Business Environment

Economic Indicators-2 : 

Economic Indicators-2 Module-2 12/14/2008 1 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Inflation is a rise in the general level of prices of goods and services in an economy over a period of time Inflation is a decline in the real value of money—a loss of Purchasing Power Inflation is measured in Inflation Rate. Inflation Rate is the rate of Increase of a price Index The price Index measure the cost of buying a standard basket of goods and services at different points of time Inflation Rate = Pt - Pt-1 -------------- * 100 Pt-1 Purchasing Power = 1 ----------------* Rs 1+ Inflation Rate 12/14/2008 2 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Inflation Rate Pt - Pt-1 -------------- * 100 Pt-1 In 2007 We can only purchase 91.2 % of goods bought in 2006 12/14/2008 3 manavazhaganr@bsnl.in

Rate Of Inflation- Basis of calculation : 

Rate Of Inflation- Basis of calculation Based on: Consumer Price Index - CPI Wholesale Price Index - WPI Producer Price Index - PPI Consumer Price Index: Measures the cost of buying a standard basket of goods & services at different point of time at retail level. The basket of goods & services and consumption pattern are found out through Household Survey It is the most widely used Index to measure Inflation 12/14/2008 4 manavazhaganr@bsnl.in

Rate Of Inflation- calculation based on CPI : 

Rate Of Inflation- calculation based on CPI The rate of Inflation for 2007 is 24 % 12/14/2008 5 manavazhaganr@bsnl.in

Rate Of Inflation- Basis of calculation : 

Rate Of Inflation- Basis of calculation Based on: Consumer Price Index - CPI Wholesale Price Index - WPI Producer Price Index - PPI Wholesale Price Index: Measures the General price index at the level of second or subsequent transactions but before the transaction at retail level. India uses this index to measure inflation India prepares the following indices: Primary Product Group: Essential commodities like food grains, fruits, milk etc. Manufactured Product Group: Processed foods like Sugar, Edible oil, Manufactured products like paper, cement etc Fuel, Power Light & Lubricant Group The weights of above three groups in the WPI are 22, 64,14 respectively 12/14/2008 6 manavazhaganr@bsnl.in

Rate Of Inflation- Basis of calculation : 

Rate Of Inflation- Basis of calculation Based on: Consumer Price Index - CPI Wholesale Price Index - WPI Producer Price Index - PPI Producer Price Index: Measures the General price index at the level of first transactions but before the transaction at retail level. 12/14/2008 7 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation 12/14/2008 8 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Reasons / Sources of Inflation Increased Demand for Goods - Demand Pull Inflation Increase in Cost of Production – Cost Push Inflation Increase in Wages - Wage Push Inflation Increasing Profit – Profit Push Inflation ( Monopoly Situations ) Increase in Income of Low income Groups – Income share Inflation 12/14/2008 9 manavazhaganr@bsnl.in

Rate of Inflation : 

Rate of Inflation 12/14/2008 10 manavazhaganr@bsnl.in

Rate of Inflation : 

Rate of Inflation 12/14/2008 11 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Tools of Inflation Control Restrictive Monetary Policy Restrictive Fiscal Policy Wage – Price Controls Deregulation & Privatisation 12/14/2008 12 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Tools of Inflation Control Restrictive Monetary Policy Restrictive Fiscal Policy Wage - Price Controls Deregulation & Privatisation Restrictive Monetary Policy Purpose: To reduce the demand of Goods & services. Strategy : Reduce money supply Policy adapted by Government: Increase Interest rate Increase Cash Reserve Ratio (CRR) Increase Statutory Liquidity Ratio(SLR) Increase in Prime Lending Rate ( PLR ) Sale of Government Securities ( Treasury bill , Bonds etc. ) Sell Dollars from Market 12/14/2008 13 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Tools of Inflation Control Restrictive Monetary Policy Restrictive Fiscal Policy Wage-Price Controls Deregulation & Privatisation Restrictive Fiscal Policy Purpose: To reduce the Purchasing Power of People Strategy : Reduce Government Expenditure Policy adapted by Government: Increase Direct & Indirect Tax Decrease Expenditure on New Projects Reduce Subsidies Massive borrowing Program Implement Austerity measures 12/14/2008 14 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Tools of Inflation Control Restrictive Monetary Policy Restrictive Fiscal Policy Wage-Price Controls Deregulation & Privatisation Wage-Price Controls Purpose: To reduce the Price of Goods Strategy : Reduce Price of Essential Commodities, Wages Policy adapted by Government: Import Essential Commodities Reduce Excise Duty Wage Freeze Austerity Measures Ban Futures Trading on Commodities 12/14/2008 15 manavazhaganr@bsnl.in

