# TION

FACTORS INFLUENCING THE GDP OF INDIA

.................................. As GDP is sum of the Consumption................................................ 1........................................................................................................................................................... Government Expenditure and Net Exports.................... 4 REGRESSION ANALYSIS ................. 10 SIGNIFICANCE TEST ........................................... OBJECTIVE: ANALYSIS OF FACTORS AFFECTING GDP OF A NATION In this project................................................................................ when we know the values of our variable....... These factors are not directly accounted for in GDP calculations....................................................................... 14 VALIDATION OF OUR MODEL..................................................................................................... Investments.................................................................. 13 R-SQUARED AND OVERALL SIGNIFICANCE OF THE REGRESSION ................................................................................................................................................................................................ 3 VARIABLES USED FOR REGRESSION ANALYSIS........................................Contents 1............................ I tried to research and find out.. 5 TRANSFORMATION ................ 12 STANDARDISED COEFFICIENTS .......................................................1 TOOLS USED FOR OUR RESEARCH ANALYSIS ............................................. 16 1.......................................................................................... Y= C + I + G + (X-M) Our factors are the various factors affecting each of these components......................... 15 CONCLUSION........................................ 8 CORRELATION ....................................... This will be useful in predicting an estimated GDP for future years.............................. 7 CONFIDENCE LEVEL ....... 7 TEST OF FIT OF MODEL ........................................... 2 STEPS INVOLVED IN ANALYSIS ...................................................................................... how the various quantitative factors that affect GDP are correlated to it...................................................................................................................... OBJECTIVE ...................... hence we try to establish a relationship between these factors and GDP and how they could affect it.................................................................................

Prediction or estimation is one of the major problems in almost all the spheres of human activity. Regression analysis was explained by M.Moving ahead with our objective of finding out what are the various factors contributing to GDP of a nation. Once all the factors are listed. which was again found through secondary data. Our secondary data sources were as following: a) b) c) d) Business Beacon Website www.imf. The estimation or prediction of future production. income etc. are of very great importance to business professionals. prices. population estimates and population projections.org website www.com . we use some statistical tools. consumption. are indispensable for economists and efficient planning of an economy. STEPS INVOLVED IN ANALYSIS 1) Our first step was screening through secondary data sources in order to understand what are the factors that affect GDP of nation. Revenue and Expenditure etc. GNP. we had to again screen through secondary data sources to find out the values of these factors for 20 years.indexmundi. Similarly. namely REGRESSION and CORRELATION. profits. This observation leads to a very important concept known as „Regression Analysis‟. sales. and if there is some theoretical basis for doing so. Blair as follows: “Regression analysis is a mathematical measure of the average relationship between two or more variables in terms of the original units of the data.org ((International Monetory Fund) www. it is possible to predict values of one variable from the other.” If two variables are significantly correlated. and then see its affect on GDP of nation.rbi. M. investments.

4) Rainfall: Agriculture and allied sectors accounted for 16. agricultural of the country significantly depends upon the rainfall.6% of the GDP in and despite a steady decline of its share in the GDP. VARIABLES USED FOR REGRESSION ANALYSIS 1) Interest rate: With the increase in the interest rate of the country the bend will be towards saving since the cost of holding money increases resulting into less consumption decrease in the GDP and secondly the money supply in the market also falls and the GDP goes down.2) The data on all factors once collected and summarized in a proper way. . 2) Population of the country: with the rise in population the availability of the cheap labor increases and attracts more firms to invest in the country increasing the FIIs or FDIs that boosts the GDP of the country 3) Population of country getting Primary Education: higher level of literacy in the country generates more job opportunities in the economy which in turns contribute significantly in the GDP. 3) The regression analysis was done with the SPSS software used for Business Research Analysis. was ready for regression analysis.

