EXECUTIVE SUMMARY

The objective of the study titled “The impact of Selected Economic Variables on GDP of
Indian Economy” was to study the impact of Various Variables of economics on the
economic growth of the country. The variables used in the study are the Quarterly data
Interest Rate, Inflation Rate, Exchange Rate, Balance of Trade and Industrial Production of
Indian Economy. The economic growth is measured by Gross Domestic Product. The
regression results of the study found that the measure of r squared was 8.26%.

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 CHAPTER- 1
INTRODUCTION

Company Name: Centre for Monitoring Indian Economy Pvt. Ltd.

Centre for Monitoring Indian Economy (CMIE), is a leading business information

company. It was established in 1976, primarily as an independent think tank. CMIE has a
presence over the entire information food-chain - from large scale primary data collection and
information product development through analytics and forecasting.

It provides services to the entire spectrum of business information consumers

including governments, academia, financial markets, business enterprises, professionals and
media.

CMIE produces economic and business databases and develops specialised analytical
tools to deliver these to its customers for decision making and for research. It analyses the
data to decipher trends in the economy.

CMIE has built India's largest database on the financial performance of individual
companies; it conducts the largest survey to estimate household incomes, pattern of spending
and savings; it runs a unique monitoring of new investment projects on hand and it has
created the largest integrated database of the Indian economy. CMIE is a privately owned and
professionally managed company head-quartered at Mumbai.

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Topic Name : The impact of selected Economic Variables on GDP of the
Indian Economy.

The economy of India is the sixth-largest in the world measured by nominal GDP and
the third-largest by purchasing power parity (PPP). The country is classified as a newly
industrialised country, and one of the G-20 major economies, with an average growth rate of
approximately 7% over the last two decades.

India's economy became the world's fastest growing major economy in the last quarter
of 2014, surpassing the People's Republic of China. However, the country ranks 141st in per
capita GDP (nominal) with $1723 and 123rd in per capita GDP (PPP) with $6,616 as of 2016.
The long-term growth prospective of the Indian economy is positive due to its young
population, corresponding low dependency ratio, healthy savings and investment rates, and
increasing integration into the global economy.

India topped the World Bank's growth outlook for the first time in fiscal year 2015–
16, during which the economy grew 7.6%. Growth is expected to have declined slightly to
7.1% for the 2016–17 fiscal year. According to the IMF, India's growth is expected to
rebound to 7.2% in the 2017–18 fiscal and 7.7% in 2018–19.

Historically, India has classified and tracked its economy and GDP in three sectors:
agriculture, industry and services. Agriculture includes crops, horticulture, milk and animal
husbandry, aquaculture, fishing, sericulture, aviculture, forestry and related activities.
Industry includes various manufacturing sub-sectors. India's definition of services sector
includes its construction, retail, software, IT, communications, hospitality, infrastructure
operations, education, health care, banking and insurance, and many other economic
activities.

Objectives of Economic Planning in India:

1. Economic Development:
The main objective of Indian planning is to achieve the goal of economic
development economic development is necessary for under developed countries because they
can solve the problems of general poverty, unemployment and backwardness through it.
Economic development is concerned with the increase in per capita income and causes
behind this increase.

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 In order to calculate the economic development of a country, we should take into
consideration not only increase in its total production capacity and consumption but also
increase in its population. Economic development refers to the raising of the people from
inhuman elements like poverty unemployment and ill heath etc.

2. Increase Employment:
Another objective of the plans is better utilization of man power resource and
increasing employment opportunities. Measures have been taken to provide employment to
millions of people during plans. It is estimated that by the end of Tenth Plan (2007) 39 crore
people will be employed.

3. Self-Sufficient:
It has been the objective of the plans that the country becomes self-sufficient
regarding food grains and industrial raw material like iron and steel etc. Also, growth is to be
self-sustained for which rates of saving and investment are to be raised. With the completion
of Third Plan, Indian economy has reached the take off stage of development. The main
objective of the Tenth Plan is to get rid of dependence on foreign aid by increasing export
trade and developing internal resources.

4. Economic Stability:
Stability is as important as growth. It implies absence of frequent end excessive
occurrence of inflation and deflation. If the price level rises very high or falls very low, many
types of structural imbalances are created in the economy.
Economic stability has been one of the objectives of every Five year plan in India. Some rise
in prices is inevitable as a result of economic development, but it should not be out of
proportions. However, since the beginning of second plan, the prices have been rising rather
considerably.

5. Social Welfare and Services:

The objective of the five year plans has been to promote labour welfare, economic
development of backward classes and social welfare of the poor people. Development of
social services like education, health, technical education, scientific advancement etc. has
also been the objective of the Plans.

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6. Regional Development:
Different regions of India are not economically equally developed. Punjab, Haryana,
Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh etc. are relatively more developed. But
U.P., Bihar, Orissa, Nagaland, Meghalaya and Himachal Pradesh, are economically
backward. Rapid economic development of backward regions is one of the priorities of five
year plans to achieve regional equality.

7. Comprehensive Development:
All round development of the economy is another objective of the five year plans.
Development of all economic activities viz. agriculture, industry, transport, power etc. is
sought to be simultaneously achieved. First Plan laid emphasis on the development of
agriculture. Second plan gave priority to the development of heavy industries. In the Eighth
Plan maximum stress was on the development of human resources.

8. To Reduce Economic Inequalities:

Every Plan has aimed at reducing economic inequalities. Economic inequalities are
indicative of exploitation and injustice in the country. It results in making the rich richer and
the poor poorer. Several measures have been taken in the plans to achieve the objectives of
economic equality especially by way of progressive taxation and reservation of jobs for the
economically backward classes. The goal of socialistic pattern of society was set in the
second plan mainly to achieve this objective.

9. Social Justice:
Another objective of every plan has been to promote social justice. It is possible in
two ways, one is to reduce the poverty of the poorest section of the society and the other is to
reduce the inequalities of wealth and income.
According to Eighth Plan, a person is poor if the spends on consumption less than Rs. 328
per month in rural area and Rs. 454 per month in urban area at 1999-2000 prices. About 26
percent of Indian population lives below poverty line. The tenth plan aims to reduce this to
21%.

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10. Increase in Standard of Living:
The other objective of the plan is to increase the standard of living of the people.
Standard of living depends on many factors such as per capita increase in income, price
stability, equal distribution of income etc.

Reasons for studying significant Economic Variables of Indian Economy:

(1) To Understand the Working of the Economy:

The study of macroeconomic variables is indispensable for understanding the working
of the economy. Our main economic problems are related to the behaviour of total income,
output, employment and the general price level in the economy.

These variables are statistically measurable, thereby facilitating the possibilities of

analysing the effects on the functioning of the economy. As Tinbergen observes,
macroeconomic concepts help in “making the elimination process understandable and
transparent”. For instance, one may not agree on the best method of measuring different
prices, but the general price level is helpful in understanding the nature of the economy.

(2) Impact of Economic Policies:

Macroeconomics is extremely useful from the point of view of economic policy.
Modern governments, especially of the underdeveloped economies, are confronted with
innumerable national problems. They are the problems of overpopulation, inflation, balance
of payments, general underproduction, etc.

