ECONOMETRICS PROJECT

​ LINEAR REGRESSION USING R SOFTWARE 

 
Country- INDIA 
 

NAME: HARSHIKA MAHAKAL 

CLASS: TYBA (B) 
ROLL NO: 3322 
PAPER: RUAECO605A
INTRODUCTION
India, also known as the Republic of India, is a country in the South Asia region. It is the seventh
largest country by area and with more than 1.3 billion people, it is the second most populous
country and the most populous democracy in the world. Bounded by the Indian Ocean on the
south, the Arabian Sea on the southwest, and the Bay of Bengal on the southeast, it shares land
borders with Pakistan to the west;China, Nepal, and Bhutan to the northeast; and Bangladesh
and Myanmar to the east.
 
Polity:​ ​India is the world's most populous democracy.​ ​A parliamentary republic with a
multi-party system,it has seven recognised national parties, including the Indian National
Congress and the Bharatiya Janata Party (BJP), and more than 40 regional parties. India is a
federation with a parliamentary system governed under the Constitution of India, which serves
as the country's supreme legal document. It is a constitutional republic and representative
democracy. The Government of India comprises of three branches: ​the Executive, the
Legislature and the Judiciary.
India is a federal union comprising of ​29 states and 7 union territories.​ ​All states, as well in
addition to the union territories of Puducherry and the National Capital Territory of Delhi, have
elected legislatures and governments. The remaining five union territories are directly ruled by
the centre through appointed administrators.

Demography​:​ ​ India’s population is young. The median age was ​27.6 ​as of 2016. More than
half the population in India is ​under age 30 and less than one-fourth is age 45 or older.​ The
human sex ratio, according to the 2011 census, is ​940 females per 1,000 males​. Its birth and
death rates are both near the global average. Life expectancy is about ​68 years for men and 70
years for women.
Migration from rural to urban areas has been an important dynamic in the recent history of
India. The number of Indians living in urban areas grew by​ 31.2%​ between 1991 and 2001.Yet,
in 2011, around 70% of the Indian population still lived in rural areas. Major metropolitan
agglomerations of the country ​include Delhi, Mumbai, Chennai,Kolkata, Bangalore and
Hyderabad.

Economy:​ ​The economy of India is a developing mixed economy.It is the world's

fifth-largest economy by nominal gross domestic product (GDP) and the third-largest by
purchasing power parity (PPP). . ​The country ranks 139th in per capita GDP (nominal) with
$2,134 and 122nd in per capita GDP (PPP) with $7,783 as of 2018. ​Since 2014 with the
exception of 2017, India's economy has been the world's fastest growing major economy,
surpassing China.
The service sector contributes 53.66% , the industrial sector 29.02% and the agricultural
sector 17.32% to the GDP(2016 figures)​. India's foreign exchange remittances of ​US$70 billion
in 2014​, the largest in the world, contributed to its economy as there are around 25 million
Indians working in foreign countries. Major agricultural products produced in the country
include rice, wheat, oilseed, cotton, jute, tea, sugarcane, and potatoes. Major industries
operating in the country include textiles, telecommunications, chemicals, pharmaceuticals,
biotechnology, food processing, steel, transport equipment, cement, mining, petroleum,
machinery, and software.

The 513.7-million-worker Indian labour force is the world's second-largest, as of 2016.

The long-term growth prospective of the Indian economy is positive due to its young
population,english proficiency, corresponding low dependency ratio, healthy savings​ ​and
investment rates, and increasing integration into the global economy. India topped the World
Bank's growth outlook for the first time in fiscal year 2015–16, during which the economy grew
7.6%. However, despite previous reforms, economic growth is still significantly slowed by
bureaucracy, poor infrastructure, and inflexible labor laws.
REVIEW 
The historical review of India’s economy can be divided into three time periods: during the
colonial rule, after gaining independence and after the globalization, liberalization and
privatization reforms of 1991.

DURING THE COLONIAL RULE:

The structure of India’s present-day economy is not just of current making; it has its roots
steeped in history, particularly in the period when India was under British rule which lasted for
almost two centuries before India finally won its independence on 15 August 1947. India had an
independent economy before the advent of the British rule. Though agriculture was the main
source of livelihood for most people yet, the country’s economy was characterised by various
kinds of manufacturing activities. India was particularly well known for its handicraft industries
in the fields of cotton and silk textiles, metal and precious stone works etc.
The sole purpose of the British colonial rule in India was to reduce the country to being a raw
material supplier for Great Britain’s own rapidly expanding modern industrial base. The colonial
government never made any sincere attempt to estimate India’s national and per capita
income.
India’s economy under the British colonial rule remained fundamentally agrarian - about 85% of
the country’s population lived mostly in villages and derived livelihood directly or indirectly
from agriculture. However, despite being the occupation of such a large population, the
agricultural sector continued to experience stagnation. As in the case of agriculture, so also in
manufacturing, India could not develop a sound industrial base under the colonial rule.
Furthermore, the growth rate of the new industrial sector and its contribution to the Gross
Domestic Product (GDP) remained very small.
The restrictive policies of commodity production, trade and tariff pursued by the colonial
government adversely affected the structure, composition and volume of India’s foreign trade.
For all practical purposes, Britain maintained a monopoly control over India’s exports and
imports.

