MACROECONOMICS PROJECT

TITLE: “A GLIMPSE OF THE INDIAN ECONOMY”

Presented By: Group VI

Aman Dixit (HRA053)
Akanksha Gupta (HRA031)
Lavina Nembhani (HRA049)
Malvika Srivastava (HRA048)
Neha Parekh (HRA007)
Niharika Nagda (HRA047)
Nirmay Desai (HRA029)

Introduction

Since World War II, the world economy has developed considerably. Over half of global GDP,
calculated in terms of purchasing power parity (PPP), is accounted for by emerging market
countries, other developing countries, and economies in transition, retaining much of the world's
currency reserves, and forming a majority of the world's population.

The top slots in the emerging order have come to be held by China and India. China, the US and
India contributed 56.9 percent to global growth in 2018, the latest year for which adjusted for
global GDP data is available. A comparison from the past reveals that in the 1970s, the engines
of global growth were the US, Japan, Germany, France and the UK, contributing 46.4 percent to
global growth between 1970-71. India has been a major player in the global economy since the
2000s, but the rise of China dwarfs it. While Europe was a major contributor to economic growth
in the late 20th century, its share of global GDP growth in recent years has faded. Since the
1970s, Japan has also seen a slowdown. In the 1980s and 1990s, shocks to the U.K. economy led
to the slowing of global GDP growth. India's economy is $9.448 trillion (purchasing power
parity) and accounts for a 7.45% share of world GDP (PPP). It is the fifth largest economy in the
world by nominal GDP and the third largest by parity of purchasing power (PPP). According to
the International Monetary Fund (IMF), India was ranked 142nd by GDP (nominal) and 124th by
GDP (PPP) on a per capita income basis in 2020.

The Republic of India is considered one of the world's rising superpowers. Several indicators are
attributed to this ability, the key ones being its demographic dynamics and a rapidly developing
economy and military. After the United States of America and the People's Republic of China,
India's economy is actually the world's third largest in real GDP terms. India overtook China to
become the world's fastest-growing major economy as of 2015, according to the World Bank. Its
record growth was 10.4 percent in the third quarter of 2003, when it grew faster than any other
developing economy. IMF figures show that in 2011, India became the world's third largest
economy, surpassing Japan's economy and the fifth largest economy by GDP (Nominal). India's
growth in 2015 was 7.5%. India, rising at 9% a year, is the second largest food producer in the
world, next to China. The production of food accounts for gross revenue of USD 69.4 billion.
Compared to many world leaders, India is still a relatively small player in manufacturing. Some
new developments indicate an increase in the future, because 11-12 percent of the manufacturing
sector is rising. India currently has an expanding IT sector that is considered one of the world's
best. Some have started defining India as a powerhouse of technology. It is known as the World
Office and is a pioneer in the service sector. This is primarily because a wide pool of highly
skilled, low-cost, English-speaking staff is available. India is becoming one of the world's
leading computer software producers and is undergoing a steady science and technology
revolution with mushrooming R&D centers. Indian economy also contributes to interlinking
development across countries. Nearly all MNCs develop production where it is close to the
markets; where skilled and unqualified labor is available at low costs; and where the availability
of other production factors is ensured.

Objectives of the Analysis

● To perform macroeconomic analysis of the Indian economy and critical evaluation of its
policy making over the period time
● To discuss the movements of fundamental macroeconomic variables of the Indian
economy during the last one decade and to identify the reasons behind its growth and
movement of the macroeconomic variables.
 ● To understand the impact of the global financial crisis on the trade ratios
● To study the impact of Policy Shocks [Demonetization and GST] on the Indian economy
● Impact of reforms on exports, employment and poverty; determinants of employment and
wages; impact of economic growth and job security on employment and wages and
growth, poverty and inequality in India.
● To understand the positive effect of various fiscal policy measures on state fiscal
capability by growing tax revenue and changing the length of fiscal balance.
● To analyze the change in the Savings and investment behavior in India and direction of
causality between savings/ Investment and growth.
● To discuss macroeconomic policy in our selected country (India) and critically examine
the focus of such policy making.
● To critically analyze the slowdown and policy suggestion for the same. Also, to examine
the appropriateness of these policies and their contribution towards the high growth
momentum in the country.