The main responsibility of these governments rests in the regulation and control of
overpopulation, general prices, general volume of trade, general outputs, etc. Tinbergen says:
“Working with macroeconomic concepts is a bare necessity in order to contribute to the
solutions of the great problems of our times.” No government can solve these problems in
terms of individual behaviour. An analysis of the use of macroeconomic study provides
solution of certain complex economic problems such as:

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 a) General Unemployment:
The Keynesian theory of employment is an exercise in macroeconomics. The general
level of employment in an economy depends upon effective demand which in turn depends
on aggregate demand and aggregate supply functions.

Unemployment is thus caused by deficiency of effective demand. In order to

eliminate it, effective demand should be raised by increasing total investment, total output,
total income and total consumption. Thus, macroeconomics has special significance in
studying the causes, effects and remedies of general unemployment.

b) In National Income:
The study of macroeconomics is very important for evaluating the overall
performance of the economy in terms of national income. With the advent of the Great
Depression of the 1930s, it became necessary to analyse the causes of general overproduction
and general unemployment.

This led to the construction of the data on national income. National income data help
in forecasting the level of economic activity and to understand the distribution of income
among different groups of people in the economy.

c) In Economic Growth:
The economics of growth is also a study in macroeconomics. It is on the basis of
macroeconomics that the resources and capabilities of an economy are evaluated. Plans for
the overall increase in national income, output, and employment are framed and implemented
so as to raise the level of economic development of the economy as a whole.

d) In Monetary Problems:
It is in terms of macroeconomics that monetary problems can be analysed and
understood properly. Frequent changes in the value of money, inflation or deflation, affect the
economy adversely. They can be counteracted by adopting monetary, fiscal and direct control
measures for the economy as a whole.

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 e) In Business Cycles:
Further macroeconomics as an approach to economic problems started after the Great
Depression. Thus its importance lies in analysing the causes of economic fluctuations and in
providing remedies.

(3) For Understanding the Behaviour of Individual Units:

For understanding the behaviour of individual units, the study of macroeconomics is
imperative. Demand for individual products depends upon aggregate demand in the economy.
Unless the causes of deficiency in aggregate demand are analysed, it is not possible to
understand fully the reasons for a fall in the demand of individual products.

The reasons for increase in costs of a particular firm or industry cannot be analysed
without knowing the average cost conditions of the whole economy. Thus, the study of
individual units is not possible without macroeconomics.

Market size of Indian Economy-

India's gross domestic product (GDP) grew by 7 per cent year-on-year in October-
December 2016 quarter, which is the strongest among G-20 countries, as per Organisation for
Economic Co-operation and Development (OECD) Economic Survey of India, 2017.
According to IMF World Economic Outlook Update (January 2017), Indian economy is
expected to grow at 7.2 per cent during FY 2016-17 and further accelerate to 7.7 per cent
during FY 2017-18.

The tax collection figures between April 2016 and January 2017 show an increase in
Net Indirect taxes by 16.9 per cent and an increase in Net Direct Taxes by 10.79 per cent
year-on-year, indicating a steady trend of healthy growth. The total number of e-filed Income
Tax Returns rose 21 per cent year-on-year to 42.1 million in 2016-17 (till 28.02.17), whereas
the number of e-returns processed during the same period stood at 43 million.

Corporate earnings in India are expected to grow by over 20 per cent in FY 2017-18
supported by normalisation of profits, especially in sectors like automobiles and banks, while

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GDP is expected to grow by 7.5 per cent during the same period, according to Bloomberg
consensus.
India has retained its position as the third largest start up base in the world with over
4,750 technology start-ups, with about 1,400 new start-ups being founded in 2016, according
to a report by NASSCOM.
India's labour force is expected to touch 160-170 million by 2020, based on rate of
population growth, increased labour force participation, and higher education enrolment,
among other factors, according to a study by ASSOCHAM and Thought Arbitrage Research
Institute. India's foreign exchange reserves stood at US$ 366.781 billion as on March 17,
2017 as compared to US$ 360 billion by end of March 2016, according to data from the RBI.

1. Gross Domestic Product (GDP) :

Gross domestic product (GDP) is a monetary measure of the market value of all final
goods and services produced in a period (quarterly or yearly). Nominal GDP estimates are
commonly used to determine the economic performance of a whole country or region, and to
make international comparisons. Nominal GDP per capita does not, however, reflect
differences in the cost of living and the inflation rates of the countries; therefore using a basis
of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing
differences in living standards between nations.

Components of GDP by expenditure:

GDP computed on the expenditure basis.
GDP (Y) is the sum of consumption (C), investment (I), government spending (G)
and net exports (X – M).
Y = C + I + G + (X − M)
Here is a description of each GDP component:
C (consumption) is normally the largest GDP component in the economy, consisting
of private expenditures in the economy (household final consumption expenditure). These
personal expenditures fall under one of the following categories: durable goods, nondurable
goods, and services. Examples include food, rent, jewellery, gasoline, and medical expenses,
but not the purchase of new housing.
I (investment) includes, for instance, business investment in equipment, but does not include
exchanges of existing assets. Examples include construction of a new mine, purchase of
software, or purchase of machinery and equipment for a factory. Spending by households

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(not government) on new houses is also included in investment. In contrast to its colloquial
meaning, "investment" in GDP does not mean purchases of financial products. Buying
financial products is classed as 'saving', as opposed to investment. This avoids double-
counting: if one buys shares in a company, and the company uses the money received to buy
plant, equipment, etc., the amount will be counted toward GDP when the company spends the
money on those things; to also count it when one gives it to the company would be to count
two times an amount that only corresponds to one group of products. Buying bonds or stocks
is a swapping of deeds, a transfer of claims on future production, not directly an expenditure
on products.
G (government spending) is the sum of government expenditures on final goods and
services. It includes salaries of public servants, purchases of weapons for the military and any
investment expenditure by a government. It does not include any transfer payments, such as
social security or unemployment benefits.
X (exports) represents gross exports. GDP captures the amount a country produces,
including goods and services produced for other nations' consumption, therefore exports are
added.
M (imports) represents gross imports. Imports are subtracted since imported goods
will be included in the terms G, I, or C, and must be deducted to avoid counting foreign
supply as domestic.
C, G, and I are expenditures on final goods and services; expenditures on intermediate
goods and services do not count. (Intermediate goods and services are those used by
businesses to produce other goods and services within the accounting year.
Revision of the base year for index of industrial production (IIP) and the wholesale
price index (WPI) failed to boost India's economic growth, which slowed down to a three-
year low of 7.1%. Demonetisation move also had an impact on FY17 numbers. The growth
was revised upwards to 8% for the previous year from 7.9% due to revision in the IIP and
WPI series. The impact of demonetisation was more discernible in the quarterly figures as
GDP growth fell to 6.1% as against 7% in the third quarter.

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Impact of GDP on Indian stock market : -
The correlation between economic growth and stock market returns is a recurring
question amongst analysts and investors alike. While many claim that 'theoretically' both
figures should be the same, others believe that there is no correlation at all.

In this research piece we will address some of the most common assumptions and
observations. However, please note that the complexity of this issue is high and this
simplified approach may not entirely provide an adequate comparison of these two variables.

GDP Growth = Stock Market Returns-

In a theoretical environment stock price increases should exactly match real GDP
growth. The underlying economy of a country translates into a company’s profits, thus into
Earnings per Share (EPS), which eventually determines the price of a company’s stock.
However, this only works if a country’s economy is closed, valuations remain
constant and if only domestic companies are listed on a country’s stock market. The world
economy isn’t ‘theoretical’, hence this example may not be an appropriate comparison,
however understanding the basic principles of stock market returns is crucial for this
experiment.

