UNDERSTANDING MACROECONOMICS

GROSS DOMESTIC PRODUCT

GDP

GDP : MEASURES FLOW OF GOODS & SERVICES IN AN ECONOMY ITS A FLOW AND NOT A STOCK MEASURES THE PRODUCTIVE POWER OF AN ECONOMY IN A PERIOD GDP IS THE VALUE OF ALL THE FINAL GOODS & SERVICES PRODUCED IN THE ECONOMY IN THE GIVEN TIME PERIOD NOMINAL GDP: MEASURES AT CURRENT PRICES REAL GDP: MEASURES OUTPUT OF A PERIOD AT THE PRICES OF SOME BASE YR REAL GDP GIVE THE ESTIMATE OF REAL OR PHYSICAL CHANGE IN OUTPUT BETWEEN ANY SPECIFIED YEARS GDP/CAPITA: NOMINAL GDP/POPULATION OR REAL GDP/POPULATION PRICE INDEX: CURRENT YR PRICES/BASE YR PRICES * 100 GDP DEFLATOR: NOMINAL GDP/REAL GDP * 100. THE DEFLATOR MEASURES THE CHANGE IN PRICES THAT HAVE OCCURRED BETWEEN THE BASE YEAR AND CURRENT YEAR
PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

GDP

CONSUMER PRICE INDEX (CPI): MEASURES THE COST OF BUYING A FIXED COST OF GOODS & SERVICES REPRESENTATIVE OF THE PURCHASES OF URBAN CONSUMER DIFFERENCES BETWEEN CPI & GP DEFLATOR

GDP DEFLATOR MEASURES PRICES OF A MUCH WIDER GROUP OF GOODS CPI MEASURES THE COST OF A FIXED BASKET OF GOODS WHICH DOES NOT VARY OVER TIME. THE BASKET OF GOODS INCLUDED IN THE GDP DEFLATOR DIFFER FROM YEAR TO YEAR. IT USES THE QUANTITY OF CURRENT YR. AS WEIGHTS. GDP DEFLATOR IS A MOST COMPREHENSIVE MEASURE SINCE IT INCLUDES ALL OUTPUT AND IT INCLUDES CHANGES IN SPENDING WHICH OCCUR ON ACCOUNT OF INCREASED PRICES WPI/PPI: INCLUDES PRICES OF FINISHED GOODS; INTERMEDIATE GOODS AND CRUDE MATERIALS AT WHOLESALE LEVEL. WHOLESALE PRICES EVENTUALLY IMPACT RETAIL PRICES. A CHANGE IN WPI FOR CONSUMER GOODS IS USUSALLY A GOOD PREDICTOR FOR A CHANGE IN CPI.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

GDP

CALCULATING GROSS DOMESTIC PRODUCT: VALUE ADDITION: AT EACH STAGE OF MANUFACTURE OF A GOOD , ONLY THE VALUE ADDED TO THE GOOD AT THAT STAGE OF MANUFACTURE IS COUNTED AS PART OF GDP. E.G VALUE OF FLOOR SOLD BY THE MILLER MINUS THE COST OF THE WHEAT IS THE MILLERS VALUE ADDED, BECAUSE ONLY CURRENT OUTPUT. CONSTRUCTION OF A NEW HOUSE. TRANSACTION IN EXISTING HOUSES IS EXCLUDED. REALTORS FEES IN THE SALE OF EXISTING HOUSES IS CONSIDERED A PART OF GDP. GDP IS VALUED AT MARKET PRICES & NOT FACTOR COSTS. MARKET PRICE INCLUDES SALES TAX & EXCISE TAXES.

GOVERNMENT SERVIVES ARE VALUED AT THE RATE OF WAGES GIVEN TO THE GOVT. EMPLOYEES.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

GDP
MEASUREMENT OF GDP IN INDIA
ANIMAL ;HUSBANDRY, FORESTRY , FISHING,MINING & FACTORY ESTABLISHMENT IS CALCULATED BY OUTPUT METHOD. ESTIMATES OF PRODUCTION ARE MULTIPLIED BY MARKET VALUE TO OBTAIN GROSS VALUE . DEDUCTIONS ARE MADE FOR COST OF MATERIALS. AGRICULTURE: AREA SOWN * YIELD PER HECTARE MINUS COST OF SEEDS, MANURES,FERTILISERS. SMALL ENTPS: NO. OF PEOPLE EMPLPYED * AVG. EARNINGS , THE CONTRIBUTION OF SMALL SECTOR IS OBTAINED. TO PROVIDE FOR FACTOR PAYMENTS AND ADDITION OF 20% IS MADE. BANKING & INSURANCE: WAGES & SALARIES, DIRECTOR FEES AND DIVIDENDS & RETAINED PROFITS ARE ALL ADDED TO GET THEIR CONTRIBUTION. HOUSING PROPERTY: NET RENTALS OF ALL HOUSES. PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

