Role of GDP in developing India

This report gives the different aspects relating the GDP growth of India. GDP rate since independence, reasons for fluctuation in GDP, role of Indian government in growth of GDP, role of public, privet and government in growth of GDP and finally reasons of devaluation of devaluation of rupee in comparison to dollar are outlined in a nutshell.

Role of GDP in developing India

Journey since Independence

Mr. Divakar Kumar London School of Economics and Political Sciences (LSE)

Role of GDP in developing India

ACKNOWLEDGEMENT
I would like to thank Ashray for Everyone for providing me this wonderful opportunity to work as an intern on the project Role of GDP in Developing India. I would be failing in my duty if I do not thank Mr Sandeep Kumar Mahto who showed enough confidence in me and handed me this challenging task. I would also take this opportunity to thank various representatives Ministry of Human Resource Development (MHRD), Data Portal of India, Central Statistics Office (CSO) of India, Ministry of Finance, and Planning Commission of India for providing me with data and information at right time. Without their constant and informative support my work would be incomplete. I would thank my elder brother Mr Ranjeet Kumar for his continuous encouragement and support. I would like to thank my mother and father for their constant support and guidance for my work. Further, thanks to my siblings Prabhakar, Simpi and Pammi for their help in making my project a grand success. Thanks to my dear friend Deepshikha for her guidance towards my work.

Role of GDP in developing India

Contents
Page Number Acknowledgement Contents Preface Definition of Gross Domestic Product (GDP) 1. 2. 3. 4. 5. 6. GDP Defined in three ways GDP explained more GDP- A long definition by World Bank Development relevance Statistical concept and methodology Limitations and exceptions 11 1 2 4 6

GDP Rate from 1947-2012 1. 2. 3. 4. 5. 6. GDP of India in current US$ since 1960 Line graph of Indian GDP in Billions of US dollars Annual growth rate of Indian GDP since 1960 Line graph of Growth of Indian GDP in annual % GDP of India per capita in current US dollars since 1960 Line graph of GDP per capita in current US$

Reason for fluctuation in GDP 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. High Inflation Enough to keep Growth on check! Slow Reform Movement Stalling Growth Prospects! Earnings Slowdown Impacted by higher Operating costs! Current Account Deficit Signs of Growing Concern! Industrial Growth A bit too volatile to Digest! Rising Interest Rates Renders Working Conditions Costly! Fiscal Deficit The Unbudgeted woes! FII Selling Moving back to the West! Global woes India still not decoupled yet! Unforeseen Events The Natures Fury Politics and policies are deterring investments: Power outages are impacting growth: Consumer confidence is low and could impact consumption: The weakness in the rupee isn't helping exports, and exports are impacted by global demand:

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Role of GDP in developing India

Role of Indian Government in Growth of GDP 1. 2. 3. 4. 5. Pre-liberalisation period (19471991) Post-liberalisation period Agriculture Research and development Industrial output

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Role of Public, Private and Government Companies in growth of GDP of India 1. 2. 3. 4. Public and private sector employment in India Employment in the public sector in 1998 Share of public sector in GDP Share of Public and Private sector in Gross domestic savings and Gross domestic capital formations 5. Performance of Public sector (at current prices) Reason for devaluation in rupee in comparison to dollar till 2013 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. JOURNEY SINCE INDEPENDENCE PRESENT SCENARIO Dollar on a Horse Ride Recession in the Euro Zone Is Back On the Table Bleak Fundamental Outlook No Balance at Balance Of Payments Basic law of economics Price of crude oil Performance of dollar with respect to other currencies Volatility in the equity market Effects of equity market problems on investors Poor current account deficit Withdrawal of investors Downgrading of Indian stocks Condition of import bill Contraction of Indian economy Future prospects of INR

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Conclusion

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Role of GDP in developing India

Preface
The economy of India is the ninth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRICS. On a per-capita-income basis, India ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012, according to the IMF. India is the 19th-largest exporter and the 10th-largest importer in the world. The economy slowed to around 5.0% for the 201213 fiscal year compared with 6.2% in the previous fiscal. India's GDP grew by 9.3% in 201011; thus, the growth rate has nearly halved in just three years. GDP growth rose marginally to 4.8% during the quarter through March 2013, from about 4.7% in the previous quarter. The government has forecast a growth rate of 6.1%-6.7% for the year 2013-14, whilst the RBI expects the same to be at 5.7%.

The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist policies and import-substituting economy that failed to take advantage of the post-war expansion of trade. This model contributed to widespread inefficiencies and corruption, and the failings of this system were due largely to its poor implementation.

In 1991, India adopted liberal and free-market principles and liberalised its economy to international trade under the guidance of Former Finance minister Manmohan Singh under the Prime Ministry of P.V. Narasimha Rao, prime minister from 1991 to 1996, who had eliminated Licence Raj, a pre- and post-British era mechanism of strict government controls on setting up new industry. Following these major economic reforms, and a strong focus on developing national infrastructure such as the Golden Quadrilateral project by former Prime Minister Atal Bihari Vajpayee, the country's economic growth progressed at a rapid pace, with relatively large increases in per-capita incomes.

The combination of protectionist, import-substitution, and Fabian social democractic-inspired policies governed India for some time after the end of British occupation. The economy was then characterised by extensive regulation, protectionism, and public ownership of large monopolies, pervasive corruption and slow growth. Since 1991, continuing economic liberalisation has moved the country towards a market-based economy. By 2008, India had established itself as one of the world's fastest growing economies. Growth significantly slowed to 6.8% in 200809, but subsequently recovered to 7.4% in 200910, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period. India's current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 201011, according to the state Labour Bureau, was 9.8% nationwide.

Role of GDP in developing India

As of 2011, India's public debt stood at 68.05% of GDP which is highest among the emerging economies. However, inflation remains stubbornly high with 7.55% in August 2012, the highest amotrade (counting exports and imports) stands at $606.7 billion and is currently the 9th largest in the world. During 201112, India's foreign trade grew by an impressive 30.6% to reach $792.3 billion (Exports-38.33% & Imports-61.67%).

This report gives one a journey through the post-independence era in context of GDP and its components. This report is particularly Indias GDP journey. First section of this report defined GDP its components and definition by World Bank. Further it gives the limitations of GDP. Second section deals with GDP rate of India from 1947-2012. The summary is given in the form of Data Table and Line graph. All data have been collected through World Bank and Data Portal of India. Third section deals with reasons for fluctuation in GDP. Fourth and fifth section is a summary of role of Indian Government, Private, and Public companies in growth of GDP. Finally the last section is a summary of causes of devaluation of Indian Rupee in comparison to Dollar till 2012.

