Macro-Economic Concepts – Relevance in the Indian Economy

1. GVA VS GDP

Why the transition? What is the difference?

What is the current controversy regarding the GDP?

Gross value added (GVA) is defined as the value of output less the value of intermediate
consumption. Value added represents the contribution of labour and capital to the production process.
When the value of taxes on products (less subsidies on products) is added, the sum of value added for
all resident units gives the value of gross domestic product (GDP). Thus, Gross Domestic Product
(GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without discounting for
capital consumption or depreciation) in all the sectors of that economy during the said year after
adjusting for taxes and subsidies. 

GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices
GDP at market prices = GVA at basic prices + Product taxes- Product subsidies

Read: https://www.livemint.com/news/india/why-questions-are-being-raised-over-gdp-numbers-
1560350142489.html

2. Fiscal Deficit – borrowing requirement of the Government

Fiscal deficit is ₹1, 57,048 crore — 22% of budget estimate (corresponding period for previous year's
24%).
In India, we have the Fiscal Responsibility and Budget Management or FRBM Act which suggested
bringing the fiscal deficit down to about 3 percent of the GDP as the ideal target. Unfortunately,
successive governments have not been able to achieve this target.

When the government borrows a very large sum of money, then private investors like corporates have
that much lesser money available to borrow to finance their own investment plans. This is called
crowding out of private investment

Also, when the government borrows a large amount, it also has to pay higher interest. When the
government as a sovereign, risk-free entity borrows at a higher rate of interest, the interest rates for all
other sorts of borrowing also go up in tandem.
Finance minister Nirmala Sitharaman reduced the fiscal deficit target to 3.3 per cent from an earlier
3.4 per cent for 2019-20 in a move that signals government's commitment to fiscal consolidation.

Read: https://economictimes.indiatimes.com/news/economy/policy/budget-2019-why-sitharaman-
doesnt-have-much-leeway-on-fiscal-deficit/articleshow/69730620.cms?from=mdr

3. Repo rates

Repo rate is the rate at which RBI lends to its clients generally against government securities.
Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in
repo rate discourages the commercial banks to get money as the rate increases and becomes
expensive. Since January, RBI has cut the repo rate by a total 75 basis points (bps) in three
announcements. These were aimed at making loans cheaper for investment and consumption, key
drivers of growth. The repo rate is the rate at which banks borrow short term money from the central
bank.

Repo rate is RBI’s mechanism to tame inflation,

Read: https://www.business-standard.com/article/economy-policy/rbi-governor-shaktikanta-das-takes-
public-sector-banks-to-task-on-rate-cut-119072000067_1.html

4. Current account deficit

The current account measures the flow of goods, services into and out of the country. We run into a
deficit if the value of the goods and services we import exceeds the value of those we export. The
current account includes net income, including interest and dividends, and transfers, like foreign aid.
The central bank wants to see the current account gap within 2.5% of the GDP, which is seen as
crucial for currency stability. The current account is part of the balance of payments. It records all
international trade and financial transactions. The other two parts are the capital account and the
financial account

Read : https://www.livemint.com/news/india/fy19-current-account-deficit-inches-up-to-2-1-but-more-
than-halves-in-q4-rbi-1561726011873.html

5. Demographic dividend

Demographic dividend refers to the growth in an economy that is the result of a change in the age
structure of a country's population. The change in age structure is typically brought on by a decline in
fertility and mortality rate
Demographic dividend is said to be occurring when the ratio of the working age population is high
and the dependency ratio in terms of proportion of children and elderly people low. This advantage
can create the space needed to increase investments in enhancing human capabilities, which, in turn,
can have a positive influence on growth and development.

Read:

https://www.livemint.com/news/india/how-to-reap-india-s-demographic-dividend-
1563382235153.html

6. Purchasing power parity:

Purchasing power parity is defined as the number of units of a country’s currency required
to buy the same amount of goods and services in the domestic market as one dollar would
buy in the US. 

The technique of purchasing power parity allows us to estimate what exchange between
two currencies is needed to express the accurate purchasing power of the tow currencies in
the respective countries. We have observed that the market exchange rate doesn’t reflect
the purchasing power of a currency.

Read: www.thebalance.com/purchasing-power-parity-3305953

7. Capital account convertibility in India

The Indian currency, the rupee (INR), is not yet fully convertible. However, there are talks of making
it fully convertible and setting up an onshore INR market. There are many advantages and
disadvantages associated with rupee convertibility, which have led to a long continuous debate over
the last two decades since reforms were first introduced during the early 1990s. Current account
convertibility relates to the removal of restrictions on payments relating to the international exchange
of goals, services and factor incomes Capital account convertibility refers to a liberalization of a
country’s capital transactions such as loans and investment, both short term and long term as well as
speculative capital flows.