Decline in GDP growth rate is good news for Indian economy-

The latest GDP figures for January-March 2017 show that for the first time since
2015, India trailed China on growth rate. India has officially lost the tag of the fastest
growing economy to China as the March quarter registered a growth rate of 6.1 per cent
much below than expected 7.1 per cent. The GDP growth was 8 per cent in 2015-16 and 7.5
per cent in the previous year.

Demonetisation is being blamed for slowdown in the GDP growth rate. But, this
decline in growth rate may actually be the good news both for Indian economy and Narendra
Modi government as it gives credence to their fight against black money.

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The following sectors are hit badly-
According to the Central Statistics Office, the growth rate declined - under
demonetisation impact - in manufacturing, mining, trade, hotels, transport, communication,
services related to broadcasting, financial, real estate and professional services in the fourth
quarter.
The construction sector was the hardest hit by demonetisation as it saw a contraction
of 3.7 per cent. It had grown at 6 per cent rate during the same quarter in 2015-16.
The manufacturing sector growth declined to 5.3 per cent in the last quarter from 8.2 per cent
in the preceding quarter. The growth rate was 12.7 per cent in the same period the previous
year.

Theoretical versus Real Economy-

Studies have shown that in many countries there is somewhat of a correlation between
GDP growth and stock market returns. In theory, and over the long-term, aggregate corporate
earnings rise when the economy grows or vice versa. However, there are plenty of examples
where the stock market was clearly disconnected from the real economy.
Looking at shorter timeframes, it is noted that dramatic variations of the two key
variables, especially in times of significant volatility. During the 2008 Financial Crisis
(‘GFC’), stock markets around the world plummeted approximately 40-60%, but of course,
the real economy did not shrink ~50% within a few months.

2. Interest Rate :

An interest rate, is the amount of interest due per period, as a proportion of the
amount lent, deposited or borrowed (called the principal sum). The total interest on an
amount lent or borrowed depends on the principal sum, the interest rate, the compounding
frequency, and the length of time over which it is lent, deposited or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as interest

to the borrower, normally expressed as an annual percentage. It is the rate a bank or other
lender charges to borrow its money, or the rate a bank pays its savers for keeping money in
an account.

Annual interest rate is the rate over a period of one year. Other interest rates apply
over different periods, such as a month or a day, but they are usually annualised.

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Interest rates vary according to:

 the government's directives to the central bank to accomplish the government's goals
 the currency of the principal sum lent or borrowed
 the term to maturity of the investment
 the perceived default probability of the borrower
 supply and demand in the market as well as other factors.

3. Inflation Rate :

In economics, inflation is a sustained increase in the general price level of goods and
services in an economy over a period of time. When the price level rises, each unit
of currency buys fewer goods and services; consequently, inflation reflects a reduction in
the purchasing power per unit of money – a loss of real value in the medium of exchange and
unit of account within the economy. A chief measure of price inflation is the inflation rate,
the annualized percentage change in a general price index, usually the consumer price index,
over time. The opposite of inflation is deflation.

Inflation affects economies in various positive and negative ways. The negative
effects of inflation include an increase in the opportunity cost of holding money, uncertainty
over future inflation which may discourage investment and savings, and if inflation were
rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will
increase in the future. Positive effects include reducing the real burden of public and private
debt, keeping nominal interest rates above zero so that central banks can adjust interest rates
to stabilize the economy, and reducing unemployment due to nominal wage rigidity.

Economists generally believe that high rates of inflation and hyperinflation are caused
by an excessive growth of the money supply. Views on which factors determine low to
moderate rates of inflation are more varied. Low or moderate inflation may be attributed to
fluctuations in real demand for goods and services, or changes in available supplies such as
during scarcities. However, the consensus view is that a long sustained period of inflation is
caused by money supply growing faster than the rate of economic growth.

Today, most economists favour a low and steady rate of inflation. Low (as opposed to
zero or negative) inflation reduces the severity of economic recessions by enabling the labor
market to adjust more quickly in a downturn, and reduces the risk that a liquidity

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trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary authorities. Generally, these monetary
authorities are the central banks that control monetary policy through the setting of interest
rates, through open market operations, and through the setting of banking reserve
requirements.

If economic growth matches the growth of the money supply, inflation should not
occur when all else is equal. A large variety of factors can affect the rate of both. For
example, investment in market production, infrastructure, education, and preventative health
care can all grow an economy in greater amounts than the investment spending.
Well, inflation based on wholesale price index (WPI) was at a very low 1.8% in
March 2002, but that had no appreciable impact on the market—the Sensex was at 3,469
points at that time, marginally lower than in March 2001. Or, consider 1995-96, when the
inflation rate had fallen to 4.5% by March 1996, after being as high as 16.9% a year earlier.
Yet, between March 1995 and March 1996, the Sensex moved up just a tad, from 3,260 to
3,366.
Now consider periods of high inflation. In March 1995, WPI inflation was at 16.9%,
rising from 10.6% in the same month the previous year. The Sensex fell from 3,778 to 3,260
over the period. But between March 1993 and March 1994, the Sensex rallied 65%, although
inflation increased from 7.1% to 10.6%. The data seem to show that the Sensex has little
correlation with WPI inflation.
The argument that stocks are an inflation hedge is based on the premise that
companies are able to raise prices during inflationary times, protecting their earnings. On the
other hand, if input prices rise more than that for manufactured goods, then margins will be
squeezed. Well, fuel price inflation was at 10.4% in March 2005, but that had no appreciable
impact on the bull run then under way. And back in 1993-94, in spite of big increases in
inflation for primary articles and for fuel, the stock market rallied.
Clearly, there are more powerful factors than inflation that affect stock prices.
Gross domestic product (GDP) growth was 7.3% in 1995-96 and 8% in 1996-97, yet the
Sensex went up all of 3% between March 1995 and March 1997. Yet, when GDP growth fell
to 4.3% in 1997-98, the Sensex went up in that year.
The 10-year yield on the benchmark government bond fell from 10.86% in March
2000 to 6.19% in March 2003, but the Sensex too fell during the period.

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On the other hand, the 10-year yield went up from 5.15% in March 2004 to 7.93% in March
2007, yet that was the period that saw a huge rally in the Sensex.
However, it’s likely that the huge fall in interest rates from the late-1990s prepared
the base for the big rally in stocks years later. And as we can see today, the lagged effect of
rising interest rates did impact earnings in the interest-rate sensitive sectors, which affected
stocks in those sectors.
In a recent note by Citi Investment Research’s global equity strategists, they looked at
the relation between inflation and stock returns in global markets and concluded that
“investors need three things to occur for equities to provide strong returns. First, inflation
needs to be in the ‘not-too-high, not-too-low’ range. Second, inflation should be falling.
Third, valuations should be reasonable. That last bit about valuations perhaps makes all the
difference.
And as far as the Indian market is concerned, that valuation has usually depended on
foreign fund inflows. Liquidity, rather than domestic fundamentals, has been the main
determinant of returns in the Indian market.

4. Exchange Rate :

In finance, an exchange rate of two currencies is the rate at which one currency will
be exchanged for another. It is also regarded as the value of one country’s currency in
relation to another currency. For example, an interbank exchange rate of 114 Japanese yen to
the United States dollar means that ¥114 will be exchanged for each US$1 or that US$1 will
be exchanged for each ¥114. In this case it is said that the price of a dollar in relation to yen is
¥114, or equivalently that the price of a yen in relation to dollars is $1/114.

