final presentation srijita upld

7/27/2019 Final Presentation Srijita Upld

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EF F E C T S OF S O M E

M A C R O E C O N O M I C

VA R I A B L E S O N

E C O N O M I C G R O W T H


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E G

IMacroeconomic variables (e.g. National Income (GDP), investment(private and public), employment rate, balance of trade, money supply

and general rise in price level (inflation), interest rate, play a vital role in

the economic performance of any country. The study develops anempirical framework to examine the relationship between the

macroeconomic environment and trends in macroeconomic variables..

The macro economic variables that are supposed tobe associated with an improvement in higher growth rate are higher

income level, higher investment rate, and real depreciation of exchange

rate. The estimated significant effects of growth, income and investment

provide evidence that policies designed to promote investment and

growth are likely also to contribute to an improvement in economic

growth.


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DATASOURCE& METHODOLOGY

Data source-Reserve Bank of India (Handbook of Statistics on Indian Economy)

Various issues, National Sample Survey Organisation (NSSO)

World Bank

IMF, Various issues

Methodology-Economic tools like correlation, regression, testing of hypothesis,

observation of trends of economic variables and study of their growth

and impacts on each other and overall economic performance are

used.


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REVIEWOFLITERATUREThe standard wisdom of macroeconomics came to be questioned with the

publication ofJohn Maynard Keynes 1936 book, The General Theory Of

Employment, Interest and Money (1936).

Keynesian macroeconomics put forward fiscal and monetary policy to generate

effective demand in the economy.

Keynes showed that faced with a recession or depression like situation, a policy

maker can undertake major government expenditure programmes that can boost

effective demand and can ultimately help the economy to come out of recession. For

a considerable period the Keynesian revolution seemed synonymous with a weak

instrument of stabilization policy.

According to Moggridge and Susan (1974) unlike the classical school, Keynes

thought money is not a veil and hence an increase in the quantity of money in will

not only lead to an increase in aggregate output, but, also a reduction in interest rate

and exact role of money could vary with circumstances.


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A diametrically opposite view on monetary policy came from Milton Friedman.

Keynes and Friedman are often seen at the extreme corners of the poles while

Keynes stood for government intervention, Friedman represented the superiority of

market forces..

The standard economic prophesies in the 1980s increasingly favoured price stability

as an exclusive objective of monetary policy.

Edward Prescott and Finn Kydland (1977) had developed time inconsistency

problem, which describes situation where, with passing of time, policies that were

determined to be optimal yesterday are no longer perceived to be optimal today.

Now there has been much comment by the media and criticism by business that the

policy of hiking interest rates to combat inflation will hurt investment and growth.

A rising interest rate will shave off 2% points from out 6 6.5 GDP growth rate. One

firm level study by Centre for Studies in Social Science, Calcutta (Mangit 2008)

shows that real interest rates do not explain private investment.

However, we extend our study to examine the effects of interest rate, the inflationrate, investment and trade balance on GDP growth.


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RESEARCHQUESTIONThe relation between GDP and Prime Lending Rate.

Relation between Public Investment and Prime LendingRate.

Relation between Private Investment and Prime LendingRate.

Relation between GDP and Total Investment.

Relation between GDP , Total Inflation and Real lendingrate.

Relation between deficit in trade balance, Exchange Rate,FDI, FII and GDP growth.


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TableONE

The relationbetween GDP &

PrIme LendIng Rate
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ECONOMIC ANALYSIS:From table 1, we have observed that the relationship

between the prime lending rate and GDP growth.We intend to focus on the statistical associations. This

will give us some idea on what to expect of our growth

rate, if the RBI keeps on raising the prime lending rate

in the face of a sustained rise in prices.

We analyse pre-reform and post-reform periods and

find that:

The association was positive and moderate in the pre-

reform period (0.7719).

There is a negative association between them during

the post reform period but much lower(-0.8519).


