Software export growth set to slow: Nasscom



Emerging trends in form of automation will take away many jobs but will also generate high demand of skilled professionals. While exports will suffer in short run , they will return to normal when picture gets clear about protectionism across world.

From UPSC perspective, following things are important:

Prelims level: Nasscom, Brexit.

Mains level: Factors that are affecting exports in short run and way forward.


  1. The country’s software export growth is set to slow to 7-8% this fiscal year, down from 8.6% a year earlier, according to industry body Nasscom
  2. The domestic market was projected to grow faster than the export market during this fiscal

Factors that affect software exports:

  1. Increased rhetoric on protectionism
  2. Elections, Brexit and visa issues
  3. Macroeconomic uncertainties
  4. Focus on cost optimisation
  5. Currency volatility

Inflection point in industry and way forward:

  1. Improvements in financial services and a high potential in digital businesses would be the key growth drivers
  2. An improvement in legacy business and increased automation-based projects would also be among the growth drivers
  3. The demand will be for technology-skilled professionals and it was imperative for new and existing people to reskill themselves

[op-ed snap] Signs of stability on external front



Op-ed discusses present situation of India’s CAD, factors that affect it and might affect in near future and other related aspects. Important. Read B2B for knowing about highlighted terms.

From UPSC perspective, following things are important:

Prelims level: Current Account Deficit (CAD), Gross Domestic Product (GDP), hot money, exchange rate, Foreign direct investments (FDI), trade deficit, fiscal deficit, balance of payments

Mains level: Risks to India’s CAD and BoP by various national and international factors, current trends and other related issues.



  1. Over the past few years, one of the prominent features of India’s improving macroeconomic fundamentals has been the reduction in its Current Account Deficit (CAD)
  2. CAD has declined successively, reaching 0.7% of GDP in fiscal 2017
  3. It had surged to 4.8% of Gross Domestic Product (GDP) following the taper tantrum of 2013

Positive Developments in external front in last few years

  1. CAD’s financing has also become more robust
  2. Prior to fiscal 2014, financing depended a lot on foreign portfolio inflows
  3. A chunk of that is “hot money” that exits quickly, leading to volatility in the exchange rate
  4. Foreign direct investments (FDI), which are way more durable and stable, have surpassed foreign portfolio inflows in the past two years
  5. Since fiscal 2015, FDI inflows alone have been sufficient to finance India’s CAD

Benefits of FDI:

  • Increased employment opportunities
  • Greater technological know-how

Risks that India is facing on external front:

  1. Rising commodity prices: These increase India’s trade deficit because we import way more than we export
  2. Rising protectionism: Even as global demand improves, there are increased instances of rising protectionism in advanced economies
  3. Increasing manifestation of this trend will impair India’s external position
  4. US and Europe constitute the biggest chunks of India’s merchandise exports
  5. Immigration restrictions negatively affect the earnings of Indian workers abroad, which would reduce inward remittances
  6. As much as 80% of the remittances to India are personal transfers, and 60% by workers

Fiscal health of the Centre and the states:

  1. There is a trend reversal
  2.  The Centre’s fiscal deficit has fallen from 5.8% of GDP in fiscal 2012 to 3.5% in 2017
  3. And that of states has risen
  4. The situation could worsen further for states, leading to a higher combined deficit

Twin Deficits Hypothesis: The Effect of Fiscal Consolidation on the Current Account

  1. Theoretically: A standard implication of many theoretical models is that a fiscal contraction leads to a depreciation of the real exchange rate and an accompanying fall in the current account deficit
  2. Practically: Empirical research suggests that such a rise in consolidated fiscal deficit may not automatically lead to expansion of CAD


  1. India’s balance of payments account is expected to remain healthy over the near term with CAD at moderate levels and adequately financed


Read about fiscal deficits here (click2read)

Read about BoP and CAD here (click2read)

Know about FDI here (click2read)

Hot Money

Hot money is currency that moves regularly, and quickly, between financial markets so investors ensure they are getting the highest short-term interest rates available.


Why you don’t feel the record-low inflation



The newscard discusses inflation trends and factors that affect it. Important from both Pre and Mains point of view. Bookmark it.

From UPSC perspective, following things are important:

Prelims level: CPI, its base year, NSSO, Engel’s law, Base effect, Blue moon concept (geography).

Mains level: Despite a decline in inflation numbers, inflation is visible commonly, why?


  1. India’s latest retail inflation numbers show that the inflation rate, measured by the Consumer Price Index (Combined — new series) was 2.2% for May 2017
  2. A CPI inflation rate below 2.5% is a once-in-a-blue-moon occurrence in India
  3. Earlier this index was CPI – Industrial Workers

Three reasons why lowering of inflation does not reflect in common prices:

a) Place to place difference: All-India CPI Combined is compiled by collecting town and village-level data on the prices of goods and services across States and then aggregating them

  • All States and Union Territories do not get equal weighting in the total
  • The weights are decided by the consumption expenditure within each State relative to the all-India consumption basket
  • While the State of Maharashtra gets a 13.2% weight in the all-India CPI (Combined), J&K weighs in with just 0.94%, Puducherry with 0.17% and Sikkim with 0.05% (Seeing Prelims 2017, you may be asked numbers next year 🙁 )
  • Runaway inflation in India’s less populous low-spend States and Union Territories is unlikely to show up in the form of a big swing in the overall index

b) Consumption basket: In order to arrive at a CPI General Index that is representative of both India and Bharat, the statistics office assigns different weights to the different products and services

  • These weights are derived from the actual spending patterns of rural and urban households as captured by the NSSO’s ground-level survey of expenditure patterns across India
  • The latest such survey was the 68th round conducted over 2011-12
  • Because the majority of Indian households belong to lower-income strata, the CPI General Index thus carries a far higher weight to products than services
  • Services often witness higher price rise than products in the Indian context
  • In practise, more affluent households will tend to spend a far lower proportion of their income on food and essentials and make a higher allocation to non-essentials and services (This is known as Engel’s Law)

c) Base effect: The official CPI print captures the point-to-point change in the index in the latest month, compared to the same month last year

  • This makes the number susceptible to distortions from one-off factors both in the base month and in the current one
  • Every year, food prices usually soar in the months of April-May as they represent the pre-monsoon months when food crops are in short supply
  • This year a bountiful monsoon has led to a bumper production of pulses, oilseeds and horticultural crops and thus lowering of prices
  • If we ignore the monthly numbers and focus on three-year trends instead, we find that price levels have continued to creep up steadily. Between May 2014 and now, the CPI Combined has risen at an annual 4.5%.


Base effect

Suppose if the base year the consumer price index is 100, next year it goes to 150 and the next to 200. Now the last years inflation is 33.5% where as actually it is (200–100)/100)100=100%.

So if in a country there is cost of living allowance on salary, in place of a 100% rise in wages one will get only 33.5% rise in wages which is too low for the reality of the economic state.

This is called the base effect, which tend to understate the inflation numbers when inflation is rising and overstate when prices are falling.


[op-ed snap] Why India stands to gain



There has been slow growth since financial crisis of 2008 and present situation also does not point towards a bright future for global economy. India has various advantages in its favour and will be able to maintain high growth momentum. Op-ed discusses all factors related to growth. Must read for Mains. Bookmark it.

From UPSC perspective, following things are important:

Prelims level: Demographic dividend, Protectionism, Quantitative easing, Make in India, Skill India, direct cash transfers, Ease of doing business, GST, Labour reforms, Agriculture reforms, Various rating agencies (S&P etc.)

Mains level: Reforms undertaken to bring Indian economy on growth track and way forward.



  1. The global economy has been recovering from the recession of 2009 at a tepid rate (at approximately 2.5 per cent per annum)
  2. This rebound has been much slower than that after World War II

Reasons behind this slow growth:

  • Declining populations
  • Protectionism
  • De-leveraging
  • No major productivity-enhancing revolution
  • Decoupling of political needs and economic reality

Great opportunity for India:

  1. Population growth boosts economic growth through an increase in the workforce, aided by an increase in productivity 
  2. India is in the throes of a demographic dividend which would be an impetus to growth, if the new entrants to the work force are productively employed

Steps taken by Government to reap benefits of this situation:

  • corporate governance reform
  • pro-growth tax reform
  • agricultural reform
  • government administration reform
  • the expansion of public-private partnerships
  • increasing jobs through targeted manufacturing/service investment — tourism, health, education, micro and small enterprises, agribusiness and massive drives in all the areas
  • Make in India, Skill India, productivity-based infrastructure development
  • initiatives related to the ease of doing business

Effects of these steps:

  1. These strategies have begun to make a difference and should, over a reasonable period of time, create the jobs we need
  2. The rationalisation of subsidies and direct cash transfers will plug leakages associated with the previous subsidy regime and make money available for merit subsidies — health, education, etc. — that can help us exploit our population dividend

Reasons behind financial crisis of 2008:

  1. During the golden age of growth, the increase in productivity was largely the consequence of technological advances
  2. As productivity-based growth slowed, easy money took its place
  3. The reduction in inflation led to a reduction in interest rates by the Central Bank
  4. Prior to this lowering of borrowing costs, economic growth and borrowing moved in tandem — as this should
  5. Reductions in the cost of borrowing to near-zero and easy money led to global debt surging from 100 per cent of GDP in the 1980s to 300 per cent by 2008, which led to the financial crisis

India’s current situation:

  1. India’s debt to GDP ratio is 68 per cent
  2. It is now poised to leapfrog directly into the digital world and reap the productivity gains
  3. We are moving towards increasing manufacturing’s share in furthering jobs
  4. This, combined with the increase in consumption through workforce increase, should impact both consumption and investment, leading to the delta required to take our GDP past 8 per cent
  5. The priorities are:
  • Ease of doing business
  • Infrastructure improvement
  • Fiscal reforms — such as GST
  • Agriculture reforms
  • Administrative reforms
  • Labour reforms
  • Digital revolution

Saved from 2008 financial crisis but entangled in another one:

  1. The global financial crisis largely passed India by; so, our need for quantitative easing was limited
  2. But we have created our own crisis — non-performing assets (NPA)
  3. Banking system has a provisioning coverage of 50 per cent plus on NPAs

Global situation and impact on India:

  1. With growing political uncertainty in the US, the emergence of protectionist policies and amidst slowdown concerns related to China, countries whose GDP is dependent on exports could find themselves with increased instability 
  2. The most affected are those with exports accounting for a high percentage of their GDP and with low domestic demand support
  3. India appears to be less vulnerable on these fronts
  4. India is most insulated from China’s slowdown: Its annual GDP growth could be lower by a slight 0.14 percentage points as compared to 0.26 percentage points in developing Asia

Why is India insulated?

  1. Household consumption spending has 59 per cent share in India’s GDP and has been the major driver of economic growth.
  2. It has, on many occasions, acted as a protective shield to global demand shocks
  3. India also has low reliance on external savings to fund its growth
  4. As per S&P Ratings, the banks are mainly deposit-funded and don’t rely on wholesale funding to grow their loan books

CAD widens to $3.4 billion in Q4


News is not important as such. Know about important terms in B2B.


  1. The current account deficit widened in the fourth quarter of 2016-17 to $3.4 billion or 0.6% of the GDP
  2. It was $ 0.3 billion or 0.1% of the GDP during the same period of the previous financial year

Reason behind this increase:

  1. The widening of the CAD on a year-on-year basis was primarily on account of a higher trade deficit ($29.7 billion) brought about by a larger increase in merchandise imports relative to exports


Know everything about deficits here (click2read)

CPI inflation slows to lowest since 2012



While inflation trend has been on lower side since a year but recent farmer protests in various states signify that there is a huge mismatch between government data and actual situation as the actual benefits of this slowdown have not trickled down to producers. A comprehensive policy in this regard is need of the hour.

