Economic Indicators

A Project on Study of Economic Indicators and its Impact on India

INDEX Sr. No. | Content | 1. | Introduction. | 2. | Rationale of Study. | 3. | Objective of the study. | 4. | Literature Review. | 5. | Hypothesis | 6. | Method. | 7. | Research methodology | 8. | Sample Size. | 9. | Tools and techniques. | 10. | Research tools. | 11 | Procedure & data collection. | 12. | Data analysis and interpretation. | 13. | Suggestions and recommendations. | 14. | Bibliography. |

INTRODUCTION
An Overview of the Indian Economy:

Indian economic policy after independence, influenced by the colonial experience, which was seen by Indian leaders as exploitative in nature, and by their exposure to Fabian socialism, became protectionist in nature. The early policy makers formulated a policy of import substitution, industrialization, state intervention in labour and financial markets, a large public sector, overt regulation of business, and central planning. This led to a low overall average growth rates upto 1980.

The economic reforms that surged economic growth in India after 1980 can be attributed to two stages of reforms. The pro-business reform of 1980 initiated by Indira Gandhi and carried on by Rajiv Gandhi, eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. The economic liberalization of 1991, initiated by then Indian prime minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a macroeconomic crisis did away with the Licence Raj (investment, industrial and import licensing) and ended public sector monopoly in many sectors, thereby allowing automatic approval of Foreign Direct Investment (FDI) in many sectors .

The reform process has had some very beneficial effects on the Indian economy, including higher growth rates, lower inflation, and significant increases in foreign investment. The economy of India is now the fourth-largest in the world as measured by purchasing power parity (PPP), with a GDP of US $3.36 trillion. India was the second fastest growing major economy in the world, with a GDP growth rate of 8.1% at the end of the first quarter of 2005–2006. The country 's economy is diverse and encompasses agriculture, handicrafts, industries and a multitude of services. Services are the major source of economic growth in India today, though two- thirds of the Indian workforce earn their livelihood directly or indirectly through agriculture. In recent times, India has also capitalized on its large number of highly educated people who are fluent in the English language to become an important location for global companies outsourcing customer service and technical support call centers. It is also a major exporter of skilled workers in software services, financial services, and software engineering.

With the increasing importance of the economy of India, which is now well above the one billion mark in population, monitoring Indian economic cycles is now of more interest Identifying Potential Economic Indicators

* The choice of economic indicators is a very sensitive issue as the forecast performance depends on the quality of the indicators. The indicators should cover all the broad sectors in the economy, viz., real sector, financial sector, government sector, external sector, etc.

* Silver (1991) suggested the following six criteria to judge the quality of an indicator. The quality of an indicator is judged through some pre-defined criteria, set as per need and purpose of the analysis. In determining the usefulness of an indicator, the traditional National Bureau of Economic Research (NBER) approach applied the following six criteria to a series:

* Economic Significance – How well understood and how important is the role of variables in business cycles? * Statistical Adequacy – How well does the series measure the economic variable or process? * Timing – How consistently has the series led the economy at turning points? * Conformity – How regularly has the indicator conformed to the business cycle at large? * Smoothness – How easily can one discriminate between non-random movements of the series and the irregular component? * Timeliness – How promptly is the series available?

Under this strategy, a score is awarded for each criterion and an overall score for each indicator under consideration is worked out. The indicators to be used for forecasting the overall economic activity are then chosen from these indicators on the basis of their overall scor
The selection of individual indicator to construct composite indicators follows certain steps5:

* Prepare an exhaustive list and form a database of time series consisting of several variables. * Group chosen variables into few important categories, each representing a broad sector. * Subject variables in each sector to certain econometric procedures, like, unit root tests, co-integration tests etc.

The appropriateness of an indicator may also be assessed, through its turning points, vis-à-vis., the reference series. For assessing the appropriateness of a Leading Indicator (LI), the point-to-point lead periods may be estimated. The standard deviation of these point-to-point leads will give the extent to which the estimated lead period of the LI is reliable. The lead period of a LI may be estimated by measuring median or mean lead. For evaluation of the length of the lead, the median lead is preferred to the mean, as the mean lead is strongly affected by extreme values.

5 Simone (2001).

The Indicator Approach:

The indicator approach starts from the observation that the time series which describe the individual economic processes do not all turn at once in periods of cyclical change. From the large number of available time series, those are selected whose cyclical movement is in a specific systematic relationship to the general business or economic cycle. The indicator approach consists essentially of classifying economic indicators into leading, coincident and lagging categories and then combining the relevant components into corresponding composite indexes. This approach works because in a market-oriented economy, in cycle after cycle, economic indicators reach turning points in a known sequence. Basically, leading indicators turn before coincident indicators, which turn before lagging indicators.

The coincident indicators measure current economic performance and are used to represent the level of current economic activity. These help to date peaks and troughs of business cycles. The leading indicators, on the other hand, combine series that tend to lead at business cycle turns and provides a summary measure of what can be expected in the near future. Leading indicators generally represent commitments made with respect to future activity or are factors that influence such commitments. Examples are placement of new orders, intentions to build, and changes in profitability. The lagging indicators reach their turning points after the peaks and troughs of the coincident indicators, helps to clarify and confirm the underlying pattern of economic activity identified with the help of coincident and leading indexes. For instance, the levels of stocks, instalment credit outstanding, and interest rates depict previous changes in the economy.

Broadly, there are three types of indicators, viz., leading, coincidental and lagging indicators. The leading index, which combines the series that tend to lead at business cycle turns, provides a measure of expectation in the near future. The coincident index, comprising of indicators that measure the current economic performance is used to represent the level of current economic activity. On the other hand, the lagging index is a combination of indicators that reach their turning points after the peaks and troughs of the coincident indicators, helps to clarify and confirm the underlying pattern of the economic activity.

2 Klein, P.A. (1998), 3 See Annex-II.A, 4 See Annex-II.B.
The Ideal Indicator:

The object is to use economic cycle indicators to make an early diagnosis of cyclical movements. The main question is to ascertain the cyclical turning points and to distinguish between turning points which are to be rated as being cyclical and non- cyclical fluctuations in the time series. The following formulations may be considered as the prerequisites for the ideal business or economic cycle indicator:

* It would cover half-a-century or longer, thus showing its relation to the business cycles under a variety of conditions. * It would lead the month, around which cyclical revival centres, by an invariable interval of say, three months or even better, six months. It would also lead the central month of every cyclical recession by an invariable time interval, which might differ from the lead at revival. * It would show no erratic movements, that is, it would sweep smoothly up from each cyclical trough to cyclical peak and then sweep smoothly down to the next trough, so that every change in its direction would herald the coming or recession in the general economy or business. * The cyclical movements would be pronounced enough to be readily recognized, and give some indication of the coming change. * It would be so related to the general economic activity as to establish as much confidence as the nature of such things allows that its future behaviour in regard to economic cycles will be like its past behaviour.

Types of economic indicators:

The majority of economic indicators available to investors fall into one of these categories: leading, coincident, and lagging indicators. The main thread tying them together is their lead-lag relationship and feedback feature. The feedback between these indicators dampens the cycles and helps predict the future of the economic and financial system. For instance, when an economy expands at an above average growth rate, workers expect a rise in personal income. Consumers borrow more money to purchase items they want. More borrowed money raises the level of interest rates. Higher interest rates cause consumers to borrow and buy less. Producers cut production and the economy slows to a more sustainable growth rate. The feedback created by rising interest rates reduces the appetite of consumers for goods and maintains the economy within balanced growth ranges. This is a simplified example. In a complex economic system, other feedbacks exist. We call the vertical line separating each phase of the business and financial cycle a configuration. The configuration identifies the turning point (top or bottom) of each cycle (Fig. 2.1). As we move from one turning point to another, market prices move from one extreme to another. Investment risk changes as the business and financial cycles move from one configuration to the next, thus creating investment opportunities. When the configuration favors a specific asset, we assume a higher level of confidence and buy the specified asset.

The above graphs show the relationship between leading, coincident, and lagging indicators. Each turning point or configuration is a unique position in the business and financial cycle. By knowing where we are in the cycle, we can develop a strategy to profit from the current trend of the cycle.

The turning points of the leading indicators lead the turning points of the coincident indicators by months. The lead-time is about 12-24 months. The coincident indicators reflect what is happening in the economy.