which in turns affects the GDP of the country.. We also found that People Employed is a Lagging Variable. and A is the value Y is predicted to have when all the independent variables are equal to zero. Market Risk which affect GDP significantly. X2 and so on are the independent variables you are using to predict it. Hence. b1. Inflows of physical capital resulting from FDI could also increase the rate of economic growth and the GDP of the country. it looks like following equation : . like Business Confidence. X1. 7) People Employed: More employment results into greater expenditure. In our case. b2 and so on are the coefficients or multipliers that describe the size of the effect the independent variables are having on your dependent variable Y.5) Exchange Rate: With the appreciation in the value of the national currency the revenue generated from the exports is less which in turn affects the GDP of the country 6) Foreign direct investment: It is theoretically straightforward to argue that inflows of FDI have a potential for increasing the rate of Economic growth in the host country. Our Independent variables are the various factors found from secondary data analysis. but we have dropped them from regression analysis because of their qualitative nature. 2001 employment will be regressed against 2002 GDP. The equation is in the form: Y = b1X1 + b2X2 + . which means that the change in this variable in one year. the value of say. will affect the GDP of the subsequent year. + A where Y is the dependent variable you are trying to predict. There are various other factors.. is GDP of the country. REGRESSION ANALYSIS Our Dependent variable in the regression analysis.

Data tabularized in MS Excel 2003. .GDP = a + b1F1 + b2F2 + b3F3 … + bnFn Where F1 to Fn = various factors acting as independent variables Steps : 1.Data is then imported to SPSS Data View. Run regression : PATH Analyse  Regression  Linear  Enter Dependent and Independent variables and run regression. 2.

and to maintain uniformity of variables throughout. with data being collected for 10 years. we transformed them using the Ln ( Log Natural) function in excel.TRANSFORMATION Since our degree of freedom is 9. . 5. These variables were 1. 2. were taken as it is. therefore in order to have a better regression. 4. 3. CONFIDENCE LEVEL We have taken a confidence level of 80% for our F test and 70% for T test. GDP Population of Country NRI Deposits Population FDI Other variables since had no great variation among these 10 years.

20. we need to reject the null hypothesis.TEST OF FIT OF MODEL The most important part comes where we need to test whether the model developed by us is right or not. Hence we moved ahead with further analysis. This test starts with the null hypothesis that R2 = 0 Which means that correlation is 0. Regression (Explained Sum of Squares) . we can neglect the null hypothesis. When the significance or P value of F test is less than . as our confidence level is 80%.019 rejected the null hypothesis and proved that the model developed by us is right. A good model means that all the variables together. Our output was as follows: Significance value of . This is checked by carrying out the F test or ANOVA test. In order to prove our model good. significantly explain our dependent variable‟s behavior.

Explained SS gives you the variance that is explained by the Model. Our value for the same is 1. The total variation in our model which is given by the Total Sum of Square is 1. This gives you the deviation of fitted regression value around mean.008. so are degree of freedom = 10 – 1 = 9 . Second column represents degree of freedom. The part which couldn‟t be captured by our model or Residual Sum of Squares is . Data taken are for 10 years .488. The model degree of freedom corresponds to the number of predictors minus n (K-n) where n is the number of parameters estimated.496.

985 units Deposits in turn increase the investment in our country and hence increasing the GDP.906 units. our correlation coefficients tell us by how much does GDP increase or decrease when the corresponding variables increase by 1 unit. . Increase in 1 unit of NRI Deposits results in a increases in GDP by . GDP . Increase in exchange rate results in a decrease in GDP by . i.e. Increase in 1 unit of organized sector employment by activity results in a decrease in GDP by . This is because In organized sector with the advent of modern technology.CORRELATION As we are running regression on a single dependent variable. 2. the Imports are affected and hence GDP. 3. automation. Here we can deduce that: 1.164 units Since our money depreciates with increase in exchange rate. is highly needed and hence increase in the labour workforce is decreasing the GDP of the country.

