TOPIC-ANALYSIS OF ECONOMIC REFORMS IN INDIA

ECONOMIC REFORMS IN INDIA

The economic reforms or liberalization in India mark a shift from socialist economy
to a market economy. Initiated by the then Indian Prime Minister P.V. Narasimha
Rao and his Finance Minister Manmohan Singh, their immediate cause was a
foreign exchange crisis during Chandrashekhar government when India had to sell
its gold reserves. Reforms ended the Licence Raj (investment, industrial and import
licensing) and several public monopolies.

The UF government brought a budget that encouraged reforms but the 1997 Asian
financial meltdown and political instability caused economic stagnation. The
Vajpayee administration continued with privatization, reduced taxes, introduced a
firm fiscal policy aimed at lessening deficits and debts and enhanced initiatives for
public works.

India under Nehru and Congress followed the Soviet model of planned economy to
rid India of the exploitive colonial British economic policy and its vestiges after
independence. Five-Year Plans achieved much but also led to heavy centralization,
inefficient State capitalism, State monopolies in mining, machine tools, water,
telecommunications, insurance, and electrical plants. The so-called Hindu rate of
growth became a joke as India stagnated at 3.5% from 1950s to 1980s, while per
capita income averaged 1.3%, even as Pakistan grew by 8%, Indonesia by 9%,
Thailand by 9%, South Korea by 10% and in Taiwan by 12%.

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Today, the private sector has become an active participant in the
telecommunications sector. Insurance has been opened to private investors, both
domestic and foreign. The economy has grown at more than 6 per cent, coupled
with full macroeconomic stability. The rate of inflation is once again coming down
after spiraling alarmingly.

Rising incomes have helped reduce poverty. According to official figures, the
proportion of poor in total population has declined from 40 per cent in 1993-1994 to
26 per cent in 2000.

Most importantly, the attitude toward reforms has changed. Virtually every political
party today recognizes the need for continued reforms.

Though slow pace of reforms is credited with India’s firm fundamentals and
weathering the shock of global economic depression, yet all is not well with India’s
reforms and the fiscal deficit remains in doldrums. The combined deficit at the
Centre and States exceeds 10 per cent of GDP. This deficit is unsustainable; it is
also crowding out private investment.

Infrastructure like roads, railways and ports all need expansion. Improvement in
quality of service and delivery systems is a must. The government has recently
started building roads, but the pace remains slow. India’s power sector is also in a
horrible State.

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Economic reforms have bypassed agriculture. Farmers are committing suicide and
do not get full market price for their product. Procurement prices are below the
market price. Further, export restrictions must be phased out.

If India grows at 6 per cent per annum on a sustained basis, it will take 14 years to
reach the current level of per capita income of People’s Republic of China, 36 years
to reach Thailand’s, and 104 years to reach that of the United States.

Thus, the need for accelerated growth can hardly be overemphasized.

 Economic planning in India was started in 1950 after independence, it was
deemed necessary for the economic development and growth of the nation.
Through economic planning, growth and development in India can be divided
into two parts (i) Phase I reforms and (ii) Phase II reforms.

(i) Reforms in Phase I:

 The post-independence period of India was marked by economic policies

which tried to make the country self-sufficient. Under the economic reform,
stress was given more to the development of defence, infrastructure, and
agricultural sectors. Government companies were set up and investment was
done more in the public sector. This was made to make the base of the country
stronger. New roads, rail lines, bridges, dams, and lots more were constructed
to, strengthen the infrastructure.
 During the Five Years Plans initiated in the 1950s, India9s economic reforms
somewhat followed the democratic socialist principle with more emphasis on
the growth of the public and rural sectors.
 Most of the policies were meant for the increase of exports compared to
imports, central planning, business regulation, and also the intervention of the
state in the finance and labor markets.
 In the mid-850s huge scale nationalization was done to industries like mining,
telecommunications, electricity, and so on.
 Policy tended towards protectionism, with a strong emphasis on import
substitution, industrialization under state monitoring, and state intervention at
the micro level in all businesses, especially in labor and financial markets, a
large public sector, and business regulation.
 Under the Industrial Development Regulation Act of 1951, steel, mining,
 machine tools, water, telecommunications, insurance, and electrical plants,
among other industries, were effectively nationalized.
 Elaborate licenses, regulations, and the accompanying red tape, commonly
referred to as Licence Raj, were required to set up business in India between
1947 and 1990.
 During the mid-1960 effort was made to make India self-sufficient and also
increase the production and export of food grains. The government initiated
the 'Green Revolution' movement and stressed better agricultural yield through
the use of fertilizers, improved seeds, and lots more.
 New irrigation projects were undertaken and rural banks were also set up to
provide financial support to the farmers.
 In 1966, India had just embarked on its first experiment with broad-based
economic liberalization with a characteristic combination of whim, status quo-
ism, and bad economics. Reforms were a precondition for a much-needed
increase in foreign aid. Unfortunately, neither did the increase in aid
materialize, nor did the reforms survive.
 In 1969, the Government of India nationalized 14 major private banks; one of
the big banks was the Bank of India. In 1980, 6 more private banks were
nationalized. The goal of the nationalization of banks is to stimulate new
entrepreneurs and improve all backward areas by promoting quick growth in
agriculture, small industries, and export. This was part of a larger political
strategy to limit big commercial interests.
 The Privy Purse was a type of payment paid to the royal family of all former
princely states as part of their agreement to integrate with India in 1947 and
then merge their kingdoms in 1949, in which they lost all ruling rights. Privy
Purse was discontinued under Prime Minister Indira Gandhi's regime, after the
26th Amendment in 1971, using which all their privileges and allowances
from the Centre were rendered invalid.
 The reforms of the 1980s witnessed rather limited deregulation and 'partial
 liberalization of only a few aspects of the existing control regime.
 But the reforms of the 1980s, which were under the influence of the famous
'Washington Consensus' ideology had a crippling impact on the economy.
 The whole Seventh Plan (1985-90) promoted further relaxation of market
regulations with heavy external borrowings to increase exports (as the thrust
of the policy reform).

By 1985, India had started having balance of payment problems. This is due to
more expenditure by the government whereas the income generated was less.
In addition, there were huge disparities between income and expenditure. By
the end of 1990, it was in a serious economic crisis. The government was close
to default, its central bank had refused new credit. In 1991, India met with an
economic crisis – related to external debt.
 Due to the economic crisis, India launched a process of Economic Reforms on
July 23, 1991, during the Narasimha Rao government. Though liberal policies
were announced by the government during the 1980s with the slogan of
economic reforms they didn't materialize much, thus economic reforms were
launched with full conviction in the early 1990s.

Reasons for Major Economic Reforms:

 The Collapse of the Soviet Union

 The Gulf War

 Political Uncertainty

 Rising Fiscal Deficit

 Grave External Payment Crisis (Balance of Payment)

 Gulf Crisis

 High ratio of deficit funding

 Failure of state-owned enterprises

 Decrease in foreign exchange reserves

 Reform measures:

1. Macroeconomic Stabilization Measures

 It includes all those economic policies which intend to boost the aggregate
demand in the economy-be domestic or external.
 For the enhanced domestic demand, the focus has to be on increasing the

purchasing power of the masses, which entails an emphasis on the creation of

gainful and quality employment opportunities.

2. Structural Reform Measures

 It includes all the policy reforms which have been initiated by the government
to boost the aggregate supply of goods and services in the economy.
 It naturally entails unshackling the economy so that it may search for its

potential for enhanced productivity.

 For the purchasing capacity of the people to be increased, the economy needs
increased income, which comes from increased levels of activity.

 Income so increased is later distributed among the people whose purchasing

power has to be increased.
 This will take place by property initiating a suitable set of macroeconomic

policies.
 New Economic Policy:
 New Economic Policy was based on LPG or Liberalization, Privatization, and
Globalization model.
 These three processes specify the characteristics of the reform process India

initiated.

 Precisely seen, liberalization shows the direction of reform, privatization

shows the path of reform and globalization shows the ultimate goal of the
reform.

 Liberalization:

Liberalization was done in various sectors in the following ways:

1. Deregulation/Delicensing of the Industrial Sector:

 Industrial licensing was abolished for almost all products. But product
categories- alcohol, cigarettes, hazardous chemicals, industrial explosives,
electronics, aerospace, and drugs and pharmaceuticals were regulated.
 Many industries which are reserved for the public sector have now been
"dereserved". Only railways, defense equipment, and atomic power generation
have been reserved for the public sector.
 The market has been allowed to determine the prices.