Analysis of Macroeconomic Scenario in the Past Decade

A decade ago, with its annual growth rate hitting 8-9% between 2003 and 2008, India was a
rising star in the global economy, with price stability and moderate fiscal and balance of
payments deficits. It was praised as one of the major economies that developed the fastest.

The boom is related to a sharp upturn in the investment rate, which peaked at 38% of GDP in
2007-08, while domestic savings financing (most) of this investment is growing.
Foreign direct investment (FDI), foreign portfolio investment (FPI) and external commercial
borrowing (ECBs) are unparalleled foreign capital inflows, augmented by domestic wealth at
close to 10 percent of GDP. An growing share of short-term financial inflows has triggered
financial fragility concerns. The protests against the inflows were, however, muted as the capital
inflows were reportedly put to productive use.

The 'Dream Run' was also a debt-led development that flourished at an unparalleled pace with
bank loans to the private corporate sector (PCS); a significant share accrued to big businesses
and politically linked companies.

The 2008 Global Financial Crisis reversed the boom, although it only modestly affected India for
two reasons: (i) its tighter financial regulations and (ii) the relatively large and closed domestic
markets.

After a brief fall in 2008-09, India witnessed a V-shaped recovery which lasted until 2011-12,
thanks to accommodative monetary and looser fiscal policies (a concerted effort by the Group of
20 countries).

In rural India, lower production growth has led to job losses, the displacement of workers from
the labour force (due to a lack of job opportunities), a sharp increase in the open unemployment
rate, and a stagnation in real wages.
The euphoria about reforms was tempered by the middle of the 2010s, with economic growth
clearly lower than in the previous decade; domestic savings, consumption and capital inflows
were also downward. As the US levied taxes on outsourcing and because of technological
changes, IT exports tapered off. However, inflation was high on account of foreign oil prices,
and the deficit in the balance of payments (BOP) became unstable for a while.

Decelerating production growth impacted corporate profits and thus their ability to service the
huge debt they had accrued during the boom. Corporate bad debts were converted into non-
performing assets (NPAs) in the banking sector because companies were unable to repay loans,
reducing the ability of banks to offer new loans.

Realizing the worsening economic condition and the frustration with the previous political
dispensation, the government of the National Democratic Alliance (NDA) came to power on the
development agenda (modelled after the alleged success of Gujarat), the eradication of
corruption and the implementation of the rule of law. In the popular imagination, the fall of
Kingfisher Airlines and then Vijay Mallya fleeing the country, leaving behind the bleeding of
public sector banks, was emblematic of all that had gone wrong with the previous regime's
economic management. The incoming government promised that financial legislation (including
implementation of strict tax laws) will be used to prosecute and punish financial fraud. This was
an agenda with a mainstream appeal that was wide.

The new ruling coalition also advanced the principle of "minimum government and maximum
governance," in its election campaign, evidently influenced by Margaret Thatcher and Ronald
Reagan to actively pursue free-market values. With global financial elites and the globalised
Indian culture, these opinions resonated well. The government sought to stick to fiscal
conservatism, encouraged inflation targeting, and claimed to uphold the rule of law, true to its
beliefs. To explain, to win over foreign investors, the Government devoted its significant
administrative resources to enhancing India's ranking in the Ease of Doing Business (EDB) index
of the World Bank. The ranking went up to the 63rd position in 2019, a highly reported
achievement, from the 142nd position in 2014.

