GDP India’s nominal GDP as at 2017 is $2.454 trillion. India experiences a positive economic growth rate of 7.2% since 2016. Nominal GDP per capita as at 2017 is $1,850.
GDP GROWTH RATE DECLINED STEADILYFrom January to March of 2016, there was a GDP growth rate of 9.1%. From April to June of 2016, there was a slight decline in GDP growth rate by approximately 1.2% to 7.9%. From July to September of 2016, the GDP growth rate further declined to 7.
5%. On November 8 2016, demonetization was implemented on the nation from September to December 2016, which caused the GDP growth rate to fall to 7.0%. From October to December of 2016, the GDP growth rate fell to 6.5%. From January to March of 2017, the GDP growth rate was 6.
1%, a downturn of 3% on a yearly basis. As at April to June 2017, the GDP growth rate is recorded at the lowest of 5.7%.Factors that caused the declining GDP of India in 20161. Implementation of GSTThe Goods and Services Tax (GST) was implemented on 1st July 2016 to make the transition process easier. However, it had caused the manufacturing sector to reach the lowest growth rate in five years. Many manufacturers destocked their products during April to June 2016 to avoid paying GST, resulting in a decrease in the supply of goods and services and a decline in GDP in the short-run.
An example is that in India the GST would add up to 8% of the cost of new homes, which reduced consumers’ demand by about 12%. This will cause a decline in GDP in short run due to the falling demand. However, the implementation of GST will benefit the nation in the long-run as the Indian government can earn more revenue by collecting taxes. The government can use these revenue collected to benefit the country through government spending (injections).All in all, GST helps to create a transparent and corruption-free tax administration in the long run. GDP can be understated due to the black money issue because it is not reported in the GDP.
Therefore, the implementation of GST can help to track transactions in the country, discouraging the usage of black money and causing the GDP growth rate to increase in the long run.2. DemonetizationDemonetization is a process that involves a change of national currency, where old currencies are replaced with new ones. A country would choose to demonetize their currency to reduce illegal activities and eliminate the usage of counterfeit currencies. This would cause a decline in GDP in the short run due to lower purchasing power, but benefit in the long run. Demonetization hits India on November 8, where 86% of India’s currency was void to eliminate the ‘black market’s cash supply’ to resolve the black money issue and counterfeit notes out of the economy, converting them into legal and taxable money.
This caused the GDP growth rate to fall to 7.0% as it caused the disruption of the cash transaction for many jobs. As a result of demonetization, it affected the unorganised sectors, which constitutes approximately 45% of India’s economy. Since the employment terms are not fixed and enterprises are not registered with the government in the unorganised sector, the GDP is likely to go further down.Transactions made in the unorganised sectors are non-market transactions. Since GDP only reports formal market transactions, any revenue made in the unorganised sector will not be accounted for in the GDP, which explains why India’s GDP was understated. The aim of demonetization is to remove the high usage of black money in the nation. This caused the GDP to have a sharp decline in the short-term as the demand for many goods and services decreased due to insufficient new currency for some citizens and the delayed cash transactions by different firms, of which many lost their purchasing power.
However in long term, this will benefit the economy as the GST will help to eliminate the black money issue. 3. Disciplined government spendingIn 2017, India faces fiscal deficit, reaching approximately 96.1% of the budget for the full fiscal year that ends on March 2018. In order to manage the fiscal deficit, the government has been focusing on reducing the public expenditure. However, this has resulted in an overall decline in investments for infrastructure, transport sectors and social capital, such as education and health sector, which are the biggest job providers.Facing such crisis, the government has to reduce its aggregate expenditures to avoid economic risk overtime.