GDP

LIMITATIONS IN ESTIMATION OF NATIONAL INCOME

OUTPUT OF NON MONETISED SECTOR: A BULK OF AGRICULTURAL OUTPUT IS EITHER CONSUMED BY PRODUCERS OR IS BARTERED AWAY. IF ONE REMOVES THIS PORTION THE OUTPUT OF AGRICULTURE WOULD REDUCE CONSIDERABLY. NON AVAILABILTY OF DATA OF SMALL ENTPS & HOUSEHOLD SECTOR( NO ACCOUNTS NOT REGISTERED) . AN ELEMENT OF GUESS WORK. PARALLEL ECONOMY: 18-20% ( 1983-84 ESTIMATE)

SOMETIMES PRICES MAY FALL ( COMPUTERS) OR RISE DUE TO ADDITIONAL FEATURES. IT IS DIFFICULT TO ACCOUNT FOR IMPROVEMENTS IN THE QUALITY OF GOODS.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

GDP

GDP SERIES IN INDIA

CSO 1948-49 TO 64-65 AT 1948-49 PRICES CSO 1960-61 SERIES AT 60-61 PRICES UPTO 1975-76 . ANOTHER SERIES WITH 1970-71 AS THE BASE YEAR. DIFFERENT BASE YEARS GIVE DIFFERENT DEFLATORS BECAUSE OF DIFFERENT WEIGHTS EG 1950-51 1970-71 FOOD ARTICLES: 504 431 FUEL/POWER 30 85 INDUSTRIAL RM 115 119 MANUFACTURERS 311 366 -----------------1000 1000 CSO NEW SERIES 1980-81 AS BASE CSO NEW SERIES WITH 1993-94 AS BASE PRICES 1N 1993-94 SERIES , ESTIMATE S FROM INCOME FROM UNREGISTERED MFG. ; PRIVATE COMMUNICATION SERVICES AN D PRIVATE SERVICES UNDER TV & RADIO HAVE BEEN INCLUDED

THE BASE YEAR WILL BE REVISED EVERY 5 YRS TO REFLECT THE STRUCTURAL CHANGES IN THE ECONOMY.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

GDP

SOME IMPORTANT IDENTITIES:

A SIMPLE ECONOMY: Y= C+I . OUTPUT SOLD CAN BE WRITTEN IN TERMS OF COMPONENT OF DEMAND AS SUM OF CONSUMPTION & INVESTMENT SPENDING= OUTPUT PRODUCED ACCUMULATION OF INVENTORIES IS COUNTED AS PART OF INVESTMENT.
DISPOSABLE PERSONAL INCOME= WHOLE OF INCOME Y. PART WILL BE SPENT ON CONSUMPTION AND PART ON SAVING. C+ I= Y = C+S THEREFORE IN A SIMPLE ECONOMY SAVINGS=INVESTMENT SOME OF THE INVESTMENT MIGHT BE UNDESIRED INVENTORY INVESTMENT

AN ECONOMY WITH GOVT. & FOREIGN TRADE Y= C+I+G+NX YD= Y-TAXES= C+S=C+I+G+NX-TAXES S=I +(G-TAXES)+(EXPORTS-IMPORTS) EXCESS OF SAVINGS OVER INVESTMENT OF PRIVATE SECTOR = GOVT. BUDGET DEFICIT + TRADE SURPLUS

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

GDP

SOME IMPORTANT IDENTITIES

THE PRIVATE SECTOR HAS THREE WAYS OF DISPOSING OF ITS SAVINGS: LEND TO BUSINESS FIRMS FOR INVESTMENT LOANS TO GOVT FOR MEETING ITS FISCAL DEFICIT. LEND TO FOREIGNERS WHO ARE BUYING MORE FROM US THAN WE ARE BUYING FROM THEM. IF THE GOVT. SPENDS MORE THAN IT RECEIVES AS REVENUES , THEN IT HAS TO BORROW AT HOME ( PRIVATE SAVINGS EXCEED INVESTMENTS) BORROW ABROAD ( IMPORTS EXCEEDS EXPORTS)

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

GDP

GROSS & NET DOMESTIC PRODUCT

NDP= GDP MINUS DEPRECIATION IT IS THE TOTAL VALUE OF PRODUCTION MINUS THE VALUE OF THE AMOUNT OF CAPITAL USED UP IN PRODUCING THAT OUTPUT.

GDP & GNP

GNP IS THE VALUE OF FINAL GOODS & SERVICES PRODUCED BY DOMESTICALLY OWNED FACTORS OF PRODUCTION. THE DIFFERENCE BETWEEN GDP & GNP ARISE BECAUSE SOME OF THE OUTPUT PRODUCED WITHIN A GIVEN COUNTRY IS MADE BY FACTORS OF PRODUCTION OWNED ABROAD.