Read :

8. Inflation – CPI vs WPI

Wholesale Price Index (WPI) estimates inflation by ascertaining the price paid on the purchase of
goods by the wholesalers from manufacturers and comparing it with the base year prices. As against
Consumer Price Index (CPI) is used to measure the changes in prices, by making a comparison,
through time, the overall price of the fixed basket of commodities.

In India, Wholesale Price Index is published by Office of Economic Advisor which comes under
Ministry of Commerce and Industry. On the contrary, Consumer Price Index is declared by Central
Statistics Office, which works under Ministry of Statistics and Programme Implementation.

In wholesale Price Index, the inflation is measured by tracking the price paid at the first stage of the
transaction. Conversely, the price paid at the last stage of the transaction is used to measure inflation
in consumer price index.

WPI basket covers the only price of goods, whereas services like housing education, recreation and so
forth are also covered in CPI basket along with the goods.

WPI is concerned with the prices paid on the trade of goods between two business houses for the
purpose of resale. In contrast, CPI stresses on the prices of goods bought by the consumers for the
purpose of consumption.

Read: https://www.outlookindia.com/outlookmoney/finance/all-you-need-to-know-about-cpi-and-
wpi-3253

http://www.forbesindia.com/article/special/measuring-inflation-using-cpi-is-more-beneficial-
for-the-common-man/43583/1

9. Sectoral composition of India’s GDP:

Services sector is the largest sector of India. Gross Value Added (GVA) at current prices for Services
sector is estimated at 92.26 lakh crore INR in 2018-19. Services sector accounts for 54.40% of total
India's GVA of 169.61 lakh crore Indian rupees. With GVA of Rs. 50.43 lakh crore, Industry sector
contributes 29.73%. While, Agriculture and allied sector shares 15.87%.

At 2011-12 prices, composition of Agriculture & allied, Industry, and Services sector are 14.39%,
31.46%, and 54.15%, 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 18.57 per cent, 27.03 per cent and 54.40 per
cent.

Read: https://www.ibef.org/economy.aspx
10: Sovereign Bonds: Govt's plan to sell its first foreign sovereign bonds-  a risky money idea?
A government bond or sovereign bond is a bond issued by a national government, generally with a
promise to pay periodic interest payments called coupon payments and to repay the face value on the
maturity date. The government will finally introduce an Indian sovereign bond to the world, which
can be used to mop up at least $10 billion, or about Rs 70,000 crore, according to tentative plans.

“India’s sovereign external debt to GDP (gross domestic product) is among the lowest globally at less
than 5 per cent. The government would start raising a part of its gross borrowing programme in
external markets in external currencies. This will also have beneficial impact on demand situation for
the government securities in domestic market,” Finance Minister Nirmala Sitharaman said in her
maiden Budget speech for 2019-20.

Read : https://www.livemint.com/opinion/online-views/opinion-due-diligence-needed-on-sovereign-
bonds-1563117249886.html

11Open Banking

Open banking is also known as "open bank data." Open banking is a banking practice that provides
third-party financial service providers open access to consumer banking, transaction, and other
financial data from banks and non-bankfinancial institutions through the use of application
programming interfaces (APIs).Open banking is becoming a major source of innovation that is poised
to reshape the banking industry.

 Open banking is the system of allowing access and control of consumer banking and financial
accounts through third-party applications.
 Open banking has the potential to reshape the competitive landscape and consumer
experience of the banking industry. 
 Open banking raises the potential for both promising gains and grave risks to consumers as
more of their data is shared more widely.

Under open banking, banks allow access and control of customers personal and financial data to third-
party service providers, which are typically tech startups and online financial service vendors.
Customers are normally required to grant some kind of consent to let the bank allow such access, such
as checking a box on a terms-of-service screen in an online app. Third-party providers APIs can then
use the customer's shared data (and data about the customer's financial counterparties). Uses might
include comparing the customer's accounts and transaction history to a range of financial service
options, aggregating data across participating financial institutions and customers to create marketing
profiles, or making new transactions and account changes on the customer's behalf.   
Source : Investopedia.com

12 Production Linked Incentive Scheeme (PLI)

PLI Schemes are a cornerstone of the Government’s push for achieving an Atmanirbhar Bharat.The
objective is to make domestic manufacturing globally competitive and to create global Champions in
manufacturing. Thestrategy behind schemeis to offer companies incentives on incremental sales from
products manufactured in India, over the base year. They have been specifically designed to boost
domestic manufacturing in sunrise and strategic sectors, curb cheaper imports and reduce import bills,
improve cost competitiveness of domestically manufactured goods, and enhance domestic capacity
and exports.The first three PLI Schemes were approved earlier in March, 2020 and these were
followed by another 10 New PLI Schemes in November, 2020. 