2. Financial Sector Reforms:

 Reduce the role of RBI from the regulator to the facilitator of the financial
sector.
 These reforms led to the establishment of private banks.

 FDI in banks was raised to 50%.

 But certain managerial aspects have been retained with the RBI, to safeguard
the interests of the account holders.

 Foreign Institutional Investors (FII) like merchant bankers, mutual funds, and
pension funds are now allowed to invest in Indian financial markets.

3. Tax Reforms:
 The very high corporate tax earlier has been gradually reduced. Efforts have
also been made to reform indirect taxes.
 The tax procedures have been simplified and the rates also have been lowered.

1973-74-Eleven tax slabs, with rates from 10 to 85 percent.

1990-91-In five Budgets between 1991-96, FM Manmohan Singh reduces IT
slabs to three (20, 30, and 40 percent).

4. Foreign Exchange Reforms (External Sector Reforms):

 The rupee was "devalued" against foreign currencies which led to an increase
in the inflow of foreign exchange.
 The market has been allowed to determine the foreign exchange rates.

5. Trade and Investment Policy Reforms:

 Dismantling of quantitative restrictions on imports and exports.

 Reduction of tariff rates (taxes on imports).

 Removal of licensing procedures for imports except in case of hazardous and

environmentally sensitive products.
 Export duties have been removed to promote exports.
  Privatization:

 Privatization means the transfer of assets from the public sector to the private
sector.
 Privatization helps in improving financial discipline and to facilitate
modernization.
 Privatization helps in the strong inflow of FDIs.

 Disinvestment: Privatization of public sector enterprises by selling off part of

the equity of PSES to the public is called Disinvestment.
 Criticism:

1. Assets of PSUs have been undervalued.

2. The money from disinvestments was diverted to meet the shortage in

government revenue rather than in creating new assets.

 Globalization:

 Globalization is the process of international integration arising from the

interchange of world views, products, ideas and mutual sharing, and other
aspects of culture.
 Outsourcing: In Outsourcing, a company hires regular service from external
sources, which was hitherto provided internally. It is an outcome of
globalization. Thanks to the new economic policy, India became a major
source of outsourcing jobs. Eg: BPO, banking services, etc.,
 World Trade Organisation (WTO): WTO was established to administer all
multilateral trade agreements by providing equal opportunities to all countries
in the international market for trading purposes. India has been an active
 member of WTO, which aims to enlarge trade between countries.

(ii) Reforms in Phase II:

Though there were no such announcements or proposals when India launched

its reforms in 1991, in the coming times, many 'generations' of reforms were
announced by the governments. A total of three generations of reforms have
been announced.

 First Generation Reforms (1991-2000)

The reforms undertaken from 1991-2000 are called by the government the
First Generation of Reforms. The features of the First Generation Reforms
were:

(i) Promotion to Private Sector

 This included various important and liberalizing policy decisions, i.e., de

reservation' and delicensing of the industries, abolition of the MRTP limit,
abolition of the compulsion of the phased production and conversion of loans
into shares, simplifying environmental laws for the establishment of
industries, etc.

(ii) Public Sector Reforms

 The steps are taken to make the public sector undertakings profitable and
efficient, their disinvestment (token), their corporatization, etc., were the
major parts of it.
 (iii)External Sector Reforms
 They consisted of policies like abolishing quantitative restrictions on the
import, switching to the floating exchange rate, full current account
convertibility, reforms in the capital account, permission to foreign investment
(direct as well as indirect), promulgation of a liberal Foreign Exchange
Management Act (the FEMA replacing the FERA), etc.

(iv) Financial Sector Reforms

 Several reform initiatives were taken up in areas such as banking, capital
market, insurance, mutual funds, etc.

(v) Tax Reforms

 This consisted of all the policy initiatives directed towards simplifying, broad
basing, modernizing, checking evasion, etc.
 A major re-direction ensued by this generation of reforms in the economy-the

'command' type of the economy moved strongly towards a market-driven

economy, private sector (domestic as well as foreign) to have greater
participation in the future.

 Second Generation Reforms (2000-01 Onwards)

Reforms of the 1990s were not effective enough, so another set of reforms was
required. These reforms were not only deeper and delicate but required higher
political willpower from the governments. The features of such reforms are:

(i) Factor Market Reforms

 Considered the backbone for the success of the reform process in India, it
consists of dismantling the Administered Price Mechanism (APM).
 There were many products in the economy whose prices were fixed /regulated

by the government, viz., petroleum, sugar, fertilizers, drugs, etc.

