 The down turn that appears to have began in the USA in September,2008 have
some negative effect on Indian economy.
 The most immediate effect of this global financial crisis on India is an out flow
of foreign institutional investment (FII) from the equity market.
 The impact of the global crisis has been transmitted to the Indian economy
through three distinct channels, namely: the financial sector, exports and
exchange rates. The other significant channel of impact is the fall of the
business and consumer confidence leading to decrease in investments and
consumer demand.
 Economic liberalization of India means the process of opening up of the Indian
economy to trade and investment with the rest of the world. Till 1991 India
had a import protection policy wherein trade with the rest of the world was
limited to exports. Foreign investment was very difficult to come into India
due to a bureaucratic framework. After the start of the economic
liberalization, India started getting huge capital inflows and it has emerged as
the 2nd fastest growing country in the world.
 In 1991, after India faced a balance of payments crisis, investors deserted India
as turbulence descended: prime minister Rajiv Gandhi was assassinated and
what’s now known as the Balance of Payments Crisis gripped the country.
The fruits of liberalisation reached their peak in 2007, when India recorded its
highest GDP growth rate. With this, India became the second fastest growing
major economy in the world, next only to China. The growth rate has slowed
significantly in the first half of 2012.
Firstly, the Gulf War. Soaring oil prices pushed up the cost of India’s
imports.
Investors loss of confidence to the government
 It had to pledge 20 tones of gold to Union Bank of Switzerland and 47 tones
to Bank of England as part of a bailout deal with the International Monetary
Fund (IMF).
 IMF required India to undertake a series of structural economic reforms.
 Trade, hotels, transport and communication; financing, insurance, real estate
and business services and community, social and personal services account for
more than 60 percent of GDP
Agriculture, forestry and fishing constitute around 12 percent of the output,
but employs more than 50 percent of the labor force.
Manufacturing accounts for 15 percent of GDP, construction for another 8
percent and mining, quarrying, electricity, gas and water supply for the
remaining 5 percent.
REAL GDP – Adjusted to inflation
Nominal GDP- unadjusted to inflation
 Indian Exports increased 26.8% and touched US$ 18.9 billion in November 2010
Foreign Tourist from January to November 20100 was about 4.93 million as compared to 4.46
million foreign tourists during the same period in 2009. The growth rate registered by the
ministry of tourism was 20.7%
Foreign exchange earnings went up to whopping US$12.88 billion during the period January to
November 2010 as compared to US10.67 billion during January to December 2009.
Investment industry. The mutual funds industry managed US$ 160.44 billion total assets.
Telecommunication Industry. The number of wireless subscriber increased to 70.69 million. The
total telephone using population increased to 62.51%
Information Technology and software services generated revenues of US$ 63.7 billion
Factors that helped the 2010 GDP increased
 Agriculture industry grew 1.4% in 2012-13 against the 1.8% estimate
Mining production contracted by 2.2% instead of growing 0.4% as extimate
Construction 1.1% against the 5.9% estimate
Financial services and Real estate grew at a faster trot of 10.9% compared to
8.6% estimate
Community services (representing government expenditure) expanded just
5.3% against 6.8% estimate.
Gross Domestic savings (GDS) at current prices in 2012-13 is estimated at
Rs30.4trillion as against Rs28.2trillion in 2011-12, constituting 30.1 % of GDP at
market prices against 31.3% in the previous year.
 High Borrowing Costs and delays in securing mandatory government approvals
 High Inflation and slower hiring
YEAR
%
1991
13.87
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
11.79
6.36
10.21
10.22
8.98
7.16
13.23
4.67
4.01
3.68
5.40
3.80
3.77
4.20
6.20
2007
6.40
2008
8.30
2009
10.90
2010
12.00
2011
8.90
2012
9.30
Consumers delay replacing serviceable products and focus on achieving value
for money, seeking out deals and eliminating indulgences.
The inflation rate in India was recorded at 8.31 percent in March of 2014.
Inflation Rate in India averaged 9.71% from 2012 until 2014, reaching an all
time high of 11.16% in November of 2013 and a record low of 7.55% in January
of 2012
YEAR
%
1994
3.70
1995
2.20
1996
2.10
1997
2.60
1998
3.60
2000
4.30
2002
8.80
2003
9.50
2005
8.90
2006
7.80
2007
7.20
2008
9.10
2009
9.70
2010
10.00
2011
9.80
2012
8.50
60% of India’s workforce is self-employed
Nearly 30% are casual workforce (e.i. they work only when they are able to get
jobs and remain unpaid for the rest of the day)
More than 90% labour force is employed in the “unorganized sector”, (e.i.
sectors which don’t provide with the social security and other benefits of
employment in the “organized sector”)
Unemployment increases susceptibility to malnutrition, illness, mental stress
and loss of self-esteem, leading to depression results suicide, etc.
Slow down in US economy have made a chilling effect in the Indian IT body
shops like TCS, Wipro, and Infosys.
IT projects that are halfway to completion, or companies that are stuck with
cash flow issues on businesses that are yet to reach break even, will run out of
cash
Government and other private companies are reluctant in starting new
ventures and starting new projects etc.
Growth engine for the economy
◦ Cost advantage
◦ cost arbitrage
◦ Quality/maturity process
◦ hosts more than 55% of SEI CMM level firms
◦ highest number of ISO certified companies
◦ Ease of scalability
◦ Technically competent labor pool
7% of global market
1.2% revenue (1998) to 5.8% (2009)
3.5-4.1% additional in Net value (2009)
Key highlight of the Indian IT industry:
◦ Export revenues USD 47.3 billion (gross 2009), 66% from IT Industry
◦ Domestic market grown to 26% of INR
◦ 29% export on engineering services and software products
◦ Direct employment reached nearly 2 million
43% of Western Companies are cutting back IT spending, nearly 30%
are scrutinizing IT projects for better returns.
