Whenever, one talks about country's economy, the two parameters GDP and inflation plays important role

in determining country's economy. GDP: The gross domestic product (GDP) is the amount of goods and services produced in a year, in a country.

INFLATION: The consumer price index (CPI) calculates the change in consumer price of a set of goods and services such as food, clothing, fuel, housing, medical, transport, education etc.

GDP and inflation are often associated with one another because governments and central banks often make decisions based on these figures and they attempt to manipulate them.
If an economy is not growing or is not growing fast enough, a central bank may lower interest rates to make borrowing more attractive.

If an economy is growing too fast, which could lead to shortages because people are demanding products and services faster than they can be supplied, moves may be made slow GDP. This may be done by increasing interest rates, which is considered a means of making money harder to come by because borrowing is more expensive.

Interest Rates

NOMINAL GROWTH, REAL GROWTH, AND THE INFLATION RATE

We can apply this nominal-real-inflation relationship to interest rates. Interest rates are just growth rates, since they tell how fast an amount of money that you owe (or are owed) is growing.

Nominal interest rate = real interest rate + inflation (expected) As time passes, and the actual inflation that occurs is observed, the relationship becomes Nominal interest rate = actual real interest rate + actual inflation actual real interest rate (real rate of return, yield) = nominal interest rate - actual inflation Interest Rates, Assets, and the "Money Time Machine" principal + principal times interest rate =future value present value + (present value x interest rate) =future value. An item that a person owns and that gives the person benefits, either now or in the future, is called an asset.

RELATION BETWEEN INFLATION, GDP, GNP INTEREST & EXCHANGE RATES

Real interest rate The "real interest rate" is the rate of interest an investor expects to receive after allowing for inflation.
Let us consider Indian scenario. Banks want to give 5% on savings deposits. Assume Government figure of inflation is around 6.8% then the investor or saver will loose 1.8% of the value of his total

savings every year. This is if we assume the inflation is 6.8%.

Nominal Inflation rate Nominal interest rate is the total interest that one gets on his savings for a period of one year before adjusting (deducting) inflation or expected inflation.

Gross National Product G N P

The extra money is borrowed by investors to produce

something and sell thus generate interest to government which again was spend on public purposes.

Raising taxes
Taxes is equivalent to reducing savings in the hands of

people and equivalent to cutting wages or raising prices thus lead to inflation or low purchasing power.

EXCHANGE RATES Governments usually tries to control money supply by either not printing notes or not borrowing or by increasing interest rates so that investors will not borrow. This is called Monetary Policy. Borrowing money from domestic or foreign sources is called Debt Financing.

Balancing these considerations is called Fiscal Policy or Public Financing. Simply stated it theorizes the Inflation Differential between two counties of trade is exactly equal to exchange rate differential.

Indias inflation rate has grown more than expectations in May 2012 with increase in fuel and food prices. The following table shows the inflation rates of India in the last few months:
Month
July 2011 August 2011 September 2011 October 2011 November 2011 December 2011

Inflation Rate
8.43% 8.99% 10.06% 9.39% 9.34% 6.49%

January 2012
February 2012 March 2012 April 2012 May 2012 June 2012

5.32%
7.57% 8.65% 10.22% 10.16% 10.05%

The table below provides an indication of the inflation rates of India in the last few years:
April 2003
April 2004 April 2005 April 2006 April 2007 April 2008 April 2009

5.12%
2.23% 4.96% 4.65% 6.67% 7.81% 8.70%

April 2010
April 2011

13.33%
9.41%

CONDITION OF THE INR

In the year gone by, the value of the INR with regards to the US Dollar has gone down by approximately. This has affected the share market negatively as well.

CONDITION OF EXPORT AND IMPORT

In May 2012, India exported goods and services worth 25.68 billion US dollars this was a reduction of 4.16 percent compared to May 2011. According to the information, imports have come down to 41.9 billion US dollars, which is a decrease of 7.36 percent. The trade deficit has been calculated at $16.3 billion.

INDIA ECONOMIC GROWTH

In the quarter that ended in March 2012, Indias GDP saw a growth rate of 5.3 percent compared to the quarter that ended in March 2011. This was the slowest rate after 2003.

FACTORS FOR INFLATION RATE

A newly released press note from the Central Statistical Office reveals that in 2011-12 Indias GDP has grown by 6.5 percent compared to 8.4% in 2010-11.

IMPACT OF INFLATION AND GDP ON STOCK MARKET RETURNS IN INDIA

When the government has enough finance circulation available that you can buy, the cost of products, solutions usually go up. This leads to the loss of the purchasing power of people. The value of money also reduces. In a nut spend, for the economic climate to succeed, inflation and currency marketplaces ought to be more contouring and foreseen.

Agriculture sector, one of the most important part of the Indias national income, has expanded very sharply backed by good monsoon rains and nonagriculture sector also showed robust growth.

