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India. In pictures.
A graphical representation of the Indian economy
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India: Key facts & figures…
Economic Indicators
GDP (US$ bn, 2001)
GDP per capita (PPP US$, 2003)
Industries (% of GDP, 2002)
Agriculture (% of GDP, 2002)
Services (% of GDP, 2002)
Exports (US$ bn, 2002)
Imports (US$ bn, 2002)
Public expenditure on education (% of GDP, 1998-2000)
Public expenditure on health (% of GDP, 2001)
Fiscal Deficit (% of GDP, 2003)
Forex Reserves (US$ bn, 2003)
India
477.3
2,830.0
21.5%
23.9%
54.6%
52.7
65.2
4.1%
0.9%
5.4%
119.8
China
1,159.0
4,690.0
51.1%
15.4%
33.5%
325.7
281.5
2.1%
1.9%
-3.0%
439.8
Human Development Indicators
Population (million, 2001)
Annual population growth (1975-2001)
Population density (people per 1sq km)
Population under age 15
Population living below $ 1 a day (1990-2001)
Unemployment (% of labour force, 2002)
Adult literacy rate (15 years and above)
Female adult literacy rate (15 years and above)
Life expectancy (years, 2001)
Infant Mortality rate (per 1,000 live births, 2001)
1,033.0
2.0%
324.0
33.7%
34.7%
9.9%
58.0%
46.4%
63.3
67.0
1,285.2
1.3%
130.0
24.3%
16.1%
9.0%
85.8%
78.7%
70.6
31.0
Other Indicators
Telephone mainlines (per 1,000 people, 2001)
Internet users (per 1,000 people, 2001)
Cellular subscribers (per 1,000 people, 2001)
38.0
6.8
6.0
137.0
25.7
110.0
Source: UNDP, Economist
INDIA,
SHINING?
Factors that play a very vital
role in achieving our objective
of a sustainable long-term
growth in GDP. We still have a
long way to go!
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Real GDP growth: 5-year average…
7.0
6.0
5.0
4.0
3.0
2.0
FY56
FY62
F68
FY74
FY80
FY86
FY92
FY98
FY04
What this graph means?
Our view…
Gross Domestic Product (GDP), in crude terms, is
the output of an economy. Like a company has sales,
an economy has GDP. This graph indicates the 5
year average real GDP growth (GDP net of inflation)
over the last fifty years.
The graph indicates that real GDP growth, as
calculated on a 5-year moving average basis, has
been on a constant rise. This clearly indicates that
while there have been cycles, the run-rate of our
economy’s growth has shown an improving trend.
Source: RBI
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Real GDP growth & Per capita GDP…
Per capita GDP (Rs)
Real GDP growth (RHS, %)
25,000
10.0
20,000
8.0
15,000
6.0
10,000
4.0
5,000
2.0
0
0.0
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
What this graph means?
Our view…
Apart from the growth in GDP, how this growth is
shared is also important. If the population growth is
higher, then GDP has to grow faster. This will
increase income at the hands of the populace. While
per capita GDP is a good factor, it does not clearly
reflect the disparities in income levels
While India boasts of as one of the fastest growing
economies in the world, the slow growth in per capita
GDP tells the other side of the story. Though we are
among the top five economies in the world in terms of
size, in terms of per-capita GDP, we are lagging way
behind.
Source: CMIE
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Real GDP contributors (%)…
Agriculture & allied
Industry
Services
60.0
50.0
40.0
30.0
20.0
10.0
1950s
1960s
1970s
1980s
1990s
2000-01
2001-02
2002-03
What this graph means?
Our view…
GDP basically comprises of output by agriculture,
industrial and services sectors. If one were to break
this up further, while agriculture includes allied
activities, the industrial sector includes capital goods,
mining, electricity and services includes housing,
banking, transportation, utilities and tourism.
As can be seen from the graph above, the
contribution of the services sector has significantly
outpaced the other two. While every economy goes
through this transition, the Indian economy has
missed the industrial transition. We are now a
services led economy. But is services the answer?
Source: RBI
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GDP & its constituents (% growth)…
Industry
Services
Agriculture
GDP
14.0
10.0
6.0
2.0
-2.0
-6.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
Growth of an economy is a influenced by the
performance of its constituents. Though it is
important to understand what contributes to the GDP,
it is also important to understand what proportion of
the population is dependent on each of these
constituents.
One of the basic reasons of the underperformance of
the Indian economy has been the volatile growth of
the agricultural sector. Even when the contribution
from this sector is around 25% of GDP, the fact that
almost 70% of the population depends on it has
affected our economic performance.
Source: CMIE
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Growth in agricultural production & GDP…
Agricultural production (%)
GDP (RHS, %)
30.0
9.0
20.0
8.0
10.0
7.0
0.0
6.0
-10.0
5.0
-20.0
4.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
The graph is indicative of a high level of co-relation
between India’s GDP growth and growth of
agricultural production.
