GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY

MBA General (Weekend Program)

Managerial Economics
Assignment # 1

Submitted by :SAHEEL SACHDEA Roll no. :- 00816633513 Section B

MACROECONOMICS
Abstract
Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies.With microeconomics, macroeconomics is one of the two most general fields in economics.

Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic model and their forecasts are used by governments to assist in the development and evaluation of economic policy.
Macroeconomics encompasses a variety of concepts and variables, but there are three central topics for macroeconomic research.Macroeconomic theories usually relate the phenomena of output, unemployment, and inflation. Outside of macroeconomic theory, these topics are also extremely important to all economic agents including workers, consumers, and producers.

Nature of Macro-economics:Macro-economic studies the aggregates of the entire economy. The nature of macro-economic can be understood with the help of the following aspects: I) DETERMINATION OF NATIONAL INCOME AND EMPLOYMENT: ~ Macro-economic deals with aggregate demand and aggregate supply that determines the equilibrium level of income and employment in the economy. ~ The level of aggregate demand determines the level of income and employment. ~ Macroeconomics also deals with the problem of unemployment due to lack of aggregate demand. Moreover, it studies the economic fluctuations and business cycles. ii) DETERMINATION OF GENERAL PRICE LEVEL: ~ Macroeconomics studies the general level of price in an economy. ~ It also studies the problem of inflation and deflation. iii) ECONOMIC GROWTH AND DEVELOPMENT: ~ Macroeconomics deals with economic growth and development. ~ It studies various factors that contribute to economic growth and development. vi) DISTRIBUTION OF FACTORS OF PRODUCTION: ~ Macroeconomics also deals with various factors of production and their relative share in the total production or total national income

Scope and significance:

~ Macroeconomics occupies a significant place in economic analysis and has a lot of theoretical and practical importance. ~ The importance of macro-economics can be understood from the following points: i) POLICY FORMULATION: ~ Macroeconomics plays a very important role in formulating economic policies. Since Government intervention in economic affairs is indispensable in the present economic scenario, the knowledge of aggregates is of great importance in the framing as well as the implementation of economic policies of the nation.

ii) BASIS FOR MICROSTUDY: ~ Macroeconomics provides the basis for microeconomic analysis as the study of aggregates helps to understand and verify the behaviors of individual units. iii) MULTI-DIMENSIONAL STUDY: ~ Macroeconomics has a very wide scope and covers multi-dimensional aspects like population, employment, income, production, distribution, consumption, inflation, etc. ~ This is very helpful in controlling fluctuations in these factors. vi) NATIONAL INCOME: ~ Macroeconomics studies national income accounting which helps to understand the distribution of income among different groups of people. It is also instrumental in forecasting the level of economic activity. v) SPECIAL GROWTH MODELS: ~ Macroeconomics has been useful in developing special growth models. These growth models are applied for economic development because the economics of growth is, in essence, the study of macroeconomics. vi) MONETARY PROBLEMS: ~ Macroeconomics has special significance in studying monetary problems that adversely affect the economy. ~ In fact, macroeconomics focuses on the problems of inflation and deflation and their solution by adopting monetary, fiscal and direct control measures.

Importance of Macroeconomics:
It helps to understand the functioning of a complicated modern economic system. It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply. It helps to achieve the goal of economic growth, higher level of GDP and higher level of employment. It analyses the forces which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it. It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation. It explains factors which determine balance of payment. At the same time, it identifies causes of deficit in balance of payment and suggests remedial measures. It helps to solve economic problems like poverty, unemployment, inflation, deflation etc., whose solution is possible at macro level only, i.e., at the level of whole economy. With detailed knowledge of functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies. Last but not the least merit is that macroeconomic theory has saved us from the dangers of application of microeconomic theory to the problems of the economy as a whole.

