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Impect of macroeconomics determinant on the gdp growth rate and performance of indian economy.

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Impect of macroeconomics determinant on the gdp growth rate and performance of indian economy.

  1. 1. 1 | P a g e Project Report on Impact of Macroeconomic Determinants on the GDP Growth rate and Performance of Indian Economy Subject: Principal of Economics MASTERS IN BUSINESS ADMINISTRATION 3rd Semester Presented to: Prof. Hina Shafique Submitted By: Fezan Akhtar MBAP-F13-19 Faisal Saeed MBAP-F13-07 Hina Shaheen MBAP-F13-10 Faiza Manzoor MBAP-F13-15 Uzma Latif MBAP-F13-06 Asia Yasmeen MBAP-F13-25 Faculty of Management Studies THE SUPERIOR UNIVERSITY LAHORE Campus, Okara, Pakistan Date of Submission, XYZ
  2. 2. 2 | P a g e Acknowledgement All our praises are for Allah the Almighty, who bestowed potentially upon us to accomplish this report successfully. We have a deep sense of gratitude to my honorable Teacher, Hina Shafique for her generous initiation, cooperation & guidance in writing this report. It is because of him that we have been able to compile the information collected on the given topic and also present it in a comprehensible form. We are also thankful of our all group members for their hard working and cooperation each other without all of this we couldn’t able to do all of this.
  3. 3. 3 | P a g e Executive Summary This project has been designed to determine the impact of macroeconomic determinants on GDP growth rate. For, this purpose we select Indian’s economy because it is a developing country. First, of all the report consists of economic profile of Indian’s economy, its introduction, which covers all facts and figures related to the impact of macroeconomic determinants on GDP growth rate. The macro economics determinants Such as, Inflation, Unemployment, Foreign direct Investment, Poverty has impacting the Indian’s economy year to year in different growth rates, as described in the report. The Indian’s economy has faced inflation problem in past few decades. The report also contains determinants of inflation, its types, its effect on purchasing power and hyperinflation. The Indian’s economy has faced unemployment problem, as described in the report. Poverty is a big hurdle in the way of economic growth in Indian’s economy. Poverty is just like a disease to which many other problems such as crime, low-paced development, etc. are associated. In India, the unemployment rate measures the number of people actively looking for a job as a percentage of the labour force. The report consists of India Unemployment Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news. In the last we have discussed investment and importance of investment also described, its types as made by Indian’s economy this report also contains some valuable suggestion for the betterment of Indian’s economy. We concluded our report with the aim that if the country has used its funds in profitable activities so that, there will be a better return of the investment. The country should adopt various government and monetary policies for its growth and development in various sectors.
  4. 4. 4 | P a g e TABLE OF CONTENTS PAGE 1. INDIAN ECONOMY ......................................................................................05 1.1. Introduction..............................................................................................05 2. ECONOMICS PROFLIE ........................................................................................06 2.1. GDP by Sector .........................................................................................06 2.2. Transportation in india ............................................................................07 3. INIAN REAL GDP ..........................................................................................07 3.1. Growth rate and performance or GDP calculation method....................07 4. UNEMPLOYMENT IN INDA.......................................................................09 4.1. Types of Unemployment...........................................................................09 4.2. Current Rate of Unemployment ...............................................................10 4.3. Formula of calucating Unemployment ....................................................11 4.5. Why unemployment is problem ................................................................11 4.6. Problem casued due to Unemployment....................................................12 4.7. Solution to unemployment of india ..........................................................12 5. INLATION .........................................................................................................13 5.1. Features of Inflation.................................................................................13 5.2. Current rate of inlation............................................................................13 5.3. Calculation of Inflation............................................................................15 5.4. Effect of inflation on purchasing power...................................................15 5.5. Hyperinflation ..........................................................................................15 5.6. Way to cantrol inflation ...........................................................................15 6. POVERTY......................................................ERROR! BOOKMARK NOT DEFINED. 6.1. Types of Poverty.........................................Error! Bookmark not defined. 6.2. Effect of poverty.........................................Error! Bookmark not defined. 6.3. Measures of poverty...................................Error! Bookmark not defined. 6.4. Proverty estimate.......................................Error! Bookmark not defined. 6.5. ways to cantrol poverty..............................Error! Bookmark not defined. 7. INVESTMENT ................................................................................................21 7.1. Importance of Investment.........................................................................21 7.2. Types of investment..................................................................................23 7.3. Introduction of FDI..................................................................................23 7.4. Current rate of FDI..................................................................................24 7.5. Types of FDI.............................................................................................24 7.6. Determinants of FDI in india...................................................................24 8. CONCLUSTION...................................................................................................27 REFERENCES .............................................................................................................28
  5. 5. 5 | P a g e Indian Economy – overview: Introduction: India is a South Asian country that is the seventh largest in area and has the second largest population in the world. India covers an area of 3,287,240 square km (India geography) and its population stands at 1.215 billion people in 2010 (India population). India has Great Plains, long coastlines and majestic mountains. Thus, the land has abundant resources. India shares its borders with China, Bangladesh, Pakistan, Nepal, Sri Lanka and Myanmar. India has become one of the most attractive destinations for investment owing to favourable government policies and reforms in the past few months. The approval of foreign direct investment (FDI) in several sectors has allowed investments to pour into the economy. According to the data provided by Department of Industrial Policy and Promotion (DIPP), the cumulative amount of FDI inflows in the country in the period April 2000-September 2014 was US$ 345,073 million. Growth in India is expected to rise to 5.6 per cent in 2014 and pick up further to 6.4 per cent in 2015 as both exports and investment will increase, according to the World Economic Outlook (WEO) report released by International Monetary Fund (IMF). Sectors projected to do well in the coming years include automotive, technology, life sciences and consumer products. Engineering and research and development (ER&D) export revenue from India is expected to reach US$ 37-45 billion by 2020, from an estimated US$ 12.4 billion in FY14, according to Nasscom. Furthermore, the US$ 1.2 trillion investment that the government has planned for the infrastructure sector in the 12th Five-Year Plan is set to help in further improving the export performance of Indian companies and the Indian growth story, which will consequently improve the overall Indian economy.