 Though a major section of the products under the APM was produced by the
private sector, they were not sold on market principles which hindered the
profitability of the manufacturers as well as the sellers and ultimately the
expansion of the concerned industries leading to a demand-supply gap.
 Under market reforms, these products were to be brought into the market fold.

 But we cannot say that the Factor Market Reforms (FMRs) are complete in
India. It is still going on.
 Cutting down subsidies on essential goods is a socio-political question in

India.
 Till market-based purchasing power is not delivered to all consumers, it would
not be possible to complete the FMRs.

(ii) Public Sector Reforms

 The second generation of reforms in the public sector especially emphasizes

areas like greater functional autonomy, frees leverage to the capital market,
international tie-ups and Greenfield ventures, and disinvestment.

(iii) Reforms in Government and Public Institutions

 This involves all those moves which go to convert the role of the government
from the 'controller' to the 'facilitator' or the administrative reform, as it may
be called.

(iv) Legal Sector Reforms

 Though reforms in the legal sector were started in the first generation itself,
 now it was to be deepened and newer areas were to be included, such as,
abolishing outdated and contradictory laws, reforms in the Indian Penal Code
(IPC) and Code of Criminal Procedure (CrPC), Labour Laws, Company Laws
and enacting suitable legal provisions for new areas like Cyber Law, etc.

(v) Reforms in Critical Areas

 The second-generation reforms also commit to suitable reforms in the

infrastructure sector (i.e, power, roads, especially as the telecom sector has
been encouraging), agriculture, agricultural extension, education, healthcare,
etc. These areas have been called by the government 'critical areas'.

 Third Generation Reforms

 Announcements of the third generation of reforms were made on the margins
of the launching of the Tenth Plan(2002-07).
 This generation of reforms commits to the cause of a fully functional
Panchayati Raj Institution (PRis), so that the benefits of economic reforms, in
general, can reach the grassroots.
 Though the constitutional arrangements for a decentralized developmental
process were already effected in the early 1990s, it was in the early 2000s that
the government gets convinced of the need for 'inclusive growth and
development.
 Till the masses are not involved in the process of development, the
development will lack the 'inclusion' factor, it was concluded by the
government of the time.
 Impacts of Economic Reforms

 Positive Impacts:  Negative Impacts:

 Increase in foreign investment  The agriculture sector of the

and/or foreign direct investments Indian economy was somehow
in the Indian economy. neglected in the economic reforms
 Increase in foreign exchange since 1991.
reserves.  The public investment in the
 A decrease in the Inflation rates. agricultural sector was reduced,
 Increase in the national income. and subsidies on fertilizers were
Increase in the exports of the removed. Hence it led to an
country. increase in the cost of production
 Increase in growth of the service which affected many marginal and
sector. Consumer sovereignty. small farmers.
 The price rise during the reforms  Jobless growth.

was also kept under control.  A rise in income inequalities in the

country
 Adverse effects of the

disinvestment policies could be

seen
 Spread of consumerism

 Encouragement of economic
colonialism
 Cultural erosion
 Latest Economic Reforms

 Towards the end of 2011, the second UPA Coalition Government initiated the
introduction of 51% Foreign Direct Investment in the retail sector. But due
to pressure from coalition parties and the opposition, the decision was delayed.
It was later approved in December 2012.
 The second NDA Government also opened up the coal industry through the

passing of the Coal Mines (Special Provisions) Bill of 2015. It effectively

ended the state monopoly over the mining of the coal sector and opened up for
private, and foreign investments, as well as private sector mining of coal.
 The Government introduced the Undisclosed Foreign Income and Assets