Growth and development

Dependency theorists argue that poor countries have sometimes experienced economic growth with little or no economic development initiatives; for instance, in cases where they have functioned mainly as resource-providers to wealthy industrialized countries. There is an opposing argument, however, that growth causes development because some of the increase in income gets spent on human development such as education and health. According to Ranis et al., economic growth and is a two-way relationship. Moreover, the first chain consists of economic growth benefiting human development with the rise in economic growth, families and individuals will likely increase expenditures with heightened incomes, which in turn leads to growth in human development. Further, with the increased consumption, health and education grow, also contributing to economic growth. In addition to increasing private incomes, economic growth also generates additional resources that can be used to improve social services (such as healthcare, safe drinking water, etc.). By generating additional resources for social services, unequal income distribution will be mitigated as such social services are distributed equally across each community, thereby benefiting each individual. Concisely, the relationship between human development and economic development can be explained in three ways. First, increase in average income leads to improvement in health and nutrition (known as Capability Expansion through Economic Growth). Second, it is believed that social outcomes can only be improved by reducing income poverty (known as Capability Expansion through Poverty Reduction). Lastly, social outcomes can also be improved with essential services such as education, healthcare, and clean drinking water (known as Capability Expansion through Social Services). John Joseph Puthenkalam's research aims at the process of economic growth theories that lead to economic development. After analyzing the existing capitalistic growth-development theoretical apparatus, he introduced the new model which integrates the variables of freedom, democracy and human rights into the existing models and argues that any future economic growth-development of any nation depends on this emerging model as we witness the third wave of unfolding demand for democracy in the Middle East. He develops the knowledge sector in growth theories with two new concepts of 'micro knowledge' and 'macro knowledge'. Micro knowledge is what an individual learns from school or from various existing knowledge and macro knowledge is the core philosophical thinking of a nation that all individuals inherently receive. How to combine both these knowledge would determine further growth that leads to economic development of developing nations. Yet others believe that a number of basic building blocks need to be in place for growth and development to take place. For instance, some economists believe that a fundamental first step toward development and growth is to address property rights issues, otherwise only a small part of the economic sector will be able to participate in growth.

Factors affecting economic growth

The primary driving force of economic growth is the growth of productivity, which is the ratio of economic output to inputs (capital, labor, energy, materials and services (KLEMS)). Increases in productivity lower the cost of goods, which is called a shift in supply. By John W. Kendricks estimate, three-quarters of increase in U.S. per capita GDP from 1889 to 1957 was due to increased productivity. [4] Over the 20th century the real price of many goods fell by over 90%. Lower prices create an increase in aggregated demand, but demand for individual goods and services are subject to diminishing marginal utility. Demographic factors influence growth by changing the employment to population ratio and the labor force participation rate. Other factors include the quantity and quality of available natural resources, including land. Growth phases and sector shares Economic growth in the U.S. and other developed countries went through phases that affected growth through changes in the labor force participation rate and the relative sizes of economic sectors. The transition from an agricultural economy to manufacturing increased the size of the high output per hour, high productivity growth manufacturing sector while reducing the size of the lower output per hour, lower productivity growth agricultural sector. Eventually high productivity growth in manufacturing reduced the sector size as prices fell and employment shrank relative to other sectors. The service and government sectors, where output per hour and productivity growth is very low, saw increases in share of the economy and employment. Demographic changes The age structure of the population affects the employment to population ratio and the labor force participation rate. The increase in the percentage of women in the labor force in the U.S. contributed to economic growth, as did the entrance of the baby boomers into the work force. Historical sources of productivity growth Economic growth has traditionally been attributed to the accumulation of human and physical capital, and increased productivity arising from technological innovation. Before industrialization, technological progress resulted in an increase in population, which was kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the Malthusian trap. The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized eventually saw their population growth slow, a condition called demographic transition. Increases in productivity are the major factor responsible for per capita economic growth this has been especially evident since the mid-19th century. Most of the economic growth in the 20th century was due to reduced inputs of labor, materials, energy, and land per unit of economic output (less input