Rate Of Inflation : 

Rate Of Inflation Tools of Inflation Control Restrictive Monetary Policy Restrictive Fiscal Policy Wage-Price Controls Deregulation & Privatisation Deregulation & Privatisation Purpose: To control Supply side Inflation Strategy : Increase Competition & Growth Policy adapted by Government: Allow Private players to operate in restricted areas 12/14/2008 16 manavazhaganr@bsnl.in

Money Supply : 

Money Supply Total amount of money available in an economy at a particular point of time. Money supply is : monitored by Central Bank (RBI) through Monetary Policy Divided into Four categories – M0,M1, M2,M3 12/14/2008 17 manavazhaganr@bsnl.in

Money Supply : 

Money Supply M0, M1, M2, M3 Money Supply M0: It includes All coins, Currency held by the Public, Traveler's Cheques These assets can be converted into money quickly It is the most liquid measure of Money supply It is called Reserve money 12/14/2008 18 manavazhaganr@bsnl.in

Money Supply : 

Money Supply M0, M1, M2, M3 Money Supply M1: It includes M0 Demand Deposits with banks It is the Very liquid measure of Money supply This money is used to measure Money in circulation It is also called Narrow money / Transaction Money 12/14/2008 19 manavazhaganr@bsnl.in

Money Supply : 

Money Supply M0, M1, M2, M3 Money Supply M2: It includes M1 Time Deposits Savings Deposits It is the Broader measure of Money supply 12/14/2008 20 manavazhaganr@bsnl.in

Money Supply : 

Money Supply M0, M1, M2 & M3 Money Supply M3: It includes M2 Large Time Deposits It is the Broader measure of Money supply It is called the Broad Money 12/14/2008 21 manavazhaganr@bsnl.in

Money Supply : 

Money Supply M0, M1, M2 & M3 Money Supply 12/14/2008 22 manavazhaganr@bsnl.in

Money Supply : 

Money Supply Sources of Money Supply Bank Credits Foreign Exchange Reserves Government’s Currency Liability to Public 12/14/2008 23 manavazhaganr@bsnl.in

Money Supply : 

Money Supply To maintain Price Stability Money supply & Output should match Low Money Supply Liquidity shortage Increase in Interest rate Depress Demand Decrease output Recession Excess Money Supply Lowers Interest rate Increase Demand Increase output Fuels inflation 12/14/2008 24 manavazhaganr@bsnl.in

Money Supply : 

Money Supply How to reduce Money Supply? RBI issues Bonds, treasury bills Banks Reduce credit RBI Sells Dollars /Euros Increase Cash Reserve Ratio ( CRR ) Increase Statutary Liquidity Ratio ( SLR ) Increase Prime Lending Rate ( PLR ) How to increase Money Supply? RBI issues Fresh Money Banks increase credit RBI buys Dollars /Euros Reduce Cash Reserve Ratio ( CRR ) Reduce Statutary Liquidity Ratio ( SLR ) Reduce Prime Lending Rate ( PLR ) 12/14/2008 25 manavazhaganr@bsnl.in

Money Supply : 

Money Supply How to reduce Money Supply? If RBI Increase CRR by 2% , how much money will be taken out from our economy ? How to increase Money Supply? To infuse one crore rupees into economy , how many dollars should be bought by RBI at the exchange rate of Rs.50/- per dollar ? Velocity of Money The velocity of money is the average frequency with which a unit of money is spent in a specific period of time If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy goods and services from each other in just three transactions over the course of a year Mechanic buys $40 of corn from farmer. Farmer spends $50 on tractor repair. Mechanic spends $10 on food from farmer then $100 changed hands in course of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent an average of twice a year, which is to say that the velocity was 2 / yr 12/14/2008 26 manavazhaganr@bsnl.in

Foreign Trade : 

Foreign Trade Export + Import Foreign trade affects National Income Indicators: 1. Foreign trade orientation : Foreign trade as percentage of National Income is an Indicator of Country's foreign trade orientation High foreign trade orientation is viewed favorably by Domestic Exporters & MNCs’ Low foreign trade orientation indicates inward orientation & poor international relations 2. Composition of Foreign trade : Low income & Low growth economy - Exports Primary & Low value added gods - Imports Machinery, high value added consumer goods, Defense items - Dependence on Import High income & High growth economy - Imports Primary & Low value added gods - Exports Machinery, high value added consumer goods, Defense items - Dependence on Export 12/14/2008 27 manavazhaganr@bsnl.in

