India

COUNTRY ANALYSIS

I ND IA

W O N G K W O K H I N , I B B AC H A N Y I K F U , I B B AY E U N G Y A N H A N G , I B B AT E N G W A I L I , Q F R ML I N O K , I B B A

GROSS DOMESTICPRODUCTION

BACKGROUND

According to World Bank, India is currently the 3rd biggest economy in the world,representing 3.03% of the world’s economy. As a track record of the Indiannominal GDP, India achieved its all-time peak of GDP in 2013 with value ofapproximately USD 1876.80 billion. Having produced the lowest GDP in 1970(USD 63.50 billion), India maintain an average nominal GDP of around USD517.27 billion.

With reference to World Bank, the above line graph shows the time series of IndianGDP from 2004 to 2014. Note that this is a record of nominal GDP and hence,inflation has not been taken into account. Although the nominal GDP seems to beincreasing, the real GDP may decrease. From the graph above, we could observethat there has been a consistent growth of nominal GDP except of the year 2009.That year marks the Great Recession.

The above bar chart is based on data from the World Bank. India was ranked 10th inthe world in terms of GDP.

The above bar graph is the real GDP growth rate for the period between 2008 and2013. Data has been taken from the Statista. There has been an obvious decreaseafter the year 2010. According to many economists, this is due to a series ofstrategies. First and foremost, there was excessive fiscal stimulus which ultimately ledto inflation and a large current account deficit. Following that, monetary tighteningoccurred to contain inflation. The situation aggravated when there was a persistentinflation in food prices. High nominal interest rates, slow growth, fiscal stimulus biasedtowards consumption rather than investment, and the delay in withdrawing the fiscalstimulus in the recovery all contributed to the halving of investment spending in theperiod from 2008 to 2012. Therefore, manufacturing growth declined drastically from2012 to 2014, and economic growth sank to an annual average of approximately 5%.

2005

I N F L A T I ONS P E C I F I C E V E N T S W I T H I N T H E

D E C A D E T H A T D R O V E T H EI N F L A T I O N I N I N D I A :

A s t a t e - l e v e l m u l t i -p o i n t t a x o n v a l u ea d d i t i o n c o l l e c t e da t d i f f e r e n t s t a g e so f s a l e .

2009O i l c o m p a n i e s r a i s ep e t r o l , d i e s e l a n dc o o k i n g g a s p r i c e s a sg l o b a l c r u d e o i l p r i c e st o u c h a r e c o r d .

20 1 0T h e g o v e r n m e n t a n dR e s e r v e B a n k o f I n d i a( I n d i a ' s C e n t r a l B a n k )a n n o u n c e c u t s , t a xb r e a k s a n d l e n d i n gr a t e c u t s f o r g l o b a lm e l t - d o w n h i tc o m p a n i e s .

2008T h e g o v e r n m e n tr a i s e d i n c o m e t a xe x e m p t i o n l i m i t( d e m a n d p u l li n f l a t i o n )

I N F L A T I ONB A C K G R O U N D A N D T H E S I X

M A J O R D R I V E R S O F I N F L A T I O N I NI N D I A :

With reference to annual consumer priceindex inflation, which is related to the cost ofhousehold living. The inflation rateincreased drastically from 3.8% in 2004 to12.0% in 2010. The price level wasincreasing at a decreasing rate(disinflation)from 2010 to 2011 and 2013 to2014. With respect to the India economy asa whole, the inflation rate fluctuatedbetween 4.2% and 8.7% from 2004 to 2009.Disinflation occurred from 9.0% in 2010 to5.11% in 2014.

Background

THE SIX MAJOR DRIVERS OF INFLATION IN INDIA

Capital Stock Deficiency:

Capital stock deficiency tends to lead to bottlenecks, under which resource constraints,including limited infrastructure and/or the lack of manufacturing capacity delay overallproduction or service generating processes, further leading to higher inflation throughshortages in supply. India's capital stock-to-GDP ratio was 1.79 in 2010, among the lowestin Asia.