At the same time, however, the government sponsored nationalist initiatives such as Make in
India to increase the share of the manufacturing sector in GDP to 25% by 2022 and generate an
additional 100 million jobs in the manufacturing sector. And populist, targeted, welfare
initiatives have been promoted, such as the provision of free cooking gas connections to women
in families below the poverty line (under the Pradhan Mantri Ujjwala Yojana) and small bank
loans for the poor and unemployed (called Mudra loans) without collateral.

Economic shocks: In November 2016, the government demonetized the large-valued currency
notes of Rs.1000 and Rs. 500, accounting for 86.4 percent of the total value of the currency in
circulation, to eliminate black money and also to make greater use of digital transactions.
Indeed, it was a macroeconomic shock, crippling the informal/unorganized sector (which mostly
operates on cash transactions), employing up to 90% of the workforce and contributing almost
half of the national production. Economists are almost adamant about the adverse effects of
demonetization (Ramakumar 2018). Many think it has led to a contraction of economic activity.
Nor has the political shock led to decreased cash use: it is inching back to its pre-demonetisation
stage as a proportion of GDP, as per the RBI Annual Report, 2018-19.3.

For quite a while, the Goods and Services Tax (GST) to replace different indirect taxes has been
in the making. However, in less than a year, its release in 2017 was the second shock, accepted in
theory but widely criticised for its poor design and execution. In addition to adversely affecting
small and informal enterprises (which find it difficult and costly to comply with the various
computerised filings and procedures of GST), resulting in a significant tax collection shortfall, it
has affected government finances as well as the sharing of revenue between states and the centre.

Changes in economic statistics: In early 2015, a new GDP series was launched by the then
Central Statistical Office (CSO), now the NSO, with the base year 2011-12, replacing the earlier
one with the base year 2004-05. Surprisingly, in the new series, the absolute GDP size for 2011-
12 was slightly smaller (by 2.3 percent) than that of the previous series. But in the following
years, its annual growth rates were substantially and systematically higher than in the older
series. There was widespread criticism that the new series appeared to deliberately overestimate
the GDP growth rate, as the new GDP growth rates were out of line with many economic
correlations.

Exhibit 1 shows the real annual growth rate, which shows that GDP growth has gradually risen
from 5.5 percent in 2012-13 to 8.2 percent in 2016-17, then decreased to 5 percent in the current
year (2019-20), so the economy has only slowed down after 2016-17, possibly due to the
demonetisation shocks and the GST introduced sharply.

However, because of the nature of methodological improvements used and the newer data sets
that have been used, the GDP growth rates are overstated. To demonstrate, from 4.8 percent in
the old series to 6.2 percent in the new series, the annual GDP growth rate for 2013-14 increased
dramatically. Similarly, the growth rate of the manufacturing sector for the same year fluctuated
from (-) 0.7% in the old series to (+) 5.3% in the new series. We can therefore conclude the
following:

● The current decade's GDP growth rates are markedly lower than those reported in the last
decade.

● In the new sequence, the rise in GDP growth rates from 2012-13 to 2016-17 is overstated
by a margin of 11⁄2 to 21⁄2 percentage points.

● The real growth rates registered for the last six quarters could, therefore, be much lower
than the figures officially published.

There, however, is a silver lining. The inflation rate, calculated by the consumer price index
(CPI), decreased sharply from 9.5% in 2013-14 to 3.4% in 2018-19, with an annual average rate
of 5.3% over the period (Exhibit 2). The fall largely reflects a decrease in international oil prices,
an exogenous factor. As India imports almost 80% of its commercial energy needs, oil prices
will remain the best predictor of domestic inflation rates (besides food prices).
Exhibit 3 shows gross savings and investment rates (all at current prices) from 2004-05 to 2017-
18.6 The investment rate peaked at 38% of GDP in 2007-08 (just before the global financial
crash) and gradually decreased to 30% of GDP a decade later in 2017-18. 36.4 percent and 29
percent respectively are corresponding estimates for the saving rate. In modern India, such a fall
in saving and investment rates is unprecedented, suggesting a deep dent in the future production
growth of the economy. If one acknowledges the stylised truth of economics that a sustained
increase in the domestic saving rate is a prerequisite for an economic take-off (as occurred in all
of Asia in the 20th century), India's observed decline in the saving rate of such magnitude is bad
for India's economic growth.

