MACROECONOMY & POLICIES

KEY MACROECONOMIC DATA:

IDENTIFYING THE CHALLENGES FOR INDIAN ECONOMY

Presented by: Group 1

ABHISHEK GUPTA 2017142006
AMIT JHA 2017142019
Submitted to:
BHARAT KURDA 2017142036
Prof. SAYAN BANERJEE
HITESH SHARMA 2017143058
NILESH PANDEY 2017143175
VISHAL RATHI 2017142165
 INTRODUCTION
Macro economy helps us to understand the functioning of a complicated
modern economic system.

It helps to achieve the goal of economic growth, higher level of GDP and
higher level of employment.

Macro economy helps to bring stability in price level and analyses

fluctuations in business activities.

It helps to formulate correct economic policies and also coordinate

international economic policies.

It identifies the causes of deficit in balance of payment and suggests

remedial measures.
 CHALLENGES IN INDIAN ECONOMY

Interest Rates
Fiscal Framework
Inflation
Employment
Trade Deficit
Domestic Policies
 INTEREST RATES
Interest rates have high influence on both growth and inflation.
Higher the interest rate, higher is the cost of capital and
contributes to slowdown investment in the economy.
High interest rates also impact FDI due to the uncertainty in the
exchange rate as the market expects interest rates to eventually
fall.
CRR = 4%
Repo Rate = 6%
SLR = 19.5%
 FISCAL FRAMEWORK

A commitment towards fiscal consolidation is seen in recent times.

E.g. Steady decline in the fiscal deficit (FD) from 4.5% of GDP in 2013-14 to
3.5% in 2016-17.

India has a Twin Balance Sheet problem (TBS) with overleveraged

companies and stressed assets in banks (NPAs). So India needs a
countercyclical policy like Advanced Economies.

But Indias conditions are different from Advanced Economies.

This creates Fiscal Fragility.

 Both its growth rates and inflation are substantially higher than AEs.
Therefore:
Higher fiscal spending to boost growth is presently not needed.
A countercyclical policy could trigger higher inflation.
India adopted Financial Responsibility and Budget Management (FRBM) Act
in 2003. This Act was mirrored by Fiscal Responsibility Legislation (FRL)
adopted in the states.

Comparing the 11 years before FRL to the 10 years afterwards

Fiscal deficits fell by almost half- from an average of 4.1 percent of GSDP on
average to 2.4 percent of GSDP.

Revenue deficits also fell sharply from 2.1 percent of GSDP on average to -
0.3 percent of GSDP after the FRL.
 INFLATION
A sustained increase in the aggregate or
general price level in an economy and at the
same time decrease in supply of goods and
services.

Two types of Inflation:

Demand-Pull and Cost-Push.

Current Inflation rate in India (Oct2017) is

3.58%.

In 2017, India Ranks on 14th in the World by

Yearly Inflation Rate.

The Most common and well-known measure

of inflation is the change in the Consumer
Price Index (CPI)
 EFFECTS OF INFLATION
Lowers National Saving
Redistribution of Income and Wealth
Collapse of Monetary System
Business Uncertainty
Discourages Investment and Savings
Higher Interest/Income Tax Rates
Risk Of Wage Inflation
 EMPLOYMENT
About 12 million people join the job seekers queue in India every
year. While industry is creating jobs, too many such jobs are in the
informal sector, which accounts for 84% of current jobs.
CHALLENGES FOR EMPLOYMENT

Increased automation of operations.

Indias growth model is capitalist intensive and less labour intensive.
Lack of ease in hiring and firing(pending labour reforms) has discouraged
industries to hire more.
High interest rates and excess capacity have hurt expansion plans.
Falling exports for over a year due to global slowdown.
Drought like condition for 2 consecutive years have shrunk rural demands
Unemployment Rate in India decreased to 3.46 percent in 2016
from 3.49 percent in 2015. Unemployment Rate in India
averaged 4.08 percent from 1983 until 2016, reaching an all time
high of 8.30 percent in 1983 and a record low of 3.46 percent in
2016.
Trade relations and amity with neighbouring nations:

The border disputes and cross-border trade play an important role in the
development of any nation.
Exports fell 1.1% in October to $23.1 billion while imports expanded at
the slowest pace in 10 months at 7.6% to $37.1 billion. Indias trade
deficit in the month was $14 billion.
Though positive factors like increasing FDI, increased forex reserves,
reduced global oil prices reducing imports bills, and good capital account
surplus to neutralise the CAD deficit might be encouraging.
 EXTERNAL FACTORS AND ITS IMPACT ON ECONOMY
But we need to be careful about our dependence on support of external factors
1) Tightening monetary policy of US Federal Reserve and other central banks, which
would affect Asian markets the worst(since they are the biggest beneficiaries).
2) Indian companies have huge international capital debts in rupee-denomination,
which can become volatile.
3) Unfavourable trade balance for long period of time.
4) Risks of interest rate hikes internationally and rupee Depreciation/unstability.

Hence we need to rely more on internal measures-

1) Try making exports more competitive via steps like interest subvention to exporters
in labour intensive sectors, etc.
2) Increase duty on gold.
3) Import substitution.
4) Liberalise FDI norms.
5) Take steps to increase capital inflows, decrease subsidy bill, etc., to finance the
increased CAD
DOMESTIC POLICIES AND UPRONT CHALLENGES FOR ECONOMY
DEMONITIZATION

SECTOR IMPACT
Short Term Long Term
Cash supply & Interest rate Deposits will decline but slowly, Loan rates
Money/Interest rate
decline, Bank deposits increased could fall further

Unaccounted Income Stock of black money fell Reduced flow of unaccounted Income

Will be beneficial if formalization increases

Slow growth, Cash intensive and corruption falls. Informal output would
GDP
sectors were affected decline but recorded GDP will increase as the
economy is more formalized

Income tax rose because of Indirect and corporate tax could decline as
Tax Collection
increased disclosure slow growth

Uncertainty increased due to Tax arbitrariness and harassment could

Uncertainty/Credibility
unsure economic future policies attenuate credibility
 GOODS & SERVICE TAX (GST)

GST After Shock Creates Widening Two Speed Economy In India

GST has driven a wedge between firms that have adapted to the new levies
and a vast swathe of small businesses representing almost half the Indian
economies that are struggling
It is India's biggest tax overhaul since Independence
Big companies have used the disruptions to gain market share
Problems faced by smaller operations such as -- Compliance cost, Supply chain
disruptions, & Multiple policy changes.
Indias GST has been more than a decade in making and is expected to make
dodging taxes more difficult, bring the nations vast cash economy into the
mainstream

Double Taxation Avoidance Agreement(DTAA) It is a bilateral economic

agreement between two nations tat aims to avoid double taxation of the same
income in two countries. It allows India the ability to tax NRI residents for capital
gains sale of shares arising in India.
 CONCLUSION

STILL ROOM FOR OPTIMISM

Despite these challenges, India is expected to be among the
fastest growing large economies in the world in 2017.
Mitigating these risks is important, particularly given global
economic uncertainty, and failure to do so may prevent the
economy from realizing its growth potential in the coming
year.
 REFERENCES:

Economic Survey of India (2016-2017)

India Yearbook (2017)
TradingEconomies.com
Livemint.com
Business Standard