INDIAN ECONOMIC ENVIRONMENT

Prepared By
Nilesh Sen Purvi Dakalia

Submitted to Prof. Neelam Mam

What is Economics?
Economics is a social science, its basic function is to study how individuals, households, firms and nations maximize their gains from their limited resources. There are two types of economy Free enterprise economy and Planned economy.

Objectives of Economic Policies

Guide growth while controlling Inflation Achieve full employment Steady growth of national income as measured by output of goods and services Improve balance of payments by guiding foreign trade and investment Reduce regional imbalances Reduce economic imbalance in society

Indian Economy today

Indian economic era since independence can be divided in two parts Pre 1991 (pre reform period) Post 1991 (reform period which led to liberalization of Indian economy)

Inflation
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Effects of Inflation

Positive

Negative

Consumer price index

A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. Measures changes

Weights for CPI

Po x qo Wi = ------------- x 100 Po x qo
Example: 1. Total Expenditure: Rs. 3000, 2. Expenditure on Wheat Flour:- Rs. 100 3. % of Expenditure on Wheat flour = (100/3000)*100 = 3.33 Weight of Wheat flour = 3.33%

FORMULA USED FOR COMPUTATION OF CPI

The formula as given below is being used for the computation of CPI. (Pn/Po) x wi Index = --------------------x 100 wi Where In = CPI for the nth period Pn = price of an item in the in the nth period Po = price of an item in the base period wi = weight of the ith item in the base period wi = Total weight of all items.

EXAMPLE FOR COMPUTATION OF CPI

ITEM UNIT BASE PRICE (Po) 29.91 45.01 36.23 28.99 PRICE IN MAR, 12 (Pn) 47.61 52.72 44.03 31.50 WEIGH T (Wi) 0.2230 0.2017 0.2214 0.4272 1.0733 Pn / Po Po / Pn x Wi 0.3550 0.2363 0.2691 0.4642 1.3246

Moong Pulse Mash Pulse Masoor Pulse Gram Pulse

Kg Kg Kg Kg

1.5918 1.1713 1.2153 1.0866

( Pn/Po) x Wi
Index = -------------------------------- x 100 Wi 1.3246 I = -------------------------- x 100 = 123.41 1.0733

Wholesale Price Index

The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation.

WEIGHTS FOR WPI

Production Self Consumption +Imports- Exports e.g.Wheat = (100 )-(20) + (10) (10) =80 Value of Marketing Surplus= 80 x 1000 = 80000 Total Value of all the Items included in WPI =100,0000 % of Wheat in Total Value = (80000/1000000) x 100 = 8%

Economic Policies and tools

Monetary Policy Fiscal Policy

Monetary Policy
The Monetary and Credit Policy is the policy statement through which the Reserve Bank of India seeks to ensure price stability for the economy.

Objectives of the Monetary Policy

Price stability Ensure adequate flow of credit to the productive sectors Stability for the national currency Growth in employment and income Growth in Output To control Inflation

INSTRUMENTS OF MONETARY POLICY

Bank Rate of Interest Cash Reserve Ratio - DONE Statutory Liquidity Ratio Open market Operations - DONE Deficit Financing - DONE

Fiscal Policy
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are government taxation and expenditure.

MACROECONOMICS
It is study of large economic aggregates, their relationship including national income, investmenta and saving , market ,imports and exports and balance of payements. Multierplier model is a theory used to explain how output is determined in the short run. The name multiplier comes from the finding that each rupee change in certain expenditures leads to more than a rupee change in the gnp. The multiplier model explain how shocks to investment , foreign trade and government tax and expenditure policies can affect output and employement in an economy with unutilized resources.

 THE KEYNESIA MULTIPLIER MODEL SHOWS THAT AN INCREASE IN INVESTMENT WILL INCREASE GNP BY AN AMPLIFIED AMOUT BY AN AMOUT GREATER THAN ITSELF. EXAMPLEINVESTMENT INCREASE BY RS 50 CRORE AND THIS CAUSE AN INCREASE OF RS 100 CRORES IN THE CRORES IN THE GNP , THE MULTIPLER IS 2. THE SIZE OF THE MULTIPLIER (K) DEPENDS UPON THE MARGINAL PROPENSITY TO CONSUMER (MPC)Y AND THE MARGINAL PROPENSITY TO SAVE (MPS). K= 1 /1- MPC=1\MPS(MPS). IF THE MPC IS 80% MPS WILL BE 20% AND K WILL BE 5.

Business Cycle
Business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years.

International Trade & BOP

International trade is the exchange of capital, goods,and services across international borders or territories. BOP is the difference between the exports and imports of a nation for a given period. Trade deficit Trade surplus

Foreign Exchange Market

Foreign market is a market within which individuals, business firms, governments, banks and others purchase and sell foreign currencies. It performs as a clearing house. The foreign exchange rate refers to the price of one currency in terms of another currency.

Capital Market
Capital markets provide for the buying and selling of long term debt or equity backed securities. Examples of Capital market transactions 1. A company raising money on the primary markets 2. A government raising money on the primary markets 3. Trading on the secondary markets

Money Market
The Money market is a component of the financial markets for assets involved in shortterm borrowing, lending, buying and selling with original maturities of one year or less. Common money market instruments are Certificate of deposit, Repurchase agreements, Commercial paper, Treasury bills etc.

Economic indicators and value of Investment

Leading Indicator Consumer Sentiment Automobile sales Conumer purchase around Diwali Coincident indicator Job Advertisement Lagging indicator Unemployement rate Employement Growth

THANK YOU