On the other side, inflation in India could be worrisome for the policy makers.
2008 2009 2010 2011
5.1 7.2 9.1 8.0 9.6 7.6 -8.5 -2.4 7.7 3.7 12.4 3.6 4.9 7.3 -9.6 -2.8 9.1 11.3 9.1 8.1 6.7 7.8 -8.3 -3.2

Details
(Figures in per cent) Real GDP Growth Inflation Consumer Price Index Wholesale Price Index Short-Term Interest Rate* Long-Term Interest Rate** Fiscal Balance (per cent of GDP)^ Current Account Balance (per cent of GDP) Note: *Mumbai Three Month Offer Rate **10 Year Government Bond

2012
8.5 5.1 5.2 5.5 7.6 7.9 -6.7 -2.9

8.2 5.8 5.8 5.7 7.6 7.9 -7.4 -3.0

^Gross fiscal Balance for central and State Government. CPI for Industrial Workers

Composition of Indias GDP by Sector.

Amount in Crores of Indian Rupees (10

Million)

Agriculture, Forestry & Fishing Minning Quarrying Manufacturing Electricity, Gas & Water Supply

876,563.00 129,671.00 799,513.00 80,440.00

Construction Trade, Hotel, Transport & Communication Financing, Insurance, Real Estate & Bus Service
Community, Social & Personal Services Total Annual GDP

437,768.00 1,274,534.00 700,943.00

690,373.00 4,989,804.00

Graphical Representation of Indias GDP Composition

Sources: VMW Analytic Services and OECD. This data is provided from the different sources and VMW does not have any guarantee for the accuracy.

INDIA INFLATION RATE

The inflation rate in India was recorded at

6.87 percent in July of 2012. Historically, from 1969 until 2012, India Inflation Rate averaged 8.0 Percent reaching an all time high of 34.7 Percent in September of 1974 and a record low of -11.3 Percent in May of 1976.

INDIA GDP GROWTH RATE

The Gross Domestic Product (GDP) in India expanded 1.3

percent in the first quarter of 2012 over the previous quarter. Historically, from 2000 until 2012, India GDP Growth Rate averaged 7.4 Percent reaching an all time high of 11.8 Percent in December of 2003 and a record low of 1.6 Percent in December of 2002.

NEGATIVE TRENDS
The headlines on Indias hectic pace of growth

in the mid 2000-2010 decade and the subsequent fall in GDP growth is more pedantic than a practical course on what lies ahead for stakeholders of the country.

Domestic issues include rising fiscal deficit (5.9% of GDP in 2011-12 up 1.3% from initial estimates), rising subsidy bill (highest even recorded in 2011-12), rising inflation (averaged over 9% for 2011-12), falling economic growth (came off to 6.5% in 2011-12 from 8.4% in 2010-11), weakening Rupee (down over 20% against USD in 2011-12), falling equity markets (Sensex and Nifty down close to 10% in 2011-12) and rising bond yields (ten year bond yield up 150bps in 2011-12). Global issues include worries on sovereign debt of Eurozone countries with Spain joining the ranks of Greece, Portugal and Ireland requiring bailout, China hard landing with GDP growth forecast at 8% to 8.5% levels from high double digit levels seen in whole of 2000-10 decade and sluggish US economy with unemployment rates at 8.2% higher than long term averages of close to 6%.

The services sector continues to be a star performer as its share in GDP has climbed from 58% in 2010-11 to 59% in 201112 with a growth rate of 9.4%. The Economic Survey expects the growth rate of real GDP to pick up to 7.6% in 2012-13 and faster beyond that. The Survey recognizes that sustainable development and climate change are becoming central areas of global concern and India too is equally concerned and engaged constructively in global negotiations. Climate change challenges ahead are large and India is doing more than its fair share in reducing its energy-intensity of growth.

Key Outcomes:

Rate of growth estimated to be 6.9%. Outlook for growth and stability is promising with real GDP growth expected to pick up to 7.6% in 2012-13 and 8.6% in 2013-14. Agriculture and Services sectors continue to perform well. 2.5 % growth in Agro sector forecast. Services sector grows by 9.4 %, its share in GDP goes up to 59%. Industrial growth pegged at 4-5 percent, expected to improve as economic recovery resumes. Inflation on WPI was high but showed clear slow down by the year-end; this is likely to spur investment activities leading to positive impact on growth. WPI food inflation dropped from 20.2% in February 2010 to 1.6% in January 2012; calibrated steps initiated to rein-in inflation on top priority. India remains among the fastest growing economies of the world. Countrys sovereign credit rating rose by a substantial 2.98 percent in 2007-12. Fiscal consolidation on track - savings & capital formation expected to rise. Exports grew @ 40.5% in the first half of this fiscal and imports grew by 30.4%. Foreign trade performance to remain a key driver of growth. Forex reserves enhanced covering nearly the entire external debt stock. Central spending on social services goes up to 18.5% this fiscal from 13.4% in 2006-07. MNREGA coverage increases to 5.49 crore households in 2010-11. Sustainable development and climate change concerns on high priority.