The growth in monetary aggregates is a leading indicator. It anticipates changes in the financial markets and the economy. A peak in the growth of the money supply leads a peak in the growth of the economy (coincident indicators) by about 1-2 years. A peak in the growth of the economy (coincident indicators) leads a peak in interest rates, growth in commodity prices, and inflation (lagging indicators) by 12-24 months.

A decline in the lagging indicators is followed quickly, usually less than 6 months, by a rise in the growth of monetary aggregates and the dollar (leading indicators). After about 12-24 months from the trough in the monetary aggregates, the economy (coincident indicators) strengthens. A trough in the growth of the economy (coincident indicator) leads a rise in inflation, the growth of commodity prices, and interest rates (lagging indicators) by about 1-2 years.

The rise in the lagging indicators generates important feedbacks and requires a shift in portfolio strategy. For instance, a trough in interest rates, in the growth of commodity prices, and inflation is followed, usually by less than 6 months, by a peak in stock prices, growth in monetary aggregates, and the dollar. Then, the cycle is in position to repeat the pattern.

An understanding of the above relationships helped avoid the debacle of the stock market price bubble in 2000. In 1997, monetary aggregates (leading indicators) began to rise more rapidly. The Fed encouraged the rise. The Fed was responding to a credit and currency crises in the banking system. In late 1998, about 16 months later, the economy (coincident indicators) grew more rapidly. About a year later, in 1999, short-term interest rates (lagging indicators) began to rise accompanied by higher growth in commodity prices.

The rise in short-term interest rates caused the growth of the money supply to decline in mid 1999. This decline was bound to last for many months. Since stock prices and the growth of the money supply have the same turning points, the conclusion was clear – stock prices were very close to a major downturn. This was a prime time to begin a more conservative investment strategy.

Two important feedbacks exist. The first is the decline in the lagging indicators, followed by a rise in stock prices, the dollar, and growth in monetary aggregates. The second is the rise in the lagging indicators, which precedes a peak in the stock prices, in the growth of monetary aggregates, and the dollar. The action of the lagging indicators is a valuable tool to assess financial risk.

The important indicators are easy to track.

* The leading indicators are the growth of the money supply, stock prices, slope of the yield curve, and the dollar.

* The coincident indicators reflect the intensity of economic activity. Employment, production, housing activity, retail sales, car sales, and purchasing manager indexes are the most useful ones. They are reported in the news as they happen and they mirror current business activity.

* The lagging indicators are the most crucial gauges. The significant ones are short-term interest rates, bond yields, , inflation at the producer and at the consumer level, and growth in commodities

The level of real short-term interest rate (the difference between short-term interest rates and the inflation rate) is a proven measure to assess monetary policy. High real short-term interest rates are associated with periods of declining inflation rates, higher bond prices and lower bond yields, and lower precious metal stock prices, as occurred from 1985 to 2000. Low real interest rates imply periods of rising inflation rates, lower bond prices and higher bond yields, and higher precious-metal stock prices, and a more volatile business cycle.
Leading indicators

Generally indicators are identified based on some economic rationales. As suggested by De Leeuw (1991), selection of a leading indicator may be justified by one or more of the following five rationales: * Production Time – the fact that for many goods it takes months or even years between the decision to produce and actual production. * Ease of Adaptation – the fact that certain dimensions of economic activity have lower costs of short-run variations than others (e.g., weekly hours compared with employment) * Market Expectations – the fact that some time-series tend to reflect, or to be especially sensitive to, anticipation about future economic activity. * Prime Movers – the view that fluctuations in economic activity are driven basically by a few measurable forces, such as monetary and fiscal policies. * Change-versus-Level – the view that changes in economic time series generally turn up or down before levels.

The leading indicators provide information on the future trend of the economy. When the leading indicators begin to grow at a slower pace, the economy is likely to grow at a slower pace within 12-24 months. As the leading indicators increase the pace of their growth, the economy is likely to grow at a faster pace within 12-24 months. The following leading indicators have been selected for their reliability to predict turning points in the economy based on many years of experience in using them.

The money supply is the most important of the leading indicators. Sadly, money supply is widely misunderstood. Money supply is measured in more than one way. Sometimes, however, because of technological innovation or changes in the banking system, some measures of money supply get distorted. So, we follow many measures and expect distortion because of temporary factors.

There are four main measures of money supply. Money supply is a measure of how much liquidity is in the economy.

* Money supply - M1: M1 consists of currency, travelers ' checks of non-bank issuers, and demand deposits at all commercial banks.

* Money supply - M2: M2 is M1 plus savings deposits including money market savings accounts, small denomination time deposits, and balances in retail money market funds.

* Real money supply - M2: This leading indicator is computed by subtracting the rate of inflation in consumer prices from the growth in the money supply M2.

* Money supply - M3: The third measure of money supply is M3, which consists of M2 plus large denomination time deposits in the amount of $100,000 or more, balances in institutional money funds, and Eurodollars held by U.S. residents in foreign banks.

* Money supply – MZM: MZM is money with zero maturity (Fig. 2.4). It is defined as

* M2 plus institutional money funds, minus total small denomination time deposits.

Leading indicators are indicators that usually change before the economy as a whole changes. They are therefore useful as short-term predictors of the economy. Stock market returns are a leading indicator: the stock market usually begins to decline before the economy as a whole declines and usually begins to improve before the general economy begins to recover from a slump. Other leading indicators include the index of consumer expectations, building permits, and the money supply. The Conference Board publishes a composite Leading Economic Index consisting of ten indicators designed to predict activity in the U. S. economy six to nine months in future.

Illustration of a Leading Indicator:

Figures 1 and 2 illustrate the concept of leading indicators. The time series chosen as a leading indicator in Fig. 1 is the business climate for predicting the industrial production. In Fig. 2, business climate is taken as the indicator for the Gross National Product (GNP) of the erstwhile Federal Republic of Germany.

Figure 1: Illustration of leading indicator for industry for
(a) The erstwhile Federal Republic of Germany and
(b) European Union

Figure 2: Illustration of leading indicator for the economy of the erstwhile Federal Republic of Germany

List of Leading Indicators for Indian Economy:

The following is an exhaustive list of likely candidates for series which can be considered as leading indicators of the Indian economy: • Trends in Gross Domestic Product (GDP): Contribution of Agriculture, Industry and Services • Purchasing Power Parity (PPP) Index • Fiscal Deficit • Trends in Inflation Rate • Interest Rates • Credit Off-take • Balance of Payment • Foreign Exchange Reserves • Crude Oil Rates • Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) Trends • Rain fall Index • Sensex • Exchange Rate • Savings/GDP Ratio • Human Development Index • Electric Power Generation

The scope of this report has been restricted to a few indicators which can qualify as leading indicators of the Indian economy.

Lagging indicators

Lagging indicators are indicators that usually change after the economy as a whole does. Typically the lag is a few quarters of a year. The unemployment rate is a lagging indicator: employment tends to increase two or three quarters after an upturn in the general economy.

In finance, Bollinger bands are one of various lagging indicators in frequent use. In a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical performance; similarly, improved customer satisfaction is the result of initiatives taken in the past.
The Index of Lagging Indicators is published monthly by The Conference Board, a non-governmental organization, which determines the value of the index from seven economic variables. The Index tends to follow changes in the overall economy.

The components on the Conference Board 's index are: * The average duration of unemployment (inverted) * The value of outstanding commercial and industrial loans * The change in the Consumer Price Index for services * The change in labour cost per unit of output * The ratio of manufacturing and trade inventories to sales * The ratio of consumer credit outstanding to personal income * The average prime rate charged by banks

Coincident indicators

Coincident indicators change at approximately the same time as the whole economy, thereby providing information about the current state of the economy. There are many coincident economic indicators, such as Gross Domestic Product, industrial production, personal income and retail sales. A coincident index may be used to identify, after the fact, the dates of peaks and troughs in the business cycle.

There are four economic statistics comprising the Index of Coincident Economic Indicators: * Number of employees on non-agricultural payrolls * Personal income less transfer payments * Industrial production * Manufacturing and trade sale

The Philadelphia Federal Reserve produces state-level coincident indexes based on 4 state-level variables: * Nonfarm payroll employment * Average hours worked in manufacturing * Unemployment rate * Wage and salary disbursements deflated by the consumer price index (U.S. city average)

The Economy of India is the eleventh largest in the world by nominal GDP and the fourth major by purchasing power parity (PPP). In 2010 the country 's per capita GDP (PPP) is $3,290 (IMF, 127th). Following strong economic reforms from the post-independence socialist economy, the country 's economic growth progress at a quick pace, as free market principles were initiate in 1991 for international antagonism and foreign investment.