Food Price Pressures:An increase in food inflation causes aggregate CPI inflation to rise substantially as foodconstitutes a large share of the CPI basket. The lack of rainfall during the monsoon seasonoften hits India's food production. In addition, the structural change in food intake hascontributed to food price inflation. Rising per capita income and diversification of diettowards high-value food products like milk, eggs, meat, fish, pulses, vegetables and fruits,have been often cited as the reason for increased demand for these commodities.

Import Price Pressures:

Import price pressures have also been an important factor for overall inflation as Indiahas become a more open economy over the past 10 years. In fact, the importedgoods-to-GDP ratio doubled from just above 11 percent in FY00/01 to 21.9 percent inFY10/11 with bulk imports, such as crude oil, metals, rubber and food - primarilycommodity-related items - accounting for 42.7 percent of total imports.

Inflation Expectations:

In the Reserve Bank of India's latest inflation expectations survey ofhouseholds, respondents' inflation expectations for three months aheadinched up to 12.2 percent in the third quarter of 2011 from 11.8 percent in thesecond quarter. Overall, inflation expectations have been largely driven byfood price inflation in India as food constitutes more than 50 percent of theaverage Indian household's consumption basket.

With 22% of the population living below the poverty line in 2009-10, the persistence offood inflation at high levels is extremely undesirable. This section already spends asignificant proportion of their income on food and is unable to divert additionalexpenditure to food to neutralize the effect of food inflation. Thus, high food inflationaggravates nutrition deficiency in India.

Consequence on citizens:

Demand Side Drivers (The NationalRural Employment Guarantee Act(NREGA)):

Supply Side Drivers

The agricultural scarcity or the damage in transit creates a scarcity causing highinflationary pressures. The damage in transit would weaken the capital of Indiaeconomy. The short-run aggregate supply and long-run aggregate supply woulddecrease, which led to the increase in price level and caused inflation.

Quantity theory of money:

The sharp rise in personal income and an expansionary fiscal policy, have played animportant role in keeping inflation persistently high. For the former, the sharp rise inpersonal income increased the disposable income of consumers, which led to anincrease in private consumption expenditure. For the latter, an expansionary fiscalpolicy was a deficit budget that led to increase in government expenditure. Therefore,both of them would increase the aggregate demand in the economy, thus the pricelevel increased and caused inflation.

Equation: Money supply x velocity = Price level x Production

Money supply factor: High creation of money supply from excess loans In the past 10 years, Indian banks have substantially brought down their loan standards and have dramatically increased the loans they provide. Thus, huge money is now sloshing around the system.

Velocity factor :High velocity of money due to general optimism India is at a stage where people are overoptimistic and spend every penny they have earned. Thus, the velocity is substantially higher, increasing the inflation.

Production factor :Low supply of products due to system issueIndia has severe supply side issues - low electricity production, byzantine rules, businessunfriendly practices, etc - that doesn't allow the production to go up.

UNEMPLOYMENT RATE

ANALYSIS:

The unemployment rate of female is significantly

higher than male

According to statistics in 2011, the male literacy rate 82.14% and femaleliteracy rate is 65.46%. As a result, female can hardly get a chance to beemployed compared with male, leading to a high unemployment of women. Toimprove the literacy level, the Indian government has imposed several policiessuch as free educational program and setting up new school.

Indian unemployment rate from 2004 to 2014

Agricultural industry as the largest employer

The agricultural industry in India is well developed while they provide secondmost crops in the world, behind China. In 2010, about 51.2% of total Indianworkforce came from agricultural industry and also some similar sectors likeforestry and fishery. The mature agricultural industry employs a significantnumber of Indian workforces, leading to a steadily low unemployment rate inIndia.

UPCOMING CHALLENGE:

Possible structural unemployment

Rapid improvement of education in India has become a challenge to themarket and also the graduates themselves. As mentioned, most of the Indianworkforces are from agriculture and construction. However, the increasingnumbers of university graduates are not willing to do those so-called “blue-collar” jobs, leading to structural unemployment. The unemployment rate willkeep in a rising trend if there is still persistent mismatch between the skills oflabor and also the work. The Indian government should definitely payattention in the sign of rising unemployment rate(the unemployment raterises from 3.6% in 2013 to 4.9% in 2014).

