Macroeconomic Analysis and Policies

Group 10

MASTERS OF BUSINESS ADMINISTRATION

Project on

India's current macroeconomic position and

concerns
For internal assessment in

Macroeconomic Analysis and Policies

Submitted By:
Pramit Narayan Biswas
Priyanjali Das
Abhiteja Pachipulusu
Gauri Sharma
Satyajit Kulkarni

C014
C019
C051
C056
C064
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Macroeconomic Analysis and Policies

Group 10

Table of Contents
1.

Introduction.......................................................................................................... 3

2.

GDP of India- the bright spot................................................................................3

3.

Exhibits................................................................................................................ 7

4.

References......................................................................................................... 12

Macroeconomic Analysis and Policies

Group 10

1. Introduction
India is the ninth largest economy in the world by nominal GDP1 and third largest in terms of PPP2, but India is
categorized as a lower middle economic country3 by World Bank owing to its less than average GNI per capita 4.
India became the world's fastest growing economy from the last quarter of 2014 by replacing the People's
Republic of China5. Also India topped the World Banks growth outlook for 2015-16 with the economy having
grown 7.3% in 2014-15 and expected to grow 7.5% in 2015-1 66. Although huge population of India depends on
agriculture most part of the GDP comes from service sector which amounts to 53% of GDP 7. India is one of the
fastest growing services sector with its compound annual growth rate at 9%, just below Chinas 10.9 %, during
the last 11-year period from 2001 to 2012. Inflation, another major economic indicator, has considerably been
declining over the past few years and adoption of CPI is giving better reflection of inflation in the economy.
Please see Exhibit- 1 for Indian macroeconomic indicators 11 for the past 5 years and, current fiscal year
(computed so far). Though India is doing well in terms of these major indicators, it lags behind many countries
in ease of doing business rankings9 at 130. Also it ranks poor at 135 in HDI10 (human development index) which
measures the standard of living of a country. Government took initiatives such as Make in India, Digital India,
Jan-Dhan Yojana and reforms in FDIs in the hope of improving the growth, financial inclusion and investments
in India to develop its key economic factors.

2. GDP of India- the bright spot

India is one of the emerging economies in the world which is making continuous efforts for advancement in
growth, well being of the country. BRICS are the countries among the fastest growing emerging economies.
India took the lead in the Real GDP growth in this fiscal year i.e., 2015 by surpassing China12.
Service sector dominance
Indias GDP is composed of agricultural sector, industrial sector, and service sector. As per the World Bank data,
the breakdown of GDP in the respective sectors is 17%, 30%, and 53% 1414. In the long run, the rate of decline in
agriculture contribution to GDP is high, but it got stabilized from 2008-2014. It is the year 1991, the
liberalization privatization policies were introduced, India growth turned around and services sector grew
rapidly till date. Please see Exhibit- 4 for trends in each of the sector1414.
The domination of the service sector can be explained using good market equilibrium equationY= C+I+G+(X-M)
Considering the consumption (C), exports (X) category in the GDP equation, below observations can be made
from Indian economic indicators presented in Exhibit- 1:
(i)
(ii)

In 2014-2015, the domestic consumption of services is above one trillion USD and from the year
2009-2010 to 2014-2015, the average is near to one trillion USD.
From the year 2009-2010 to 2014-2015, the trade balance is negative, but the services balance
remains positive and the average margin gap is more than $200 US billion.
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Macroeconomic Analysis and Policies

(iii)

Group 10

In the same period, the services exports constitute 50% of the total exports by the country.