The value of any money in an economy is hard to bet, to be stable for a long stage of time as there are number of factor influence its approval and the depreciation. The currency value of an economy influences the growth rate of GDP in an economy. Several other factors that have a direct power on the over or the undervaluation of a currency are listed below:
Need and importance of economic indicators
Indicators will be an important and useful forecasting and planning tool for policymakers, financial analysts, financial investors and businesses.

Financial success depends on the investment process. The need for a disciplined approach becomes apparent when markets go through a long and deep period of volatility as in the 1970s and after 2000. What to buy or sell, when to buy or sell, why to buy or sell, and how much to buy or sell are important issues. These issues need resolution before beginning an investment program.

The above indicators are used to establish economic and financial scenarios needed to manage risk. These scenarios help to recognize the level of risk and play a major role in developing investment strategies.

An investment strategy is needed because forecasts, by definition, are uncertain. A strategy helps us when markets do not meet our expectations. An intelligent strategy protects our capital in the worst cases. Strategies based on formulas eventually end in painful failure. For this reason a process to manage risk is vitally important. A continual review of markets, their direction, and the performance of our investments provide essential clues to the wisdom of our strategy. If the performance is dismal, change quickly.

How do we proceed? We need to understand what occurs in the business and financial world. By tracking economic and financial indicators, we use the necessary tools to find how the financial community plays the game. This chapter lists the important indicators needed to follow the trend of the business and financial cycles. We do not need to use an exhaustive list of all available indicators. We do need to use the reliable ones as explained in the project.

The relationships between the leading, coincident, and lagging indicators provide a logical framework to understand the pattern of business activity and the valuable investment assets.
GROSS DOMESTIC PRODUCT

Basics of GDP:

Gross domestic product, or GDP, is one of several measures of the size of its economy. Until the 1980s the term GNP or gross national product was used. The two terms GDP and GNP are almost identical. The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + investment + government spending + (exports − imports) "Gross” means depreciation of capital stock included. Without depreciation, with net investment instead of gross investment, it is the Net domestic product. Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called net exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic production not consumed at home (the exports).

Economists have preferred to split the general consumption term into two parts; private consumption, and public sector spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are: * Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption * If separated from endogenous private consumption, Government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework. *
Therefore, GDP can be expressed as:

GDP = private consumption + government + investment + net exports or simply, GDP = C + G + I + NX

The Present State of GDP:

The robust performance of the Indian economy continued during the second quarter (July-September) of 2005-06 and then late 2011. According to the Central Statistical Organisation (CSO), the economy recorded a real GDP growth of 8.0 per cent in the second quarter of 2005-06 and ~9% in end 2011 maintaining the momentum of growth in the first quarter. Real GDP originating from the ‘agricultural and allied activities’ benefited from the positive impact of the near normal South-West monsoon. GDP has been falling steeply off late on the back of uncertain global economic environment and high interest rate.

Indian economy growth slowed to 4.5% during the third quarter of fiscal 2013 which came above market expectations of 4.6%. This was lower compared with 5.3% growth in the previous quarter.
GDP at factor cost at constant (2004-05) prices for Q3 of 2012-13 is estimated at Rs. 14,115.94 billion, as against Rs 13,512.52 billion in Q3 of 2011-12.

The economic activities which registered significant growth in Q3 of 2012-13 over Q3 of 2011-12 are, financing, insurance, real estate and business services at 7.9%, construction at 5.8 percent, community, social & personal services at 5.4%, trade, hotels, transport and communication at 5.1% and electricity, gas & water supply at 4.5%.

The growth rate in agriculture, forestry & fishing, mining and quarrying and manufacturing is estimated at 1.1%, (-) 1.4% and 2.5%, respectively in this period.
The Significance of GDP:
The growth in GDP indicates the overall improvement of the economy. The rate of growth of GDP vis-à-vis population growth and inflation rate is indicative of the additional resources being made available in the country. It also facilitates capital formation as higher FII and FDI is attracted, when the GDP growth is superior to the other constituents of the sub-continent. This, in turn, is likely to propel further growth and add impetus to the buoyancy of the economy.

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country 's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It 's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
HUMAN DEVELOPMENT INDEX

Introduction

The UN Human Development Index (HDI) is a comparative measure of poverty, literacy, education, life expectancy, childbirth, and other factors for countries worldwide. It is a standard means of measuring well-being, especially child welfare. The index was developed in 1990 by the Pakistani economist Mahbub ul Haq, and has been used since 1993 by the United Nations Development Programme in its annual report.

The HDI measures the average achievements in a country in three basic dimensions of human development:

* A long and healthy life, as measured by life expectancy and birth. * Knowledge, as measured by the adult literacy rate (with two-thirds weight) and the combined primary, secondary, and tertiary gross enrolment ratio (with one- third weight). * A decent standard of living, as measured by gross domestic product (GDP) per capita at purchasing power parity (PPP) in US Dollar.

The first two indicators are social indicators. Life expectancy, a much desired objective of human beings, reflects the progress made in such fields as health, infant and child mortality and nutrition.

Significance:
The index is useful and meaningful, especially for the less-developed countries. While it gives importance to income, it does not do so unduly. The decline in its weightage after a certain point, automatically raises the importance of social indicators. Equally important, the inclusion of social indicators, the HDI stresses the importance of the quality of life. The index helps bring into the limelight the wide disparities that exist in the levels of human development between them and the developed countries.

In the following passages, there will be several comparisons made to China. We felt that since China is our biggest competitor today, it would be apt to make to include it in the future discussions to show how India stands.

In the last Century, India’s population has increased from 250 to 1000 million, an increase of about 400%! In India, in the last 100 years the actual number of poor people, has steadily increased. In China, all young children go through 9 years of schooling, this ensures 100% literacy. In India it is hardly 50%. China’s per capita is US$845 vs US$425 for an Indian. Their GDP is 2.5 times of India. Because of China’s successful Population Policy, China has added 300 million LESS people, in the last 30 years. China has been able to reduce the people below poverty line to 3%, i.e. only 40 million people. India has 40% or 400 million below the poverty line. We fail to understood the fact why some thinkers and leaders, in India, mention that our population is our strength. How can they make such statements, with so much poverty, illiteracy & a low standard of living? It’s a nightmare for the POOR in India! The average age in China, for women to get married, the first time, was 23.57 years, in 1998.

India has 17% of the world’s population, 2.2% of the land area, 1.4% of the world’s GDP and only 0.6% of the world trade. This means that 98.6% of the World’s GDP [Buying Power] & 99.4% of the World’s Trade is not with India! India must plan larger exports, for increasing the standard of living of its people.

Employment:

Population, food security, education and remunerative employment opportunities are closely interconnected. Rising levels of education and rising living standards are powerful levers for reducing birth and mortality rates. As population growth slows to replacement levels over the next two decades, India’s greatest challenge will be to expand the opportunities for the growing labour force, to enrich their knowledge and skills through education, raise their living standards through gainful employment and make provisions for ensuring a good life for the aged. India has met the challenge of producing sufficient food to feed everyone, but it has yet to meet the challenge of generating sufficient employment opportunities to ensure that all its people have the purchasing power to obtain the food they require. Gainful employment is one of the most essential conditions for food security and economic security. Conversely, food security is an essential requirement for raising the productivity of India’s workforce to international levels .

India’s labour force has reached 375 million approximately in 2002, and it will continue to expand over the next two decades. The actual rate of that expansion will depend on several factors including population growth, growth of the working age population, labour force participation rates, educational enrolment at higher levels and school drop-out rates. Projections based on these parameters indicate that India’s labour force will expand by 7 to 8.5 million per year during the first decade of this century, and will increase by a total of about 160-170 million by 2020, i.e., 2.0 percent per annum.

Total unemployment in India has been estimated to be about 35 million persons in 2002. This figure takes into account the significant level of underemployment and seasonal variations in the availability of work. It also reflects wide variations in the rate of unemployment among different age groups and regions of the country. Approximately three-fourth of the unemployed are in rural areas and three-fifth among them are educated. The recent trends towards shedding excess labour to improve competitiveness and increasing capital intensity have further aggravated the situation. A clear consensus is now emerging that major changes in economic policy and strategy will be needed to meet the country’s employment needs.