1950-1990​:
Jawaharlal Nehru and many other leaders and thinkers of the newly independent India, sought
an alternative to the extreme versions of capitalism and socialism by deciding that the country
would be a socialist society with a strong public sector but also with private property and
democracy. In 1951, the country adopted its first Five-Year Plan whose goals were: growth,
modernisation, self-reliance and equity. The policymakers of independent India addressed the
issues of growth and equity through land reforms and promoting the ‘High Yielding Variety”
seeds which ushered in a revolution in Indian agriculture. The industrial policy that the country
adopted was closely related to the trade policy. In the first seven year plans. Trade was
characterized by import substitution. In this policy the government protected the domestic
industries from foreign competition.

POST 1991:
In 1991, India met with an economic crisis relating to its external debt- the government was not
able to make repayments on its borrowings from abroad. As a result, India approached the
World Bank and the International Monetary Fund for managing the crisis and agreed to the
conditionalities of World Bank and International Monetary Fund by removing the restrictions
on the private sector, reduce the role of the government in many areas and remove trade
restrictions between India and other countries. The government initiated a variety of policies
which fall under three heads viz. Liberalisation, privatisation and globalisation. Liberalisation
was introduced to open up various sectors of the economy and was characterized by
deregulation of industrial sector, financial sector reforms, foreign exchange reforms, trade and
investment policies reforms. The government envisaged that privatisation could provide strong
impetus to the inflow of FDI and it attempted to improve the efficiency of public sector
undertakings by giving them autonomy in taking managerial decisions.

I​ndia’s long-term economic growth has steadily accelerated over a fifty-year period, without
any prolonged reversals.I​ndia’s average economic growth in the past 50 years provides a
long-term perspective that it has accelerated slowly but steadily across all sectors – agriculture,
industry and services and become more stable.​Thus, while growth averaged 4.4 percent a year
during the 1970s and 1980s, it accelerated to 5.6 percent during the 1980-1991, and further
to 6.4 per cent between 1991-2001. ​The acceleration of growth is evident not just for
aggregate GDP, but even more strongly for per capita GDP. India’s economic growth story since
the 1990s has been steady, stable, diversified, and resilient and reflect strong macroeconomic
fundamentals. During the reform period, the growth of agriculture and industrial sector had
declined whereas the growth of service sector had increased.Before 1991, growth accelerated
episodically, was punctuated by large annual variations, and often failed to sustain. Thus,
growth has not just accelerated post liberalisation, it has also become more stable.

Compared to most industrialising economies, India followed a fairly restrictive foreign private
investment policy until 1991 - relying more on bilateral and multilateral loans with long
maturities. Inward foreign direct investment (FDI, or foreign investment, or foreign capital
hereafter) was perceived essentially as a means of acquiring industrial technology that was
unavailable through licensing agreements and capital goods import. Technology imports were
preferred to financial and technical collaborations. Even for technology licensing agreements,
there were restrictions on the rates of royalty payment and technical fees. However after its
1991 reforms, India not only permitted foreign investment in almost all sectors of the economy
(barring agriculture, and, until recently, real estate), but also allowed foreign portfolio
investment - thus practically divorcing foreign investment from the ersts hile technology
acquisition effort. The policy of Government of India on the inflow of foreign capital is
favourable since the introduction of ​New Industrial Policy in 1991.​ Further, laws were changed
to provide foreign firms the same standing as the domestic ones. ​Approved FDI rose from
about Rs 500 crore in 1992 to about Rs 55 thousand crore in 1997. The top 10 investing
countries in India between 1991 and 2000 were: US, Mauritius, UK, Japan, South Korea,
Germany, Australia, Malaysia, France and Netherlands.​ The economically advanced states of
Maharashtra, Delhi, Kamataka, Tamil Nadu and Gujarat had attracted one-half of the approved
foreign investment. The most preferred sector by foreign direct investors was that of power
and fuels followed by telecommunications sector, services sector, chemicals sector etc.
DATA SOURCES & METHODOLOGY 

The data on GDP values and FDI flows in India was collected from the official website of United
Nations Conference on Trade And Development (unctad.org). The project covers the period
from the year 2000 to 2015.
The variables considered for the regression analysis are gross domestic product (GDP) at
constant prices in US dollars in millions and foreign domestic investment (FDI) at current prices
in US dollars in millions.