From UPSC perspective, following things are important:

Prelims level: CPI, IIP, their base years, factors affecting them.

Mains level: Policy measures required by various stakeholders in order to provide benefits of lower inflation to everyone, from producers to consumers.


  1. Retail inflation at 2.18% in May, eased to its lowest level since the Centre began measuring it on a nationwide basis in 2012
  2. Separate data showed industrial output expanded by 3.1% in April

Reasons behind this trend:

  1. Slowdown in CPI inflation was driven in large part by cooling food prices
  2. Growth in the Index of Industrial Production (IIP) was spurred by the manufacturing sector within which the tobacco and the pharmaceuticals sectors grew the fastest

Looming farmer crisis and desired RBI measures:

  1. It reflects the crisis the farmers are facing because food prices have crashed as a result of bumper crops
  2. This does provide stronger grounds for the RBI to revise its interest rates downwards in its next review

Upside risks to inflation:

It can be due to three factors-

  • Increase in the house rent component in CPI
  • Implementation of GST, and
  • Announcement of large farm loan waivers and higher deficits of states


Know everything about inflation here (click2read)

Revise quickly about various indices related to inflation from table below: (Prelims worthy 🙂 )

[op-ed snap] Getting back on the growth track


There are multiple factors involved in growth of economy and the op-ed sheds a light on nearly all of them. Can be used in Mains as well.

From UPSC perspective following things are important:

Prelims level: IIP, WPI, GDP, Bankruptcy code, GST, FDI, NPA, Inflation, Balance of Payments

Mains level: Factors that are hampering job creation and other economic developments, suggested measures and way forward.



  1. The National Income numbers for 2016-17 have been released
  2. Recent revisions in the Index of Industrial Production and Wholesale Price Index do not alter the annual growth rates for the recent years

Demonetization impact:

  1. For the quarter January-March 2017, overall growth rate of GDP is 6.1%, which is nearly 1% below the growth rate for the previous quarter at 7%
  2. The year-on-year decline is, however, steep

How to analyze these numbers?

  1. Three factors have to be kept in mind

First- a decline in growth rate has been seen from the beginning of the year. The growth rate of every quarter has been sliding from the previous quarter

Second- During Quarter 4, the only two sectors which have shown strong growth are agriculture and public administration

Third- The sectors that have shown a sharp decline are construction and trade, hotels, transport and communication. These are the sectors which use cash extensively

Difficult to decipher:

  1. While the adverse effects of demonetisation on GDP are clearly seen, it is difficult to decipher how much of the decline in growth rate in the January-March quarter is due to demonetisation and how much due to the underlying declining trend

Role of investment:

  1. In recent years an attempt has been made to raise public investment
  2. This effort combined with some improvements in the efficiency in the use of capital has led to significant improvements in the output of coal, power and roads
  3. But the private investment needs to be brought at par or even more than public investment
  4. Growth can happen because of greater utilisation of existing capacity or new investment
  5. Job creation in the first case will only be modest as is happening currently in India (Jobless growth)
  6. It is only new investment that will push growth and that will generate greater employment
  7. For sustained high growth, we need new investment

Reforms undertaken and their impact:

  1. The Bankruptcy Code has become operational
  2. The Goods and Services Tax will very soon come into force
  3. The FDI rules have been considerably relaxed
  4. It will, however, take some time before the impact of the first two is felt on investment and growth

Debt burden and NPA Resolution:

  1. One of the reasons for investment not picking up is the burden of debt under which Indian businesses are suffering
  2. The health of the banking system is closely aligned to the health of the private sector business, both corporate and noncorporate and currently it is also under stress
  3. It is the resolution of the NPA (non-performing assets) problem that will enable the banks to restart their lending programme in a big way and help business to embark on new investment

All factors are supportive:

  1. The macroeconomic stability parameters are in good shape
  2. Prices are under control
  3. The Central government fiscal deficit is adhering to the road map laid out in the Budget
  4. The balance of payments situation is also under control
  5. The monsoon is expected to be normal in the current year
  6. This is the appropriate time to convert sentiment to firm action with a big push on private investment

[op-ed snap] Need for corrective action


Mains Paper 3: Economy | Growth

From UPSC perspective, following things are important:

Prelims level: Not Much

Mains level: Article gives an overview of the bad effects of Demonetisation and talks about some of the possible solutions.



  1. The Article talks about how investment slowdown remains the challenge for the economy after demonetisation
  2.  GDP growth has slowed for the first time in five years, in 2016-17, to 7.1%

Is it all because of demonetisation?

  1. Quarterly estimates show that demonetisation certainly slowdown the economy, but growth rate had started weakening six months earlier
  2. Let’s not go for the reasons but just remember this point that not all bad is due to demonetisation

Pointers to highlight the unintended side effects of Demonetisation

  1. Due to demonetisation the gross value added (GVA) grew at its slowest pace in at least eight quarters
  2. The loss of momentum is considerable
  3. Growth slumped to 5.6%. Just four quarters earlier it was a robust 8.7%
  4. Construction and manufacturing sectors which are crucial sources of jobs, have been most severely affected

How do we recover from these unexpected/ unavoidable setbacks?

  1. Currently, exports and private investments are not powering the Economy(according to the writer)
  2. Demonetisation briefly affected the private consumption (which means that for a while, we had little money to spend on un-necessary consumption items)
  3. As the cash crunch eases, consumption will probably revive
  4. But the risk to the recovery is from the credit crunch that demonetisation worsened
  5. The demonetisation overburdened the banks and took their attention away from the problem of bad loans (do not use such lines in exam – this is an opinion and was mostly inevitable)

The way forward

  1. The government has so far played a passive role, first by relying on banks, and now on the Reserve Bank of India, to solve the bad loans problem
  2. Unless addressed seriously, the credit crunch could stall the economy’s recovery.
  3. The quicker the banking sector recovers its health, the speedier will be the recovery
  4. The stress, if unattended, will limit the effectiveness of the monetary support of lower interest rates

GDP estimates: Reading the tea leaves


Mains Paper 3: Economy | Growth

Economy is slowly recovering back to normal after the note ban impact and it is expected that a good monsoon this year would help gain the same momentum which was the reason for India becoming ‘fastest growing economy’.

This op-ed may look a bit technical to the newbies. Truth be told, almost all economics related op-eds are that way. We would have liked to cut down on specifics but then when we talk about economics, the devil is in the details!

From UPSC perspective, following things are important:

Prelims level: Basic terms like real and nominal GDP, GVA and factors affecting growth.

Mains level: How do various sectors contribute in overall economy, factors that affect them and other related issues.


  1. The CSO’s provisional GDP estimates for the fourth quarter and full year FY17, released recently revealed that India’s real GDP growth skidded sharply to 6.1% in the January-March quarter of 2017, after averaging 7.2% in the first nine months of the fiscal year
  2. This slump lost India the ‘fastest growing economy’ tag allowing China to edge ahead

Why this happened?

  1. Economy took a sizeable knock due to the note ban

Interesting trends:

a) Delayed impact of note ban: The brunt of the note ban was felt in the fourth quarter of 2016-17 and not in the third quarter, when the thunderbolt move was announced and it impacted all sectors of economy

  1. Reason for delayed impact: Delayed impact of note ban might be because of strong festival season sales in October that masked the disruption to consumption in November and December in Q3
  2. Downward revision possible: Even the latest GDP estimates may get revised downwards in the coming months, as they do not fully reflect the performance of the informal sectors of the economy
  3. Factors that helped maintain momentum: A rebound in the farm economy and a spending spree from the government helped prop up economic growth to 7.1 per cent for the full year
  4. Undesirable in long run: Over-reliance on the government is not great news for the long-term health of the economy, or the aspiration towards ‘less government’

b) Investment slump: For economic growth to create jobs, demand for goods and services has to fuel investments in new factories and offices, but investment in Indian economy is not growing or changing

  1. Increase in Private and government spending: Private spending (despite the demonetisation shock) registered healthy growth and Government spending also rose by over 6 times
  2. No new investments: Growth in new investments slumped to 2.4% from 6.5%
  3. Favorable conditions for restart of investment cycle: The Government has been ironing out issues in stalled projects and Interest rates have gone down. Rebound in consumer demand can revive the private sector that has excess capacity with it

c) Nominal growth returns: Nominal growth (economic growth in value terms) is quite important for common man instead of Real GDP (growth in the volume of economic output without inflation)

  1. Improvement in GVA: Gross Value Added (GVA) at current prices has staged a sharp improvement in fourth quarter of FY17 as compared to first quarter
  2. Nominal GDP growth too has revived
  3. Importance: It is nominal GDP growth that determines increases in income for farmers, entrepreneurs and the salaried
  4. Profit and sales growth for India Inc. are also pegged to nominal rather than real GDP growth


Take this time and get your eco basics in place. Read this series of blog posts written to help you with that:

Economics Concepts Simplified

[op-ed snap] Slowing down



Mains Paper 3: Economy | Growth

RBI has been quite successful in maintaining its target of inflation specified by government in Monetary policy framework and this provides opportunity for rolling out other reforms. Op-ed discusses slowing growth of economy and suggests a short term measure in order to revive growth.

From UPSC perspective, following things are important:

Prelims level: GDP, Goods and Services Tax, new monetary policy framework, Insolvency and Bankruptcy Code, government small savings/provident fund schemes.

Mains level: Impact of demonetisation on growth and suggested measures in order to revive growth.


  1. The single biggest takeaway from the Central Statistics Office’s (CSO) provisional estimates of national income for 2016-17 is that the Indian economy is suffering a growth and investment slowdown which cannot be wished away
  2. At 6.6 per cent, growth in gross value added (GVA, which is basically GDP net of taxes on goods and services) during the fiscal ended, was below the 7.9 per cent for 2015-16

Slowdown and its aftermath:

  1. Demonetisation: The particularly sharp deceleration in the last quarter is clearly linked to demonetisation
  2. Higher government spending: The CSO data suggests that higher government spending is what has partly saved the day
  3. Liquidity problem solved: Lack of liquidity in the system is no longer a constraint to growth or spending
  4. Real crisis: The real crisis today is investment. Without investment reviving, there can be no jobs and incomes to sustain spending

Reform initiatives undertaken:

  1. Goods and Services Tax, a new monetary policy framework explicitly targeting consumer price inflation below 6 per cent, an Insolvency and Bankruptcy Code, and aligning returns on government small savings/provident fund schemes with market rates
  2. All these should yield results in the long run

Short term reform(s) needed:

  1. Monetary stimulus via a 50 basis points cut in interest rates by the RBI, when inflation is truly under control, will certainly help now
  2. Also, a clear signal from the top not to divert space to divisive issues, be it cow or Ram Temple

January-to-March GDP growth slows down to just above 6%



Mains Paper 3: Economy | Growth

Some study says demonetisation has had low or no impact on economy, some say it had a big impact. Now CSO data has put a seal on the latter opinion. Lower growth rate forecast and downward growth in all sectors indicates the negativity of demonetisation. Points can be used in Mains when asked to analyse demonetisation.

From UPSC perspective, following things are important:

Prelims level: IIP, WPI, GVA, Real GDP and all such important terms.

Mains level: Impact of demonetisation on overall economy, change in base year of IIP, WPI and its results and other related issues.