As stated earlier, the key contributor to the incremental production growth was a sharp rise in
exports during the 2000s. A turnaround was observed by the global financial crisis followed by
the Great Recession. India, too, has seen its exports fall from 25% in 2012-13 as a percentage of
GDP, to around 19% in 2017-18 (Exhibit 4). The decline in oil prices, however, contracted the
import bill; thus, there was no improvement in the ratio of net exports to GDP.

In 2015, the Make in India flagship initiative was launched, the results of which show the
following dismal picture:

● A stagnation in the manufacturing sector's share of GDP is clear, if not a small decrease.

● According to NSSO employment surveys, the industrial sector lost 3.5 million workers in
the manufacturing industry between 2011-12 and 2017-18 (Mehrotra and Parida, 2019).

● Secular declines can be seen in I the utilisation of industrial capacity since 2011, and (ii)
the increase in the value of stalled investment projects, especially in the private sector,
since July 2015 (Exhibit 6 and 7)

While it is possible to produce a lot more disaggregated data, enough to conclude that the
industrial sector has performed poorly since 2011-12 (Nagaraj, 2019). Therefore, contrary to the
official perception of a temporary setback, a deep industrial slowdown has existed over almost
the entire decade of the 2010s.
Analysis of macroeconomic policies in the economy during the Recent Decade

2015 2016 2017 2018 2019

Population (million) 1,283 1,300 1,317 1,334 1,352

GDP per capita (USD) 1,633 1,766 2,018 2,023 2,113

GDP (USD bn) 2,096 2,295 2,657 2,699 2,857

Economic Growth (GDP, annual variation in %) 8.0 8.3 7.0 6.1 -  

Consumption (annual variation in %) 7.9 8.1 7.0 7.2 -  

Investment (annual variation in %) 6.5 8.5 7.2 9.8 -  

Industrial Production (annual variation in %) 3.3 4.6 4.4 3.8 -1.2

Public Debt (% of GDP) 68.8 68.7 69.4 69.4 71.9

Money (annual variation in %) 11.5 6.7 21.8 14.3 10.3

Inflation Rate (CPI, annual variation in %, eop) 4.8 3.9 4.3 2.9 5.9
Inflation Rate (CPI, annual variation in %) 4.9 4.5 3.6 3.4 4.8

