National Income trends and

structural transformation in
India from 2005 – 2017

A presentation by:

FAS N1
NATIONAL INCOME INDICATORS :

To estimate the total economic activity in a country, we use a variety of economic measures. Some of
these measures are: Gross Domestic Product (GDP), Gross National Product (GNP) and Net National
Income (NNI). All the indicators are aimed at counting the total amount of goods and services
produced within the economy in a given time period. National Income is also defined as the total
income of the nation and it restricts the goods and services that are considered for this counting.

Some of the measures of National Income, i.e the indicators, which we have used for our analysis are:

GDP : Gross domestic product (GDP) is the total value of all the final goods and services produced
within the country in a given period of time. Nominal GDP usually estimates economic performance
of a whole country or region and compares it with make international estimates. Per capita GDP is
often used as an indicator of the standard of living of a country.

INFLATION: Over a period of time , if there is a sustained increase in the general price level of
goods and services in an economy, the phenomenon is called Inflation. As a result of a rise in the
general price level, each unit of currency now purchases fewer goods and services which implies
decreased purchasing power, given the income remains constant. A negative inflation rate is called
Deflation. Inflation affects an economy in both positive and negative ways. The negative effects of
inflation include and lesser investments and savings. Positive effects include reducing unemployment
and labour market equilibrium through nominal wages.

CURRENCY EXCHANGE RATE: This is the value of a country’s currency with respect to another
currency. The currency exchange rates is determined in the foreign exchange market. This market is a
continuous currency trading market which is open to different types of buyers and sellers. A currency
becomes more valuable whenever demand for it is greater than the supply. It will become less
valuable whenever demand is less than supply.

MONETARY POLICY : Monetary policy is the process by which monetary authority of a country,
the Reserve Bank of India (RBI) , controls the money supply in the economy through interest rates.
This is done to maintain price stability and high economic growth. Some of the ways the RBI controls
the money supply are :
Cash Reserve Ratio (CRR): A certain percentage of bank deposits which banks are required to keep
with RBI in the form of reserves or balances. Higher CRR with the RBI will lead to a lower
liquidity in the system and vice versa.
Statutory Liquidity Ratio (SLR): Every financial institution has to maintain a certain quantity of
liquid assets (non cash) with themselves at all times. This needs to be a fixed portion of their total
time and demand liabilities.
Repo Rate and Reverse Repo Rate: Repo rate is the interest rate at which RBI lends money to banks
against government securities. Reduction in Repo rate allows commercial banks to get money from
the RBI at a cheaper interest rate. Reverse Repo rate is the rate of interest at which the RBI borrows
money from commercial banks. This is an efficient regulatory feature as an increase in the Repo rate
increases the cost of borrowing and lending of banks. This discourages the public to borrow money
and encourages them to deposit more.

Let us now look at some of the major economic events that occurred between 2005-2017 and had an
impact on the Indian Economy in terms of National Income trends.
Some of the events we shall look at are:
- Financial Crisis of 2008-09
- Lok Sabha Election 2014
- Demonetisation 2016
- Goods and Services Tax 2017

FINANCIAL CRISIS 2007-2008

The financial crisis 2008, which occurred due to the failure of financial system, is considered by many
economist to be the worst since Great Depression of the 1930s. This was followed by a global
economic downturn, the Great Recession. High default rate in US subprime home mortgage sector is
considered to be the prime cause of this crisis. This was also known as “subprime bubble”. During
late 1990s banks started seeing more profits in housing loans due to continuous price increase. To
maximise profit and attract more people to take loans, housing banks reduced down payments from
30% to 10% and thirty years loan rates from 5% to 3% so that they can adjust the interest rate to the
subprime mortgage loans and daytime interest rate after three years. These banks did not observe
criteria relating to customers’ financial capability of repaying their loans because if they defaulted,
banks could take ownership of their homes and through this gain more profits. This housing bubble
which began in 1998, peaked in 2006 and busted in 2007.

EFFECTS ON INDIAN ECONOMY:

1. GDP: The global recession which started in 2007, initially impacted Indian economy when
GDP growth slowed down from 9% in 2007-08 to 7.8% in April-September 2008. But
collapse of Wall Street in September caused India’s GDP fall to 5.8%, 5.8% and 6.1% in next
three quarters. Even though it was a huge blowback, still it far exceeded World Bank’s
forecast of 4% growth in 2009.

2. INFLATION: Wholesale Price Inflation reached to 12.6%, highest in last 13 years, in early
August 2008 driven by higher oil and commodity price globally. Although it fell under 12%
later in September. This was done by increasing interest rates by RBI. Hence people started
saving instead of spending the money.

3. CURRENCY EXCHANGE RATE: Net FII inflow into India totalled $20.3 Billion in 2007-08,
but due to financial crisis, $11.1 Billion were pulled out in first nine months of calendar year 2008
which caused sharp depreciation of Indian Rupee from Rs. 39.20 on January 1, 2008 to Rs. 48.86
on October 16, 2008, a decline of nearly 25%.
 4. MONETARY POLICY: Due to increasing inflation during financial crisis, RBI tightened
the monetary policy. RBI raised the CRR and repo rate to 9% to reduce liquidity in banking
system. Growth of money supply and credit was brought down.

GOODS AND SERVICES TAX 2017:

GST was launched all over India including Jammu & Kashmir on1st July 2017 at midnight by the
then President of India, Sir Pranab Mukherjee and Prime Minister Sir Narendra Modi. GST replaced
many Indirect Taxes in India. As per an article on Wikipedia, Goods & Services Tax Law in India is
a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
In simple words, Goods and Service Tax (GST) one tax for the entire country. This tax is levied on
goods and services. Many indirect tax laws that previously existed in India have been replaced. While
we see certain impacts of GST in the economy now, in 2017 most speculations that were made
regarding its impacts on the economy can be seen below.

EFFECTS ON INDIAN ECONOMY:

1. GDP: The Gross Domestic Product depends on revenue generated by the economy in a year. GST
has the capability to extend the GDP by 2 percent and also of increasing per-capita income of
individuals. GST scheme was expected to improve the indirect revenues collected by the government
as the tax compliance and tax paying base was expected to be enhanced. This increased income of the
government will be used in developmental projects and improve the conditions of the economy.
 Source : Central Statistics Office

2. INFLATION: While there is not much negative effect of GST on inflation, but tax on services which is
a major portion of GDP, is increasing. Moreover, many items like petrol, diesel, etc are outside the ambit of
GST. An inflation distortionary impact arises as an offset on these items which will not be available under
GST. In the short-term, the reduction in cost may not be directly passed on to GST. Overall, it was
forecasted that in the short-term, inflation could be somewhere between neutral to a marginal increase due
to GST. In the medium to long-term, GST would put a downward pressure on inflation .

Source : Central Statistics Office

3. CURRENCY EXCHANGE RATE : Post the introduction of GST, the initial signs were good. The
value of Indian rupee went down from Rs.70 to Rs.66.67 for a short period when GST was
announced. The common opinion was that GST would have a positive on the value of Indian rupee.

4. MONETARY POLICY: The Repo rate was kept unchanged at 6.25%, citing upward risks to
inflation and global uncertainty. The Monetary Policy Committee, raised the reverse repo rate to 6%
(this was an increase by 0.25 basis points) and the Marginal Standing Facility (MSF) rate was cut to
6.5%.