Soviet Union with socialist practices, large public sectors, high import duties and lesser private participation characterizing it, leading to massive inefficiencies and widespread corruption. However, in 1991, India adopted free market principles and liberalized its economy to international trade. Following these strong economic reforms, the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people.

Beneficial Effects of the Reform Process

– Fourth Largest Growing Economy in terms of PPP with a GDP of US $3.36 trillion

– In Exchange terms , Tenth Largest in the world with a GDP of US$ 691.87 billion (2004)

– Second Fastest Growing Major Economy of the World with a growth rate of 8.1% for the 1stQ of 2005-06

Features 1. The Indian economy is a developing economy. It’s a mixed economy in

the sense that both private sector and public sector coexist and participate in the production process.

2. It is characterized by high population density and population growth. 3. About one-third of the population live below poverty line. 'Vicious

cycle of poverty' operates in many sectors of the economy. 4. There is high level of unemployment and underemployment In

addition, there is 'disguised unemployment' in the agricultural sector. 5. The level of technology used in production process is low in many

sectors. Modern technology has not been adopted in all sectors of the economy.

6. There is a shortage of physical and economic infrastructure.

India's SWOT analysis

STRENGTHS• High savings/investment , forex reserves, quality talent and IT,

broad based and growing entrepreneurial class, market size, macro economic and financial stability, language, democracy and political system stability

WEAKNESSES• Physical infrastructure, human development indicators,

agriculture, shortage of skilled manpower

OPPORTUNITIES • Demographic dividend, knowledge based growth , increased

integration with world economy, urbanization

THREATS • Global Uncertainty, fiscal deficit, climate change – energy and

food security, regional and social inequalities

The India Story

• Socialist policies – minimal private sector role

• Bureaucratic

• Protected market

• Small consumer markets

• Underdeveloped infrastructure

• One of the fastest growing economies ; 9%+ growth rate for 5 years prior to current crisis

• Resilient Economy – 5-6% growth at the peak of the global crisis

• Opening up sectors for investment

• Promising consumer markets

• Significant investment in infrastructure development

YESTERDAY

TODAY

• Largest democracy; Stable government.

• Dominant private sector; Increasing withdrawal of

government from business

• Robust banking sector; Capital markets

• World class IT & telecom infrastructure

• A ‘connected economy’; Economic efficiency & quality of

governance

An Enabling Environment

Reason for the highest growth rates in the mid-2000s

• The growth was led primarily due to a :• huge increase in the size of the middle class

consumer population(AVERAGE working age being 25)

• a large workforce comprising skilled and non-skilled workers(NAREGA scheme)

• improvement in education standards(mid-day meal for rural) and considerable foreign investments(FDIs and FIIs).

Major issues of Development

• Low per-capita income• Income inequalities• High incidence if poverty• Predominance of agriculture and instability of output• Rapid population growth• High dependency ratio• Low level of human development• Unemployment• Imbalance between population size, resources and capital• Inadequacy of entrepreneurs

Changing scenario of Indian economy

• Growth of national income• Rise in per-capita income• Structural transformation• Expansion of social capital• Slowly changing occupational distribution of

population• Growth of basic capital goods industries

POLITICAL INFLUENCE TO GDP GROWTH

Red Marker – 1991 to 1994 – CongressGreen Marker – 1995 to 1997 – United FrontBlue Marker – 1998 to 2003 – BJPRed Marker – 2004 to 2008 – Congress

GDP GROWTH IN INDIA FROM 1991-2008 Source:http://www.google.co.in/imgres?imgurl=http://www.dalalstreet.biz/old_images/stocktips/gdp-growth-india

h

Period 1950-1980

1980-1990

1990-2000

2000-2007

Annual Real GDP Growth

3.7% 5.9% 6.2% 6.8%

Annual Real GDP per Capita Growth

1.5% 3.8% 4.4% 5.8%

India’s Real GDP Growth

INDIA and Global Economy - Prospects

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-5

0

5

10

15

20

World Advanced Economies Emerging & Developing Economies

Forecast for 2010 and 2011

Per

cen

t

Indian Economy - Growth Trajectory

•Average GDP growth at 8.9 per cent during 2003-08•Real GDP grew at 8.8 per cent in 2010-11 (Q1) (6.0 per cent in 2009-10 (Q1))•RBI places real GDP growth forecast at 8.5 per cent for 2010-11

Per

cent

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-

2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11 (F)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

INDIAN ECONOMY: BROAD FEATURES

• Employment• Poverty• Investments• Infrastructure• Agriculture• Financial sector

Average Annual Growth Rate of Industrial Sector

Five Years Plans Target Actual

Sixth Plan(1980-85)

8.7% p.a. 3.5% p.a.