Inflation (PPI, annual variation in %) -3.6 1.8 2.9 4.3 1.7

Policy Interest Rate (%) 6.75 6.25 6.00 6.25 4.40

Stock Market (annual variation in %) -9.4 16.9 11.3 17.3 -23.8

Exchange Rate (vs USD) 66.25 64.86 65.11 69.19 75.34

Exchange Rate (vs USD, aop) 65.42 67.04 64.46 69.91 70.91

Current Account (% of GDP) -1.1 -0.7 -1.8 -2.1 -  

Current Account Balance (USD bn) -22.1 -15.2 -48.7 -57.0 -  

Trade Balance (USD billion) -117.3 -108.9 -158.6 -182.3 -153.5

Exports (USD billion) 262 275 305 331 314

Imports (USD billion) 379 384 463 513 467

Exports (annual variation in %) -15.6 5.1 10.6 8.5 -5.1

Imports (annual variation in %) -15.3 1.3 20.5 10.7 -8.9

International Reserves (USD) 356 373 421 414 476

External Debt (% of GDP) 23.1 20.5 19.9 20.1 -  

Indian agriculture has seen a distinct shift towards an increase in cereals, oilseeds, sugarcane and
horticultural crops in the absolute and relative area and a decrease in coarse cereals and pulses
areas (Bathla, 2008a; Joshi, Gulati et al., 2004; Naik and Jain, 1999). It is argued that trade
liberalization initiatives introduced in the early 1990s and the subsequent establishment of
multilateral trading rules under the WTO have precipitated the acreage shifts which originally
occurred in response to support for the price system and technological developments.
It is anticipated that favorable terms of trade (price incentives) would have a positive effect on
agriculture in terms of increased private investment, changes in crop area shifts, increased
exports, output and growth. In addition to price variables, software, weather, irrigation and
infrastructure or non-price supply side variables, land allocation decisions are also affected. The
incentive structure, which in turn defines the amount of exports, imports, crop acreage and
production, is adjusted by all these variables put together.
In order to maintain economic growth, such as the global financial crisis in 2008-2009 and the
growing fiscal deficit from 1.5 percent in 2007-2008 to 2.9 percent in 2009-2010, the Indian
economy has suffered several obstacles during the period from 2008-2009 to 2014-2015. Despite
the global slowdown and fiscal deficit in the state level, the Indian economy achieved a good
economic growth at 9.3 percent in both 2009–2010 and 2010–2011 (Economic survey
report, 2012). Additionally, the fiscal downturn in 2013-14 was attributed to lower revenue
growth and fiscal deficit. In order to boost the fiscal situation of the Indian States, the 14th
Finance Commission raised the tax refund from 32% to 42% and offered alternate sources of
funding for development activities (Economic survey report, 2014).
Relevant fiscal reforms were recently implemented by the central government of India in 2015-
2016 to raise additional revenue and to improve the fiscal capability of the state government.
First under the "Swachh Bharat" project, the central government levied taxes on coal, lignite, and
polymer bags. Second, it launched an online auction for the distribution of coal blocks and
created non-tax revenue from the use of natural resources. Third, Jan-dhan-Mobile schemes were
implemented using biometric information from Aadhaar to effectively execute welfare schemes
and the public distribution system. Fourth, the government abolished untargeted petroleum and
LPG subsidies and reduced the burden of subsidies on the state budget (Economic Survey report,
2015). A potential policy review in the context of the Indian economy will be the impact
evaluation of these fiscal policy measures on the generation of fiscal space for health.
PHE's state-wise growth patterns show a great story regarding the growth trends in the revenue
of the state and the transition of central government during the 1991-2003 period. It will include
the country's initial structural reforms and state-level fiscal adjustment arrangements. With
higher revenue growth and central government transfers, high-income states such as Gujarat,
Haryana, and Punjab have a lower PHE growth rate. Middle-income and low-income states such
as Andhra Pradesh, Karnataka, Kerala, Madhya Pradesh, Rajasthan, Uttar Pradesh, and Odisha
have shown modest growth linked to revenue growth.
Link between the policies and performance of the Economy

The results of the cointegration show that there is a long-term correlation between changes in
public health spending and changes in macroeconomic factors in the Indian economy. The
outcome of the regression coefficient indicates that the state's revenue ability (tax revenue and
indirect tax) and the central government's fiscal transfer (tax devolution) are the Indian states'
main public health care financing providers. Although other sources of state government
revenue, including non-tax revenue and direct tax, do not have any effect on public health
expenditure in the short term, they do have a positive impact on public health expenditure growth
in the long term. The positive and important effect of major macroeconomic factors (i.e.
domestic debt, GSDP per capita and fiscal balance) on the long-term growth of public health
expenditure has been identified, while the impact on public health expenditure, in the short run,
has been negligible.
From the study of public health expenditure and macroeconomic policies, we observed that
various fiscal policy measures such as tax reform, reform of fiscal management, national health
policy, and improvement of central transfer during the fiscal deterioration period(1991-2003)
have had a positive effect on state fiscal capability by growing tax revenue and improving the
length of fiscal balance. Despite the favorable macroeconomic environment since 2005, the share
of public health expenditure in relation to macroeconomic factors has been enormously disparate
among the states of India and only modest improvements have been seen in the growth of public
health expenditure. In order to achieve UHC, the study proposed the following fiscal policy steps
for the generation of fiscal room for health.