These observations indicate the prominence of services sector in India and aggregate demand for services is
humongous.
Private Consumption and Fixed Investment
Over the years from 2012-2015 there is an increase in growth of private consumption and fixed investment in
India. Please see Exhibit- 31313. Though the growth rate of private consumption behaves in a cyclical manner, in
absolute terms there is an increase in private consumption. And the downturns might be due to the negative
shocks occurred in that period. The long run trend can be attributed to the increase in level of disposable income
which improved both savings and consumption of the households. Fixed investment is part of gross private
investment, and it has seen a tremendous growth rate over the period. If we apply this phenomenon in the goods
market equilibrium equation- C, I -> Aggregate Demand -> and hence Y
Government Spending and interest rate
When government spending raises, the aggregate demand and consumption increases. It being an expensive
policy due to which private investment reduces because of crowding out effect, an expansionary fiscal policy
should be accompanied by expansionary monetary policy. We can observe these trends by comparing
government spending of India and interest rates set by RBI. Please see Exhibit- 51515, 16.
(i)
Between 2013 and 2015, all time high repo rate of 8% can be observed during Jan 2014 when
government spending is at very low compared to previous quarter. So contractionary fiscal policy
was associated with contractionary monetary policy where interest rates are high discouraging
investment.
So when G & i -> I(i)
(ii)
Highest government spending can be observed during the last quarter of 2014, and then repo rate
was reduced by 25 bps. So expansionary fiscal policy was associated with expansionary
monetary policy where interest rates are lower and encourages investment. So when G & i
-> I(i)
It is not necessarily all the time, this phenomenon works, as other factors such as inflation and other shocks can
alter the policy decisions.
Industrial Sector and GDP
Even Industrial sector forms substantial share in the GDP, but India lacks proper infrastructure, government
support in clearances/approvals, incentives to grow etc. Over the period of 2009-2010 to 2014-2015 the share of
industrial sector out of GDP is 28.1% and the growth rate is significantly decreasing1111. Below are few concerns
India has been facing to spur the growth in Industrial Sector:
(i)
Low demand of industrial products due to less domestic consumption, low purchasing power,
and poor standard of living.
(ii)
The process of approving the licenses, political issues, red tape discourages the investment in this
sector.
(iii)
Losses in some PSUs because of improper management, inefficiency led to high expenditure by
government to cover losses which otherwise can be spent on G which effectively improves
output.
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Macroeconomic Analysis and Policies

(iv)
(v)

Group 10

Lack of infrastructure such as energy crisis, transportation problem, telecommunication facilities

add owes to growth in this sector.
India depends a lot on imports for capital goods and substituting it with domestic production has
to be stimulated.

Crude oil and India GDP:

In OPEC countries, GDP is defined by their oil exports and many economies dependent on oil imports, one
among them is India. It can be observed from the Exhibit- 1 1111 that over the period of 2009-2010 to 2014-2015,
approximately 31% of imports was composed of oil imports. Volatility in oil prices, regulation of oil by OPEC,
import duty on oil will have a cascading effect on GDP and inflation of India, because production of various
goods and transpiration of those goods is dependent on oil. So oil imports play a crucial role in the economy of
India. Currently the deflation in terms of WPI is due to the slump in oil prices 1717,18. The future expected growth
as per World Banks growth outlook for 2015-16 is a lot based on the oil price fluctuations.

Macroeconomic Analysis and Policies

Group 10

Macroeconomic Analysis and Policies

Group 10

3. Exhibits
Exhibit- 1
INDIA'S MACROECONOMIC INDICATORS
INDICATORS
2009-10
GDP (at current
1365.4
prices, US$ bn)
GDP Per capita
1146.7
(US$)
Real GDP
8.6
Growth (%)
Agriculture &
0.8
allied activities
Industry
9.2
Services
10.5
Sectoral Share in GDP (%)
Agriculture &
14.6
allied activities
Industry
28.3
Services
57.1
Population (mn)
1190.7
Inflation rate
12.2
(CPI, annual
avg. %)
Inflation rate
3.8
(WPI, annual
avg. %)
Gross Fiscal
6.5
Deficit (% of
GDP)
Exchange Rate
47.4
(`/US$, avg.)
Exchange Rate
67.1
(`/Euro, avg.)
Exports (US$
178.8
bn)
% change
-3.5
Oil Exports (US$
28.2
bn)
% change
2.3
Non-oil Exports
150.6
(US$ bn)
% change
-4.6
Imports (US$
288.4
bn)
% change
-5.1
Oil Imports (US$
87.1
bn)
% change
-7.0
Non-oil Imports
201.2
(US$ bn)
% change
-4.2
Trade Balance
-109.6
(US$ bn)
Services
96.0
Exports (US$
bn)***
Software Exports
49.7
(US$ bn)***
Services
60.0
Imports (US$
bn)***
Services Balance
36.0
(US$ bn)***
Current Account
-38.4
Balance (US$
bn)
CAB as
-2.8