Role of GDP in developing India

Defining Gross Domestic Product (GDP)

Definition of Gross Domestic Product (GDP)

The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX where: "C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending "I" is the sum of all the country's businesses spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

GDP Defined in three ways

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output. GDP can be defined in three ways, which should give identical results.

Role of GDP in developing India

First, it is equal to the total expenditures for all final goods and services produced within the country in a specified period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production by all the industries, plus taxes and minus subsidies on products. Third, it is equal to the sum of the income generated by production like compensation of employees, taxes on production and imports less subsidies, and gross operating surplus

GDP explained more

GDP is commonly GDP per capita used as an indicator of The GDP per capita given on this page shows the GDP at purchaser's prices the economic health in constant 2000 U.S. dollars divided by midyear population. GDP at of a country, as well purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies as to gauge a not included in the value of the products. It is calculated without making country's standard of deductions for depreciation of fabricated assets or for depletion and living. Critics of using degradation of natural resources. Dollar figures for GDP are converted GDP as an economic from domestic currencies using 2000 official exchange rates. The term measure say the Constant Prices refers to a metric for valuing the price of something over statistic does not take time, without that metric changing due to inflation or deflation. into account the underground economy transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

GDP- A long definition by World Bank

GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar figures for GDP are converted from domestic currencies using single year official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used.

Role of GDP in developing India

Development relevance
An economy's growth is measured by the change in the volume of its output or in the real incomes of its residents. The 2008 United Nations System of National Accounts (2008 SNA) offers three plausible indicators for calculating growth: the volume of gross domestic product (GDP), real gross domestic income, and real gross national income. The volume of GDP is the sum of value added, measured at constant prices, by households, government, and industries operating in the economy. GDP accounts for all domestic production, regardless of whether the income accrues to domestic or foreign institutions.

The components used to calculate GDP

Consumption: -- Durable goods (items expected to last more than three years) -- Nondurable goods (food and clothing) -- Services
Government Expenditures: -- Defence -- Roads -- Schools Investment Spending: -- Non-residential (spending on plants and equipment), Residential (single-family and multi-family homes) -- Business inventories Net Exports: -- Exports are added to GDP -- Imports are deducted from GDP

Statistical concept and methodology

Gross domestic product (GDP) represents the sum of value added by all its producers. Value added is the value of the gross output of producers less the value of intermediate goods and services consumed in production, before accounting for consumption of fixed capital in production. The United Nations System of National Accounts calls for value added to be valued at either basic prices (excluding net taxes on products) or producer prices (including net taxes on products paid by producers but excluding sales or value added taxes). Both valuations exclude transport charges that are invoiced separately by producers. Total GDP is measured at purchaser prices. Value added by industry is normally measured at basic prices.

The GDP report also includes information regarding inflation: -- The implicit price deflator measures changes in prices and spending patterns. -- The fixed-weight price deflator measures price changes for a fixed basket of over 5,000 goods and services.

Growth rates of GDP and its components are calculated using the least squares method and

Role of GDP in developing India

constant price data in the local currency. Constant price U.S. dollar series are used to calculate regional and income group growth rates. Local currency series are converted to constant U.S. dollars using an exchange rate in the common reference year.

Limitations and exceptions

Gross domestic product (GDP), though widely tracked, may not always be the most relevant summary of aggregated economic performance for all economies, especially when production occurs at the expense of consuming capital stock.

The Gross Domestic Product (GDP) in India was worth 1841.70 billion US dollars in 2012. The GDP value of India represents 2.97% of the world economy. GDP in India is reported by the The World Bank Group. India GDP averaged 485.65 USD Billion from 1970 until 2012, reaching an all-time high of 1872.90 USD Billion in December of 2011 and a record low of 63.50 USD Billion in December of 1970. The gross domestic product (GDP) measures of national income and output for a given country's economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time.

While GDP estimates based on the production approach are generally more reliable than estimates compiled from the income or expenditure side, different countries use different definitions, methods, and reporting standards. World Bank staff review the quality of national accounts data and sometimes make adjustments to improve consistency with international guidelines. Nevertheless, significant discrepancies remain between international standards and actual practice. Many statistical offices, especially those in developing countries, face severe limitations in the resources, time, training, and budgets required to produce reliable and comprehensive series of national accounts statistics.

Among the difficulties faced by compilers of national accounts is the extent of unreported economic activity in the informal or secondary economy. In developing countries a large share of agricultural output is either not exchanged (because it is consumed within the household) or not exchanged for money.

Each industry's contribution to growth in the economy's output is measured by growth in the industry's value added. In principle, value added in

Role of GDP in developing India

constant prices can be estimated by measuring the quantity of goods and services produced in a period, valuing them at an agreed set of base year prices, and subtracting the cost of intermediate inputs, also in constant prices. This double-deflation method requires detailed information on the structure of prices of inputs and outputs.

In many industries, however, value added is extrapolated from the base year using single volume indexes of outputs or, less commonly, inputs. Particularly in the services industries, including most of government, value added in constant prices is often imputed from labour inputs, such as real wages or number of employees. In the absence of well-defined measures of output, measuring the growth of services remains difficult.

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Moreover, technical progress can lead to improvements in production processes and in the quality of goods and services that, if not properly accounted for, can distort measures of value added and thus of growth. When inputs are used to estimate output, as for nonmarket services, unmeasured technical progress leads to underestimates of the volume of output. Similarly, unmeasured improvements in quality lead to underestimates of the value of output and value added. The result can be underestimates of growth and productivity improvement and overestimates of inflation.

GDP was first developed by Simon Kuznets for a US Congress report in 1934. In this report, Kuznets warned against its use as a measure of welfare. After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy.

Informal economic activities pose a particular measurement problem, especially in developing countries, where much economic activity is unrecorded. A complete picture of the economy requires estimating household outputs produced for home use, sales in informal markets, barter exchanges, and illicit or deliberately unreported activities. The consistency and completeness of such estimates depend on the skill and methods of the compiling statisticians.

Rebasing of national accounts can alter the measured growth rate of an economy and lead to breaks in series that affect the consistency of data over time. When countries rebase their national accounts, they update the weights assigned to various components to better reflect current patterns of production or uses of output. The new base year should represent normal operation of the economy - it should be a year without major shocks or distortions. Some developing countries have not rebased their national accounts for many years. Using an old base year can be misleading because implicit price and volume weights become progressively less relevant and useful.

