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AIEFS is a non-profit academic organization founded in 1975 at Bloomsburg State University, Pennsylvania

Volume 6 Issue 2 Association Objectives Promote interest in the study of Indian Economics & Finance Encourage inquiry into, and analysis of the problems facing the Indian economy Facilitate communication and discussion among Scholars

November 15, 2013

State of the Indian Economy

Charan Singh1
The Indian economy has undergone diverse stages of makeover, over the years. India was among the better performing countries post the financial crisis period. However, the performance of the economy in recent years has rather been tardy due to many factors. Currently the Indian economy is facing a variety of challenges. Not just the global slowdown with bleak prospects for exports, but domestic factors are also playing a significant role in this grim situation. The IMF had recently revised downwards global growth rate. Amidst the already slow global recovery, emergence of new risks, such as uncertainties about expectations of withdrawal from unconventional monetary easing by the advanced economies is a cause of concern to India. Domestically, almost every macroeconomic indicator has been critical, be it industry, construction or services. The macroeconomic conditions in the country weakened during 2012-13. While growth came down to 5.0 per cent in 2012-13 (a 10-year low), the first quarter of 2013-14 also indicated a considerable fall in growth, to 4.4 per cent (Table 1). The growth scenario is grim. Fast clearance of delayed and stalled projects, despite fierce election battles, would not immediately influence growth as there generally is a gestation lag. Aggregate demand remains weak primarily due to slowing private consumption and contracting fixed investment. Various surveys indicate that business confidence remains weak, while inflation expectations have increased. Agriculture which constitutes less than 14 per cent of GDP, despite a good monsoon, cannot be expected to significantly influence overall growth rate. Industrial growth has experienced a near-stagnation situation for the past two years. Prime element in reduction of the overall performance of industrial growth is shrinkage in the mining and manufacturing sectors. Growth rate of manufacturing was a mere 1.0 per cent in 2012-13. Production of capital goods also declined by 6.0 per cent during 2012-13,

Executive Committee 2013-2015 President

Amitrajeet Batabyal Rochester Inst. of Technology

Executive Director
Chandana Chakraborty Montclair State University Assistant Executive Director Meenakshi Rishi Seattle University

Treasurer
Artatrana Ratha St. Cloud State University

Elected Members
Kalyan Chakraborty Emporia State University Shailendra Gajanan University of PittsburghBradford Jyoti Khanna Colgate University Sushanta Mallick Queen Mary Univ. London Artatrana Ratha St. Cloud State University Bansi Sawhney University of Baltimore

Ex-officio Member
Kusum Ketkar

RBI Chair Professor of Economics, IIM Bangalore. Views are personal.

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125

Volume 6 Issue 2. November 15, 2013

indicating a sharp fall in the investment activity. Services sector recorded the lowest growth in 11 years at 6.8 per cent during 2012-13. The fiscal situation is also grim (Table 2). Other than collections from custom duties, growth in gross tax revenue has been lower under major heads, as would be expected in a slow growing economy. Widening of revenue deficit together with higher capital expenditure has added to the gross fiscal deficit, inducing risk of fiscal slippage. Fiscal slippage is apparent but given that governments' borrowing costs are lower than last year despite rise in average maturity, fiscal profligacy is anticipated in the election year. External sector vulnerabilities also got highlighted in 2012-13. Indias balance of payments has been under growing pressure as noted in widening of Current Account Deficit (CAD). In the on-going situation, CAD reached a historic peak of 4.8 per cent of GDP in 2012-13 and widened from 3.6 per cent of GDP in Q4 (2012-13) to 4.9 per cent of GDP in Q1 (2013-14). To contain CAD, the government and the RBI have taken stringent measures, especially to restrict import of gold. In Q1 of 2013-14, the external debt as a ratio to GDP increased and the reserve adequacy indicators deteriorated (Table 3). The currency experienced increased volatility during the recent period. Sudden surge in capital outflows at the back of the likelihood of tapering of the US Fed Reserves quantitative easing programme lead to a sharp depreciation of the Indian Rupee. Between mid-May and end-August 2013, the rupee depreciated rapidly by 17.7 per cent against the US dollar. Improvements in global sentiments have helped in reversing this trend in early September, and the rupee appreciated by 6.0 per cent and further by 1.9 per cent up to October 25, 2013. However, policy makers understand that any relief due to postponement of tapering by the Fed Reserve is only procrastination and not a permanent respite. Inflationary pressures are raising their head in India. Wholesale Price Index (WPI) inflation declined to 4.6 per cent in May 2013. However, due to a rise in food and fuel prices, the WPI again rose to 6.5 per cent in September 2013. Vegetable prices were the driving force within the food articles. Further, depreciation of the rupee along with rise in crude oil prices brought about a rebound of fuel inflation. Inflation measured by Consumer Price Index (CPI) continued to stay near double-digit levels, mainly driven by high food inflation. To anchor inflation, the repo rate has been raised twice within a period of last six weeks, intensifying the war with inflation. But will it lead to expected results? Not 2