The above graph shows that the unemployment rate of Indian keeps in a low andstable level even being compared to other developed countries, and this mostlyboils down to the large number of employment opportunities provided byagricultural and construction industry.

Three majorsectors in India

Manufacturing sector

Agriculture sector

Service sector

B a c k g r o u n d :

The agriculture sector has long been playing an indispensable role in Indian economy.It employs a little more than a half of India’s population, where more than 70% of therural households depend on agriculture as their main source of income. At 157.35million hectares, India holds the second largest agricultural land globally. It is also thelargest producer of pulses, milk, tea, cashew and jute, and the second largestproducer of wheat, rice, fruits and vegetables, sugarcane, cotton and oilseeds.

Agriculture sector

C o n t r i b u t i o n o n G D P :

Gross Domestic Product (GDP) from Agriculture and Allied Sector and its Percentage Share to Total GDP

Source : CSO; Advance Estimates

The contribution of agriculture sector to the country has been increasing in the pastdecade thanks to the raise in foodgrain production. However, the percentage share ofagriculture sector to the total GDP has been gradually declining. In specific, itdropped from 19% in 2004-05 to 13% in 2013-14. It can be explained by the structuralchanges in its economy from a traditional agrarian economy to industry and servicedominated one. In the past ten years, India has emerged as a major agriculturalexporter, even being one of the top ten leading exporters of agricultural products inthe globe for now. Within the years of 2004 to 2014, its exports escalated for nearlyeight times. Surprisingly, the strategy of the country is to export mainly to thedeveloping countries, instead of developed countries. Other than the United States(the largest market for India’s agricultural exports), the countries that imported atleast $1 billion worth of products from India in 2013 were China, Iran, Vietnam,Bangladesh, Saudi Arabia, United Arab Emirates, Indonesia, Malaysia, and Pakistan. Intotal, 79 percent of India’s exports went to developing markets.

G r o w t h :

In terms of the growth of internal and external demand, the rise in income andconsumption, food processing sector and agricultural exports are reasons behind theboom of the agricultural sector. Better seeds, use of fertilizer, education of farmersand provision of agricultural credit and subsidies by the government also increase theagricultural productivity. Nonetheless, the increase of private participation in Indianagriculture, growing organic farming and usage of information technology are thetrends that are being witnessed by the growing agriculture industry.

C h a l l e n g e s :

1. High food lossesLosses after harvest due to poor infrastructure. India has very poor rural roadsaffecting timely transfer of outputs from Indian farms. The lack of cold storage andharvest spoilage cause over 30% of farmer's produce going to waste.

G o v e r n m e n t ' s s t r a t e g i e s :

2. Farmers share only a small portion of revenue

The Indian farmer receives just 10 to 23% of the price the Indian consumer pays forexactly the same produce, the difference going to food losses, inefficiencies andmiddlemen. The unorganized retail also limits Indian farmer's ability to sell thesurplus and commercial crops. In contrast, farmers in developed economies of Europeand the United States, in contrast, receive 64 to 81%:

3. Low yields per capita labour force

Rain-fed farming comprising 80 million hectares is cultivated by 300 million farmers.Although large scale mechanization of agriculture is practiced in some parts of thecountry, most of the agricultural operations are carried on by human using simple andconventional tools and implements. This is especially true with small and marginalfarmers which results in huge wastage of human labour.

1. The Ministry of Food Processing Industries has taken some new initiatives todevelop the food processing sector which will also help to enhance the incomes offarmers and export of agro and processed foods among others.

2.The Department of Agriculture & Cooperation under Ministry of Agriculture hasentered into MOUs/Agreements with 63 countries including United State ofAmerica. Agreements with these countries provide better agricultural facilities due tocooperation in areas such as Research and Development, Capacity Building, Germ-Plasm Exchange, Post Harvest Management, Value Addition/ Food Processing, PlantProtection, Animal Husbandry, Dairy & Fisheries and also help in enhancing bilateraltrade.