Education:

Literacy, the basis of all education, is as essential to survival and development in modern society as food is to survival and development of the human body. Literacy rates in India have arisen dramatically from 18 per cent in 1951 to 65 per cent in 2001, but these rates are still far from the UMI reference level of 95 per cent. Literacy must be considered the minimum right and requirement of every Indian citizen. Vast differences also remain among different sections of the population. Literacy among males is nearly 50 per cent higher than females, and it is about 50 per cent higher in urban areas as compared to the rural areas. Literacy rates range from as high as 96 per cent in some districts of Kerala to below 30 per cent in some parts of Madhya Pradesh. Rates are also significantly lower among scheduled castes and tribes than among other communities. Literacy is an indispensable minimum condition for development, but it is not sufficient. In this increasingly complex and technologically sophisticated world, ten years of school education must also be considered as an essential prerequisite for citizens to adapt and succeed economically, avail of the social opportunities and develop their individual potentials. Education is the primary and most effective means so far evolved for transmitting practically useful knowledge from one generation to another.

In terms of total investment in R&D, India’s expenditure is 1/60th of that of Korea, 1/250th of that of the USA, and 1/340th of that of Japan. More significantly, atomic energy, space and defence research account for 71 per cent of all central spending on science and technology, which means that relatively little is left for investment in agriculture, energy, telecommunications and other crucial sectors within the sphere of science and technology. R&D expenditure even in

These low figures reflect on our R&D performance. India’s share of global scientific output in 1998 was only 1.58 per cent of the world’s total. Out of 500,000 new patent applications filed globally each year, China accounts for 96,000 and Korea accounts for 72,000, while India accounts for only 8,000. Of greater concern has been the country’s inability to capitalize on our huge pool of manpower and extensive network of scientific research organizations for transferring proven technologies from the lab to the land and to the factory. Despite possessing the world’s largest cadre of agricultural scientists, we have not been able to extend the momentum of Green Revolution to other regions and crops and to update the scientific practices of our farmers to levels comparable with most other nations. Crop productivity remains far below and production costs far above world averages. A similar gap exists in the application of science and technology for food processing and many other industries. High technology exports account for only 6 per cent of total manufacturing exports for India compared to over 20 per cent for the UMI reference level.

SCHOOL ENROLLMENT; PREPRIMARY (% GROSS) IN INDIA

Health for All:
The health of a nation is difficult to define in terms of a single set of measures. At best, we can assess the health of the population by taking into account indicators like infant mortality and maternal mortality rates, life expectancy and nutrition, along with the incidence of communicable and non-communicable diseases. According to these measures, the health of the Indian population has improved dramatically over the past fifty years. Life expectancy has risen from 33 years to 64 years. The infant mortality rate (IMR) has fallen from 148 to 71 per 1000. The crude birth rate (CBR) has declined from 41 to 25 and the crude death rate (CDR) has fallen from 25 to under 9. The couple protection rate (CPR) and total fertility rate (TFR) have also improved substantially. Despite these achievements, wide disparities persist between different income groups, between rural and urban communities, and between different states and even districts within states. The infant mortality rate among the poorest quintet of the population is 2.5 times higher than that among the richest. Maternal mortality remains very high. More than one lakh women die each year due to pregnancy-related complications.

Like population growth and economic growth, the health of a nation is a product of many factors and forces that combine and interact with each other. Economic growth, per capita income, employment, levels of literacy and education—especially among females—age of marriage, birth rates, availability of information regarding health care and nutrition, access to safe drinking water, public and private health care infrastructure, access to preventive health care and medical care, health insurance, public hygiene, road safety, and environmental pollution are among the factors that contribute directly to the health of the nation.

Life expectancy at birth:

MONSOON AND ITS IMPACT ON AGRICULTURE

Introduction

More than 58% of country 's population depends on agriculture, a sector producing only 22% of GDP. The agriculture and allied sector witnessed a growth of 9.1% in 2003-04, which fell steeply to 1.1% in the current fiscal year. Favorable monsoon facilitated an impressive growth rate of 9.6% in 2003-04 on the back of negative growth in the preceding year. However, deficient rainfall from the southwest monsoon is estimated to have caused a significant decline in kharif crops production in the current year.

Monsoon and it’s Forecasting in India

Indian economy which is still considered as an agricultural economy – is Dependant on the amount of monsoon rains as large parts of the agricultural produce comes from the monsoon fed crops. Good monsoon always means a good harvest and brings in cheers all around the country. A weak or bad monsoon is always considered as a big setback to India’s economy and always results in a big loss in the country GDP levels. Understanding the mechanisms driving global weather patterns leads us to question "what went wrong" when inconsistent weather conditions arise. Whenever periods of drought or flooding exceed than what is normally expected, driving forces in the weather have likely been either suppressed or enhanced in some manner.

As with any meteorological phenomenon, especially one demonstrating a periodic (cyclic, or recurring) tendency, attempts to forecast the monsoon have been underway for ages. Efforts to predict the performance of the monsoon based on correlations of observed weather features have been pursued since the late 1800s, when it was assumed that Himalayan snow-cover directly affected regional weather patterns. However, before forecasting can be attempted, knowledge of the phenomenon itself must be understood.

In the case of the Indian monsoon, what to look for in the period leading up to the monsoon onset as well as during the active monsoon itself are vital components of understanding the physical nature of the phenomenon

IMD Methodology

In the months prior to the expected start of the rainy season, the Indian Meteorological Department (IMD) predicts the onset date and rainfall potential of the monsoon using a statistical model that evaluates 16 "precursor" conditions, which indicate the potential strength of the monsoon circulation. Of the 16 parameters used, 6 regard temperature conditions, 3 wind or pressure field values, 5 pressure anomalies, and 2 snow-cover. The most important of these appear to be: 1) the position of the 500mb ridge centered over 75E longitude averaged over the month of April; 2) monthly average temperatures over the Indian sub-continent (March and May monthly averages at different locations); and 3) El Niño/Southern Oscillation conditions. Independent studies have shown these parameters to have a high correlation separate from other fields, and are frequently used separately for unofficial pre-season forecasts. Once the season has begun, forecasts of daily rainfall are attempted by observing and predicting the lengths of "active" and "break" periods. These are naturally occurring phases in the monsoon, lasting from 5 to 7 days, identified by fluctuations in the typical pattern. Several features associated with the active phase, brings rain to the northern Indian Plains and its west coast. They include tropical depressions in the Bay of Bengal, a low-level jet stream along the east African coast, and the variations in the monsoon trough, the area of low pressure that develops over India during the summer monsoon season.

The current monsoon forecast methods are generally either statistical or numerical. Statistical forecasts look at correlation or relationships between known phenomena and the event being analyzed, such as the earlier example of monsoon performance bases on the Tibetan Plateau snow pack. However, their strength lies in steering one towards a logical result rather in absolutes. For instance, in the case of the Asian drought of 1987, the monsoon was weak, resulting in one of the worst droughts of the century. But the El Niño which caused the disruption in world weather patterns was not as strong as the 1982-83. In contrast, a numerical model is a mathematical simulation of the atmosphere, represented by known physical relationships such as the equations of motion and thermo-dynamics etc. For example, the various models used by meteorologists to provide temperature and precipitation forecasts out to 5 days are numerical models, run on supercomputers due to the large amounts of data being processed.

This is a very serious issue for developing countries like India because such countries rely so heavily on agriculture for economic and cultural survival. 27% of India’s gross domestic product comes from its agricultural production. 13-18% of India ’s total annual exports are agricultural products. Because India is an underdeveloped country, its agricultural system does not benefit from advanced technology. Without such advanced irrigation systems and other technological benefits, changes in India ’s rainfall and climate would have incredible effects.

The Importance of rainfall

Output growth severely affected by rainfall, especially in earlier years when share of agriculture was 40 – 50 %; data crucial for proper estimates of production function, tfpg etc.