PERSONAL DISPOSABLE INCOME

YD= GDP+ NET FACTOR INCOME FROM ABROAD- DEPRECIATIONRETAINED EARNINGS-TAXES

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

10

GDP

ANNUAL AVG. GROWTH RATES IN VARIOS PLANS

1951-56 1956-61 1961-66 1966-69 1969-74 1974-79 1979-80 1980-85 1985-90 1990-91 1991-92 1992-97 FIRST PLAN SECOND PLAN THIRD PLAN ANNUAL PLANS FOURTH PLAN FIFTH PLAN ANNUAL PLAN SIXTH PLAN SEVENTH PLAN ANNUAL PLAN ANNUAL PLAN EIGTH PLAN 3.6% 4.0% 2.4% SERIOUS DROUGHT 3.7% 3.3% INFLATION 5.0% -6.0% 5.4% 5.9% 5.1% 0.1% 6.8%

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

11

GDP

RECENT DATA ON NATIONAL INCOME 95-96 96-97 97-98

GDP CMP GNP CMP GDP FC GDP GR GDP/CAP GROWTH 11880 11745 10733 7.3% 12670 5.5% 13682 13551 12435 7.8% 14370 5.4% 15224 15092 13900 4.8% 15738 2.7%

98-99
17416 17261 15975 6.5% 17613 3.7%

RS.BN 99-00
19296 19142 17556 6.1% 19123 4.9%

2000-01
20880 20706 18958 4.0% 20320 2.1%

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

12

GDP

TRENDS IN GDP BY INDUSTRY OF ORIGIN

IN(%)

YEAR 1950-51 1970-71 1980-81 1996-97 AGRI 55.3% 44.5% 38.1% 26.1% MFG 16.1% 23.6% 25.9% 31.0% SERVICES 28.5% 31.9% 36.0% 42.9% AT PRESENT THE SHARE OF SERVICES STAND AT ABOUT 54% GROWTH IN SERVICES SECTOR HAS AVERAGED 8.5% DURING 1994-00 THE RISING CONTRIBUTION OF SERVICES IN GDP HAS PROVIDED RESIL IENCE TO THE INDIAN ECONOMY FROM ADVERSE AGRICULTURAL SHOCKS THE DISTRIBUTION OF GDP IN DEVELOPED COUNTRIES INDICATE A MUCH HIGHER SHARE OF INDUSTRY & SERVICES AND A RELATIVE LOW SHARE OF AGRICULTURE
MACROECONOMICS PROF. NAVEEN BHATIANLDIMSR 13

GDP

IMPACT OF AGRICULTURAL GROWTH ON GDP

LAST 16 YRS DATA HAS SHOWN THAT POOR AGRO-GROWTH YEARS HAVE MORE IMPACT ON OVERALL GDP GROWTH RATES THAN ON INFLATION 1-2% DROP IN AGRO-GDP LEADS TO AN OVERALL DROP OF0.3-0.5% APART FROM THIS DIRECT IMPACT THERE COULD BE AN INDIRECT IMPACT ON GROWTH AS WELL TO THE EXTENT THAT REST OF THE ECONOMY DEPENDS UPON RURAL DEMAND. IN THE SIX YRS WHEN THE AGRI GROWTH HAS DROPPED, THE GROWTH IN NON AGRI GDP IN THE NEXT YR WAS 6.4% AS AGAINST 7.2% IN THE OTHER YEARS. THE LAG COULD BE DUE TO THE TIME INVOLVED IN THE REACTION OF RURAL INCOME TO AGRICULTURAL GROWTH. IF THE AGRI SECTOR WITNESSES A DROP THIS YEAR, OTHER SECTORS COULD BE ADVERSLY IMPACTED NEXT YEAR. PAST DATA DOESNT SUGGEST A STRONG IMPACT OF AGRICULTURAL PERFORMANCE ON INFLATION.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

14

GDP

IMPACT OF AGRICULTURAL GROWTH ON GDP A STORNG INDUSTRIAL GROWTH RESTS ON AGRICULTURE GROWTH THROUGH BOTH THE DEMAND AND THE SUPPLY ROUTES. ALTHOUGH THE OVERALL CONTRIBUTION OG AGRICULTURE IN GDP HAS COME DOWN, IN CASE OF SEVERAL STATES THE CONTRIBUTION OF AGRICULTURE TO THE STATE PRODUCT IS CLOSE TO 40 %. IN ANY PROGRAMME OF BALANCED REGIONAL DEVELOPMENT, AGRICULTURE HAS TO PLAY AN IMPORTANT ROLE. TWO-THIRS OF THE POPULATION ARE STILL DEPENDENT ON AGRICULTURE. TO ABSORB THE GROWING LABOUR FORCE AND TO REDUCE THE BACKLOG OF UNEMPLYED, STRONG GROWTH IN AGRICULTURE BECOMES ALMOST IMPERATIVE. ITHAS BEEN ESTIMATED SEVERAL TIMES THAT 50% OF INCREASE IN EMPLYMENT OPPORTUNITIES, WILL HAVE TO COME FROM AGRICULTURE. PLANNING COMMISSION HAS ESTIMATED THAT IF THE OVERALL GDP HAS TO GROW AT 7% AGRICULTURAL OUTPUT MUST INCREASE AT AN ANNUAL RATE OF 4.5% PER ANNUM BETWEEN 1997-2002.
PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