Highlights of Production Linked Incentive Scheme (PLI)

 The PLI scheme can also bring back old designs and product customs that can contribute
heavily to the diversity, while also empowering forgotten artistry buried due to colonialism.
 The framework of the PLI scheme is to reward increased production.
 Due to the niche and specificity of PLI linked sectors, that mostly involve careful and
attentive focus on manforce and creating, PLI can enhance building systems to adjust to
climate change and even essentially reverse it in the many years to come

Source: https://cleartax.in/g/terms/pli-scheme

13. China-Plus-One, : This refers to a strategy in which companies avoid investing only in
China and diversify their businesses to alternative destinations.
Where did the need for it arise from? For the last 30 years, Western companies have invested
heavily in China, attracted by its low labour and production costs, as well as the considerable
and growing size of its domestic consumer market. Leading to an overconcentration of their
business interests in China.In late July, a grouping of 18 economies, including India, the US,
and the European Union, unveiled a roadmap for establishing collective supply chains that
would be resilient in the long term. The roadmap also included steps to counter supply chain
dependencies and vulnerabilities.  This can be seen as a part of the overall China-plus-one
strategy.
Source: https://www.business-standard.com/podcast/international/what-is-the-china-plus-one-
strategy-122072600052_1.html

India G-20

India will convene the G20 Leaders' Summit for the first time in 2023, as 43 Heads of
Delegations- the largest ever in the G20–will participate in the final New Delhi Summit in
September later this year. As a nation committed to democracy and multilateralism, India's
presidency will be a significant milestone as it seeks to find practical global solutions for the
benefit of all and embody the idea of "Vasudhaiva Kutumbakam," or "the world is one
family."
The G20 Summit is held annually with a rotating presidency, and in 2023, India will hold the
presidency. The group does not have a permanent secretariat and is supported by the
previous, current, and future holders of the presidency, known as the troika. In 2023, the
troika consists of Indonesia, Brazil, and India.
This summit will conclude a series of meetings throughout the year, with potential host cities
for meetings from December 2022 to February 2023 including Bengaluru, Chandigarh,
Chennai, Guwahati, Indore, Jodhpur, Khajuraho, Kolkata, Lucknow, Mumbai, Pune, Rann of
Kutch, Surat, Thiruvananthapuram, and Udaipur.
Vasudhaiva Kutumbakam, which translates to "One Earth, One Family, One Future," is the
theme of India's G20 presidency
The G20 group of 19 countries and the EU was established in 1999 as a platform for Finance
Ministers and Central Bank Governors to discuss international economic and financial issues.
Together, the G20 countries account for almost two-thirds of the global population, 75% of
global trade, and 85% of the world's GDP. In the wake of the global financial and economic
crisis of 2007, the G20 was elevated to the level of Heads of State/Government and was
named the "premier forum for international economic cooperation."

Points for discussion:

A.The Ten Lakh capex expenditure In india and its future growth : Read
https://economictimes.indiatimes.com/news/economy/infrastructure/capital-expenditure-outlay-
hiked-to-rs-10-lakh-crore-in-budget-2023-24/articleshow/97517251.cms

B. Pause Button on FED Rate Hike Read :

https://economictimes.indiatimes.com/markets/stocks/news/us-fed-meet-powell-may-hit-pause-
button-after-15-months-rate-trajectory-critical/articleshow/100973136.cms

Views on the budget highlights: Read https://www.ndtv.com/india-news/budget-highlights-a-

look-at-highlights-of-union-budget-2019-20-2064606

What India needs now to overcome the slow down in growth

Read: https://www.indiatoday.in/magazine/cover-story/story/20190722-the-growth-question-budget-
2019-1566560-2019-07-12

C. Global slow down in trade – causes and impact on India

The trade war will adversely affect global trade and financial markets. IMF has predicted that a full-
blown trade war would cause the global economy to slow down by more than 0.8% in 2020. This will
lead to shrinking of Indian exports in the coming months, not only to the US and China but also to
other countries.

