TASK 3: ARISE, AWAKE, STOP-NOT

TILL THE GOAL IS REACHED

SUB: ECONOMIC REFORMS AND GDP ANALYSIS

Sanjay Joseph
JUNIOR RESEARCH ANALYST (FINANCE)
BATCH ID: 21WM30 B21
HEDGE SCHOOL OF APPLIED ECONOMICS
COLLEGE: MONTI INTERNATIONAL
INSTITUTE OF MANAGEMENT STUDIES
Economic Reforms—The First Phase
With the changes in the nature of markets and institutions, industrial organisation and structures
and social relations of production in various countries of the world, India has also started to
respond to all these changes, particularly to the increasing globalization of economic processes.
The first phase of economic reforms that had its origin in 1985 when Mr. Rajiv Gandhi took over
as the Prime Minister of the country. Just after that Mr. Gandhi declared the New Economic
Policy where he put much emphasis on improvement in productivity, absorption of modern
technology and fuller utilization of capacity and finally on the greater role for the private sector.
In order to provide greater scope to private sector, this new policy introduced various policy
changes regarding industrial licensing, technology up-gradation, elimination of controls and
restrictions, foreign capital, fiscal policy, rationalizing and simplifying the system of fiscal and
administrative regulation and export-import policy.
These policy changes were brought with the sole-intention to create a favourable climate for
getting a big boost in private sector investment which would, in turn usher in rapid growth of the
economy as well as pave the way for modernization of the economy.
In this connection, Prof. K.N. Raj rightly observed that, “There has been, however, a general
agreement that a very distinctive feature of these policy changes taken as a whole is the greater
scope for unfettered expansion they offer to the private sector, particularly in the corporate
segment of manufacturing industry and the opportunities opened up to multi-national enterprise.”
Accordingly, the New Economic Policy stressed on removing unnecessary restrictions in issuing
licences, in denying Industrial Licences to MRTP companies and in making adjustment of output
to administered prices.
In this connection, the government introduced various measures in the following manner:
1. Cement:
Cement was totally decontrolled and a number of private sector units were issued additional
licensed capacities.
2. Sugar:
The share of free sale of sugar in open market was enlarged.
3. Asset limit:
The ceiling of the asset limit of big business houses was enhanced from Rs. 20 crores to Rs. 100
crores.
4. Broad-banding:
The scheme of “broad-banding” of licences was introduced to bring variety in the production of
two wheelers which was later extended to 25 other categories of industries like, four-wheelers,
chemicals, petro-chemicals, pharmaceuticals, typewriters-etc.
5. Drug:
94 drugs were completely delicensed and 27 industries were placed outside the purview Of
MRTP Act.
6. Textile:
Introduction of new Textile Policy, 1985 practically abolished the distinction between mill,
power loom and handloom sectors and also between natural and synthetic fibre for licensing
purposes.
7. Electronics:
Electronics industry was liberalised from MRTP Act restrictions. The entry of FERA Companies
in the areas was also liberalised.
8. Foreign Trade:
Export-Import Policy, 1985 was announced in order to pave the way for easier and quicker
access to imports, strengthening export production base and for facilitating technological up-
gradation.
9. LTFP:
Long Term Fiscal Policy, 1985 was announced for the implementation of the Seventh Plan in a
smooth manner.

Economic Reforms in India—the Second Phase:

The first phase of economic reforms failed to yield the expected result in most of the fronts.
More particularly, the deficit in the balance of trade account gradually increased and thus the
average deficit in balance of trade during the Sixth Plan which was to the extent of Rs. 5,935
crore, suddenly rose to the tune of Rs. 10,841 crore during the Seventh Plan.
Moreover, receipts on invisible account has also declined Thus the country has been plunged into
a serious balance of payments crisis. In order to save the situation, the Government approached
the World Bank and the International Monetary Fund (IMF) to extend loan to the tune of about
$7 billion. IMF finally decided to advance this loan but at the same times insisted that the
Government should put the economy again on right track.
Accordingly, Dr. Manmohan Singh, the then Finance Minister of India finally made a
commitment by his letter dated August 27, 1991 to the IMF Managing Director Michel
Camdessus that the Government of India set certain macro-economic targets and also initiated
certain policy measures in order to bring about structural readjustment of the economy.