Exchange rates are determined in the foreign exchange market,[2] which is open to a
wide range of different types of buyers and sellers, and where currency trading is continuous:
24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT
Friday. The spot exchange rate refers to the current exchange rate. The forward exchange
rate refers to an exchange rate that is quoted and traded today but for delivery and payment
on a specific future date.

In the retail currency exchange market, different buying and selling rates will be
quoted by money dealers. Most trades are to or from the local currency. The buying rate is
the rate at which money dealers will buy foreign currency, and the selling rate is the rate at
which they will sell that currency. The quoted rates will incorporate an allowance for a

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dealer's margin (or profit) in trading, or else the margin may be recovered in the form of
a commission or in some other way. Different rates may also be quoted for cash, a
documentary form or electronically. The higher rate on documentary transactions has been
justified as compensating for the additional time and cost of clearing the document. On the
other hand, cash is available for resale immediately, but brings security, storage, and
transportation costs, and the cost of tying up capital in a stock of banknotes (bills).

Stock market and foreign exchange plays a crucial role for the development of
country. Asian crisis (1997-1998) is the major reason for establishing a relationship between
exchange rate and stock price. During this period, the merging market has faced depreciation
in exchange rate and so resulted in fall of stock price.

Hence from this, it is understood that although trade flow has some impact on stock
price of companies, the main source of revenue comes from foreign exchange. Many
hypotheses shown that there exist a causal relationship between exchange rate and stock
price. Fall in the local currency makes leads to increase in foreign demand, resulting in
increased value of firm and stock price. Similarly increase in the local currency makes less
profit thus leads to decrease of foreign demand. Exchange rate movements also affect the
value of a firm’s payables or receivables. Thus, on a macro basis the impact of exchange rate
on stock price depends upon both the country’s international trade and the degree of trade
imbalance.

The continuous increases in the world trade and capital movements have made the
exchange rates as one of the main determinants of business profitability and equity prices.
Exchange rate changes directly influence the international competitiveness of firms, given
their impact on input and output price. The present study analyses the relationship between
stock prices volatility and exchange rates movement in India. The analysis on stock markets
has come to the fore since this is the most sensitive segment of the economy and it is through
this segment that the country’s exposure to the outer world is most readily felt.

5. Balance of Trade :

The balance of trade or Net Exports is the difference between the monetary value of
exports and imports of output in an economy over a certain period of time. It is the

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relationship between a nation’s imports and exports. A favourable balance of trade is known
as a trade surplus and consists of exporting more than is imported; an unfavourable balance
of trade is known as a trade deficit or, informally, a trade gap.

The balance of trade forms part of the current account, which includes other
transactions such as income from the net international investment position as well as
international aid. If the current account is in surplus, the country's net international asset
position increases correspondingly. Equally, a deficit decreases the net international asset
position.

The trade balance is identical to the difference between a country's output and its
domestic demand (the difference between what goods a country produces and how many
goods it buys from abroad; this does not include money re-spent on foreign stock, nor does it
factor in the concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with

recording and collecting data. As an illustration of this problem, when official data for all the
world's countries are added up, exports exceed imports by almost 1%; it appears the world is
running a positive balance of trade with itself. This cannot be true, because all transactions
involve an equal credit or debit in the account of each nation. The discrepancy is widely
believed to be explained by transactions intended to launder money or evade taxes,
smuggling and other visibility problems. Especially for developing countries, the transaction
statistics are likely to be inaccurate.

Factors that can affect the balance of trade include:

 The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting
economy vis-à-vis those in the importing economy;
 The cost and availability of raw materials, intermediate goods and other inputs;
 Exchange rate movements;
 Multilateral, bilateral and unilateral taxes or restrictions on trade;
 Non-tariff barriers such as environmental, health or safety standards;
 The availability of adequate foreign exchange with which to pay for imports; and
 Prices of goods manufactured at home (influenced by the responsiveness of supply)

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Trade balance in India:

The trade performance of any country can be measured in terms of its imports,
exports, trade balance, total trade, and its growth over the years. India relies less on other
countries than do its emerging market (EWZ) (FXI) peers. The country’s export performance
has also been steadily increasing over the last few years. Despite these favourable factors,
India’s trade balance (EPI) (PIN) is negative.

The following chart shows India’s trade balance over the last year:

India’s trade gap in 2017

India’s trade gap increased 173.5% on a year-over-year basis to ~$13.3 billion in

April 2017, beating the market’s expectations of ~$12.8 billion gap. Due to a rise in oil and
gold imports, it recorded the highest deficit since November 2014.

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India’s total imports increased 49.1% on a year-over-year basis to ~$37.9 billion, boosted by
a 30.1% rise in oil imports and a 211.4% increase in gold. Exports rose 19.8% to $24.6
billion. The export of gems and jewelry (excluding petroleum) rose 17% in April 2017.

Growing imports

India has recorded sustained trade deficits in the last three decades mainly due to the
high growth of imports, particularly of crude oil (USO), gold (GLD), and silver (SLV). The
biggest trade deficits were recorded with China, Saudi Arabia, Iraq, Switzerland, and Kuwait.
India’s trade deficit was around 9%–10% of its GDP through 2015. Imports of oil, petroleum
products, gold, and silver accounted for more than 45% of India’s total imports through April
2017. Given the current global protectionist scenario, a high trade deficit could create
pressure on the rupee (INDA).
In our view, this could impact the cost competitiveness of import-dependent exports
in India (SCIF) (SMIN). The relatively inelastic nature of demand and an increase in global
prices of commodities (USO) could contribute to increased import costs, leading to an
increased fiscal deficit for India (INDA) (INDL). The inelastic demand and expensive
imports are expected to result in a high value of imports. India’s increasing demand for gold
and oil could drive the performance of the respective ETFs to some extent. The SPDR Gold
Trust ETF (GLD) has gained about 10% so far in 2017.

6. Industrial Production :

Industrial production is a measure of output of the industrial sector of the economy.

The industrial sector includes manufacturing, mining, and utilities.[1]Although these sectors
contribute only a small portion of gross domestic product (GDP), they are highly sensitive
to interest rates and consumer demand.[2] This makes industrial production an important tool
for forecasting future GDP and economic performance. Industrial production figures are also
used by banks to measure inflation, as high levels of industrial production can lead to
uncontrolled levels of consumption and rapid inflation.

19
 WHAT ARE IIP NUMBERS?

 IIP- index of industrial production is a measurement which represents the status of production
in the industrial sector for a given period of time compared to a reference period of time.
 IIP number is one of the best statistical data, which helps us to measure the level of industrial
activity in Indian economy. It is a short term indicator. It is useful to gauge the rate of
industrial growth until the actual results from the annual survey of industries are published.
 IIP data is broadly divided into three segments – manufacturing (79.36%), mining &
quarrying (10.47%) and electricity (10.17%).
 Another way of categorizing the items used in the calculation of IIP is a ‘Use based
classification’ with categories like Basic Goods, Capital goods, Intermediate goods,
Consumer durables and Non-consumer durables.
 The IIP index reflects the growth in India’s industrial activity and excludes all kinds of
services (for example banking sector).
 The base year for the index over the period of the analysis is 1993-94 and it includes items
whose gross value of output is at least Rs 80 crores and Rs 20 crores at gross value added
level. The products included are the ones used on consistent basis and can comprise of small
scale sector as well as unorganized production sector.

