HS 700: Applied Economics

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Leading Indicators of the Indian Economy

• Group 12
• Lt Col D G Naik
• Grenville Savio Noronha
• Gnanasundaram C
• Kaushik K

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Introduction

• History of the Indian Economy
• The Liberalization Process The 80s and the 90s
• Beneficial Effects of the Reform Process
• We are the Fourth Largest Growing Economy in
  terms of PPP with a GDP of US 3.36 trillion
• In Exchange terms, we are the Tenth Largest in
  the world with a GDP of US 691.87 billion
  (2004)
• Second Fastest Growing Major Economy of the World
  with a growth rate of 8.1 for the 1stQ of
  2005-06

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Introduction

• The increasing importance of the Indian Economy
  has led to a need to Forecast the Performance of
  the of the Indian Economy
• Monitoring of the Indian Economic Cycle has
  become an increasingly attractive option for this
• Dua et. al. initially propounded an index based
  on concurrent indicators but using an index based
  on leading indicators is seen to be more
  appropriate.

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The Indicator Approach

• The Indicator Approach exploits the fact that
  different time-series do have different cyclical
  periods
• Time-series can be classified into Coincident,
  Leading and Lagging Indicators
• Coincident Measures of Output, Income,
  Employment and Sales
• Leading Placement of New Orders, Intention to
  Build and Changes in Profitability
• Lagging Installment Credit Outstanding and
  Interest Rates

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The Ideal Indicator

• It would cover half a century or longer, thus
  showing its relation to the economic cycles over
  a variety of conditions
• It would lead the month, around which cyclical
  revival centers, by an invariable interval of
  say, three months or even better, six months. It
  would also lead the central month of every
  cyclical recession by an invariable time
  interval, which might differ from the lead at
  revival.

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The Ideal Indicator

• It would show no erratic movements, that is, it
  would sweep smoothly up from each cyclical trough
  to cyclical peak and then sweep smoothly down to
  the next trough, so that every change in its
  direction would herald the coming or recession in
  the general economy or business.
• The cyclical movements would be pronounced enough
  to be readily recognized, and give some
  indication of the coming change
• It would be so related to the general economic
  activity as to establish as much confidence as
  the nature of such things allows that its future
  behavior in regard to economic cycles will be
  like its past behavior

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Illustration of a Leading Indicator
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List of Leading Indicators

• Trends in Gross Domestic Product (GDP)
  Contribution of Agriculture, Industry and
  Services
• Purchasing Power Parity (PPP) Index
• Fiscal Deficit
• Trends in Inflation Rate
• Interest Rates
• Credit Off-take
• Balance of Payment
• Foreign Exchange Reserves
• Crude Oil Rates
• Foreign Direct Investment (FDI) Trends
• Rain fall Index
• Sensex
• Exchange Rate
• Savings/GDP Ratio
• Human Development Index
• Electric Power Generation

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Gross Domestic Product

• GDP consumption investment
  government
• spending (exports -
  imports)
• Consumption, Investment Final Expenditure on
  Goods and Services
• Export-Import Balance of Trade
• Consumption Private and Public
• Significance of GDP

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GDP Indian Scenario
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GDP Indian Scenario
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GDP Indian Scenario

• The GDP growth trend for the last three years
  appears to indicate the beginning of a new phase
  of cyclical upswing in the economy from 2003-04
• The initial momentum to this new phase of
  expansion, in 2003-04, was provided by
  agriculture
• Industry and services have acted as the twin
  engines propelling overall growth of the economy

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• Grenville Savio Noronha

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Human Development Index

• HDI is a measure of poverty, literacy, education,
  life expectancy, childbirth, and other factors.
• It is a standard means of measuring well being,
  especially child welfare.
• HDI stresses the importance of the quality of
  life.

