Macro Analysis (GDP)

Major Economic reforms introduced in India

Economic reforms are set of policies, rules and regulation to achieve economic growth.
Economic reforms are needed when there is poor performance of public sector, adverse balance
of payment, fall in foreign exchange reserves, huge debts on government and inflationary
pressure. There are various economic reforms introduced in India to tackle these problems such
reforms are as follows:

Liberalization: Liberalization was conceived with the premise that all regulations or limits
levied on international markets would be relaxed in order for trade to take place. It allowed the
opening of economic boundaries to foreign investors and MNCs. Several economic changes
were imposed as part of the Liberalization process, including the extension of manufacturing
capability, the de-servicing of generating zones, and the abolition of industrial licensing, by the
government, and freedom to import goods.

Privatization: Privatization refers to allowing the private sector more opportunities to regulate
various utilities while reducing the position of the public sector (government-owned enterprises)
in them. FDI (Foreign Direct Investment) was launched in India with privatization, providing
healthy competition to Indian products and services.

Globalization refers to the convergence of the Indian economy with the global economy in the
sense of structural reforms. It means that India's economy will now be dependent on the global
economy and vice versa. It promotes FDI and international trade with various countries.

Monetary Reforms: Monetary policy is a sort of control policy through which the central bank
controls the supply of money with a view to achieving the objectives of the general economic
policy. Reforms in this policy are called monetary reforms. The major points with regard to the
monetary reforms are Statutory Liquidity Ratio (SLR) has been lowered, The banks have been
allowed freedom to decide the rate of interest on the amount deposited, New standards have been
laid down for the income recognition for the banks, Permission to collect money by issuing
shares in the capital market has been granted to nationalized banks, and Permission to open
banks in the private sector has also been granted.
Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs
whenever there is a change of national currency: The current form or forms of money is pulled
from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country
completely replaces the old currency with new currency. On 8 November 2016, the Government
of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma
Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange
for the demonetized banknotes. This is one of the major economic reform introduced in India.

Impact of Economic Reforms:

 Sharp correction in fiscal deficit-GDP ratio and reduced monetization of deficits.

 New industrial policy fostered competition.
 Real GDP growth averaged 5.7 per cent per annum in the 1990s, which accelerated
further 2000s.
 Exports and imports of goods and services have more than doubled.
 The high growth was achieved in an environment of price stability as headline WPI
inflation dropped.
 Economic reforms have accelerated growth but failed to generate adequate employment.
 Agriculture as a percentage of real GDP declined. There is a need to increase agricultural
productivity.
 Failed to address labor market inflexibity and thereby increasing concentration of labor
force in agricultural sector hence high unemployment.
 It could not attract sufficient investment in Infrastructure.
 Credit market has still remain an important issue.
 There was an increase in air travel and expansion in the civil aviation sector due to
reforms. In order to promote competition, the government adopted the Open Skies Policy
(through which private players were allowed into aviation sector) in 1991. The results of
this policy are visible today with private players in the domestic aviation market as well
as the international markets.
 There was a vast expansion of the telecommunication sector. In fact, this sector has been
one of the biggest beneficiaries of economic reforms.
GDP Analysis

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and
services produced within a country's borders in a specific time period.

Main Factors Affecting GDP

 Poverty and Economic Inequality: With increase in per capita income, the incidence of
poverty often goes up. So, social welfare diminishes. This is what has happened in India
over the plan period. Although India has achieved a satisfactory growth rate in recent
years, the planners have failed to alleviate poverty in 56 years.
 Quality of Life: Various factors make a particular town or city an attractive place to live.
Some of these desirable features get reflected in GDP: spacious, well-constructed homes,
good star hotels and restaurants, a variety of entertaining and high-quality medical
services.
 Underground Economy: Many activities are performed unofficially. The underground
economy includes both legal and illegal activities from informal (private) nursing, house
cleaning or child care to organized crime. House cleaners or plumbers are paid in cash.
Such transactions go unnoticed by the tax authorities.

Contribution of various sectors in GDP

The services sector is the largest sector of India. Gross Value Added (GVA) at current prices for
the services sector is estimated at 100.46 lakh crore INR in 2019-20. The services sector
accounts for 54.77% of total India's GVA of 183.43 lakh crore Indian rupees. With GVA of Rs.
50.40 lakh crore, the Industry sector contributes 27.48%. While Agriculture and allied sector
share 17.76%.

At 2011-12 prices, the Agriculture & allied, Industry, and Services sector's composition is
14.65%, 30.19%, and 55.17%, respectively.