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125

Volume 6 Issue 2. November 15, 2013

likely because the main culprit in this episode of inflation is select list of food items and not just the demand pressures that the monetary policy is seeking to address. Rather, the rise in interest rates may not yield higher deposits either as only few save through the banking channel while others save in gold and real estate, especially when economic uncertainty is high and black economy is flourishing. And if global sentiments change, capital outflows would still occur because of prevailing economic environment. Thus, hike in interest rates will only further stifle growth, resulting in higher unemployment. Traditionally, any responsible central bank, to safeguard the interests of citizens, would tighten the monetary policy when fiscal profligacy, especially during the election year, is noted. But if it impinges on growth and unemployment -other two objectives of monetary policy - then probably the monetary stance needs to be boldly revisited and not considered through traditional lens. Table 1: Sector-Wise Growth Rates of GDP (2004-05 prices)
(Per cent)

2011-12 1. Agriculture, forestry & fishing 2. Industry Mining and quarrying Manufacturing Electricity, gas and water supply 3. Services Trade, hotels, transport and communication Financing, insurance, real estate and business services Community, social and personal services Construction 4. GDP at factor cost Source: RBI 6.0 5.6 6.2 11.7 7.0 3.6 2.7 -0.6 2.7 6.5 7.9

2012-13 1.9 1.2 -0.6 1.0 4.2 6.8 6.4 8.6 6.6 4.3 5.0

2012-13 (Q1) 2.9 -0.2 0.4 -1.0 6.2 7.6 6.1 9.3 8.9 7.0 5.4

2013-14 (Q1) 2.7 -0.9 -2.8 -1.2 3.7 6.2 3.9 8.9 9.4 2.8 4.4

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125

Volume 6 Issue 2. November 15, 2013

Table 2: Key Deficit Indicators (Combined Government)

(As per cent to GDP)

Year 201112 201213 201314 Source: RBI

Revenue Deficit 4.1 3.7 2.9

Gross Fiscal Deficit 7.6 7.5 6.9

Outstanding Liabilities 65.4 65.5 65.8

Table 3: External Sector Vulnerability Indicators

(Ratios in per cent)

Indicator Ratio of Total Debt to GDP Ratio of Short-term to Total Debt (Residual Maturity) Ratio of Reserves to Total Debt Ratio of Short-term Debt to Reserves (Residual Maturity) Reserves Cover of Imports (in months) External Debt (US$ billion) Source: RBI

End-Mar 2012 19.7 42.7 85.1 50.1 7.1 345

End-Mar 2013 21.3 44.2 74.5 59.0 7.0 392

End-Jun 2013 22.7 43.8 72.7 60.2 6.7 388

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125

Volume 6 Issue 2. November 15, 2013

AIEFS Program at ASSA 2014 Philadelphia*

2014 Annual Meeting of the Allied Social Science Association (ASSA) January 03, 2014 AIEFS Executive Committee Meeting: 4:30-5:45pm, Loews-Jefferson Board Room Invitation: Executive Committee Members AIEFS Reception: 6.00 - 8.00PM, Philadelphia Marriott, Room 405 Invited Speaker: Amitava Krishna Dutt, University of Notre Dame, Consumerism in Less Developed Countries Invitation: Members, colleagues, friends and others

January 03, 2014

January 03, 2014 12:30 p.m., Philadelphia Marriott, Meeting Room 310

International Trade and Finance (F1)

Presiding: Chandana Chakraborty, Montclair State University (chakrabortyc@mail.montclair.edu) Paper 1: Indias Petroleum Demand: Empirical Estimation and Projections for the Future Author: Pradeep Agarwal, Institute of Economic Growth Paper 2: Trade Discontinuities and the Recovery of Margin of Trade Author: Usha Nair-Reichert, Georgia Institute of Technology Paper 3: Quota Expiration and the Geography of United States Textile & Apparel Imports: The Scale Economies and Vertical Integration Author 1: Anusua Datta, Philadelphia University Author 2: Mikhail Kouliavtsev, Austin State University Paper 4: Comparative Advantage as a source of Exporters Pricing Power: Evidence from China & India Author 1: Sushanta Mallick, Queen Mary University of London Author 2: Helena F. Marques, University of Belaric Islands Paper 5: An Empirical Investigation of Purchasing Power Parity: The case of Chinese Yuan Author 1: Bansi Sawhney, University of Baltimore Author 2: Faith Mangir, Selcuk University Author 3: Kishore Kulkarni, Metropolitan State University Paper 6: Globalization and the Evolution of Indian Financial Markets Author 1: Renu Kallianpur, AXA Advisors Author 2: Saul Melkes, University of Iowa