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Role of GDP in developing India

To obtain comparable series of constant price data for computing aggregates, the World Bank rescales GDP and value added by industrial origin to a common reference year. Because rescaling changes the implicit weights used in forming regional and income group aggregates, aggregate growth rates are not comparable with those from earlier editions with different base years. Rescaling may result in a discrepancy between the rescaled GDP and the sum of the rescaled components. To avoid distortions in the growth rates, the discrepancy is left unallocated. As a result, the weighted average of the growth rates of the components generally does not equal the GDP growth rate. 11

GDP Rate From 1947-2012

GDP of India in current US$ since 1960

Year GDP (current US$) Year GDP (current US$) Year GDP (current US$) Year GDP (current US$) Year

1960 NA 1966 NA 1972 72716595 886.08 1978 13970868 8959.48 1984

1961 NA 1967 NA 1973 87014945 188.13 1979 15567433 7009.82 1985

1962 NA 1968 NA 1974 10127148 9825.57 1980 18959412 1347.88 1986

1963 NA 1969 NA 1975 10019951 4361.01 1981 19688347 4526.44 1987

1964 NA 1970 63517181 993.61 1976 10451811 8780.15 1982 20423436 6470.42 1988

1965 NA 1971 68532271 313.33 1977 12361783 7579.07 1983 22209028 3349.14 1989

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Role of GDP in developing India

GDP (current US$) Year GDP (current US$) Year GDP (current US$) Year GDP (current US$) Year GDP (current US$)

21587823 3652.14 1990 32660801 4285.82 1996 39978688 8515.03 2002 52279845 7731.02 2008 12240966 25885.47

23658910 0978.44 1991 27484234 8144.40 1997 42316041 9439.98 2003 61757257 8402.85 2009 13653729 12989.09

25335244 4883.55 1992 29326235 2360.49 1998 42874103 0147.28 2004 72158529 3250.32 2010 17109172 18018.04

28392697 7522.35 1993 28419371 6755.32 1999 46434439 5616.42 2005 83421689 7836.72 2011 18728454 06804.92

30179095 1202.89 1994 33301446 3391.51 2000 47469162 7708.13 2006 94911676 9619.22 2012 18417173 71769.71

30123372 8790.86 1995 36659964 5609.10 2001 49237857 9615.66 2007 12387001 95643.90

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Source: World Data Bank

Line graph of Indian GDP in Billions of US dollars

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Role of GDP in developing India

GDP (current US$)

2E+12 1.8E+12 1.6E+12 1.4E+12 1.2E+12 1E+12 8E+11 6E+11 4E+11 2E+11 0 GDP (current US$)

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1975

1960

1963

1966

1969

1972

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Annual growth rate of Indian GDP since 1960

Year GDP growth (annual %) Year GDP growth (annual %) Year GDP growth (annual %) Year GDP growth (annual %) Year GDP growth (annual %)

1960 NA

1961 3.722 743

1962 2.931 128

1963 5.994 353

1964 7.452 95

1965 2.635 77 1975 9.149 912

1966 0.055 33 1976 1.663 104

2011

1967 7.825 963

1968 3.387 929

1969 6.539 7

1970 5.157 23

1971 1.642 93

1972 0.553 3 1982 3.475 733

1973 3.295 521

1974 1.185 336

1977 7.254 765

1978 5.712 532

1979 5.238 18 1989 5.947 343

1980 6.735 822

1981 6.006 204

1983 7.288 893

1984 3.820 738

1985 5.254 299

1986 4.776 564

1987 3.965 356

1988 9.627 783

1990 5.533 455

1991 1.056 831

1992 5.482 396

1993 4.750 776

1994 6.658 924

1995 7.574 492

1996 7.549 522

1997 4.049 821

1998 6.184 416

1999 8.463 071

2000 3.975 053

2001 4.944 226

2002 3.907 534

2003 7.943 995

2004 7.848 792

2005 9.284 882

2006 9.263 965

2007 9.801 36

2008 3.890 957

2009 8.479 784

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Role of GDP in developing India

Year GDP growth (annual %)

2010 10.54 639

2011 6.330 518

2012 3.236 943

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Line graph of Growth of Indian GDP in annual %

GDP growth (annual %)

12 10 8 6 4 2 0 -2 -4 -6 -8 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 GDP growth (annual %)

GDP of India per capita in current US dollars since 1960

Year GDP per capita (current US$)

1960 NA

1961 NA

1962 NA

1963 NA

1964 NA

1965 NA

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Role of GDP in developing India

Year GDP per capita (current US$) Year GDP per capita (current US$) Year GDP per capita (current US$) Year GDP per capita (current US$) Year GDP per capita (current US$) Year GDP per capita (current US$) Year GDP per capita (current US$) Year GDP per capita (current US$)

1966 NA 1972 125.2010 15 1978 209.3518 951 1984 282.2862 435 1990 375.8907 93 1996 410.8183 568 2002 485.5537 094 2008 1042.083 832

1967 NA 1973 146.4422 33 1979 227.9164 288 1985 302.6455 85 1991 310.0837 677 1997 427.2361 968 2003 564.6188 086 2009 1147.239 088

1968 NA 1974 166.5642 458 1980 271.2495 839 1986 317.1100 126 1992 324.4951 264 1998 425.4452 943 2004 649.7103 643 2010 1419.112 674

1969 NA 1975 161.0323 114 1981 275.3210 064 1987 347.8095 84 1993 308.5347 869 1999 453.0124 208 2005 740.1159 323 2011 1533.665 574

1970 114.4041 94 1976 164.1086 371 1982 279.2208 778 1988 361.9319 056 1994 354.8548 761 2000 455.4437 732 2006 830.1632 213 2012 1489.235 167

1971 120.6968 307 1977 189.6167 729 1983 296.9175 881 1989 353.8203 909 1995 383.5509 262 2001 464.7269 155 2007 1068.678 519

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The Gross Domestic Product per capita in India was last recorded at 1106.80 US dollars in 2012. The GDP per Capita in India is equivalent to 9% of the world's average. GDP per capita in India is reported by the World Bank. India GDP per capita averaged 448.91 USD from 1960 until 2012, reaching an all-time high of 1106.80 USD in December of 2012 and a record low of 228.34 USD in December of 1960. The GDP per capita is obtained by dividing the countrys gross domestic product, adjusted by inflation, by the total population.

Line graph of GDP per capita in current US$

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Role of GDP in developing India

GDP per capita (current US$)

1800 1600 1400 1200 1000 800 600 400 200 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 GDP per capita (current US$)

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Role of GDP in developing India

Reasons for fluctuation in GDP

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High Inflation Enough to keep Growth on check!