In order to restore both internal and external confidence, the Narasimha Rao Government
initiated a good number of stabilisation measures in 1991-92. These measures include—
tightening of monetary policy by raising interest rates, adjustment of the exchange rate of rupee
by 22 per cent, liberalisation and simplification of foreign trade policy, reduction of fiscal deficit
and introduction of other reforms in economic policy necessary to bring a new element of
dynamism to the process of economic growth of the country.
The memorandum submitted by the then Finance Minister observed that, “The thrust will be to
increase the efficiency and international competitiveness of industrial production, to utilize
foreign investment and technology to a much greater degree than in the past, to improve the
performance and rationalize the scope of the public sector and to reform and modernize the
financial sector so that it can more efficiently serve the needs of the economy.”
Macro-Economic objectives:
The main macro-economic objectives of economic reforms (2nd phase) in India include:
(a) Attaining economic growth at the rate of 3 to 3.5 per cent in 1991-92 and at 4 per cent in
1992-93;
(b) Reducing the annual rate of inflation by 9 per cent in 1991-92 followed by 6 per cent in
1992-93;
(c) Relieving the critical balance of payments situation and rebuilding foreign exchange reserves
to $ 2.2 billion in 1991-92;
(d) Reducing current account deficit in the budget from 2.5 per cent of GDP in 1990-91 to 2.0
per cent by 1992-93.
Policy Measures of Second Phase of Economic Reforms:
The following are the major areas of the second phase of economic reforms in India:
1. Fiscal Policy Reforms:
The Government initiated various fiscal measures in order to reduce the fiscal deficit from 8.4
per cent of GDP in 1990-91 to 5.0 per cent in 1996-97 and to 3.7 per cent in 2006-2007. In order
to achieve this target, the Government introduced various controls over public expenditure and
took initiative to raise both its tax and non-tax revenue
The other measures include imposition of fiscal discipline by both Central and State
Governments, reduction of subsidies, developing a more efficient expenditure system,
encouraging state governments to streamline the working State Enterprise, more particularly
State Electricity Boards and State Transport Corporations and withdrawal of budgetary support
to Central public sector enterprises and to improve their profitability and efficiency.
2. Monetary Policy Reforms:
The Government pursued a restrictive monetary policy for reducing inflationary pressures and
also for improving balance of payment position.
3. Pricing Policy Reforms:
In order to reduce budgetary provision for subsidies and to promote a more flexible price
structure, the Government increased the administered prices of various commodities and inputs
(petroleum products and fertilizers) and gave greater freedom to public sector enterprises to set
price as per market forces.
4. External Policy Reforms:
The government introduced stabilisation and import compression measures in order to reduce the
current account deficit in balance of payments to 2.1 per cent of GDP in 1991-92 and then to 2
per cent of GDP in 1992-93.
5. Industrial Policy Reforms:
In order to make necessary reforms in its industrial policy, the Government introduced its new
industrial policy on July 24, 1991.
The various measures under industrial policy reforms include:
(a) Abolition of the scheme of industrial licensing for all industrial projects excepting 18
industries related to security, strategic or environmental concerns etc.;
(b) De-reservation of the area of public sector from 17 to 8 industries in order to open up area of
investment for the private sector;
(c) Elimination of the system of pre-entry scrutiny of investment decisions of the MRTP
companies and controlling only “unfair or restrictive business practices”;
(d) Liberalisation of location policy;
(e) Abolition of phased manufacturing programmes earlier enforced to increase the pace of
indigenisation and
(f) Removal of mandatory convertibility clause.
6. Foreign Investment Policy Reforms:
The new industrial policy, 1991 made provision for increased flow of foreign investment in
connection with technology transfer, marketing expertise and introduction of modern managerial
techniques. Accordingly, the new policy included 34 priority industries in Annexure III to give
automatic permission for foreign direct investment up to 51 per cent foreign equity.
In respect of foreign technology agreements automatic permission will be provided in high
priority industry for royalty payments up to 5 per cent on domestic sales, 8 per cent on export
sales or a maximum payment of Rs. 1 crore. Moreover, in order to promote exports of Indian
commodities in international market, foreign trading companies were also allowed to raise their
foreign equity holdings up to 51 per cent for export activities.