per widget). The balance of growth has come from using more inputs overall because of the growth in output (more widgets or alternately more value added), including new kinds of goods and services (innovations). During colonial times, what ultimately mattered for economic growth was the institutions and systems of government imported through colonization. There is a clear reversal of fortune between poor and wealthy countries, which is evident when comparing the method of colonialism in a region. Geography and endowments of natural resources are not the sole determinants of GDP. In fact, those blessed with good factor endowments experienced colonial extraction that provided only limited rapid growth whereas colonized countries that were less fortunate in their original endowments experienced relative equality and demand for the rule of law. These initially poor colonies end up developing an open franchise, equality, and broad public education, which helps them experience greater economic growth than the colonies that had exploited their economies of scale. During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, and new processes streamlined production of chemicals, iron, steel, and other products. Machine tools made the economical production of metal parts possible, so that parts could be interchangeable. During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inanimate power for human and animal labor, to water and wind power with electrification and internal combustion. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures (canals, railroads, and highways), new materials (steel) and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, and the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, which is universally used today. Productivity lowered the cost of most items in terms of work time required to purchase. Real food prices fell due to improvements in transportation and trade, mechanized agriculture, fertilizers, scientific farming and the Green Revolution. Great sources of productivity improvement in the late 19th century were railroads, steam ships, horsepulled reapers and combine harvesters, and steam-powered factories. The invention of processes for making cheap steel were important for many forms of mechanization and transportation. By the late 19th century prices, as well as weekly work hours, fell because less labor, materials, and energy were required to produce and transport goods. However, real wages rose, allowing workers to improve their diet, buy consumer goods and afford better housing. Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s. Following the Great Depression, economic growth resumed, aided in part by demand for entirely new goods and services, such as telephones, radio, television, automobiles, and household appliances, air conditioning, and commercial aviation (after 1950), creating enough new

demand to stabilize the work week. The building of highway infrastructures also contributed to post World War II growth, as did capital investments in manufacturing and chemical industries. The post World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the Middle East. Economic growth in Western nations slowed down after 1973. In contrast growth in Asia has been strong since then, starting with Japan and spreading to Korea, China, the Indian subcontinent and other parts of Asia. In 1957 South Korea had a lower per capita GDP than Ghana, and by 2008 it was 17 times as high as Ghana's. The Japanese economic growth has slackened considerably since the late 1980s.

Methods of Computing National Income

The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation. There are three methods of measuring national income of a country. They yield the same result. These methods are; (1) The Product Method (2) The Income Method and (3) The Expenditure Method We now look at each of the three methods in turn. I. Value Added Method Value added method is also named as Production method. This method is used to measure national income at the phases of production of each enterprise and each industrial sector during a year. In fact this method measures the contribution of each enterprise in the flow of goods and services in the economy. Under this method, the economy is- generally divided into three industrial classes namely (a) Primary sector (b) Industrial sector and (c) Service sector. The main enterprises included in these sectors are agriculture, fishing, forestry, mining, manufacturing, construction, transport and communication, trade and commerce insurance, banking etc. For computing national income, the values added by the above three sectors at each stage is worked out. The value of output at each enterprise is found by multiplying the physical output with the market prices of the goods produced. For example, firm A produces necessary raw material and sells it in market for Rs. 2000 to firm B. The firm B manufactures raw material, into finished goods and sells it to firm C for Rs. 4000. The firm C sells the finished goods to household for Rs. 5000/=. The value added at each stage is Rs. 2000 + 2000 + 1000 = Rs. 5000. The total value added is Rs.5000. Precautions for this approach There are certain precautions which are to be taken to avoid miscalculation of national income using this method. These in brief are:

1 Problem of double counting: When we add up the value of output of various sectors, we should be careful to avoid double counting. This pitfall can be avoided by either counting the final value of the output or by including the extra value that each firm adds to an item. (ii) Value addition in particular year: While calculating national income, the values of goods added in the particular year in question are added up. The values which had previously been added to the stocks of raw material and goods have to be ignored. GDP thus includes only those goods and services that are newly produced within the current period. (iii) Stock appreciation: Stock appreciation, if any, must be deducted from value added. This is necessary as there is no real increase in output - (iv) Production for self consumption. The production of goods for self consumption should be counted While measuring national income. In this method, the production of goods for self consumption should be valued at the prevailing market prices. II. The Expenditure Method: The expenditure approach measures national income as total spending on final goods and services produced within nation during an year: The expenditure approach to measuring national income is to add up all expenditures made for final goods and services at current market prices by households, firms and government during a year. Total aggregate final expenditure on final output thus is the sum of four broad categories of expenditures (i) consumption (ii) Investment (iii) government and (iv) Net exports. (i) Consumption expenditure: Consumption expenditure is the largest component of national income. It includes expenditure on all goods and services produced and sold to the final consumer during the year. (ii) Investment expenditure: Investment is the use of todays resources to expand tomorrows production or consumption. Investment expenditure is expenditure incurred on by business firms on(a) new plants, (b) adding to the stock of inventories and (c) on newly constructed houses. (iii) Governnnentexpenditure: (G) it is the second largest component of national income. It includes all government expenditure on currently produced goods and services but excludes transfer payments while computing national income. (iv) Net exports: Net exports are defined as total exports minus total imports.