  6. 6. 6 | P a g e Economic Profile: Asian Development Bank predicts India's gross domestic product (GDP) to grow by 6 per cent for 2013-14. Moreover, World Bank sees 6.7 per cent GDP growth for India by 2015. Gross Domestic Product (GDP) Composition by Sector:  Services: 65 per cent  Industry: 18 per cent  Agriculture: 17 per cent  Forex Reserves: US$ 330,213.4 million. for the week ended Feb 6, 2015  Gross Fixed Capital Formation (GFCF): Gross Fixed Capital Formation in India decreased to 4957.25 INR Billion in the second quarter of 2014 from 5356.22 INR Billion in the first quarter of 2014. Gross Fixed Capital Formation in India averaged 3568.76 INR Billion from 2001 until 2014, reaching an all time high of 5356.22 INR Billion in the first quarter of 2014 and a record low of 2021.90 INR Billion in the first quarter of 2002. Gross Fixed Capital Formation in India is reported by the Ministry of Statistics and Programmed Implementation (MOSPI).  Value of Exports: Exports during January, 2015 were valued at US $ 23883.60 million (Rs.148617.82 crore) which was 11.19 per cent lower in Dollar terms (10.97 per cent lower in Rupee terms) than the level of US $ 26891.58 million (Rs. 166932.15 crore) during January, 2014. Cumulative value of exports for the period April-January 2014-15 was US $ 265037.38 million (Rs 1613789.24 crore) as against US $ 258721.45 million (Rs 1562119.12 crore) registering a growth of 2.44 per cent in Dollar terms and growth of 3.31 per cent in Rupee terms over the same period last year.  Export Partners: US, Germany, UAE, China, Japan, Thailand, Indonesia and European Union. India is also tapping newer markets in Africa and Latin America  Currency (code): Indian rupee (INR)  Exchange Rates: Indian rupees per US dollar - 1 USD = 62.20 NR (Feb 16, 2014)  Fiscal Year: 1 April - 31 March  Cumulative FDI equity Inflows: 27,401 million (from April, 2014 to November, 2014)  Share of Top Investing Countries FDI Equity Inflows: Mauritius, Singapore, UK, Japan, USA, Netherlands and Cyprus (as on November 2014)  Major Sectors Attracting Highest FDI Equity Inflows: Services Sector, Construction Activities, Telecommunications, , Computer Software & Hardware, Drugs and Pharmaceuticals, Chemicals (as on November 2014)
  7. 7. 7 | P a g e Transportationin India  Airports: The Airports Authority of India (AAI) manages a total of 125 Airports  International Airports: Ahmedabad, Amritsar, Bengaluru, Chennai, Goa, Guwahati, Hyderabad, Koch i, Kolkata, Mumbai, New Delhi, Thiruvananthapuram, Port Blair, Srinagar, Jaipur, Nagpur, Calicut, Tiruchirapalli, Coimbatore  Railways: The Indian Railways network is spread over some 64,000 km, with 12,000 passenger and 7,000 freight trains each day from 7,083 stations plying 23 million travellers and 2.65 million tones of goods daily  Roadways: India’s road network of 4.1 million km is the second largest in the world. With the number of vehicles growing at an average annual pace of 10.16 per cent, Indian roads carry about 65 per cent of freight and 80 per cent of passenger traffic  Waterways: 14, 500 km India: Real gross domestic product (GDP) The statistic shows the growth of the real gross domestic product (GDP) in India from 2008 to 2013, with projections up until 2018. GDP refers to the total market value of all goods and services that are produced within a country per year. It is an important indicator of the economic strength of a country. Real GDP is adjusted for price changes and is therefore regarded as a key indicator for economic growth. In 2012, India's real gross domestic product growth was at about 4.7 percent compared to the previous year. Gross domestic product (GDP) growth rate in India Recent years have witnessed a shift of economic power and attention to the strengthening economies of the BRIC countries: Brazil, Russia, India, and China. The growth rate of gross domestic product in the BRIC countries is overwhelmingly larger than in traditionally strong economies, such as the United States and Germany. While the United States can claim the title of the largest economy in the world by almost any measure, China nabs the second-largest share of global GDP, with India racing Japan for third- largest position. Despite the world-wide recession in 2008 and 2009, India still managed to record impressive GDP growth rates, especially when most of the world recorded negative growth in at least one of those years. Part of the reason for India’s success is the economic liberalization that started in 1991and encouraged trade subsequently ending some public monopolies. GDP growth has slowed in recent years, due in part to sky rocketing inflation. India’s workforce is expanding in the industry and services sectors, growing partially because of international outsourcing — a profitable venture for the Indian economy.