7. Public Sector Policy Reforms:

Considering the huge amount of losses incurred by a good number of public sector enterprises,
the Government has taken various policy measures of making necessary reforms of the public
sector.
These policy measures include:
(a) Reservation of list of industries under public sector reduced to 8 as against 17 industries
reserved earlier;
(b) Review of those public investments be made in order to avoid those areas where social
considerations are not so paramount and where private sector investment would be more
efficient;
(c) Enterprises earning higher profit and judged appropriate, will be provided with much higher
degree of arrangement autonomy through the system of MOD;
(d) Progressive reduction of budgetary support of public enterprises;
(e) Inviting private sector participation to increase market discipline and also the competitive
capacity of these public sector enterprises through disinvestment of part of equity of selected
enterprises;
(f) Referring the chronically sick public enterprises to the 3oard for Industrial and Financial
Reconstruction (BIFR) for its rehabilitation, reconstruction or rationalisation.
In the mean time, the Government has taken decision to dereserve the area of industries and thus
reduced the number of industries reserved for public sector to 8 and also allow private sector
participation even in these 8 areas selectively. The Government also allowed joint ventures with
foreign companies.
The Government has also decided to disinvest 20 per cent of the equity of public enterprises to
selective private sector enterprises. Accordingly, in 1991-92 and in 1992-93, Rs. 3,038 crore and
Rs. 1,866 crore respectively were raised through disinvestment of PSE shares.
In 1993-94, the Government realised Rs. 2,291 crore against the targeted amount of Rs. 3,500
crore and in 1994- 95, the Government plans to mobilise Rs. 4,000 crore through disinvestment
of PSUs shares but it realised Rs. 5,237 crore. A National Renewal Fund (NRF) has also been
created for training and redeployment of workers and also to provide voluntary retirement
compensation.
Game Plan for Public Sector Reform, 1994-95:
On February 8, 1994, the Government announced a “game plan” for the public sector reform in
1994-95 which gave more emphasis on improving dynamic efficiency and quality check of the
performance and also to give more weight (50 per cent) for profit and profit related criteria in the
memorandum of understanding (MOU) to improve the financial performance of the public
sector.
Originally no weight was given to profit when MOU was introduced in 1988. It subsequently
raised to 35 per cent in 1993-94 and the weight has been substantially stepped up to 50 per cent
for 1994-95.
The Government has already evolved a six-year action plan to restructure public sector
undertakings and the idea is to have 100 per cent weight for profit at the end of six years to make
the public enterprises fully run on commercial lines.
8. Trade Policy Reform:
In the context of globalisation of the economy and also to promote international integration of
our country, phasing out of excessive and indiscriminate protection given to domestic industry
become necessary. This would develop a vibrant export sector and create a regime of price based
system.
The main objective is to eliminate progressively the system of licenses and quantitative
restrictions, particularly for capital goods and raw materials so that these items can be placed
easily on open general license (OGL). The new policy made provision for reduction of the scope
of public sector monopoly sharply for most export items and also a good number of import
items.
In this context, the Government has introduced Export-Import Policy, 1992-97 and 1997-2002
for the coming five years and on 13th April 1998 the Government has further modified this new
Exim Policy (1997-2002) and also announced its annual Exim Policy, 2000-01 and also in 2001-
2002; Again on 31st March, 2002, the Government announced its new Exim Policy, 2002-07 so
as to achieve 1 per cent share in global exports by 2007.
9. Social Policy Reforms:
To meet the objective of poverty alleviation as a part of our adjustment process, the government
has allocated a higher amount of outlays on elementary education, rural drinking water supply,
assistance to small and marginal farmers, programmes for the welfare of scheduled caste and
scheduled tribe and other weaker sections of the society, programme for women and children and
also on infrastructure and employment generation projects.
As a part of this programme, the 1995-96 Budget has introduced a National Social Assistance
Scheme in the form of housing assistance, old age pension, maternity benefit, group insurance
for schemes etc. for those living below the poverty line.
Economic Reforms in India come under the ESI (Economic & Social Issues) section of the Phase
II exam for RBI Grade B. Topics covered under it are Industrial and Labour policy, Monetary
and Fiscal policy, Privatization and Role of Economic Planning.
Economic reforms in India refer to the neo-liberal policies introduced by the Narsimha-Rao
government in 1991 when India faced a severe economic crisis due to external debt. This crisis
happened largely due to inefficiency in economic management in the 1980s. The revenues that
the government was generating were not enough to meet the expenses. Hence, it had to make
hefty borrowings from foreign banks to pay the debt. Hence, they were caught up in debt-trap.
To curb this crisis, India approached the world bank and international monetary fund (IMF) for
the loan and received $7 million to manage their crisis. As a result of which, these international
organizations expected India to open its door to trade with other countries by removing the strict
restrictions hitherto present. Hence India adopted the LPG (Liberalisation, Privatisation &
Globalization) reforms under the Economic Reforms. Let us look at each one of them:
Liberalization: Liberalization was brought about with an idea that any regulations or restrictions
that were imposed on free trade must loosen up its grip to allow trade. It allowed opening up the
economic borders for foreign investments and MNCs. Several economic reforms that were
imposed under Liberalization include expansion of production capacity, de-servicing producing
areas, abolishing industrial licensing by the government, and freedom to import goods.
Privatization: Privatization refers to giving more opportunities to the private sector in regulating
different services and reducing the role of the public sector (government-owned enterprises) in
them. With privatization, FDI (Foreign Direct Investment) was introduced in India giving
healthy competition to the Indian goods and services.
Globalization: In the context of economic reforms, Globalization means integration of the
Indian economy with the world economy. It means that the economy of India will now also
depend on the world economy and vice versa. It encourages FDI and foreign trade with different
countries.
Several other topics that are included under Economic Reforms in India in RBI Grade B Exam
are Industrial and Labor Policy, Monetary and Fiscal Policy, Labor Law and Role of Economic
Planning. Let us look at them briefly:
 Industrial Policy:
An industrial policy of a country, sometimes symbolised as IP, sometimes industrial strategy, is
its official strategic effort to encourage the development and growth of all or part of the
economy, often focused on all or part of the manufacturing sector.
 Labour Law:
The term Labour Law is used to denote that body of laws which deal with employment and non-
employment, wages, working conditions, industrial relations, social security and labour welfare
of industrially employed, persons. Labour has a vital role in growing productivity and
management must help create conditions in which workers can make their maximum
contribution towards this objective.
 Monetary Policy:
Monetary policy is the procedure by which the monetary authority of a country, typically the
central bank or currency board, controls either the cost of very short-term borrowing or the
money supply, often targeting inflation rate or interest rate to ensure price stability and general
trust in the currency.
 Fiscal Policy
In economics and political science, fiscal policy is the use of government revenue collection and
expenditure to monitor and influence a nation's economy. It developed out of the Great
Depression, when the laissez-faire approach to economic management was ended and
government intervention became the means of influencing macroeconomic variables.
 Economic Planning:
Economic planning is a mechanism for the allocation of resources between and within
organizations which is held in contrast to the market mechanism. As an allocation mechanism for
socialism, economic planning replaces factor markets with a direct allocation of resources within
a single or interconnected group of socially-owned organizations.