  1. In an indication that demonetisation may have hit the economy hard, Gross Domestic Product (GDP) in the January-March quarter grew at the slowest pace in at least four quarters at 6.1 per cent as against a 7.0 per cent growth in October-December, data released by Central Statistics Office (CSO) on Wednesday showed
  2. For the 2016-17 financial year, however, the GDP growth rate was kept unchanged at 7.1 per cent, despite expectations that the revision of GDP in line with the new series of the Wholesale Price Index and the Index of Industrial Production (IIP) would yield a higher growth rate of around 7.6 per cent

Fall in GVA and other sectors:

  1. Gross Value Added (GVA) growth, which is GDP minus net taxes and serves as a more closely watched estimate for quarterly growth, also fell sharply to 5.6 per cent in January-March from 8.7 per cent last year and 6.7 per cent in October-December.The GVA growth of 5.6 per cent for January-March is the lowest in at least eight quarters
  2. Gross Fixed Capital Formation, which is a proxy for private investment, also fell to 28.5 per cent in January-March from 29.5 per cent in previous quarter and 30.8 per cent in the same period last year
  3. Private Final Consumption Expenditure, an indicator for household consumption expenditure, declined to 57.3 per cent in January-March from 58.6 per cent in October-December, but was higher than 56.6 per cent last year
  4. Government Final Consumption Expenditure also slowed to 9.4 per cent in the fourth quarter from double-digit growth shown in previous three quarters


Changes in IIP and WPI:

  1. On May 12, with an aim to bring major macroeconomic indicators of IIP and WPI in line with national accounts, the government changed its base year to 2011-12
  2. IIP growth based on the new methodology has been higher than the growth based on the old base year
  3. For 2016-17, IIP growth averaged 5.0 per cent in the new series as against a mere 0.7 per cent in the old base series
  4. The new WPI series does not include any indirect taxes, which brings it conceptually closer to the producer prices and also removes fiscal impulse impact
  5. The new methodology has led to consistently lower WPI inflation than earlier series
  6. For 2016-17, the WPI inflation averaged a mere 1.7 per cent in the new series as against 3.7 per cent growth in the old base series.



Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. Value added represents the contribution of labour and capital to the production process. When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP). Thus, Gross Domestic Product (GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of that economy during the said year after adjusting for taxes and subsidies.

World Bank pegs India’s economic growth at 7.2 per cent this financial year



Mains Paper 3: Economy | Growth

A very good assessment of India’s growth outlook and associated risks that may affect growth. Read and bookmark it for Mains.

From UPSC perspective, following things are important:

Prelims level: Growth forecast, World bank reports and factors affecting growth.

Mains level: What are short term and long term measures that need to be taken by India for maintaining groeth trajectory, associated risks and other related issues.


  1. World bank pegged India’s GDP growth at 7.2 per cent in 2017-18
  2. This was on account of reforms, domestic consumption, and improvement in trade
  3. World Bank on Monday said that there were signs of a slowdown in early part of last fiscal but a favourable monsoon lifted the economy before being temporarily hit due to demonetisation

GST effect:

  1. Boost from GST: India remains the fastest growing economy in the world and it will get a big boost from its approach to GST which will reduce the cost of doing business for firms, reduce logistics costs of moving goods across states, while ensuring no loss in equity.
  2. Positive impact: Overall the impact of GST on equity and poverty is likely to be positive.

Demonetisation effect:

  1. As a result of the immediate cash crunch on account of demonetisation, a modest slowdown is expected in GDP growth in 2016-17 to 6.8 per cent.
  2. Recovery expected: Growth is expected to recover in 2017-18 to 7.2 per cent and is projected to gradually increase to 7.7 per cent in 2019-20

Risks to growth outlook:

  1. Uncertainty: There are significant risks for India’s growth outlook on the back of uncertain global environment, including the rising protectionism, as well as slowing Chinese economy that may hamper external demand
  2. Rising NPAs: Private investment is lagging due to “corporate debt overhang” and financial sector is stressed with high levels of non-performing assets (NPAs) of the banks
  3. Rising oil prices: Subdued private investment would put downside pressure on India’s potential growth, besides a rapid increase in global oil and commodity prices
  4. Low female participation: According to an assessment done by the World Bank, India’s potential GDP growth can go up by a full percentage point if half the gap in female labour force participation rate with Bangladesh or Indonesia, is closed .The rate has been declining since 2005. This is a matter of concern as women’s paid employment is known to increase their ability to influence decision-making within the household, and empower them more broadly in society as a whole

[op-ed snap] The other debt issue: on the States’ finances



Mains Paper 3: Economy | Mobilization of resources

The editorial talks about changing scenario of states economy who were at forefront in embracing fiscal consolidation path and maintaining it since adoption. (Economic survey 2017 also has a similar chapter).

From UPSC perspective, following things are important:

Prelims level: Read about fiscal deficit, primary deficit and other related terms.

Mains level: Recommendations of N.K. Singh panel, what should be India’s fiscal consolidation path and other related issues.


  1. For the first time in 11 years, in 2015-16 the combined fiscal deficit of India’s 29 States as a proportion of the size of their economies breached the 3% threshold recommended as a fiscally prudent limit by successive Finance Commissions
  2. The Reserve Bank of India has warned that the States’ expectation to revert to the 3% mark in their 2016-17 Budgets may not be realised, based on information from 25 States

Not a Magic number:

  1. Chief Economic Adviser Arvind Subramanian has asserted that the 3% of GDP benchmark for the fiscal deficit of the States or the Centre is not a magic number
  2. Yet, it serves as an anchor for fiscal discipline in a country whose two biggest crises in recent decades — the balance of payments trouble in 1991, the currency tumble in 2013 — were precipitated by fiscal irresponsibility

What led States to this situation?

  1. UDAY: Taking on the massive debt of their chronically loss-making power distribution companies, as part of the UDAY restructuring exercise steered by the Centre, has dented the States’ fiscal health significantly over the past couple of years
  2. Increasing Capital Expenditure: Since private investment remained elusive in last few years, the States’ had to focus on  boosting capital expenditure in sectors such as transport, irrigation and power.
  3. Tepid economic growth: Due to Tepid Economic Growth , States had to resort to higher market borrowings even after the Centre hiked their share from tax inflows to 42% from 32%, starting 2015-16.
  4. Actual Hike much less: The Center has been short-changing States by relying on special levies such as surcharges, cesses and duties that are not considered part of the divisible tax pool.So, instead of a 10% rise in the States’ share of gross tax revenue, the actual hike in 2015-16 was just 7.7%

Hopes from GST:

  1. The forthcoming Goods and Services Tax regime should, it is to be hoped, correct this anomaly to an extent

Other stress points:

  1. Pay Commission hikes, rising interest payments, the unstated risks from guaranteeing proxy off-budget borrowings by State enterprises, and the boisterous clamour for ad hoc loan waivers


  1. The N.K. Singh panel on fiscal consolidation has recommended a focus on overall government debt along with fiscal deficit and a 20% debt-to-GDP ratio for States by 2022-23
  2. Not just the Centre, but States (with outstanding liabilities to GDP of around 24% as of March 2017) also need to tighten their belts considerably


A quick recap on all types of deficits:

  1. A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings.
  2. Deficit differs from debt, which is an accumulation of yearly deficits.
  3. Budget deficit means the excess of government expenditure over its revenue for a particular year or budget.
  4. Fiscal deficit is the the accumulation of yearly deficits of past all years. Basically it takes into account or is the summation of budget deficits of past years.
  5. Primary deficit is one of the parts of fiscal deficit. It can be arrived by deducting interest payment from fiscal deficit.

[op-ed snap] Timely refresh: on the growth of industrial output



Mains Paper 3: Indian Economy and issues relating to growth

One of the most important issue which concerned the policy makers from last few years was Stagnation of Industrial Growth .However the recent change in Base year of IIP has to some extent tried to reduce the concern of policymakers in industrial sector front since it establishes the fact that industrial growth was not stagnant in last few years.

From UPSC perspective following things are important:

Prelims level: What is IIP? Factual details about change in base year of IIP.

Mains level: How old base year was underestimating industrial growth


  1. Revision to the base year for the Index of Industrial Production and the Wholesale Price Index reveal an overall macroeconomic picture of Indian Economy
  2. IIP data founded on the new base year of 2011-12 shows that industrial output has grown annually at an average pace of only 3.82% over the last five fiscal years

How it helped

  1. The change in the base year has helped in understanding the condition of industrial activity in Indian Economy
  2. It shows that the condition is more robust over the entire period of last 5 fiscal year than had been previously posted.

Updating of the base year for WPI

  1. The base year for WPI is also revised to 2011-2012
  2. It means, the deflator applied to the 109 items captured in value terms in the new IIP (54 in the older series) has also changed, with a more benign wholesale inflation reading automatically lifting the value of the corresponding industrial item.

Effect on other Sectors

  1. The index of manufacturing sector is raised to 77.63%
  2. Electricity, has had its weight of just 8% in the new series, even after the inclusion of renewable resources in power sector.

New mechanism for reviewing

  1. A mechanism in the form of a Technical Review Committee has been put in place to periodically review the products featuring in the item list and to revise the series dynamically.
  2. The reviews, for both the IIP and the WPI(separately), will help in ensuring that data pertaining to industrial output and wholesale price inflation will be relatively current and more accurately reflect economic trends.

Significance of IIP figures

The RBI considers it as a key gauge of economic health while reviewing its monetary stance.


Know more about IIP

  1. The Index of Industrial Production (IIP) is an index for India which details out the growth of various sectors in an economy such as mining, electricity and manufacturing
  2. It is compiled and published monthly by the Central Statistical Organisation (CSO) six weeks after the reference month ends

To read further – click here to get a quick reference table

IIP, inflation data show turnaround may be on the way



Mains Paper 3- Government Budgeting, Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

The news related to base year change has been covered previously (click2read). This news contains some added information that can be used in Mains answers.

From UPSC’s perspective, the following things are important:

Prelims Level: Base year changes, which department brings out which index, what are items included in these indices and their overall effect on economy, look out for the B2B down the card

Mains level: Fodder from this news could be quoted while writing your answer(s) on inflation targets of RBI, industrial growth and on issues related to progress of Make in India.


  1. Factory production, measured on a new, more recent base year, grew more robustly and in a less volatile manner than had been presumed in the year to March, indicating that an industrial turnaround may be under way
  2. Under the new series with a 2011-12 base year, the Index of Industrial Production (IIP) rose 5% in the financial year and 2.7% in March, data released by the Central Statistics Office (CSO) showed
  3. Under the old series with a 2004-05 base year, IIP rose by a mere 0.7% in the full year and 2.5% in March

Why this change?

  1. The CSO and the department of industrial policy and promotion (DIPP) shifted to the more recent base year for IIP and Wholesale Price Index-based (WPI-based) inflation, respectively, to derive a more accurate and realistic picture of the key indicators

Expected outcome:

  1. This will align these data with gross domestic product (GDP) data, which is already being measured on a 2011-12 base year

What are the other changes?

  1. On the new base year, the mining sector has almost the same weightage (14.4%) in the new series as in the old series (14.2%)
  2. Manufacturing has a higher weightage at 77.6%, up from 75.5%. The weightage of electricity in IIP under the new series has declined to 8% from 10.3%
  3. To reduce volatility in the capital goods segment, data in the new series will now be captured in terms of ‘work in progress’ to better represent growth in the segment and to avoid reporting of production figures in bulk after the completion of production
  4. DIPP updated WPI to the new series by assigning revised weights to the list of items it tracks to better reflect the price situation
  5. It also excluded excise duty while computing WPI to insulate it from changes in fiscal policy such as implementation of the goods and services tax

Effects of these changes:

  1. Economists say the lower CPI and WPI numbers aren’t likely to provide room for any policy rate cut anytime soon due to upside risks to core inflation, which excludes food and fuel
  2. The Reserve Bank of India’s monetary policy committee, with a mid-term retail inflation target of 4%, has maintained a hawkish stance on inflation
  3. Inflation in the next couple of months is contingent upon the monsoon
  4. A poor monsoon could lead food prices to rise and force the central bank to raise interest rates for the first time in more than three years


[op-ed snap] Boom, bust


  1. It’s almost like global markets woke up towards the end of last year, and decided that the despondency and gloom of the last few years was but a bad dream, disconnected from a more buoyant future
  2. Since then, global equities have been surging, repeatedly setting new highs, and capital has been rushing back to emerging market assets
  3. Indeed, India received $9 billion of foreign portfolio inflows in March alone — the highest monthly portfolio inflow on record

What explains this swing from depressive to manic behaviour?