hence an increase in the rainfall results in increase in agricultural productivity and hence the GDP. . and hence increase in FDI increases GDP. Increase in 1 unit of Population results in a increase in GDP by .4. Increase in 1 unit of FDI results in a increase in GDP by . as loans become expensive for investors. Hence the GDP is directly affected. This output table not only shows how the independent variables are correlated to GDP. but also correlations among them. 5. On analyzing we find that high correlation of .917 between NRI deposits and Population of the country.315 units Our country is greatly influenced by the agricultural sector. Increase in 1 unit of bank interest rate results in a decrease in GDP by . 6. which results in multi co linearity of these variables.932 unit FDI is a direct component of investment.981 units Population increases the available workforce in the country and hence the GDP of nation. Increase in 1 unit of Actual Rainfall results in a increase in GDP by . 7.739 units Increase in bank rate decreases the investment in the country.

1) Organised Sector Employment by Activity 2) Population of Country 3) Bank rate or Interest rate . When the test carried out at 70% significance level. The standard error is an estimate of the standard deviation of the coefficient. The t statistic is the coefficient divided by its standard error.30 rejects null hypothesis and shows that variables have significant contribution to dependent variable. we carry out T test on the independent variables. we find the following variables to fulfil this condition and qualify as significantly affecting variables.SIGNIFICANCE TEST In order to find out whether the coefficients of our independent variables are really different from 0 or if alternatively any apparent differences from 0 are just due to random chance. To carry out this null hypothesis test. a measure of the precision with which the regression coefficient is measured. significance value less than . The null (default) hypothesis is always that each independent variable is having absolutely no effect (has a coefficient of 0) and you are looking for a reason to reject this theory. From the outpur generated.

or mm as in case of rainfall. . While some are in Monetory terms. we should make them unit less. These betas are better correlations for predictions. To carry out a objective comparisons among the variables.The other variables are not unimportant. The standardized co efficient in the above table. but as a whole. or try and convert them into same unit. they make a significant impact as calculated from ANOVA Test STANDARDISED COEFFICIENTS Our variables are not in uniform unit. others are in number of people. do this for us. they are just not having significant INDIVIDUAL effect on GDP of India.

5% of the variation in GDP is explained by the factors taken. . unless our main concern is using the regression equation to make accurate predictions.R-SQUARED AND OVERALL SIGNIFICANCE OF THE REGRESSION The R-squared of the regression is the fraction of the variation in our dependent variable. This is a highly satisfying score for making use of model in making predictions. Our output is as follows for the Model Summary: R2 = . 975 which means 97. The R-squared is generally of secondary importance. GDP that is accounted for (or predicted by) our independent variables.

855611096 7.506696 -3.55636 6. this year was affected by global economy. provided that the global economy remains reasonably stable.99721 6. we found out that.396030918 6.228885687 6. it shows a large deviation of 13%.99221 8. In the year 2008. On analyzing this particular Year.37408 10. we clearly see that our model is fit for the first 8 years.065445 -1.421814 2.95121 PERCENTAGE CHANGE 6.730057018 6.32924 0.117205503 7. This is because our model takes care of variables that are confined to Indian Economy context.91114 6.55968 6.05146 7.169294783 6. .580512916 6. especially the recession times in USA.75624 13.177782416 PRIDICTED GDP 6.69066 2. Our model hence can Predict GDP with fair accuracy.981153 -1.7753 By running our model on the past data and finding the value of the dependent variable.86479 2.VALIDATION OF OUR MODEL YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ACTUAL GDP 6.101675972 7.25516 6. not affecting the Indian Economy.131622063 6.32619 6.08729 6.

and hence predict the future growth in GDP of a Nation. We can obtain future predicted data of rainfall from Meteorological Department. . Population and other variables from the respective departments. we cannot predict the future GDP of 2012-2013. Since these values are not open to common public. we can use this model to predict the GDP values with knowledge of increase or decrease in the factors known. Interest rate from RBI. But our model will be useful.CONCLUSION Since our model is fit. once the data is available.