Recent Reforms in India

1. Demonetization
impact on Black Money and Corruption: ' Black Money' or 'Dirty Money' is the money on which
not tax is paid to the Government and it goes unaccounted in the duration of country tax
assessment period which causes revenue loss to the government. It is argued that steps taken by
the government of demonetization can help curbing black money in the country. Corruption will
also be automatically reduced by removing black money from economy.
 Impact on Counterfeit Currency: The Biggest positive impact of the demonetization will
be on the counterfeit/fake currency as it currently thrown out of the system full
 Impact on GDP: GDP become down because circulation of currency is less because of cash
crunch in the country. The GDP formation could be impacted by this measure, with
reduction in the consumption demand. Moreover, this expected impact on GDP may not be
significant as some of this demand will only be deferred and re-enter the stream once the
cash situation becomes normal.
 Lower Inflation: Inflation arises due to higher liquidity in the market. Because of
demonetization there is less liquidity and less cash flow in the market thats why inflation
becomes down. As the black money goes out of the system the money supply will shrink to
 some degree. This will reduce inflation rate in the Lower absence of any open market
interventions by the Reserve Bank of India. Inflation is of four types.
Creeping Inflation (2% – 4%)
Walking Inflation (5% – 10%)
Galloping Inflation (10% – 20%) Hyper Inflation (more than 20%)

 Impact on Purchasing Power: The move of demonetization has affected the purchasing
power. This is mainly affect those assets that are used as long term investments like Real
Estate, Vehicles and core sectors of cement and steel. The stock prices of the companies of
these sectors will have a negative impact. Purchasing power of consumer is also affected due
to the shortage of cash because 90% transactions taking place in cash in the Indian economy.
 Impact on Real Estate Sector: Demonetization smashed the real estate market and it will
result in more than 50% drop down and it will remain for further 5 to 6 months. While the
short-term impact is negative, Experts hoping that rate cuts in the coming months would
boost home sales.
 Impact on Banks and Financial Institutions: The demonetization effects on banks will be
both on the positive side and the negative side. However, In the long run it will be more on
the positive side. As per directions of Government people have to deposit their money with
the banks which will increase the liquidity of the banks for short term. This liquidity can be
used by banks for lending purpose for long run. As the liquidity of banks increases, they are
expected to enhance the borrowing cycle by the lending money at lower rate of interest.
However, the negative impact also as the earning of the banks will also take a hit for the
next 2-3 quarters. We may not see loan book growing as the banks will be busy in
facilitating the demonetization process.
 Impact on Lending Rate: Lending rate become down because of Banks getting money at
Repo ate and banks lending money at Base Rate. In this situation Repo Rate become less
and automatically Base Rate will become down and banks having sufficient money to lend
so lending rate become down.
 Impact on Ecommerce: Impact of demonetization on Ecommerce mostly bad, some good.
For the online retail market, gross merchandise value (GMV) of players fell by 40-50% in
first few weeks after demonetization, in the middle of their biggest quarter for sales. Things
may remain bleak till March. Even high-value items like expensive smart phones are selling
less. Products returned are up by 50%. And experts feel consumer sentiment won’t improve
quickly. But the boost to digital payments (100% jump in transactions) has led industry to
hope for a bright medium term. Also, grocery and food delivery set-ups are doing better
since they sell essential items. Some saw new customer orders jump to 25%, from the usual
15-16%
 Impact on Tourism: Cash Crunch badly hits the tourism sector. It is very difficult for
people for getting the money from the banks and ATMs. The travel and hospitality
industries are facing a tough time. Peak tourism period of November-December badly hit.
For tourist destinations beyond metros, business may be down by as much as 40%. Tourism
business in metros may go down by 10%. Cash shortage at airports and hotels are a big
problem. And many national monuments entry points don’t have card payments facilities.
Western countries have issued advisories on cash Liquidity in India
 Online Transactions and others modes of payment: The Government wants to go cash-
less, Demonetization will have positive impact on digital transactions and other mode of
payment. With cash transactions facing a reduction, alternative forms of payment will see a
surge in demand. Digital transaction systems, E wallets, online transactions using E banking,
 usage of Plastic money (Debit and Credit Cards), UPI, EFTPOS, Net Banking Aadhar card,
etc. will definitely see substantial increases in demand. This should eventually lead to
strengthening of such systems and the infrastructures required

2. Good And Services Tax (GST)

GST, also known as the Goods and Services Tax is defined as the giant indirect tax structure
designed to support and enhances the economic growth of a country. More than 150 countries
have implemented GST so far. However, the idea of GST in India was mooted by Vajpayee
government in 2000 and the constitutional amendment for the same was passed by the Loksabha
on 6th May 2015 but is yet to be ratified by the Rajya sabha. However, there is a huge hue and
cry against its implementation. It would be interesting to understand why this proposed GST
regime may hamper the growth and development of the country.