2010-11
1708.5

2011-12
1843.2

2012-13
1835.8

2013-14
1875.9

2014-15
2050.6f

2015-16
2144.9f

1411.7

1498.5

1468.4

1476.4

1587.9e

8.9

6.7

5.1**

6.9**

7.4p**

7.6@

8.6

5.0

-0.2**

3.7**

0.2p**

1.9 (Apr-Jun)p**

7.6
9.7

7.8
6.6

2.9**
8.7**

4.5**
9.1**

6.1p**
10.2p**

6.5 (Apr-Jun)p**
8.9 (Apr-Jun)p**

14.6

18.9**

17.7**

17.2**

16.1p**

14.2 (Apr-Jun)p**

27.9
57.5
1210.2
10.8

32.9**
48.2 **
1230.0
10.3

32.3**
50.0**
1250.2
10.2

31.7**
51.1**
1270.6
9.5

31.4p**
52.5p**
1291.4e
6.4

32.1 (Apr-Jun)p**
53.7 (Apr-Jun)p**
5.00 (Oct, '15)

9.6

8.9

7.4

6.0

2.0

-3.81 (Oct '15)

4.8

5.8

4.9

4.4

4.1e

3.9e

45.6

47.9

54.4

60.5

61.1

60.2

65.9

70.1

81.2

77.5

249.8

306.0

300.4

314.4

309.6

39.8
36.4

22.5
56.7

-1.8
60.9

4.7
63.2

-1.5
56.7

29.0
213.4

55.9
249.2

7.3
239.5

3.8
251.2

-10.2
252.8

41.8
369.8

16.8
489.3

-3.9
490.7

4.9
450.2

0.6
447.5

28.2
106.0

32.3
155.0

0.3
164.0

-8.3
164.8

-0.6
138.3

21.6
263.8

46.2
334.3

5.9
326.7

0.4
285.4

-16.0
309.3

31.1
-120.0

26.7
-183.3

-2.3
-190.3

-12.6
-135.8

8.4
-138.0

124.6

140.9

145.7

151.5

155.4

66.09 (Nov
20,'15)
70.86 (Nov
20,'15)
154.3 (Apr-Oct
'15)
-17.6^
16.7 (Apr-Sep
'15)
-50.3^
97.2 (Apr-Sep
'15)
-8.8^
232.1 (Apr-Oct
'15)
-15.2^
55.0 (Apr-Oct
'15)
-42.1^
177.1 (Apr-Oct
'15)
-0.9^
-77.8 (Apr-Oct
'15)
78.0 (Apr-Sep
'15)

53.1

62.2

65.9

69.4

73.1

18.3 (Apr-Jun '15)

80.6

76.9

80.8

78.5

79.8

43.9 (Apr-Sep
'15)

44.0

64.0

64.9

73.0

75.6

-47.9

-78.2

-87.8

-32.4

-27.5

34.2 (Apr-Sep
'15)
-6.2 (Apr-Jun
'15)

-2.8

-4.2

-4.8

-1.7

-1.3

-1.2 (Apr-Jun '15)

Macroeconomic Analysis and Policies

percentage of
GDP (%)
Forex Reserves
(US$ bn)
External Debt
(US$ bn)
External Debt to
GDP Ratio (%)
Short Term Debt
(US$ bn)
Short Term Debt /
Total Debt (%)
Total Debt
Service Ratio (%)
FDI (US$ bn)
GDRs/ADRs
(US$ bn)
FIIs (net) (US$
bn)
FDI Outflows
(US$ bn)
Memo Items:
Global GDP (%
change)
Advanced
Economies
Emerging and
Developing
Economies
World Merch.
Trade (Vol., %
change)
World Merch.
Exports (US$
trn)
Growth in Value
of World Merch.
Exports (%)

Group 10

279.1

304.8

294.4

292.0

304.2

341.6

260.9

317.9

360.8

409.4

446.3

474.4

18.3

18.2

20.9

22.3

23.6

23.7

352.5 (Nov
13,'15)
482.9 (Apr-Jun
'15)
24.0 (Apr-Jun '15)