  1. To be sure, the global reflation story was alive and kicking in the first quarter of 2017, with nominal GDP growing by 6% (annualised) for a second successive quarter — a significant jump over the last two years
  2. More importantly, global manufacturing growth is finally on the surge, amidst tantalising signs that global business equipment spending is gaining steam
  3. Advanced economies have suddenly found a second engine of growth: Business spending
  4. Despite the growth lift, markets remain relatively sanguine about global inflation as oil prices are expected to be capped by the impressive supply response from shale
  5. Consequently, even as activity lifts, markets believe that the Fed will remain relatively dovish, reflected in the fact that benchmark US treasury yields retreated to a five-month low in recent days
  6. From an emerging markets’ perspective, this is as good as it gets
  7. They get the benefit of stronger global growth through higher exports, but are shielded from tighter global monetary conditions
  8. Asian exports have surged in recent months, and India’s own manufacturing exports galloped in February and March
  9. Yes, the global economy is experiencing a cyclical lift. But we could be bouncing towards a malaise
  10. The inconvenient truth is that the underlying fundamentals have not changed


  1. In the US, for example, revealed potential growth – the sum of labour force participation and productivity growth – has fallen to an abysmal 1.1% in the last three years
  2. So, for an economy that is near full employment, growth much stronger than this will simply elicit higher inflation and a faster hiking cycle from the US Federal Reserve
  3. Europe is healing but is peppered with political risk in the coming year, starting as soon as this weekend
  4. China has stabilised but at the cost of much-needed re-balancing
  5. Finally, many emerging markets —India included — need to undergo a painful deleveraging and asset resolution process
  6. So, the underlying structural malaise around the world is simply being papered over by a temporary cyclical lift emanating in advanced economies

In the face of economic nationalism:

  1. Global risks have risen under the radar as economic nationalism becomes more pervasive around the world
  2. Much was made about the tightening of H1-B visas and its impact on India
  3. What if the US were to impose a border-adjustment tax (BAT) to help pay for the promised tax cut later this year, especially since the expected fiscal savings from healthcare reform did not materialise?
  4. Either markets will have to brace for a much smaller tax package or accept a disruptive BAT to pay for a bigger tax cut
  5. Both outcomes are likely to be badly received
  6. The BAT is essentially a large tariff on imports into the US and would dramatically accentuate recent de-globalisation trends
  7. It would also result in (potentially significant) pressure on the US dollar to appreciate, thereby creating innumerable complications for policymakers in emerging markets, who will be faced with sharp depreciation pressures of their currencies
  8. Finally, think of US trade protectionism as being akin to a negative supply shock to the economy
  9. The resulting price pressures would likely force the Fed to normalise at a faster pace
  10. In turn, the growth-impinging fallout of more rapid normalisation could simply fuel more economic protectionism and nationalism

Why is this so important for Indian growth prospects?

  1. Because we are far more open — and therefore vulnerable — than we believe
  2. India’s exports to GDP have almost doubled over the last 15 years, from 12% of GDP in 2000 to 20% of GDP currently, having peaked at 25% in 2013
  3. To put this in perspective, India’s exports/GDP are at the same level as Indonesia and twice the level of a Brazil
  4. This has crucial implications for India’s potential growth
  5. India was able to attain 8.8% average growth between 2003 and 2008 because exports were surging at nearly 18% a year in that period
  6. In contrast, domestic consumption grew at just 6.5% and, more generally, has averaged 7% over the last 15 years
  7. In the last five years, however, exports have grown at just 2.6% a year
  8. With exports making up 20% of GDP, even if they were to grow at 5% (twice the level of the last five years), instead of the 18% growth in 2003-2008, we would need to deduct a full two percentage points from the 9% growth during that period
  9. In other words, unless global prospects improve on a sustainable basis or we can find offsetting domestic growth drivers, 7% will become the new 9%, as regards India’s growth prospects

Export products:

  1. Furthermore, what we export today makes us slightly more vulnerable
  2. Gone are the days of primarily exporting textiles, leather, gems and jewellery
  3. Today, engineering goods and pharmaceuticals constitute 60% of the non-oil manufacturing basket
  4. We find that these higher value-added manufacturing exports along with services are also much more sensitive to global growth impulses
  5. So, volumes surge in the good times but collapse in down-cycles
  6. Being more cyclical, they are also more volatile and risky
  7. In particular, the bulk of India’s exports to the US are engineering goods, pharmaceuticals and IT services
  8. Given the high sensitivity of these sectors to the business cycle, any reduction in imports from the US — either through lower growth or increased protectionism — could disproportionally impact India’s exports


It is easy to get carried away in the current environment. Markets are surging, the global data-flow has become more constructive and the past looks like a bad dream. We are bouncing, but towards a malaise (confirmatory signs are in the most recent US retail sales data). Markets may ignore these realities but policymakers cannot. An important read for Mains. Assessment of boom/ recovery in international economy after a long weak period.

[op-ed snap] Sharpen the focus on growth


  1. It is time for policymakers to turn their attention to the major task of accelerating economic growth
  2. As of now the prospects are not encouraging
  3. The Central Statistics Office’s second advanced estimates indicate that the growth rate of GDP for 2016-17 will be 7.1% as against 7.9% in 2015-16
  4. The growth rate of gross value added at basic prices in 2016-17 will be 6.7% as against 7.8% in 2015-16
  5. The growth rates projected for 2016-17 do not capture the impact of demonetisation, which when taken into account may bring down the projected growth rate by around 0.5%
  6. The decline in the growth rate is not a recent phenomenon. It started in 2011-12
  7. The persistence of relatively low growth over a five-year period calls for a critical examination
  8. Even though the new numbers on national income give us some comfort, they do not tell the whole story

Determinants of growth:

  1. The growth rate is determined by two factors — the investment rate and the efficiency in the use of capital
  2. As the Harrod-Domar equation puts it, the growth rate is equal to the investment rate divided by the incremental capital-output ratio
  3. The incremental capital-output ratio (ICOR) is the amount of capital required to produce one unit of output
  4. The higher the ICOR, the less efficient we are in the use of capital

An analysis of past five years:

  1. As we look at the Indian performance in the last five years, two facts stand out
  2. One is a decline in the investment rate and the second is a rise in ICOR; both of which can only lead to a lower growth rate
  3. As growth was coming down sharply initially, the investment rate was falling only slowly, implying a rising ICOR

What factors effect ICOR?

  1. ICOR is a catch-all expression which is determined by a variety of factors including technology, skill of manpower, managerial competence and also macroeconomic policies
  2. Thus delays in the completion of projects, lack of complementary investments in related sectors and the non-availability of critical inputs can all lead to a rise in ICOR
  3. In the short run, the biggest gain in terms of growth will be by getting “stalled projects” moving
  4. A periodic reporting by the government on the progress of stalled projects will be of great help

Declining investment rate:

  1. India’s investment rate reached a peak in 2007-08 at 38.0% of GDP
  2. With an ICOR of 4, it was not surprising that a high growth rate of close to 9.4% was achieved
  3. One sees a steady decline in the investment rate since then
  4. According to the latest estimates, the gross fixed capital formation rate fell to as low as 26.9% in 2016-17
  5. With this investment rate, it is simply impossible to achieve a growth rate in the range of 8 to 9%

Why did the investment fall?

  1. In 2011 and 2012, in discussions on the Indian economy, the one phrase that used to be bandied about was “policy paralysis”, pointing to the inability of the government to take policy decisions because of “coalition compulsions”
  2. There was a sense of uncertainty created in the minds of investors
  3. The external environment was also not encouraging
  4. The growth rate of the advanced economies remained low and the recovery from the crisis of 2008 was tepid which had an adverse impact on exports
  5. However, India benefited by large capital inflows except in 2013
  6. For almost three years beginning 2010, India had to cope with a high level of inflation which also had an adverse impact on investment sentiment
  7. Once the growth rate starts to decline, it sets in motion a vicious cycle of decline in investment and lower growth


  1. The standard prescription, whenever private investment is weak, is to raise public investment which can take a longer term view
  2. In the best of times, public investment has been 8% of GDP
  3. The Central government’s capital expenditures even after some increase in the last two years, is only 1.8% of GDP
  4. About 3 to 4% of GDP comes from public sector undertakings and the balance from State governments
  5. What is needed now is for public sector undertakings to come out with an explicit statement indicating the extent of investment they intend to make during the current fiscal
  6. It is also necessary to enhance private investment, and that too private corporate investment
  7. During the high growth phase, corporate investment reached the level of 14% of GDP
  8. A recent study shows that the total cost of projects initiated by the corporate sector has come down from ₹5,560 billion in 2009-10 to ₹954 billion in 2015-16

The way forward:

  1. Three things need attention
  2. First, reforms to simplify procedures, speed up the delivery system and enlarge competition must be pursued vigorously
  3. Some significant steps have been taken in this regard in recent years such as moving forward on the GST Bill, passing of the Bankruptcy Act, and enlarging the scope of foreign direct investment
  4. Second, all viable “stalled” projects must be brought to completion
  5. Third, financial bottlenecks need to be cleared
  6. The banking system is under stress. The non-performing loans of the system have risen and are rising. This has squeezed the profitability of banks with some showing loss
  7. More distressing is the minimal flow of new credit
  8. The problem is often referred to as the twin balance sheet problem
  9. If corporate balance sheets are weak, automatically the banks’ balance sheets also become weak
  10. At least some part of the accumulation of bad debts has been due to the slowdown of the economy. The old saying is “bad loans are sown in good times”
  11. Asset restructuring companies are part of the solution and we have some experience of them

Long-term lending:

  1. We should have institutions focussed on long-term lending such as IDBI and ICICI as they were before 1998
  2. Investment, as they say, is an act of faith in the future. If there has to be investment resurgence, it is necessary to create the climate which promotes this faith


This op-ed has details on terms like ICOR that are important. The numerical data may be avoided, but this op-ed will certainly raise the general understanding about Investment in economics.

[op-ed snap] Demonetisation and the GDP: knock-out punch or mild tap?


  1. Estimates from the Central Statistics Office (CSO) peg FY17 GDP growth at 7.1%
  2. But commentators who believe that the economy has suffered a debilitating blow from the note ban are not willing to rest their case here
  3. They have flagged a long list of issues with these GDP numbers, apart from hinting that the numbers are fudged

Closer analysis of CSO’s estimates:

  1. A closer analysis of the CSO’s estimates suggests that, contrary to perception, they do factor in the impact of the note ban
  2. While India’s GDP estimation method could certainly do with improvements, the CSO has been both transparent and consistent with its methods, allowing little room for suspicions of window-dressing

Why so high?