POSITIVE IMPACT OF GST:

 Increase in Foreign Investment- With GST, India is now a unified market and the
foreign investment has increased in India. The goods that are manufactured within India
because of their reduced costs have become more competitive in international market
leading to growth in export. The implementation of Goods & Services tax puts India in the
line of international tax standards, making it easier for Indian businesses to sell in the
global market.
 Fewer Tax- GST has two constituents: The central GST and the State GST. The Central
GST will replace - Service Tax, Central Excise Duty, and Custom Duty etc. The State
GST will replace - State VAT, Central Sales Tax, Tax on Advertisements, Luxury Tax,
Purchase Tax, Entertainment Tax etc. Before GST, there were so many taxes and now
they have replaced all these taxes and duties with Central GST and State GST.
 Reduce the cost of doing business- GST has changed VAT all over India. Now we do
not need to pay different amounts of taxes in different states. It is one tax system for all
states of India and so we have already got rid of various taxes and duties on our
businesses.
 Transparency- The tax administration has started working corruption free. Also enabling
sales invoices to show the tax applied has resulted in transparency.

NEGATIVE IMPACT OF GST:

 Dual Control - GST is being referred to as a single taxation system but in reality it is a
dual tax because both the state and centre both will collect separate tax on a single
transaction of sale and service.
 Incumbent increase of the cost of some commodities - The tax rate has been increased
for many products, thus increasing their costs.
 Some sector are at a loss- Sectors like Textile, Media, Pharma, Dairy Products, IT and
Telecom are bearing the brunt of a higher tax. Also the price of commodities has
increased like jewellery, mobile phones and credit cards.
 Real Estate Market affected - Economists are of the opinion 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.
3. Farm bill 2020
The newly passed farm bills will give farmers the freedom to trade across states and empower
them to turn into traders of their own produce and be in control of the process. The intent behind
these three bills is that the new regulation will create an ecosystem where the farmers and traders
will enjoy the freedom of choice of sale and purchase of agri-produce and promote barrier-free
inter and intra-state trade and commerce outside the physical premises of markets notified under
State Agricultural Produce Marketing legislations.

The lacunae with the existing system are that the farmers had been facing several problems in the
late 1800s. These problems included overproduction, low crop prices, high transportation costs,
high-interest rates, and growing debt. Farmers worked to alleviate these problems. The other
major issue with the existing MSP-based procurement system is the working dependence on
middlemen, commission agents, and red-tapism of the APMC (Agriculture Produce Marketing
Committee) officials. An average farmer finds it difficult to get access to these mandis and
depends on the market to sell farm produce.
Pros of the new Farm Bills
 The farmers had moved towards a freer and more flexible system.
 Selling produces outside the physical territory of the mandis will be an additional
marketing channel for the farmers.
 The new bill has not brought any major drastic changes, only a parallel system working
with the existing system. Prior to these bills, farmers can sell their produce to the whole
world, but via the e- NAM system.
 The amendment to the Essential Commodities Act which is one of the three bills under
protest removes the scare or fear of the farmers that traders who buy from farmers would
be punished for holding stocks that are deemed excess and inflicting losses for the
farmers.
 The bills ensure that the farmer or the producer is given the same attention as production
is and the farmer gets the stipulated price for crops, so that farming survives.
 The prime minister Narendra Modi tweeted on September 20th, that the “system of MSP
will remain” and “government procurement will continue”. The Agriculture Minister also
stated that past governments actually never thought it mandatory to introduce a law for
MSP.
 In the existing APMC system, it is mandatory for farmers to go through a trader (via
Mandis) so as to sell their produce to consumers and companies and they receive
Minimum Selling Prices for their produce. It was this very system that has influenced the
rise to a cartel led by traders and uncompetitive markets due to which the farmers are paid
MSP (a very low price) for their produces.
Cons of the Farm Bills
 The Farm Bills hampers with the monopoly of APMC (agricultural produce market
committee) mandis, thereby allowing sale and purchase of crops outside these state
government-regulated market yards or mandis.
 The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Bill does not
give any statutory backing to MSP. The farmers have nothing to do with the legal system
 but everything to do with the MSP, a price at which they sell their produce, there is not
even a mention of either “MSP” or “Procurement” in the said bill.
 The government declares MSPs for crops, but there has been no law mandating their
implementation.
 The only crop where MSP payment has some statutory implementation is sugarcane for
which FRP is determined. This is due to its pricing being governed by the Sugarcane
(Control) Order, 1966 issued under the Essential Commodities Act.
 The new bills are placing farmers and traders at the mercy of civil servants, rather than of
the courts.

List of Macro-economic factor that affect economy of India:

• Unemployment.
• Poor educational standards.
• Poor Infrastructure.
• Balance of Payments deterioration.
• High levels of private debt.
• Inequality has risen rather than decreased
• Large Budget Deficit.
• Rigid labour Laws

GDP
Gross domestic product (GDP) is the standard measure of the value added created through the
production of goods and services in a country during a certain period. As such, it also measures
the income earned from that production, or the total amount spent on final goods and services
(less imports). While GDP is the single most important indicator to capture economic activity, it
falls short of providing a suitable measure of people's material well-being for which alternative
indicators may be more appropriate. This indicator is based on nominal GDP (also called GDP at
current prices or GDP in value) and is available in different measures: US dollars and US dollars
per capita (current PPPs). All OECD countries compile their data according to the 2008 System
of National Accounts (SNA). This indicator is less suited for comparisons over time, as
developments are not only caused by real growth, but also by changes in prices and PPPs.