SeventhPlan(1985-90)

8.7% p.a. 8.5% p.a.

Eighth Plan(1992-97)

7.6%p.a. 8.1%p.a.

Ninth Plan(1997-2002)

4.5%p.a.

Tenth Plan(2002-07)

8.90 8.74

Eleventh Plan(2007-11)

10-11

Concerns for INDIAN ECONOMY

• INFLATION• UNEMPLOYMENT• CORRUPTION• MONEY LAUNDERING• BLACK MONEY• SLACKEN RULES AND POLICIES resulting into

plethora of scams• POVERTY

Inflation has increased significantly after being moderate during first half of 2009-10

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

0.02.04.06.08.0

10.012.014.016.0

WPI Inflation (Annual Average)

Per c

ent

Apr

il

May

June

July

Aug

ust

Sept

embe

r

Oct

ober

Nov

embe

r

Dec

embe

r

Janu

ary

Febr

uary

Mar

ch

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0WPI Inflation (y-o-y)

2008-09 2009-10 2010-11

Per c

ent

Monetary and Inflation conditionsInflation - WPI and CPI

Apr/

08

Jul/0

8

Oct

/08

Jan/

09

Apr/

09

Jul/0

9

Oct

/09

Jan/

10

Apr/

10

Jul/1

0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

CPI-Industrial Workers CPI-Agricultural Labourers WPI- All CommoditiesWPI-Essential Commodity Group WPI-Food (Composite)

y-o-

y pe

r cen

t

UNEMPLOYMENT

• Structural Unemployment• Under – employment• Disguised Unemployment • Open Unemployment • Educated Unemployment • Frictional Unemployment • Seasonal Unemployment

INDIAN ECONOMY :CHART PROGRESS (Including development and growth)

SOUNDNESS OF INDIAN ECONOMY………

Fiscal Situation: Key Indicators

Year Primary deficit Revenue deficit Gross Fiscal Deficit(1) (2) (3) (4)

Centre 2008-09 2.6 4.5 6.02009-10 RE 3.1 5.3 6.62010-11 BE 1.9 4.0 5.5 States 2008-09# 0.6 -0.2 2.42009-10 RE# 1.6 0.8 3.42010-11 BE# 1.0 0.4 2.9 Combined 2008-09 3.4 4.3 8.52009-10 RE 4.8 6.0 10.02010-11 BE 3.0 4.4 8.3

RE: Revised Estimates; BE: Budgeted Estimates.# : data pertain to 27 State Governments.

Current Trends - Real GDP Growth (Per Cent) Item 1950-80 2005-06 2006-07 2007-08 2008-09 2009-10@ 2010-11 Q1

(Average)1 2 3 4 5 6 7 8

1. Agriculture and Allied Activities

2.1 5.2 3.7 4.7 1.6 0.2 2.8

(18.1) (17.2) (16.4) (15.7) (14.6) (14.0)2. Industry 5.4 8.1 13.6 9.3 3.1 10.4 11.4

(20.0) (20.7) (20.7) (20.0) (20.5) (20.8)2.1 Mining and Quarrying 4.6 1.3 8.7 3.9 1.6 10.6 8.92.2 Manufacturing 5.3 9.6 14.9 10.3 3.2 10.8 12.42.3 Electricity, Gas and Water Supply 9.6 6.6 10.0 8.5 3.9 6.5 6.6

3. Services 4.5 11.3 10.2 10.4 9.3 8.3 9.4(61.9) (62.2) (62.9) (64.4) (64.9) (65.2)

3.1 Trade, Hotels, Transport Storage and Communication 5.1 12.1 11.7 10.7 7.6 9.3 12.23.2 Financing, Insurance, Real Estate and Business Services 3.5 12.8 14.5 13.2 10.1 9.7 8.03.3 Community, Social and Personal Services 4.3 7.6 2.6 6.7 13.9 5.6 6.73.4 Construction 4.9 12.4 10.6 10.0 5.9 6.5 7.5

4. Real GDP at Factor Cost 3.5 9.5 9.7 9.2 6.7 7.4 8.8(100) (100) (100) (100) (100) (100)

Figure in parenthesis are percentage share to GDP; @: Revised estimates Source: Central Statistical Office

Demand Side Drivers of Growth

(Percentage to GDP)

2008-09 2009-10 2009-10 Q1 2010-11 Q1

Share Contribution Share Contribution Share Contribution Share Contribution

Private Consumption 59.5 78.2 57.6 33.4 59.9 33.5 56.5 22.6

Government Consumption 11.5 33.6 11.8 15.7 11.5 30.8 11.9 16.3Gross Fixed Investment 32.9 25.8 32.8 30.8 31.2 (-)4.4 30.5 23.7

Net Exports (-) 6.2 (-) 36.2 (-) 5.1 7.8 (-) 4.8 36.4 (-) 5.2 (-) 9.8

Source: CSO

Growth in Index of Industrial Production (Y-o-Y)

During April-July 2010, the IIP growth increased to 11.4 per cent as compared with 4.7 per cent last year.