Share of primary (comprising agriculture, forestry, fishing, and mining & quarrying), secondary
(comprising manufacturing, electricity, gas, water supply & other utility services, and
construction), and tertiary (services) sectors have been estimated as 19.90 percent, 25.33 percent,
and 54.77 percent.
At previous methodology, the composition of Agriculture & allied, Industry, and Services sector
was 51.81%, 14.16%, and 33.25%, respectively at current prices in 1950-51. Share of
Agriculture & allied sector has declined at 18.20% in 2013-14. Share of Services sector has
improved to 57.03%. Share of Industry sector has also increased to 24.77%.

According to CIA Facebook, sector-wise Indian GDP composition in 2017 is as follows:

Agriculture (15.4%), Industry (23%), and Services (61.5%). With the production of agriculture
activity of $375.61 billion, India is 2nd larger producer of agriculture products. India accounts
for 7.39 percent of total global agricultural output. India is way behind China, which has $991 bn
GDP in the agriculture sector. GDP of the Industry sector is $560.97 billion, and world rank is 6.
India's world rank is eight in the Services sector, and its GDP is $1500 billion.

The Agriculture sector's contribution to the Indian economy is much higher than the world's
average (6.4%). The industry and services sector's contribution is lower than the world's average
30% for the Industry sector and 63% for the Services sector. The pie chart below shows the
percentage contribution of each sector in the GDP for the FY 2020-2021.
GDP Growth rate

The GDP growth rate is how much more the economy produced than in the previous quarter.

GDP Growth rate of India (each quarter) in Past three years

10
5
0
2020-2021 2019-2020 2018-2019
-5
-10
-15
-20
-25
-30

Q1 Q2 Q3 Q4

Year Q1 Q2 Q3 Q4
2020-21 -23.92 -7.54 0.4 0.1
2019-20 5.24 4.42 4.08 3.09
2018-19 7.10 6.20 5.59 5.67

Comparative Analysis

GDP growth for FY2020-21 Q3 is 0.4 percent, while the same figure for FY 2019-21Q3 was
4.08 percent. This large disparity is attributable to the economic downturn that occurred during
the lockout era as a result of the suspension of business operations.

The Indian economy shrank 23.9% year-on-year in the first quarter of 2020-21, much worse than
market forecasts of an 18.3% drop. It is the biggest contraction on record, as India imposed a
coronavirus lockdown in late March and extended it several times, halting most economic
activities. Still, India remains the third worst-affected country in the world by the pandemic.

The Indian economy shrank 7.5% yoy in Q2 2020-21, less than expectations of an 8.8% drop,
amid easing of lockdown restrictions from June, higher demand during festival season and a
rebound in manufacturing and utilities. It follows a record 23.9% plunge in Q1, bringing the
economy into recession for the first time on record.
The economy of India grew 0.4% year-on-year in the last three months of 2020, slightly below
market forecasts of a 0.5% gain. Still, it is the first expansion in three quarters as the government
opened economic activities in phases from June after a coronavirus lockdown in late-March. The
contraction for financial year 2020/2021 was estimated slightly higher at 8% from 7.7% which
would be the biggest drop ever.

Forecast changes in GDP FY 2021-22

India's economic growth forecast for the Q1 of financial year 2021-22 to be fall down as second
wave of corona virus has strike the country and private consumption is likely to contract due to
large-scale loss of income in the face of worsening domestic outbreak of COVID-19.

Historic and Expected Performance of GDP growth rate

From the above bar graph the real GDP growth rate is expected to be 8.8% in 2021, 7.99% in
2022, 7.63% in 2023, 7.41% in 2024 and 7.18% in 2025.

Events that affected the change in GDP growth rate.

2008 Recession
The global recession started in December 2007. The initial impact on India was muted: GDP
growth slowed from 9% in 2007-08 to 7.8% in April-September 2008, still a very high rate. But
after Wall Street collapsed in September, India's growth plummeted to 5.8%, 5.8% and 6.1% in
the next three quarters.

Demonetization

The Indian economy is a cash-driven economy and demonetization has largely affected its
growth. The GDP growth rate of 8.01% in 2015-2016 fell to 7.11% in 2016-2017 after
demonetization. This was largely due to less availability of cash in cash-intensive industries like
manufacturing and construction. It has also adversely impacted the primary function of banks to
issue loans and has put pressure on them as current account holder’s demand0 large sums of
cash.

2020 Coronavirus Pandemic

GDP growth for 2020-21 at (-) 4.5 per cent. With the rapid spread of COVID-19 pandemic
manifesting into an economic and healthcare crisis globally, the latest forecast marks a sharp
downward revision from the growth estimate of 5.5 per cent. The pandemic outbreak has
severely impacted the economic activities as the country had to go through a lockdown to check
spread of the virus.

Name: Medha Singh

Date: 01.05.2021

College: Christ University

Designation: Finance Intern