Financial Stability Assignment 2022

TABLE OF CONTENTS
TABLE OF CONTENTS 1
ABSTRACT 2
I. Introduction: Understanding macroeconomic indicators: India’s situation 2
II. Assessing growth sustainability; demand and supply-side challenges to growth; analyzing
growth from the demand and supply side—the Indian experience 3
III. Assessing India’s external sector vulnerability 6
IV. Fiscal deficit sustainability and fiscal prudence 8
V. Financial stability 9
VI. Macroeconomic lessons for managers: Betting on the India growth story 12
REFERENCES 14

ABSTRACT
In July 2016, India was celebrating the 25th anniversary of its economic reforms. The
reforms, initiated in 1991 as a result of a severe fiscal deficit-driven balance of
payments crisis, comprised three pillars: privatization, liberalization, and
globalization. The reforms saw India gradually break free of the low annual growth
rate of 3.0–3.5 per cent that had characterized it up to the 1980s, euphemistically
referred to as the “Hindu growth rate.” In 2016, with an annual growth rate of 7.6 per
cent, India emerged as the fastest growing economy in the world, outpacing China’s
6.9 per cent annual growth rate. The movement in the country’s macroeconomic
indicators in the past 25 years pointed to a macroeconomic turnaround. What elements
constituted this turnaround? Were these positive macroeconomic indicators
sufficiently sustainable? Should investors be confident about India’s growth story in
2016?
I. Introduction: Understanding macroeconomic indicators: India’s situation
What macroeconomic indicators are used to evaluate an economy? Does the Indian
economy present a picture of a turnaround?
For a 25-year period, some macroeconomic indicators are used to evaluate India's
economy:
GDP
The article tells us that India's GDP at current prices grew from $280.8 billion in
1990/91 to $2,251 billion in 2016/16- a 702 percent increase in 25 years.
Expenditure to GDP ratio:
Employment growth rate: The article tells us that from 1993 to 2009, there was a
decline in employment growth. During the 2000s, there was little to no increase in job
rates.
Fiscal Deficit
During 1990/91, the Indian economy had a fiscal deficit of 7.61 percent; however, it
significantly declined by 3.94 % during 2015/16.
GDP per capita
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GDP per capita explains how much people profit from their country's economy.
India's GDP per capita in constant 2010 prices rose from $309 in 1991 to $1,598 in
2015.
Indeed the Indian economy presents a picture of a turnaround. A new government
leased 20 tonnes of gold out of its stock to the State Bank of India and allowed the
Reserve Bank of India (RBI) to ship 47 tonnes of gold to the Bank of England in July
1991 to raise $600 million. The government then embarked on a new economic
policy, including privatization, liberalization, and globalization. The economic
reforms began in July 1991, and the mid-1990s restored macroeconomic balance.
India's GDP grew from $280.8 billion in 1990/91 to $2,251 billion in 2015/16- a 702
percent increase in 25 years.
II. Assessing growth sustainability; demand and supply-side challenges to
growth; analyzing growth from the demand and supply side—the Indian
experience
Is an 8% growth rate substantial for India?
Since 2005, India has been growing at the rate of >7% (except for the year 2008-09).
It is mainly because of the rapidly rising middle class of the country. The demand for
goods has been on the rise in the economy.
For the full fiscal year 2021-2022 (April 2021 to March 2022), India's real GDP
growth rate is forecast at 8.2%, recovering from a sharp 7.3% decline compared to the
previous year (2020-2021) due to the strong impact of the covid 19 pandemic. The
Indian economy is forecasted to continue to grow strongly in the financial year 2022-
2023, at a rate of 6.7%.
When the country starts showing signs of recovery from the pandemic, we will see a
considerable rise in employment, leading to more disposable income in the hands of
the people, leading to an increase in demand for goods and services. This would cause
a growth rate of >8% in the short run.
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Generate many initiatives, for example: “Make in India” - is an initiative by the
Government of India to make and encourage companies to develop, manufacture and
assemble products made in India and incentivize dedicated investments into
manufacturing aimed "to transform India into a global design and manufacturing
export hub."
"Make in India" had three stated objectives: to increase the manufacturing sector's
growth rate to 12-14% per annum; to create 100 million additional manufacturing jobs
in the economy by 2022; to ensure that the manufacturing sector's contribution to
GDP is increased to 25% by 2022 (later revised to 2025).
However, India could not be complacent with such growth in per capita income. As
Raghuram Rajan, the former Governor of the Reserve Bank of India, India’s central
bank, stated:
“At one level, we are still a $1,500 per capita economy. All the way from $1,500 per
capita to $50,000, which is where Singapore is, there are a lot of things to do. We are
still a relatively poor economy, and to wipe the tears from every eye, one would at
least want to be middle-income, around $6,000–$7,000, which, if reasonably
distributed, will have dealt with extreme poverty. And that is two decades worth of
work to be even moderately satisfied.”
=> India has a long way to go to achieve its steady state.
What are the challenges to growth on the demand side and on the supply side?
Supply Side:
Service sector:
In 2015/16, the service sector emerged as the most significant contributor to GDP with
a 61.9 percent share. However, the share in overall employment in India is 26.9
percent.
It had experienced declining growth rates in 2015/16, with the slowdown concentrated
in public administration, defense, and other services because of the restraints on public
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