Leading Indicators of the Indian Economy

Group 12: Lt Col D G Naik Grenville Savio Noronha Gnanasundaram C Kaushik K

HS 700: Applied Economics Course Project Presentation

Introduction

History of the Indian Economy The Liberalization Process: The 80s and the 90s Beneficial Effects of the Reform Process

We are the Fourth Largest Growing Economy in terms of PPP with a GDP of US $3.36 trillion In Exchange terms, we are the Tenth Largest in the world with a GDP of US $ 691.87 billion (2004) Second Fastest Growing Major Economy of the World with a growth rate of 8.1% for the 1stQ of 2005-06

Introduction

The increasing importance of the Indian Economy has led to a need to Forecast the Performance of the of the Indian Economy Monitoring of the Indian Economic Cycle has become an increasingly attractive option for this Dua et. al. initially propounded an index based on concurrent indicators but using an index based on leading indicators is seen to be more appropriate.

The Indicator Approach

The Indicator Approach exploits the fact that different time-series do have different cyclical periods Time-series can be classified into Coincident, Leading and Lagging Indicators Coincident: Measures of Output, Income, Employment and Sales Leading: Placement of New Orders, Intention to Build and Changes in Profitability Lagging: Installment Credit Outstanding and Interest Rates

The Ideal Indicator

It would cover half a century or longer, thus showing its relation to the economic cycles over a variety of conditions It would lead the month, around which cyclical revival centers, 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.

The Ideal Indicator

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 behavior in regard to economic cycles will be like its past behavior

Illustration of a Leading Indicator

List of Leading Indicators

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) Trends Rain fall Index Sensex Exchange Rate Savings/GDP Ratio Human Development Index Electric Power Generation

Gross Domestic Product

GDP = consumption + investment + government spending + (exports imports) Consumption, Investment: Final Expenditure on Goods and Services Export-Import: Balance of Trade Consumption: Private and Public Significance of GDP

GDP: Indian Scenario

GDP: Indian Scenario

GDP: Indian Scenario

The GDP growth trend for the last three years appears to indicate the beginning of a new phase of cyclical upswing in the economy from 2003-04 The initial momentum to this new phase of expansion, in 2003-04, was provided by agriculture Industry and services have acted as the twin engines propelling overall growth of the economy

Grenville Savio Noronha

Human Development Index

HDI is a measure of poverty, literacy, education, life expectancy, childbirth, and other factors. It is a standard means of measuring well being, especially child welfare. HDI stresses the importance of the quality of life.

Human Development Index

The three basic dimensions of HDI : 1) Life expectancy at birth

2) Knowledge (as measured from adult literacy rate)

3) Standard of living

Human Development Index

EMPLOYMENT: Indias 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. Approximately three-fourth of the unemployed are in rural areas and three-fifth among them are educated.

Human Development Index

EDUCATION : Literacy rates in India have arisen dramatically from 18% in 1951 to 65% in 2001, but these rates are still far from the UMI reference level of 95%. Literacy among males is nearly 50% higher than females, and it is about 50% higher in urban areas as compared to the rural areas. Literacy rates range from as high as 96% in some districts of Kerala to below 30% in some parts of Madhya Pradesh.

Human Development Index

In terms of total investment in R&D, Indias 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 defense research account for 71% 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.

Human Development Index

R&D expenditure even in Indias fast-growing IT sector has been averaging around 3% of sales turnover (STO), which is much lower as compared to the 14-19% expended by internationally reputed software firms. These low figures reflect on our R&D performance. Indias share of global scientific output in 1998 was only 1.58 per cent of the worlds 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.

Human Development Index

HEALTH : 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 educationespecially among femalesage 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.

Human Development Index

Human Development Index

Gnanasundaram C

MONSOON AND ITS IMPACT ON AGRICULTURE

58% of country's population depends on agriculture

27% of India s GDP comes from its agricultural production.

13-18% of India s total annual exports are agricultural products.

Good monsoon always means a good harvest

MONSOON AND ITS IMPACT ON AGRICULTURE

IMD predicts the onset date and rainfall potential of the monsoon
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. Monsoon facilitated an impressive growth rate of 9.6% in 2003-04

MONSOON AND ITS IMPACT ON AGRICULTURE

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: s Standard deviation for each rainfall station, 1871-2003: ss (4 months mean) Rainfall for each station and year: Rs Define: Js = (Rs - s)/ss; for each rainfall station and year Yearly Rainfall Index = S (As* Js)/SAs

FDI in India

FDI 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. India is considered a stable country for investing in by corporate overseas. India has displaced US as the second-most favored destination for (FDI) in the world after China according to an AT Kearney's FDI FDI is a tool for jump-starting economic growth through its bolstering of domestic capital, productivity and employment.

FDI in India
FDI has an impact on 1. Country's trade balance 2. Increasing labour standards and skills 3. Transfer of new technology and innovative ideas 4. Improving infrastructure, skills and the general business climate. US INVESTMENT IN INDIA 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%) Service Sector (Fin. & Non-Fin. Services) (8.28%).

India's English-speaking population is highly valued by American, Canadian and British investors. 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. 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. Although far behind China, India figures among the ten most attractive destinations for foreign investment, according to a new survey.

Lt Col D G Naik

SENSEX

Definition Significance Calculation Methodology

Selection Free Float Market Capitalization (from September 1, 2003 ) Calculation, closure

Maintenance

Definition

Sensitivity Index Base Year 1978 79, Base = 100 Basket of 30 constituent stocks representing a sample of large, liquid and representative companies from diverse sectors.

Significance

Barometer of Business climate. Facilitates capital formation.

Domestic Market/ Institutions. FIIs. FDIs.

Likely to lead to boom in other asset classes as the profits get ploughed.

Choice of constituents, Calculation Methodology and Maintenance for SENSEX

Journey Of SENSEX

CONCLUSION

Leading Indicators relative to the objective.

Choice. Standardization.

Construction of Ideal Leading Indicators not easy. Forecast based on Leading Indicators a useful planning tool.

References
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Pami Dua and Anirvan Banerji, A leading index for the Indian economy, Working paper no. 90, Centre for Development Economics, March, 2001. J D Lindlbauer, Business Cycle Indicators From Qualitative Data, In Searh of Economic Indicators Essays on Business Surveys (Lecture Notes in Economics and Mathematical Systems, Werner H. Stringel, Ed. Berlin: Springer-Verlag, 1977. Raj Kapila and Uma Kapila, Understanding Indias Economy Reforms: The Past, The Present and The Future, New Delhi: Academic Foundation, 1996. Uma Kapila, Indian Economy since Independence, New Delhi: Academic Foundation, 1998 [Online], Available: http://en.wikipedia.org/wiki/Economy_of_India [Online], Available: http://en.wikipedia.org/wiki/Gross_Domestic_Product [Online], Available: http://ibef.org/home.aspx [Online], Available: http://www.investopedia.com [Online], Available: http://www.rbi.org.in [Online], Available: http://www.ibef.org [Online], Available: http://rbi.org.in/ [Online], Available: http://www.economywatch.com/