15

GDP

IMPACT OF AGRICULTURAL GROWTH ON GDP

CONSTRAINTS ON FASTER AGRICULTURAL GROWTH: AVAILABILITY OF LAND. DUE TO INCREASING LEVELS OF URBANISATION AND INDUSTRIALISATION. THE PROBLEM IS FURTHER AGGREVATED BY THE FACT THERE IS NO FURTHER SCOPE OF CONVERTING FOREST LAND INTO AGRICULTURAL LAND. IT IS EXPECTED THAT NET SOWN AREA WILL REMAIN CONSTANT AT 142 MILLION HECTARES. WITH THYE NET AREA REMAINING CONSTANT, THE GROS SOWN AREA CAN BE INCREASED ONLY THROUGH ENHANCED CROP INTENSITY. IRRIGATION POTENTIAL HAS TO BE IMPROVED;BETTER WATER RESOUCES MANAGEMENT INCLUDING CONSERVATION AND PRICING OF WATER AND ADEQUATE AGRICULTURAL CREDIT & EXTENSION SERVICES, WHICH RESPONSE QUICKLKY TO THE NEEDS OF THE FARMER. DURING THE LAST THREE DECADES , THE AGRICULTURE SECTOR , THE WORLD OVER HAS REGISTERED A SUBSTANTIAL IMPROVEMENT IN PRODUCTIVITY, MADE POSSIBLE THROUGH HIGH YIELDING VARIETIES OF SEED ;ASSURED SUPPLY BOF WATER AND USE OF CHEMICAL FERTILIZERS AND PESTICIDES. PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

16

GDP

IMPACT OF AGRICULTURAL GROWTH ON GDP

CONSTRAINTS ON FASTER AGRICULTURAL GROWTH: IT IS NOW BECOMING INCREASINGLE CLEAR THAT A VERY HIGH LEVEL OF USE OF INPUTS SUCH AS CHEMICAL FERTILIZERS CAN LEAD TO LAND DEGRADATION AND OTHER ECOLOGICAL AND ENVIRONMENTAL PROBLEMS. TO INCREASE YIELD, THE CONSUMPTION OF FERTILIZERS NEEDS TO GO UP FROM THE CURRENT LEVEL OF 75.26 KG PER HECTARE TO 185.81 KG PER HECTARE. CAN BIOTECHNOLOGY BE AN ANSWER?

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

17

GDP

INDIAN AGRICULTURE IN THE OPEN ECONOMY: ALTHOUGH THERE HAS BEEN NO DIRECT TAXATION OF AGRICULTURE, YET IT HAS PROVED TO BE A HEAVILY TAXED SECTOR. THIS IS DUE TO HIGH PROTECTION TO DOMESTIC INDUSTRY AND AN OVERVALUED EXCHANGE RATE. AGRICULTURE HAD TO BEAR THE BRUNT OF GENERATING RESOURCES FOR THE NEWLY EMERGING INDUSTRIAL SECTOR. AFTER FOUR DECAEDS OF DEVELOPMENT, THE SHARE OF AGRICULTURE IN NATIONAL GDP SLID FROM 56% TO 31% AND ITS SHARE IN THE WORKING POPULATION FELL ONLY MARGINALLY FROM 71% TO 64%. RURAL INDIA APPEARS TO HAVE BEEN BETRAYED, BUT KEPT ALIVE WITH OCCASIONAL INJECTIONS OF TECHNOLOGY AND SUBSIDIES. IN THE 60S , THE PERIOD OF GREEN REVOLUTION WAS MADE POSSIBEL THROUGH PRICE SUPPORT ( FCI) & IMPORT OF HIGH VARIETY SEEDS. BUT THE PERIOD WAS SHORTLIVED.
PROF. NAVEEN BHATIANLDIMSR 18

MACROECONOMICS

GDP

INDIAN AGRICULTURE IN THE OPEN ECONOMY: SINCE THE 80S , AGRICULTURE IS SURVIVING ON AN INCREASING DOSAGE OF INPUT SUBSIDIES, CREATING LARGE PRICE DISTORTIONS, BANKRUPTING THE INPUT SUPPLYING AGENCIES AND PLACING AN UNSUSTAINABLE FINANCILA BURDEN ON THE EXCHEQUER.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

19

GDP

STRUCTURAL TRANSFORMATION OF INDIAN ECONOMY

INDIAN ECONOMY IS PASSING THROUGH A PROCESS OF TRANSITION FROM AGRICULTURE TO INDUSTRIALISATIONTO SERVICES. THE STRUCTURAL CHANGE IS SLOW DUE TO LOWER RATE OF MFG. GROWTH.

THE CHANGING STRUCTURE OF NATIONAL INCOME NEEDS TO BE FURTHER STRENGTHENED BY STEPPING UP INDUSTRIALISATION& AGRICULTURE GROWTH WITH EMPHASIS ON AGRO BASED INDUSTRIES SUPPLYING INPUTS TO AGRI.
IN THE 90S SERVIVES & INDUSTRY HAVE RECORDED HIGHER GROWTH & AGRICULTURE A LOWER GROWTH WITHIN INDUSTRIAL SECTOR MAJOR GROWTH HAS COME FROM MFG. WHILE MINING , ELECTRICITY , GAS & WATER SUPPLY HAVE REGISTERED LOWER GROWTHS PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

20

GDP

RECENT TRENDS IN INDIAS GDP 91-92 92-93 93-94 94-95 GDP 0.8 5.3 6.2 7.8 AGRI -2.3 6.1 3.7 5.4 SER 4.6 5.2 7.1 8.2 MFG. -1.9 4.3 7.6 10.3

95-96 96-97 97-98 99 7.6 7.8 5.0 6.0 3.2 9.4 -1.0 7.6 9.6 7.5 7.8 5.8 13.2 6.7 6.3 4.6