We have already mentioned in the previous slide
about the large dependence of India’s GDP growth
on the performance of the agricultural sector. This
graph just proves our point. Can we continue to
ignore this sector?
Source: CMIE
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Investments by the manufacturing sector…
Gross fixed assets (% growth)
Sales (% growth)
20.0
15.0
10.0
5.0
0.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
-5.0
What this graph means?
Our view…
Economy functions in cycles i.e. trough, recovery,
peak and deceleration. Generally, close to the peak,
investments in physical assets tend to be on the
higher side and vice versa. Investments by the
manufacturing sector is thus, a crucial factor to watch
out for.
The excess investments by the manufacturing sector
in the mid-1990s seem to be drying out. Sales growth
has continued to outpace investment in physical
assets. Of course, consolidation has played a role.
But how long can the sector grow sales without
additional investments? Investment recovery in sight!
Source: CMIE
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Where the Rupee comes from…
Other Capital Receipts
(17.7%)
Borrowings
(24.4%)
Tax Revenue
(42.0%)
Non-Tax Revenue
(15.9%)
What this graph means?
Our view…
The pie chart represents various sources of revenue
for the Indian government. Tax revenue contributes
the largest chunk (42%) followed by borrowings
(24%) and other capital receipts (17.7%).
Disinvestment receipts is 17.0% of other capital
receipts.
While tax revenue accounts for a larger portion of
government’s total revenues, a sedate growth in this
stream is a cause of concern. Also, the fact that
borrowings make a large chunk is indicative of the
government’s rising indebtedness.
Source: RBI
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Where the Rupee goes…
Other Non-Plan Expenditure
(18.4%)
Plan Expenditure
(27.6%)
Subsidies
(11.1%)
Interest Payments
(28.1%)
Defense
(14.9%)
What this graph means?
Our view…
Any government, like a company, has to spend
towards various aspects to improve competitiveness.
This graph indicates the areas of expenditure of the
Indian government. The central government’s
expenditure can be broadly segregated into revenue
and capital expenditure.
The pie indicates that the government spends a big
chunk of its total expenditure towards interest
payments (unproductive). However, the plan
expenditure, which includes spending towards
infrastructure development, has a lower share. One
of the major reasons for India’s slow rate of growth.
Source: RBI
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Constituents of tax receipts (% of GDP)…
Direct Tax
Indirect Tax
Expenditure
20.0
16.0
12.0
8.0
4.0
0.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
The graph indicates the Central governments’ major
sources of revenues – direct and indirect taxes – as a
percent of GDP. Expenditure as percent of GDP
indicates that receipts are not enough for the
government to meet its expenditures.
As we had mentioned in the previous slide, growth in
tax revenues has been inadequate and this has been
a concerning factor. Better tax administration and
widening the tax net are some measures that could
bridge the gap.
Source: CMIE
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Constituents of non-plan expenditure (%)…
Subsidies
Defense
Interest payments
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
The graph shows various constituents of the
government’s non-plan expenditure as a percent of
the total non-plan expenditure. The biggest expense
of 28.1% goes towards interest payments. Among the
remaining two, while defense expenditure has been
falling, that towards subsidies is on a rise.
The high levels of interest payments, as shown in the
chart above, are a result of the Indian government’s
rising indebtedness (see the next slide). While
subsidies, per se, are not bad, in most of the cases, it
has failed to serve the purpose.
Source: CMIE
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Increasing debt burden of the government…
Outstanding internal debt (Rs trillion)
% of GDP (RHS)
12.0
44.0
9.0
38.0
6.0
32.0
3.0
26.0
0.0
20.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
The above graph indicates the Central government’s
rising internal debt and the same as a percent of
GDP. The graph is actually meant to indicate the
rising burden on the Indian government towards
making capital and interest repayments that is likely
to hamper its development expenditure.
As the previous slide indicated, the biggest burden on
the Indian government is due to high interest
expenses. The cause can be found out in the graph
above. Though the government has benefited from
the low interest regime, in absolute terms, debt
burden has continued to increase.
Source: CMIE
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Major Deficit Indicators of Central Govt. (%)…
Fiscal Deficit
Revenue Deficit
Primary Deficit
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2001-02
2002-03
2003-04 (BE)
What this graph means?
Our view…
Deficit simply means the excess of expenditure over
receipts or the amount that the government borrows
in a fiscal . This is a result especially of the
government’s profligacy on various non-plan
expenses like interest payments and subsidies.
While deficits are unavoidable for a developing
economy, as the govt. has to spend towards various
initiatives from a long-term perspective, the case of
India is different. The govt.’s largest expenses are
towards non-development aspects (as shown in Slide
10), which is concerning.
Source: RBI
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Interest rate & Change in money supply…
Interest Rate (%)
Money Supply (RHS, %)
9.0
17.0
8.0
16.0
7.0
15.0
6.0
14.0
5.0
13.0
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
In a market-based economy, the price of money
(interest rate) is determined by the demand and
supply of the same. The graph shows the effect of
increased money supply in the economy on the
interest rates.