  8. 8. 8 | P a g e The agriculture sector in India is still a global power, producing more wheat or tea than anyone in the world except for China. However, with the mechanization of a lot of processes and the rapidly growing population, India’s unemployment rate remains relatively high. Figure (1.1) Indian GDP is calculated by Expenditure method which is as follows GDP = consumption + investment + (government spending) + (exports-imports) and the formula is GDP = C + I + G + (X-M) Where:  C - stands for consumption which includes personal expenditures pertaining to food, households, medical expenses, rent, etc  I - stands for business investment as capital which includes construction of a new mine, purchase of machinery and equipment for a factory, purchase of software, expenditure on new houses, buying goods and services but investments on financial products is not included as it falls under savings  G- stands for the total government expenditures on final goods and services which includes investment expenditure by the government, purchase of weapons for the military, and salaries of public servants  X - stands for gross exports which includes all goods and services produced for overseas consumption  M - Stands for gross imports which include any goods or services imported for consumption and it should be deducted to prevent from calculating foreign supply as domestic supply.
  9. 9. 9 | P a g e Unemployment: Unemployment means a person willing to work but unable to find a qualified job. Our country is facing many problems but one of the serious problems is of unemployment. Many graduates, doctors, engineers, scientist are unemployed or working underemployed. Due to unemployment we are wasting our country’s human resource. Types of Unemployment in India So, we can see unemployment is a serious problem which is not always easy to identify. Let us discuss the different types of unemployment in India. SeasonalUnemployment Normally when we talk of employed people we mean those who have work throughout the year. But this may not possible for all. In agriculture, work is seasonal even though agricultural activities are performed throughout the year. During the peak agricultural seasons (when the crop is ready for harvesting) more people are required for work. Similarly in the sowing, weeding and transplantation period more labour is required. Employment therefore increases at this time. In fact we will find that there is hardly any unemployment in rural areas during these peak agricultural seasons. However, once these seasons are over the agricultural workers, especially those who do not own land or whose land is not sufficient to meet their basic requirement (these are landless laborers and marginal farmers respectively), remain unemployed. This type of unemployment is known as seasonal unemployment. Voluntary Unemployment: People who are unwilling to work at prevailing wage rate and people who get a continuous flow of income from their property or any other sources and need not to work, such people are voluntarily unemployed. Frictional Unemployment: Unemployment attributable to the time required to match production activities with qualified resources. Frictional unemployment essentially occurs because resources, especially labor, are in the process of moving from one production activity to another. Employers are seeking workers and workers are seeking employment, the two sides just haven't matched up.
  10. 10. 10 | P a g e Hence unemployment of the frictional variety increases. This mismatch is largely the result of limited information, which is often compounded by geographic separation between producer and resource. CausalUnemployment Cyclical unemployment is based on a greater availability of workers than there are jobs for workers. It is usually directly tied to the state of the economy. Lower demand for products due to lack of consumer confidence, disinterest, or reduction in consumer spending results in the workforce cutting back on production. Since production is reduced, companies that retail such products may also cut back on workforce, creating yet more cyclical unemployment. DisguisedUnemployment: There are also instances where we find too many people working when so many are not required. In agriculture we may find that all members of the family work. It is possible that 3-4 people can do a given work in the farm, but we find that the whole family of say 10 people doing the job. This may be because the excess people are not able to find employment elsewhere, so rather than remain unemployed they prefer to do the work along with others. This is known as disguised unemployment. This occurs when more than the necessary numbers of people are employed for the specified work. Disguised unemployment is found in agriculture because of the lack of employment opportunities elsewhere. Similarly disguised unemployment can be found in industry and offices as well. India Unemployment Rate: Unemployment Rate in India decreased to 5.20 percent in 2012 from 6.30 percent in 2011. Unemployment Rate in India averaged 7.58 Percent from 1983 until 2012, reaching an all time high of 9.40 Percent in 2009 and a record low of 5.20 Percent in 2012. Unemployment Rate in India is reported by the Ministry of Labour and Employment, India. Figure (1.2)
  11. 11. 11 | P a g e Formula of Calculate Unemployment: In other words, Labor force (also called work force) is the total number of people employed or seeking employment in a country or region. One is classified as ‘not in labour force’, if he or she was engaged in relatively longer period in any one of the non-gainful activities. Unemployment rate is the percent of the labor force that is without work. Unemployment rate = (Unemployed Workers / Total labor force) X 100 As far as the situation in India was concerned, the longer the reference period, the smaller will be the rate of unemployment and the shorter the reference period, the larger the unemployment rate. The Work participation rate is also estimated which is defined as the percentage of total workers (main and marginal) to total population. Why Unemployment is a problem: If the problem of unemployment is solved it will help in development of the country. With Population of 1.20 billion in our country the unemployment rate is increasing day by day. The problem of unemployment is rising but still many industries are facing the problem of skilled candidate for their company. There is a boom of software companies, Outsourcing companies in India, but still facing the problem of unemployment. Here are some of the reasons why there is unemployment in India 1. There are employment opportunities in India, but the rising population problem creates the unemployment. If the population grows in the same rate the next generation will face more problems of unemployment. If there is vacancy for 1 position 100 or 1000 apply for the position and only one gets the job and others remain unemployed. 2. Inflation 3. Indians don’t take jobs which are below their grades. Many find it difficult to work at the below qualification level job. 4. Low wages or salary below the market rate. 5. Many big industries look for the skilled candidate only, for their company. 6. Recession 7. Many Employers give preference to the experienced candidates only and not the fresher. 8. Not enough or new jobs: As per the experience & analysis from Get Sarkai Naukri, number of new government jobs is decreasing every year. Government is not able to create enough jobs keeping in mind the Indian population. 9. Slow business expansion 10. Advanced Technology: Earlier for a task hundreds or thousand people were required to do a work but now due to the advanced technology only one person can do many people’s work. With the advanced technology companies are hiring few persons to operate the