Inflation has shot up to 8.43% in December 2011 as against 7.48% in November 2011. Food inflation remains stubbornly high at 16.91%. Needless to say, markets have already felt jitters based on concerns emanating from this prime culprit.

Watch before you buy!!!!

Slow Reform Movement Stalling Growth Prospects!

The reformist movement started off well during the phase 1 of UPA ruling. Though, the pace of reforms was mired by obstructive policies of Left-coalition partners, the seeds were sown for a fast-paced reformist movement in the ensuing phase which bypassed the Leftists altogether. Further, the 2nd phase started off with the big-bang reform initiatives such as the Womens Reservation Bill, the GST structure which intends to swallow all sundry taxes and biggest ever indirect tax reform in the form of DTC. While DTC just managed to get the appointment of the Finance Minister by 2012, the GST reform got stuck in the mess of outstanding issues between the States and the Centre. To add to the woes, the emergence of the top scandals and frauds further mired the prospects of timely roll-out of GST, as opposition parties are in no mood to entertain any discussion in the Parliament until Manmohan Singh government ratifies a JPC probe in the matter. The scandal

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Role of GDP in developing India

debate has paralyzed the Parliamentary proceedings adding thousands of crore to tax-payers wealth erosion.

Earnings Slowdown Impacted by higher Operating costs!

High inflation and rising interest rates scenario does not impact individuals and tax-payers alone. It also affects corporate profitability. Higher input costs leads to squeeze in corporate margins at operating level or a spill-over to generalized inflation if the same is passed on to final consumers.

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While the pure commodity players are likely to benefit from the demand and supply mismatch, others involved in processing of raw-materials and turning them into finished goods might see an impact on the cost of goods sold and operating margins of the company. In such a scenario, companies that rely on high volume growth and master cost efficiency techniques, can weather the crisis through strategic planning or sometimes even by passing on the rising input burden to the final consumers. The commodity cycle has yet again turned bullish. Manufacturing companies are more susceptible to such impact of rising raw material prices. The tremors of the same shall be felt in next few quarterly performances.

Current Account Deficit Signs of Growing Concern!

Indias current account deficit has surged to 4.1% of GDP during second quarter of the fiscal as against 3.2% the previous year. Merchandise trade deficit widened to $35.4 billion during Q2 FY11 as against $31.6 billion in previous quarter as growth in imports far outpaced the progress in exports.

Am I getting stronger?

In its policy review, the RBI had warned that high current account deficit 3.5% of GDP for the fiscal 2010-11 is not sustainable. The central bank had also indicated that soaring oil prices could have negative impact on the trade balance going forward. The high current account deficit coupled with large fiscal deficit could play havoc for India in sustaining in its dream run amongst other emerging market economies. According to DGFT, Indias trade deficit for the year is likely to range between $115-125 billion.

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Role of GDP in developing India

Ground Reality: High current account deficit could seem even more inflated in a likelihood of a reversal in foreign capital flows covering it.

Industrial Growth A bit too volatile to Digest!

The volatility in the industrial output numbers announced over the last few months has left economists high-and-dry with regard to arriving at any type of conclusion on growth figures for the economy. 19 In latest, the core growth (countrys infrastructure sector output) registered a smart comeback in December with 6.6% growth. These core sectors crude oil, petroleum refinery products, coal, cement and steel accounts for almost a quarter of the countrys IIP. Thus, it raises hopes of robust December overall IIP data. However, in November the slowdown in industrial production had hit an 18-month low of 2.7%, raising questions on the veracity of an index data. Further, lower growth in manufacturing and electricity has pulled down IIP growth in August 2010.

A bit too volatile to Digest!

Ground Reality: FM Pranab Mukherjee has gone on record saying high inflation and weak IIP data were cause of concern and that the government was examining ways to shore up industrial production.

Rising Interest Rates Renders Working Conditions Costly!

One thing for sure Cash is King! Logically, holding cash reserves acts as a liability. Hold cash in one hand and inflation in another wipe both the props in your hand against each other. Outcome: your cash gets eroded in its value and inflation reigns.

However, your cash can survive this onslaught of inflation in the rising interest rate scenario on the back of higher returns on investment. Thus, depositors get rewarded for holding the sheer cash

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Role of GDP in developing India

liquidity in high-yielding investment avenues such as bank fixed deposits. But, the opposite also holds true. If youre a borrower, you are standing on the wrong side of the system. A borrower could be a corporate entity looking to expand the business or even an individual looking to raise a loan for buying home or a car. Thus, rising interest rate scenario can directly impact the growth prospects of a nation as it sums up to costly working conditions and operating environment. RBI raised repo (6.5%) and reverse repo rates (5.5%) by 25 bps in a bid to tame inflation. Moreover, bankers believe another 50 bps hike could well be in the offing soon. So, will these measures actually tame inflation or choke the growth rate?

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Fiscal Deficit The Unbudgeted woes!

When a governments expenditures exceed the revenue that it generates, it is a case of fiscal deficit. Though, fiscal deficit is not necessarily a negative economic event, a controlled fiscal situation points towards a balanced budget policy of a country. More recently, RBI had indicated that managing inflation through monetary policy becomes more of a challenge if the fiscal deficit goes unguarded. The government had set a deficit target of 4.8% of GDP for FY12. Analysts are of the opinion that delay in reform rollover such as implementation of GST, adoption of food security bill, pass on of the oil subsidies to the final consumers could affect growth and delay fiscal consolidation.

FII Selling Moving back to the West!

Calendar year 2010 has seen net equity inflow to the tune of $29 billion, or Rs.133, 000 crore in rupee terms. In a major trend developing off late, the preferred route of investment for overseas investors to pump money into India has been FII inflow rather than FDI inflows.

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Role of GDP in developing India

This is of bit concern as some noted economists point out that FII inflow can reverse on signs of even slightest deterioration in the macro-economic indicators of the country. On the other hand, inflows routed through FDI are more stable and long-term integrating with the economy. FDI inflows have been decelerating since last 4 quarters in 2011. Take, for example, the FII outflows in January 2011 totalled at Rs. 4813 crore on the back of growing concerns of untamed inflation eating away growth prospects. These FII outflows hardly amount to a fraction (1/29th) of the humungous $29 billion inflows witnessed in 2010. Yet, the volatility in the equity markets is unprecedented stock markets have already corrected by almost 15% from its recent peak. 21

Global woes India still not decoupled yet!

Neither India, nor China has ever decoupled from global markets. With increasingly globalization, no country can avoid negative impact of trade and business with overseas partners.