Importance
 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.
Nominal vs. Real GDP
GDP can be expressed in two different ways—nominal GDP and real GDP. Nominal GDP takes
current market prices into account without factoring in inflation or deflation. Nominal GDP
looks at the natural movement of prices and tracks the gradual increase of an economy's value
over time.
On the contrary, real GDP factors in inflation. meaning it accounts for the overall rise in price
levels. Economists generally prefer using real GDP as a way to compare a country's economic
growth rate. Real GDP is how economists can tell whether there is any real growth between one
year and the next. It is calculated using goods and services prices from a base year, rather than
current prices, in order to adjust for price changes. By comparing the resulting real GDP to
nominal GDP, economics can calculate a GDP price deflator, which can serve as a measure of
inflation in the economy.
GDP for Economists and Investors
GDP is an important measurement for economists and investors because it is a representation of
economic production and growth. Both economic production and growth have a large impact on
nearly everyone within a given economy. When the economy is healthy, there is usually a lower
level of unemployment, and wages tend to increase as businesses hire more labor to meet the
growing demand of the economy. Economists look at positive GDP growth between different
time periods (usually year-to-year) to make an assessment of how much an economy is
flourishing. Conversely, if there is negative GDP growth, it may be an indicator that an economy
is in or approaching a recession or an economic downturn.
Investors pay attention to the GDP because a significant percentage change in the GDP–either up
or down–can have a significant impact on the stock market. In general, a bad economy usually
means lower earnings for companies. And this can translate into lower stock prices.
Investors may pay attention to positive and negative GDP growth when they are devising an
investment strategy. However, it's important to note that because GDP is a measurement of the
economy in the previous quarter or year, it is better used to help explain how economic growth
and production have impacted your stocks and your investments in the past. It is not considered a
helpful predictor of how the market will move in the future.
Drawbacks
 It does not account for the underground economy: GDP relies on official data, so it
does not take into account the extent of the underground economy, which can be
significant in some nations.
 It is geographically limited in a globally open economy: Gross National Product
(GNP), which measures the output from the citizens and companies of a particular nation
regardless of their location, is viewed as a better measure of output than GDP in some
cases. For instance, GDP does not take into account profits earned in a nation by overseas
companies that are remitted back to foreign investors. This can overstate a country's
 actual economic output. For example, Ireland had a GDP of $210.3 billion and a GNP of
$164.6 billion in 2012, the difference of $45.7 billion (or 21.7% of GDP) largely being
due to profit repatriation by foreign companies based in Ireland.
 It emphasizes economic output without considering economic well-being: GDP
growth alone cannot measure a nation's development or its citizens' well-being. For
example, a nation may be experiencing rapid GDP growth, but this may impose a
significant cost to society in terms of environmental impact and an increase in income
disparity.
GDP Calculation
GDP can be calculated either through the expenditure approach—the sum total of what everyone
in an economy spent over a particular period—or the income approach—the total of what
everyone earned. Both should produce the same result. A third method, the value-added
approach, is used to calculate GDP by industry.
Expenditure-based GDP produces both real (inflation-adjusted) and nominal values, while the
calculation of income-based GDP is only carried out in nominal values. The expenditure
approach is the more common one and is obtained by summing up total consumption,
government spending, investment, and net exports.

GDP = C + I + G + (X – M)
where:
C = private consumption or consumer spending;
I = business spending;
G = government spending;
X = value of exports
M = the value of imports.
GDP fluctuates because of the business cycle. When the economy is booming, and GDP is rising,
there comes a point when inflationary pressures build up rapidly as labor and productive capacity
near full utilization. This leads the central bank to commence a cycle of tighter monetary policy
to cool down the overheating economy and quell inflation.
As interest rates rise, companies and consumers cut back spending, and the economy slows
down. Slowing demand leads companies to lay off employees, which further affects consumer
confidence and demand. To break this vicious circle, the central bank eases monetary policy to
stimulate economic growth and employment until the economy is booming once again. Rinse
and repeat.

GDP ANALYSIS
YEAR FY21 FY20 FY19
 QUARTER Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
GROWTH
-24.43 -7.44 0.46 1.64 5.39 4.61 3.28 3.01 7.56 6.49 6.33 5.84
RATE %

COMPARATIVE ANALYSIS
FY21 Q1
Owing to a strict nationwide lockdown due to the novel coronavirus (COVID-19) during the first quarter
of the financial year 2020-21, India’s Gross Domestic Product (GDP) for the April-June quarter (Q1)
slipped by a sharp 23.9 %, as per provisional estimates released by Ministry of Statistics and Programme
Implementation (MOSPI).
The GDP had expanded by 5.2 % in the corresponding quarter of 2019-20.
The June quarter GDP data is the worst contraction in the history of the Indian economy mainly because
the central government on March 25 had ordered a complete lockdown of most of the manufacturing and
service sectors owing to the spread of COVID-19.
As per the data by the National Statistical Office (NSO), all key sectors except agriculture witnessed
contractions, with construction witnessing a drop of a whopping 50.3% while the manufacturing industry
saw a 39.3% fall. Apart from these two industries, electricity, gas, water supply and other utility services
slipped 7%. Trade, hotels, transport, communication and services related to broadcasting contracted
47.0%. Only the agriculture, forestry and fishing industry witnessed a growth of 3.4% in the June quarter,
the data showed.

