Past And Current State Of The Indian Economy Economics Essay

The Indian Economy is one of the fasted growing economies. It ranks third largest economy in the world in terms of Purchasing Power Parity and 12th largest in terms of market exchange rate at $1,242 billion. It is predicted by Goldman Sachs, the Global Investment Bank that by 2035, India would be the third largest economy in the world just after US and China and grows up to 60% the size of US economy. This Booming economy of today had to pass through many difficult times before it achieved the current GDP of 8.9%. The Indian economy has been propelled by liberalization policies that have been instrumental in boosting demand as well as trade volume. India was also able to keep its economy growing at a healthy rate even during the 2007-09 recession having a 5.4% GDP.

The history of Indian economy can be broadly divided into three phases:

Pre- Colonial

This phase lies between the Indus Valley Civilization to the 1700 AD time line when the Indian economy was very developed because of its good trade relationships with the other parts of the world. This was proved by the coins which were used during that era. Every village in India was a self sufficient entity as they were economically independant and all teh economic needs were fulfilled within the village.

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Colonial

Colonization commenced with the arrival and advent of the East India Company which ruined the Indian economy to a great extent. The British used to buy raw materials from India at very cheap rate and finished goods were sold back to Indian markets in higher than normal price. This led to two-way depletion of resources. During this phase India’s share of world income declined from 22.3% in 1700 AD to 3.8% in 1952.

Post Colonial

Agriculture and Industrial sector were given immediate attention. Industrial sector developed at a fast pace to provide employment opportunities to the growing population and keep pace with the developments in the world. The GDP became 9% in 2005-06 which was 2.3% in 1951-52.

Man Mohan Singh introduced Economic Liberalization in 1991. PV Narsimha Rao was a stepping stone for Indian economic reform movements. Trade liberalization, financial liberalization, tax reforms and opening up to foreign investments were some of the important steps, which helped Indian economy to gain momentum

To maintain its current status and to achieve the target GDP of 10% for financial year 2006-07, Indian economy has to overcome many challenges.

Current Scenario of Indian Economy

Outsourcing has been the biggest boon to our economy. We have English speaking population which has been instrumental in making India a preferred destination for information Technology products as well as business process outsourcing.

Indian large, dynamic, diverse economy is steadily expanding in major sectors including manufacturing industries, agriculture, textiles and handicrafts and services. Agriculture constitutes a major component of the Indian economy with over 66% of the Indian population earning its livelihood from this area. India is also primarily driven by domestic (consumer) consumption which is in contrast with Japan and China which follows an export-oriented model.

Statistics of Indian Economy

In 2009, India’s PPP GDP stood at $3.548 trillion and was the fourth largest economy by volume.

The Services sector, backed by the IT revolution, remained the biggest contributor to the national GDP with a contribution of 58.4%.

The industry sector contributed 24.1% and the agriculture sector contributed 17.5% to the GDP.

The employment scenario was dominated by the services sector, creating 62.6% of the jobs for the 467 million workforces.

The Industry sector contributed 25.8% to the GDP and employed 20% of the workforce.

The Agriculture sector contributed 15.8% to the GDP and created 17.5% jobs (India Labor Force).

The unemployment rate remained around 10% in 2009.

However, rising inflation became a major concern, and measures to check it are being implemented.

In 2009, the rate of inflation was around 10.7% (India Inflation Rate Change).

Challenges before Indian economy:

Population Explosion.

Poverty Unemployment

Rural Urban divide

Question 2: Foreign Exchange

The Foreign Exchange Market is a worldwide decentralized over-the-counter financial market for the trading of currencies. The Foreign exchange market determines the relative values of different currencies. A wide range of different types of Buyers and sellers around the world do trading via financial centres around the clock except for weekends. Forex fixing is the daily monetary exchange rate fixed by the national bank of each country.

Purpose of foreign Exchange: The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a Indian business to import British goods and pay Pound Sterling, even though the business’s income is in Rupees.

ForEx Transaction: Initially, the foreign exchange rate remained fixed as per the Bretton Woods System but today since 1970s the countries gradually switched to floating Exchange Rate.

Uniqueness of ForEx market: The foreign exchange market is unique because of

Its huge trading volume, leading to high liquidity

Its geographical dispersion

Its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday

The variety of factors that affect exchange rates

The low margins of relative profit compared with other markets of fixed income

The use of leverage to enhance profit margins with respect to account size.

Determinants of FX rates: These explain the fluctuations in FX rates in a floating exchange rate regime:

(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. These theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital]

(b) Balance of payments model: It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.

(c) Asset market model: The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”

Supply and demand for any given currency by several factors:

Economic factors: These include: (a) economic policy, disseminated by government agencies and central banks, (b) economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy and monetary policy

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country’s currency.

Balance of trade levels and trends: Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation’s economy. For example, trade deficits may have a negative impact on a nation’s currency.

Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Generally, the more healthy and robust a country’s economy, the better its currency will perform, and the more demand for it there will be.

Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency.

Political conditions: Internal, regional, and international political conditions and events can have a profound effect on currency markets. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect

Market psychology: Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a “flight to quality,” with investors seeking a “safe haven.” The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt.

“Buy the rumour, sell the fact”: It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use.

Risk aversion in forex: In case of any potentially adverse event which may affect the market condition occurs then Foreign Exchange exhibits risk aversion.In the context of the forex market, traders liquidate their positions in various currencies to take up positions in safe haven currencies, such as the Euro. The choice of which is based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across world fell while the US Dollar strengthened. This happened despite the strong focus of the crisis in the USA.