ECONOMIC ANALYSIS

Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China. Here we will focus on Indian economy as the growth has
GDP : The strengthening of economic activity in the recent years has been supported by persistent increase in gross domestic investment rates from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in 2005-06. It may also be noted that over 95 per cent of investment in the country during this period was financed by the domestic savings. The expected real GDP growth in 2007-08 is around 8.5 per cent. Agricultural GDP growth doubled to around 4 per cent in 2006-07 and is particularly important in Indian context. Interest Rates : In an open economy, the domestic interest rate is influenced by international rates, which in case of India has been on the upswing since 2004. India's interest rates are expected to go up in the medium term. A higher interest rate may be needed to control the anticipated higher inflation. With indications of a further hike in the US and the European Central Bank's interest rates, it is more likely that India will follow suit. Because if India's economic growth is to keep up with that of other countries in a deregulated market environment, it has to adopt the interest cycle of the global economy.

Inflation : Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upward trend with intermittent decreases. However, average inflation in the 52 weeks ending on February 3, 2007 remained at 5 per cent. A spurt in inflation like in the current year has been observed in the recent past in 1997-98, 2000-01, 2003-04 and 2004-05.

Inflation, with its roots in supply-side factors, was accompanied by buoyant growth of money and credit in 2005-06 and 2006-07 so far. While GDP growth accelerated from 7.5 per cent to 9.0 per cent between 2004-05 and 2005-06, the corresponding acceleration in growth of broad money (M3) was from 12.3 per cent to 17.0 per cent. Year-on-year, M3 grew by 21.1 per cent on January 19, 2007. The industrial resurgence and upswing in investment was reflected in, and sustained by, growth of gross bank credit (as per data covering 90 per cent of credit by scheduled commercial banks), for example, to industry (medium and large) at 31.6 per cent and for housing loans at 38.0 per cent in 2005-06. It was also observed in year-on-year growth of gross bank credit at 32.0 per cent in September 2006, albeit marginally down from 37.1 per cent in 2005-06. Reconciling the twin needs of facilitating credit for growth on the one hand and containing liquidity to tame inflation on the other remained a challenge. RBI put a restraint on the rapid growth of personal loans, capital market exposures, residential housing beyond Rs. 20 lakh and commercial real estate loans by more than doubling the provisioning requirements for standard advances under these categories from 0.40 per cent to 1.0 per cent in April 2006. Simultaneously, it increased the risk weight on exposures to commercial real estate from 125 per cent to 150 per cent.

Fiscal Policy : Managing fiscal discipline in the midst of competitive demands on public resources and tax expenditures vis--vis varied and often conflicting expectations of stake holders is a complex exercise. The last three years fiscal results, particularly measured against the deficit targets, demonstrate the effectiveness of managing resources. It is reassuring that deficits have been contained within the mandated limits. The upswing in growth has appeared to have propelled the economy to take-off, and it has been accompanied with a reduction in fiscal deficit from a level of 5.9 per cent of GDP in 2002-03 to 3.7 per cent of GDP in 2006-07. During the same period, revenue deficit has declined from 4.4 per cent of GDP to 2.0 per cent of GDP. Tax-GDP ratio which was 8.8 per cent in 2002-03 has go up to 11.4 per cent in 2006-07. The improvement in deficit indicators has been achieved through improvement in tax-GDP ratio. Investors Confidence : Indian economy has achieved what it has been hoping for quite some time. Perhaps at no time during the post-liberalization period, Indian economy has shown such kind of optimism. It is poised to enhance its real economic growth rate in the current year, holding a huge reserve of foreign exchange that is rather unprecedented, interest rates at an all time low and inflation very much under control, increasingly robust corporate performance, strong operational performance from the banking sector, surge in the stock prices and a whole range of reforms right from new norms for issuance in the primary markets to the setting up of a central listing authority to benchmarking Indian stock exchanges with the international best practices. All these factors have boosted investor confidence in the economy. Employment : Both growth of population and labour force have shown substantial decrease. This is a positive signal. Little Growth in the organised sector employment has been noticed in the private sector. Public sector has shown a negative growth. Significant employment generation took place in the tertiary sector particularly in services industries. Substantial employment growth was observed in the small and unorganised sector, i.e., in small and tiny enterprises. Self-employment and casual labour continued to play a pivotal role in rehabilitation of the unemployed.

