CHALLENGES FACED BY

INDIA OVER A DECADE IN

THE FIELD OF ECONOMY

Definition

Inflation can be defined as the rise in

overall price level in the economy, i.e.
rise in prices of all the goods and
services.
When prices rise, it erodes the
purchasing power of money.
Inflation is a situation in which there is a
persistent and appreciable increase in
general level of prices.

Inflation in India

Inflation is the greatest economic concern which

has gripped India into its jagged tentacles.
India has been plagued by the disease of
inflation since the 1950s but it has started
showing its prominently harmful symptoms and
ill effects since 1991, post liberalization.
Kick started by the fiscal crisis of 1991, marked
by deficits in government finances and
devaluation of the rupee, a whopping inflation of
13.66 per cent took its toll on the Indian
economy.

METHODS TO MEASURE
WPI
CPI
GNP
DEFLATOR

Rupee Depreciation
Reasons and Effects

How a Currency value is

decided ?

When Demand > Supply, Currency

becomes more valuable and vice versa.

REASONS FOR RUPEE DEPRECIATION

WITHDRAWAL OF INVESTMENTS

Recession in developed economies like

US made big
institutions
to pull
outare
their
Institutional
investors
investing
in India
directly
by the global market
money impacted
from India
uncertainty. In 2008 India had a net outflow
of $14billion of FIIs and INR drastically. A
volatile currency is never good for a foreign
investor as it increases the transaction risk.
Though RBI has intervened through open
market operations to arrest the downfall of
INR (managed float) but the reserves of
$290billion dont provide enough room to
make a significant impact.

EUROZONE CRISIS

Defaulttoconcerns
of European
has
Owing
uncertainty
prevailingnations
in Europe
resulted
in in
loss
of confidence
in the Euro
and
slump
international
market,
and appreciation
dollar
investors
prefer toofstay
away from risky
investments. This has significantly
affected the portfolio investment in India.
Credit rating agencys downgrade of India
to BBB- has not helped the cause. Any
outward flow of currency or decrease in
investment will put a downward pressure
on exchange rate.

TRADE DEFICIT

Trade deficit has widened by 40,000

The fiscal deficits continue to remain high.
crores
in the lastprojected
quarter. aThis
has
The government
fiscal
deficit
resulted
increased
imports
spike
target of in
4.6%
for 2011-12
but isand
likely
to bein
dollar
much demand
higher on account of higher subsidies.

The markets questioned the fiscal deficit

numbers just after the budget and projected
the numbers could be much higher. This
indeed has become the case. As highlighted
above, persistent fiscal deficits play a role in
shaping expectations over the currency rate
as well.

HIGHER IMPORT
BILLS

Expecting
current
account
deficit to settle at 3.0-3.1% of
GDP by March 2012

IMPACT OF RUPEE
DEPRECIATION

Economic recovery will get delayed as...

The Reserve Bank of India will not be
able to cut rates for fear of causing more
outflow..
Weaker rupee will make capital imports
expensive, forcing companies to delay
investments..
Impact on inflation and higher fuel prices
will affect consumer sentiment..
Foreign investors will postpone
investments till things stabilise

FISCAL SLIPPAGE

INCREASED BURDEN ON
BORROWERS

IMPACT ON EXPORTS

1. MACRO SHOCKS
Has the economy been shock-proofed?

2. SECTORAL CHALLENGES
Sectoral growth rates since
Independence
1
2
3
4

50s
3.1
6.3
4.3
3.9

60s
2.5
5.5
4.8
3.7

Agriculture and Allied

Industry*
Services
GDP (factor cost)
* Includes Construction
Source: Central Statistical Organisation

70s
1.8
4.1
4.4
3.2

80s
3.6
7.1
6.7
5.6

(Percent)
90s
2.8
5.7
7.8
5.8

2. SECTORAL CHALLENGES: Industry

Indias low share of industry in
GDP compared to East Asia.
100%
90%
80%

42.2

37.4
48.5

70%

53.1
69.5

60%
50%

22.1

40%

47.0

26.6

28.6

35.7
24.9

10%

1.9

0%
LDCs

Agriculture
Services

50.9

29.6

30%
20%

33.3

Industry

India

OECD

17.3

SubSaharan
Africa
WDI

15.6

15.9

East Asia &

Pacific

China

3. GROWING UNEMPLOYMENT:
jobless growth?
Elasticity of Employment to GDP

Sector
1
2
3
4
5

1977-78
to
1983

Agriculture
Mining & Quarrying
Manufacturing
Electricity
Construction
Wholesale & Retail
6
Trade
Transport Storage &
7
Construction
Finance, Real Estate,
Insurance & Business
8
Services
Community, Social and
9
Personal Services
All Sectors
Source: Planning Commission Reports

1983
to
1993-94

1993-94
to
1999-00

0.45
0.80
0.67
0.73
1.00

0.50
0.69
0.33
0.52
1.00

0.00
0.00
0.26
0.00
1.00

0.78

0.63

0.55

1.00

0.49

0.69

1.00

0.92

0.73

0.83
0.50
0.07
0.53
0.41
0.15
on Labour and Employment

3. GROWING UNEMPLOYMENT (cont):

Millions Employed (% Unemployed)

Will moderate growth be enough?