WHEN IS IT PUBLISHED?

Usually IIP number of a particular month would be published after two months. The date of
publishing IIP numbers are usually between 11 to 14th of a month. As IIP shows the status of
industrial activity, you can find out if the industrial activity has increased, decreased or
remained same.

IIP AND STOCK MARKETS.

 The reduced consumer spending leads to lower demand situation. The producers respond by
cutting down on the production. Low industrial production results in lower corporate sales
and profits, which directly affects stock prices. So a direct impact of weak IIP data is a
sudden fall in stock prices.

20
 A continuous fall in overall IIP data may lead to many fundamentally strong stocks being
undervalued. This gives you the perfect opportunity to invest in fundamentally strong
companies at discount price.
 Growth in IIP numbers are good signs for cement and steel industries. Mining Sector
contributes approx. 10% to the IIP. Growth figures can tell us in advance about how mining
and steel companies are going to fare in coming quarters.
 The IIP data is purely industrial data. Banking sector is not included in it. But, increase in
production & investment activity is usually financed through borrowings from banks. So, if
industrial production & capital spending is increasing then it is likely to have a positive
impact on the banking sector. A lower IIP data can affect banking industry adversely.
 The reason behind the increase/decrease in IIP figures needs to be checked before investing.
Though IIP does indicate the condition of the country’s economy, it should not be taken as
the sole basis for investment. This is because some sectors may show higher performance as
compared to others. This was evident in the recent past when realty sector showed higher
performance, pharma sector lagged behind.

PROBLEMS WITH IIP NUMBERS.

A major problem with the IIP data is its outdated base year 1993-94. Its product
basket of 543 items is no longer representative considering the dramatic transformation of the
economy and the consumption behaviour of the people in the post-reform period. Some of the
old products have gone out of use and many new products have come into the market over
the past decade and a half.

There is very little representation of the products manufactured by the micro, small
and medium enterprises which account for about 45 per cent of the total industrial output in
the country and 40 per cent of exports. Hence the IIP numbers fail to capture the actual trends
in this sector.

Another drawback is that the data are revised, reclassified, challenged by industry
associations and found not in tune with the Annual Survey of Industries.
However, IIP data is something that investors need to keep track. Indian stock markets are
very sensitive to IIP Numbers. A better IIP number would show a positive growth on our
Industrial production and share markets would possibly cheer.

21
 CHAPTER- II
REVIEW OF LITERATURE

1. Factors Affecting GDP (Manufacturing, Services, Industry): An Indian

Perspective, Dhiraj Jain , K. Sanal Nair and Vaishali Jain, 3rd April,2015.

In this study, it was found that the variable which affects the growth of GDP
components (Manufacturing, Service, Industry) were FDI, Net FII equity, Net FII debt,
Import, Export. The study found a significant affect of FDI, Net FII equity and Import on
GDP components. But a significant affect of Net FII debt on GDP components could not be
established. Multiple regression analysis was used to develop the relationship.

There was no significant affect of Export on GDP (Manufacturing, Industry)

components but services had a significant affect. In this study, the impact of different macro
economic factors on GDP components had been analysed. But for any future policy in
designing the GDP components FDI, Net FII equity, Import, Export should also be taken into
consideration but Net FII debt should not be taken.

2. An Analytical Study of Interest rate and Stock Returns in India, Dr. T.

Muthukumaran and Dr.V.K.Somasundaram, October,2014.

The study tried to estimate causality relationship between Interest rate and Stock
returns. The impact of Interest rate and Stock returns in India is studied, by using monthly
data from April 1997 to March 2014.

The study finds a Short run causality observed between Interest rate and stock returns
revalued the following, that there is no causality between Interest rate and stock returns.
The study implies that the Interest rate neither affects Stock returns nor a Stock return affects
the interest rate. Thus, the present study empirically proves, stock market has no relation with
the growth of interest rate in India and vice versa.

22
 3. The Relationship between Interest Rate and Exchange Rate in India,Pradyumna
Dash,2012.

The exchange rate regime in our country has undergone a significant change during
1990s. Until February 1992, exchange rate in India was fixed by the Reserve Bank of India.
Thereafter a dual exchange rate system was adopted during March 1992 to February 1993
which also came to an end and a unified market came into being in March 1993.

The present exchange rate system in our country is popularly known as ‘managed
floating exchange rate regime’. But the external value of the rupee was found to be under
pressure for a few episodes because of various reasons like the East Asian and Russian
currency crisis, border conflict, rise in oil prices, political instability etc.

The Reserve Bank of India has been using high interest rate policy to contain the
excessive volatility and to contain the excessive market pressure on rupee in the foreign
exchange market. In this context, the Paper has attempted to study the relationship between
interest rate and exchange rate in India by using cointegration based on vector auto regression
model during April 1993 to March 2003 and June 1995 to March 2003 and by using a
theoretic vector auto regression model during June 1995 to March 2003.

The variables like call money rate, exchange rate were found to be non-stationary,
whereas the variables like net intervention and expected inflation rate differential between
India and world were found to be stationary. It was found that there has been a long-run
relationship between the above mentioned variables.

Both call money rate and net intervention have negatively and significantly influenced
the exchange rate, whereas the expected rate of inflation 25 differential between the India and
world has not played significant role in the behaviour of exchange rate in India. It has been
found that the overall appreciation of exchange rate was found to be 5 paise and 16 paise due
to one standard deviation change (around 3.18 and 3.30 percentage increase) in interest rate
in a CVAR model during April 1993 to March 2003, and June 1995 to March 2003
respectively.

23
 Similarly, the overall appreciation of exchange rate was found to be 9 paise due to one
standard deviation change (around 3.34 percentage increase) in interest rate in a VAR model.
Similarly, the variance decomposition, in a VECM at 50 month horizon, indicates that
changes in exchange rate accounts for about 41 and 35 percent variation in interest rate
during April 1993 to March 2003 and June 1995 to March 2003 respectively. Similarly,
changes in exchange rate explain about 27 variation of interest rates in a VAR model during
June 1995 to March 2003.

But, the changes in interest rate policy were found to be endogenous in stabilizing the
exchange rate. In other words, declines in the value of the exchange rate have prompted
monetary authorities to raise domestic interest rates. It is so because the Granger cause test
indicates a bidirectional causality or feedback between interest rate and exchange rate in
India during April 1993 to March 2003 and June 1995 to March 2003. Interest rate in India
was also found to be endogenous by both weak and block exogenity tests. Therefore, both the
interest rate and exchange rate were affecting each other.

Finally, there is a strong case for an increase in interest rates to stabilize the value of
rupee during the downward pressure in India because the cost of doing so in terms of output
loss, financial system fragility, decline in investment, etc may not outweigh the benefits of a
more nominal appreciated exchange rate.

4. A Study on Inflation in India, R.V.S.S., Nagabhushana Rao1 , P. Chenchu Reddy ,

A.M. Mahaboob Basha , P. Srinivasulu3 and K. Sai Pranav, December,2013.

Finally the author wants to conclude that inflation plays major role, to weaken the
economy. Mainly inflation can be seen in food articles, which impact on weaker sections of
the people in the nation. Government and policy makers of the economy should think more
about, how to reduce inflation. Food is universal need for people. If inflation more in food
articles, it will harm to the country people. Inflation should not be there in food articles
because food is essential need for all categories of the people.