Market analysts have a tendency to repeatedly use this vague axiom decoupling story of India. They use this phrase time and again to support their theory of a Buy rating on emerging India growth story. But, ever since the last decade, the decoupling theory has never lived up to its expectations. In fact, ever since the India story has bloomed it finds itself more and more attached to the global economy. It is now more coupled than ever before. Moreover, this can be sensed from the fact that even with a slightest of positive data from the US economy, the hot money has deserted from the Indian shores to seek safety in undervalued American stocks.

The European economy is still in doldrums. During the 2008-crash, Indian IT sector had made a conscious effort to diversify their outsourcing business away from America, to other geographical locations such as Europe. But, to their dismay, the recession has widely spread its wings across the Europe.

Unforeseen Events The Natures Fury!

The global warming is the biggest issue for the environmentalists today. Every few days we get to hear the news of either an earthquake or tsunami or a volcano erupting and damaging life and trade across the world.

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Role of GDP in developing India

Nature has its own way of taking revenge against the man-made destruction of environment. In this new century, the magnitude of such natural occurrences is so huge that it can devastate the whole of village or district where it strikes. It severely affects the logistics and trade in the area and alienates the location for days together which can hurt the economic activity for a prolonged period.

Politics and policies are deterring investments:

The last 1.5 years markets have become "increasingly disillusioned with the pace of reform, with a number of investment projects stalled and corruption allegations tainting the incumbent government." And the emergence of regional parties and Congress' dismal performance in state polls means they're starting to play it safe with their politics and economic policies.

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Power outages are impacting growth:

The recent power outage that left 50% of the country in darkness, and "anecdotal evidence of worsening power shortages" are all impacting growth. What's more notified power cuts are at record highs and do not cover a massive chunk of the country that isn't connected to the power grid.

Consumer confidence is low and could impact consumption:

Unlike the slowdown in investment which is well recorded, declining consumer confidence shows that consumption which has been stable could slow too.

The weakness in the rupee isn't helping exports, and exports are impacted by global demand:

The share of exports in GDP has increased and while the weakness in the rupee would be expected to boost exports, the composition of India's exports is dominated by high-value goods, so the weaker rupee is unlikely to have a major impact. Rather exports will be affected by global demand. Export growth is expected to be soft in coming months.

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Role of GDP in developing India

Role of Indian Government in Growth of GDP

23

Role of Indian Government in Growth of GDP

Pre-liberalisation period (19471991)

Indian economic policy after independence was influenced by the colonial experience, which was seen by Indian leaders as exploitative, and by those leaders' exposure to British social democracy as well as the progress achieved by the planned economy of the Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialisation, economic interventionism, a large public sector, business regulation, and central planning, while trade and foreign investment policies were relatively liberal. FiveYear Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalised in the mid-1950s. Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of the country's independence. They expected favourable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidising manual, low-skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers. The rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of

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Role of GDP in developing India

growth by economists, because of the unfavourable comparison with growth rates in other Asian countries. Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities. Subsequently the Emergency and Garibi Hatao concept under which income tax levels at one point rose to a maximum of 97.5%, a record in the world for non-communist economies, started diluting the earlier efforts. 24

Post-liberalisation period
In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies; removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded reforms.

In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than agricultural residents.

While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK

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Role of GDP in developing India

and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century.

Agriculture
India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the total workforce and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the green revolution.

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India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper. It also has the world's largest cattle population (193 million). It is the second largest producer of wheat, rice, sugar, groundnut and inland fish. It is the third largest producer of tobacco. India accounts for 10% of the world fruit production with first rank in the production of banana and sapota.

The required level of investment for the development of marketing, storage and cold storage infrastructure is estimated to be huge. The government has implemented various schemes to raise investment in marketing infrastructure. Amongst these schemes are Construction of Rural Go downs, Market Research and Information Network, and Development / Strengthening of Agricultural Marketing Infrastructure, Grading and Standardisation.

Research and development

The Indian Agricultural Research Institute (IARI), established in 1905, was responsible for the research leading to the "Indian Green Revolution" of the 1970s. The Indian Council of Agricultural Research (ICAR) is the apex body in kundiure and related allied fields, including research and education. The Union Minister of Agriculture is the President of the ICAR. The Indian Agricultural Statistics Research Institute develops new techniques for the design of agricultural experiments, analyses data in agriculture, and specialises in statistical techniques for animal and plant breeding. Prof. M.S. Swaminathan is known as "Father of the Green

25

Role of GDP in developing India

Revolution" and heads the MS Swaminathan Research Foundation. He is known for his advocacy of environmentally sustainable agriculture and sustainable food security.

Industrial output
India is tenth in the world in factory output. Manufacturing sector in addition to mining, quarrying, electricity and gas together account for 27.6% of the GDP and employ 17% of the total workforce. Economic reforms introduced after 1991 brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods. In recent years, Indian cities have continued to liberalise, but excessive and burdensome business regulations remain a problem in some cities, like Kochi and Kolkata.

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Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family firms and required political connexions to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, focusing on designing new products and relying on low labour costs and technology. The Indian market offers endless possibilities for investors.

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Role of GDP in developing India

Role of Public, Private and Government Companies in growth of GDP of India

27

One may look at the role of public sector in Indian Economy in terms of its share in providing employment, its share in investment, its share in national generated and its share in saving and capital formations.
Public and private sector employment in India

Since employment in the public sector is confined in the organised sector, public sector employs 70% of the workers employed in organised sector of the Indian Economy. Year 1971 1981 1991 1998 Public sector 71 155 190 194 Private sector 121 74 77 87 Total 192 229 267 281 1 as % of 3 in lakh 55 68 71 70

From table we may note that 50 % of the total employment in the public sector was in the government administration and community and personal services. The biggest chunk of employment in economic enterprises was in transport, storage and in communications was of the order of about 31 lakhs and next in importance was in manufacturing was 17 lakhs. 5.3 lakh persons employed in agriculture and other allied activities reflect employment under employment guarantee scheme rather than any productive activity in the normal sense. The share of public sector in total employment in organised sector public+ private; reveals that in transport and communications, electricity, gas, water, and constructions, the share of public sector is in 95-98%, a total dominant situation. In manufacturing share of public sector was 27% of the total since its entry is of recent origin. With the nationalisation of coal mines

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Role of GDP in developing India

and take-over of 20 commercial banks significant improvement has taken place in public sector. Public sector is big employer, 70% of total as far as organised sector of Indian Economy is concerned.