  12. 12. 12 | P a g e machine. Give a command on computer and the work is done this has cut off the employment of many. 11. Corruption: In Government sector and in some private sector people get the job by giving the bribe. Even though the candidate is not that qualified but if he gives the bribe he gets the job. So to get a government job give a bribe. The qualified candidate remains unemployed as no money to give the bribe. Problems causeddue to unemployment  Unemployment and poverty goes side by side. The problem of unemployment gives rise to the problem of poverty.  Young people after a long time of unemployment find the wrong way to earn money.  To get rid from the unemployment stress, they accept alcohol or drugs.  Unemployed youths accepts suicide as the last option of their life  Lower economic growth  Increase rate in Crimes. As the employed youth don’t have anything to do they start doing robbery, murder etc.  Health issues i.e. it affects mentally as well as physically Solutions to the unemployment in India 1. The very first solution for the unemployment is to control the rising population of our country. Government should motivate people to have small families. Indian government has started initiatives to control the population but still the population is rising. 2. The quality of Indian education should be improved. The current education system is not up to the level. Government should keep a strict watch on the education system and try to implement new ways to generate skilled labour force 3. Also today’s youth should join the institute or select the course where proper training is given and the course is as per the current industries requirements. Take the course as per your interest and which will bright your future. 4. Government should encourage and develop the agriculture based industries in rural areas so that the rural candidates don’t migrate to the urban areas. More employment should be generated in rural areas for the seasonal unemployment people. 5. Rapid Industrialization should be created. 6. Development of the rural areas will stop the migration of the rural people to the urban cities and this will not put more pressure on the urban city jobs. 7. Government should allow more foreign companies to open their unit in India, so that more employment opportunities will be available.
  13. 13. 13 | P a g e Inflation: Inflation means the condition of a substantial and rapid increase in the general price level which causes a decline in the purchasing power of money. Inflation is statistically measured in terms of percentage increase in the price index per unit of time. There is no generally accepted definition of inflation and different economists define it differently. According to Crowther, “Inflation is a ‘state’ is which the value of money is falling i.e. the prices are rising”. According to Fried man, “Inflation is always and everywhere a monetary phenomenon”. According to Keynes, “Inflation is the result of the excess of aggregate demand over the available aggregate supply and true inflation starts only after full employment”. Features ofInflation:  Inflation is always accompanied by a rise in the price level.  Inflation is a monetary phenomenon and it is generally caused by excessive money supply.  Inflation is a dynamic process as observed over the long period.  A cyclical movement of prices is not inflation.  Pure inflation starts after full employment.  Inflation may be demand pull or cost push.  Excess demand in relation to the supply of everything is the essence of inflation. Current India InflationRate: The inflation rate in India was recorded at 5.11 percent in January of 2015. Inflation Rate in India averaged 8.87 percent from 2012 until 2015, reaching an all time high of 11.16 percent in November of 2013 and a record low of 4.38 percent in November of 2014. Inflation Rate in India is reported by the Ministry of Statistics and Programmed Implementation (MOSPI), India. Figure (1.3)
  14. 14. 14 | P a g e Inflationis calculatedin India: In India inflation is calculated by using the Wholesale Price Index (WPI). But this system is considered backward as compared to the Consumer Price Index (CPI), a method that is used by the developed countries to calculate inflation. The Wholesale Price Index or WPI is the price of certain wholesale goods. Any change in this index, points towards inflation. Earlier WPI figures used to be released on every Thursday but now these figures are updated on monthly basis. The main focus is on goods traded between corporations. These figures affect the stock exchange and fixed price market in India. Different commodities for calculating WPI are chosen on the basis of their importance in a region. Then the wholesale price of these commodities is taken up to calculate the Wholesale Price Index. In1993-94 there was 435 items but at present there are about 676 items in the list of WPI. In India, there are three groups of Wholesale Price Index - Primary Articles (20.1 percent of total weight), - Fuel and Power (14.9 percent) and - Manufactured Products (65 percent). Impact of Inflation: In inflation money supply increases that impact both economy as well as social life of the nation. Economy: Value of money is eroded by inflation that we are seeing at present. There comes a decline in worth and purchasing power of Rupee. Controlling inflation is highly important for a balanced progress in India. India has huge population of poor. They bear the impact of inflation greater than any other segment of society. So keeping inflation low is the need of the day. High inflation adversely affects the trade. Common Man: Common man suffers the most due to inflation as general price of all the essential commodities gets hiked. His monthly income becomes less than expenditure leading to burden and pressure to earn more. Also fall in household savings have been observed at the time of inflation. In present inflation state, cost of daily usable items like food and milk has gone up by 12% that constitute about 30-40% of monthly expenditure. After spending so much on these items he is left with very little money for other things. There is an increase in home loan rates by 1-2%. This has a direct impact on EMI. Hike in petrol and diesel prices. All this leads to a decline in the standard of living.