  1. First, the sceptics ask, how did the GDP growth for FY17 turn out to be so high?
  2. The 7.1% number is unchanged from the CSO’s initial estimates and is also well above the 6.5%-6.8% growth estimated by most private forecasters
  3. Is the CSO implying that vacuuming up 86% of cash in circulation had no impact on the economy?
  4. Well, that is a wrong reading of the numbers
  5. To gauge the actual level of economic activity, Gross Value Added (GVA) is the more pertinent number than GDP
  6. The GVA measures the value of output created by different segments of the economy. Indirect taxes (minus subsidies) are added to it, to arrive at the GDP

In terms of GVA:

  1. The GVA for FY17, as per CSO data, does show a dent from demonetisation
  2. At 6.7%, it has registered a sharp decline of 110 basis points from 7.8% (revised estimate) for FY16
  3. While GVA growth is pretty close to private forecasts, what lifted the GDP is the strong 3% surge in indirect taxes that the CSO estimates for this fiscal
  4. This is a plausible number, given that the Centre’s indirect tax collections already surged by 25% in April-December 2016, powered by higher excise duty on fuel and service tax

Reading the economy after note ban:

  1. So the CSO does admit that economic activity has been impacted by the note ban
  2. Two-wheeler sales collapsed by 22% year-on-year in December, banks reported anaemic loan growth at 5%, cement despatches fell by 9% and realtors saw a 40% dip in home sales
  3. But given that the economy is made up of literally hundreds of products and sectors, it is well within the realm of possibility that the economy did well even while these indicators slowed
  4. For instance, for the same December month, steel output grew by 15%, power generation surged by 6% and refinery output expanded 6.4%
  5. If bank credit slumped, companies doubled their borrowings from the bond market
  6. Manufacturing saw its GVA growth slide from 12.8% in Q3 2015 to 8.3% in Q3 2016. Finance, real estate and services saw growth collapse from 10.4% to 3.1%. Construction weakened from 3.2% to 2.7%
  7. But making up for these was the 6% rebound in agriculture (2.2% shrinkage last year), 6.8% increase in electricity, gas and water supply and a bumper 11.9% hike in ‘public administration, defence and other services’ which lifted the GVA
  8. Agricultural output bounced back due to a good monsoon after consecutive drought years
  9. Electricity generation was up on better coal availability
  10. ‘Public administration’ reflects higher government payouts on salaries and pensions after the Seventh Pay Commission

Listed Companies:

  1. December quarter results from listed companies also provide independent confirmation that the big picture wasn’t much dented by the note ban
  2. Commentary from listed firms suggests that urban discretionary purchases bounced back quickly as consumers switched to digital payments
  3. Commodity industries, helped by global price rebound, did very well this quarter
  4. In some sectors, business shifted from the unorganised to organised players due to digital payments
  5. Analysts also suspect that, in some cases, companies mopped up demonetised notes from their distribution channels and pumped them with inventory instead. (This would show up as ‘sales’ in the company’s books and as ‘output’ in GDP estimates)

Informal left out?

  1. A third criticism of the CSO estimate is that it fails to capture the performance of the informal economy, which clearly bore the brunt of the note ban
  2. This criticism is partly valid
  3. Over 40-45% of the Indian economy is informal and hardly any data points relating to it are available at a quarterly frequency
  4. CSO arrives at its quick estimates of the GDP is to take the available data from the organised sector and extrapolate it to infer informal activity
  5. GVA for agriculture is guesstimated based on kharif and rabi crop prospects
  6. The GVA for services is inferred from sales tax collections, deposits and credit, telephone connections and so on
  7. Manufacturing GVA uses the index of industrial production and listed company filings
  8. It is quite likely that the quarterly GVA estimate, which mainly uses data from the formal sector, painted a rosier picture of growth than the ground reality
  9. The methodology for estimating informal sector performance and GDP revisions are well-documented and disclosed on the Ministry of Statistics and Programme Implementation website


An important op-ed regarding demonetisation. Brush up your macroeconomic definitions.

[op-ed snap] No time for complacency


  1. GDP growth estimates in the third quarter; quite at variance with what the critics of the demonetisation exercise had assumed
  2. No doubt there could be correction in the fourth quarter, primarily to factor the impact of the informal sector

Data of informal sector:

  1. It has never been easy to capture real time data on economic activity in the informal sector
  2. It is recognised that apart from leads and lags, the conclusions are derivative using surrogates which detract both from their timeliness and accuracy
  3. This is not a new problem and past estimates of GDP numbers have also suffered from multiple ex-post corrections as and when data becomes unavailable

Digitisation dividend:

  1. Moving towards greater digitisation and reducing dependence on cash transactions will accelerate the pace of financial inclusion and formalisation of the informal economy
  2. The GDP estimates are supported by two other crucial independent international assessments last week
  3. The first from the Article IV Consultations 2017 of the International Monetary Fund (IMF) and the second from the biennial Economic Survey of the Organisation for Economic Cooperation and Development (OECD). Both these have distinct commonalities
  4. Both conclude that Indian economic growth is robust, propelled by consumption demand and accelerated structural reforms

Short term challenges:

  1. The growth projection of 5% (the higher side of the 6.75-7.5% range forecasted in this year’s Economic Survey) for the next fiscal is however contingent on resolving several short-term challenges
  2. First, the OECD’s survey raises concerns about India’s large interest payments due to the high levels of public debt as compared to other emerging economies
  3. This is in consonance with the suggestions of the Fiscal Responsibility and Budget Management (FRBM) Review Committee, which projects a declining debt-to-GDP ratio to approximately 60% by 2023
  4. Second, the health of the banking and financial sector
  5. The twin balance sheet problem of both corporates and banks, highlighted in the Economic Survey, has a relationship but would need differentiated actions
  6. Easing one will no doubt ameliorate the other but policy frameworks are not necessarily symmetrical
  7. The concept of a centralised Public Sector Asset Rehabilitation Agency (PARA) envisaged as a ‘Band Bank’ spin-off model has gained some traction
  8. The classic issues of not confusing between the stock and the flow would need to be addressed

Rule-based management:

  1. Creating an institutional framework or mechanism to seek broader consensus has some advantages
  2. This also ties up with what the OECD’s Economic Survey and the IMF’s report describe as a progressive move to a more rule-based management of the economy
  3. The constitution of the Monetary Policy Committee, GST Council, Banks Board Bureau, are robust examples
  4. The problem is somewhat complicated by the Reserve Bank acting as the principal banking ombudsman with inherent conflict of interest
  5. In the long run, we need an alternative mechanism for the banking sector
  6. This will not happen overnight; far-reaching structural changes need perseverance and tenacity

The GST transformation:

  1. Balanced regional development and combining growth with employment has received extensive attention in both these reports
  2. The GST regime and decisive move towards formalisation of the economy using technology would reduce disparities
  3. Local government entities need greater empowerment
  4. Making grants available in two parts — a basic grant and performance grant — will make a difference
  5. Enabling local bodies to impose and realise property taxes and other levies would strengthen their financial viability
  6. The 15th Finance Commission, yet to be constituted, while reviewing the implementation of past recommendations can consider incentivising States on empowerment and delegation of powers to local bodies
  7. Seeking to replicate best governance practices in labour and product markets among the States could also prove beneficial in mitigating inter-State growth divergence
  8. There are other recommendations in the IMF and OECD reports relating to education, health, and tax changes, to name a few, which deserve separate treatment


The future may look bright but pursuing and deepening structural reforms is the way forward. Albert Einstein once said, “We cannot solve our problems with the same thinking we used when we created them.” an important op-ed for Mains.

[op-ed snap] Resilience reaffirmed


  1. The resilience of India’s economy has been reaffirmed by the latest data
  2. Both the third-quarter and full-year growth estimates belying widespread concerns that the November 8 decision to withdraw high-value currency notes would significantly dampen momentum

GDP values:

  1. The Central Statistics Office stuck with its January advance estimate for gross domestic product in the 12 months ending March 2017 to post a healthy 7.1% growth
  2. It projected GDP to have expanded 7% in the fiscal third quarter
  3. This reflects only a marginal slowdown from the 7.3% registered in the preceding three-month period

Growing economy:

  1. This expansion occurred in the October-December quarter, when about 86% of the currency in circulation in the form of ₹500 and ₹1,000 notes was abruptly sucked out of the system
  2. It potentially resulted in what the Economic Survey termed an “aggregate demand shock” and the Reserve Bank of India referred to as “demand compression associated with adverse wealth effects”
  3. Undergirding this better-than-expected performance were the agriculture, mining and manufacturing sectors and, interestingly, government expenditure

Growing sectors:

  1. The overall gross value added (GVA) in the third quarter is estimated to have increased by 6.6%
  2. Agricultural GVA in the period is projected to have surged 6%
  3. This is a sharp quickening from the second quarter’s 3.8% pace and in stark contrast with the 2.2% contraction in the earlier year
  4. Near-normal monsoon in 2016 helped lift kharif crop output substantially
  5. Mining and manufacturing GVA too appear to have done far better than in the preceding quarter, bucking the so-called ‘demonetisation drag’ to post 7.5% and 8.3% growth, respectively
  6. Public administration, defence and other services clocked double-digit GVA growth: at 11.9%, a robust acceleration from the 7.5% in the third quarter of 2015-16

Lagging sectors:

  1. It is only the financial, real estate and professional services segment, which is linked to consumption that lagged
  2. The pace of expansion is more than halving from the July-September quarter to a modest 3.1% increase
  3. Chief Statistician T.C.A. Anant has said the government will continue to keep evaluating the numbers in relation to the impact of demonetisation
  4. The CSO trimmed its full-year GVA growth estimate to 6.7% from the 7% projected in January

Cautions taken:

  1. The Survey had also made a cautionary assertion that recorded GDP growth would “understate” the overall impact of demonetisation
  2. The most affected parts of the economy- informal and cash based are either not captured in the national income accounts
  3. Or their measurement is based on formal sector indicators


[op-ed snap] In India, diverging incomes despite equalising forces


  1. If India has to do well, the States as a whole must do well
  2. It also requires that large differences in economic development between them must narrow over time
  3. Economists call this narrowing — reduction in relative disparities — “convergence”

Economic Survey:

  1. In the 2000s, while standards of living (measured in terms of Gross State Domestic Product or consumption) per capita increased in all the States, the disparities among them also increased
  2. In other words, there was divergence across the States instead of convergence
  3. The first puzzle stems from the international comparisons: across countries disparities are declining in contrast to India
  4. The second puzzle is a temporal one: the tendency towards disparities within India has been strengthening, not weakening, over time

Bucking a global trend:

  1. Convergence occurs when a State that starts off with a lower level of per capita GDP sees faster growth of per capita GDP in the future so that it catches up with better-performing States
  2. Poorer countries are catching up with richer countries, the poorer Chinese provinces are catching up with the richer ones
  3. But in India, the less developed States are not catching up; instead they are, on average, falling behind the richer States
  4. Internationally, growth rates of per capita GDP widened at least since the 1820s with poorer countries growing slower than richer countries, leading to the basic divide between advanced and developing countries
  5. Since 1980 this long-term trend was reversed and poorer countries started catching up with richer ones
  6. In stark contrast, there continues to be divergence within India or an aggravation of regional inequality
  7. But things changed for both the world and China in the 2000s; however they did not change for India
  8. This was despite the promise that less developed States such as Bihar, Madhya Pradesh and Chhattisgarh had started improving their relative performance
  9. But the data show that those developments were neither strong nor durable enough to change the underlying picture of divergence or growing inequality

How does Convergence happen?