MANUFACTURING SECTOR

In the past decade, the contributionof manufacturing sector to India GDP remained between 13% to 16%. The contribution of India’s manufacturing sector has remainedstagnant from 2004 to 2014.

CONTRIBUTION ON GDP:

Slowing external and domestic demand has caused the manufacturing sector to move at aslower pace than the overall economy. Operating conditions improved for producers of

Manufacturing sector’s contribution to GDP

intermediate goods, but remained unchanged in the capital goodscategory. The recovery in manufacturing activity is likely to facechallenges going ahead due to structural constraints and underlyinginflation pressures on the Indian economy.

In 2014, India witnessed increase in new export orders, highest since2012. Overall, activity in the manufacturing sector expanded in the past 3years. This increase demonstrates improved demand conditions in thecountry’s key export markets. Further, inflationary pressures eased andpurchasing activity increased, thereby demonstrating improvedperformance of manfacturing sector. As a result, its value added to GDPincreased from year 2012 to year 2014.

Key Growth motivators:

The cost of labor in India is cheaper than in many other countries, thusproviding competitive advantage to the country’s manufacturing sector.

1. Decrease in labor cost

2. Increase in competitiveness against China

Gaining competitiveness against Chinese manufacturers due to currencyfluctuations and soaring operational cost in China are offering growthopportunities for the Indian manufacturing sector.

3. Rise in export and domestic orders

Manufacturing activities have gradually risen due to new export ordersand increased domestic demand in the past decade.

Challenges:

1. Complex regulations, legislations, and taxation

Foreign manufacturing companies are less keen to come to India due toits complex regulatory framework. India ranks 132 among 185 countriesclassified as easiest place for doing business.

2.Increase in interest rates

Consumer buying and cost of capital for corporations are adverselyimpacted due to higher interest rates. Despite RBI measures, the interestrate is higher and is hampering the demand and business operations inthe manufacturing sector.

DISPARITY BETWEEN THE RICH AND THE POOR

According to the World Bank, from 2005 to 2012, the Gini index of India has increased from33.4 to 33.6. This data reveals the fact that the income inequality between urban areas andrural areas in India has been widening even after the economic reform.

Factors that triggered the phenomenon

During the economic liberalization, majority of earning assets like land, cattleand shares, are in the hands of a few middle and upper class households.These households have taken their advantage to accumulate a prodigiousamount of wealth after the economic reform, while only little economicbenefits have gone into the lower class’ pockets, and some of the peopleeven suffered from inflation.

1.Uneven distribution of assets

The differences in quality and quantity of infrastructure between rich andpoor states, such as Gujarat and Orissa have drastically restricted the jobopportunities in some particular states. The inadequacy of transportationnetwork in many states have also limited the geographic and occupationalmobility of the poor, which hinder them from finding better-paid jobs.

2.Uneven development progress between differentregions

Wealthy households sometimes take larger advantages from subsidies onessential goods and services. For instance, the subsidies on electricity andliquefied petroleum gas can be dispensable the poor, as many villages don’even have any electricity supply and 75% of the petroleum gas is consumedby the wealthiest 50% of Indian families.

3. Government's policies may benefit the rich on a larger extent

DISPARITY BETWEEN THE RICH AND THE POOR

According to the World Bank, from 2005 to 2012, the Gini index of India has increased from33.4 to 33.6. This data reveals the fact that the income inequality between urban areas andrural areas in India has been widening even after the economic reform.

SolutionsThe Indian government has put much efforts and resources in poverty reduction of the countrywhere most of the policies focus on the agriculture sector.

1. National Rural Employment GuaranteeScheme(NREGS)

The government implemented the scheme in 2006 to ensure livelihoodsecurity in rural areas by providing 100 days of wage employment to thevoluntary adults in every household in each financial year. The scheme wascovering only 200 districts in India initially, and was later expanded to alldistricts in the country.