(Imposition of Tax) Bill, 2015, popularly known as the Black Money Bill. It
aims to curb black money, or undisclosed foreign assets and income, and
imposes tax and penalty on such income. The Act is effective from 1 July
2016 onwards (Assessment Year 2016-17) and extends to the whole of India.
 In 2015, the government of India eased restrictions on foreign direct
investment (<FDI=) in India to promote the 8Make in India9 and 8Startup
India9 initiatives. The reforms are wide-ranging and aim to ease doing
business, simplifying and rationalizing the process of FDI. The key highlight
of the recent reforms is that more FDI proposals in more sectors will now be
placed under the automatic route and not require the consent of the
government. Of particular note is the liberalization in the Broadcasting,
Construction, Defense, and Single Brand Retailing sectors.
 In the 2016 budget session of Parliament, the Modi-led NDA Government
pushed through the Insolvency and Bankruptcy Code to create time-bound
processes for the insolvency resolution of companies and individuals.
 On November 8, 2016, Prime Minister Narendra Modi announced
'Demonetisation' to weed out black money from the country. The move,
 which saw the currency notes of Rs 500 and Rs 1,000 denominations getting
banned, wiped out 86% of India's currency overnight.
 On 1 July 2017, the NDA Government under Modi approved the 'Goods and
Services Tax Act' after the legislation was first proposed 17 years earlier

under the NDA Government in 2000 to replace multiple indirect taxes with a
unified tax structure.
 On 20 September 2019 Finance Minister Nirmala Sitharaman announced a
reduction of the base corporate tax rate from 30% to 22% for companies that
do not seek exemptions and reduced the rate for new manufacturing
companies from 25% to 15%.
 The Indian agriculture acts of 2020, often termed the Farm Bills, were three
acts initiated by the Parliament of India in September 2020. The Lok Sabha
approved the bills on 17 September 2020 and the Rajya Sabha on 20
September 2020. The President of India, Ram Nath Kovind, gave his assent on
27 September 2020. The Farm Acts:
1. Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act,
2020
2. Farmers (Empowerment and Protection) Agreement on Price Assurance
and Farm Services Act, 2020
3. Essential Commodities (Amendment) Act, 2020
 The Central Government on recommendations of The Second National
Commission on Labour proposed to replace 29 existing Labour Laws with
four Codes to simplify and modernize labor regulation. The major challenge
was to facilitate employment growth while protecting workers' rights. The
Labour Codes which were passed in both the Houses of the Parliament and
received Presidential Assent are as follows:
1. Occupational Safety, Health & Working Conditions Code, 2020
2. Social Security Code, 2020
 3. Industrial Relations Code, 2020
4. Wages Code, 2019

Impacts

 Impact on FDI:

a. For the Indian economy which has tremendous potential, FDI has had a
positive impact.
b. FDI inflow supplements domestic capital, as well as the technology and
skills of existing companies.
c. It also helps to establish new companies, All of these contribute to the
economic growth of the Indian Economy.

 Impact on Black Money Bill:

a. Failure to furnish a return in respect of foreign assets and bank accounts

or income will be punishable with rigorous imprisonment for a term of
six months to seven years.
b. Abetment or inducement to make a false return or a false account or
statement or declaration will be punishable with rigorous imprisonment
from 6 months to 7 years.
c. Penalty for non-disclosure of income or an asset located outside India
will be equal to three times the normal tax rate of 30 percent.
d. Failure to furnish the return in respect of foreign income or assets shall
attract a penalty of Rs 10 lakh.
 Impact on Demonetisation:
a. Because of demonetization, there is less liquidity and less cash flow in
the market.
b. After demonetization, terrorist activities in the valley had reduced
significantly.
 c. The Indian Government had seemed as if less prepared for the move and
most of the Indians were finding it difficult to get cash in hand for day-
to-day needs.
d. Small businesses vanished due to the worst hit by demonetization
implementation in India. Cash payments to workers and employees are
still practiced in small-scale businesses. So as India faced a cash crunch,
small business units were not able to pay their workers.
 Impact on GST:
a. With GST, India is now a unified market and foreign investments have
increased in India. The implementation of the Goods and Services tax
puts India in line with international tax standards, making it easier for
Indian businesses to sell in the global market.
b. Before GST, there were so many taxes and now they have replaced all
these taxes and duties with Central GST and State GST.
c. GST is being referred to as a single taxation system but in reality, it is a
dual tax because both the state and center both will collect separate taxes
on a single transaction of sale and service.
d. Economists think that GST in India has already had a negative impact on
the real estate market. It has added up to 8 percent to the cost of new
homes and reduced demand by about 12 percent.
 Impact on Farm Bills:

a. States will lose revenue as they won't be able to collect 'mandi fees' if
farmers sell their produce outside registered APMC markets.
b. The Farmers Agreement on Price Assurance and Farm Services Bill,
2020, seeks to empower farmers by facilitating contract Farming.
c. The new law on contract farming does not look at the fundamental
obstacle to formal contract farming. The fear of potential loss of
ownership of land due to the plethora of complex land laws is the most
significant obstacle to formalizing contract farming.
 Impact on Labor Codes:

a. The labor codes would not only provide social security to organized
sector employees but also to informal sector workers like gig and
platform workers.
b. The laws have single-handedly destroyed several industrial towns in UP,
Bihar, and other states.
c. The government has proposed to introduce more conditions restricting
the rights of workers to strike.
 Macroeconomic Factors