Read: https://www.livemint.com/companies/people/india-cannot-stay-immune-to-global-impact-of-
the-trade-war-hsbc-s-quinn-1560451343573.html

D Iran – oil crisis – impact on commodity prices

Iran is India's third-largest supplier of oil. Geopolitical tension and the reduction in crude oil
production in several countries, along with Iran, has added to the upward pressure on oil prices, which
will impact India’s trade balance, inflation and rupee. India faces biggest impact of tensions in Strait
of Hormuz. Read more at :

//economictimes.indiatimes.com/articleshow/70301376.cms?
utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

E. Global slow-down of auto industry – India’s stand on EV and budget

The Indian automobile industry has failed to shake off the slowdown that has been plaguing it for
months now. Auto sales across all segments continued the downtrend in June as manufacturers cut
production to keep inventory in check amid weak retail sales and subdued consumer sentiment.

During the month, domestic sales across passenger vehicles (PVs), commercial vehicles (CVs) as well
as two- and three-wheelers fell 12 per cent year-on-year, industry body Society of Indian Automobile
Manufacturer (Siam) said. The combined sales of all automobiles fell to 1.9 million units in June
against 2. 2 million units a year ago.

Read: https://www.financialexpress.com/market/slowdown-in-auto-sector-this-analyst-highlights-
three-key-reasons/1645442/

F. The NBFC crisis in India:

NBFCs are facing a liquidity crunch. In other words, they don’t have money to lend or are facing
enormous difficulties in raising funds. NBFCs typically borrow money from banks or sell commercial
papers to mutual funds to raise money. They on-lend these money to small and medium enterprises,
retail customers and so on. When NBFCs don’t have money to lend, that reduces the credit flow to the
economy, hits economic growth and causes many borrowers to default on loans.

Read: https://www.moneycontrol.com/news/business/all-you-want-to-know-about-the-nbfc-crisis-
3966551.html

G. Hong Kong Crisis:

Hong Kong facing biggest political crisis since its handover to China
What has precipitated the crisis is the Extradition Bill proposed by city Chief Executive Carrie Lam.
The Bill proposes to allow extradition to mainland China. Even though Lam announced later that the
Bill has been indefinitely suspended, protests led by pro-democracy groups have refused to subside.
The Hong Kong government has not said that it is shelving the controversial bill allowing extradition
to the mainland – only suspending it, following the protests. 

Read: https://www.dailypioneer.com/2019/columnists/hong-kong-extradition-bill--what-lies-
ahead-.html

H.

IPO Rush: Start ups in india? How fin tech helps?

Read https://www.livemint.com/companies/start-ups/how-fintech-is-revolutionizing-startup-
funding-in-india-startup-news-11685929324911.html

I. Global Economic outlook:

https://www.imf.org/en/Blogs/Articles/2023/01/30/global-economy-to-slow-further-amid-
signs-of-resilience-and-china-re-opening
The baseline forecast is for growth to fall from 3.4 percent in 2022 to 2.8 percent in 2023,
before settling at 3.0 percent in 2024. Advanced economies are expected to see an especially
pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible
alternative scenario with further financial sector stress, global growth declines to about 2.5
percent in 2023 with advanced economy growth falling below 1 percent. Global headline
inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023 on the
back of lower commodity prices but underlying (core) inflation is likely to decline more
slowly. Inflation’s return to target is unlikely before 2025 in most cases.
J. Asia will lead the world growth in 2023
https://www.imf.org/en/Blogs/Articles/2023/05/01/asia-poised-to-drive-global-economic-
growth-boosted-by-chinas-reopening
1K: US banks fail but Indian banks remain steady
A total of three regional US banks have faced closure - Silicon Valley Bank, Signature Bank
and First Republic Bank all shut shop between March and April this year.
The turmoil surrounding these three regional bank failures have also had an adverse impact
on stock prices for the entire sector. 
The core issue for regional banks was the relentless interest rate hikes made by the US central
bank and its direct impact on bond prices. A bond is considered to be the safest investment
avenue and bond issued by the US Government is the safest financial instrument in the
world. 
As interest rates rise, so do bond yields. Bond yields and bond prices have an inverse
relationship. Now majority of these banks buy government issued bonds and as the value of
these bonds drop, it affects the bank’s liquidity situation. 
After the negative effects of interest rates, all these banks had an asset-liability mismatch in
their portfolio:

Global credit rating agency Moody’s Investors Service on Wednesday said outlook for
India’s banking sector remains stable and is supported by economic growth and improved
financials.

L . Ukraine war : Global Impact on food prices, energy prices, geopolitics, people

https://www.npr.org/2023/02/22/1157106172/ukraine-russia-war-refugees-food-prices