When the government stopped funding for projects like building of infrastructure, jobs will decline in numbers resulting in lesser revenue generated. Hence, it is critical for India’s government to ensure that its expenditure does not exceed its revenue. If the problem of fiscal deficit is not solved, it is plausible that the government will not be able to continue running and investing on developing the country. Hence, the GDP declines when government spending decreases. India’s government can adopt the expansionary fiscal policy to increase the government spending which will lead to a cumulative increase in GDP due to the spending multiplier. The government can spend lesser to cover up the negative GDP gap in order to reach the full employment GDP as a result of the multiplier effect.
As a result, a new equilibrium GDP is established with minimum government spending which prevents fiscal deficit.4. Capacity Utilisation declinedFirms will always try to maximise utilisation of their resources to incur less expenditures.In India, the capacity utilisation figure dropped drastically over five years, from 79% to the current 70%. The continuous decline was measured from 952 government manufacturing firms and around 348 non-government manufacturing firms. The decline in capacity utilisation leads to dwindling foreign investments, which in turn leads to the slowdown of the economy. A decline in capacity utilisation means that the firms are not maximising the use of resources due to high costs of production.
This occurs when there is a lack of demand for goods and services. Firms would no longer need to produce as many goods and services as before, resulting to firms under-utilizing their resources. When firms under-utilise their resources, they are not able to produce enough supply to meet demand, leading to inventory depletion. The decrease in average output evidently and directly leads to a drop in India’s GDP in short run. With effect of inventory depletion in the long run, firms will then start hiring more workers which increases capacity utilisation, leading to increase in production in order to meet the demand, ultimately increasing India’s GDP.
UNEMPLOYMENT Unemployment Graph The graph shows that the unemployment rate in India constantly fluctuating from Feb 2016 to Nov 2017. As at 1 September 2017, the unemployment rate in India was 3.9%, of which 4.75% was from the urban area and 3.48% from the rural area. Current unemployment rate is rising and low job growth is due to factors like:1.
Capacity utilisation in industryThe graph shows the manufacturing sector in the last 4 years. There were no improvements in terms of capacity utilization in India. Capacity utilization was at 71.2% for the quarter ended 30 June 2013. Since there was a drop in India’s capacity utilisation, it means India’s total production was not maximised. For instance, the global demand for tobacco falls since 2014, causing the Tobacco Board to reduce their crop size by ?.
This led to the decline in production and the industry no longer needs to supply the same amount of Tobaccos as before. Hence, machines will be underutilized as resources are not used to their maximum potential. This will cause the factories to cut down on their factors of production, such as labour. Factories will then retrench employees, causing unemployment rate to increase. 2. Agriculture growth Most agricultural works are done in the rural parts of India, which makes it difficult for the government to calculate exactly how many people are employed or unemployed.
In fact, more than 58% of people living in rural areas do agriculture work for a living. This causes an understatement of the unemployment rate. Additionally, agricultural work that are mostly done by families are not considered formal market transactions and will not be recorded in the calculation of GDP. Many working as unpaid workers in family businesses are considered employed but are not accounted for in the employment rate, causing the unemployment rate to be overstated. 3. Unskilled workersAs India has many unskilled workers who are not taught of the latest technologies, only skilled workers are preferred in technological sectors, creating structural unemployment. This means that unskilled workers are not be able to get a job easily due to mismatch of skills.
For example, a tech sector is expected to face a shortage of as high as 500,000 employees in 2010 as there weren’t enough workers that are skilled in the sector. However, with advancement in technology in these industries, the unemployment rate will only increase because the unskilled workers are unable to keep up with the skills required for these industries due to lack of proper training. 4. Small and medium enterprises (SMEs) unable to generate more jobs Small and Medium Enterprises require large amounts of labour for production and they employ 40% of the workforce in India. However, due to low investment and lack of easy access to loans, there is a lack of financial capital, resulting in them not being able to pay and hire enough workers, thus increasing the unemployment rate.
