COUNTRY ANALYSIS

INDIA

WONG KWOK HIN, IBBA

CHAN YIK FU, IBBA
YEUNG YAN HANG, IBBA
TENG WAI LI, QFRM
LI NOK, IBBA

GROSS DOMESTIC
PRODUCTION
BACKGROUND
According to World Bank, India is currently the 3rd biggest economy in the world,
representing 3.03% of the worlds economy. As a track record of the Indian
nominal GDP, India achieved its all-time peak of GDP in 2013 with value of
approximately USD 1876.80 billion. Having produced the lowest GDP in 1970
(USD 63.50 billion), India maintain an average nominal GDP of around USD
517.27 billion.

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

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

The above bar graph is the real GDP growth rate for the period between 2008 and
2013. Data has been taken from the Statista. There has been an obvious decrease
after the year 2010. According to many economists, this is due to a series of
strategies. First and foremost, there was excessive fiscal stimulus which ultimately led
to inflation and a large current account deficit. Following that, monetary tightening
occurred to contain inflation. The situation aggravated when there was a persistent
inflation in food prices. High nominal interest rates, slow growth, fiscal stimulus biased
towards consumption rather than investment, and the delay in withdrawing the fiscal
stimulus in the recovery all contributed to the halving of investment spending in the
period from 2008 to 2012. Therefore, manufacturing growth declined drastically from
2012 to 2014, and economic growth sank to an annual average of approximately 5%.

INFLATION
SPECIFIC EVENTS WITHIN THE
DECADE THAT DROVE THE
INFLATION IN INDIA:
2005
A state-level multipoint tax on value
addition collected
at different stages
of sale.

2008
The government
raised income tax
exemption limit
(demand pull
inflation)

2009
Oil companies raise
petrol, diesel and
cooking gas prices as
global crude oil prices
touch a record.

2010
The government and
Reserve Bank of India
(India's Central Bank)
announce cuts, tax
breaks and lending
rate cuts for global
melt-down hit
companies.

INFLATION
BACKGROUND AND THE SIX
MAJOR DRIVERS OF INFLATION IN
INDIA :
Background

With reference to annual consumer price

index inflation, which is related to the cost of
household living. The inflation rate
increased drastically from 3.8% in 2004 to
12.0% in 2010. The price level was
increasing at a decreasing rate
(disinflation)from 2010 to 2011 and 2013 to
2014. With respect to the India economy as
a whole, the inflation rate fluctuated
between 4.2% and 8.7% from 2004 to 2009.
Disinflation occurred from 9.0% in 2010 to
5.11% in 2014.

THE SIX MAJOR DRIVERS OF INFLATION IN INDIA

Capital Stock Deficiency:

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

Food Price Pressures:

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

Consequence on citizens:
With 22% of the population living below the poverty line in 2009-10, the persistence of
food inflation at high levels is extremely undesirable. This section already spends a
significant proportion of their income on food and is unable to divert additional
expenditure to food to neutralize the effect of food inflation. Thus, high food inflation
aggravates nutrition deficiency in India.

Import Price Pressures:

Import price pressures have also been an important factor for overall inflation as India
has become a more open economy over the past 10 years. In fact, the imported
goods-to-GDP ratio doubled from just above 11 percent in FY00/01 to 21.9 percent in
FY10/11 with bulk imports, such as crude oil, metals, rubber and food - primarily
commodity-related items - accounting for 42.7 percent of total imports.

Inflation Expectations:
In the Reserve Bank of India's latest inflation expectations survey of
households, respondents' inflation expectations for three months ahead
inched up to 12.2 percent in the third quarter of 2011 from 11.8 percent in the
second quarter. Overall, inflation expectations have been largely driven by
food price inflation in India as food constitutes more than 50 percent of the
average Indian household's consumption basket.

Demand Side Drivers (The National

Rural Employment Guarantee Act
(NREGA)):
The sharp rise in personal income and an expansionary fiscal policy, have played an
important role in keeping inflation persistently high. For the former, the sharp rise in
personal income increased the disposable income of consumers, which led to an
increase in private consumption expenditure. For the latter, an expansionary fiscal
policy was a deficit budget that led to increase in government expenditure. Therefore,
both of them would increase the aggregate demand in the economy, thus the price
level increased and caused inflation.

Supply Side Drivers

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

Quantity theory of money:

Equation: Money supply x velocity = Price level x Production
Money supply factor: High creation of money supply from excess loans
In the past 10 years, Indian banks have substantially brought down their loan
standards and have dramatically increased the loans they provide. Thus, huge money is
now sloshing around the system.
Velocity factor :High velocity of money due to general optimism
India is at a stage where people are overoptimistic and spend every penny they have
earned. Thus, the velocity is substantially higher, increasing the inflation.
Production factor :Low supply of products due to system issue
India has severe supply side issues - low electricity production, byzantine rules, business
unfriendly practices, etc - that doesn't allow the production to go up.

UNEMPLOYMENTRATE

Indian unemployment rate from 2004 to 2014

ANALYSIS:
The unemployment rate of female is significantly
higher than male
According to statistics in 2011, the male literacy rate 82.14% and female
literacy rate is 65.46%. As a result, female can hardly get a chance to be
employed compared with male, leading to a high unemployment of women. To
improve the literacy level, the Indian government has imposed several policies
such as free educational program and setting up new school.

Agricultural industry as the largest employer

The agricultural industry in India is well developed while they provide second
most crops in the world, behind China. In 2010, about 51.2% of total Indian
workforce came from agricultural industry and also some similar sectors like
forestry and fishery. The mature agricultural industry employs a significant
number of Indian workforces, leading to a steadily low unemployment rate in
India.

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

UPCOMING CHALLENGE:
Possible structural unemployment
Rapid improvement of education in India has become a challenge to the
market and also the graduates themselves. As mentioned, most of the Indian
workforces are from agriculture and construction. However, the increasing
numbers of university graduates are not willing to do those so-called bluecollar jobs, leading to structural unemployment. The unemployment rate will
keep in a rising trend if there is still persistent mismatch between the skills of
labor and also the work. The Indian government should definitely pay
attention in the sign of rising unemployment rate(the unemployment rate
rises from 3.6% in 2013 to 4.9% in 2014).

Three major
sectors in India

Agriculture
sector
Manufacturing
sector

Service
sector

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

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

Source : CSO; Advance Estimates

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

Growth:
In terms of the growth of internal and external demand, the rise in income and
consumption, food processing sector and agricultural exports are reasons behind the
boom of the agricultural sector. Better seeds, use of fertilizer, education of farmers
and provision of agricultural credit and subsidies by the government also increase the
agricultural productivity. Nonetheless, the increase of private participation in Indian
agriculture, growing organic farming and usage of information technology are the
trends that are being witnessed by the growing agriculture industry.

Challenges:
1. High food losses
Losses after harvest due to poor infrastructure. India has very poor rural roads
affecting timely transfer of outputs from Indian farms. The lack of cold storage and
harvest spoilage cause over 30% of farmer's produce going to waste.

2. Farmers share only a small portion of revenue

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

3. Low yields per capita labour force

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

Government's strategies:
1. The Ministry of Food Processing Industries has taken some new initiatives to
develop the food processing sector which will also help to enhance the incomes of
farmers and export of agro and processed foods among others.
2.The Department of Agriculture & Cooperation under Ministry of Agriculture has
entered into MOUs/Agreements with 63 countries including United State of
America. Agreements with these countries provide better agricultural facilities due to
cooperation in areas such as Research and Development, Capacity Building, GermPlasm Exchange, Post Harvest Management, Value Addition/ Food Processing, Plant
Protection, Animal Husbandry, Dairy & Fisheries and also help in enhancing bilateral
trade.

M A NUF A CTURING SECTOR

CONTRIBUTION ON GDP:
Manufacturing sectors contribution to GDP

In the past decade, the contribution

of manufacturing sector to India
GDP remained between 13% to
16%. The contribution of Indias
manufacturing sector has remained
stagnant from 2004 to 2014.
Slowing external and domestic
demand has caused the
manufacturing sector to move at a
slower pace than the overall
economy. Operating conditions
improved for producers of

intermediate goods, but remained unchanged in the capital goods

category. The recovery in manufacturing activity is likely to face
challenges going ahead due to structural constraints and underlying
inflation pressures on the Indian economy.
In 2014, India witnessed increase in new export orders, highest since
2012. Overall, activity in the manufacturing sector expanded in the past 3
years. This increase demonstrates improved demand conditions in the
countrys key export markets. Further, inflationary pressures eased and
purchasing activity increased, thereby demonstrating improved
performance of manfacturing sector. As a result, its value added to GDP
increased from year 2012 to year 2014.

Key Growth motivators:

1. Decrease in labor cost
The cost of labor in India is cheaper than in many other countries, thus
providing competitive advantage to the countrys manufacturing sector.

2. Increase in competitiveness against China

Gaining competitiveness against Chinese manufacturers due to currency
fluctuations and soaring operational cost in China are offering growth
opportunities for the Indian manufacturing sector.

3. Rise in export and domestic orders

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

Challenges:
1. Complex regulations, legislations, and taxation
Foreign manufacturing companies are less keen to come to India due to
its complex regulatory framework. India ranks 132 among 185 countries
classified as easiest place for doing business.

2.Increase in interest rates

Consumer buying and cost of capital for corporations are adversely
impacted due to higher interest rates. Despite RBI measures, the interest
rate is higher and is hampering the demand and business operations in
the manufacturing sector.

DISPARITY BETWEEN
THE RICH AND THE POOR
According to the World Bank, from 2005 to 2012, the Gini index of India has increased from
33.4 to 33.6. This data reveals the fact that the income inequality between urban areas and
rural areas in India has been widening even after the economic reform.

Factors that triggered the phenomenon

1.Uneven distribution of assets
During the economic liberalization, majority of earning assets like land, cattle
and shares, are in the hands of a few middle and upper class households.
These households have taken their advantage to accumulate a prodigious
amount of wealth after the economic reform, while only little economic
benefits have gone into the lower class pockets, and some of the people
even suffered from inflation.

2.Uneven development progress between different

regions
The differences in quality and quantity of infrastructure between rich and
poor states, such as Gujarat and Orissa have drastically restricted the job
opportunities in some particular states. The inadequacy of transportation
network in many states have also limited the geographic and occupational
mobility of the poor, which hinder them from finding better-paid jobs.

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

larger extent

Wealthy households sometimes take larger advantages from subsidies on

essential goods and services. For instance, the subsidies on electricity and
liquefied petroleum gas can be dispensable the poor, as many villages don
even have any electricity supply and 75% of the petroleum gas is consumed
by the wealthiest 50% of Indian families.

DISPARITY BETWEEN
THE RICH AND THE POOR
According to the World Bank, from 2005 to 2012, the Gini index of India has increased from
33.4 to 33.6. This data reveals the fact that the income inequality between urban areas and
rural areas in India has been widening even after the economic reform.

Solutions
The Indian government has put much efforts and resources in poverty reduction of the country
where most of the policies focus on the agriculture sector.

1. National Rural Employment Guarantee

Scheme(NREGS)
The government implemented the scheme in 2006 to ensure livelihood
security in rural areas by providing 100 days of wage employment to the
voluntary adults in every household in each financial year. The scheme was
covering only 200 districts in India initially, and was later expanded to all
districts in the country.

2.National Highways Development Project(NHDP)

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

3.The Right To Education Act(RTE)

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

DISPARITY BETWEEN
THE RICH AND THE POOR
All of the policies mentioned have increased the government expenditure in every financial
year, which have risen the aggregate demand and the gross domestic products of the
Indian economy

The effects of policies on Indian

economy
Reducing the cost of production
of the farmers.

Eg. NREGS

Increasing the short-run

aggregate supply of the economy.

Contributing to the economy by

increasing the long-run aggregate
supply and the national output.
Eg. NHDP: rises the capital of
India by developing more
highways
Eg. RTE: increases the quality of human
capital of the country through providing more
education opportunities

DISPARITY BETWEEN
THE RICH AND THE POOR
Although there are policies on hekping the poor, the disparity between the rich and the poor
has been a serious problem in India due to the following challenges,

Challenges
1.Poverty reduction policies are not efficient and
effective enough to resolve the problem
A report pointed out the NREGS has reduced the supply of farm
labor, and led to an escalation in farm wages, which is adversely
impacting the profitability of the farmer.

2.Infrastructure development is still far from

satisfactory in many rural areas

The increase in income of farmers does not result in an increase in

living standard, since there is a lack of community-level
infrastructure such as schools and health-care networks in poor
areas.

3.Corruption problem is serious

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

ESTIMATION ON THE
FUTURE ECONOMY
Indian economy had been growing extremely fast in the past few years,
however, in the previous fiscal year, the growth rate had dropped to
7.5%, while it used to have a growth rate of double digits before.
Moreover, some rating agencies, like Fitch, had reduced its prediction on
Indian economy growth to negative. Standard & Poors even set to reduce
Indian investment rating. There are several reasons behind this, but we
predict that the economy of India is able to improve in the following
years, due to the BJP government's first full-year budget for 2015/16.

GROSS DOMESTIC PRODUCT:

Recent estimations for the year 2014/15 was made to put the economy a
stronger growth at 7.4% than in 2013/14 and government forecasts that
growth will accelerate to an impressive 8.1-8.5% in 2015/16. This
stronger growth may be associated with the the new GDP methodology
recently introduced by the Ministry of Statistics and Programme
Implementation. But mostly because of the BJP government's first fullyear budget, for 2015/16, increasing government spending on
infrastructure, hoping to improve business environment and broaden the
social security net.

INFLATION RATE:
The government has shown its determination on keeping the inflation
rate low by announcing the completion of an agreement with the RBI for
an official inflation target of under 6%. The government will also
amend the Reserve Bank of India Act to establish a monetary policy
committee.The agreement is the first time that India has adopted a
formal inflation target.

ESTIMATION ON THE
FUTURE ECONOMY
UNEMPLOYMENT:
India, had been witnessing a few simultaneous entries and exits of
international companies, due to the political and structural problems.
For example, the German organization Fraport, the second biggest
airports investors in the world, left the Indian market ; Telenor, a
Norwegian government funded organization, put in 2.5 billion dollars
in India but its 2G telecom licenses were cancelled as well, which made
up its mind to leave the Indian market.

The exit of these companies has brought higher unemployment rate to

India in the past few years. However, we believe that the unemployment
rate can be lowered in the upcoming years, due to some new policies
stated in the full-year budget.

The government decided to spend more on several welfare schemes,

such as the rural employment guarantee programme, which need to use
US$810m more but we think welfare schemes like this can lower the
unemployment rate. Moreover, as the government is keen to support the
manufacturing and infrastructure sectors by improving existing policies
and schemes, subsidizing. For example, the new budget released by
Indian government promised to spend more money on building
infrastructure. 700 billion rupees (HK$88 billion) will be invested in
new railways, roads and other infrastructure.