TRADE POLICY Indias economic performance has continued to be impressive since 2001-02 and growth has been particularly rapid since 2003-04 averaging over 8.5% with around 9% in 2006-07. This performance is largely due to unilateral trade and structural reforms, in particular in services provided by India. Rapid economic growth has also resulted in an improvement in social indicators such as poverty and infant mortality. India is preparing herself for becoming an economic superpower, and it must expedite socioeconomic reforms and take steps for overcoming institutional and infrastructure bottlenecks inherent in the system. Availability of both physical and social infrastructure is central to sustainable economic growth. Since independence Indian economy has thrived hard for improving its pace of development. Notably in the past few years the cities in India have undergone tremendous infrastructure up gradation but the situation in not similar in most part of rural India. Similarly in the realm of health and education and other human development indicators India's performance has been far from satisfactory, showing a wide range of regional inequalities with urban areas getting most of the benefits. In order to attain the status that currently only a few countries in the world enjoy and to provide a more egalitarian society to its mounting population, appropriate measures need to be taken. All these issues show that India is growing and it still has tremendous opportunity to grow even at a faster rate.

MONETARY POLICY The RBI is the central bank of India and decides on the monetary policy. Monetary policies are related to the rules framed by the RBI to control the liquidity, inflation and interest rates. It uses different types of tools such as Cash reserve ratio, statutory liquidity ratio, Repo rate etc. to control the inflation and liquidity in the economy.

The liquidity in the economy has increased sharply in the year 2004 that is why the inflation during that time period also increased with a higher rate. To miyigate the inflation RBI effectively used the CRR tool and has been increasing the CRR since then. At a value of less than 5% during 2003, CRR now stands at 7%. The RBI is now able to restrain the inflation whithin 4%. Liquidity conditions remained fairly comfortable up to early September 2006 with the unwinding of the Central Government surplus balances with the RBI and continued intervention in the foreign exchange market to maintain orderly conditions. During 2006-07, up to September 8, 2006, RBI had not received any bid for repo under Liquidity Adjustment Facility (LAF) and the continuous flow of funds under reverse-repo indicated a comfortable liquidity position. In 2005-

06, the reverse repo rate had been raised by 25 basis points each time on April 29 and October 26, 2005, and on January 24, 2006 to reach 5.50 per cent. In 2006-07, it was raised again by 25 basis points each time on June 9 and July 25, 2006. There was some tightness with the onset of the festival season and due to high credit expansion and outflows on account of advance tax payment. From mid-September through October, 2006, while RBI had to provide accommodation to some banks through repo facility, with reverse repo operations simultaneously, in net terms, RBI absorbed liquidity from the system.

CRR
8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

CRR

Exchange Rate
Indian Rupee against the USD remained stable between Rs 40.00/41.00. Indian Rupee traded mostly below Rs 41.00 in June 2007. Throughout the month Rupee gained against the USD but remained volatile and crossed Rs 41.00 exceptionally in only one trading session. The rupee ranged between Rs 40.47/41.01 averaging at Rs 40.8 in June 2007, showing weakness towards the last trading sessions of the month. The central bank continues to maintain its limited intervention in the forex market until the inflationary pressures are minimized. In June 2007 INR against the Euro demonstrated less volatility than it did against the USD. It peaked at Rs 55.09 and remained above Rs 55.00 level in the penultimate trading sessions before attaining a level below Rs 55.00. However it averaged at Rs 54.7 in June2007.

Challenges faced by Indian Economy Currently Indian economy is facing these challenges:

Sustaining the growth momentum and achieving an annual average growth of 7-8 % in the next five years. Simplifying procedures and relaxing entry barriers for business activities. Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China as India's land area is almost half of China's total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (world bank figures). Boosting agricultural growth through diversification and development of agro processing. Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. Developing world-class infrastructure for sustaining growth in all the sectors of the economy. Allowing foreign investment in more areas Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Empowering the population through universal education and health care. India needs to improve its HDI rank, as at 127 it is way below many other developing countries' performance. The UPA government is committed to furtering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance. Government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the future.