SHARE OF SERVICES HAS SURPASSED SHARE OF AGRI. & MFG IN A SHORT SPAN OF TIME. THIS IS DUE TO THE FACT THAT THE ECONOMY DIDNT HAVE TO PASS THROUGH INCREMENTAL PROCESS OF IMPROVING TECH. IN STAGES FOR ADVANCEMENT OF A STEADY GROWTH PROCESS THE SERVICES SECTOR CONSTITUTE A TAX BASE WITH VAST BUT UNEXPLOITED POTENTIAL. THEREFORE ITS RAPID GROWTH HAS LONG TERM IMPLICATIONS FOR FISCAL POLICY
PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

21

GDP

TRENDS IN INDIAS GDP

PRESENCE OF A GROWTH CYCLE IN INDIAS ECONOMY DISCERNIBLE DOWNTREND IN SECOND HALF OF 90S AFTER A HIGH GROWTH PHASE IN 1994-97 FROM 1997-2001 QUARTERLY GDP GROWTH HAS BEEN AFFECTED BY FLUCTUATION IN AGRICULTURE OUTPUT. THE SLOWDOWN IN INDUSTRIAL OUTPUT IS ATTRIBUTED TO: LOW AGRICULTURE PRODUCTION SUBDUED PERFORMANCE OF INFRASTRUCTURE ( POWER) LOW INVESTMENT ACTIVITY PRESENCE OF EXCESS CAPACITY IN MANY INDUSTRIES THE SLOWDOWN IS MORE IN BASIC GOODS; CAPITAL GOODS & INTERMEDIATE GOODS
PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

22

SAVINGS & INVESTMENTS

SAVINGS PATTERN
HH SAVINGS PUBLIC SEC PVT. SECTOR 93-94 18.4 0.6 3.5 -----22.5 11.0 7.4

% OF GDP
94-95 19.7 1.7 3.5 -------24.9 11.9 7.8 26.0 -1.1% 95-96 18.1 2.0 4.9 ------25.1 8.9 9.3 26.8 -1.7 97 -98 17.8 1.5 4.2 ------23.5 9.9 8.0 24.5 -1.0 98-99 99-00 19.1 19.8 - 0.8 -1.2 3.7 3.2 -------- ----22.0 22.3 10.9 8.2 23.5 -1.5 10.5 9.2 23.2 0.9

HH SAVINGS FINANCIAL PHYSICAL GROSS CAP FORM SAVING INVMT GAP

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

23

SAVINGS & INVESTMENTS

SAVINGS & INVESTMENT

THERE HAS BEEN A STEADY INCREASE IN HOUSEHOLD SAVINGS WITH FINANCIAL SAVINGS OUTSTRIPPING PHYSICAL SAVINGS. THE DECLINE IN PHYSICAL ASSETS IS ON ACCOUNT OF WITHDRAWL OF WEALTH TAX ON FINANCIAL ASSETS AND LOWER RETURNS ON PHYSICAL ASSETS THE PVT SECTOR SAVINGS HAS INCREASED FROM 2.5% IN 80S TO 3.5% IN 90S. OFLATE THERE HAS BEEN A DECLINE IN PVT. SECTOR SAVINGS WHICH CAN BE ATTRIBUTED TO LOWER PROFITABILITY CONDITIONS ASSOCIATED WITH THE SLACKENING OF INDL. ACTIVITY AS WEEL AS SUBDUED CAPITAL MARKETS NET FLOW OF EXTERNAL SAVINGS HAS REMAINED AROUND 1.4% ( CAD)

THERE HAS BEEN A DECLINE IN PUBLIC SECTOR SAVINGS ON AC OF HIGH AND CONTINUING FISCAL DEFICIT. PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

24

SAVINGS & INVESTMENTS

SAVINGS & INVESTMENT

THE SAVINGS RATE HS INCREASED FROM 10.77% OF GDP IN THE 1950 TO 18.91% IN 1970S AND IN THE NINETIES THE SAVINGS RATE HAS GONE UP TO 26.1% ICOR- INCREMENTAL CAPITAL TO OUTPUT RATIO HAS TOUCHED A HIGH OF 5.76 IN THE SEVENTIES AND IN THE RECENT PAST IT HAS BEEN AROUND 4. THE SOUTH EAST ASIAN ECONOMIES HAVE GROWN AT AN AVERAGE RATE OF MORE THAN 7% FOR THE PAST 25 YEARS. THE PER CAPITA GNP IN 1995 OF SOUTH KOREA , MALAYSIA AND THIALAND WERE $ 11,450, $9021,AND $ 7540 RESPECTIVELY IN COMPARISION WITH $1400 OF INDIA. WITH THE REFORMS , IT IS EXPECTED THAT THE PRODUCTIVITY & EFFICIENCY OF THE SYSTEM WOULD IMPROVE AS BARRIERS TO ENTERY AND GROWTH HAVE BEEN DISMANTLED. DURING THE THREE YEAR PERIOD 1994-97 THE GROWTH RATE HAS EXCEEDED 7.5%.THE DECLINE THEREAFTER HAS BEEN DUE TO DECLINE IN INDUSTRIAL PRODUCTION AND AGRICULTURE. THE TWO SEGMENTS OF INDUSTRIAL PRODUCTION WHICH HAVE SHOWN SHARP FLUCTUATIONS HAVE BEEN THE CAPITAL GOODS SECTOR AND THE DURABLE CONSUMPTION GOODS SECTOR. EXCESS CAPACITY WAS BUILT-UP IN SEVERAL INDUSTRIES SUCH AS AUTOMOBILES WHICH IS BEING ELIMINATED AND THIS IS A PAINFUL PROCESS. IT HAS BEEN THE XPERIENCE OF MANY COUNTRIES THAT THE CAPITAL GOODS SECTOR AND THE DURABLE CONSUMPTION GOODS SECTIR ARE SUBJECT TO CYCLICAL FLUCTUAIONS. TRENDS HAVE SHOWN THAT SUSTAINING A HIGH GROWTH RATE IN INDUSTRIAL PRODUCTION REQUIRES A STEADY GOWTH IN AGRICULTURE AND AN IMPROVEMENT IN THE GROWTH OF EXPORTS.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