A nation's economy rises and falls due to factors both inside and outside the
control of governments and their citizens. These variables, known as
macroeconomic factors, describe the events that change the financial outlook
of a country. These are the broad indicators of financial growth or decline that
affect an economy. A macroeconomic factor is a geopolitical environmental or
economic event that can impact the monetary stability related to the whole
economy of a country or region instead of a specific part of the population.

A macroeconomic factor may be considered positive, negative, or neutral

based on the way it affects the economy. The major macroeconomic factors
are as the following:

 Interest Rates: Interest rates reflect the amount of return earned by investing
money within a country's financial system. Higher interest rates indicate a
higher value for the currency of a national economy.
 Inflation: Inflation that occurs rapidly is a measure of economic instability or
downturn while steady inflation is usually predicted as a normal economic
factor.
 Fiscal Policy: Monetary policy is shaped by large financial institutions in both
the public and private sectors. Large banks and government agencies make
decisions that impact interest rates, inflation, and federal budgets. This guides
the flow of money in circulation within an economy.
 Gross Domestic Product (GDP): It describes the overall economic value of

the goods and services produced by a country. GDP is also a measure of

spending by a government and its citizens along with the financial impact of
trade and investments within a nation.
 National Income: It is the combined amount of money a country generates
within its economy. This figure helps economists measure economic growth
along with standards of living for citizens including income distribution.
 Employment: The unemployment rate of a country offers an indication of the
economic health of a nation. A higher employment rate versus those
unemployed indicates a stronger economy. When a majority of citizens are
employed, their spending increases the amount of money in circulation and
boosts the economy.
 Economic Growth Rate: This factor describes the change in the percent of
the cost of producing goods or services in a country during a certain period of
a previous growth period.
 Industrial Production: Depending on the main industries of a country, the
production of goods from these facilities contributes to the economic
fluctuations of a nation. This macroeconomic factor can also indicate market
volatility.
 International Trade: It impacts the economic health of a country by

indicating the value of its currency and the demand for it across the world.
Economies that export more goods than they import through international
trade reach a surplus and raise the value of their currency since their goods are
in more demand.
 Retail Sales: Retail sales indicate how much citizens are spending. Business
traders watch spending reports to gain insight into the overall health of an
economy. Retail is the direct marketplace for domestic goods and services.
When retail sales increase, so does economic growth.
 Business Cycle: Predictable economic patterns of growth, recession, and

recovery are referred to as the business cycle. This cycle impacts economic
markets and can be observed through periods of low unemployment and high
production rates that turn to high unemployment and low production and back
again to economic growth.
GDP Analysis
 COMPARATIVE ANALYSIS REPORT FOR GDP

FY22 FY21 FY20

QTR Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Growth 13.5 4.1 5.4 8.4 20.1 2.5 0.7 -6.6 -23.8 2.8
Rate %

20.10%

13.50%
8.40%
5.40%
4.10%
0.70%
2.50% 2.80%
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

−6.60%

−23.80%
FY 2022 FY 2021 FY 2020

REPORT

Based on the current factors, the Indian economy is progressively losing

momentum as inflationary expectations remain elevated due to rising global
energy and food prices, monetary policy normalizes and global conditions
deteriorate. The GDP growth for FY23 is expected to grow between 6.9% -
7.3%.

COMPARATIVE ANALYSIS PREVIOUS YEAR

FY22 Q2 V Q1

The Indian economy expanded by 13.5% in the second quarter of 2022. There
is a visible increase from the first quarter which was 4.1%. But the market
forecasts were 15.2%. Household spending growth improved to 25.9% year on
year in Q2 compared to a 1.8% expansion in Q1. Meanwhile, fixed investment
growth improved to 20.1% in Q2, from the 5.1% increase logged in the
previous quarter, with state spending slowing to 1.3% growth after a rise in
Jan-March. Manufacturing grew to 6.5% growth after a 0.2% contraction in
the previous quarter while the construction sector grew 16.8% after 2.0%
growth in the previous quarter, data showed.