1. First by increasing domestic tax revenue collection and expanding the tax base, increase
the fiscal capacity of states.
2. Second, the formalization of the unorganized sector and indirect tax revenue through the
successful implementation of the GST reform would produce more direct tax revenue.
3. Third, efficiently utilizing the central government transition (tax devolution and central
grants) by the respective Indian state governments.
4. Fourth, the health budget of the respective state government is given higher priority and
the health budget is periodically increased with respect to state domestic income. India
will cross 5 percent of GDP on public health expenditure by 2030 with these measures.

Conclusion

● Economic Issues:

As per the NITI Aayog, the present economic crisis is the worst crisis India is facing since
Independence. The underperformance of the economy has been there for quite a while but now
slowdown is widely acknowledged. Even the Mission Chief for India in the Asia and Pacific
Development told “India is now in the midst of a significant economic slowdown”. As the
government was initiating some reforms at the start of the pandemic to make people believe that
this slowdown is cyclical but now it is evident that it is not merely a cyclical decline. Moreover,
the data shown is not credible the output growth has been overstated. If we aggregate data to see
a credible picture then we would witness unprecedented economic distress. Some of the facts of
distress are as follows: Between 2011-12 and 2017-18, the country has witnessed job losses of
between 6.2 million to 15.5 million, a rise in the unemployment rate from 3.3% to 8.8% of
workforce, a fall in the labour force participation rates, stagnation in rural wages, a fall in per
capita consumption, and an increase in absolute poverty by 30 million people. The nature of
economic growth has been Non-inclusive growth which marks the prevalence of high inequality
in the Indian socio-economic paradigm, Jobless growth- unemployment in India is highest in 45
years according to NSSO, Inadequate spending on social infrastructure- India spends 3% on
education and 1.5% on health and Unsustainable Development.

● Challenges:

Overstated GDP growth rates hampers good decision making as the data presented is faulty and
it misleads policy makers. In the 2000s there was a rise in investment rates, domestic savings,
rising bank credit growth and a market flooded with FDI, FPI and ECB. The Global Financial
Crisis in 2008 overturned the situation of 2000 as domestic saving, investment, and capital
inflows trended downwards. Lower output growth led to job loss, withdrawal of workers from
the labour force, a sharp rise in the open unemployment rate, and a stagnation in real wages in
rural India. Moreover the 2 economic reforms i.e., Demonetisation of high valued currency in
2016 and GST in 2017 further led to sharp fall in GDP growth rates. In 2000 there was a rise in
investments, savings and bank credit growth but during the 2010s the new capital investment fell
which turned Corporate bad debts into NPAs. The quick economic revival with public support
could have melted away the NPAs earlier during the 2010s. But policymakers stuck to targeting
fiscal deficit, inflation and structural reforms to reduce policy-induced rigidities.

The attention has been more to cleaning up the banking frauds ending corruption, introducing
new banking reforms but less on poor lending practices by banks and deep-seated crony
capitalism and Corporate frauds.

● Prospects:

The way out of the slowdown now is to increase public infrastructure investment as private
investment is driven by demand which is not much. Public Infrastructure investment would
create demand and hence would crowd in Private infrastructure investment. A boost to NREGA
as unemployment is on rise and bank credit to rural economy would help to mitigate agrarian
crisis, create jobs and would help rural economy. The infrastructure deficit and unemployment
crisis are far more serious concerns than budgetary prudence at such a time of slowdown.
Appendix
Exhibit-1

Source: National Accounts Statistics, 2019

Exhibit-2
Source: Handbook of statistics on Indian economy

Exhibit-3
Source: National Accounts statistics

Exhibit-4

Source: Mehrotra and Parida, 2019

Exhibit-5

Source: National Accounts statistics

Exhibit-6

Source: Web releases made since December 2011

Exhibit-7

Source: CMIE
Plagiarism Report