Construction of Rainfall Index

For each year, only rainfall for four months, June through September, are considered. * Area of each state =As * (Mean)Rainfall for each rainfall station, 1871-2003: µs * Standard deviation for each rainfall station, 1871-2003: ss * (4 months mean) Rainfall for each station and year: Rs * Define: Js = (Rs - µs)/ss; for each rainfall station and year * Yearly Rainfall Index = S (As* Js)/SAs

FOREIGN DIRECT INVESTMENT (FDI) IN INDIA

Introduction:

Foreign direct investment is investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset.

The idea of India is changing. This is best proved by the increasing number of countries showing interest to invest in India. Another encouraging factor is that India is considered a stable country for investing in by corporates overseas. This is evident from the fact that not a single corporate has approached the World Bank Group 's Multilateral Investment Guarantee Agency (Miga) for non-commercial risk cover for making investments into the country. India has displaced US as the second-most favoured destination for foreign direct investment (FDI) in the world after China according to an AT Kearney 's FDI

Foreign direct investment (FDI) has become a key component of national development strategies for all most all the countries over the Globe. FDI is considered to be an essential tool for jump-starting economic growth through its bolstering of domestic capital, productivity and employment. The reliance on FDI is rising heavily due to its all round contributions to the economy. The important effect of FDI is its contributions to the growth of the economy. FDI has an impact on country 's trade balance, Increasing labour standards and skills, Transfer of new technology and innovative ideas, Improving infrastructure, skills and the general business climate. Foreign direct investment (FDI) is considered to be the lifeblood for economic development as far as the developing nations are concerned. FDI to developing countries in the 1990s was the leading source of external financing. The rise in FDI volume was accompanied by a marked change in its composition. That is investment taking the form of acquisition of existing assets (mergers and acquisitions) grew much more rapidly than investment in new assets particularly in countries undertaking extensive privatization of public enterprises.

FDI IN INDIA AND US:

India and the US have multi faceted relations in the field of politics, economics and commerce. India-US economic relations in the form of bilateral investments and trade constitute important elements in India-US bilateral relations particularly because India is now the second fastest growing economy in the world and USA is the world 's largest economy.

Economic Reforms introduced since 1991 have radically changed the course of the Indian economy and has led to its gradual integration with the global economy. The effect of this reform process on trade and investment relation with US is profound. USA is the largest investing country in India in terms of FDI approvals, actual inflows, and portfolio investment. US investments cover almost every sector in India, which is open for private participants. India 's investments in USA are picking up. USA is also India 's largest trading partner. By 2003, India became the 24th largest export destination for the US. In terms of exports to the US, India now ranks eighteenth largest country.

US INVESTMENT IN INDIA:

With regards to FDI U.S. is one of the largest foreign direct investors in India. The stock of actual FDI Inflow increased from U.S. $11.3 million in 1991 to US $4132.8 million as on August 2004 recording an increase at a compound rate of 57.5 percent per annum. The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.

Top sectors attracting FDI from USA are: Fuels (Power & Oil Ref.) (35.93%), Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%) Electrical Equipment (including Computer Software & Electronics) (9.50%), Food Processing Industries (Food products & marine products) (9.43%), and Service Sector (Fin. & Non-Fin. Services) (8.28%).

FDI IN CHINA

China has principal attractions like low-cost labor and an enormous domestic market of more than 1.2 billion consumers. The investment climate has been opened up gradually. In the 1980s, foreigners were restricted to export-oriented joint ventures with Chinese firms. In the early 1990s, they were allowed to manufacture goods for sale in the domestic Chinese market; and by the mid-1990s; the establishment of wholly foreign- owned enterprises was permitted. China 's accession to the WTO forces the government to open up the services sector. In 2004,China being one of the fastest-growing economies in the world attracted actual FDI of more than US$60.6 billion, up 13 per cent from the previous year. Foreign direct investment (FDI) in China dropped slightly in the first five months of the year 2005-06 but within a reasonable fluctuation. China attracted US$22.4 billion of FDI over the period, a 0.79 per cent decrease from the previous year, according to statistics published by the Ministry of Commerce. Contracted direct investment to China, which indicates the future trend of FDI flow rose nearly 15 per cent over last year to US$65 billion. The ministry said China approved 16,437 new foreign-invested ventures between January and May, down 4.75 per cent year-on-year. Based on official information, the country realized FDI of US$4.89 billion in May, a comparatively large decrease of some 22 per cent over last year. Although all the figures for the period show a declining or slowing growth rate, experts said the average investment in each project was increasing. India is the sixth most attractive FDI destination.

Although far behind China, India figures among the ten most attractive destinations for foreign investment, according to a new survey. India jumps to sixth place from 15th last year, said a survey by leading global consulting firm A T Kearney Inc. Other surprises in this year 's survey, besides India, has Poland, Russia and Brazil replacing France, Italy, Canada and Australia in the top ten. India 's English-speaking population too is highly valued by American, Canadian and British investors. Overall, European and Asian executives view India more favorably this year. India is a prime offshore location for low and high-tech activities, its low-cost, English-speaking and IT- savvy labor force, coupled with a large market potential, underpin global executives ' improved outlook and investment confidence this year. Services sector investors ranked India as the fourth most attractive this year, up from the 14th place in 2002, it said adding as a leading offshore location India received investments from GE Capital, American Express, Citibank, Conseco, British Airways, Dell Computers and Reuters. This FDI resulted in the development of call centres, back office support and facilities to handle knowledge-intensive activities. However, FDI remains significantly lower than China and Brazil, it noted. Investors still face a highly bureaucratic business climate as well as ceilings on foreign ownership in India. From software giant Microsoft to telecom biggies Nokia and Samsung to auto majors Honda and Toyota, global players now eye India as the most attractive destination for investment. December 2005 alone saw a number of global business leaders in India lauding India 's great economic prowess and making huge investment promises.

SENSEX – THE BAROMETER OF INDIAN ECONOMY

Introduction

Though the BSE was established in 1875, till the decade of eighties there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. Due to be wide acceptance amongst the Indian investors, SENSEX (Sensitivity Index) is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The market value of listed companies of India Inc hit Rs 29.11 trillion (Rs 29,11,000 crore) on March 24, 2006 - an increase of Rs 12 trillion (Rs 12,00,000 crore) in the past 12 months when compared with Rs 17.08 trillion (Rs 17,08,000 crore) the same time last year.

The SENSEX captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through SENSEX.

Significance of SENSEX as a Leading Indicator

Rising SENSEX is indicative of improving business climate and greater growth expectations. Since rising trend in SENSEX attracts investments from retail, institutions, and Foreign Institutional Investors, it facilitates capital formation at relatively reasonable rate and with greater ease. This in turn gives fillip to the capex and the growth cycle acquires continuum as a result.

Calculation Methodology

SENSEX is scientifically designed as per globally accepted construction and review methodology. SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100.

The calculation of SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.

Index Review Frequency

The Index Committee meets every quarter to review all BSE indices. However, every review meeting need not necessarily result in a change in the index constituents. In case of a revision in the Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index.

Source : icicipruamc

INFLATION
Introduction

Inflation is an increase in the general level of prices, or, alternatively, it is a decrease in the value of money. To say that prices have gone up means that the value of money (purchasing power) has gone down.

Inflation is one of those economic phenomena that affects every citizen, almost every day. During periods of falling inflation, prices may still go up because actually, when inflation is down, it is only the rate of increase in prices that is down. While nominal incomes go up, the real worth of incomes is eroded with price-increase.

The rate of inflation is important because it affects the planning at all levels. For example, if prices are declining, holding inventories is expensive, and sellers will try to minimize inventories. The price at which people borrow and lend funds will also depend heavily on what they expect to happen to prices. The real rate of return will decline for higher inflation rate.

Significance of Inflation as Leading Indicator

Currently, a great deal of popular attention is being paid to issues relating to inflation and its measurement in India, than ever before, reflecting some new realities. First, with the dismantling of most administered interest-rates, the link between inflation and interest rate is, relative to the past, more closely tracked by savers, investors and financial intermediaries. Second, with the progressive opening up of the economy, the integral link between inter-country interest rate differentials, inflation rate differentials and the forward exchange premia are closely observed when viewing exchange rate movements. Third, in a liberalised trading regime and market determined exchange rate regime, and also if the country has to allow the economy to be "globalised" or more open, inflation-tracking is critical in terms of maintaining competitiveness of domestic industry. Fourth, the market participants carefully track inflation data to anticipate and assess monetary policy changes, in view of the recent trends in the manner of articulation of such policy changes.