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Human Development Index

• The three basic dimensions of HDI
• 1) Life expectancy at birth
• 2) Knowledge (as measured from adult literacy
  rate)
• 3) Standard of living

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Human Development Index

• EMPLOYMENT
• Indias labour force has reached 375 million
  approximately in 2002, and it will continue to
  expand over the next two decades.
• The actual rate of that expansion will depend on
  several factors including population growth,
  growth of the working age population, labour
  force participation rates, educational enrolment
  at higher levels and school drop-out rates.
• Approximately three-fourth of the unemployed are
  in rural areas and three-fifth among them are
  educated.

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Human Development Index

• EDUCATION
• Literacy rates in India have arisen dramatically
  from 18 in 1951 to 65 in 2001, but these rates
  are still far from the UMI reference level of
  95.
• Literacy among males is nearly 50 higher than
  females, and it is about 50 higher in urban
  areas as compared to the rural areas.
• Literacy rates range from as high as 96 in some
  districts of Kerala to below 30 in some parts of
  Madhya Pradesh.

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Human Development Index

• In terms of total investment in RD, Indias
  expenditure is 1/60th of that of Korea, 1/250th
  of that of the USA, and 1/340th of that of Japan.
  
• More significantly, atomic energy, space and
  defense research account for 71 of all central
  spending on science and technology, which means
  that relatively little is left for investment in
  agriculture, energy, telecommunications and other
  crucial sectors within the sphere of science and
  technology.

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Human Development Index

• RD expenditure even in Indias fast-growing IT
  sector has been averaging around 3 of sales
  turnover (STO), which is much lower as compared
  to the 14-19 expended by internationally reputed
  software firms.
• These low figures reflect on our RD performance.
  Indias share of global scientific output in 1998
  was only 1.58 per cent of the worlds total.
• Out of 500,000 new patent applications filed
  globally each year, China accounts for 96,000 and
  Korea accounts for 72,000, while India accounts
  for only 8,000.

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Human Development Index

• HEALTH
• Like population growth and economic growth, the
  health of a nation is a product of many factors
  and forces that combine and interact with each
  other.
• Economic growth, per capita income, employment,
  levels of literacy and educationespecially among
  femalesage of marriage, birth rates,
  availability of information regarding health care
  and nutrition, access to safe drinking water,
  public and private health care infrastructure,
  access to preventive health care and medical
  care, health insurance, public hygiene, road
  safety, and environmental pollution are among the
  factors that contribute directly to the health of
  the nation.

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Human Development Index
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Human Development Index
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• Gnanasundaram C

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MONSOON AND ITS IMPACT ON AGRICULTURE

• 58 of country's population depends on
  agriculture
• 27 of India s GDP comes from its agricultural
  production.
• 13-18 of India s total annual exports are
  agricultural products.
• Good monsoon always means a good harvest
• Bad monsoon results in a big loss in the country
  GDP levels.

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MONSOON AND ITS IMPACT ON AGRICULTURE

• IMD predicts the onset date and rainfall
  potential of the monsoon
• Output growth severely affected by rainfall,
  especially in earlier years when share of
  agriculture was 40 50
• data crucial for proper estimates of production
  function, tfpg etc.
• Monsoon facilitated an impressive growth rate of
  9.6 in 2003-04
• Fell steeply to 1.1 in the current fiscal year

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MONSOON AND ITS IMPACT ON AGRICULTURE

• Construction of Rainfall Index
• For each year, only rainfall for four months,
  June through
• September, are considered.
• Area of each state As
• (Mean) Rainfall for each rainfall station,
  1871-2003 µs
• Standard deviation for each rainfall station,
  1871-2003 ss
• (4 months mean) Rainfall for each station and
  year Rs
• Define Js (Rs - µs)/ss for each rainfall
  station and year
• Yearly Rainfall Index S (As Js)/SAs

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FDI in India

• FDI is investment made by a foreign individual or
  company in productive capacity of another
  country. It is the movement of capital across
  national frontiers in a manner that grants the
  investor control over the acquired asset.
• India is considered a stable country for
  investing in by corporate overseas.
• India has displaced US as the second-most favored
  destination for (FDI) in the world after China
  according to an AT Kearney's FDI
• FDI is a tool for jump-starting economic growth
  through its bolstering of domestic capital,
  productivity and employment.