FY21 Q2
According to the official data, India’s gross domestic product (GDP) contracted by 7.5% during the July,
August, and September quarter. This means in Q2 of 2020-21 India produced 7.5% fewer goods and
services when compared to what India produced in Q2 of 2019-20.
In the process, India’s economy has now formally entered into a technical recession because — along
with the nearly 24% contraction in Q1 — India has had two consecutive quarters when GDP growth rate
has declined.
The 23.9% fall in GDP in Q1 was one of the worst among the major economies of the world. But the
7.5% contraction is better than the global average. According to an analysis by the State Bank of India’s
research team, 49 countries have declared GDP data for the July-Sept quarter. The average decline of
these 49 countries is 12.4%. In comparison, India’s 7.5% looks much better. In the previous quarter —
that is, April, May, June — the average of these 49 economies was minus 5.6% while India contracted by
almost 24%.
First of all, as compared to just one sector adding positive value in Q1, three sectors added positive value
in Q2. These were agriculture, manufacturing and utilities.
The initial data for Q2 FY2021 revealed a milder contraction than our forecast of 9.5 %, primarily driven
by a better-than-expected performance of manufacturing, electricity and construction, and to a smaller
extent, agriculture.
While manufacturing volumes continued to contract, the GVA of this sector eked out a marginal 0.6 %
growth in Q2 FY2021, on the back of aggressive cost-cutting measures, a pared down wage bill and
benign raw material costs.
Agriculture and allied activities maintained a steady growth of 3.4 % in Q2 FY2021, benefitting from the
healthy kharif season that was underway, as well as a robust performance of the fishery sector. In
contrast, the services sector as a whole recorded a deeper contraction in Q2 FY2021 than what we had
estimated, confirming the view that the contact-intensive portions of the economy will experience a
delayed and difficult recovery.
Moreover, the pace of contraction of two sub-sectors, financial, real estate and professional services, and
public administration, defense and other services, actually worsened in Q2 FY2021 relative to the
previous quarter.
In terms of the components of demand, unsurprisingly, the pace of contraction in private final
consumption expenditure narrowed sharply in Q2 FY2021, benefitting from the pent-up demand related
to the lockdown quarter. Equally unsurprisingly, the loss of momentum in government spending in Q2
FY2021, led to a 22.2 % contraction in government final consumption expenditure (GFCE). As a result,
this component displayed the ignominy of posting the worst performance on the expenditure-side in Q2
FY2021, after being the best performer with a 16.4 % expansion in Q1 FY2021.

FY21 Q3
India GDP Q3 Data: After two consecutive quarters of contraction, India’s Gross Domestic Product
(GDP) for the October-December quarter (Q3) grew by 0.4 %, while the GDP for the entire financial year
2020-21 (FY21) is seen contracting (-)8 %, as per the second advanced and quarterly estimates of GDP
released by the Ministry of Statistics and Programme Implementation (MoSPI).
The government also revised its GDP estimates in the previous two quarters. According to the latest data,
the GDP contracted by 7.3% in July-September quarter (Q2) instead of the previous estimate of -7.5%
and by a sharp 24.4% in April-June quarter (Q1) instead of the earlier reported -23.9%. The Q1
contraction is the worst in the history of the Indian economy, which happened due to a strict nationwide
lockdown because of the coronavirus (COVID-19) pandemic.
In the third quarter, the manufacturing sector, which had a contraction of 1.5 % in Q2, rose by 1.6 %.
Apart from this, the agriculture, forestry and fishing sector grew 3.9 % in Q3. Agriculture has been the
only sector to register a growth in all the three quarters.
Among the other industries, contraction was seen in trade, hotels, transport, communication and services
related to broadcasting at 7.7 % in Q3, better from a contraction of 15.3 % in Q2. The construction sector
showed a growth of 6.2 %, much better from a contraction of 7.2 % in Q2. This pickup benefitted from
the continued unlocking of the economy, uptick in consumption during the festive season, as well as
higher Central government spending
Apart from the festive season boost to private spending, central government expenditure supported the
positive growth for the quarter as capital expenditure and net lending increased by a significant 118% in
Q3FY21, in contrast to the contraction of 39% in the previous quarter.
On the other hand, the capital outlay of 19 states including Andhra Pradesh, Gujarat, Uttar Pradesh,
Haryana, Karnataka, Kerala, Madhya Pradesh, Odisha, Punjab, Rajasthan and Telangana fell 14% in
Q3FY21 after a massive 42% decline in the previous quarter,

FY21 Q4
India's economy expanded by 3.1 % in the January-March quarter and dragged the full year FY20 GDP
growth to 4.2 %, weakest since the financial crisis hit more than a decade back. The economy had grown
at 6.1 % in 2018-19 (FY19). The Gross Value Added (GVA) for Q4 came in at 3 % almost the same as
the GDP growth in Q4 which shows that the tax collections would have been hit in the fourth quarter. For
full year, GVA came in at 3.9 %
Amid coronavirus pandemic, India's gross domestic product (GDP) grew at 1.6 % in the January-March
quarter of fiscal year 2020-21, but witnessed a contraction of 7.3 % for the entire fiscal year, showed
government data.
India’s GDP figures showed the growth at 3 % in Q4 of FY21, while growth for FY21 came at 4 %, an
11-year low.