  15. 15. 15 | P a g e Effects of Inflationat purchasing power: Inflation reduces the purchasing power of consumers in that country. I.e. the value of that currency falls. Hence lose interest as their returns may fall (in the rupee denominated assets) so they start taking out their money out of the economy - Rupee further depreciates. Indian goods become cheaper in the world market and if the elasticity is high, Indian exports may increase. Hyperinflation: Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless. Hyperinflationin India: The Indian middle class is going to have hyper inflation in the years to come, especially in 2012. Of course many politicians do not want to accept it. Mark my words the prices of petrol will shoot to another Rs.10 in 2012. Secondly the prices of commodity will increase by Rs.10- 20 in various ranges. For example soaps will be costlier will Rs.2- Rs5 and tea by Rs.20 – Rs.10. Adding up to it is the value of rupees. Rs.100 will be half the value. The nation is heading into devaluation of currency internally. The rise in salary will be only 10- 15%. The price rise will be close to 25- 50%. Of course the data send by congress government is manipulated. Take the year basis instead of manipulated weekly level. It will tell you real the picture. Howto control inflationin India: In order to control inflation in India, work needs to be done on several fronts. Major reason of inflation in India is the ever increasing difference between Aggregate Demand and Aggregate Supply. In India supply is almost constant where as demand is increasing. So if India wants to control inflation then this gap has to be reduced. India must focus on demand and supply of goods and commodities. To achieve this either we have to increase the capacity of present production units or build new one. India must work on its infrastructure to improve the efficiency that will ultimately bring down the price. Like transporting goods via rail is a cheaper option than road. But as compared to rail our road network is much developed so we are using the costlier option leading to more cost. India must structure its domestic economy as there is no control on external economic conditions of the world. Exchange rate stability is must to achieve so that international price pressure can be controlled to an extent. Bulk of fuel requirement is met by imports in India. An alternative to this must be implemented to reduce inflation.
  16. 16. 16 | P a g e Poverty: Poverty is about not having enough money to meet basic needs including food, clothing and shelter. However, poverty is more, much more than just not having enough money. Poverty in India: Poverty in India is still a major issue even in this day and age. The population of people living below the poverty line in India is the highest in the world and the problem is not going away. If you've ever been to India then you'll understand - from the moment the place hits the ground the poverty is evident, indeed it is the idea of such extreme poverty which puts people of the idea of travelling to India in the first place. Types Of poverty: There are two types of poverty absolute poverty and relative poverty. Absolute poverty: refers to inability of a section of population to achieve basic necessities of life. Relative poverty: on the other hand, refers to inequality in distribution of income and expenditure. Effects of Poverty in India: 1. Rapidly Rising Population: The population during the last 45 years has increased at the rate of 2.2% per annum. On average 17 million people are added every year to its population which raises the demand for consumption goods considerably. 2. Low Productivity in Agriculture: The level of productivity in agriculture is low due to subdivided and fragmented holdings, lack of capital, use of traditional methods of cultivation, illiteracy etc. This is the main cause of poverty in the country. 3. Under Utilized Resources: The existence of under employment and disguised unemployment of human resources and under utilization of resources has resulted in low production in agricultural sector. This brought a down fall in their standard of living. 4. Low Rate of Economic Development: The rate of economic development in India has been below the required level. Therefore, there
  17. 17. 17 | P a g e persists a gap between level of availability and requirements of goods and services. The net result is poverty. 6. Price Rise: The continuous and steep price rise has added to the miseries of poor. It has benefited a few people in the society and the persons in lower income group find it difficult to get their minimum needs. 7. Unemployment: The continuously expanding army of unemployed is another cause of poverty. The job seeker is increasing in number at a higher rate than the expansion in employment opportunities. 8. Shortage of Capital and Able Entrepreneurship: Capital and able entrepreneurship have important role in accelerating the growth. But these are in short supply making it difficult to increase production significantly. 9. Social Factors: The social set up is still backward and is not conducive to faster development. Laws of inheritance, caste system, traditions and customs are putting hindrances in the way of faster development and have aggravate" the problem of poverty. 10. Political Factors: The British started lopsided development in India and reduced Indian economy to a colonial state. They exploited the natural resources to suit their interests and weaken the industrial base of Indian economy. In independent India, the development plans have been guided by political interests. Hence, the planning a failure to tackle the problems of poverty and unemployment. Recentmeasurementof Poverty situation in India: Poverty Ratio in India declined to 21.9 percent in 2011-12 from 37.2 percent measured in 2004- 05 on the basis of the increase in per capita consumption. The Planning Commission of India on 23 July 2013 released its report on the Poverty Estimates for 2011-12. The report was based on the Large Sample Surveys on Household Consumer Expenditure conducted by the National Sample Survey Office (NSSO) of the Ministry of Statistics and Programme Implementation.
