Indian Economy - Some Basic Features

8/8/2019 Indian Economy - Some Basic Features

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Triumphant Institute of Management Education Pvt. Ltd.

The

Indian

Economy



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State of economy pre-1991

•

• Socialistic thinking

• Resource poor economy; investment role for Govt.

• 5 yr plans – License Raj – Quota Restrictions

• Sellers market; No pressure on manufacturer to

improve quality

• Ready market – no price for innovation



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Pre LPG

• Sellers market led to corruption, inefficiency

• Inward looking economy

• Conserve forex; Import substitution

• Few luxuries; Feeling of shortage in the economy

• Huge trade deficit; Forex reserves - $ 1 bn



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First Generation Reforms• De-License; Liberalization of import norms

• Taxation Reforms– Direct & Indirect

• Forex norms –FII & FDI allowed

• Dividend repatriation allowed

• Banking sector reforms; RBI relaxes controls

• Stock market reforms – SEBI



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Second Generation Reforms

• Infrastructure

• Telecom reforms

• Insurance – GIC & LIC

• Labour law reforms

• Disinvestment

• Power sector reforms



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Part 2: Some Statistics



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India: Basic Info

5.5% Inflation rate

$160 billionForex Reserves

65% Literacy Rate

45.33%Working Age Population

7.80%Unemployment rate

$3,700 Per capita income (PPP)

9%GDP growth rate (2005-

06)

$4 trillionGDP (PPP)

$796 billionGDP (nominal)1.38% Population growth rate

1.095 billion Population

Source: CIA Factfile and Wikipea,

2006 estimates

510 mn Employed

127 HDI Rank

22% below PL



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INDIA: Basic Info

• Low per capita income

• High population growth rate (1.38% growth)

• Dependence on primary production

• 72.25% live in villages

• High density of population – 324/sq.km

• High rate of un employment

• Improper distribution of wealth



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India: Some facts

• High Illiteracy (Literacy – 64.8%; 75.3% male and

53.7% female literates)

• Low level of technology and productivity

• Poverty; 46% of children suffer from malnutrition.

• High savings but low capital formation



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Core Sectors• Coal

• Cement

• Power• Steel

• Petroleum

• Petroleum refinery products



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THE 3 SECTORS OFECONOMY

• Primary – agriculture, forestry, fishery, animal

husbandry

• Secondary – mineral, power, mining, manufacturing industries

• Services – transport, trade, communication, banking,

other services



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Part 3: India and the World



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Our main export partners ($112 b)

17%

9%

7%

5%5%4%

53%

USA

UAEChina

Singapore

UK

Hong Kong

Others

Source: CIA Factfile, 2006 estimates



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Our main import partners($188 b)

7%6%

5%

82%China

USA

Switzerland

Others

Source: CIA Factfile, 2006 estimates



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Part 4: Budget Basics



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TAXES

• DIRECT TAXES: Direct incidence of tax on the person who pays the tax; liability to pay tax is

NOT passed on to someone else. Examples: IT,

gift tax, corporation tax, wealth tax, land revenue, etc.

• INDIRECT TAXES: Levied on goods and

services; traders / producers pay it. Liability

passed on to end customer. e.g. VAT, excise

tax, customs duty, service tax, etc.



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For the previous financial year • Economic Review of the country

• Assessment of budget: targets v/s actuals

For the coming financial year • Economic Forecast for the country

• Government revenue and expenditure targets

• Components of government revenue and expenditure

• Miscellaneous financial measures

Union Budget: What is it?



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STRUCTURE OF UNIONBUDGET

REVENUE SIDE

1. Revenue receipts

(a) Tax Revenue: Central excise, customs duty,

corporation tax, IT, service tax, VAT (b) Non-Tax Revenue: Interest receipts on loans,

dividends from PSUs.

2. Capital receipts include principal repayment from debtors, market borrowings,disinvestment proceeds



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STRUCTURE OF UNION

BUDGET

EXPENDITURE SIDE

1. Plan expenditure(a) Incurred in central development schemes.Costs around 25% of total expenditure.

(b)Types: Revenue and Capital

2. Non-plan expenditure(a) Interest payments, defense, subsidies, salary

of govt. employees.(b) Accounts for approx. 75% of total expenditure.



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DEFICITS

• Revenue deficit

Revenue expenditure (interest+subsidy+ defense +police) - Revenue receipts ( tax+non tax)

• Budget deficit

Total expenditure - total receipts

• Fiscal deficitBudget deficit + borrowings from banks & public



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Part 5: Important Terms Decoded



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INDICATORS OF ECONOMY

INFLATION

• Steady rise in prices, resulting in decline inpurchasing power of the money.