2.National Highways Development Project(NHDP)

In 2006, the government invested US$71 billion on the project to widen themajor highways in India, and has already built more than 45000km of railwayuntil now. Combining with other developments on road transport, the livingstandard of the poor is likely to increase as more essential amenities can bebuilt in the rural areas under the advancement of transportation.

3.The Right To Education Act(RTE)

This came into force in 2010, to provide children aged between 6-14 the righto receive education by requiring all private schools to reserve 25% of theirseats for the disadvantaged students.

All of the policies mentioned have increased the government expenditure in every financialyear, which have risen the aggregate demand and the gross domestic products of theIndian economy

DISPARITY BETWEEN THE RICH AND THE POOR

The effects of policies on Indianeconomy

Reducing the cost of production of the farmers.

Eg. NREGS

Increasing the short-run aggregate supply of the economy.

Contributing to the economy by increasing the long-run aggregate

supply and the national output.

Eg. NHDP: rises the capital ofIndia by developing morehighways

Eg. RTE: increases the quality of humancapital of the country through providing moreeducation opportunities

Although there are policies on hekping the poor, the disparity between the rich and the poorhas been a serious problem in India due to the following challenges,

DISPARITY BETWEEN THE RICH AND THE POOR

Challenges

1.Poverty reduction policies are not efficient andeffective enough to resolve the problem

A report pointed out the NREGS has reduced the supply of farmlabor, and led to an escalation in farm wages, which is adverselyimpacting the profitability of the farmer.

2.Infrastructure development is still far fromsatisfactory in many rural areas

The increase in income of farmers does not result in an increase inliving standard, since there is a lack of community-levelinfrastructure such as schools and health-care networks in poorareas.

3.Corruption problem is serious

Most of the funding for poverty reduction did not go into the righthands.

ESTIMATION ON THEFUTURE ECONOMY

I n d i a n e c o n o m y h a d b e e n g r o w i n g e x t r e m e l y f a s t i n t h e p a s t f e w y e a r s ,

h o w e v e r , i n t h e p r e v i o u s f i s c a l y e a r , t h e g r o w t h r a t e h a d d r o p p e d t o

7 . 5 % , w h i l e i t u s e d t o h a v e a g r o w t h r a t e o f d o u b l e d i g i t s b e f o r e .

M o r e o v e r , s o m e r a t i n g a g e n c i e s , l i k e F i t c h , h a d r e d u c e d i t s p r e d i c t i o n o n

I n d i a n e c o n o m y g r o w t h t o n e g a t i v e . S t a n d a r d & P o o r ’ s e v e n s e t t o r e d u c e

I n d i a n i n v e s t m e n t r a t i n g . T h e r e a r e s e v e r a l r e a s o n s b e h i n d t h i s , b u t w e

p r e d i c t t h a t t h e e c o n o m y o f I n d i a i s a b l e t o i m p r o v e i n t h e f o l l o w i n g

y e a r s , d u e t o t h e B J P g o v e r n m e n t ' s f i r s t f u l l - y e a r b u d g e t f o r 2 0 1 5 / 1 6 .

G R O S S D O M E S T I C P R O D U C T :R e c e n t e s t i m a t i o n s f o r t h e y e a r 2 0 1 4 / 1 5 w a s m a d e t o p u t t h e e c o n o m y a

s t r o n g e r g r o w t h a t 7 . 4 % t h a n i n 2 0 1 3 / 1 4 a n d g o v e r n m e n t f o r e c a s t s t h a t

g r o w t h w i l l a c c e l e r a t e t o a n i m p r e s s i v e 8 . 1 - 8 . 5 % i n 2 0 1 5 / 1 6 . T h i s

s t r o n g e r g r o w t h m a y b e a s s o c i a t e d w i t h t h e t h e n e w G D P m e t h o d o l o g y

r e c e n t l y i n t r o d u c e d b y t h e M i n i s t r y o f S t a t i s t i c s a n d P r o g r a m m e

I m p l e m e n t a t i o n . B u t m o s t l y b e c a u s e o f t h e B J P g o v e r n m e n t ' s f i r s t f u l l -

y e a r b u d g e t , f o r 2 0 1 5 / 1 6 , i n c r e a s i n g g o v e r n m e n t s p e n d i n g o n

i n f r a s t r u c t u r e , h o p i n g t o i m p r o v e b u s i n e s s e n v i r o n m e n t a n d b r o a d e n t h e

s o c i a l s e c u r i t y n e t .