25

SAVINGS & INVESTMENTS

SAVINGS & INVESTMENT

INFRASTRUCTURE PRODUCTIVITY WILL DETERMINE HOW INDIA WILL COPE WITH THE INCREASING PACE OF URBANISATION, GLOBALISATION AND TECHNOLOGICAL INNOVATIONS IN MANUFACTURING. THE FINANCING REQUIREMENTS OF INFRASTRUCTURE AS A WHOLE ARE MASSIVE. IN ORDER TO ACHIEVE THE DESIRED LEVELS OF INVESTMENTS, BOTH PUBLIC AND PRIVATE, IT IS ESSENTIAL THAT THE ISSUES OF APPROPRIATE PRICING AND COST RECOVERY BE TACKLED AT THE EARLIEST WITH TRANSPARENT AND EXPLICIT SUBSIDISATION WHWERE NEEDED, THE PROCESS OF DEREGULATION AND PRIVATISATION OF INFRASTRUCTURE SERVICES MUST BE SUPPLEMENTED BY THE ESTABLISHMENT OF STAUTORY AND REGULATORY AUTHORITIES FOR ENSURING FAIR COMPETETION AMONG PUBLIC AND PRIVATE OPERATORS AND PROTECTING COMSUMER INTERESTS, PUBLIC SAFETY AND ENVIRONMENTAL CONCERNS.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

26

SAVINGS & INVESTMENTS

BREAKUP OF HOUSEHOLD SAVINGS IN FINANCIAL ASSETS RSBN
FINANCIA L ASSETS % OF GDP FIN LIAB. NET SAVINGS 97-98 1717 11.3 249 1468 98-99 2097 11.9 267 1830 99-00 2441 12.5 358 2084 00-01 2647 12.1 358 2289

SAVINGS AS PERCENT OF GFA & GDP FOR FY2000-01 ITEM % OF GDP CURRENCY 0.8 DEPOSITS 5.4 CLAIMS ON GOVT. 1.6 INVMT. IN SHARES/DEB. 0.3 CONTRACTUAL SAVINGS 4.0

% GFA 6.4 44.3 13.1 2.7 33.4

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

27

SAVINGS & INVESTMENT

SAVINGS INVESTMENTS BALANCES (GAP)

PVT. SECTOR PUBLIC SECTOR NET EXTNL INFLO 94-97 6.4% -6.0% 1.4 97-98 5.7% -5.1% 1.5 98-99 8.0% -7.2% 1.0 99-00 7.8% -8.2% 1.0

SOURCES OF GROWTH IN INDIAN ECONOMY:

THE DECELERATION IN THE ECONOMIC ACTIVITY IN 2000-01 IS OFTEN ASCRIBED TO COMPLETION OF A CYCLICAL CATCH-UP FOLLOWING A PHASE OF HIGH EXPANSION IN THE WAKE OF INSTITUTIONAL REFORMS POST WORLD WAR II DEVELOPMENT ECONOMICS HAS EVOLVED AROUND THE CENTRAL ROLE OF CAPITAL ACCUMULATION IN GROWTH. SUBSEQUENTLY ROLE OF TECHNOLOGY HAS BEEN EMPHASISED PROF. NAVEEN BHATIANLDIMSR

MACROECONOMICS

28

SAVINGS & INVESTMENT

SOURCES OF GROWTH IN THE INDIAN ECONOMY CROSS COUNTRIES STUDIES RELATING TO DEVELOPING COUNTRIES SUGGEST THAT: CAPITAL ACCUMULATION AC. FOR 60-70% OF PER CAPITA GROWTH INCREASES I EDUCATION & HUMAN CAPITAL FACTOR FOR 10-20% REMAINING 10-30% IS DUE TO IMPROVEMENTS IN TFP ( TOTAL FACTOR PRODUCTIVITY) TFP ACCOUNTS FOR 55% GROWTH IN HONGKONG SINGAPORE KOREA & TAIWAN