52.3

65.0

78.2

96.7

91.7

84.7

84.4 (Apr-Jun '15)

20.1

20.4

21.7

23.6

20.5

17.9

17.5 (Apr-Jun '15)

5.8

4.4

6.0

5.9

5.9

7.5

7.5 (Apr-Jun '15)

37.7

36.0

46.6

34.3

36.0

44.3

3.3

2.0

0.6

0.2

0.02

24.4 (Apr-Sep
'15)
0.3 (Apr-Sep '15)

29.0

29.4

16.8

27.6

5.0

40.9

-9.4 (Apr-Sep '15)

15.1

17.2

10.9

7.1

9.2

1.7

2.3 (Apr-Sep '15)

2010
5.4

2011
4.1

2012
3.4

2013
3.4

2014f
3.4

2015f
3.1

2016f
3.6

3.1

1.7

1.2

1.4

1.8

2.0

2.2

7.4

6.2

5.2

5.0

4.6

4.0

4.5

14.3

6.9

2.5

3.0

3.1

3.0

3.9

15.0

18.0

18.1

18.5

18.6

16.5

17.0

21.7

20.0

0.3

2.4

0.5

-11.2

2.7

Exhibit- 2: Indias Real GDP standing among BRICS from 2012-2015

Macroeconomic Analysis and Policies

Group 10

Exhibit- 3: Fixed investment and Private consumption growth rate

Exhibit- 4: GDP Composition by sector

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Macroeconomic Analysis and Policies

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Macroeconomic Analysis and Policies

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Exhibit- 5:
Government spending history

11

Macroeconomic Analysis and Policies

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RBI repo rate history

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Macroeconomic Analysis and Policies

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4. References
1. GDP (current US$),
http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?
order=wbapi_data_value_2014+wbapi_data_value+wbapi_data_value-last&sort=desc
2. GDP, PPP (current international $),
http://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?
order=wbapi_data_value_2014+wbapi_data_value+wbapi_data_value-last&sort=desc
3. http://data.worldbank.org/country/india
4. Country and Lending Groups,
http://data.worldbank.org/about/country-and-lending-groups
5. India clocks 7.5% growth in January-March quarter, becomes world's fastest growing
economy,
http://www.dnaindia.com/money/report-india-clocks-75-growth-in-january-marchquarter-becomes-world-s-fastest-growing-economy-2090462
6. World Bank retains India growth forecast at 7.5% for 2015-16,
http://economictimes.indiatimes.com/news/economy/indicators/world-bank-retains-indiagrowth-forecast-at-7-5-for-2015-16/articleshow/49584688.cms
7. Services, etc., value added (% of GDP),
http://data.worldbank.org/indicator/NV.SRV.TETC.ZS
8. India has second fastest growing services sector,
http://www.thehindu.com/business/budget/india-has-second-fastest-growing-servicessector/article6193500.ece
9. Economy Rankings,
http://www.doingbusiness.org/rankings
10. Human Development Report 2014,
http://hdr.undp.org/en/content/human-development-report-2014
11. Indias Macroeconomic Indicators, PP 1,
http://www.eximbankindia.in/sites/default/files/ind-eco.pdf
12. Indian Economy, Monsoon risk clouds short term outlook, PP 3, Crisil Research report
13. Indian Economy, Monsoon risk clouds short term outlook, PP 4, Crisil Research report
14. Emerging Markets: Analyzing India's GDP,
http://www.investopedia.com/articles/investing/082515/emerging-markets-india-nextsuperstar.asp?layout=orig
15. India Government Spending,
http://www.tradingeconomics.com/india/government-spending
16. Chronology of Repo Rate in India (History of Repo Rates),
http://www.allbankingsolutions.com/Banking-Tutor/Chronology-Repo-Rate-India.shtml
17. India Wholesale Price Index Change,
http://www.tradingeconomics.com/india/producer-prices-change
18. Oil price collapse a big bounty for India. No need for oil subsidies,
https://infogr.am/oil-price-collapse-a-big-bounty-for-india-no-need-for-oil-subsidies

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Macroeconomic Analysis and Policies

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