Despite the Indian government’s high deficit and
consequently, rising borrowings, the liquidity or the
supply of money in the Indian economy has been
robust. One major reason for this is the consistent
inflow of foreign capital. High liquidity is one factor
that has supported the softer interest rate regime.
Source: CMIE
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Interest rate & GDP growth…
Interest Rate (%)
GDP Growth (RHS, %)
13.0
10.0
11.0
8.0
9.0
6.0
7.0
4.0
5.0
2.0
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
This graph shows the co-relation between interest
rates and the GDP growth. Interest rate here means
the bank rate or the rate at which the RBI lends
money to commercial banks. Over the past few
years, we have had a soft interest rate regime, mainly
due to high liquidity (see Slide 15).
As shown in the graph, the softer interest rate regime
over the past few years has had a lag effect on the
growth of the Indian economy. Lower interest rates,
apart from helping companies to restructure their
existing high-cost debt to low-cost ones, has also
boosted retail demand for money.
Source: CMIE
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Interest rate & Inflation…
Interest Rate (%)
Inflation (RHS, %)
9.0
4.4
8.0
4.2
7.0
4.0
6.0
3.8
5.0
3.6
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
This graph shows the relationship between interest
rates and inflation. It all happens in a cycle. Across
the world, the central bankers are concerned about
inflation. If inflation goes beyond unacceptable levels,
the central bank raises interest rates to slowdown
growth.
Despite rising fiscal deficit and strengthening of oil
prices, inflation has remained under check in the last
five years. This was due to low capacity utilisation
and lack of significant credit demand from corporates.
Adequate liquidity has prevented any upward
pressure on interest rates.
Source: CMIE, World Economic Outlook, 2003
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Annual Consumer Price Inflation (%)…
US
Japan
EU
China
India
20.0
15.0
10.0
5.0
0.0
-5.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
What this graph means?
Our view…
Inflation has been a global phenomenon. And when it
rises beyond a point, it becomes a menace. The
above graph indicates that, when compared to some
of the developed and developing economies over the
past few years, inflation in India has been relatively
higher.
One key factor that impacts inflation globally is oil
prices. Though inflation is country specific, in the last
few years, crude prices have remained firm. The RBI,
in its annual monetary policy, has projected inflation
in India at 5% for FY05 (target for FY04 was 4.0% to
4.5%).
Source: World Economic Outlook, 2003
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Rs/US$ rate & Forex reserves…
Forex Reserves (US$ bn)
Rs/US$ rate (RHS)
120
49.0
48.0
100
47.0
80
46.0
45.0
60
44.0
40
43.0
42.0
20
41.0
0
40.0
1999-00
2000-01
2001-02
2002-03
2003-04
What this graph means?
Our view…
The graph indicates rising foreign exchange inflows
into the Indian economy and the consequent effect
on the exchange rate. Rupee has strengthened vis-àvis the US dollar. The reason for this is that a large
supply of the dollar has led to a fall in dollar value
thus having a strengthening effect on the rupee.
A large amount of these forex inflows have come in
the form of remittances from NRIs. Increased inflow
of FII money has also played its part. However, as
Mr. Ajit Dayal says, India is a developing country and
we need to borrow to invest in assets. In the longterm, rupee is likely to weaken.
Source: CMIE
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India: So, what’s the call?
India: So, what’s the call?
Reasons to buy…
Reasons not to buy…
 The essence of democracy
 Lack of vision among policy makers
 Growing entrepreneurial culture
 Bureaucratic hurdles
 Changing population mix (rising middleclass and younger population)
 Poverty, illiteracy and inadequate
healthcare
 Low penetration levels across sectors
 Concerning fiscal situation
 A robust financial sector
 Large low cost talent pool
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Key terms…
Fiscal Deficit is the excess of expenditure over government’s receipts in an accounting year.
More simply, it equals the amount of borrowings made by the government in a year.
FD = Total Expenditure – Revenue Receipts – Disinvestment Receipts – Recovery of loans
Higher Fiscal Deficit leads to Increased Govt. Borrowing leads to Increased Spending leads to
Greater Money Supply leads to Inflation leads to Demand for money exceeding supply leads to
Higher Interest Rates
Revenue Deficit is the excess of revenue expenditure over revenue receipts.
Primary Deficit is measured by Fiscal Deficit less interest payments.
Subsidies, as defined by the Economist, are payments, usually made by the government, to keep
prices below what they would be in a free market, or to keep alive businesses that would otherwise
go bust, or to make activities happen that otherwise would not take place. Subsidies can be a form
of protectionism, by making domestic goods and services artificially competitive against imports.
Inflation means rising prices. Inflation erodes the purchasing power of a unit of currency. More simply,
since prices rise, Re 1 spent tomorrow will buy you lesser amount than what it can buy you today.
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Thank you!
Thank you!
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