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FDI in India

• FDI has an impact on
• Country's trade balance
• Increasing labour standards and skills
• Transfer of new technology and innovative ideas
• Improving infrastructure, skills and the general
  business climate.
• US INVESTMENT IN INDIA
• U.S. is one of the largest foreign direct
  investors in India.
• The stock of actual FDI Inflow increased from
  U.S. 11.3 million in 1991 to US 4132.8 million
  as on August 2004 recording an increase at a
  compound rate of 57.5 percent per annum.
• The FDI inflows from the US constitute about 11
  percent of the total actual FDI inflows into
  India.

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• Top sectors attracting FDI from USA are
• Fuels (Power Oil Ref.) (35.93)
• Telecommunications (radio paging, cellular mobile
  basic telephone services) (10.56)
• Electrical Equipment (including Computer Software
  Electronics) (9.50)
• Food Processing Industries (Food products
  marine products) (9.43)
• Service Sector (Fin. Non-Fin. Services)
  (8.28).

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• India's English-speaking population is highly
  valued by American, Canadian and British
  investors.
• India received investments from GE Capital,
  American Express, Citibank, Conseco, British
  Airways, Dell Computers and Reuters.
• This FDI resulted in the development of call
  centres, back office support and facilities to
  handle knowledge-intensive activities.
• From software giant Microsoft to telecom biggies
  Nokia and Samsung to auto majors Honda and
  Toyota, global players now eye India as the most
  attractive destination for investment.
• Although far behind China, India figures among
  the ten most attractive destinations for foreign
  investment, according to a new survey.

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• Lt Col D G Naik

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SENSEX

• Definition
• Significance
• Calculation Methodology
• Selection
• Free Float Market Capitalization (from September
  1, 2003 )
• Calculation, closure
• Maintenance

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Definition

• Sensitivity Index
• Base Year 1978 79, Base 100
• Basket of 30 constituent stocks representing a
  sample of large, liquid and representative
  companies from diverse sectors.

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Significance

• Barometer of Business climate.
• Facilitates capital formation.
• Domestic Market/ Institutions.
• FIIs.
• FDIs.
• Likely to lead to boom in other asset classes as
  the profits get ploughed.

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Choice of constituents,Calculation
Methodologyand Maintenancefor SENSEX
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Journey Of SENSEX
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CONCLUSION

• Leading Indicators relative to the objective.
• Choice.
• Standardization.
• Construction of Ideal Leading Indicators not
  easy.
• Forecast based on Leading Indicators a useful
  planning tool.

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References

• Pami Dua and Anirvan Banerji, A leading index
  for the Indian economy, Working paper no. 90,
  Centre for Development Economics, March, 2001.
• J D Lindlbauer, Business Cycle Indicators From
  Qualitative Data, In Searh of Economic
  Indicators Essays on Business Surveys (Lecture
  Notes in Economics and Mathematical Systems,
  Werner H. Stringel, Ed. Berlin Springer-Verlag,
  1977.
• Raj Kapila and Uma Kapila, Understanding Indias
  Economy Reforms The Past, The Present and The
  Future, New Delhi Academic Foundation, 1996.
• Uma Kapila, Indian Economy since Independence,
  New Delhi Academic Foundation, 1998
• Online, Available http//en.wikipedia.org/wiki/
  Economy_of_India
• Online, Available http//en.wikipedia.org/wiki/
  Gross_Domestic_Product
• Online, Available http//ibef.org/home.aspx
• Online, Available http//www.investopedia.com
• Online, Available http//www.rbi.org.in
• Online, Available http//www.ibef.org
• Online, Available http//rbi.org.in/
• Online, Available http//www.economywatch.com/