Per

cent

2008-09 AprMay Jun Jul

AugSe

p OctNov

Dec Jan Feb

Mar

2009-10 AprMay Jun Jul

AugSe

p OctNov

Dec Jan Feb

Mar

2010-11 AprMay Jun Jul

-5.0

0.0

5.0

10.0

15.0

20.0

6.2

4.45.4

6.4

1.7

6.0

0.1

2.5

-0.2

1.00.2 0.3

1.12.1

8.37.2

10.69.3

10.2

12.0

17.7

16.3

14.7 14.615.2

11.3

5.8

13.8

Growing Openness

India’s Trade Openness (% of GDP)

Exports ImportsCurrent Account

Capital Account

1990s 8.0 10.8 26.8 15.12000s 12.2 17.5 45.4 33.8

2009-10 13.9 22.8 55.2 48.3

Source: RBI

Increased Tradability of Services

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Services Exports to Services GDP

Per

cen

tage

to

Ser

vice

s G

DP

Current Account Balance & Capital Inflows

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

-4

-2

0

2

4

6

8

10

Current Account Balance as a pecentage of GDP

Net Capital Flows as a percentage of GDP

Per

cen

t

Capital FlowsUS $ billion

Item

2008-09 2009-10

Apr-Mar Apr-Mar

1. Inward FDI 35.2 31.7

2. FIIs -15.0 29.0

3. ECBs 7.9 2.5

4.  NRI Deposits 4.3 2.9

5.  Other Banking Capital -7.5 -0.8

6.  Short-term Trade Credits -1.9 7.7

Total 7.2 53.4

FII flows amounted to US$3.5 billion during April-June 2010-11 as against US $ 8.3 billion during April-June 2009-10

FDI Flows to India

Source: RBI

(US $ million)

2006-07 2007-08 2008-09 2009-10

April-July

2009-10

April-July

2010-11

Equity 16,394 26,757 27,807 22,908 10,381 7,557

Re-invested Earnings 5,828 7,679 6,428 8,079

Other Capital* 517 292 757 695

Total 22,739 34,728 34,992 31,682 10,381 7,557

* Inter company debt transactions of FDI entities

Banking Sector Scenario

• Indian banks continue to remain well capitalized as per Basel II requirements

• NPAs at manageable level despite the downturn

• Significant liquidity buffers - CRR and SLR prescriptions

• Focus on CD ratio and SLR requirement help in limiting leverage

Structural Reforms

• Discussion paper on licensing New Private Sector Banks issued in August 2010

• Discussion paper on presence of foreign banks to be issued shortly

• Working Group looking into Holding Company structure

Financial Stability and Development Council

GOI setting up Financial Stability and Development Council (FSDC) for:

• Achieving inter-regulatory coordination and overseeing systemic risks and

• laying down a macro-prudential overlay to financial sector regulation

Focus on Financial Inclusion

• Adoption of mobile- based and smart card based technologies , UIDs

• IMPLEMENTATION OF BASEL III NORMS• Focus on e-governance projects• Importance of CSR in corporate world• Education and awareness in investing

Basel III

• BCBS release Basel III norms on September 12, 2010 – implementation in a phased manner

• Capital adequacy of Indian banks will not be impacted significantly – they already have high CRAR and Core CRAR

• Leverage ratio will be around 6, much comfortable than the Basel requirement of 3

• Indian banks largely follow retail model and therefore liquidity is not an issue for them

Macroeconomic situation – RBI’s latest assessment on September 16, 2010

Global Scenario• Recovery slowing; global environment continues to be a cause for cautionDomestic Scenario• Recovery consolidating; economy rapidly converging to its trend rate of

growth. Agri. growth prospects boosted; sustained growth in service sector. • Inflation dominant concern; implications for real interest rates • Fiscal deficit conforming to budget estimates • External front -export growth constrained by continuing sluggishness in

global economy; demand for imports increased due to strong domestic recovery

• Overall assessment - growth remains steady. Inflation appears to have stopped accelerating though the rate may remain high for some months.

Monetary Measures announced • Repo rate under LAF increased by 25 basis points from 5.75 % 6 %. Reverse

repo rate increased by 50 basis points from 4.5 % to 5.0 %

Thanks….