National income calculated from the expenditure side is the sum of final consumption expenditure, expenditure by business on plants, government spending and net exports. NI = C + 1 +G + (X M) Precautions While estimating national income through expenditure method, the following -

precautions should be taken. (i) The expenditure on second hand goods should not be included as they do not contribute to the current years production of goods. (ii) Similarly, expenditure on purchase of old shares and bonds is not included as these also do not represent expenditure on currently produced goods and services. (iii) Expenditure on transfer payments by government such as unemployment benefit, old age pensions, interest on public debt should also not be included because no productive service is rendered in exchange by recipients of these payments. Ill. The Income Approach: Income approach is another alternative way of computing national income. This method seeks to measure national income at the phase of distribution. In the production process of an economy, the factors of production are engaged by the enterprises. They are paid money incomes for their participation in the production. The payments received by the factors and paid by the enterprises are wages, rent, interest and profit. National income thus may be defined as the sum of wages, rent, interest and profit received or accrued to the factors of production in lieu of their services in the production of goods. Briefly, national income is the sum of all income, wages, rents, interest and profit paid to the four factors of production. The four categories of payments are briefly described below : (i) Wages: It is the largest component of national income. It consists of wages and salaries along with fringe benefits and unemployment insurance. (ii) Rents: Rents are the income from property received by households. (iii) Interest: Interest is the income private businesses pay to households who have lent the business money. (iv) Profits: Profits are normally divided into two categories (a) profits of incorporated businesses and (b) profits of unincorporated businesses (sole proprietorship, partnerships and producers cooperatives) Precautions While estimating national income through income method, the following precautions should be undertaken.

(i) Transfer payments such as gifts, donations, scholarships, indirect taxes should not be included in the estimation of national income. (ii) Illegal money earned through smuggling and gambling should not be included. (iii) Windfall gains such as -prizes won, lotteries etc. is not be included in the estimation of national income. (iv) Receipts from the sale of financial assets such as shares, bonds should not be included in measuring national income as they are not related to generation of income in the current year production of goods. Why three approaches are equal The three approaches used for measuring national income give the same result. The r.lason is the market value of goods and services produced in a given period by definition is equal to the amount that buyers must spend to purchase them. So the product approach which measures market value of good and services produced and the expenditure approach which measures spending should give the same measure of economic activity.Now as regards the income approach, the sellers receipts must equal what the buyers spend. The sellers receipts in turn equal the total income generated by the economic activity. Thus, total expenditure must equal total income generated implying that the expenditure and income approach must also produce the same result.

Inflation
In economics, inflation is a persistent increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates (to mitigate recessions),and encouraging investment in non-monetary capital projects. Some economists maintain that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply, while others take the view that under the conditions of a liquidity trap, large injections are "pushing on a string" and cannot cause significantly higher inflation.Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in realdemand for goods and services, or changes in available supplies such as during scarcities, as well as to changes in the velocity of money supply measures; in particular the MZM ("Money Zero Maturity") supply velocity.However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most economists favor a low and steady rate of inflation.Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Controlling inflation
A variety of methods and policies have been used to control inflation. Stimulating economic growth If economic growth matches the growth of the money supply, inflation should not occur when all else is equal. A large variety of factors can affect the rate of both. For example, investment in market production, infrastructure, education, and preventative health care can all grow an economy in greater amounts than the investment spending. Monetary policy The U.S. effective federal funds rate charted over fifty years. Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping their inter-bank lending rates at low levels, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy. There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied. Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand). Fixed exchange rates Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.