In Percapita income of the people is less, less percapita income of the people
surviving is very difficult with high inflation in the country. Futher More analysis can be seen
from the below references, which helps to understood clear cut picture about inflation

24
position in India. I have taken below references for my particular analysis, I would like to
thanks to all authors who helped me to complete successfully. I would like to thanks the
writers of the below articles who given me an idea to write an article in the topic of inflation,
up to my knowledge I analysed the things in this articles. These below all reference articles
will become only cross reference articles.

5. Impact of Exchange rate on Trade and GDP for India - A Study of Last Four
Decade, Dr. G. Jayachandran, 9th September, 2013.

This research has provided empirical estimates of the Economic relationship between
Exchange Rate, Inflation, Government Revenue and Income growth in India. In the long-run
the exchange rate and income may not drift a part, but in the short run their relationship is
weak and indirect. Together these results provide confirmation that there is no evidence of a
strong direct relationship between changes in the exchange rate and GDP growth. Rather
India’s Economic growth has been directly affected by fiscal and monetary factors.

Particularly the growth of government revenue and economic growth. The long-run
effects are predicted in models that assume market distortions such as information problems
or product market failures. In this short run when some prices in the economy can be stickly,
movements in nominal exchange rates can alter relative prices and affect international trade
flows. These short run affects however, are not straight forward, as they are likely to depend
on specific characters of the economy, including the currency in which domestic producers
invoice their products and the structure of trade.

A doubling of real exchange rate volatility decreases trade in differentiated products

by about two per cent. Developing country exports of manufactures may be much more
greatly affected due to a combination of greater exchange rate volatility and greater sensitive
of their exporters to that volatility. The investigated the relationship between the tax revenue
to GDP ratio, trade liberalization and changes in the exchange rate using a panel data set of
sub- Saharan countries.

Results suggests that trade liberalization, accompanied by appropriately supportive

monetary policies, may preserve tax yield. This result has important implications for

25
countries that have been reluctant to undertake trade liberalization for fear of the revenue
consequences.

When a large domestic economy liberalizes and gets increasingly integrated with the
global economic, the influence of the external sector, including the exchange rate movement
could become substantial during the transition. The finding support those who point out that
exchange rate volatility have a negative impact on trade.

6. Inflation and the Indian Economy, Naresh Kanwar.

Inflation in general and food price inflation in particular has been a persistent problem
in India over the past few years .Price stability is crucial for sustainable growth structure and
factors influencing food inflation, therefore it is critical for any rational policy decision to
contain it within comfortable limits. It is essential that economic policies should be backed up
with statistical information and an understanding of economic theory.

Collective action from the world wide should be taken on inflation .making economic
policies on this is just not easy but international coordination is important not just for
achieving strong ,sustainable and balanced growth but for maintaining enough liquidity in the
economy.

26
 CHAPTER- III
RESEARCH METHODOLOGY

Research Statement:

The research was done to find out if selected Economic Variables such as Interest
Rate, Inflation Rate, Exchange Rate, Balance of Trade and Industrial production have an
impact on Economic growth of India. Secondary Data was collected on a quarterly basis for
the selected Economic Variables on quarterly basis. This was obtained from
tradingeconomics.com and all other legitimate sources.

Development of Indian Economy:

1) Growth has been strong :

Economic growth of around 7½% makes India the fastest-growing G20 economy. The
acceleration of structural reforms, the move towards a rule-based policy framework and low
commodity prices have provided a strong growth impetus.
Recent deregulation measures and efforts to improve the ease of doing business have
boosted foreign investment. Investment is still held back by the relatively high corporate
income tax rates, a slow land acquisition process, regulations which remain stringent in some
areas, weak corporate balance sheets, high non-performing loans which weigh on banks’
lending, and infrastructure bottlenecks. Quality job creation has been low, held back by
complex labour laws.

Average increase 2014-2016 Q3

Brazil -1.546302672
Russia -1.498334462
South Africa 1.356310987
Chile 1.973590496
Mexico 2.078123311
Colombia 3.412221625
Turkey 3.83441413

27
Indonesia 5.003088798
China 7.024714823
India 7.272334627

Annualised average increase 2014-2016Q3

Y-o-y % increase
8
7
6
5
4
3
2
1
0
-1
-2
Brazil

Russia

Mexico

Colombia

Indonesia
Turkey
Chile

India
China
South Africa

2) Tax reform could make growth more inclusive :

A comprehensive tax reform would promote inclusive growth. Timely and effective
implementation of the Goods and Services Tax would support competitiveness, investment
and economic growth. Government’s plans to reduce the corporate income tax rate and
broaden the base will serve the same objectives. These two on-going reforms have been
designed to be revenue-neutral while India needs to raise additional tax revenue to meet
social and physical infrastructure needs.
Property and personal income taxes, which are paid by very few people, could be
reformed to raise more revenue, promote social justice and empower sub-national
governments to better respond to local needs. Ensuring clarity and certainty in tax legislation
and employing more skilled tax officers would strengthen the tax administration and make
the system fairer and more effective.

Tax revenue
Indonesia 12.48428161
Russia 14.57622995
India 16.79980245

28
China 18.56896092
Mexico 19.686
Chile 19.819
Colombia 20.23106081
South Africa 25.57032167
Turkey 28.719
Brazil 32.40309891
OECD 34.155

Tax revenue, 2015 or latest year available

% of GDP
40

35

30

25

20

15

10

0
Russia
Indonesia

Colombia

Turkey

Brazil
Mexico
India

Chile
China

OECD
South Africa

3) Policy reforms at the state and municipal levels could boost productivity and
reduce spatial disparities:
Spatial disparities in living standards are large. India is reforming relations across
levels of government to empower the states and make policies more responsive to local
conditions. Some states have taken the lead in improving the ease of doing business and now
enjoy higher productivity and income. Additional efforts to showcase reform efforts at the
state level and identify best practices will support the reform process and help achieve better
and balanced regional development.
In rural areas, poverty rates are high and access to core public services is often poor.
Farm productivity is low owing to small and fragmented land holdings, poor input
management, and inefficient market conditions. In urban areas, agglomeration benefits are

29
quickly reduced by congestion costs, in particular air pollution and long commuting times, all
of which reduce well-being.

2013 or latest year available

South Africa 0.15

OECD 0.16
Turkey 0.22
China 0.25
India 0.27
Brazil 0.30
Mexico 0.32
Russia 0.33
Chile 0.33
Colombia 0.35
Indonesia 0.41

Inequality in GDP per capita across regions,

2013 or latest year available

Gini index
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Russia

Colombia
Turkey

Brazil

Indonesia
Mexico
India

Chile
OECD

China
South Africa

30
 4) Strong growth has raised incomes and reduced poverty but inequalities remain:
Strong growth since the mid-1990s has raised GDP per capita by over 5% per year
(Figure 1.A). The acceleration of structural reforms since 2014 and the move towards a
rulebased policy framework have brought a new growth impetus and improved the outlook:

● The reaffirmation of fiscal rules and the implementation of inflation targeting have
improved predictability of macroeconomic policy and policy outcomes.
● Licenses for oil, gas fields and coal mines have been auctioned under clear rules, thus
ending the practice of discretionary allocation.
● In the context of the Make in India initiative, foreign direct investment (FDI) rules have
been changed, reducing the share of FDI inflows requiring government approval.
● The simplification of administrative requirements, the scrapping of obsolete laws, the
modernisation of bankruptcy laws, the removal of specific tax reliefs and greater reliance on
e-government are improving the ease of doing business and reducing administrative delays,
uncertainty and corruption.
● Discretionary and earmarked grants from the central government to the states have largely
been replaced by a higher tax share, empowering the states to experiment and tailor policies
to local needs. A ranking system for the states on the ease of doing business has been
introduced.
● The implementation of a goods and services tax (GST), to replace a myriad of consumption
taxes, could be a game-changer over the medium-run: it will help make India a common
market and promote investment, productivity and competitiveness.