On the external front, exports of goods and services increased 14.7% on an

annual basis in the second quarter, which was below the first quarter's 16.9%
expansion. Conversely, imports of goods and services growth picked up to
37.2% in Q2.

FY22 Q2 V FY21 Q2

India9s GDP grew at 13.5% in the second quarter of 2022-23, with GVA in the
economy rising by 12.7%. The corresponding quarter of 2021 recorded a GDP
growth of 20.1% and an 18.1% uptick in GVA amid the second COVID-19
wave. Comparing Q2 of 2022 with Q2 of 2021, GVA increased faster for
agriculture, forestry & fishing (4.5% vs 2.2% in Q2 2021); electricity, gas,
water supply & other utility services (14.7% vs 13.8%); financial, real estate
& professional services (9.2% vs 2.3%) and public administration, defence &
other services (26.3% vs 6.2%).
On the other hand, a slowdown was seen for mining & quarrying (6.5% vs
18%); manufacturing (4.8% vs 49%); construction (16.8% vs 71.3%) and
trade, hotels, transport, communication & services related to broadcasting
(25.7% vs 34.3%). On the expenditure side, household consumption
accelerated (25.9% vs 14.4% in Q2 2021) and government expenditure
rebounded (1.3% vs -4.8%). Meanwhile, gross fixed capital formation slowed
(20.1% vs 62.5%) and net foreign demand contributed negatively to growth,
as exports rose 14.7% while imports advanced at a faster 37.2%.

FY22 Q1 V FY21 Q4

GDP growth lost momentum, falling to 4.1% year on year in the first quarter
of 2022, from 5.4% in the fourth quarter of 2021. Q1's reading marked the

slowest reading in a year. The deceleration was due to a base effect, as in

seasonally adjusted quarter-on-quarter terms growth was nearly unchanged.
Private consumption growth fell to 1.8% in Q1, marking the weakest
expansion since Q4 2020 (Q4 2021: +7.4% YoY). Consumer spending was
likely hit by the third Covid-19 wave that ravaged the country earlier in the
quarter, as well as higher inflation. Government spending sped up to a 4.8%
increase in Q1 (Q4 2021: +3.0% YoY), while fixed investment growth
improved to 5.1% in Q1, from the 2.1% increase recorded in the previous
quarter. Exports of goods and services growth fell to 16.9% in Q1, marking
the worst result since Q1 2021 (Q4 2021: +23.1% YoY). In addition, imports
of goods and services growth moderated to 18.0% in Q1 (Q4 2021: +33.6%
YoY), marking the lowest reading in a year.

FY22 Q1 V FY21 Q1

Comparing the GDP growth rate of the first quarter of 2022 with the
corresponding quarter of 2021, it is visible that the GDP has risen to 4.1%
from 2.5%. Still, there are visible ups and downs when comparing both
quarters.
Private consumption in Q1 2021 was 2.7% whereas it fell in Q1 2022 to
1.8% marking the weakest expansion since Q4 2020. Government spending
fell to 4.8% in Q1 2022 compared with 28.3% of the same in Q1 2021. But
there is a visible increase in exports(16.9% in Q1 2022 and 8.8% in Q1 2021)
and imports(18% in Q1 2022 and 12.3% in Q1 2021).

FORECAST EXPECTED IN GDP IN FY23

The RBI expects the economic growth estimate for the fiscal year 2023 to
grow by 7%.
Due to constant geopolitical tensions, monetary policy tightening across
nations, and elevated inflation, India9s central bank has lowered its growth
estimates by cutting the former forecast of 7.2% to 7%. Several rating
agencies have also recently trimmed their annual growth rate projections after
GDP growth fell short of expectations in the past quarters.
 Difference between GDP and GDP Growth

GDP:

 GDP stands for "Gross Domestic Product" and represents the total monetary
value of all final goods and services produced (and sold on the market) within
a country during a period (typically 1 year).
 GDP is the most commonly used measure of economic activity.