EACH COUNTRY GROWTH PERFORMANCE DEPENDS UPON NO. OF CONDITIONAL FACTORS INCLUDING NATURAL ENDOWMENTS, MACROECONOMIC STABILITY, OUTWARD ORIENTATION& STATE OF FINANCIAL DEVELOPMENT. IN INDIA GDP GROWTH WAS 2.9% IN 1970S;5.8% IN 1980s AND 6.4% IN THE 1990s RATE OF NET FIXED CAPITAL ACCUMULATION INCREASED FROM 3.6% IN 70s TO 4.2% IN 80s & FURTHER TO 5.3% IN 90S. THE GROWTH OF EMPLOYMENT HOWEVER DECLINED WHICH SUGGEST AN INCREASE D SUBSTITUTION OF CAPITAL FOR LABOUR IN RECENT YRS. RECENT STUDIES HAVE SHOWN POSITIVE RATES OF GROWTH OF PRODUCTIVITY IN MFG SECTOR

MACROECONOMICS

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29

SAVINGS & INVESTMENT

SOME STUDIES HAVE HIGHLIGHTED THE EXISTENCE OF INCREASING RETURNS TO SCALE OF PRODUCTION WITH GAINS IN FACTOR PRODUCTIVITY ATTRIBUTED TO INFRASTRUCTUR; HUMAN CAPITAL ACCUMULATION ND EXPANSION IN EXTERNL TRADE. THE INCREASING ADAPTABILITY OF NEWER TECHNOLOGIES; EXPANSION OF MARKET SIZE BEING FACILITATED BY DISMANTLING OF BARRIERS AND OUTWARD ORIENTATION OF ECONOMY ARE FACTORS ATTRIBUTED TO EXISTENCE OF INCREASING RETURNS TO SCALE OF PRODUCTION IN THE INDIAN ECONOMY. RECENT STUDIES IN INDIA HAVE SHOWN THAT CAPITAL ACCUMULATION ACCOUNTS FOR 59% OF GROWTH AND LABOUR FOR 37% STRATEGIES FOR GROWTH IN THE MEDIUM TERM WOULD HINGE AROUND SUBSTANTIAL INCREASE IN CAPITAL ACCUMULATION ALONG WITH IMPROVEMENT IN FACTOR PRODUCTIVITY. THIS IN TURN WOULD DEPEND UPON EFFORTS TO MOBILISE CONSIDERABLY HIGHER SAVINGS THAN ACHIEVED SO FAR.

SOURCES OF GROWTH IN THE INDIAN ECONOMY

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

30

SAVINGS & INVESTMENT

SOUCES OF GROWTH IN THE INDIAN ECONOMY

THE OBSTACLES TO GROWTH AT PRESENT INCLUDE: DELAYS & INADEQUACIES IN FISCAL ADJUSTMENT. THE TIGHTENING INFRASTRUCTURAL CONSTRAINT. CONTINUING HIGH LEVEL OF POVERTY. RIGIDITIES IN THE LABOUR MARKET. CAPITAL & TECHNOLOGY GAPS IN AGRICULTURAL SECTOR.

MACROECONOMICS

PROF. NAVEEN BHATIANLDIMSR

31

GDP

DEMAND DISTRIBUTION OF NOMINAL GDP (PERCENT)

95-97 97-98 98-99 99-00 PVT. CONSUMP. 64.9 63.7 64.6 64.5 GOVT.CONSUMP. 10.7 11.3 12.0 12.9 PVT CAPITAL 15.3 15.4 15.0 14.9 GOVT. CAP FORM 7.8 6.4 6.3 6.4 CHANGES IN STOK 1.0 1.2 -0.1 1.4 EXPORTS 10.5 10.9 11.1 11.8 IMPORTS 11.4 12.1 12.8 13.1 CAD -0.9 -1.2 -1.7 - 1.3 PVT. CONSUMPTION GROWTH AVG. MOVED DOWN FROM 6.3% IN 94-97 TO 4.3% IN 1997-00. GROWTH RATE OF GOVT. EXPENDITURE MOVED UPTO 12.6 % IN 97-00 FROM AN AVG. OF 4.6% IN 1994-97. THE GROWTH OF INDUSTRIAL OUTPUT SLOWED DOWN TO 5.1% DURING 2000-01 FROM6.7% IN 99-00 DUE TO LOW AGRI PROD, LOW INVMT. ACTIVITY & PRESENCE OF EXCESS CAPACITY IN MANY INDUSTRIES. PROF. NAVEEN BHATIANLDIMSR

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CONCERNS FOR SUSTAINABLE ECONOMIC GROWTH

THE RATE OF CAPITAL FORMATION HAS BEEN DECLINING IN LATE 90s WHICH REFLECTS INADEQUATE RESPONSE OF PVT. INVESTMENT TO CURRENT STATE OF STRUCTURAL REFORMS & DECELERATION IN PUBLIC INVESTMENT. INFRASTRUCTURAL CONSTRAINTS. INDIA IS NOT IMMUNE TO THE SLOWDOWN PHASE OF THE GLOBAL BUSINESS CYCLE CYCLICAL IMPEDIMENTS: SLOWDOWN IN AGGREGATE DEMAND SLOWDOWN IN INVESTMENT DEMAND STRUCTURAL IMPEDIMENTS: AGRI: FALLING CAP. FORMATION LOSS OF PACE IN TECH. UPGRADATION DEFECIENCIES IN PHYSICAL & SOCIAL INFRAST.
PROF. NAVEEN BHATIANLDIMSR