  18. 18. 18 | P a g e Figure (1.4) The National Poverty Line estimated for rural areas during 2011-12 was 816 rupees per capita per month, whereas, for urban areas it was recorded at 1000 rupees per capita per month. Thus, for a family of five, the all India poverty line in terms of consumption expenditure would amount to about 4080 rupees per month in rural areas and 5000 rupees per month in urban areas. These poverty lines would vary from State to State because of inter-state price differentials. Poverty Estimates 2011-12 1. The all India poverty ratio is obtained as state-population weighted average poverty ratio, and the all India poverty line is the per capita per month expenditure that corresponds to the all India poverty ratio. 2. The NSSO tabulates expenditure of about 1.20 lakh households. Since these households have different number of members, the NSSO for purpose of comparison divided the household expenditure by the number of members to arrive at per capita consumption expenditure per month. This is called Monthly Per Capita Consumption Expenditure (MPCE) and is computed on the basis of three different concepts: a) Uniform Reference Period (URP) b) Mixed Reference Period (MRP) c) Modified Mixed Reference Period (MMRP).
  19. 19. 19 | P a g e 3. The national level poverty ratio based on comparable methodology (Tendulkar Method) for 1993-94, 2004-05 and 2011-12 estimated from Large Sample Survey of Household Consumer Expenditure data of 50th, 61st and 68th round respectively are given in the image. 4. The percentage of persons below the Poverty Line in 2011-12 has been estimated as 25.7 percent in rural areas, 13.7 percent in urban areas and 21.9 percent for the country as a whole. The respective ratios for the rural and urban areas were 41.8 percent and 25.7 percent and 37.2 percent for the country as a whole in 2004-05. It was 50.1 percent in rural areas, 31.8 percent in urban areas and 45.3 percent for the country as a whole in 1993-94. In 2011-12, India had 270 million persons below the Tendulkar Poverty Line as compared to 407 million in 2004-05, that is a reduction of 137 million persons over the seven year period. 5. The decline in poverty flows from the increase in real per capita consumption. The per annum increase in real MPCE for each of the ten deciles. The clear inferences are a) The real MPCE increased by much more in the second period (2004-05 to 2011-12) as compared to the first (1993-94 to 2004-05) b) That the increase was fairly well distributed across all deciles of the population c) The distribution was particularly equitable in rural areas The ratio is based on the methodology that was suggested by the Suresh Tendulkar Committee that suggests the factors in money spent on health and education besides calorie intake to fix a poverty line. As per Tendulkar Methodology, the poverty line has been expressed in terms of MPCE based on Mixed Reference Period. Since several representations were made suggesting that the Tendulkar Poverty Line was too low, the Planning Commission, in June 2012, constituted an Expert Group under the Chairmanship of Dr. C. Rangarajan to once again review the methodology for the measurement of poverty. The report on the recommendation on poverty line made by Tendulkar Committee from the Rangarajan committee is likely to be submitted by mid 2014. Ways to Control Poverty inIndia: 1. More Employment Opportunities: Poverty can be eliminated by providing more employment opportunities so that people may be able to meet their basic needs. For this purpose, labour intensive rather than capital intensive techniques can help to solve the problem to a greater extent. During the Sixth and Seventh Five Year Plans, the programmes like Integrated Rural Development Programme, Jawahar Rozgar Yojana and Rural Landless Employment Guarantee Programme etc. have started with a view to eliminate poverty in the rural sector.
  20. 20. 20 | P a g e 2. Minimum Needs Programme: The programme of minimum needs can help to reduce poverty. This fact was realized in the early seventies as benefits of growth do not percolate to poor people and less developed countries are left with no choice except to pay direct attention to the basic needs of the low strata of the society. In the Fifth Five Year Plan, minimum needs programme was introduced for the first time. 3. Social Security Programmes: The various social security schemes like Workmen’s Compensation Act, Maternity Benefit Act, Provident Fund Act, Employees State Insurance Act and other benefits in case of death, disability or disease while on duty can make a frontal attack on poverty. 4. Establishment of Small Scale Industries: The policy of encouraging cottage and small industries can help to create employment in rural areas specially in backward regions. Moreover, this will transfer resources from surplus areas to deficit without creating much problem of urbanisation. 5. Uplift of Rural Masses: As it is mentioned that India lives in villages, thus, various schemes for the uplift of rural poor may be started. The poor living in rural areas generally belong to the families of landless agricultural labourers, small and marginal farmers, village artisans, scheduled castes and scheduled tribes. However, it must be remembered that Government of India has introduced many schemes from time to time. 6. Land Reforms: Land reform has the motto, “land belong to the tiller”. Thus legislature measures were undertaken to abolish Zamindari System. Intermediaries and ceiling on holdings was fixed. But it is a bad luck, these land reforms lack proper implementation. Even then, it is expected that if these reforms are implemented seriously, it would yield better results which will be helpful to reduce the income of the affluent section. 7. Spread of Education: Education helps to bring out the best in human body mind and spirit. Therefore, it is urgent to provide education facilities to all. The poor should be given special facilities of stipend, free books and contingency allowance etc. Education will help to bring awakening among the poor and raise their mental faculty. 8. Social and Political Atmosphere: Without the active co-operation of citizens and political leaders, poverty cannot be eradicated from India. A conducive social and political atmosphere is a necessary condition for eradicating the poverty from its root.