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0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

GDP At FactorCost

YEARS

Pre-Liberalization GDP at FactorCost

GDP at Factor Cost

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

GDP At FactorCost

YEARS

Post-Liberalization GDP at FactorCost

GDP at Factor Cost


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TableONE

The relation

between Primelendingrate&

Public investment
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ECONOMIC ANALYSIS:From table 2, we have observed that the

relationship between the prime lending rate andpublic investment. We focus on the

statistical association between these two

variables and give us some idea about how far

changes in prime lending rate affected public

investment.

We analyse pre-reform and post-reform periods and find that

:

The association between public investment and

prime lending rate in the pre-reform period ispositive and high (0.8009).

The association between public investment and

prime lending rate in the post-reform period is

negative and low (-0.7853).


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0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

YEARS

PRE-LIBERALIZATION-TOTALPUBLIC INVESTMENT

GDP at Factor Cost

0.00

5000.00

10000.00

15000.00

20000.00

25000.00

30000.00

35000.00

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05T

OTALPUBLICINVES

TMENT

YEARS

POST -LIBERALIZATION-TOTAL PUBLIC INVESTMENT

Series1


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Table 3-The relation between PrivateInvestment and Prime Lending Rate
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ECONOMICANALYSIS:From table 3, we have observed that the relationship betweenthe prime lending rate and private investment in order to focus

on the statistical association between these two variables and

give us some idea about how far changes in prime lending

rate affected private investment.

We analyse pre-reform and post-reform periods and find that :

In the pre-reform period, the association between private

investment and prime lending is positive and high

(0.7145).

In the post-reform period, the association betweenprivate investment and prime lending rate negative and

low (-0.8326).


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0

100

200

300

400

500

600

700

800

900

1 3 5 7 9 11 13 15 17 19 21TOTALPRIVATEINVESTMENT

YEARS

PRE-LIBERALIZATION-TOTALPRIVATE INVESTMENT

Total PrivateInvestment

YEAR

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

7000.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14

TOTALPRIVATEINV

ESTMENT

YEARS

POST-LIBERALIZATION-TOTALPRIVATE INVESTMENT

TOTAL PRIVATEINVESTMENT


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Table 4-GDP and Total Investment
http://localhost/var/www/apps/conversion/tmp/scratch_8/correlation%20between%20GDP%20and%20Total%20investment.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correlation%20between%20GDP%20and%20Total%20investment.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correlation%20between%20GDP%20and%20Total%20investment.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correlation%20between%20GDP%20and%20Total%20investment.xlsx


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ECONOMICANALYSIS:From table 4, we have observed that the

relationship between GDP and Total

investment in order to focus on the statistical

association between

these two variables and give us some

idea about how far changes in prime

lending rate affected private

investment.

We analyse pre-reform and post-

reform periods and find that :

We have the association between GDP and

total investment as positive both in pre-reformand post-reform period.

In the post-reform period, the association between

GDP and total investment (0.9957) is higherthan in the pre-

reform period (0.9779).


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0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

1 2 3 4 5 6 7 8 9 10 11

PRE-LIBERALIZATION-TOTALINVESTMENT AND GDP AT

FACTOR COST

GDP at Factor Cost

TotalInvestment

0

5000

10000

15000

20000

25000

30000

35000

1 2 3 4 5 6 7 8 9 10 11 12 13 14

POST-LIBERALIZATION-TOTALINVESTMENT AND GDP AT

FACTOR COST

Series1

Series2


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Table 5-The relation

between REPO RATE,REVERSE REPO RATE AND

PRIME LENDING RATE
http://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/correl%20btw%20prime%20lending%20rate%20,repo,reverse%20repo.xlsx


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ECONOMICANALYSIS:From table 5, we have observed that the relationship between Repo

rate, Reverse rate and Prime Lending Rate in order to focus on thestatistical association between these two variables and give us some

idea about how far changes in prime lending rate affected Repo rate and

Reverse rate.

We analyse post-reform period and find that :

The relationship between repo rate and prime lending rate in post-

reform period shows a negative association(-0.1803), and,

relationship between Reverse repo rate and prime lending rate in

post-reform period shows a positive association(0.1849).

So, upward or downward changes in the repo rate do not affect

prime lending rate.

When the RBI, for a policy measure, revised the repo rate either

upward or downward, commercial banks did not respond to thepolicy by revising the prime lending rate.