Under the Bretton Woods agreement, most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Bretton Woods agreement broke down in the early 1970s, countries gradually turned to floating exchange rates. However, in the later part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation was used in many countries in South America in the later part of the 20th century (e.g. Argentina (19912002), Bolivia, Brazil, and Chile). Gold standard

Under a gold standard, paper notes are convertible into pre-set, fixed quantities of gold. The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself has no innate value, but is accepted by traders because it can be redeemed for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver. The gold standard was partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton Woods system broke down in 1971, causing most countries to switch to fiat money money backed only by the laws of the country. According to Lawrence H. White, an F. A. Hayek Professor of Economic History "who values the Austrian tradition", economies based on the gold standard rarely experience inflation above 2 percent annually. However, historically, the U.S. saw inflation over 2% several times and a higher peak of inflation under the gold standard when compared to inflation after the gold standard. Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output. Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining.

Wage and price controls Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. More successful examples include the Prices and Incomes Accord in Australia and the Wassenaar Agreement in the Netherlands. In general, wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term. Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed (see creative destruction). Cost-of-living allowance For more details on this topic, see Cost of living.The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements (such as social security) are tied to a cost-of-living index, typically to the consumer price index. A cost-of-living allowance (COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in low inflation economies. During hyperinflation they are adjusted more often. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments ("COLAs") or cost-of-living increases because of their similarity to increases tied to externally determined indexes.

Economic Development in India In past decade

The economic development in India followed socialist-inspired policies for most of its independent history, including state-ownership of many sectors; India's per capita income increased at only around 1% annualised rate in the three decades after Independence. Since the mid-1980s, India has slowly opened up its markets through economic liberalisation. After more fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a free market economy. In the late 2000s, India's growth reached 7.5%, which will double the average income in a decade. Analystssay that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government's 2011 target of 10%. States have large responsibilities over their economies. The annualised 19992008 growth rates for Tamil Nadu (9.8), Gujarat (9.6%), Haryana (9.1%), or Delhi (8.9%) were significantly higher than for Bihar (5.1%), Uttar Pradesh (4.4%), or Madhya Pradesh (6.5%). India is the tenth-largest economy in the world and the third largest by purchasing power parity adjusted exchange rates (PPP). On per capita basis, it ranks 140th in the world or 129th by PPP. The economic growth has been driven by the expansion of services that have been growing consistently faster than other sectors. It is argued that the pattern of Indian development has been a specific one and that the country may be able to skip the intermediate industrialisation-led phase in the transformation of its economic structure. Serious concerns have been raised about the jobless nature of the economic growth. Favourable macroeconomic performance has been a necessary but not sufficient condition for the significant reduction of poverty amongst the Indian population. The rate of poverty decline has not been higher in the post-reform period (since 1991). The improvements in some other non-economic dimensions of social development have been even less favourable. The most pronounced example is an exceptionally high and persistent level of child malnutrition (46% in 20056). The progress of economic reforms in India is followed closely. The World Bank suggests that the most important priorities are public sector reform, infrastructure, agricultural and rural development, removal of labour regulations, reforms in lagging states, and HIV/AIDS. For 2012, India ranked 132nd in Ease of Doing Business Index, which is setback as compared with China 91st and Brazil 126th. According to Index of Economic Freedom World Ranking an annual survey on economic freedom of the nations, India ranks 123rd as compared with China and Russia which ranks 138th and 144th respectively in 2012. Agriculture Composition of India's total production (million tonnes) of foodgrains and commercial crops, in 2003 04. 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. 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. Main problems in the agricultural sector, as listed by the World Bank, are: 1. 2. 3. 4. India's large agricultural subsidies are hampering productivity-enhancing investment. Overregulation of agriculture has increased costs, price risks and uncertainty. Government interventions in labour, land, and credit markets. Inadequate infrastructure and services.

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 Revolution" and heads the MS Swaminathan Research Foundation. He is known for his advocacy of environmentally sustainable agriculture and sustainable food security. Industrial output An industrial zone near Mumbai, India. 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.