  21. 21. 21 | P a g e Investment: Investment is time, energy, or matter spent in the hope of future benefits actualized within a specified date or time frame. Investment has different meanings in economics and finance. Investment in economics and its importance: In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX. Investment divided into non-residential investment (such as factories) and residential investment (new houses). "Net" investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year. Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation measurable at a point in time. Investment is often modeled as a function of income and interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest. Types of Investments in India As stated earlier, the investment industry is huge; therefore the types of investments are also varied. Different types of investments are: (1) Cash investments: Cash investments are generally risky and offer a low rate of interest. Some of the important types of Cash investments are; certificates of deposit (CDs) and treasury bills and savings bank accounts. (2) Debt securities: This type of investment gives returns in the form of fixed periodic payments and the fixed capital appreciates at maturity. This is safe bait for the investors in the investment industry and has always proved to be the risk free investment tool. Though, it is generally low in risks, the returns are also lower than the other peer securities.
  22. 22. 22 | P a g e (3) Stocks: Investors can also buy stocks (equities) from the secondary markets and be a part of any business corporate that are listed in the stock exchanges. By this way, one can become a part of the profits that the company generates. But one thing that should be kept in mind is that stocks are generally more volatile and carries more risk than bonds. (4) Mutual funds: They are usually a collection of stocks and bonds that a fund manager selects for an investor such that the returns are maximum. The investor does not have to track the investment, be it a bond, stock- or index-based mutual funds. (5) Derivatives: Derivatives are financial contracts, whose value is derived from the value of the underlying assets like equities, commodities and bonds. They can take the form of futures, options and swaps. Investors choose derivatives as they are used to minimize the risk of loss that result from variations in the underlying asset values. Commodities: The items that are traded on the commodities market are agricultural and industrial commodities and they need to be standardized. Commodities trading have always been giving high returns and thus they are the riskiest of all investment options. One, who trades in commodities, requires specialized knowledge and analytical capabilities. Real estate: Investing in real estate has to be a long term affair. Funds get hooked into the real estate sector for a considerable time period.
  23. 23. 23 | P a g e INTRODUCITON TO FDI: Foreign Direct Investment (FDI) broadly encompasses any long-term investments by an entity that is not a resident of the host country. Typically, the investment is over a long duration of time and the idea is to make an initial investment and then subsequently keep investing to leverage the host country’s advantages which could be in the form of access to better (and cheaper) resources, access to a consumer market or access to talent specific to the host country - which results in the enhancement of efficiency. This long-term relationship benefits both the investor as well as the host country. The investor benefits in getting higher returns for his investment than he would have gotten for the same investment in his country and the host country can benefit by the increased know how or technology transfer to its workers, increased pressure on its domestic industry to compete with the foreign entity thus making the industry improve as a whole or by having a demonstration effect on other entities thinking about investing in the host country.  Foreign Direct Investment is a measure of foreign ownership of domestic productive assets such as factories, land and organizations. Foreign direct investments have become the major economic driver of globalization, accounting for over had of all cross-border investments.  Foreign direct investment is an international financial flow with the intention of controlling or participating in the management of an enterprise in a foreign country. Current India ForeignDirect Investment: Foreign Direct Investment in India increased to 3459 USD Million in December of 2014 from 1767 USD Million in November of 2014. Foreign Direct Investment in India averaged 1027.46 USD Million from 1995 until 2014, reaching an all time high of 5670 USD Million in February of 2008 and a record low of -60 USD Million in February of 2014. Foreign Direct Investment in India is reported by the Reserve Bank of India. Figure (1.5)
  24. 24. 24 | P a g e Role of FDI in India: Government of India accepts the key role of Foreign Direct Investment (FDI) in economic development not only as an addition to domestic capital but also as an important source of technology and global best practices. The Government of India has put in place a liberal and Transparent FDI policy. FDI up to 100% is allowed under the automatic route in most sectors/activities. FDI policy in India is reckoned to be among the most liberal in emerging economies. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. Types of FDI There are two types of FDI: Greenfield investment: It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries like India. Mergers and Acquisition: It occurs when a transfer of existing assets from local firms takes place. Determinants of foreign direct investment in India Market Size: Market size which is measured in terms of GDP is expected to have positive relationship with FDI. Countries having more GDP growth rate can attract more FDI inflows. Market oriented FDI aims to set up enterprises to supply goods and services to the local market. This kind of FDI may be undertaken to exploit new markets. The market size of host countries is very important location factor for market oriented FDI. The general implication is that host countries with larger market size, faster economic growth and higher degree of economic development will provide more and better opportunities for these industries to exploit their ownership advantages and therefore, will attract more market-oriented FDI. Even for export oriented FDI, the market size of host countries is an important factor because larger economies can provide larger economies of scale and spill-over effects. (1) Portfolio Diversification: The diversification of portfolio is also considered to be another determinant. The approximate mix of bonds, securities, stock, debenture, depository receipts, etc. refers to portfolio investment. The maturity of these instruments may vary from few months to few years. The concern of an investor is for these instruments at a time of risk perceptions. It implies that the investors are able to invest in or take out their capital for diversification of their portfolio assets due to perceived risk in a country. The higher is the perceived country risk due to political, economic and financial changes in one country; an investor would like to take out his capital out of the country.