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0

2

4

6

8

10

12

14

PLR,REPO RATE,REVERSE REPO

RATE

YEARS

POST-LIBERALIZATION-PLR,REPO RATE

AND REVERSE REPO RATE

PLRREVERSE REPO RATE

REPO RATE


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Table 6-The Relationship Between

GDP, RealInterest Rate and Inflation

Rate
http://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/gdp,inflatn%20and%20plr.xlsx


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ECONOMICANALYSIS:From table 5, we have observed that the relationship between

GDP, Real Rate of Interest and Inflation Rate n order to focus

on the statistical association between these two variables and

give us some idea about how far changes in the real interest

rate affected the GDP and the Inflation rate.

We analyse pre-reform and post-reform periodsand find that:

We have calculated, as well as observed, that the

overall association between our growth and

inflation is negative.

In the pre-reform period the association is

positive (0.352).

But, in the post-reform period the association is

ratherstrongly negative (-0.4654).

PRE LIBERALIZATION GROWTH OF GDP REAL INTEREST


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-5

0

5

10

15

20

Pre

-liberalisation

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

GROWTHOFGDP,RE

ALINTERESTRATEAND

INFLAT

IONRATE

YEARS

PRE-LIBERALIZATION- GROWTH OF GDP, REAL INTERESTRATE AND INFLATION RATE

Inflation RateBased on WPI

Real Lending Ratebased on WPI

Growth of GDP

0

2

4

6

810

12

14

16

1

991-92

1

992-93

1

993-94

1

994-95

1

995-96

1

996-97

1

997-98

353704

199

9-2000

2

000-01

2

001-02

2

002-03

2

003-04

2

004-05

2

005-06

2

006-07

2

007-08

2

008-09

GROWTHOFGDP,REALINTERE

STRATEAND

INFLATIONRATE

YEARS

POST-LIBERALIZATION- GROWTH OF GDP,REAL INTERESTRATE AND INFLATION RATE

Inflation RateBased on WPI

Real LendingRate based onWPI

Growth OfGDP


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Table 7: Relationship between Current Account

Deficit, Exchange Rate and Inflation
http://localhost/var/www/apps/conversion/tmp/scratch_8/trade%20balance.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/trade%20balance.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/trade%20balance.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/trade%20balance.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/trade%20balance.xlsxhttp://localhost/var/www/apps/conversion/tmp/scratch_8/trade%20balance.xlsx


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ECONOMICANALYSIS:

For the Current Account Balance, we notice that thedata is available only for the post-reform per iod.

We have observed in our table that there had been

continuousdeficitin trade account of balance ofpayments.

The deficit in trade account (in commensurate with)

thehigh import bil lin terms of foreign exchange on

importing oil and gold.


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-200

-180

-160

-140

-120

-100

-80

-60

-40

-20

0

1990-91

1995-96

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Trade Balance(= Total Exports-TotalImports)

Trade Balance(= TotalExpotrs-Total Imports)

C


28/32

CONCLUSION:From the data tables, we can infer that the first half of the period i.e., 1990-91 to1999-2000 GDP growth was around 5-7% with a steady increase in investment,share of investment in the private sector increased to two-third of the totalinvestment, while inflation during the first two years of this period was on anaverage above 15%, though for the rest of the decade it was below 10%.

For the second half of this period, i.e., from 2000-01, the GDP growth rate wasaround 8-9%, reaching its peak at 9.56% in 2006-07. Though after a year, Indianeconomy showed a downfall with a growth rate of 6.72% . Share of the privatesector in investment remained the same.

The inflation rates during this period, we will see that during the first half it wasbelow 5% and rose above it during 2006-07 but never crossed 10%. But duringNovember, 2009 to June 2010, it was well above 15%, though it increases slowlyduring the later part of that financial year.

Recently the RBI argued that it was left with only very little space for furthereasing of monetary policy in this current financial year.

The Trade account and current account deficit risks would continue to stay, thougha fall in global-commodity prices blocked temporary respite to it. The CAD-GDPratio for the last 5 years was expected to be around 5%, which is twice thesustainable level.