 According to the National Statistical Office data, gross value added (GVA) growth in the
manufacturing sector accelerated to 6.9 % in the fourth quarter of 2020-21 compared to a
contraction 4.2 % a year ago.
 Farm sector GVA growth was down at 3.1 %, compared to 6.8 % in the corresponding period of
2019-20.
 Construction sector GVA grew by 14.5 % from 0.7 % growth earlier. Mining sector shrank by 5.7
%, as against a contraction of 0.9 % a year ago.
 Electricity, gas, water supply and other utility services segment grew by 9.1 % in the fourth
quarter, against 2.6 % expansion a year ago.Similarly, trade, hotel, transport, communication and
services related to broadcasting contracted by 2.3 % in the fourth quarter from 5.7 % growth
earlier.
 Financial, real estate and professional services grew by 5.4 % in Q4 FY21 from 4.9 % growth.
 Public administration, defense and other services growth fell to 2.3 % during the quarter under
review, from 9.6 % a year earlier.
The economy snapped out of technical recession in the October-December quarter of the financial year
2020-21 and expanded by a revised 0.5 %, after reporting two consecutive quarters of de-growth in the
same fiscal. The GDP contracted by 7.3 % in the September quarter (second quarter) of the fiscal year
2020-21. The measures taken by the government to contain the spread of the pandemic have had an
impact on economic activities as well as data collection mechanisms.

Analysis of FY2020-21 GDP

For the entire fiscal FY2020-21, GDP came in at a contraction of -7.3%. The contraction has been much
better compared to the forecasts of the RBI and the Ministry of Statistics and Programme Implementation
(MOSPI), which had expected the GDP for the full year to contract at -8.0%. The high level of
Government Consumption spending in the last quarter may have contributed to the better-than-expected
results.
The negative growth driven by the pandemic and its impact on the economy is reflective of the significant
fall in household consumption, by 9.1% in FY21 as compared to a 5.5% rise in FY20. Meanwhile, the
public expenditure by the government increased by 2.91% in FY21, much slower than the 7.88% rise seen
in FY20.
Barring agriculture, which continued its stellar performance, growing at 3.6% in FY2021, and electricity
that grew at 1.9%, every other sector contracted during the year. The contraction in trade (–18.2%),
construction (–8.6%), mining (–8.5%) and manufacturing (–7.2%) is particularly ominous, as these
account

Growth outlook to FY22

To regain Rs 145 trillion size, the economy will have to grow by 10-11 % in the current 2021-22 fiscal
but the outbreak of the second wave of COVID-19 infections last month has disrupted the momentum of
economic activity and many expect the GDP may not touch double-digit growth rate despite the low base.
The sectoral performance in Q4FY21 reveals that there was definitely a recovery in manufacturing,
construction and finance, real estate etc. numbers, which would have boded well for FY22. However,
with the second wave leading to a closedown of services sector in particular, progress might remain
muted.
The Reserve Bank of India (RBI) Governor-led Shaktikanta Das Monetary Policy Committee, in its first
bi-monthly monetary policy review for the new financial year 2021-22, retained its GDP growth
projection at 10.5 % in the current fiscal 2021-22. Rating agency, ICRA expects real GDP to expand in
the range of 8-9.5% in FY22. Double digit growth realization is unlikely, in light of recent events. The
second wave has also put V shaped growth trajectory in question.
The Q4FY21 GDP growth of 1.6% reflects the full impact of unlocking of the economy post COVID-19
shock (of first wave). While the second wave of infections has been much more severe, the absence of a
stringent nationwide lockdown has been a positive.
The economy, which was facing a slowdown even before the pandemic, now confronts a crash of
consumer demand - constituting over 55% of the economy - as household incomes and jobs have
declined. Unemployment soared to a near one-year high of 14.73% in the week ending May 23, according
to the Centre for Monitoring Indian Economy, a Mumbai-based private think tank.
In FY22, positive growth estimation can be attributed to an extremely low base effect, coupled with
accommodative nature of RBI policy, heightened government expenditure and a cooled down inflation.
We believe, India’s growth expectations will be dictated by movement in covid-19 cases and vaccine
distribution. Government spending is likely to remain higher on account of efforts to boost private
investment and consumption spending.

Conclusion
Moving forward, we expect growth rate to pick up on the back of latest relief measures announced by the
government, phased unlocking by states, normal monsoon, high vaccination and lower number of new
cases. As far as Apr'21 is concerned, core infrastructure index has declined 15% MoM, fiscal spending
has declined and auto sales have also fallen sharply. Therefore, growth rate for April-June quarter is
likely to be weak due to the lockdown on trade & business activities for most part of the quarter.
However, the nationwide vaccination drive will be the key factor in improving the business sentiment
across the country. The faster the vaccine traction, the faster would be the delinking between mobility and
virus proliferation.