The two frequently used measures of inflation in India are based on Wholesale Price Index (WPI) and Consumer Price Index (CPI). Then the discussion would turn to the concept of core inflation and its relevance to India. Some exploratory analysis is attempted on the apparent puzzle of the current low inflation being accompanied by relatively high growth in money supply.

Wholesale Price Index (WPI)

The WPI is the main measure of the rate of inflation often used in India. The WPI is available for all commodities, and for major groups, sub-groups and individual commodities. The basic advantage of this measure of inflation is its availability at high frequency, i.e. on weekly basis with a gap of about two weeks, thereby enabling continuous monitoring of the price situation for policy purposes. This index does not cover non-commodity producing sectors viz. services and non- tradable commodities.

Consumer Price Index (CPI)

The important measure at the point of consumption is the Consumer Price Index for Industrial Workers (CPI-IW) which is meant to reflect the cost of living conditions and is computed on the basis of the changes in the level of retail prices of selected goods and services on which a homogeneous group of consumers spend the major part of their income. Its coverage is broader than the other indices of CPI like the CPI for Agricultural Labourers (AL) and the CPI for Urban Non-Manual Employees (UNME). Besides, CPI-AL and CPI-UNME are not considered as robust national inflation measures because they are designed for specific groups of population with the main purpose of measuring the impact of price rise on rural and urban poverty.

Comparison of WPI and CPI

While each of the measures has its advantages as well as weaknesses, the selected measure of inflation should broadly capture the interplay of effective demand and supply forces in the economy at frequent intervals. This will be facilitated if the price indices have a high periodicity of release, and it is in this sense that WPI is superior to CPI. WPI 's coverage of commodities is also high. While services do not come under the ambit of WPI, the coverage of non-agricultural products is better in WPI than CPI, making WPI less volatile to relative price changes as against the CPI. The coverage of tradable items, essentially manufactured products (weight = 57.06 per cent) is higher in the case of WPI whereas the coverage of non-tradables like services pertaining to education, medical care and recreation are more in the case of CPI-IW. The weekly periodicity of WPI with a lag of a fortnight often coincides with the release of banking and money supply data on 14 day basis.

Core Inflation

A measure of inflation that excludes certain items which face volatile price movements. Core inflation eliminates products that can have temporary price shocks because these shocks can diverge from the overall trend of inflation and give a false measure of inflation. Core Inflation is thought to be an indicator of underlying long-term inflation.

Core inflation is most often calculated by taking the Consumer Price Index and excluding certain items from the index, usually energy and food products. Other methods of calculations include the outliers method, which removes the products that have had the largest price changes.

A measure of core inflation has two distinct uses for monetary policy purposes. While one role is in setting or formulating policy, the second role is in providing policy accountability. Because of these two uses, many central banks are interested in estimating core inflation. But, it should be equally recognised that different methods used to estimate core inflation give various estimates and hence it is very difficult to have a precise and unique definition, which is universally acceptable. Hence, the need for further research on defining core-inflation, appropriate for India.

Problems arise when there is unanticipated inflation

• Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan. • Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run. • People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living. • The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated. • If the inflation rate is greater than that of other countries, domestic products become less competitive.

Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it 's not so easy to label inflation as either good or bad -- it depends on the overall economy as well as your personal situation

Current Account
Introduction

Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. And a current account surplus is usually associated with trade surplus. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contribute to a current account surplus as the value interest or dividends generated abroad is bigger than the value of interest or dividends generated from foreign capital in the country. Net transfer payments are very important part of the current account in poor and developing countries as workers ' remittances, donations, aids and grants and official assistance may balance high trade deficits.

INDIA CURRENT ACCOUNT

India recorded a Current Account deficit of 22.30 USD Billion in the third quarter of 2012. Current Account in India is reported by the Reserve Bank of India. Historically, from 1949 until 2012, India Current Account averaged -1.32 USD Billion reaching an all time high of 7.36 USD Billion in March of 2004 and a record low of -22.30 USD Billion in September of 2012. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). This page includes a chart with historical data for India Current Account.

A current account deficit measures the balance of trade in:

* Goods * Services * Net investment incomes and transfers
A deficit on the current account means a country is importing more than we are exporting. This will have to be matched by a surplus on the financial and / or capital account.

The financial account comprises of 2 main features:

a) Short Term Capital flows e.g. hot money flows and purchase of securities
b) Long Term Capital flows e.g. investment in building new factories

Some economists argue we need not worry about a current account deficit. This is because:

* If a current account deficit is financed from long term capital inflows then this can be beneficial for the economy. Inward investment can increase the productive capacity of the economy. * In an era of globalisation it is much easier to attract sufficient capital flows to finance the deficit. * If the deficit gets too large it will cause a devaluation which helps to reduce the deficit. Also when there is a slowdown in consumer spending the deficit will fall. * A current account deficit provides an outlet for domestic demand and prevents inflation.

Crude oil
Introduction
Crude oil is a naturally-occurring substance found in certain rock formations in the earth and this is mixture of mud & organic material is rich in hydrogen & carbon. Over millions of years this layer of organic rich mud becomes buried thousands of feet deep in the earth and temperature of the earth becomes hotter as you go deeper in to the earth. The combination of increasing temperature & pressure on the organic mixture causes change in to crude oil. India 's growing dependence on imported oil products and the dramatic rise in the prices of crude oil to as high as $148/bbl. the international market in July 2008, followed by an equally dramatic fall, pose significant policy challenges. The Government 's efforts to insulate domestic Consumers, at least to some extent, resulted in huge fiscal burden for the The Government and financial problems for the public sector oil the marketing companies. But for the steep fall in crude Price, it would have most likely disrupted the growth process of our economy. Crude oil is one of the most necessitated worldwide required commodities and India is importing 100 million tons of crude oil and other petroleum products and spending huge amount of foreign exchange. Such huge imports of petroleum products will have large impact on Indian economy especially when the crude oil prices in the international market shoots up. Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the Indian economy. The rise in crude oil prices has affected the Indian economy quite significantly and the country has to produce about one trillion worth of GDP to fulfill the needs of its huge population. In order to produce this one trillion dollar worth of output, India needs 2.5 million of oil per day which is 6.5 percent of total world demand for oil.

IMPACT ON INDIA 'S GDP AND INFLATION

India 's crude oil import bill may cross USD170 billion if the global price stays firm at USD 100-USD 120 a barrel. If that happens, it will upset the delicate fiscal balance, expand deficit, increase the subsidy bill that continues to bloat year after year and fuel inflationary expectations. Rising crude oil prices will impact inflation whether the government absorbs the burden or passes it to the consumer by increasing prices of petroleum products. If the government acts as a buffer, the oil subsidy bill will rise and affect fiscal deficit. This will indirectly fan inflation. The recent strengthening of crude oil prices could impact economic growth momentum in the country for the current fiscal. The main factors that would be responsible for economic growth moderation in 2011-12 would be crude oil prices and RBI 's tightening of monetary policy in response to oil prices. Rising crude price will lead higher inflation and higher inflation attracts monetary tightening. Monetary tightening would lead to a squeeze on aggregate demand, impacting economic growth. There will be an impact on the price level and on inflation. Its magnitude will depend on the degree of monetary tightening and the extent to which consumers seek to offset the decline in their real incomes through higher wage increases, and producers seek to restore profit margins.

R E L AT I O N S H I P B E T W E E N E C O N O M I C GROWTH AND OIL PRICES1 There are a number of evidences to support bidirectional or unidirectional causality between energy consumption and economic growth. Despite the expanding literature on the study of causal relationships between energy consumption and economic growth, to the best of the author 's knowledge, there have been some studies specifically addressing the causal relationship between oil consumption and economic growth. The direction of causality between oil consumption and economic growth has significant policy implications for countries, enjoying implicit generous subsidies for energy. On the other hand, if unidirectional causality runs from energy consumption to income, reducing energy consumption. Numerous studies have been conducted to examine the relationship between energy consumption and economic growth; the overall findings show that there is a strong relationship between energy consumption and economic growth. Issues related to oil imports are part of India 's huge energy needs and limited resources. India has been importing crude oil and coal and exporting petroleum products for decades. However, the export does not hedge India 's exposure to energy imports given the volumes.

Crude prices have had a strong relationship with global economic activity since 2000. When activity improves, crude prices rise. However, it can be disrupted by event risks or economic distortions (eg: quantitative easing).