Poor infrastructure, such as power supplies, will lead to lower productivity of workers as it slows down their work process, hence lowering the output of the firm. As seen in the picture above, 87% of households in Bihar experienced no electricity connection. This means that factories in Bihar (Eg: Kanti Thermal Power Station Unit-1) are unable to supply electricity to factories, causing the output and productivity to drop and increasing the unemployment rate as firms have to downsize to reduce labour costs. 2 groups that are in urgent need of jobs 1. Growing number of better educated youthsMany youths in India are educated, making them economically active. They are actively seeking for employment, but are currently not working as India does not have enough jobs for them. The reason might be that many jobs are informal and require little skills. Thus, when these educated youths work in jobs below their skill levels, they are considered underemployed.
Moreover, India’s informal economy hires about 80% of India’s labour force where the jobs in the informal sector are unstable and workers are informed about their working schedules on a daily basis. Their jobs are not contract based, meaning that workers may get retrenched without warning and have irregular pays. Underemployment will understate the unemployment rate as such jobs are excluded. Therefore, the unemployment rate of India will continue to increase if the issue of non-availability of jobs for the people who are able and willing to work is not mitigated. This includes young women in India, who are making huge advances in education and achieving higher academic qualifications, allowing them to be able to look for higher skilled jobs. Usually, when people are better educated, they will look for more suitable jobs. However, there is still discrimination towards women in India as they are expected to stay at home and look after their children, even though women are as educated as men.
As a result, they cannot contribute to the economy even though they are highly educated. Thus, they are considered unemployed as they are still searching for jobs, which increases the unemployment rate in India. Hence, the female labour force participation rate is declining from 2005 of 36.
9% to 2016 of 23.70% as seen in the graph. 2. Uneducated agricultural workers The biggest employment sector in India is the agricultural sector, which employs about 45% of India’s population. However, due to drought and natural disasters, many farms in India have suffered agricultural distress.
For example, a monsoon in April 2016 caused the number of jobs in the agriculture sector to decline as crops were destroyed and farmers were unable to grow crops for a time period due to soil erosion. Thus, the agricultural sector could not employ as many workers as before because time was needed for the flood to clear off. This resulted in the retrenchment of workers, leading to a high unemployment rate during that period. Since the unemployed workers who formerly worked in the agricultural sectors lacked the skills to work in other sectors, most employers in other sectors (E.g. technological and educational) were reluctant to employ lowly skilled workers.
Hence, the unemployed were unable to find another job easily and subsequently, they remained unemployed till they find a suitable job of the suitable skills. This is known as structural unemployment. After several unsuccessful attempts of job searching, the unemployed would eventually stop looking for jobs, becoming discouraged workers and economically inactive. This caused the unemployment rate to be understated.
Ways to decrease Unemployment Rate 1. Implementation of industrial and trade policyThe Indian government needs to focus on upgrading and improving the quality of labour in order to increase exports and foreign investment. With improvement in the quality of labour, the quality of goods and services produced becomes better. Foreign companies will then be more willing to invest and import India’s products.
The nation’s nominal GDP will increase as there are more demand for their goods and services. An example of an industrial policy is import-substitution-industrialization (ISI), which advocates the replacement of foreign imports with domestic production. To increase domestic production in India, more people have to be employed to creating more job opportunities. This is implemented to help deal with the burden of the GST as it will reduce India’s nominal GDP in the short-run. People in India are not very affluent and cannot afford many imported goods which are more expensive as compared to the local products.
Hence, the demand for these imported products is very low as locals will buy local goods and services instead due to their lower prices. With the same amount of nominal income, the locals’ real income has gone up. Locals can now buy more with their nominal income as prices are lower.
Thus, India should focus more on producing local goods, which can be exported to other countries and also purchased in India. Thus, unemployment rate will decrease as more jobs are created when there is an increase in demand for locally produced goods. 2. Implementation of Government PoliciesGovernment can provide tax incentives for manufacturers.