• 2 types - cost push & demand pull.

• Normally measured in terms of WPI, on

YoY basis.• Moderate inflation is good for economy.



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WPI - WHOLESALE PRICE INDEX

• Measures increase / decrease in industrial, commercial

prices of commodities under 3 broad categories.• Primary articles - 98 items

• Fuel, power etc. - 19 items

• Manufactured products - 318 items

• Certain weight to each category of commodities

• Base year - 1993-94• Used for calculating INFLATION.



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CPI—CONSUMER PRICE INDEX

• Calculates increase / decrease in retail price.

•Direct bearing on consumers.• Diff. types of CPIs for various consumers.

►for agricultural laborers.

►for industrial workers.

►for urban non-manual employee.



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Factors behind Inflation

• Heavy non-plan expenditure by Govt.

• High fiscal deficits and deficit financing

• Govt.’s attempts to bridge deficits by higher indirect

taxes → rise in costs.

• Large parallel economy

• Fluctuation in agricultural output

• Increase in Money Supply



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Fiscal Policy: What is it?

The government’s policy of achieving economicobjectives (employment, per capita income…)

through government earning and spending.

Government sources of funds: Taxes and duties,government businesses,fines, borrowing from public,investments

Government uses of funds: Infrastructure, mining, publicwelfare, defence, power generation, research anddevelopment



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(a)(a) M1M1 == currency in circulation - cash with bankscurrency in circulation - cash with banks

+ demand deposits with banks (also+ demand deposits with banks (alsocalled narrow money – most liquid )called narrow money – most liquid )

• M2M2 == M1+ small saving depositsM1+ small saving deposits

(c)(c) M3M3 == M1+ time deposits with banks (also called M1+ time deposits with banks (also called

broad money)broad money)

If M3 > GDP growth rate → Inflation.If M3 > GDP growth rate → Inflation.

Money Supply



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Monetary Policy

The government’s policy of achieving economic objectives (employment, per capita

income, balance of trade, economic parity…) through

controlling money supply.

• Decrease in supply: Deflation or decrease in prices

• Increase in supply: Inflation or increase in prices



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MONETARY POLICY

Regulates the money supply in the economy

(c) Bank Rate: Official rate of interest charged by RBI as the

lender of last resort. Current rate – 6%

(b) Open Market Operations: RBI buying & selling securities to

regulate money supply. Repo rate - 6%; Reverse Repo - 7.25%



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MONETARY POLICY

(c) CRR: All commercial banks should keep a certain percent of its demand & time deposits with the RBI (5.5%).

(d) SLR: Commercial banks keep a fixed percentage of their

demand & time deposits in liquid assets (securities, gold )currently at 25%.

(e) Priority sector lending

(f) Differential Interest Rates ( PLRs )



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TRADE CYCLE

Refers to fluctuation in economic activity which forms a

regular pattern.

• Expansionary phase characterized by increase in income,

output, employment & inflation.

• Contraction phase is characterized by drop in income,

output, employment & deflation (sustained fall in prices).



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TRADE CYCLE

• BOOM: Refers to a particularly sharp upwards turn indemand and output.

• RECESSION: Two consecutive quarters of falling GDP in

an economy. Beginning of slump or depression. Occurs dueto over-production during earlier phase, rise in fuel andraw material prices, etc.

• SLUMP: Severe down-turn phase. Opposite of boom, e.g.,

the great U.S. slump



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Current A/c Convertibility

• Free flow for purposes other than for capital purchases

and loans

• Exports, Imports

• Travel, Study abroad, Employment abroad

• Medical treatment, Gifts

• Consultancy, International credit cards

C it l A/ C tibilit



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Capital A/c Convertibility• The freedom to convert local financial assets into

foreign financial assets & vice versa at marketdetermined rates of exchange

• Indicator of a developed economy, gives confidence toinvestors

• However, leaves the country at risk

• Tarapore Committee (1997) recommends that there is a

need for fiscal consolidation, low inflation, & financesector reforms

Di i t t



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Disinvestment

• Period under consideration: 1991-92 to 2004-05

• Achievement – Rs. 47,646 crore as against a target of Rs. 96,800crore (14 companies privatized)

•Controversial Issues – Loss making units, Social responsibility

– Method - Public issue, strategic sale

– Valuation

– Creating monopolies – (IPCL, VSNL)

– Job loss, loss of govt. control

– Use of sale proceeds



T IME

Thank You and ALL THE BEST!

Indian Economy - Some Basic Features

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