I N F L A T I O N R A T E :

T h e g o v e r n m e n t h a s s h o w n i t s d e t e r m i n a t i o n o n k e e p i n g t h e i n f l a t i o n

r a t e l o w b y a n n o u n c i n g t h e c o m p l e t i o n o f a n a g r e e m e n t w i t h t h e R B I f o r

a n o f f i c i a l i n f l a t i o n t a r g e t o f u n d e r 6 % . T h e g o v e r n m e n t w i l l a l s o

a m e n d t h e R e s e r v e B a n k o f I n d i a A c t t o e s t a b l i s h a m o n e t a r y p o l i c y

c o m m i t t e e . T h e a g r e e m e n t i s t h e f i r s t t i m e t h a t I n d i a h a s a d o p t e d a

f o r m a l i n f l a t i o n t a r g e t .

ESTIMATION ON THEFUTURE ECONOMY

U N E M P L O Y M E N T :

I n d i a , h a d b e e n w i t n e s s i n g a f e w s i m u l t a n e o u s e n t r i e s a n d e x i t s o f

i n t e r n a t i o n a l c o m p a n i e s , d u e t o t h e p o l i t i c a l a n d s t r u c t u r a l p r o b l e m s .

F o r e x a m p l e , t h e G e r m a n o r g a n i z a t i o n F r a p o r t , t h e s e c o n d b i g g e s t

a i r p o r t s i n v e s t o r s i n t h e w o r l d , l e f t t h e I n d i a n m a r k e t ; T e l e n o r , a

N o r w e g i a n g o v e r n m e n t f u n d e d o r g a n i z a t i o n , p u t i n 2 . 5 b i l l i o n d o l l a r s

i n I n d i a b u t i t s 2 G t e l e c o m l i c e n s e s w e r e c a n c e l l e d a s w e l l , w h i c h m a d e

u p i t s m i n d t o l e a v e t h e I n d i a n m a r k e t .

T h e e x i t o f t h e s e c o m p a n i e s h a s b r o u g h t h i g h e r u n e m p l o y m e n t r a t e t o

I n d i a i n t h e p a s t f e w y e a r s . H o w e v e r , w e b e l i e v e t h a t t h e u n e m p l o y m e n t

r a t e c a n b e l o w e r e d i n t h e u p c o m i n g y e a r s , d u e t o s o m e n e w p o l i c i e s

s t a t e d i n t h e f u l l - y e a r b u d g e t .

T h e g o v e r n m e n t d e c i d e d t o s p e n d m o r e o n s e v e r a l w e l f a r e s c h e m e s ,

s u c h a s t h e r u r a l e m p l o y m e n t g u a r a n t e e p r o g r a m m e , w h i c h n e e d t o u s e

U S $ 8 1 0 m m o r e b u t w e t h i n k w e l f a r e s c h e m e s l i k e t h i s c a n l o w e r t h e

u n e m p l o y m e n t r a t e . M o r e o v e r , a s t h e g o v e r n m e n t i s k e e n t o s u p p o r t t h e

m a n u f a c t u r i n g a n d i n f r a s t r u c t u r e s e c t o r s b y i m p r o v i n g e x i s t i n g p o l i c i e s

a n d s c h e m e s , s u b s i d i z i n g . F o r e x a m p l e , t h e n e w b u d g e t r e l e a s e d b y

I n d i a n g o v e r n m e n t p r o m i s e d t o s p e n d m o r e m o n e y o n b u i l d i n g

i n f r a s t r u c t u r e . 7 0 0 b i l l i o n r u p e e s ( H K $ 8 8 b i l l i o n ) w i l l b e i n v e s t e d i n

n e w r a i l w a y s , r o a d s a n d o t h e r i n f r a s t r u c t u r e .