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. Services India is fifteenth in services output. Service industry employ English-speaking Indian workers on the supply side and on the demand side, has increased demand from foreign consumers interested in India's service exports or those looking to outsource their operations. India's IT industry, despite contributing significantly to its balance of payments, accounts for only about 1% of the total GDP or 1/50th of the total services. During the Internet bubble that led up to 2000, heavy investments in undersea fibre-optic cables linked Asia with the rest of the world. The fall that followed the economic boom resulted in the auction of cheap fiber optic cables at one-tenth of their original price. This development resulted in widely available low-cost communications infrastructure. All of these investments and events, not to mention a swell of available talent, resulted in India becoming almost overnight the centre for outsourcing of Business process. Within this sector and events, the ITES-BPO sector has become a big employment generator especially amongst young college graduates. The number of professionals employed by IT and ITES sectors is estimated at around 1.3 million as on March 2006. Also, Indian IT-ITES is estimated to have helped create an additional 3 million job opportunities through indirect and induced employment. GDP growth rate Since the economic liberalisation of 1991, India's GDP has been growing at a higher rate. Year Growth (real) (%) 2000 5.6 2001 6.0 2002 4.3 2003 8.3 2004 6.2 2005 8.4 2006 9.2 2007 9.0 2008 7.4 2009 7.4 2010 10.1 2011 6.8

Year Growth (real) (%) 2012 6.5 2013 4.4 Companies 47 Indian companies were listed in the Forbes Global 2000 ranking for 2009. The 10 leading companies were: World Rank 121 150 152 Revenue Profits Assets Market (billion (billion (billion Value $) $) $) (billion $) 34.03 22.63 24.04 4.87 2.23 4.95 43.61 35.95

Company

Logo

Industry

Reliance Industries State Bank of India Oil and Natural Gas Corporation

Oil & Gas Operations Banking Oil & Gas Operations

255.86 12.75 35.35 28.91

207

Indian Oil Corporation

Oil & Gas Operations

51.66

1.97

33.64

10.20

317 329 463 508

NTPC ICICI Bank Tata Steel Bharti Airtel Steel Authority India Limited Reliance Communications of

Utilities Banking Materials Telecommunications Services Materials Telecommunications Services

9.63 15.06 32.77 6.73

1.86 0.85 3.08 1.59

24.58

29.70

120.61 7.14 31.16 12.28 2.46 23.63

582

9.82

1.89

10.54

6.14

689

4.26

1.35

19.31

6.27

India's resource consumption 1. Oil India had about 5.6 billion barrels (890,000,000 m3) of proven oil reserves as of January 2007, which is the second-largest amount in the Asia-Pacific region behind China. Most of India's crude oil reserves are located in the western coast (Mumbai High) and in the northeastern parts of the country, although considerable undeveloped reserves are also located in the offshore Bay of Bengal and in the state of Rajasthan. The combination of rising oil consumption and fairly unwavering production levels leaves India highly dependent on imports to meet the consumption needs. In 2006, India produced an average of about 846,000 barrels (134,500 m3) per day (bbl/d) of total oil liquids, of which 77%, or 648,000 bbl/d (103,000 m3/d), was crude oil. During 2006, India consumed an estimated 2.63 Mbbl/d (418,000 m3/d) of oil.[24] The Energy Information Administration (EIA) estimates that India registered oil demand growth of 100,000 bbl/d (16,000 m3/d) during 2006. EIA forecasts suggest that country is likely to experience similar gains during 2007 and 2008. 2. Sector organisation Indias oil sector is dominated by state-owned enterprises, although the government has taken steps in past recent years to deregulate the hydrocarbons industry and support greater foreign involvement. Indias state-owned Oil and Natural Gas Corporation (ONGC) is the largest oil company, and also the countrys largest company overall by market capitalisation. ONGC is the leading player in Indias upstream sector, accounting for roughly 75% of the countrys oil output during 2006, as per Indian government estimates. As a net importer of oil, the Government of India has introduced policies aimed at growing domestic oil production and oil exploration activities. As part of the effort, the Ministry of Petroleum and Natural Gas crafted the New Exploration License Policy (NELP) in 2000, which permits foreign companies to hold 100% equity possession in oil and natural gas projects. However, to date, only a handful of oil fields are controlled by foreign firms. Indias downstream sector is also dominated by state-owned entities, though private companies have enlarged their market share in past recent years. 3. Natural gas As per the Oil and Gas Journal, India had 38 trillion cubic feet (1.11012 m3) of confirmed natural gas reserves as of January 2007. A huge mass of Indias natural gas production comes from the western offshore regions, particularly the Mumbai High complex. The onshore fields in Assam, Andhra Pradesh, and Gujarat states are also major producers of natural gas. As per EIA data, India produced 996 billion cubic feet (2.821010 m3) of natural gas in 2004. India imports small amounts of natural gas. In 2004, India consumed about 1,089109 cu ft (3.081010 m3) of natural gas, the first year in which the country showed net natural gas imports. During 2004, India imported 93109 cu ft (2.6109 m3) of liquefied natural gas (LNG) from Qatar.