  1. Convergence happens essentially through trade and through mobility of factors of production
  2. If a State/country is poor, the returns to capital must be high and should be able to attract capital and labour, thereby raising its productivity and enabling catch-up with richer States/countries
  3. Trade, based on comparative advantage, is a surrogate (substitute) for the movement of underlying factors of production
  4. A less developed country that has abundant labour and scarce capital will export labour-intensive goods (a surrogate for exporting unskilled labour) and import capital-intensive goods (a surrogate for attracting capital)
  5. The findings suggest that India stands out as an exception
  6. Within India, where borders are porous, convergence has failed whereas across countries where borders are much thicker (because of restrictions on trade, capital and labour) there is a convergence dynamic
  7. The Economic Survey shows that trade within India is quite high and mobility of people has surged dramatically- almost doubled in the 2000s
  8. These indicate that India has porous borders- reflected in actual flows of goods and people- and that porosity has been increasing
  9. Yet over time, divergence has been increasing rather than narrowing
  10. The driving force behind the Chinese convergence dynamic has been the migration of people from farms in the interior to factories on the coast, raising productivity and wages in the poorer regions faster than in richer regions

A governance deficit?

  1. One possible hypothesis is that convergence fails to occur due to governance or institutional traps
  2. If that is the case, capital will not flow to regions of high productivity because this high productivity may be more notional than real
  3. Poor governance could make the risk-adjusted returns on capital low even in capital-scarce States
  4. Moreover, greater labour mobility or exodus from these areas, especially of the higher skilled, could worsen governance
  5. A second hypothesis relates to India’s pattern of development
  6. India, unlike most growth successes in Asia, has relied on growth of skill-intensive sectors rather than low-skill ones
  7. If the binding constraint on growth is the availability of skills, there is no reason why labour productivity would necessarily be high in capital-scarce States
  8. Unless the less developed regions are able to generate skills (in addition to providing good governance), convergence may not occur

The move towards economic divergence across India in the face of the equalising forces of trade and migration is a deep puzzle waiting to be unravelled.


The op-ed is important for understanding the economic scenario of the country.

India trails Pakistan as it slips to 143rd rank in economic freedom index: report

  1. Source: Index of Economic Freedom report, annual publication by The Heritage Foundation, a top American think tank
  2. India: Ranked a dismal 143, behind its several South Asian neighbours including Pakistan, as progress on market-oriented reforms has been “uneven”
  3. Also, India’s overall score of 52.6 points is 3.6 points less than that of last year, when India ranked 123rd
  4. Issues: Despite India sustaining an average annual growth of about 7% over the past five years, growth is not deeply rooted in policies that preserve economic freedom
  5. India has been put in the category of “mostly unfree” economies
  6. The state maintains an extensive presence in many areas through public-sector enterprises
  7. A restrictive and burdensome regulatory environment discourages the entrepreneurship that could provide broader private-sector growth
  8. India has technology and manufacturing sectors as advanced as any in the world as well as traditional sectors characteristic of a lesser developed economy
  9. Extreme wealth and poverty coexist as the nation both modernises rapidly and struggles to find paths to inclusive development for its large and diverse population
  10. India is a significant force in world trade, the report noted, but corruption, underdeveloped infrastructure, and poor management of public finance undermine overall development
  11. Foreign policy: However, the report credited Prime Minister Narendra Modi with “reinvigorating” India’s foreign policy
  12. Toppers: Hong Kong, Singapore and New Zealand
  13. South Asia: Only Afghanistan (163) and Maldives (157) were ranked below India
  14. Nepal (125), Sri Lanka (112), Pakistan (141), Bhutan (107), and Bangladesh (128) surpassed India in economic freedom
  15. China with a score of 57.4 points – an increase of 5.4 points compared to previous year – was placed at 111 position


Such reports can be quoted in mains to drive home the points concisely. Note the issues with reforms.

[op-ed snap] The bumps ahead


For an economy that relies on public investment and private consumption to revive private investment and growth, the last round of official statistics on prices and industrial activity signal testing times ahead


  1. Industrial output plummeted by 0.4% in December 2016, led by a 2% decline in manufacturing (just five of 22 industries registered positive growth)
  2. A 6.8% decline in consumer goods
  3. Wholesale prices have risen at the fastest pace in two and a half years this January, at 5.25%
  4. This is particularly noteworthy since the pace of price rise at the consumer level slowed to 3.2% in the same month
  5. By contrast, consumer prices had risen fractionally faster (3.4%) than wholesale prices (3.39%) in December
  6. This divergence in wholesale prices and the prices consumers pay is unlikely to last long — with the former expected to stay firm for a few months to come, the latter will eventually catch up

RBI’s policy:

  1. The RBI may no longer track wholesale prices for monetary policy purposes
  2. Food prices are not a problem thanks to a normal monsoon
  3. But as RBI Governor Urjit Patel pointed out, consumer prices of non-food articles and fuel have been hard to contain since September 2016
  4. Such sticky core inflation is driving the latest wholesale price surge with fuel and power rising a sharp 18.14%
  5. Manufactured products are growing by almost 4% (thanks not to demand but upward commodity prices) and minerals by 1%

Higher oil prices:

  1. A rise in oil prices beyond $65 a barrel would be a cause for concern even if there is a belief that higher shale gas output will check a further spike
  2. This poses a risk to the Centre’s fiscal arithmetic as well as India’s growth hopes
  3. Higher oil price-led inflation will bring back into focus the high excise duties on petroleum products that have boosted the Centre’s tax kitty over the past couple of years
  4. Those duties were raised when prices were low to protect consumers from an upward price shock, the government had argued
  5. Cutting those duties will upset revenue calculations, but leaving them untouched will impose its own costs
  6. The RBI has cited ‘transitory effects of demonetisation on inflation and output’ as the rationale to hold interest rates and shift from an accommodative monetary stance to ‘neutral’

If inflation spikes in the coming months, it could further crimp consumer spending, with obvious consequences for the investment cycle and job creation.


The op-ed is important for understanding the economy’s condition.

[op-ed snap] The building blocks of economic policy

Five themes that should guide economic policy:

Market failures:

  1. The policy should focus on market failures
  2. Free markets work in enhancing prosperity but there are areas where state intervention is needed
  3. However, in India, the state is dominant in sectors where it is not required and lacks capacity in areas where the intervention is actually desired

Perspective of general equilibrium:

  1. Often, policy changes are made with narrow objectives, focusing on one sector or area
  2. For example, in the context of the budget, India has a history of random tinkering with tax rates to promote one sector or the other, which has resulted in distortions
  3. The most recent example is the suggestions made by the committee of chief ministers on digital payments—a host of fiscal measures that will further distort the tax system. The government should avoid such ideas

Efficient Spending:

  1. There are demands for increasing spending in various sectors of the economy and they are often legitimate as India needs improvement in a number of areas
  2. However, public spending has a cost
  3. Kelkar and others have calculated that the marginal cost of one rupee of public spending to society is around Rs3
  4. Therefore, the government should spend carefully as the cost to society is much higher than what gets recorded in the books

Individuals, including politicians, are driven by incentives:

  1. Policy changes should factor in the possibility that people can change their behaviour
  2. Insights from public choice theory show that politicians and bureaucrats also work in self-interest
  3. One of the reasons why India has had a high fiscal deficit bias is because higher government spending can lead to higher growth in the short run and could electorally benefit the ruling party
  4. Therefore, it’s important to build checks in the system
  5. An agency like the US Congressional Budget Office is needed, which independently reviews government finances so that the public in general is better informed. This will help reduce fiscal profligacy

Promote Competition:

  1. A high level of competition is desirable in a market economy as it leads to efficient allocation of capital
  2. The government has done well by getting the bankruptcy code passed as it will facilitate the closing of firms and the shifting of capital to more productive sectors of the economy
  3. Competition is the biggest reason to promote privatization of public sector companies as they distort the market because of access to government funding
  4. Movement on privatization has been slow for a number of years due to a variety of reasons


These broad principles in policymaking will help build credibility and lead to better economic outcomes in the medium to long run. The op-ed is important for basic understanding of macro-economic policies.

CEA questions rating agencies’ ‘conduct’

  1. Context: The Economic Survey 2016-17
  2. Chief Economic Advisor: Denounced the “astonishingly inconsistent” conduct of ratings agencies such as Standard & Poor’s
  3. There is a need to question such companies and the manner in which they had rated India over the last few years
  4. A section of the Economic Survey’s first chapter dealt with rating agencies’ ‘flawed outlook towards India’
  5. This box is called ‘poor standards’ because Standards & Poor’s said last year that there was no way they could upgrade India because of its low GDP and fiscal deficit
  6. India’s achievements: The passage of the Goods and Services Tax Constitutional Amendment Bill and the Bankruptcy Bill
  7. Anomaly in rating: Despite all these achievements, it is very interesting that the ratings agencies have not reflected this
  8. If you look at how they have rated China and India, it is absolutely astonishingly inconsistent. China is about six grades above us in the ratings, at AA-, and BBB- for India
  9. Risk indicators: Yet, since 2008 China had fared poorly on two key risk indicators — growth and credit growth — with its GDP growth slowing dramatically and it’s credit to GDP ratio rising sharply
  10. Everybody acknowledges that this is the single biggest risk for the Chinese economy and the world economy
  11. India’s economy has moved in the opposite direction and yet how did the ratings agencies behave?
  12. They upgraded China and despite all these risky developments they didn’t downgrade them, whereas for India, the rating was maintained six notches below China


This is an important issue in international economics and flawed behaviour of credit rating agencies for mains.

World Bank cuts India’s FY17 growth forecast to 7%

  1. What? The World Bank has lowered its growth forecast for India to 7 per cent from 7.6 per cent in 2016-17
  2. Why? Slowdown in consumption and manufacturing due to demonetisation
  3. Also an ongoing decline in private investment and credit constraints due to impaired bank balance sheets
  4. Prospects: The World Bank’s Global Economic Prospects January 2017 report added that the Indian economy is subsequently set to recover its growth momentum, with growth rising to 7.6 per cent in FY18 and further strengthening to 7.8 per cent in FY20


The reason for slow growth is not just demonetisation as it is being portrayed. It gives a broader outlook of growth.

Indians’ debt increasing, highest credit uptake among urban Scheduled Castes

  1. Source: A comparison of National Sample Survey Office (NSSO) data from the two years- 2002, 2012
  2. Findings: During the decade 2002-12, credit uptake and the resultant debt burden among Indians grew at a phenomenal pace
  3. The growth was especially fast among urban Scheduled Castes (SCs) and Scheduled Tribes (STs)
  4. Why the trend? Increased consumption has fuelled increased borrowing
  5. The borrowings are substantially higher in the SC community because of entitlement-driven loans where sops are provided to the community
  6. The figures suggest that the community is catching up with others when it comes to consumption
  7. However, the fact that the bulk of the money is spent in meeting household expenses rather than in wealth generation is a worrying aspect
  8. The money borrowed being spent on meeting household expenses was 60% in rural areas in 81% in urban areas in 2012


The NSSO, under the union government’s Ministry of Statistics and Programme Implementation, is the largest organisation carrying out socio-economic surveys in India

India’s external debt rises to $486 billion

  1. India’s external debt at the end of March 2016 stood at $485.6 billion
  2. It is an increase of 2.2% from over its level at end-March 2015
  3. Factors: It is largely driven by the increase in long-term external debt, particularly NRI deposits
  4. Of total external debt, the Govt’s share stood at 18.9% or $93.4 billion at end-March 2016 compared to 18.8% ($89.7 billion) at March 2015
  5. Manageable: India’s external debt has remained within manageable limits in 2015-16
  6. Indicators: Increase in foreign exchange reserves to debt ratio to 74.2%, the external debt-GDP ratio of 23.7% and fall in short term debt to 17.2%