CRISIL LOWERS INDIA`S GDP GROWTH TO 6.5%

CRISIL Research, Indias largest independent research house,

has lowered Indias GDP growth forecast for 2012-13 to 6.5 % from its March 2012 estimate of 7.0 %.

GDP growth: With rising uncertainty in the Eurozone, muted

investment demand, and a policy logjam, GDP growth in 2012-13 will remain around the 2011-12 level of 6.5 %.

Inflation (WPI): WPI inflation forecast is revised upward to 7.0

% to reflect the higher-than-anticipated increase in food inflation, and the impact of the weak currency.

 India to grow at 6.5 % in 2012-13

CRISIL Research believes that due to rising uncertainty in the Eurozone and muted domestic demand, particularly in the case of investment, GDP growth would remain restricted to 6.5 % in 2012-13.

WPI inflation to average 7.0 % in 2012-13

Despite our outlook of lower growth, we have revised our forecast on WPI inflation upward to 7.0 % for 2012-13 from 6.5 % previously.

Rupee to settle around 50 per US$ by March-2013

In the base case scenario rupee appreciation from the current level to around 50 per US$ by March 2013 would be supported by some easing of the current account deficit in 2012-13 and return of foreign capital inflows towards the last quarter of the fiscal year.

INDIAS STRUGGLING GDP GROWTH

Growth below expectation Weakest fiscal performance in 9 years Why did Sensex, Nifty fall

Agriculture growth falters

Manufacturing and services struggle Exports hurt Expect fewer jobs

No scope for economic stimulus

RBI cannot stimulate the economy

either No option but to reform

GLOBAL FINANCIAL MAJORS LOWER INDIA GROWTH PROSPECTS

Five

global financial services majors, including Morgan Stanley, Stanchart and Citi, have lowered India's growth prospects to 5.7-6.4% for the current fiscal, a day after markets received a "shock" from nineyear low GDP growth of 6.5% for 2011-12.

INFLATION IN INDIA MOVES UP

There are three measures of inflation in India: WPI, CPI, and the

gross domestic product (GDP) deflator.

The third measure is the most comprehensive, as it takes into account all goods and services produced in the economy. All three measures reveal signs of an early pick-up in inflation in

2006-07 and persistence thereafter.

WPI inflation consistently surpassed the RBI's comfort threshold of 5 per cent in 51 of the 70 months between April 2006 and January 2012.

CRISIL INSIGHT
The rapid growth in consumption expenditure drove up total government expenditure, increasing the fiscal deficit.

GOVERNMENT POLICIES FUEL WAGE RISE ACROSS INCOME CATEGORIES

The sharp increase in wages which was near simultaneous

across income groups in urban and rural India since 200405 boosted consumption demand.

Such sharp wage increases, which more than compensated for inflation, had no explicit link to productivity improvement.
In February 2011, the government also linked wages under the MGNREGS to inflation. As MGNREGS - wages have become the benchmark floor for rural wages, wages of other rural workers too increase along with inflation.

Key messages
Immediate steps to reduce and stabilize inflation at low

levels

Fiscal consolidation with a focus on increasing investment spending - Develop a credible roadmap to reduce the fiscal deficit to GDP ratio - Reorient government spending from consumption to investment to remove supply-side bottlenecks

Productivity improvements in bottleneck areas

Implement policies to improve farm productivity Step up efforts at skill development in sectors that face acute skill shortages Devise mechanisms to link wages to productivity in the public sector and in government safety-net programs such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) Reduce shocks from sudden changes in administered prices of petroleum fuels, by aligning them to global prices.

The Indian economy appears caught in a high-inflation trap. Per-year WPI (wholesale price index) and CPI (consumer price index) inflation rose to 6.9 per cent and 9.0 per cent over April 2006 to January 2012, from 4.7 per cent and 4.1 per cent in the preceding five years. No matter how you measure it, inflation has been high over the past six years.

Adverse shocks from shortfall of food articles, and higher global fuel and commodity prices triggered inflationary pressures. Persistence in inflation, however, originated from government policies that stimulated consumption demand but did not do enough to raise the supply potential of the economy.

MGNREGS, sharply increased wages for rural workers from 2007. These wage increases, which were not linked to productivity improvements, added to inflationary pressure. This coincided with wage increases in the public sector and in the private sector (arising from skill shortages) which generalized inflation.
Inflation inched further up in 2010-11; despite monetary tightening, inflationary pressures continued in 2011-12. A series of interest rate increases by the Reserve Bank of India (RBI) attempted to curb demand, which the higher fiscal deficit fired by consumptionoriented spending continued to spur. The nature and quantum of fiscal spending thus muted the effectiveness of the monetary policy.

The GDP numbers mean that the countrys growth slowed for eight successive quarters through the three months ended March 2012. It is also the lowest GDP growth rate in 13 quarters; the last time India registered the same rate of growth was in the quarter ended December 2009, when the global financial system had all but collapsed in the aftermath of the bankruptcy filing by Lehman Brothers Holdings Inc.