  25. 25. 25 | P a g e (2) Resource Location: Location- specific determinants have a crucial influence on a host country’s inflow of FDI. The relative importance of different A location-specific determinant depends on at least three aspects of investment: (1) The motive for investment (e.g., resources, market or efficiency-seeking), (2) The type of investment (e.g., services or manufacturing), and (3) The size of the investors (small and medium MNEs or large MNEs) Natural resources protected from international competition by imposing high tariffs or quotas, still play an important role in attracting FDI by a number of developing and developed countries. The theoretical analysis concludes that policy related variables and economic determinants together explain the variations in the FDI inflows in country. Empirical analysis concludes that the variables considered for the study are more significant in China as compared to India. In India, Long term debt is an important factor in attracting FDI but in China Foreign exchange reserves and Sum of exports and imports have more influence on FDI. These flows will be adversely affected if the natural resources are highly protected. (4) Differential Rate of Return: This theory explains mostly the held belief that the FDI flows to that country which has relatively higher return on the investment. No investor would like to invest if the rate of return on investment is low. Therefore, the flow of capital will be in those countries which ensure the highest possible rate of return. (5) Foreign Exchange Reserves: The high level of foreign exchange reserves in terms of import cover reflects the strength of external payments position and help to improve the confidence of the prospective investors. Therefore, a positive relationship is postulated between the foreign exchange reserves and the inflow of foreign direct investment. (6) Internationalization: Internationalization refers to minimize or eliminate cost of external transaction by increasing transaction within subsidiaries. This theory explains that FDI is an outcome of need to lower the cost of transaction. In other words, need for internationalization of transaction cost determines the FDI inflows. The internationalization of transaction cost is achieved through FDI investment in subsidiary to eliminate high cost of transaction or replace high cost transaction through low cost when it is impossible to eliminate. (7) Openness: Openness of a country is generally measured as the proportion of exports and imports to the GDP (Trade/GDP). The more an emerging market tries to open its economy to outside external trade, the more this host country can attract FDI. Export oriented FDI depends upon liberal trade policies reflected in openness of the country as the TNC is not interested in market seeking behavior initially and openness helps it in importing components, capital goods, and raw material.
  26. 26. 26 | P a g e (8) Government Regulations: This consists of rules and regulations governing the entry and operations of foreign investors. FDI cannot take place unless it is allowed to enter in a country. Its potential relevance is evident when policy changes sharply in the direction of more or less openness. It should be noted, however that policy changes in the direction of openness differ in an important way from those in the direction of restriction. Open policies are basically intended to induce FDI while restrictive policies such as sweeping nationalization of foreign affiliates, can effectively close the door to FDI. (9) Political Stability: The reliability and political stability determines the FDI inflows. TNCs prefer stable government so that their investment is protected. Political instability may be in the form of negative attitude of the government toward TNCs, non allowance of fund transfer, currency convertibility, war, bureaucracy and corruption. Political stability can also be measured by number of changes of democratically elected governments. Asiedu (2002) does not find any evidence relationship between FDI and political stability. (10) Tax Policies: Fiscal policies determine general tax levels, including corporate and personnel tax rates and thereby influence inward FDI. Other things being equal a country with lower tax rates should stand a greater chance of attracting FDI project than a country with higher rates. It is difficult to ascertain how much influence it can have on the total inflows of FDI. (11) Inflation: Low inflation rate is considered to be a sign of internal economic stability in the host country. High inflation rate indicates incapability of the government to balance its budget and failure of the central bank to conduct appropriate monetary policy. Changes in inflation rates of the domestic or foreign country are anticipated to alter the net returns and optimal investment Decisions of the MNEs. It is expected to give negative impact on FDI. (12) Industrial Organization: Industrial organization theory states that firm specific advantages, competition capabilities, managerial skills and practice etc. are some of the crucial points for industrial organization to survive. The relative advantages to TNCs in terms of these points make FDI to flow to a country of their choice. (13) The Level of External Indebtedness: The level of external indebtedness means the net external assistance to India in the form of loans. It is expected to have a negative impact on FDI inflows. The level of indebtedness shows the burden of repayment and debt servicing on the economy, thus making the country less attractive for foreign investors. (14) Foreign Exchange Rate: It is the rate at which one currency may be converted into another. In other words it is the relative strength of the domestic country in relation to the foreign country. High volatility of the exchange rate of the currency in the host country discourages investment by the foreign firms as it increases uncertainty regarding the future economic and business prospects of the host country.
  27. 27. 27 | P a g e Conclusion: We have concluded our report with the aim that in coming years the Indians’ economy should be more developed if it has to increase their production capacity and consumption. They need to increase employment rate also giving opportunity to everyone and lead India to development in all aspects like infrastructure, management and education. They need to take steps to increase the value of rupee in global market. India needs maximum governance and minimum government. There is no point having the world’s largest democracy unless it leads to effective government. An effective monetary and government policy is adopted for achieving success for the country.
  28. 28. 28 | P a g e Book References: Principal of Economics 5th Edition by Mankiw Macro Economics 17th Edition by McConnell.Brue.Flynn Website References: http://www.tradingeconomics.com/india/indicators http://www.indexmundi.com/india/economy_profile.html http://en.wikipedia.org/wiki/Inflation http://www.investopedia.com/terms/h/hyperinflation.asp https://bhanusigdel.wordpress.com/2011/11/26/inflation-and-its-types/ http://www.yourarticlelibrary.com/unemployment/unemployment-forms-effects- and-prevention-of-unemployment-in-india/4639/ http://www.indianmba.com/Faculty_Column/FC819/fc819.html http://www.jagranjosh.com/

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