The pace of reform is quite remarkable given the complexity of the federal structure
of government and the diversity in terms of culture, languages, geography and level of
development across the country. Growth has also become more inclusive as about 140
million people have been taken out of poverty in less than 10 years (Figure 1.B).

India has relied on large welfare programmes including price-support for food, energy
and fertilisers and has the world’s largest programme guaranteeing the “right to work” in
rural areas. The on-going reform of these schemes towards better targeting of those in need,
reducing administrative costs and corruption, and supporting financial inclusion could serve
as best practice for many emerging economies.

31
 However, many Indians still lack access to core public services, such as electricity
and sanitation. Public spending on health care, at slightly more than 1% of GDP, is low
(OECD, 2014). Although almost all children have access to primary education, the quality is
uneven. Female labour force participation remains low (OECD, 2014).

However, some other indicators of gender equality have improved, such as female life
expectancy at birth (which is now greater than that of men) and participation in education.
Deprivation is pronounced in rural areas and urban slums although some states have
performed better to reduce poverty.

A comprehensive tax reform should help to raise more revenue to finance much
needed social and physical infrastructure, promote corporate investment, enable more
effective redistribution and strengthen the ability of states and municipalities to better
respond to local needs. The implementation of the landmark GST reform will contribute to
make India a single market. By reducing tax cascading, it will boost India’s competitiveness,
investment and job creation. The GST reform is designed to be initially revenue-neutral. It
should be complemented by a reform of income and property taxes.

A. GDP per capita

India China Indonesia

1993 1641.11949 2034.73175 5289.9849

1994 1,695.47 2,274.39 5,597.56
1995 1,768.21 2,496.95 5,963.23
1996 2,007.79 2,716.32 6,332.05
1997 2,148.85 2,937.60 6,531.80
1998 2,233.48 3,139.32 5,592.19
1999 2,342.13 3,352.33 5,555.53
2000 2,427.31 3,609.51 5,745.40
2001 2,480.32 3,883.27 5,869.57
2002 2,540.74 4,210.75 6,046.16
2003 2,677.19 4,605.84 6,244.95
2004 2,853.08 5,042.13 6,465.81

32
2005 3,067.54 5,583.84 6,736.86
2006 3,300.33 6,260.74 7,006.66
2007 3,576.69 7,114.75 7,345.97
2008 3,737.80 7,761.86 7,679.00
2009 3,885.60 8,449.94 7,930.25
2010 4,256.47 9,304.26 8,324.21
2011 4,519.17 10,142.91 8,724.51
2012 4,644.07 10,885.85 9,135.84
2013 4,877.26 11,672.50 9,527.70
2014 5,156.77 12,460.68 9,889.73
2015 5,466.47 13,259.53

A. GDP per capita

2010 USD PPP
14 000
India China Indonesia South Africa
12 000

10 000

8 000

6 000

4 000

2 000

0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

(Figure 1.A)

33
 B. Poverty headcount ratio at $1.90 a day (2011 PPP)

India Brazil China Indonesia

1993 45.91 19.92 57.00 57.06

1994 45.21 16.46 52.02 53.34
1995 44.51 12.99 47.03 49.61
1996 43.81 14.17 42.05 45.89
1997 43.11 13.99 41.55 43.92
1998 42.41 12.71 41.04 41.96
1999 41.71 13.36 40.54 39.99
2000 41.01 13.49 37.68 34.46
2001 40.31 13.62 34.81 28.93
2002 39.61 12.31 31.95 23.40
2003 38.91 12.71 27.55 22.81
2004 38.21 11.04 23.15 22.22
2005 36.79 9.55 18.75 21.63
2006 35.37 7.94 17.38 21.60
2007 33.94 7.60 16.02 21.58
2008 32.52 6.29 14.65 21.55
2009 31.10 6.18 12.91 18.75
2010 26.16 5.84 11.18 15.95
2011 21.23 5.50 7.90 13.58

34
 B. Poverty headcount ratio at $1.90 a day (2011 PPP)
% of population
60.00
India Brazil China Indonesia
50.00

40.00

30.00

20.00

10.00

0.00

(Figure 1.B)

35
 GDP GROWTH RATE

YEAR GDP GROWTH RATE

2010-11 9.90%
2011-12 5.10%
2012-13 4.40%
2013-14 5.60%
2014-15 6.80%
2015-16 9.20%
2016-17 6.10%

GDP GROWTH RATE

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Gross Domestic Product (GDP) in the year 2010-11 was high i.e.9.90% then it decreased till
the year 2012-13. It again started increasing from 2013-14. And again started to decline in the
year 2016-17.

36
 INTEREST RATE
YEAR INTEREST RATE

2010-11 6.50%
2011-12 8.50%
2012-13 7.50%
2013-14 8%
2014-15 7.50%
2015-16 6.80%
2016-17 6.25%

INTEREST RATE

9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Interest rate of India was high in the year 2011-12, it started to decline from 2012-13 and
again increased a bit in the year 2013-14. But, from 2014-15 it has been decreasing.

37
 INFLATION RATE
YEAR INFLATION RATE

2010-11 0.95%
2011-12 0.78%
2012-13 0.31%
2013-14 0.58%
2014-15 0.33%
2015-16 0.08
2016-17 0.15%

INFLATION RATE
1.00%
0.90%
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Inflation Rate has been decreasing since the year 2010-11. In the year 2015-16, it was very
low but, it increased in the year 2016-17.

38
 EXCHANGE RATE
YEAR EXCHANGE RATE

2010-11 45%
2011-12 49%
2012-13 54%
2013-14 62%
2014-15 61.90%
2015-16 66.10%
2016-17 65.30%

EXCHANGE RATE
70%
60%
50%
40%
30%
20%
10%
0%
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

The Exchange rate had been increasing till the year 2013-14 then, it started to decrease from
2014-16, Again it increased in the year 2015-16 and decreased a bit in the year 2016-17.

39
 BALANCE OF TRADE
YEAR BALANCE OF TRADE

2010-11 -3848.5
2011-12 -13541.3
2012-13 -10406
2013-14 -10953.4
2014-15 -11396.2
2015-16 -4398.54
2016-17 -10437.2

BALANCE OF TRADE
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
-2000
-4000
-6000
-8000
-10000
-12000
-14000
-16000

The Balance of Trade has been negative till the year 2016-17.

40
 INDUSTRIAL PRODUCTION
YEAR RATE

2010-11 9.40%
2011-12 -2.80%
2012-13 15.10%
2013-14 3%
2014-15 2.30%
2015-16 5.50%
2016-17 3.80%

RATE
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
-2.00%
-4.00%

Industrial Production was high in the year 2012-13 then it started to decline till the year 2014-
15. It again started to increase in the year 2015-16 then it again started to decline in 2016-17.