Corruption in India
India ranked 133rd on the Ease of Doing Business Index in 2010, compared with 85th for Pakistan, 89th for People's Republic of China, 125th for Nigeria, 129th for Brazil, and 122nd for Indonesia.

Extent of corruption in Indian states, as measured in a 2005 study by Transparency International India. (Darker regions are more corrupt). Corruption in many forms has been one of the pervasive problems affecting India. For decades, the red tape, bureaucracy and the Licence Raj that had strangled private enterprise. The economic reforms of 1991 cut some of the worst regulations that had been used in corruption. Corruption is still large. A 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying a bribe or peddling influence to get a job done in a public office. The chief economic consequences of corruption are the loss to the exchequer, an unhealthy climate for investment and an increase in the cost of government-subsidized services. The TI India study estimates the monetary value of petty corruption in 11 basic services provided by the government, like education, healthcare, judiciary, police, etc., to be around 21068 crore (US$3.2 billion). India still ranks in the bottom quartile of developing nations in terms of the ease of doing business, and compared with China, the average time taken to secure the clearances for a startup or to invoke bankruptcy is much greater. The Right to Information Act (2005) and equivalent acts in the states, that require government officials to furnish information requested by citizens or face punitive action, computerization of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances. The 2006 report by Transparency International puts India at 70th place and states that significant improvements were made by India in reducing corruption.

Employment India's labour force is growing by 2.5% every year, but employment is growing only at 2.3% a year. Official unemployment exceeds 9%. Regulation and other obstacles have discouraged the emergence of formal businesses and jobs. Almost 30% of workers are casual workers who work only when they are able to get jobs and remain unpaid for the rest of the time. Only 10% of the workforce is in regular employment. India's labour regulations are heavy even by developing country standards and analysts have urged the government to abolish them. From the overall stock of an estimated 458 million workers, 394 million (86%) operate in the unorganised sector (of which 63% are self-employed) mostly as informal workers. There is a strong relationship between the quality of employment and social and poverty characteristics. The relative growth of informal employment was more rapid within the organised rather than the unorganised sector. This informalisation is also related to the flexibilisation of employment in the organised sector that is suggested by the increasing use of contract labour by employers in order to benefit from more flexible labour practices. Children under 14 constitute 3.6% of the total labour force in the country. Of these children, 9 out of every 10 work in their own rural family settings. Around 85% of them are engaged in traditional agricultural activities. Less than 9% work in manufacturing, services and repairs. Child labour is a complex problem that is basically rooted in poverty. The Indian government is implementing the world's largest child labour elimination program, with primary education targeted for ~250 million. Numerous non-governmental and voluntary organisations are also involved. Special investigation cells have been set up in states to enforce existing laws banning employment of children (under 14) in hazardous industries. The allocation of the Government of India for the eradication of child labour was US$10 million in 199596 and US$16 million in 199697. The allocation for 2007 is US$21 million. Environmental degradation About 1.2 billion people in developing nations lack clean, safe water because most household and industrial wastes are dumped directly into rivers and lakes without treatment. This contributes to the rapid increase in waterborne diseases in humans. Out of India's 3119 towns and cities, just 209 have partial treatment facilities, and only 8 have full wastewater treatment facilities (WHO 1992). 114 cities dump untreated sewage and partially cremated bodies directly into the Ganges River. Downstream, the untreated water is used for drinking, bathing, and washing. This situation is typical of many rivers in India as well as other developing countries. Globally, but especially in developing nations like India where people cook with fuelwood and coal over open fires, about 4 billion humans suffer continuous exposure to smoke. In India, particulate concentrations in houses are reported to range from 8,300 to 15,000 g/m3, greatly exceeding the 75 g/m3 maximum standard for indoor particulate matter in the United States.Changes in ecosystem biological diversity, evolution of parasites, and invasion by exotic species all frequently result in disease outbreaks such as cholera which emerged in 1992 in India. The frequency of AIDS/HIV is increasing. In 1996, about 46,000 Indians out of 2.8 million (1.6% of the population) tested were found to be infected with HIV.