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B I B L I O G R A P H Y

ARTICLES:

Amaresh SAMANTARAYA-AN INDEX TO ASSESS THE STANCE OF MONETARYPOLICY IN INDIA IN THE POST-REFORM PERIOD, EPW (MAY 16, 2009)

Mihir Rakshit (2006-2010)-inflation And Relative Prices In India: Some Analytical AndPolicy Issues, Epw (April 16, 2008)

National Sample Survey Organisation (Nsso) - Various Issues

Neha Batura-understanding Recent Trends In Inflation, Epw (June 14, 2008)

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Sinha Roy, Saiket(2001): Post Reform Export Growth in India: An Explanatory

Analysis, RIS Discussion Paper no 13/2001, Research & Information System for

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Non-Aligned and Other Developing Countries, New DelhiVeeramani, C(2007): Sources of Indias Export Growth in the Pre- and Post-

Reform Periods, EPW, VOL 42, NO 25, June 23.

Mohan, Rakesh(2005): Some Apparent Contemporary Monetary Policy, RBI

Bulletin, December, pp 1109-22.

(2007): Indias Financial Sector Reforms, RBI Bulletin,

December, pp 2199-2226.

Reddy, YV(2007): Evolving Role of the Reserve Bank of India: Recent

Developments, RBI Bulletin, December, pp 2199-2226

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Procedure of Monetary Policy in India,

(2008):Monetary Policy of the Central Bank, VOL 32, No.2, April-June, pp 17-24.

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(2007): Inflation in a Developing Economy: Theory and Policy, Money and

Finance,3 (2),89-138 reprinted in M Rakshit, Macroeconomics of Post-Reform

India (New Delhi: Oxford University Press), 2009.

(2011): Global Crisis and Indias Trade-GDP Puzzle: A Suggested Resolution,Money and Finance, forthcoming.

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Mishra, AR and S Zarabi (2008): Inflation Pays the Price of Poor Data

Collection, Business Standard, May,15, Mumbai edition.

Reserve Bank of India (2007): Macroeconomic and Monetary Developments in

2006-07, Reserve Bank of India, Mumbai.Reserve Bank of India (2008): Macroeconomic and Monetary Developments in

2007-08, Reserve Bank of India, Mumbai.

Marjit, S and K P Das(2008): Financial Sector Reform for Stimulating

Investment and Economic Growth : The Indian Experience, ADB volume,

Oxford University Press, New Delhi, forthcoming.

Nagaraj, R(2008): Indias Recent Economic Growth, EPW, 43 (15).(2011): Global Crisis and Indias Trade-GDP Puzzle: A Suggested Resolution,

Money and Finance, forthcoming.


Mishra, AR and S Zarabi (2008): Inflation Pays the Price of Poor Data

Collection, Business Standard, May,15, Mumbai edition.


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Reserve Bank of India (2007): Macroeconomic and Monetary Developments in 2006-07,

Reserve Bank of India, Mumbai.



Marjit, S and K P Das(2008): Financial Sector Reform for Stimulating Investment andEconomic Growth : The Indian Experience, ADB volume, Oxford University Press, New

Delhi, forthcoming.

Nagaraj, R(2008): Indias Recent Economic Growth, EPW, 43 (15).

(2007): Inflation in a Developing Economy: Theory and Policy, Money and Finance,3

(2),89-138 reprinted in M Rakshit, Macroeconomics of Post-Reform India (New Delhi:

Oxford University Press), 2009.

(2011): Global Crisis and Indias Trade-GDP Puzzle: A Suggested Resolution, Money and

Finance, forthcoming.


Mishra, AR and S Zarabi (2008): Inflation Pays the Price of Poor Data Collection, Business

Standard, May,15, Mumbai edition.


Reserve Bank of India, Mumbai.Reserve Bank of India (2008): Macroeconomic and Monetary Developments in 2007-08,


Marjit, S and K P Das(2008): Financial Sector Reform for Stimulating Investment and

Economic Growth : The Indian Experience, ADB volume, Oxford University Press, New

Delhi, forthcoming.

Nagaraj, R(2008): Indias Recent Economic Growth, EPW, 43 (15).

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