 Nominal GDP (or "Current GDP") = face value of output, without any
inflation adjustment.
 Real GDP (or "Constant GDP") = value of output adjusted for inflation or
deflation. It allows us to determine whether the value of output has changed
because more is being produced or simply because prices have increased. Real
GDP is used to calculate GDP growth.
 Actual GDP - real-time measurement of all outputs at any interval or any
given time. It demonstrates the existing state of business in the economy.
Potential GDP ideal economic condition with 100% employment across all
sectors, steady currency, and stable product prices.

GDP Growth Rate:

 The GDP growth rate compares the year-over-year (or quarterly) change in a
country's economic output to measure how fast an economy is growing.
 Usually expressed as a percentage rate, this measure is popular for economic

policymakers because GDP growth is thought to be closely connected to key

policy targets such as inflation and unemployment rates.
 If GDP growth rates accelerate, it may be a signal that the economy is
overheating and the central bank may seek to raise interest rates.
 Conversely, central banks see a shrinking (or negative) GDP growth rate (i.e.,
a recession) as a signal that rates should be lowered and that stimulus may be
necessary.
 Contribution of GDP to Economic Analysis

 GDP enables policymakers and central banks to judge whether the economy is
contracting or expanding, whether it needs a boost or needs to be restrained,
and if threats such as a recession or rampant inflation loom on the horizon.

 The national income and product accounts (NIPA), which form the basis for
measuring GDP, allow policymakers, economists, and businesses to analyze
the impact of such variables as monetary and fiscal policy, economic shocks,
such as a spike in the oil price, and tax and spending plans on specific subsets
of an economy, as well as on the overall economy itself.

 Along with better-informed policies and institutions, national accounts have

contributed to a significant reduction in the severity of business cycles since
the end of World War II.

Industries contributing to GDP and their weightage

 The most important and fastest-growing sector of the Indian economy is

services.
 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 employ more than 50 percent of the labor force.

 Manufacturing accounts for 15 percent of GDP.
 Construction for another 8 percent.

 Mining, quarrying, electricity, gas, and water supply for the remaining 5
percent.
 How do we calculate GDP?
GDP can be calculated in three ways: using the production, expenditure, or
income approach. All methods should give the same result.

(i) Production approach:

Sum of the "value-added" (total sales minus the value of intermediate inputs) at
each stage of production.

(ii) Expenditure approach:

Sum of purchases made by final users.

(iii) Income approach:

Sum of the incomes generated by production subjects.

GDP formula:
The formula for calculating GDP with the expenditure approach is the following:

GDP = Private Consumption + Gross Private Investment

+ Government Investment + Government Spending +
( Exports – Imports )

Or, expressed in a formula:

GDP = C + I + G + ( X – M )
 Advantages and Disadvantages of GDP

 Advantages:

 Broad indicator of development.

 Easy to measure percentage growth.

 Easy to compare to itself and other countries.

 It is a cardinal ranking which means we can compare two countries by saying

one is double or half the other.
 Cheap and easy to collect.

 Calculated from a formula that all countries use, therefore it is a reliable

indicator.
 A good way for governments to know whether economic policies have been

successful, and to what extent they have or have not been.

 Can be broken up into GDP per capita which accounts for the population of
the country when it is calculated.

 Disadvantages:

 A narrow indicator that fails to show the quality of life, the standard of
living, happiness, health care, political freedom, unemployment, and
quality of goods and services.
 GDP doesn't account for inequality: some very wealthy businessmen may
make the GDP of a country high yet the majority of the country may be
backward and in poverty. Examples of where the distribution of wealth are
uneven is in China and Brazil, these countries have a very high GDP but
 also have high inequality.
 Doesn9t account for the environmental impacts of the economic policies.

 Doesn't include the informal sector activity or the activity on the 'black'
market.
 Overseas income is not taken into account.

 High inflation may be behind a high GDP rate.

 The country may have high productivity but are not able to afford the
goods, e.g. China makes a huge number of iPhones but the majority of
people living there can't afford them.
 The government could adjust figures to gain power.

 The production process could be immoral, high GDP could be down to

trading drugs or guns.
 It either measures the growth in the past is not hugely relevant anymore or

it measures the growth in the future which is just an estimate which is often
a mistaken calculation.
 GDP can also be misleading depending on the population of a country, a
country with a high population may have a high GDP value just because of
the vast number of people who engage in economic activity.