Foreign Trade : 

Foreign Trade 3 .Growth Rate of Export : In the year 2008 – 30% Value of export - $ 94937 mn Rs. 4,051,18 Cr. till Sep-08 Export growth will be affected if Deteriorating economic condition in other countries High inflation in local economy Depreciating Local currency 4 .Growth Rate of Import : In the year 2008 – 40% Value of Import - $ 154744 mn Rs. 6,612,08 Cr. till Sep-08 5. Foreign trade Balance : Trade balance = Export – Import If foreign trade balance is negative , it is called Trade Deficit If foreign trade balance is Positive , it is called Trade Surplus Trade Deficit Decreases Foreign Exchange reserve Deficit – 256090 Cr 2008 Shrinking Deficit - can boost GDP Growth Dollar appreciates More export or less import increases GDP Increase in Deficit – Country has to borrow from foreign investors to finance shortfall. Dollar depreciates 12/14/2008 28 manavazhaganr@bsnl.in

Foreign Trade : 

Foreign Trade 6 .Export as percent of external debt : In the year 2008 – 30% Value of export - $ 94937 mn Rs. 4,051,18 Cr. till Sep-08 Debt – 6,82000 Cr - in 2008 60 % 7. Import as % of Foreign exchange Reserve : Reserve - $ 275Bn - Rs. 13 Lakh Crorers 50% 40% of import is crude oil Import 2.8 Mn barrels / day 8. Export as % of GDP : GDP – $ 1 Trillion Export - $ 94937 8% 12/14/2008 29 manavazhaganr@bsnl.in

Foreign Trade : 

Foreign Trade 12/14/2008 30 manavazhaganr@bsnl.in

Foreign Exchange Reserve : 

Foreign Exchange Reserve The Reserve Consists of: Foreign currency assets – U.S Treasury Bills , U.S Bonds etc. Gold Special Drawing Rights ( SDR) Sources Govt Buying Dollars Govt. Investment In the event of Heavy inflow of FIIs money into country ,the rupee will appreciate . Appreciating rupee will hurt export. Indicators 1. Quantity of Foreign exchange reserve indicates a country’s Ability to pay Imports Ability to pay External Debts Ability to raise debt Ability to intervene market to stabilise exchange rate Credit rating 2. Low Foreign exchange Reserve Foreign exchange crisis Government Action: Import restriction Devalue Local currency Increase Customs Duty 3. Increasing Foreign exchange Reserve Rupee will appreciate Benefit import firms 4. Decreasing Foreign exchange Reserve May be due to appreciating dollar against the basket of six major currencies. Rupee will depreciate Benefit exporters 12/14/2008 31 manavazhaganr@bsnl.in

Exchange Rate : 

Exchange Rate Exchange Rate The price of one unit of foreign currency in terms of another currency Rupee- Exchange rate Rupee Depreciation Source - Outflow of Capital Rupee Appreciation Source - Inflow of Capital Real Effective Exchange Rate (REER) It is the weighted average of nominal exchange rate adjusted for inflation differential against domestic and foreign countries. Indian REER basket of currencies include US Dollar, Euro, Yen, Pound Sterling, Hong Kong Dollar, Renminbi Yuan . Base year 1993-94. Present index level is 102.82. In this basket US & UK currencies have the weightage of 28% & 35% respectively. The weights reflect the bilateral trade between India and the region represented by currency basket Nominal Effective Exchange Rate (NEER) It is the weighted average of nominal exchange rate s in the currency basket against the domestic currency. Present level of this index is 70.63 Fall in REER / NEER – Implies 1. depreciation of Rupee 2. Improved competitiveness in that region Increase in REER / NEER – Implies appreciation of Rupee 12/14/2008 32 manavazhaganr@bsnl.in

Economic Infrastructures : 

Economic Infrastructures Power Telecommunication Transport Roads Posts 12/14/2008 33 manavazhaganr@bsnl.in

Social Indicators : 

Social Indicators 1. Poverty - <$1 a day 34.7% < $20 a day = 80 % Bangaldesh, Ethiopia, Mali, Nigeria 2. Prevalence of Child malnutrition % of children whose weight for age is more than 2 sd below the median reference as established by WHO India 61% poorest quintile 3. Under 5 Mortality – Probability that a new born baby will die before reaching age 5 – 141/1000 4. Public expenditure on Health – 0.6% of GDP Education – 1.3% of GDP - 9.6% of Govt. Expend. 5. Per-capita health expenditure :- $ 24 / year 12/14/2008 34 manavazhaganr@bsnl.in