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CONCERNS FOR SUSTAINABLE ECONOMIC GROWTH

THERE HAS BEEN A DROP IN CAPITAL FORMATION IN AGRI SECTOR. AGRI DEVELOPMENT REPRESENTS THE CONVERGENCE OF THE MAIN OBJECTIVES OF ECONOMIC POLICY IN INDIA, GROWTH STABILITY & POVERTY ALLEVATION. AGRICULTURE CONTINUES TO PROVIDE EMPLOYMENT OPP. TO 2/3 OF POPULATION. AGRICULTURE ALSO CONTRIBUTES TO 20% OF INDIAS TOTAL MERCHANDISE EXPORTS AGRICULTURE STILL CONTINUES TO PLAY A CRITICAL ROLE IN DETERMINING THE MACRO ECONOMIC BALANCES ESPECIALLY IN GENERATING PVT. CONSUMPTION DEMAND GIVEN THE OVERALL CONSTRAINT OF RESOUCES A CONSCIOUS CHOICE HAS TO BE MADE BETWEEN SUBSIDIES & INVESTMENT. IN ORDER TO OBTAIN TARGET GROWTH OF 8% GDP IN THE 10TH PLAN, INDUSTRY IS REQUIRED TO GROW OVER 10% ESPECIALLY IN AN ENVIRONMENT OF HEIGHTENED COMP. FROM IMPORTS FOLLOWING REMOVAL OF QUANTITATIVE RESTRICTIONS THE IMPETUS FOR ACCELERATED INDUSTRIAL GROWTH COULD BE REALISED BY SUBSTANTIALLY RAISING INVESTMENT IN INFRASTRUCTURE, HASTENING DISINVESTMENT PROCESS AND RESTRUCTURING PSUs. PROF. NAVEEN BHATIANLDIMSR

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CONCERNS FOR SUSTAINABLE ECONOMIC GROWTH

EXPEDITE SECOND GENERATION REFORMS. VIZ: LABOUR REFORMS; INDUSTRIAL SICKNESS POLICY REFORMS & BANKRUPTCY LAWS CURRENT ACCOUNT DEFICIT DROPPED TO 0.5% IN 2000-01 AND +IVE IN 01-02. PRELIM. PROJECTIONS OF 10TH 5 YR. PLAN INCORPORATE AN AVERAGE CAD OF 2.8% PA. THIS WOULD IMPLY THAT NET CAPITAL INFLOWS WOULD HAVE TO INCREASE FROM PRESENT LEVEL OF US $10BN TO U.S $ 40 BN BY 2007. FISCAL STABILITY IS CRUCIAL FOR ACHIEVING TARGETS BEING ENVISAGED FOR THE 10TH 5 YEAR PLAN. PUBLIC SECTOR SAVINGS OF 4.6% OF GDP AND REDUCTION OF COMBINED FISCAL DEFICIT TO 3.3% ARE KEY FISCAL INDICATORS CONSISTENT WITH PLAN TARGET. REVERSAL OF THE TREND OF DECLINING TAX/GDP RATIO I.E FROM 16% IN 1980s TO 14% IN 1999-2000. NON TAX REVENUE /GDP RATIO HAS STAGNATED AROUND 2.5% IN 1990s . AMONG THE NON TAX REVENUES , ESPECIALLY COST RECOVERY IN RESPECTOF COMMERCIALM SERVICES LIKE WATER & POWER IS VERY ESSENTIAL. T THIS REQUIRES IMPROVEMENT IN SETTING & COLLECTION OF USER CHARGES& EXTN. OF USER CCHARGES TO NON MERIT GOODS. PROF. NAVEEN BHATIANLDIMSR

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CONCERNS FOR SUSTAINABLE ECONOMIC GROWTH

EXPENDITURE MANAGEMENT: PHASED PROGRAMME OF COMPLETE DECONTROL OF UREA BY 2006. DOWNSIZING OF STAFF INTERNAL DEBT MANAGEMENT THE SIZE OF GOVT. BORROWING IS ONLY ONE ELEMENT IN GOVT. DEBT MGMT ANOTHER MAJOR PROBLEM IS BALLOONING OF PENSION LIABILITIES OF PUBLIC SECTOR ALIGNMENT OF INTEREST RATES ON SMALL SAVINGS INSTRUMENTS WITH THOSE ON SIMILAR INSTRUMENTS OFFERED BY BBANKS & FIS. STATES TO RENEGOTIATE LOANS WITH CENTRE TO REDUCE INTEREST EXPENDITURE.

FACTORS EFFECTING THE DOWNWARD FLEXIBILITY OF INTEREST RATES HIGH OPERATING EXPENSES OF PSU BANKS AND LARGE NPAS LEVELS FIXED INTEREST RATES ON FIXED DEPOSITS LARGE & PERSISTENT INCREASE IN THE SIZE OF GOVTS MARKET BORROWINGS FLOOR SET BY ADMINISTERED INTEREST RATES ON CONTRACTUAL SAVINGS HIGH LEVEL OF CRR ( WHICH IS NOW COMING DOWN)

MACROECONOMICS

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