Bullish sentiments result in (initially) a positive feedback loop of higher investor returns, which reinforces risk appetite and funding liquidity. With increasing appetite, global investors increase exposure to risky emerging markets. This has historically benefited currencies like the rupee. It is reversed when liquidity tightens.

Crude prices tend to correct in expectation of reduced global economic activity. As observed in the recent downturn, a falling rupee prevents Indian consumers from benefiting from a reduction in global commodity prices, including crude oil. An inflexible domestic consumption further affects the fiscal condition.

As a net commodity importer, India is adversely affected by rupee depreciation. A falling rupee adds to inflation but aids exports growth despite it not being a sufficient condition. Stable global demand has a stronger impact on exports as seen during 2003-8, characterised by hardening of the currency and phenomenal exports growth. An appreciating rupee will favourably impact inflation.

Controlled deregulation of fuel prices is only the first step in managing the energy problem and the more immediate problem of fiscal consolidation.

At the risk of giving an overly simple explanation, the fuel subsidy system works in the following manner. Rising oil prices hit the government directly or through oil marketing PSUs or oil companies (ONGC, GAIL). To meet this deficit, the government inevitably borrows from the domestic market, leading to higher funding costs and tightening liquidity and other Indian companies are invariably 'crowded out ' of debt funding.

The rising cost of funding is transmitted to the system as higher inflation, but with a lag. However, controlled deregulation of fuel price will mean a hike in crude prices would directly impact household expenses. While it appears to be a zero sum game in the short term, there may be an upside in the long term.

The current, almost static, consumption of subsidised fuel might change with the hike in prices. The higher price may reduce demand to a limited extent. More profound consumption behaviour may be exhibited in the medium term. It may vary from the mundane, such as increased use of public transport, to the aspirational, say installation of solar panels.

On the government front, it will provide the RBI room to change the monetary policy to support growth.

1http://businesstoday.intoday.in/story/crude-oil-prices-to-continue-governing-indian-economy-growth/1/189387.html
IIP (Index of Industrial Production)
Introduction
Comparison of economic performance over time is a key factor in economic analysis and a fundamental requirement for policy-making. Short-term indicators play an important role in this context by providing such comparison indicators. Among these short-term indicators, the Index of Industrial Production (IIP) has historically been one of the most well known and well-used indicators. The IIP measures volume changes in the production of an economy, and therefore provides a measurement that is free of influences of price changes, making it an indicator of choice for many applications.

The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. It is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month.
Sectoral Bifurcation (with 2004-2005 as base)

Sector | Weight | Manufacturing | 755.27 | Mining | 141.57 | Electricity | 103.16 | Total | 1000 |

Let’s look at below table and analyze how we say IIP is -1.80%, Manufacturing has fallen by 3.20%, etc

Above table was sectoral bifurcation. In the same way one can imagine use Based Bifurcation.
Total number of IIP for June 2012 is 168.3 whereas in 2011 it was 171.4, this shows that IIP has fallen 1.80%. In the same manner one can compute individual sectoral results. We also hear that “Manufacturing Number may be negative due to base effect”, now lets understand this with example. General IIP number in May-11 was 166.2. This shot up significantly in June-2011, which again receded to 167.2 in next month. Now what happened here is General IIP number for June-11 has created a base effect for next year same month. So probably growth may turn negative or analyst may expect low number because base (171.4) is pretty high.

Significance of IIP: * Low IIP suggests slow growth which in turn is detrimental to overall GDP Growth. * Low Manufacturing Data suggests businesses are either finding it difficult to increase production or they are simply pushing back major expansion. This could mean fewer jobs going forward. * Low Capital Goods number suggest that companies are just not buying new equipment. Capital goods are basically machines and equipment used in the production of goods. A negative number means that output of such machines is well below the baseline used for the series, and a clear pointer that companies are not interested in increasing their output until they see a change in the economic environment. * Consumer durables normally splurge during festive seasons.

Key Economic Indicators/Numbers till date (24th March 2013)

GROWTH RATE OF GDP AT CONSTANT (2004-05) PRICES Industry | 2007-08 | 2008-09 | 2009-10^ | 2010-11@ | 2011-12* | 2012-13 (AE) | I. Agriculture | 5.8 | 0.1 | 0.8 | 7.9 | 3.6 | 1.8 | II. Industry | 9.7 | 4.4 | 9.2 | 9.2 | 3.5 | 3.1 | Mining & quarrying | 3.7 | 2.1 | 5.9 | 4.9 | -0.6 | 0.4 | Manufacturing | 10.3 | 4.3 | 11.3 | 9.7 | 2.7 | 1.9 | Electricity, gas & water supply | 8.3 | 4.6 | 6.2 | 5.2 | 6.5 | 4.9 | Construction | 10.8 | 5.3 | 6.7 | 10.2 | 5.6 | 5.9 | III. Services | 10.3 | 10 | 10.5 | 9.8 | 8.2 | 6.6 | GDP at factor cost | 9.3 | 6.7 | 8.6 | 9.3 | 6.2 | 5 | ^: Third rev. estimate, @: Second rev. estimate,*: First rev. estimate, AE: Adv. Est. | Source: Central Statistics Office |

SECTORAL SHARE IN GDP AT CONSTANT (2004-05) PRICES Industry | 2007-08 | 2008-09 | 2009-10^ | 2010-11@ | 2011-12* | 2012-13 (AE) | I. Agriculture | 16.8 | 15.8 | 14.6 | 14.5 | 14.1 | 13.7 | II. Industry | 28.7 | 28.1 | 28.3 | 28.2 | 27.5 | 27.0 | Mining & quarrying | 2.5 | 2.4 | 2.3 | 2.2 | 2.1 | 2.0 | Manufacturing | 16.1 | 15.8 | 16.2 | 16.2 | 15.7 | 15.2 | Electricity, gas & water supply | 2.0 | 2.0 | 2.0 | 1.9 | 1.9 | 1.9 | Construction | 8.1 | 8.0 | 7.8 | 7.9 | 7.9 | 7.9 | III. Services | 54.4 | 56.1 | 57.1 | 57.3 | 58.4 | 59.3 | GDP at factor cost | 100 | 100 | 100 | 100 | 100 | 100 | ^: Third rev. estimate, @: Second rev. estimate,*: First rev. estimate, AE: Adv. Est. |
Source: Central Statistics Office

RATIO OF SAVINGS AND INVESTMENT TO GDP Source: Central Statistics Office | Industry | 2005-06 | 2006-07 | 2007-08 | 2008-09 | 2009-10^ | 2010-11@ | 2011-12* | 1 | Gross Domestic saving | 33.4 | 34.6 | 36.8 | 32.0 | 33.7 | 34.0 | 30.8 | 2 | Public sector | 2.4 | 3.6 | 5.0 | 1.0 | 0.2 | 2.6 | 1.3 | 3 | Private sector | 31.0 | 31.0 | 31.8 | 31.1 | 33.5 | 31.5 | 29.5 | 4 | Household sector | 23.5 | 23.2 | 22.4 | 23.6 | 25.2 | 23.5 | 22.3 | 5 | Financial saving | 11.9 | 11.3 | 11.6 | 10.1 | 12.0 | 10.4 | 8.0 | 6 | Saving in physical assets | 11.7 | 11.9 | 10.8 | 13.5 | 13.2 | 13.1 | 14.3 | 7 | Private Corporate sector | 7.5 | 7.9 | 9.4 | 7.4 | 8.4 | 7.9 | 7.2 | 8 | (Investment) | 34.7 | 35.7 | 38.1 | 34.3 | 36.5 | 36.8 | 35.0 | 9 | Public sector | 7.9 | 8.3 | 8.9 | 9.4 | 9.2 | 8.4 | 7.9 | 10 | Private sector | 25.2 | 26.4 | 28.1 | 24.8 | 25.4 | 26.5 | 24.9 | 11 | Corporate sector | 13.6 | 14.5 | 17.3 | 11.3 | 12.1 | 13.4 | 10.6 | 12 | Household sector | 11.7 | 11.9 | 10.8 | 13.5 | 13.2 | 13.1 | 14.3 | 13 | GFCF | 30.3 | 31.3 | 32.9 | 32.3 | 31.7 | 31.7 | 30.6 | 14 | Stocks | 2.8 | 3.4 | 4.0 | 1.9 | 2.8 | 3.1 | 2.1 | 15 | Valuables | 1.1 | 1.2 | 1.1 | 1.3 | 1.8 | 2.1 | 2.7 | 16 | Saving-investment Gap | -1.2 | -1.1 | -1.3 | -2.3 | -2.8 | -2.8 | -4.2 |