The statistical method of linear regression analysis has been applied to the selected variables.
Linear regression attempts to model the relationship between two variables by fitting a linear
equation to the observed data. In linear regression, the dependent variable is related to a single
explanatory variable.
At first, the regression of GDP on time is considered in the project in which GDP is considered as
the dependent variable and time as the independent variable.
Later, the regression of GDP on FDI is considered in the project in which GDP is considered as
the dependent variable and FDI as the independent variable.
Finally, the regression analysis has been performed in both the given cases using the R
software.
 
 
ANALYSIS 

1. Regression of GDP on time

Estimate Standard Error t value

Beta 6.590e - 02 8.404e - 04 78.42

Adjusted r squared: ​0.9976

The coefficient of determination (r-squared) of 0.9976 can be interpreted as that about 99.76%
of variation in the values of GDP (dependent variable) is explained by time (independent
variable).
F statistic: ​6150 on 1 and 14​ ​DF​ ​, p-value:​ <2.2e-16
Durbin Watson Test:
DW=​ 1.1766
p-value=​ 0.01788
True autocorrelation is greater than zero.

Goldfeld-Quandt Test:
GQ= ​0.37567
p-value= ​0.8707
Variance increases from segment 1 to 2.

2. Regression of GDP on FDI

Estimate Standard Error t value

Beta 1.742e - 05 3.051e - 06 5.712

Adjusted r squared: ​0.63

The coefficient of determination (r-squared) of 0.63 can be interpreted as that about 63% of
variation in the values of GDP (dependent variable) is explained by FDI (independent variable).

F statistic: ​32.63 on 1 and 14 DF,​ p-value:​ ​5.372e - 05

Durbin Watson Test:
DW= ​0.84194
p-value = ​0.001681
True autocorrelation is greater than zero.

Goldfeld-Quandt Test:
GQ=​3.0853
P-value = ​0.09808
Variance increases from segment 1 to 2.
 
Growth Trends:
1. GDP: ​The growth rate of Gross Domestic Product (GDP) of India at constant prices had
been fluctuating during the period 2000-01 to 2014-15. The GDP growth rate decreased
from 5.81% in 2001-02 to 3.84% in 2002-03. Thereafter, GDP growth rate increased and
reached a high growth trajectory of 9% plus growth. India experienced 3 consecutive
years of GDP growth rate in excess of 9% viz. 9.48% in 2005-06, 9.57% in 2006-07 and
9.32% in 2007-08.
The GDP growth rate declined to 6.72% in 2008-09 largely due to global financial
meltdown following the collapse of Lehman brothers (investment bank) of US in
September, 2008. GDP growth rate improved to 8.59% in 2009-10 and 8.91% in 2010-11
due to high capital inflows attributed to the massive Quantitative Easing (QE)
undertaken by the US to combat economic slowdown of global level.
The GDP growth rate slumped to 6.69% in 2011-12, 4.47% in 2012-13 and 4.74% in
2013-14. ​t: a plunging Indian rupee, a persistent high current account deficit and slow
industrial growth. Hit by the US Federal Reserve's decision to taper quantitative easing,
foreign investors began rapidly pulling money out of India.
India started recovery in 2013–14 when the GDP growth rate accelerated to 6.4% from the
previous year's 5.5%. The acceleration continued through 2014–15 with growth rate of 7.5%.
For the first time since 1990, India grew faster than China which registered 6.9% growth in
2015.

2. FDI: ​From 2000 to 2010, the country attracted $178 billion as FDI.The inordinately
high investment from Mauritius is due to routing of international funds through the
country given significant tax advantages – double taxation is avoided due to a tax treaty
between India and Mauritius, and Mauritius is a capital gains tax haven, effectively
creating a zero-taxation FDI channel.
The FDI flow experienced an increasing trend beginning from 2000 onwards upto 2003. In the
year 2003, FDI inflow decreased from 5629.671 USD (millions) to 4321.076 USD (millions).
It again gained a momentum after 2003, increasing extensively in the year 2006. Thereafter, FDI
trend has experienced fluctuations till 2015, experiencing downward trends after 2008 till 2010
due to spillover effects of the global financial crisis.
 
Conclusion: 
The analysis reveals that
1. There is a positive relationship between GDP and time period of India as the coefficient
of determination depicts the existence of an almost perfect fit of the regression line.
2. There exists a positive relationship between GDP and FDI of India as FDI has shown to
have a significant impact on GDP output.

REFERENCES 

● Websites:
1. www.unctad.org
2. www.wikipedia.com
3. www.communitydata.gov.in
4. www.britannica.com
5. www.financialexpress.com
6. Blogs.worldbank.org
7. www.igidr.ac.in

● ​Books:
​ ational Council of Educational Research and
1. Indian Economic Development, N
Training (NCERT)