41
 QUARTERLY ECONOMIC VARIABLES OF INDIAN ECONOMY

INTEREST INFLATION EXCHANGE BALANCE OF INDUSTRIAL

YEAR GDP RATE RATE RATE TRADE PRODUCTION

2016-17

Q1 - APR. TO
JUN. 7.90% 6.50% 1.17% 66.40% -8116.2 8.90%
Q2 - JUL. TO
SEPT. 7.50% 6.50% -0.15% 66.10% -8339.6 5.70%
Q3 - OCT. TO
DEC. 7% 6.25% -0.61% 67.50% -10369.4 3%
Q4 - JAN. TO
MAR. 6.10% 6.25% 0.15% 65.30% -10437.2 3.80%

2015-16

Q1 - APR. TO
JUN. 7.60% 7.20% 1.15% 64% -10827.1 1%
Q2 - JUL. TO
SEPT. 8.40% 7.20% 0.48% 66.10% -10166 2.10%
Q3 - OCT. TO
DEC. 7.40% 6.80% -0.39% 66.10% -11503.1 3.50%
Q4 - JAN. TO
MAR. 9.20% 6.80% 0.08 66.10% -4398.54 5.50%

2014-15

Q1 - APR. TO
JUN. 7.70% 8% 0.92% 59% -11763.2 8.30%
Q2 - JUL. TO
SEPT. 8.30% 8% 0 60.50% -14474 4.30%
Q3 - OCT. TO
DEC. 6% 8% -0.41% 62% -9178.8 4.10%
Q4 - JAN. TO
MAR. 6.80% 7.50% 0.33% 61.90% -11396.2 2.30%

42
2013-14

Q1 - APR. TO
JUN. 6.50% 7.20% 1.70% 56.50% -11280.2 -1%
Q2 - JUL. TO
SEPT. 7.50% 7.20% 1.18% 66% -6122.3 7%
Q3 - OCT. TO
DEC. 6.70% 7.80% -1% 62.50% -10187 3.50%
Q4 - JAN. TO
MAR. 5.60% 8% 0.58% 62% -10953.4 3%

2012-13

Q1 - APR. TO
JUN. 4.90% 8% 1.18% 56% -11244.5 2.30%
Q2 - JUL. TO
SEPT. 7.60% 8% 0.89% 55.70% -17149.5 -1.10%
Q3 -OCT. TO
DEC. 5.20% 8% 0.15% 54.50% -17593 7.20%
Q4 - JAN. TO
MAR. 4.40% 7.50% 0.31% 54% -10406 15.10%

2011-12

Q1 - APR. TO
JUN. 7.50% 7.40% 1.58% 45% -14358.6 9.50%
Q2 - JUL. TO
SEPT. 6.50% 8% 1.16% 45.50% -13194.9 2.50%
Q3 -OCT. TO
DEC. 6% 8.50% -0.43% 51% -14678.4 2.70%
Q4 - JAN. TO
MAR. 5.10% 8.50% 0.78% 49% -13541.3 -2.80%

43
2010-11

Q1 - APR. TO
JUN. 9.50% 4.80% 46.30% -5934.9 7.50%
Q2 - JUL. TO
SEPT. 8.60% 5.80% 46.70% -11308.3 6.20%
Q3 -OCT. TO
DEC. 9.20% 6.30% 45.30% -8069 8.10%
Q4 - JAN. TO
MAR. 9.90% 6.50% 0.95% 45% -3848.5 9.40%

Descriptive Statistics -
Descriptive statistics are brief descriptive coefficients that summarize a given data set,
which can be either a representation of the entire population or a sample of it. Descriptive
statistics are broken down into measures of central tendency and measures of variability, or
spread. Measures of central tendency include the mean, median and mode, while measures of
variability include the standard deviation or variance, the minimum and maximum variables,
and the kurtosis and skewness.

NO. VARIABLES MEAN MODE MEDIAN

1 GDP 7.16% 0.075% 7.45%
2 INTEREST RATE 7.23% 0.08% 7.30%
3 INFLATION RATE 0.79% 0.0118% 0.58%
4 EXCHANGE RATE 57.57% 0.661% 59.75%
5 BALANCE OF TRADE -1074425.50% - -1089025.00%

6 INDUSTRIAL PRODUCTION 4.69% 0.023 3.95%

The Mean, Mode and Median of Exchange rate is high among all other economic variables of
Indian Economy. Whereas, the Mean, Mode and Median of Inflation rate is lowest among all
other economic variables of Indian Economy.

44
Regression –

Estimate Standard Error T value Probability

(Intercept) 0.018711 0.049637 0.377 0.710
Interest Rate -0.542707 0.817060 -0.664 0.514
Inflation Rate -0.002048 0.010973 -0.187 0.854
Exchange Rate 0.505029 0.951925 0.531 0.601
Balance of Trade -0.036561 0.085265 -0.429 0.672
Industrial 0.014088 0.022534 0.625 0.539
Production

The regression results of the study found that the measure of r squared was 8.26%.

45
 CHAPTER- IV
FINDINGS

 India's gross domestic product (GDP) decreased in the year 2017. The growth in GDP
during 2016-17 is estimated at 7.1 per cent as compared to the growth rate of 7.6 per
cent in 2015- 16.
 The quarterly rates of selected Economic Variables like Interest Rate, Inflation Rate,
Exchange Rate, Balance of Trade and Industrial production which have a major
impact on Gross Domestic Product of the Indian Economy were found since the year
2010.
 The Mean, Mode and Median of Exchange rate is high among all other economic
variables of Indian Economy. Whereas, the Mean, Mode and Median of Inflation rate
is lowest among all other economic variables of Indian Economy. The regression
results of the study found that the measure of r squared was 8.26%.
 Revision of the base year for index of industrial production (IIP) and the wholesale
price index (WPI) failed to boost India's economic growth, which slowed down to a
three-year low of 7.1%. Demonetisation move also had an impact on FY17 numbers.
The growth was revised upwards to 8% for the previous year from 7.9% due to
revision in the IIP and WPI series.

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 CHAPTER-V
CONCLUSION

The impact of Selected Economic Variables on GDP of Indian Economy” was to

study the impact of Various Variables of economics on the economic growth of the country.
The variables used in the study are the Quarterly data Interest Rate, Inflation Rate, Exchange
Rate, Balance of Trade and Industrial Production of Indian Economy. The economic growth
is measured by Gross Domestic Product. The regression results of the study found that the
measure of r squared was 8.26%.
Gross Domestic Product (GDP) in the year 2010-11 was high i.e.9.90% then it
decreased till the year 2012-13. It again started increasing from 2013-14. And again started to
decline in the year 2016-17. Interest rate of India was high in the year 2011-12, it started to
decline from 2012-13 and again increased a bit in the year 2013-14. But, from 2014-15 it has
been decreasing. Inflation Rate has been decreasing since the year 2010-11. In the year 2015-
16, it was very low but, it increased in the year 2016-17. The Exchange rate had been
increasing till the year 2013-14 then, it started to decrease from 2014-16, Again it increased
in the year 2015-16 and decreased a bit in the year 2016-17. The Balance of Trade has been
negative till the year 2016-17.Industrial Production was high in the year 2012-13 then it
started to decline till the year 2014-15. It again started to increase in the year 2015-16 then it
again started to decline in 2016-17.
The Mean, Mode and Median of Exchange rate is high among all other economic
variables of Indian Economy. Whereas, the Mean, Mode and Median of Inflation rate is
lowest among all other economic variables of Indian Economy. The regression results of the
study found that the measure of r squared was 8.26%.

47
 BIBLIOGRAPHY

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