GROWTH RATES OF INDEX OF INDUSTRIAL PRODUCTION-USE BASED CATEGORIES
(Year on Year per cent) | BasicGoods | CapitalGoods | IntermediateGoods | Consumer goods (total) | ConsumerDurable | Consumer Non- durable | Overall | 2006-07 | 8.9 | 23.3 | 11.5 | 16.1 | 25.3 | 12.3 | 12.9 | 2007-08 | 8.9 | 48.5 | 7.3 | 17.6 | 33.1 | 10.2 | 15.5 | 2008-09 | 1.7 | 11.3 | 0.0 | 0.9 | 11.1 | -5.0 | 2.5 | 2009-10 | 4.7 | 1.0 | 6.0 | 7.7 | 17.0 | 1.4 | 5.3 | 2010-11 | 6.0 | 14.8 | 7.4 | 8.6 | 14.2 | 4.3 | 8.2 | 2011-12 | 5.5 | -4.0 | -0.6 | 4.4 | 2.6 | 5.9 | 2.9 | April -Jan (2011-12) | 5.8 | -2.9 | -0.8 | 5.4 | 3.7 | 6.6 | 3.4 | April -Jan (2012-13) | 2.8 | -9.3 | 1.7 | 2.7 | 3.2 | 2.3 | 1.0 |
Source: Central Statistics Office

INFLATION Inflation (year on year) % | Commodity | Weight | 2008-09 | 2009-10 | 2010-11 | 2011-12 | Dec-12 | Jan-13 | Feb-13 | ALL COMMODITIES | 100.00 | 8.05 | 3.81 | 9.56 | 8.94 | 7.31 | 6.62 | 6.84 | I PRIMARY ARTICLES | 20.12 | 11.04 | 12.66 | 17.75 | 9.80 | 10.56 | 10.31 | 9.70 | II FUEL & POWER | 14.91 | 11.57 | -2.11 | 12.28 | 13.96 | 10.25 | 7.06 | 10.47 | MANUFACTURED PRODUCTS | 64.97 | 6.16 | 2.22 | 5.7 | 7.26 | 5.04 | 4.81 | 4.51 | Total Consumer Non Durable | 36.92 | 7.39 | 10.09 | 10.2 | 8.00 | 8.48 | 8.51 | 8.78 | Total Consumer Durable | 6.56 | 5.66 | 4.48 | 6.74 | 10.02 | 5.06 | 5.03 | 4.35 | Total Intermediates | 21.85 | 8.64 | 1.47 | 14.98 | 9.72 | 6.60 | 5.44 | 5.97 | Total Basic Goods | 26.67 | 10.03 | -2.06 | 9.49 | 10.95 | 7.87 | 6.18 | 6.43 | Total Capital Goods | 8.00 | 3.71 | 1.01 | 3.3 | 3.12 | 2.95 | 2.79 | 2.80 | Total Food | 24.31 | 8.62 | 14.51 | 11.44 | 7.24 | 9.96 | 10.57 | 10.23 | CND less primary food | 22.58 | 6.17 | 6.28 | 5.87 | 8.61 | 6.67 | 5.67 | 6.58 | | | | | | | | | | CPI –IW | | 8.1 | 10.8 | 12.0 | 8.9 | 11.2 | 11.6 | |
Source: Office of the Economic Adviser, DIPP & Labour Bureau

FDI/FII INFLOWS Year | FDI INFLOWS(In US$ mn) | Net FII in US $ million | 2005-06 | 8961 | 9,926 | 2006-07 | 22826 | 3,225 | 2007-08 | 34835 | 20,328 | 2008-09 | 41874 | (-)15,017 | 2009-10 | 37745 | 29,048 | 2010-11 | 34847 | 29,422 | 2011-12 | 46847 | 16813 | Source: DIPP & RBI

MONETARY INDICATORS | 2009-10 | 2010-11 | 2011-12 | 2012-13 | Mar-13 | Cash Reserve Ratio | 5.00-5.75 | 5.75-6.00 | 6.00-4.75 | 4.75-4.25-4.00 | 4.00 | Bank rate | 6.00 | 6.00 | 6.00-9.50 | 9.50-9.00-8.75-8.50 | 8.50 | Repo Rate | 5.00-4.75-5.00 | 5.00-6.75 | 6.75-8.50 | 8.50-8.00-7.75-7.50 | 7.50 | Reverse Repo Rate | 3.50-3.25-3.50 | 3.50-5.75 | 5.75-7.50 | 7.50-7.00-6.75-6.50 | 6.50 | Base Rate | 11.00-12.50 | 7.50-12.00 | 8.25-10.75 | 9.70-10.50 | 9.70-10.50 | Call Money Rate | 3.24 | 5.75 | 8.12 | | 6.40-7.95** |
** As on 19/03/2013, SOURCE: RBI

NON-FOOD CREDIT OF SCHEDULED COMMERCIAL BANKS

Year | SCBs non-food credit | | Rs.crore | % (Y-o-Y) | 2005-06 | 1466386 | 38.4 | 2006-07 | 1884669 | 28.5 | 2007-08 | 2317515 | 23.0 | 2008-09 | 2729338 | 17.8 | 2009-10 | 3196299 | 17.1 | 2010-11 | 3877800 | 21.3 | 2011-12 | 4530548 | 16.8 |
Source: RBI Note: Yearly data relate to amount outstanding as on last reporting Friday of March.

FOREIGN TRADE (US $billions) Year/Month | Exports | % Growth | Import | % Growth | TRADE BALANCE | 2005-06 | 103.09 | 23.41 | 149.17 | 33.76 | -46.08 | 2006-07 | 126.41 | 22.62 | 185.74 | 24.52 | -59.32 | 2007-08 | 163.13 | 29.05 | 251.65 | 35.49 | -88.52 | 2008-09 | 185.3 | 13.59 | 303.67 | 20.68 | -118.4 | 2009-10 | 178.75 | -3.53 | 288.37 | -5.05 | -109.62 | 2010-11 | 251.13 | 40.49 | 369.77 | 28.23 | -118.63 | 2011-12 | 304.62 | 21.30 | 489.18 | 32.29 | -184.56 | 2012-13 (Apr-Feb) | 265.95 | -4.03 | 448.04 | 0.25 | -182.09 |
Source: Department of Commerce

Survey Results

Economic Indicators Companies/Analyst follow

What Analyst looks for in GDP number

Survey takeaways: * The four most widely followed indicators are inflation (57%), the unemployment rate (54%), oil prices (39%), and GDP (32%). * The two most-cited purposes for using economic indicators are budgeting/forecasting (83%) and strategic planning (71%). * 57% of respondents currently have open positions they are looking to fill.

Interview takeaways: * Inflation, the unemployment rate and GDP are good general economic indicators but each company should follow those indicators that are the best predictors for their business and/or specific industry. * Even though the unemployment rate remains high, finding qualified candidates with the needed specific job skill sets has proven difficult. * Both business and the general public have lost confidence in the ability of the government to make the difficult and unpopular decisions needed to move the economy and country forward. * Economic Indicators are tools that can be used in the business planning/decision- making process but they should not be a company’s only tools.

Bibliography

http://www.thehindubusinessline.com/features/investmentworld/article2482400.ece?ref=wl_opinion http://econ.economicshelp.org/2007/03/does-current-account-deficit-matter.html http://www.tradingeconomics.com/india/current-account http://econ.economicshelp.org/2007/03/does-current-account-deficit-matter.html http://www.tradingeconomics.com/india/current-account
http://kbsonigara.wordpress.com/2012/08/10/index-of-industrial-production-calculation-interpretation/

Bibliography: http://www.thehindubusinessline.com/features/investmentworld/article2482400.ece?ref=wl_opinion http://econ.economicshelp.org/2007/03/does-current-account-deficit-matter.html http://www.tradingeconomics.com/india/current-account http://econ.economicshelp.org/2007/03/does-current-account-deficit-matter.html http://www.tradingeconomics.com/india/current-account http://kbsonigara.wordpress.com/2012/08/10/index-of-industrial-production-calculation-interpretation/