WPI rises to 20-month high

  1. News: Wholesale Price Index (WPI) inflation accelerated in June from the previous month, touching a 20-month high as prices of fruits, vegetables and cereals continued to rise
  2. WPI inflation for June accelerated to 1.6% from 0.8% in May
  3. The rise in the WPI was driven largely by inflation in the food articles segment
  4. Office of the Economic Adviser, Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce, calculates the WPI index
  5. Base year: 2004-05

Retail inflation quickens; IIP up

  1. News: A sharp jump in the prices of vegetables drove up food costs and fanned consumer price inflation to its fastest pace in 22 month
  2. Consumer Price Inflation (CPI) was 5.77% year-on-year in June 2016
  3. The Index of Industrial Production (IIP) recorded a 1.2% year-on-year growth in May 2016, due to high growth in consumer durables (washing machines, televisions, refrigerators) output
  4. The Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation (MOSPI) releases both CPI and IIP data
  5. CPI: Base year – 2012; Released on a monthly basis for urban, rural, and combined
  6. IIP: Base year – 2004-05; Released on a monthly basis with a time lag of 6 weeks

Manufacturing activity picks up in June

  1. Manufacturing activity saw a pick up in June after two months of sluggish growth, according to a private survey
  2. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose to 51.7 in June from 50.7 in May
  3. Indian manufacturers raised production at a faster rate during June, supported by a stronger increase in new business inflows
  4. The PMI data suggest that external demand remains lacklustre even as domestic demand continues to support growth, led by consumption

Core sector growth at 2.8%

  1. News: 8 core sectors of the economy posted a 2.8% growth in May, due to a decline in output of refinery and steel products
  2. Core sectors: Crude oil, natural gas, refinery products, electricity, coal, cement, fertiliser, steel
  3. These 8 sectors, comprise almost 38% of the weight of items included in the Index of Industrial Production (IIP)

Core inflation higher than desired: Rajan

  1. Context: RBI Governor Raghuram Rajan on inflation condition in India
  2. Inflation: India’s core inflation remains a bit higher than policymakers would like
  3. Consumer prices rose last month at a more-than-expected 5.39% annual rate, up from 4.83% in March
  4. It was the first increase in the retail inflation rate since January
  5. Economic growth: However, the economy’s recovery should accelerate with a good monsoon
  6. Growth also seems to be ticking higher & India’s economy is among the world’s fastest growing, at 7 percent-plus
  7. However, the 8 percent level needed to alleviate poverty remains elusive

Resistance to reforms vanishing: Jaitley

  1. Context: Jaitley was speaking at US think tank on India’s growth prospects
  2. Opinion: India is undergoing the most critical and significant reforms after 1991, in terms of unleashing its productive forces
  3. The 7.5% growth looks impressive but considering India’s requirements it is “not good” enough
  4. Approach: The govt had adopted 3-pronged approach – being decisive, consistent and transparent
  5. Measures: Tackled corruption, eased procedures and empowered the states to take decisions
  6. The govt kept significant part of the revenue gained and diverted it to social sector and infrastructure

ADB lowers India’s growth forecast to 7.4 % for 2016-17

  1. News: Asian Development Bank has lowered India’s growth forecast to 7.4 per cent from an earlier estimate of 7.6 per cent for the financial year
    ending March 31, 2017
  2. Context: Because failure of the govt to push through the GST reform bill and the Land and Labour Reforms
  3. Relevance: Potential growth can be raised if it can successfully implement reforms including unifying tax regime, improving labour market regulations, and opening further to FDI and trade
  4. Report: Asian Development Outlook 2016
  5. Challenges ahead: India’s Challenges to finance the infrastructure, needs delivery of sustainable growth, with funding requirements estimated at around $200 billion a yr through 2017-18

Rising working population favours growth

  1. Context: DBS Group Research report ‘Global growth: what is potential and where is it going?’
  2. Global growth: Today, it is running at or a little above potential, & potential is headed down thus growth will be slower
  3. Why? Productivity and population growth have slowed a lot & will continue to fall rapidly in the years ahead
  4. India: Productivity and population growth in working age group puts India in a better place than Asian

Competitive federalism in the state bond market

  1. Context: Data from this week’s auction of state government bonds (a.k.a. state development loans)
  2. Finding: Markets are starting to differentiate between states based on their individual credit quality
  3. Usually: It is a routine affair which gets far less attention than central government bond auctions
  4. Change: but this time it caught the eye of market watchers
  5. Why? The yields being demanded by the markets for state bonds jumped considerably
  6. There was a wide difference between the yields demanded on bonds of different states

Consensus in pre-budget all party meet

  1. Context: An all party meet was held to discuss issues for Budget session so that the session goes productive
  2. The consensus: on the need to allow Parliament to function smoothly
  3. The change: It signals a rethink by political parties, who let their differences and the resulting disruptions to cause a washout of the previous 2 sessions
  4. Opposition stand: will not allow the passage of any contentious bills in the first half of the session, except those on which there is a consensus

Budget to bet on spurring growth

  1. Context: Union Budget for 2016-17 will primarily focus on stimulating growth without deviating too much from the fiscal deficit target set by Finance Minister in previous Budget
  2. Fiscal deficit target: 3.9 per cent of GDP for 2015-16, paring it further to 3.5 per cent for 2016-17 and 3 per cent for 2017-18
  3. Economic scene: Economic recovery is tentative and private sector investments remain elusive
  4. What’s clamour? Government to relax its deficit targets, to pump prime the economy via enhanced public investments
  5. Use of Twitter: For budget, the govt. invited suggestions from citizens through Twitter for the first time
  6. Some of the new suggestions are administrative in nature and can be examined at any point in the year

Industrial growth in FY14 was higher in poorer states

  1. Industrial growth in the traditionally weaker states of Bihar, Odisha and Chhattisgarh in 2013-14 dwarfed that of their more developed counterparts
  2. Data released as part of the Annual Survey of Industries showed Bihar, Odisha and Chattisgarh had grown the most industrially in FY14
  3. This is in a year when the economy had to cope with the euro crisis and its effects on Indian industry
  4. Bihar at 97.5 per cent had the highest growth but measured from the country’s steepest decline the previous year

Core sector output recovers, grows 0.9 per cent in Dec.

Fertiliser, coal, cement output and electricity production contribute.

  1. The output of 8 core industries — that comprise almost 38 per cent of the weight of items included in the Index of Industrial Production (IIP) — could record only a 0.9 per cent growth in Dec.
  2. Due to 4.1 per cent contraction in output of crude oil, 6.1 per cent contraction in natural gas and 4.4 per cent shrinkage in steel.
  3. Data on the core infrastructure industries has clearly been disappointing as growth remained sub one per cent in December after a negative blip in November.
  4. During April-December 2015 period this fiscal, the output of these eight sectors slowed to a 1.9 per cent growth from 5.7 per cent growth in the same period last fiscal.

Govt lowers GDP growth rate to 7.2%

  1. Govt has marginally revised the economic growth for 2014-15 to 7.2% from earlier estimate of 7.3%.
  2. It has taken into account the latest data on agriculture and industrial production.
  3. GDP growth rate for 2013-14 has also revised downwards to 6.6% from earlier estimate of 6.9%.
  4. There is a downward revision in terms of Gross Value Added for 2014-15 on account of subdued performance of secondary sector.
  5. GVA as a concept was introduced by the CSO last year to measure value addition in the economy.

Govt. to back state-run banks’ capital needs: Sinha

The government reiterated its commitment to support public sector banks’ capital needs at a time when bad loans are eroding their capital and putting pressure on profits.

  1. Government is going to support public sector banks and fully support all the Basel-III requirements.
  2. The banks are going to be fully supported as far as their capital adequacy in concerned.
  3. The RBI is forcing banks to clean up their balance sheet by asking the lenders to make adequate provisions for bad loans, which were unidentified hitherto.
  4. The banking regulator has prepared a list of borrower accounts, which has to be classified as non-performing.
  5. The government said it would provide Rs.25,000 crore in this fiscal year and an additional Rs.25,000 crore next fiscal year.

PMO seeks industry inputs to spur growth

The performance of 8 core sectors in November is worrying, with their output shrinking.

  1. The PMO has sought industry recommendations on reviving and sustaining the growth momentum in the core sectors of manufacturing and infrastructure.
  2. Industry had urged finance minister Jaitley to spur domestic demand in the Budget in order to revive private sector investments.
  3. To sustain the reforms process in specific sectors and assess policy issues beyond the short-term imperatives which can be addressed in the Budget.
  4. Though industrial output has grown at 3.9 per cent from April to November 2015, it remains volatile.
  5. After surging 9.8 per cent in October last year, the index of industrial production fell by 3.2 per cent in November — its worst performance since October 2011.

Act local

The best way to deal with global market panic is to get domestic policies right.

  1. The BSE Sensex has plunged below the level when Modi secured a stunning victory in elections .
  2. Rupee has fallen below Rs 68 to the dollar for the first time since August 2013 (time of taper tantrum)
  3. This volatility owes more to global factors, especially a deepening Chinese slowdown, collapse in commodity prices and US Fed normalisation of its monetary policy.
  4. US Federal Reserve embarking on a “normalisation” of its monetary policy.
  5. In real effective term, rupee has actually strengthens against a basket of 6 currencies after adjusting for inflation differential.
  6. Weakening against the dollar is, thus, a sign of the latter’s strengthening in an uncertain global environment where the greenback has become every investor’s safe-haven asset.
  7. Our focus should be on improving the domestic investment environment and preserving macroeconomic stability.

Dealing with the slowdown

IMF forecast provides India a comparative edge in wooing the global investor community.

  1. IMF has cut the global growth forecast to 3.4 % In 2016, 0.2 % below its forecast of October.
  2. Growth forecast for China unchanged at 6.3 per cent and for India at 7.5 per cent.
  3. Slowdown in China with it posting the slowest growth yet in 25 years and weak commodity prices are indicative of pronounced global weakness.
  4. The year saw turbulence in the Chinese economy, with heavy capital outflows and stock market volatility which might exacerbate in the coming year.
  5. Containing the spillover effects of volatility (exchange rate plus point no. 4) in Beijing would be a big challenge for planners in India.
  6. But it is essential for the government to coherently address the growing anxiety among domestic consumers and stem, if not fully reverse, the demand slump.

Index of Industrial production

  1. IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products.
  2. During a given period with respect to that in a chosen base period.
  3. Compiled and published monthly by the Central Statistical Organisation (CSO) 6 weeks after the reference month ends.
  4. Core sector weightage is 38%
  5. Calculated by using Laspeyres’ formula.
  6. Recent revision of IIP released by CSO with 2004-05 as the base year comprises 682 items divided into 3 groups with weightage –
  • Mining – 15%
  • Manufacturing – 75%
  • Electricity – 10%

Rise and fall

2 data sets point to tenuous nature of India’s economic recovery.

  1. First, industrial production(IIP) contracted in November to the lowest level in over 4 years with manufacturing sector esp capital goods output — a barometer of investment — to share much of the blame .
  2. CPI rose to 5.6 per cent for December, though it remains within the RBI’s January target level of 6 per cent. The main reason here was the higher food price inflation.
  3. Data paints a contradictory picture. Anaemic industrial performance with rising inflation rather than falling inflation, which is not the case.
  4. CPI continues to be relatively high and “sticky”, despite the sharp fall in commodity prices globally, especially crude.
  5. Challenges – if the government tries to jump-start the economy through higher expenditure, it will worsen its fiscal deficit, resulting in increased inflation and put pressure on the RBI to raise interest rates.
  6. If the RBI, on the other hand, tries to reduce interest rates in order to incentivise economic activity, it may further weaken its grip over the CPI inflation targets it has set itself.
  7. Quality of its expenditure is key.
  8. Government must ring-fence capital expenditure and restart private capex cycle .
  9. Reaching out to rural India, where demand has collapsed.