The government uses the expansionary fiscal policy to cut the amount of taxes charged. This will increase the manufacturers’ spending power as they pay lesser tax and aggregate demand for goods and services to reach the full employment output. In order to keep up with the increasing demand, the production for goods and services and number of workers have to increase to prevent inventory depletion. As a result, real GDP will increase.The Indian government should also advocate policies and more subsidies like tax rebates for factories and firms. This will entice more firms to hire workers, creating more job opportunities and reducing unemployment rate in India.
For example, India has Retirement Programmes like Employee’s Provident Fund Organisation (EPFO), which is similar to Singapore’s CPF. This will encourage unskilled workers to attend trainings to upgrade their skills. It tackles structural unemployment, decreasing unemployment rate.INFLATION CPI BasketThe above pie chart shows the different components in the CPI basket being evenly distributed.CPI GraphIndia’s CPI has been increasing steadily throughout the years of 2011 to 2017, from approximately 88 index points in 2011 to 134 index points in 2017. So far, the peak of the CPI graph was at the end of 2016, with 135 index points, while the trough is at the beginning of 2011, with 86 index points. Cost-push inflation occurs when there is a shortage or competition of resources to produce goods and services.
For example, a monsoon in April 2016 causes the supply of agricultural products to decline. As a result, the lack of agricultural products due to monsoon will cause prices to increase, which also increases inflation in 2016. The above graph shows the changes in CPI on a yearly basis and CPI for both rural andurban areas have been increasing. Hence, we can infer that the total expenditure has increased for an average person. CPI is calculated separately in rural and urban areas as the % of components in the fixed baskets for the 2 areas are different. For example, India’s rural areas mainly practice agriculture, so they are able to obtain many products, mainly food sources from their own farms. However, in the urban areas, the population relies on products produced in the agricultural sector, hence the components in the basket will be different. 1.
Inflation in HousingThe housing inflation increased from approximately 4.8% in June 2015 to approximately 5.1% in February 2016. For instance, Mumbai property prices kept increasing due to high demand as Mumbai is densely populated. The reason why there is a high demand is due to the increasing population in Mumbai. Mumbai’s population rose sharply by 983% since 1911 (Karnik, 2016), which increased the population in Mumbai.
Additionally, there are many immigrants coming to Mumbai due to its fast-growing urbanisation, globalisation and high employment opportunities, increasing the number of houses constructed. However, Mumbai’s geographical location is surrounded by water where there is not much area for expansion or construction, leading to lower supply and causing a shortage of housing due to increasing demand.This is known as demand-pull inflation. When sellers in India are unable to supply sufficient housing that buyers demand, they respond by raising prices, which explains why there is inflation in housing.2. Inflation in Fuel and LightThe inflation in fuel and light was caused by an increase in the GST in the fuel sector. When the government increased the GST on fuel, sellers will also increase the prices of their goods to match with inflation rate.
Rural inflation for fuel and light is also higher than the urban inflation, of which both were declining for the past 4 years due to the differences in their usage of electricity tariff and variations in cooking fuel used in rural and urban areas, such that rural India’s fuel mix is more concentrated towards domestically-produced firewoods which are more costly compared to the urban areas, which use Liquefied Petroleum Gas (LPG) and diesel. These prices have fallen because of low global prices, resulting in cheaper fuel and light.3.
Food and beveragesFood and beverages inflation graph for both rural and urban increased in 2016.Supply of crops in India dropped as monsoon in April 2016 made it unfavourable for crops to grow. The decrease in supply caused product shortages in the market, resulting in demand-pull inflation, which is the increase in general price levels due to excessive aggregate spending. Conclusion From what we have analysed, India’s economy is doing relatively well as they are at the recovery stage of the business cycle. India’s GDP is growing at a slower rate in 2016 and is expected to increase in the future due to capital investment and better technology. India’s unemployment rate declined to approximately 4% in 2017 from a high rate of 8% in 2016 because of successful implementation of government policies to reduce unemployment rate.
Lastly, inflation in India has been increasing, which causes prices of goods and services to ascend due to increase in consumer demand which portrays demand pull inflation(housing, food and beverages).