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125

Volume 6 Issue 2. November 15, 2013

Discussants: Keshab Bhattarai, University of Hull Sweta Saxena, International Monetary Fund Banani Nandi, Shannon Laboratories and AT&T Jyoti Khanna, Colgate University Valerie Cerra, International Monetary Fund Ramya Ghosh, Drexel University January 03, 2014 2:30pm, Philadelphia Marriott, Meeting Room 310

Growth and Socio-Economic Policy (O1)

Presiding: Amitrajeet Batabyal, Rochester Institute of Technology (aabgsh@rit.edu) Paper 1: Decentralization and Planning in Multiregion Model of Schumpeterian Economic Growth Author 1: Amitrajeet Batabyal, Rochester Institute of Technology Author 2: Peter Nijkamp, VU University, Amsterdam Paper 2: Political Connections, Entrepreneurship and social Network Investment Author 1: Raja Kali, University of Arkansas Author 2: Nisvan Erkal, University of Melbourne Paper 3: Caues of Banking Crisis: Deregulation, Credit Booms & Asset Bubbles, Then & Now Author 1: Shaktinil Roy, Athabasca University Author 2: David M. Kemme, University of Memphis Paper 4: Stationary & Parameter Constancy in the Demand for Money Function: The Case of India Author 1: Elias Grivoyannis, Yeshiva University Paper 5: Breaking Through: Domestic Violence in India Author 1: Aparna Mathur, American Enterprise Institute Author 2: Sita Natraj Slavov, American Enterprise Institute Paper 6: The Drivers of GHG Emissions Growth in Major Economies Author 1: Madanmohan Ghosh, Environment Canada Author 2: Thomas Rutherford, Wisconsin Institute for Discovery

Discussants:
Shailendra Gajanan, University of Pittsburgh-Bradford Bansi Sawhney, University of Baltimore Anusua Datta, Philadelphia University Manas Chatterjee, Binghamton University Nabamita Dutta, University of Wisconsin Chaitram Talele, Columbia State College *Note: So far this is the final program. Session details may differ from the ASSA Published Program

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125

Volume 6 Issue 2. November 15, 2013

About AIEFS
AIEFS is a non-profit academic organization founded in 1975 at Bloomsburg State University, Pennsylvania. Economists with interest in India felt a need to develop an identity for those involved in scholarly research on Indian economic and financial issues, to give publicity to their research outcomes and to educate the world at large on the realities of changing India. AIEFS objectives are to promote interest of the study of Indian Economics and Finance in its broadest sense, to encourage inquiry into, and analysis of the problems and issues facing the Indian economy and to facilitate communication and discussion among scholars working towards the above objectives. AIEFS sponsors sessions at the annual ASSA, Western Economic Association and Eastern Economic Association Meetings. It also holds biennial meetings either in the US or India. First biennial meeting in India was held in collaboration with Research and Information System for Developing countries (RIS) in June 2011 In Delhi. The second biennial meeting was held in collaboration with the Indira Gandhi Institute of Developments Research (IGIDR), Mumbai, in August 2013. AIEFS brings out Newlester twice a year fall and in spring. From time to time, AIEFS also publishes edited books or proceeding of papers presented at ASSA and biennieal meetings. In recent years, papers have been published in special issues of peer reviewed journals like South Asia Economic Journal, International Journal of Economic Policy in Emerging Economies, and International Journal of Business and Emerging Markets.
For futher information of AIEFS or to become a member, please visit the website: www.aiefs.org. Or contact executive director: Professor Chandana Chakraborty chakrabortyc@mail.montclair.edu. For Website related questions, please contact the Webmaster: Natalie Ratha nratha@gmail.com

URL for accessing the ASSA program:

http://www.aeaweb.org/Annual_Meeting/index.php

AIEFS Contact: Chandana Chakraborty, Department of Econ. & Finance, Montclair State University, NJ 07043 Phone: (973)-655-4125