Employment in the public sector in 1998

Sectors Manufacturing Transport, Storage and Communications Financing, Insurance, real estate and business services Government administration, community, social and personal services Other sectors Total

Lakhs 16.1 30.8 12.9 97.4

Per cent of total 8.5 15.7 6.6 50.0 28

37.0 194.2

19.2 100.0

Share of public sector in GDP

During the last 5 decades share of public sector in NDP has steadily improved. Public sector accounted for 7.5% GDP in 1950-51, 26.2% in 1995-96 at current prices. So, public sector accounts for one fifth of national output due to rapid expansion of public sector enterprises. Share of public administration and defence rose from 4.5% to 8.8% during 1950-51 and 1967-97. Share of public sector enterprise just rose from 3% in 1950-1951 to 14.7% in 199697. But still private sector enjoys dominant position in economy. In agriculture and small scale sector share of the state is almost zero.
Share of Public and Private sector in Gross domestic savings and Gross domestic capital formations

Averages for Plan Periods Gross Domestic Savings First Plan 1951-56 Second Plan 195661 Third Plan 1961-66 Fourth Plan 196974 Fifth Plan 1974-79 Sixth Plan 1980-85 Seventh Plan 19851990

Public sector

As % of GNP at Market price Private sector Total

1.7 2.0 3.4 3.0 4.6 3.6 2.3

8.7 10.4 10.9 14.4 17.0 16.5 18.1

10.4 12.4 14.3 17.4 21.6 20.1 20.4

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Role of GDP in developing India

Eighth Plan 1992-97 1997-98 1998-99 Gross Domestic capital Formation First Plan Second Plan Third Plan Fourth Plan Fifth Plan Sixth Plan Seventh Plan Eighth Plan 1997-98 (P) 1998-99 (Q)

1.4 1.4 0.0

21.9 23.3 22.3

23.3 24.7 22.3

3.5 6.6 8.4 7.2 9.5 11.1 10.7 9.2 6.5 6.7

7.2 8.8 8.3 10.9 11.7 10.5 12.1 15.4 17.5 16.6

10.7 15.4 16.7 18.1 21.2 21.6 22.8 24.6 26.9 25.1

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Performance of Public sector (at current prices)

Item Gross domestic product 1. Administrative Department 2. Departmental Enterprises 3. Non Departmental Enterprises Gross Domestic capital Formation 1. Administrative Department 2. Departmental Enterprises 3. Non Departmental Enterprises Gross Domestic Saving 1. Administrative Department 2. Departmental Enterprises 3. Non Departmental Enterprises

1980-81 19.7 7.3 3.2 9.2 41.4 10.6 11.4 19.3 16.2 8.9 0.9 6.4

Percentage share in total economy 1987-88 1994-95 27.0 26.7 9.4 8.3 4.4 13.2 44.1 10.5 9.4 24.2 10.4 -7.7 3.0 15.1 4.0 14.4 35.9 8.1 7.5 20.3 7.1 -10.2 4.0 13.2

1995-96 26.2 8.4 3.8 14.0 29.0 7.1 6.9 15.0 8.9 -8.0 3.7 13.2

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Role of GDP in developing India

Reason of devaluation of Indian Rupee in comparison to Dollar

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The Indian rupee, which was on a par with the American currency at the time of Independence in 1947, has depreciated by a little more than 65 times against the greenback in the past 66 years. The rupee touched its historic record low of below 65 (intraday) against the dollar last week on sluggish local stocks and continued dollar demand from importers.

The currency has witnessed huge volatility in the past two years. This volatility became severe in the past three months affecting major macro-economic data, including growth, inflation, trade and investment. Managing volatility in the currency markets has become a big challenge for policymakers. Despite of a series of measures taken by the central bank as well as the government to curb the volatility in the markets, the rupee continues to depreciate. The trend is unlikely to reverse any time soon. This rupee depreciation is badly hurting the Indian economy. It is fuelling inflation and has hurt economic growth.

JOURNEY SINCE INDEPENDENCE

The Indian currency has witnessed a slippery journey since Independence. Many geopolitical and economic developments have affected its movement in the last 66 years. When India got freedom on August 15, 1947, the value of the rupee was on a par with the American dollar. There were no foreign borrowings on India's balance sheet.

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Role of GDP in developing India

To finance welfare and development activities, especially with the introduction of the FiveYear Plan in 1951, the government started external borrowings. This required the devaluation of the rupee. After independence, India had chosen to adopt a fixed rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966. Two consecutive wars, one with China in 1962 and another one with Pakistan in 1965; resulted in a huge deficit on India's budget, forcing the government to devalue the currency to 7.57 against the dollar. The rupee's link with the British currency was broken in 1971 and it was linked directly to the US dollar. In 1975, value of the Indian rupee was pegged at 8.39 against a dollar. In 1985, it was further devalued to 12 against a dollar. In 1991, India faced a serious balance of payment crisis and was forced to sharply devalue its currency. The country was in the grip of high inflation, low growth and the foreign reserves were not even worth to meet three weeks of imports. Under these situations, the currency was devalued to 17.90 against a dollar. 1993 was very important. This year currency was let free to flow with the market sentiments. The exchange rate was freed to be determined by the market, with provisions of intervention by the central bank under the situation of extreme volatility. This year, the currency was devalued to 31.37 against a dollar. The rupee traded in the range of 40-50 between 2000 and 2010. It was mostly at around 45 against a dollar. It touched a high of 39 in 2007. The Indian currency has gradually depreciated since the global 2008 economic crisis. Liberalising the currency regime led to a sharp jump in foreign investment inflows and boosted the economic growth 31

PRESENT SCENARIO

In the week gone by, the Indian rupee extended falls to a new low of 65.50 to the dollar as heavy demand from importers along with weak domestic equities continued to weigh on sentiment. Weakness was also seen after Federal Reserve minutes hinted that the United States was on course to begin tapering stimulus as early as next month. Moreover, continuing its slide, the rupee also made all time low against British pound and breached the 102-mark on local bourses.