GDP Growth (%)
6.5

1999-00
397
(2.23)

2007
436
(5.61)

2012
467
(7.41)

8.0

397
(2.23)

442
(4.27)

482
(4.55)

Source: Planning Commission Reports on Labour and Employment

4. GROWING REGIONAL INEQUALITY

State GDP p.c. USD,
1999-00

Punjab

738

Maharashtra

715

Haryana

659

Gujarat

603

Tamil Nadu

582

Kerala

577

Karnataka

514

All India

494

West Bengal

474

Andhra Pradesh

465

Rajasthan

383

Madhya Pradesh

351

Uttar Pradesh

309

Orissa

282

Bihar

189

100

200

300

400

500

600

700

800

Central

4. GROWING REGIONAL INEQUALITY

(cont).
GDP PC in constant US$, projected for the
year 2050 using historical growth rates
Tamil Nadu

3765

Maharashtra

3460

Kerala

2771

Punjab

2352

Andhra Pradesh

2352

Karnataka

2258

Gujarat

2205

Haryana

1924

All India

1737

Rajasthan

1301

West Bengal

903

Madhya Pradesh

729

Uttar Pradesh

573

Orissa

466

Bihar

165

500

1000

1500

2000

2500

Statistical Organization

3000

3500

4000

Central

5. POPULATION GROWTH
Indias Regional Distribution of
Population will Change Over Time
1991

2051

North
5%

North
5%
East
14%

East
15%
"BIMARU"
41%
West
15%
South
24%

"BIMARU"
48%

West
14%

South
19%

Economic & Political Weekly, Vol. XXXVIII No. 45, November 814, 2003

6. URBANIZATION
Indias urbanization has only just begun
Urbanization
as a proportion of total population, year 2002
90
80

76.2

79.3

70
60
50
40
30

24.3

37.6

38.2

China

South East
Asia

28.1

20
10
0
LDCs

India

Latin America

OECD

Source: WDI

6. URBANIZATION (cont.)

If India does grow rapidly, one would expect about

75% of Indias population would be urbanized by
2050
Urban population in 2050 = 75% of 1.6 billion =
1.2 billion
Urban population today = 28% of 1.002 billion =
280 million
Urban population would increase by 920 million by
2050 (almost 20 million new urban residents a
year)
Can India cope with such rapid urbanization,
or will it stymie Indias growth?

7. ENVIRONMENTAL DETERIORATION

A lot of environmental problems

diminish with growth
But not all: e.g. water.
India - Per Capita Water Availability
(in cubic meters)
6000

Water stress

5000

Water scarce

4000
3000
2000
1000
0
1950
Source: www.cnie.org

1990

2025

8. HEALTH THREATS: AIDS

Prevalence of HIV as a proportion of w orking population in 2001:

India next only to, but w ell below , Sub-Saharan Africa,
9
8
7
6
5
4
3
2
1
0

8.36

0.10

0.10

0.19

0.23

0.45

Water stress

0.64

0.67

0.80

Water scarce

8. HEALTH THREATS (cont.): AIDS

But are parts of India only a decade or less behind parts of A

HIV Prevalence: STD Patients in South Africa, Major Urban Areas, 1990-2000
Com pared to Selected States of India in 2002
(Median Prevalence in percent)

39.9

52.3 49.2 53.7

47.1

57.2

30.4

1.6

5.6

6.2

9.5

14.7 15.3
11.3 13.6

18.7 21.8

Water stress
Water scarce

Source: UNAIDS/NACO

8. HEALTH THREATS (cont.):

AIDS IMPACT

Water stress
Water scarce

9. WEAKENING GOVERNANCE

Water stress
Water scarce

10. POLITICAL RISKS

India is a stable democracy (cf. China

yet to make the democratic traditions)
But democracies can be unstable:

Unstable governments
Short

tenures
Rickety coalitions

Water stress
Civil violence (cf. Sri Lanka,
Nepal)Water scarce

11. SECURITY RISKS

Regional conflict
Terrorism

Water stress
Water scarce

12. GLOBAL RISKS

Global recession
Spread of global terrorism or other forms
of conflict
Global warming or other environmental
threats to growth
Any slowing down of global growth will
Water stress
tend to perpetuate the current
economic
Water scarce
configuration.

Bibliography

http://www.mysmp.com/bonds/inflation.html
http://www.personalfinanceology.com/the-effects-ofinflation-on-your-money/
http://www.indiaonestop.com/inflation.htm
http://www.adb.org/documents/books/ADO/2004/update/i
nd.asp
http://business.mapsofindia.com/news/inflation.html
http://www.economywatch.com/inflation/economy/stockmarket.html
http://www.tradingeconomics.com/india/inflation-cpi
http://www.wikipeia.com
http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx