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HAPPY THANKSGIVING TO INDIAN GDP

DEC 1, 2009 Finance
When the market started and I was listening CNBC TV Suddenly around 11 am Udayan Mukherjee of
CNBC TV jumped of his seat and shocked to find the GDP numbers of India. Within few minutes India
was into a roller coaster ride. July-Sept GDP up 7.9%. Economist and all market speculators are
having their eyes coming out of shock. Before I get into further analysis just a quick look into the
break up of India GDP figures.
• The construction sector grew at 6.5% while financing, insurance, real estate growth came in at
7.7%.
• The manufacturing sector grew at 9.2 % in the second quarter vs 5.1% a year earlier.
• The mining space has posted the highest growth at 9.5% as compared to 3.7% YoY.

• If we look into the historical GDP number of India we will get more shocked. Since in the history of
Indian economy very often find GDP around the growth of 7.9% GDP.

The trend for India’s GDP growth rate are given below:
• 1960-1980 – 3.5%

• 1980-1990 – 5.4%

• 1990-2000 – 4.4%

• 2000-2008 – 6.4%

Few of the prime reasons behind 7.9% GDP numbers are:

• India has taken various policyØ measures to buffer the economy. Repo rate, SLR and CRR have
already been slashed. CRR can be brought down to about three per cent (RBI’s medium term goal).
All these measures in turn would infuse liquidity into the economy.

• GDP rate have also improved fabulously because of the high commodity prices which supported the
agri sector.
• Indians have something to do with agriculture and inflation will soon prove a boon to the rural
public. Their profits are going to soar. This rural boom will kick start the next round of self enhancing
growth cycle.
• The growth rate of Indian GDP fell from 7.35% in 2008-09 to 5.36% till the end of 3rd quarter of the
2009-10.

• The cumulative FDI Equity inflows (from August 1991 – August 2009) stood at Rs. 5,20,589 crore.

• Budgetary support for National Highway Development Programme (NHDP) has gone by 23% on y-o-
y basis for 2009-10.
• Expenses for the Commonwealth Games 2010, went up from Rs.2,112 crore in Interim Budget to
Rs.3,472 crore for 2009-10 fiscal.
• Allocation to railways have gone up from Rs.10,800 crore in interim budget toRs.15,800 crore for FY
2009-10.

• Allocation under National RuralØ Health Mission (NRHM) has gone up by Rs.2,057 crore over Interim
Budget estimate in 2009-10 of Rs.12,070 crore.

• Rs.2,113 crore has been allocatedØ for IITs and NITs, comprising of a provision of Rs.450 crore for
new upcoming IITs and NITs.

• India has weathered the globalØ slowdown quite well because of substantial government actions.
Fiscal stimulus in form of tax cuts, and spending increases on the rural sector and infrastructure has
contributed to the rebound in production.
• Purchases of government bonds andØ lowering of repurchase rate by the central bank has been
helping the banking sector. Adding to that a quite good performance of the agricultural sector and
India looked like it had been set for a sustainable recovery.
• Fiscal pay outs such as Sixth PayØ Commission award lower service tax exciseduty
and employment guarantee scheme have put Rs 1,20,000 crore (2.5% of GDP) into the system in
turn boosting consumption demand.
• The Indian banking system is veryØ much quite safe and sound with capital adequacy ratio of most
banks at 12% against the mandatory nine per cent. The money multiplier will have to rise to meet
growing demand for funds, subject to additional capital with banks.

• NPA are under stringent control of the RBI.

• Moreover housing/realty exposure of banks is less than 14% of the total loans and most of these
loans are well collaterised.

• The markets are booming, the stock exchange is bullish, and the rupee-dollar rates have crossed
new frontiers.
• And last but no the least India have shrugged off the poor monsoon affects on
the agriculture sector.Ø

So all the above are the key contributors behind astonishing GDP growth of 7.9%.Along with this it is
clear that in the future Indian economy is on a roller coaster ride. The huge spending from the hands
of government will boost up the consumption in the next coming quarters too. The huge spending is
focused approach and not like the one in China.
Below is the Chart of historical GDP of India.
If we look into the key sector contributors of GDP growth we get historically:
Below are the contributions of different sectors in the India’s GDP for 1990-1991 –
Agriculture: – 32%
Service Sector: – 41%
Industry: – 27%
Below are the contributions of different sectors in the India’s GDP for 2005-2006-
Agriculture: – 20%
Service Sector: – 54%
Industry: – 26%
Below are the contributions of different sectors in the India’s GDP for 2007-2008-
Agriculture: – 17%
Service Sector: – 54%
Industry: – 29%
The service sector contributes more than half of India’s GDP. Earlier agriculture was the main
contributor to the GDP. To improve the GDP and boost the economy, the government has taken
various steps like implementation of FDI policies, SEZ’s and NRI investments.

Above is the chart of historical chart of India’s inflation.

Now RBI will have to check into inflation devil. GDP of 7.9% is bound to spook off the inflation. We are
already having higher index for food prices. The CPI is already floating in the range of all time high in
the history of Indian economy. Excess flooding of money have created this euphoria. We should not
 be surprised if RBI takes immediate steps to curb the rising devil. As we all know that one of the most
common ways of controlling inflation by RBI is rolling back of interest rates which were given as
stimulus plans. But that will not affect the long term journey of the Indian economy. The reasons
behind this are 1) India has huge potential untapped as a Emerging Economy among the BRIC
nations.2) The Indian economy have a high purchasing power parity then any other economy in the
BRIC table.
By purchasing power parity we mean:
Using a PPP basis is arguably more useful when comparing generalized differences in living standards
on the whole between nations because PPP takes into account the relative cost of living and the
inflation rates of the countries, rather than using just exchange rates which may distort the real
differences in income. This entry gives the gross domestic product (GDP) or value of all final goods
and services produced within a nation in a given year. A nation’s GDP at purchasing power parity
(PPP) exchange rates is the sum value of all goods and services produced in the country valued at
prices prevailing in the United States.
The below chart shows the purchasing parity index of India in dollar terms.

What ever happens in Indian economy from RBI measures to any other measures as imposed from
time to time. India remains in the top priority list of Investments. All we need is that to look into that
Growth of income is important in itself, but it is as important for the resources that it brings in. These
resources provide us with the means to bridge the critical gaps that remain in our development
efforts.
Regard
Indranil Sen Gupta
Research Analyst
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 Tags: boon, budgetary support, cnbc, cnbc tv, commodity prices, construction sector, CRR,economist, GDP, gdp growth
rate, indian economy, liquidity, manufacturing sector, market speculators, nhdp, term goal

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