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Role of GDP in developing India

With this, British pound has become the first major foreign currency to cross 100 levels against rupee. However, steps taken by the RBI and the government to curb volatility in the exchange rate have had little effect so far. The government is now exploring structural measures to narrow the current account deficit, Finance Minister P Chidambaram said, adding that there is no plan to introduce capital controls. The Indian Rupee has depreciated to an all-time low with respect to the US Dollar. On 28th August 2013, the Indian rupee had gone down to 68.825 against the Dollar but the situation was somewhat revived by the Reserve Bank of India that decided to open a special window for helping state owned oil companies Indian Oil Corp Ltd., Bharat Petroleum Corp and Hindustan Petroleum Corp. The beneficiaries will be able to buy dollars through this window till further notice is provided. These companies, together, require about 8.5 billion dollars every month to import oil and it is expected that this will help them meet the requirements. This has had an immediate effect as is evident from the fact that the INR has started at 67 against the USD at the early proceedings in the Interbank Foreign Exchange Market. The question, however, is why this is happening. There are several reasons that can be enumerated in such a scenario: 32

Dollar on a Horse Ride

The main reason causing the rupee to fall is the immense strength of the Dollar Index, which has touched its three-year high level of 84.30. The record setting performance of US equities and the improvement in the labor market has made Americans more optimistic about the outlook for the US economy, thereby spurring greater hopes of QE tapering. The US dollar is looking like gold these days because the Federal Reserve is in a very different position versus the ECB, BoJ and the RBA. The Federal Reserve is talking about tapering asset purchases at a time when European officials are considering more aggressive monetary easing measures such as negative deposit rates. The fact that the Euro zone is in a recession is just another reason why investors are snapping up dollars. The monetary policies of the ECB and the BoJ pose a threat to the value of the EUR and JPY whereas the next move by the Fed should support the dollar. This divergence is bringing the dollar more into the limelight as a 'safe haven'. Capital preservation is just as important as capital appreciation in the present times and for this reason the direction of the monetary policy and the consequent implications for the currency has become very important.

Recession in the Euro Zone Is Back On the Table

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Role of GDP in developing India

The rupee is also feeling the pinch of the recession in the Euro zone. The euro, which was seen holding the key level of 1.30, has dropped lower to 1.28 levels on the back of deterioration in the local economic data. For the past month, investors have been selling Euros and buying dollars on the premise that the Euro zone is in a recession; and the ECB is considering more stimulus at a time when the Fed is considering less. If the data shows a deeper contraction in Europe and Mr. Draghi reminds investors that the Central bank is watching the economic data carefully to see if additional action is necessary, the EUR/USD could extend its losses. Owing to the uncertainty prevailing in Europe and the slump in the international markets, investors prefer to stay away from risky investments. The credit rating agency's downgrade of India to BBB- with a negative outlook the last of the investment grade has not helped its cause. Any outward flow of currency or a decrease in investments will put a downward pressure on the rupee exchange rate. This global uncertainty has adversely impacted the domestic factors and could lead to a further depreciation of the rupee.

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Bleak Fundamental Outlook

The country with high exports will be happier with a depreciating currency; the same does not apply for India. India, on the other hand, does not enjoy this luxury, mainly because of increasing demand for oil, which constitutes a major portion of its import basket. The fall of the oil price to US$90/barrel has helped India to fight the depreciating rupee up to some extent but at the same time the Euro zone, one of India's major trading partners is under a severe economic crisis. This has significantly impacted Indian exports because of reduced demand. Thus India continues to record a current account deficit of around 4.3%, depleting its Forex reserves in the bargain and thus depreciating the rupee. From time to time, the macro-economic policy has to accord greater emphasis to one segment or the other. At the present time the worry lines are multiple high consumer price inflation, a large fiscal deficit, poor growth, flat industrial production and a balance of payments current account deficit.

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Role of GDP in developing India

34

No Balance at Balance Of Payments

The Government of India was relaxed with respect to the CAD issue as there was a sharp fall in the commodity prices (of gold and crude oil). A large part of the import bill is driven by other resources as well. The facts show that fertilizer imports surged by 30% in the last two years and coal imports have doubled. Therefore, the problem of CAD continues to persist. The Indian economy needs to debug its structural reforms and the gap between the imports and exports. With the reduction in exports and an increase in imports, on one side the current account deficit has increased while on the other, the fiscal deficit is also expected to be above the comfort levels due to increased subsidy. A slowdown in the global economy has adversely reduced the demand for Indian goods. The falling commodity prices on the other hand have increased imports resulting in an imbalance between payments and receipts.

Basic law of economics

As per the rudimentary laws of economics if the demand for USD in India exceeds its supply then its worth will go up and that of the INR will come down in that respect. It may be that importers are the major entities who are in need of the dollar for making their payments. Another possibility here could be that the Foreign Institutional Investors are withdrawing their investments in the country and taking them elsewhere. This can create a shortfall in supply of the dollar in India. In fact, of late, the FIIs have been heading to greener pastures like Singapore owing to the greater operational efficiency and

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Role of GDP in developing India

lesser bureaucratic problems that have unsettled the Indian business fraternity and hampered its overall economic growth. This situation can only be addressed by exporters who can bring in dollars in the system. If somehow the FIIs can be wooed back, then this imbalance can also be addressed to a certain extent.

Price of crude oil

35

The worth of crude oil has been a major bane for India since it has to bring in the majority of its requirement from outside the country. The demand for oil in India has been going up every year and this has led to the present situation. All over the world, the price of oil is given in dollars. This implies that as and when the demand for oil increases in India or there is an increase in oil prices in the global market, there also arises a need for more dollars to pay the suppliers. This also results in a situation where the worth of the INR decreases significantly in comparison to the dollar.

Performance of dollar with respect to other currencies

The central banks across Japan and countries in the Eurozone have been bringing out a lot of money and this has meant that both Yen and Euro have lost their value. Compared to this the US Federal Reserve is giving hints that it will end the fiscal stimulus so that the dollar becomes stronger with respect to other currencies such as the Indian Rupee at least for the time being. Till now in 2013, the US dollar index has become stronger by 1.91%. In an interview with the Economic Times, the CO-CIO of Birla SunLife Mutual Fund, Mahesh Patil has stated that the increase in worth of USD is the major reason behind the depreciation of the INR. The Federal Reserves decision to reduce its Quantitative Easing has also contributed to the present situation as every asset class has been affected by the decision.

Volatility in the equity market

The equity markets in India have been volatile for a certain period of time. This has put the FIIs into a dilemma as to whether they should be investing in India or not. In recent times their investments have touched an unprecedented level and so if they pull out then the inflow will go down as well. As per a report in Business Today, the international investors in India have withdrawn to the tune of INR 44,162 crore during June 2013 and this is a record amount. This has also created a current account deficit (CAD) that is only increasing, thus contributing significantly to the depreciation of the INR.

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Role of GDP in developing India

Effects of equity market problems on investors

Now if the INR becomes weak then it will affect the investors who are putting their money in India. For the first time ever since 2012 the FIIs have been reduced to net sellers of debt based securities. The main reason behind this is the present state of the INR. The expenses incurred in hedging the unpredictable INR are reducing the yield differential that is the main area of profit for these investors. India, in fact, is not the only emerging market where the currency has taken a hit. The situation is similar in countries like Indonesia, Brazil and Thailand. The bond markets in several countries like India are also taking a hit as the FIIs are withdrawing en masse. The exchange traded funds are also being redeemed as the global business fraternity is looking to cut down on risks.