70% of firms negotiating lower rates, 60% cutting back on contractors
654000 jobs lost, Labor department released report, April 3, 2009
60-65% workforce
10% GDP
Agricultural exports
Agricultural GDP
◦ poor monsoons to depressed agricultural commodity prices in world market
◦ -0.1% 2008-09, 5.8% 2007-08, 0.4% 2009-10, 6.6% 2010-2011
Decline on demand
Wholesale prices of Indian Fishes imported in European Union
declined
Attributed to off-shoring and outsourcing businesses
Investments came from non-resident Indians as well as equity funds
Bankruptcy of Lehman Brother and Meryll Lynch
Decrease in market rates 10-30% in metropolitan and upcoming cities
in India
As per the figures shown in the Index of Industrial Production(IIP) in the month
of August 2008-09, the manufacturing sector has grown by a shockingly low
1.1%. The same sector had grown by 10.7% in 2007-08. It’s an indication that
industries have been relying on existing projects only.
Approximately, 60% of the total garments manufactured in India are exported to
foreign markets like EU, US, and Japan, generating revenue of up to US$ 52
billion.
During October 2008, as economic slowdown branched out, the total output of
the textile sector came down by 10%.
An estimate states that during 2008, almost 8,000,000 garment and textile
employees had lost their jobs, which is one of the biggest employer about 88.02
million.
Some biggest apparel companies in India, which are mainly located in Ludhiana
in Punjab generating employment for 4,000,000 jobs has suffered a 50% loss in
sales; especially the exports during 2008. This has affected 20 to 30% of jobs.
Monetary and Credit Policy
is essentially managed by central bank
Monetary Policy-Meaning
Reserve Bank of India states that,
oMonetary policy refers to the use
of instruments under the control of
the central bank to regulate the
availability, cost and use of money
and credit.
Objectives
Rapid Economic Growth
Price Stability
Exchange Rate Stability
Balance of Payments (BOP) Equilibrium
Full Employment
Equal Income Distribution
Rapid Economic Growth
If the RBI opts for a cheap or easy credit policy by reducing
interest rates, the investment level in the economy can be
encouraged. This increased investment can speed up
economic growth
Price Stability & Exchange Rate Stability
All the economics suffer from inflation and deflation. It can
also be called as Price Instability.
The RBI by altering the foreign exchange reserves tries to
influence the demand for foreign exchange and tries to
maintain the exchange rate stability.
Balance of Payments (BOP) Equilibrium
Many developing countries like India suffers from the
Disequilibrium in the BOP
The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP
Deficit'. The former reflects an excess money supply in the
domestic economy, while the later stands for stringency of
money
Full Employment
In simple words 'Full Employment' stands for a situation in
which everybody who wants jobs get jobs.
However it does not mean that there is a Zero
unemployment. In that senses the full employment is never
full.
Equal Income Distribution
monetary policy can make special provisions
for the neglect supply such as agriculture,
small-scale industries, village industries, etc.
and provide them with cheaper credit for
longer term
Some Instruments
Cash Reserve Ratio
-It is the ratio of a bank’s time and demand liabilities to be
kept in reserve with the RBI.
oStatutory Liquidity Ratio
-Banks have to invest a certain percentage of its time and
demand liabilities n government approved securities
Fiscal Policy
oMeans by which a government
adjusts its levels of spending in
order to monitor and influence a
nation's economy
Objectives
Development by effective Mobilisation of Resources
Efficient allocation of Financial Resources
Reduction in inequalities of Income and Wealth
Price Stability and Control of Inflation
Employment Generation
Reducing the Deficit in the Balance of
Payment
Capital Formation
Development of Infrastructure
Foreign Exchange Earnings
Development by effective Mobilisation of
Resources
The financial resources can be mobilised by :
 Taxation
Public Savings
Private Savings
Efficient allocation of Financial Resources
should ensure that the resources are allocated for generation of goods and services which are
socially desirable
designed in such a manner so as to encourage production of desirable goods and discourage
those goods which are socially undesirable
Reduction in inequalities of Income and Wealth
direct taxes such as income tax are charged more on the
rich people as compared to lower income groups
indirect taxes are also more in the case of semi-luxury and
luxury items, which are mostly consumed by the upper
middle class and the upper class
Price Stability and Control of Inflation
the government always aims to control the
inflation by Reducing fiscal deficits,
introducing tax savings schemes, Productive
use of financial resources, etc
Employment Generation
Lower taxes and duties on small-scale
industrial (SSI) units encourage more
investment and consequently generates
more employment
Reducing the Deficit in the Balance of
Payment
attempts to encourage more exports by way of fiscal
measures like Exemption of income tax on export earnings,
Exemption of central excise duties and customs, Exemption
of sales tax
Capital Formation
must be efficiently designed to encourage
savings and discourage and reduce spending
Development of Infrastructure
part of the government's revenue
is invested in the infrastructure
development
Foreign Exchange Earnings
attempts to encourage more exports by way of Fiscal
Measures like, exemption of income tax on export earnings,
exemption of sales tax
foreign exchange earned by way of exports and saved by
way of import substitutes helps to solve balance of
payments problem
consists of two main tools :
changing of tax rates
changing government spending
change in tax rates
is usually implemented when inflation is Unusually high, and there is a recession with high
unemployment.
change in government spending
has a stronger effect on the Economy than change in
tax rates
when the government decides to fight a recession it
can spend a large amount of money on goods and
services, all of which is released into the economy
Three Possible Positions
Neutral position
Expansionary position
Contractionary position