Macroeconomic Indicators of Factors Affecting the Indian Economy

Pages: 11 (1451 words) Published: March 27, 2014

FACTORS AFFECTING INDIAN ECONOMY

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Gross Domestic Product
The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

GDP = C + G + I + NX
Where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports Imports)

Inference:




In 1970’s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers.

In 1990’s, the collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. 2|Page






Prime Minister Narasimha Rao, along with his Finance Minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors.

While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's.
Starting in 2012, India entered a period of more anemic growth, with growth slowing down to 4.4%. Other economic problems also became apparent: a plunging Indian rupee, a persistent high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve's decision to taper quantitative easing, foreign investors have been rapidly pulling out money from India.

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Fiscal Deficit
When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

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Inference:










By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. Central bank had refused new credit and foreign exchange reserves. The crisis was caused by currency overvaluation the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation The caretaker government in India headed by Prime Minister P. V. Narasimha Rao's, immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral. The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million

Containing this deficit was one of the key structural adjustments undertaken by the Indian government at the time. Economic reforms helped reduce the fiscal deficit, and the combined fiscal deficit fell to 6.3% of GDP in 1996–1997.

A sharp increase in government salaries and pensions in the next year halted the process of fiscal improvement until 2003–2004 when the government introduced the Fiscal Responsibility and Budget Management Act (FRBM) to control the fiscal deficit.

The Act required the Government of India to bring down its revenue deficit by 0.5% of GDP each year until it touched zero, and to reduce its fiscal deficit by 0.3% each year to a level of 3.0% of GDP. The targets were to be achieved by 2008–2009.

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Net Capital Formation
A term used to describe net capital accumulation during an accounting period....
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