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Poor current account deficit

One of the main reasons behind the Indian governments inability to arrest the fall of the national currency is the critical current account deficit. In the 2012-13 fiscal Indias CAD was measured at 4.8 per cent of the GDP. The government has been unable to come up with any new destinations for exporting its products and this has also hampered the growth in this sector. There are other crucial reasons here like the lack of one window for clearance purposes and procedural delays. Even areas where India has traditionally done well on this front have fared badly this time around.

Withdrawal of investors
Recently ArcelorMittal and Posco decided to pull out from their projects in India. Posco did not go ahead with a steel plant worth INR 30,000 crore that was supposed to be built in Karnataka and ArcelorMittal withdrew from setting up a steel plant in Odisha that was supposed to cost around 52,000 crore. There were lot of delays and problems related to acquiring land for the project. In fact in 2012-13 the Indian companies have spent more outside India compared to FIIs in India.

Downgrading of Indian stocks

Goldman Sachs, one of the leading banks in the world, has rated Indian stocks as being underweight. It has also asked investors to be careful given the concerns surrounding the recovery of the growth of Indian economy.

Condition of import bill

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Role of GDP in developing India

Indias import bill has been going up of late and most of this can be attributed to gold. This has also hampered Indias efforts to arrest the slide of the INR. Gold alone takes up more than 10 per cent of Indias import bill in April 2013, 141 tons of gold were imported and it went up to 162 during May. The government took some measures that restricted gold imports to 31 tons during June but once again in the first 25 days in July the imports went up to 45 tons.

Contraction of Indian economy

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The various important sectors of Indian economy such as manufacturing, mining and agriculture have seen poor growth in 2013 and this has made them less appealing propositions for the investors. During June 2013, the aggregate industrial production in India reduced by 2.2 per cent and in July 2013 the RBI predicted that in the present fiscal there would be a growth of 5.5% which was lesser than its previous prediction of 5.7%.

Future prospects of INR

In spite of all that has been said above it will be foolish to write off the INR completely and say it shall not rise from the mire. Experts are saying that the government needs to take some short and medium term steps that will help the economy get back on its feet yet again. It is only through continued efforts that the Indian government will be able to retrieve the situation. However, it will take a Herculean effort to help the INR get back to the 55 mark. Year 1948-1966 1966 1975 1980 1985 1990 1995 2000 2005 Jan 2006 Jan 2007 Jan 2008 Oct 2009 Oct 2010 Jan 2011 April 2011 Sep 2011 Nov 2012 June 2013 May 2013 Aug `Exchange rate (INR per USD) 4.79 7.50 8.39 7.86 12.38 17.01 32.427 43.50 43.47 45.19 39.42 48.88 46.37 46.21 44.17 48.24 55.3950 57.15 54.73 67

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Role of GDP in developing India

Conclusion

38

When India secured independence from the British Empire in 1947, the economy, which had just taken a beating from the Second World War, had to once again withstand the repercussions of Indo-Pak partition. India had to deal with large scale refugee camps, poverty, illiteracy, health hazards and many social and economic problems. Keeping these problems in mind, the new government headed by Pandit Jawaharlal Nehru adopted a socialistic economy for India. This saw the birth of large scale Public Sector Undertakings (PSUs) foraying into capital intensive businesses such as transportation, road, mining, steel, heavy electrical, among others that are crucial for economic growth. As these businesses require large scale capital investment and would take a long time to break even, no private investor would willingly invest into such businesses. So, there is no denying the fact that the government of India took the right steps by laying a strong foundation for Indian economy. But for these public sector investments, India would be no better than Pakistan or Bangladesh as of today. Today, we find many successful people criticizing the protectionist policies adopted by the political leaders for many decades since independence. But, they forget the notion that like any child needing hand holding during infancy, the new India full of poor, penniless people, most needed such hand holding till they could start walking. The five year plans and the support programs for the socially and economically weaker sections increased the per capita income, literacy levels, and living standards of millions of Indians. During the 1980s, the government planted the seeds of economic revolution by realizing the importance of modern technology, market competition, and private entrepreneurship. Besides the PSUs and the socio-economic programs, another good thing that happened to India was the opening up of the economy also known as Liberalization, Globalization, and

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Role of GDP in developing India

Privatization (LPG) in the 1990s as a result of the World Trade Organization (WTO) agreements. Indian industry that was used to several years of protectionism initially protested against LPG underestimating the industry's capability to compete with developed nations. However, in few years, Indian industry proved itself wrong. This is evident from the statistics available to us. The GDP of India has grown from a merge 93.7 billion rupees in 1950 to about 410006.4 billion rupees in 2006. Right from 2003, India is growing at a rate more than 8 per cent. Today, India is recognized for its quality of high technology software services capability throughout the world. In 2005-06, the software industry grew by 33 per cent and the BPO industry grew by 37 per cent. India has good foreign exchange reserves and fiscal deficit is under control. BSE Sensex, which is the barometer of Indian economy, is soaring at about 15,000 points a growth of about 700 per cent from 2002 to 2007. Foreign Institutional Investors (FIIs) are consistently pumping in several billion dollars into the Indian equity market. Foreign Direct Investment (FDI) is a record high in India after the economy was opened up during 1990s. All these factors prove the strength and the confidence the entire world has in the Indian economy. Multinational financial firms such as Goldman Sachs have forecasted that India will be one of the developed nations by 2040. Research in economics has proved that one of the traits that help a nation or a community prosper is trust. Indian government under the able leadership of Nehru trusted the socio-economic model, and invested heavily in PSUs and socio-economic policies despite being aware that the benefits are not immediate. And, during 1990s, the governmental policies toward opening up of the Indian economy to foreign competition, allowing FDI in select sectors, privatizing some of the PSUs, among other large scale measures led to India becoming one of the emerging economic giants in the world.

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Role of GDP in developing India

Declaration

I, Divakar Kumar, hereby declare that the above project has been completed by me. All the data, facts and figures used in this project are true to the best of my knowledge. I take the sole responsibility of the above made project. Errors, if any are regretted by me. Constructive suggestions and feedback is whole heartedly welcomed. Regards

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Divakar Kumar London School of Economics and Political Sciences (LSE) Address for correspondence: Divakar Kumar S/O Ram Naresh Singh Village & Post- Mano (Naughara Tola) Lakhisarai Bihar-811310

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