Tax on seed funding to be scrapped

According to estimates by the team of officials working on the Start Up India programme, start-ups in the country received around 9 billion dollars of funding in 2015.

  1. The government has decided to scrap a tax on seed funding provided to start-ups by Indian angel investors in the upcoming Union Budget.
  2. To help domestic financiers bankroll new entrepreneurial ventures under its Start Up India campaign.
  3. The tax provision in question treats infusion of funds by domestic angel investors as income in the hands of the start-up, making India.
  4. The only country in the world to penalise local angel investors in such a manner.
  5. This tax applies only to domestic investors and thus acts as a disincentive to local funding for start-ups that the government wants to incentivise instead.

Indian companies plan record overseas fund-raising drive

  1. Indian companies plan to raise close to $12.33 billion in the next 3 months.
  2. This is mainly to refinance their old loans and fund expansion.
  3. It is happening at a time when very few companies are planning large capacity expansion because of stalled infrastructure projects and low capacity utilisation.
  4. Though the government has stepped up public spending, private investment is essential to a robust investment recovery.
  5. The union budget in February, the GST, and the awaited repeal of retrospective taxation could stimulate private investment.

Let’s know about Centre for Monitoring Indian Economy?

Established in 1976, it straddles the entire information food-chain – from primary data collection through analytics and forecasting.

  1. CMIE, or the Centre for Monitoring Indian Economy, is a leading business information company.
  2. It provides services to the entire spectrum of business information consumers that includes governments, financial markets, business enterprises, professionals and the media.
  3. It runs a unique monitoring of new investment projects on hand and it has created the largest integrated database of the Indian economy.
  4. CMIE is a privately owned and professionally managed company head-quartered at Mumbai.

Corporate optimism on the wane as new investments decline sharply

Industry’s optimism about the investment climate has waned due to a sharp recent decline in the value of new project announcements, data from the Centre for Monitoring Indian Economy (CMIE) shows.

  1. New projects worth Rs. 1 lakh crore were announced in the December 2015 quarter, down from Rs. 4 lakh crore in December 2014.
  2. New project announcements were at Rs.8.2 lakh crore in calendar year 2015 as compared to Rs.9.4 lakh crore in 2014.
  3. At the same time, the data shows that the value of stalled projects fell to Rs.1,723.2 crore in the December 2015 quarter, down from Rs.86,177.3 crore in 2014.
  4. The stock of stressed assets come in 5 different buckets — specific permissions, sectoral issues, market-related postponements, promoter funding issues.

Dragon’s fire may singe Indian industry

Commerce Ministry, Chief Economic Advisor, NITI Aayog Vice-Chairman to meet soon to assess impact.

  1. The decline in the value of China’s currency against the dollar is a worrying development as it may lead to a sharp increase in cheap imports hurting several Indian industries.
  2. The depreciation of the yuan may expand the country’s trade deficit.
  3. India’s trade deficit with China had ballooned from $1.1 billion in 2003-04 to $48.5 billion in 2014-15 or over 4 times India’s exports to China ($11.9 billion) in FY’15.
  4. The government is considering proposals to protect domestic steel manufacturers from cheap steel imports mainly from China.
  5. To offset the impact of trade deficit, India had sought more investments from China especially in mega industrial parks (in States such as Gujarat and Maharashtra).

Govt. lowers growth outlook, stresses supply-side reforms

Without reforms, GDP growth next year is unlikely to be significantly greater

  1. India lowered its GDP growth projection for the current year to between 7-7.5 per cent against the earlier forecast of 8.1-8.5 per cent.
  2. The cut in forecast follows GDP growth in the first half of the year slowing to 7.2 per cent from 7.5 per cent in the last year.
  3. Economic growth was dragged down by the 17.4 per cent decline in exports and adverse impact of deficient monsoons on farm sector output.
  4. The slowdown will pose a challenge to meeting the fiscal deficit target of 3.9 per cent of GDP and will also place a stress on tax revenue collections.

Maharashtra is biggest state economy, says Brickwork Ratings

Nationwide analysis finds state accounts for over 27 per cent of gross state domestic product and registered 11.69 per cent growth.

  1. Maharashtra is the biggest economy at Rs 16.87 lakh crore in terms of gross state domestic product (GSDP), followed by Tamil Nadu and Uttar Pradesh.
  2. Maharashtra earns approximately 70 per cent of its total receipts through tax revenues, the highest among the bigger states, followed by Gujarat and Tamil Nadu.
  3. Maharashtra’s infant mortality rate (IMR) of 25 is below the national average for all states, which stands at 50.
  4. The three fastest-growing states were Bihar at 17.06 per cent, MP (16.86 per cent) and Goa (16.43 per cent).

India showing early signs of recovery: Moody’s

Some of the basic parameters of recovery were looking better, as growth in the production of capital goods has picked up, according to data.

  1. An increase in public sector expenditure and an upturn in capital replacement cycle are driving investment in India.
  2. It will take a while for private investment to show a sustainable revival.
  3. India’s economy was forecast to grow forecast at 7 per cent for 2015 and 7.5 per cent for 2016, which take into account a slower investment recovery.
  4. Report forecasting the GDP growth of 2.8 per cent in the G20 economies in 2016, with recovery expectations in U.S. offset by slower growth in China and emerging markets.

Manufacturing sector growth drops to 25-month low

  1. India’s manufacturing sector grew at its slowest pace in 25 months in November on sluggish pace of new business orders.
  2. This also marks the 4th consecutive month of decline in the rate of Indian manufacturing output growth.
  3. Among sub-sectors, consumer goods was the best performing category.
  4. The slowdown in growth combined with weak inflationary pressures support further repo rate cuts.

The problem of debt concentration

India is now coming to terms with the costs of crony capitalism

Let’s find some roots in the past, for dangerous growth in corporate debt ?

  • First, the bursting of the Indian credit bubble, when bank loans grew around 10 percentage points faster than nominal GDP, has left behind inevitable cracks in the financial system.
  • Second, the concerted push for higher private investment in infrastructure encouraged companies to take on excess debt.
  • While, inexplicable policy of allowing companies in the non-tradable sector to take on foreign debt is beyond rational economic explanation.
  • Third, the regulatory mess during last few years, projects got stalled after money was put on the ground and projects got into trouble because of policy confusions that were beyond control.
  • Fourth, most heavily indebted companies shows that there is a strong link between the current financial fragility and crony capitalism excesses of the past decade.

What now, Is their any way to move out? Two reasons, why more urgent action is needed.

  • First, financial fragility in the Indian private sector is one clear worry among global investors.
  • Second, the Indian economic recovery cannot be sustained unless private-sector investment picks up, and that is difficult unless corporate financials improve.
  • India is now coming to terms with the costs of crony capitalism. The bill should not be presented to taxpayers.

What is the way out for leveraged companies in India, Can you find some solutions?

Gap widening between rural and urban India

Despite two successive years of drought, overall food inflation in India has remained tepid.

  1. Inflation has been slowing both in rural and urban areas, a widening difference between the two as rural inflation is decelerating at a much slower pace.
  2. The resultant gap between rural and urban inflation has more than doubled over the last one year, by HSBC Global Research show.
  3. The ‘excess inflation’ in rural India, is arising from food, fuel, transportation as well as from core inflation.
  4. The difference between rural and urban inflation is most stark for fuel and transportation, followed by core and to a lesser extent food.
  5. Rural India’s fuel mix is more geared toward domestically produced firewood, chips and biogas inputs, which are not a part of the global deflation cycle.

Higher investment in rural infrastructure and meaningful agricultural reforms are needed to make growth weather proof and put it on a higher, more sustainable path.

Signals point to better economic activity: CEA

The signals are pointing to an improvement in economic activity. But on the pace, we do get mixed signals,Chief Economic Adviser Arvind Subramanian said.

  1. Indirect tax revenue numbers are doing very well, direct tax revenue numbers are not doing so well.
  2. Stalled projects have also come down, but at the same time exports are in negative territory.
  3. The economy is still well below potential and that’s the sense, even though it’s recovering and full of potential, therefore it needs monetary policy support.
  4. China was experiencing a temporary wobble and it would regain its footing, but at 5-7 per cent growth levels.
  5. If China grows rapidly, it is good for the world and for India. If China slows down, it will throw up challenges.

ADB sees slower growth for Asia

Growth in developing Asia will likely be slower than previously thought as a slowdown in China’s economy hurts demand.

  1. Developing Asia is now expected to grow 5.8 percent and 6.0 percent this year and in 2016, down from the ADB’s July forecast of 6.1 percent and 6.2 percent.
  2. The region, which groups 45 countries in Asia-Pacific, grew 6.2 percent in 2014.
  3. Fears of a China-led global slowdown, which had sent global stock markets tumbling, prompted the U.S. Federal Reserve last week to hold off on raising interest rates for the first time in almost a decade.
  4. Capital outflows could accelerate ahead of the Fed rate hike and urged policymakers to strengthen financial systems in the region to mitigate shocks.
  5. India’s growth is seen weaker at 7.4 percent and 7.8 percent for this year.

India relatively insulated against deflation. Why?

“India remains a very bright spot in the global economy because we have growth and we have robust underlying demand trends.”

  1. India is relatively insulated from deflationary tendencies due to strong demand trends, but there is still a need to be watchful.Powerful deflationary forces that are at work in the global economy.
  2. “The one real challenge that looms ahead for India’s economy appears not to be price inflation but possibly price deflation,” Dr. Subramanian said.
  3. “Some of the public investment that we are ramping up now, strong demand trends and hopefully a reasonable monsoon will enable us to achieve the 8 per cent GDP growth,”.
  4. With the government working hard to increase the ease of doing business, and the strong demand in the economy, Foreign Institutional Investors are likely to start returning to the country.
  5. Skills India is one programme where hands-on skills to workers will be provided so they can join industry, including the auto components industry.
  6. In addition, the government is planning an investment of Rs 8.5 lakh crore in the Indian Railways, investments in roads have doubled and the National Infrastructure Investment Fund will further help in providing investment in the infrastructure sector.

What else do you think works for our economy?

Global growth likely to be weaker than expected: IMF chief

Ms. Lagarde said Asia is still expected to lead global growth, but the pace is slowing with a risk of possibly sagging further due to recent financial market volatility.

  • The head of the International Monetary Fund says global economic growth is likely to be weaker than earlier expected and will remain at moderate levels.
  • Asia is still expected to lead global growth, but the pace is slowing with a risk of possibly sagging further because of recent financial market volatility.

Global economic situation will have a significant impact on developing countries, including Indonesia.

[Discuss] GDP growth estimates: Grappling with new complexities

Let us first understand the new methodology on GDP numbers, changed to reflect the new base year of 2011-12 against the earlier one of 2004-05.

  1. The revised methodology, changed the way GDP numbers have been calculated. The new method was used to calculate the figures for 2014-15.
  2. The new numbers changed GDP growth to 5.1 per cent from the earlier 4.5 per cent for 2012-13 and For 2014-15, the growth came at 7.3 per cent.
  3. Now, GDP is taken at market prices. This includes indirect taxes and excludes subsidies, quite different from what had been calculated so far. Which was GDP at factor cost, which included subsidies and excluded indirect taxes.
  4. The Central Statistics Office uses price deflators to convert nominal GDP into real GDP, which is a mix of WPI, CPI and other price indices.


Let’s dig out more on –

  1. Why this new methodology comes into picture this year?
  2. What is difference between Nominal GDP and Real GDP?

:( We are working on most probable questions. Do check back this section.

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