India's Economic Problems: Difficult Road Ahead?
|
Case Code: ECON041 Case Length: 15 Pages Period: 2012-2013 Pub Date: 2013 Teaching Note: Not Available |
Price: Rs.400 Organization : - Industry : - Countries : India Themes: Major Economic Problems, Macroeconomic Policy |
Abstract Case Intro 1 Excerpts
Excerpts
Problems on Many Fronts
As a result of India’s slowest economic expansion since 2009, BNP Paribas, France’s biggest listed bank, sharply cut India's GDP forecast to 3.7% for fiscal 2014, from an earlier estimate of 5.2%. Economists pointed out a number of economic challenges facing the Indian economy, the major ones being rupee depreciation; widening current account deficit; falling investment levels; inflation, and fiscal deficit....
Rupee Depreciation
In the fiscal year 2012-2013, the rupee depreciated by roughly 10% against the dollar. According to the Ministry of Finance, the rupee depreciation was "due to decline in exports on account of euro-zone crisis and widening of trade deficit, as imports remained resilient due to high oil prices and gold imports." A trade deficit of 10.2% of GDP in 2011-2012 created volatility in the supply-demand balance in India’s domestic foreign exchange market, which placed a downward pressure on the rupee.
The average exchange rate of the rupee per US dollar ranged between INR51.81 in April 2012 and INR56.03 in December 2012. On June 27, 2012, the rupee touched an all time low of INR57.22 per US dollar, which was a 10.9% depreciation over INR51.16 on March 30, 2012. On October 05 2012, the rupee appreciated to INR51.62 per US dollar. However, thereafter, the rupee began declining and the monthly average exchange rate of the rupee ranged between INR53.02 and INR54.78 per US dollar between October and December 2012. Such volatility in the rupee increased uncertainty in India's domestic market and impacted business confidence in 2012.
The rupee's volatility continued in 2013 also. The Indian rupee, which was around INR54 against the US dollar at the beginning of the year, fell to a record low level of INR68.80 on August 28, 2013. The slide of the rupee started in May 2013 and by August 2013 it had lost 20% of its value against the dollar. Increasing oil prices as a result of the Syria conflict, widening CAD, and capital outflows intensified the rupee’s fall in August 2013...
Current Account Deficit
According to the Reserve Bank of India (RBI), India's current account deficit , swelled to US$87.8 billion (4.8% of GDP) during 2012-2013, from US$78.2 billion (4.2% of GDP) in 2011-2012. The reason behind India's swelling current account deficit in 2012 was lower exports and higher imports of oil, coal, and gold. Morgan Stanley, a global financial services firm, estimated that India's current account deficit stood at US$93.9 billion (5.1% of GDP) in 2012, just behind that of the US in absolute terms. Such a high current account deficit was expected to weaken India's economic growth, as it created a situation wherein investors dumped the country's assets...
Falling Investment
The growth rate of the Indian economy since 2003-04 showed a correlation with the investment rate. For instance, the GDP growth was lower in the years 2008-2009 and 2011-2012, when the growth rate of investment was low. One of the major economic problems which India faced in 2012-2013, was lack of investments happening in the country. According to Harish Damodaran, Reporter and Editorial Analyst of The Hindu Business Line, "The economy's main problem today is investment, not fiscal and current account deficits that will take care of themselves."...
Fiscal Deficit
India's fiscal deficit widened to 5.7% of GDP in 2011-12, according to the “Economic Survey 2012–13” report. A high fiscal deficit was a cause of concern for the Indian economy as due to it, inflation increased; monetary policy expansion became constrained; external sector imbalances widened; and investment growth and employment took a hit. This resulted overall in weak economic growth in 2011-2012...
Inflation
High inflation since 2009 had been the most challenging issue for policymakers in India. The inflation rate in India was based on the Wholesale Price Index (WPI). Inflation, as measured by the WPI remained above 7% since December 2009. During 2010-2011, it was as high as 11.1% and in 2011-2012 it was around 7.2%. Since the WPI included a higher number of products, it was given more importance than the Consumer Price Index (CPI) in India. The weight of manufactured products was 65% in the WPI basket...
Outlook
India's economic situation in 2013, according to some, was a repeat of 1991, which was the worst economic crisis of India. However, analysts opined that the situation was not as bad as in 1991, as India had reserves to pay seven months of imports in 2013, compared to just 15 days in 1991.
India's growing economic problems in 2013 were a matter of great concern, especially its large current account deficit and rupee depreciation. Apart from this, the Indian Prime Minister's economic advisory council (council) opined that containing fiscal deficit at 4.8% of GDP could be a challenge for the Indian government...
Exhibits
Exhibit I: Outstanding Investments: Stalled Projects (2006-2012)
Exhibit II: Quarterly Investments: New Projects (2006-2012)
Exhibit III: FDI Inflows Top South Asian Countries (in USD billion)
Buy this case study (Please select any one of the payment options)
| Price: Rs.400 |
Price: Rs.400 | PayPal (9 USD) |
