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ICFAI UNIVERSITY

DEHRADUN

Name: Gopal Krishan

Section: A

Enrollment No. 09BS0002792

IUD No. 0901202792

Course Name: Macro Economics and


Business Environment

Course Code: SLEC502

Submitted to: Dr. Ashish Dash

Submitted on: 17th November

Title of Assignment: Growth rate, inflation and


unemployment analysis of Indian Economy
Contents
Method used to calculate the GDP:...........................................................................................4
Factors affecting the GDP:........................................................................................................4
1950-1955..............................................................................................................................4
1956-1960..............................................................................................................................4
1961-1970..............................................................................................................................4
1971-1980..............................................................................................................................4
1990 Onwards:.......................................................................................................................5
Calculation of Inflation:.............................................................................................................5
Reasons for inflation in the Indian economy:............................................................................8
1990-2000..............................................................................................................................8
2000 onwards.........................................................................................................................8
Reasons for unemployment in India:.........................................................................................9
Student Signtaken to eliminate unemployment in India:.............................................................10
Faculty Sign
Measures
EMPLOYMENT GENERATION IN INDIA.....................................................................10
Correlation between growth and unemployment:...................................................................11
Method used for establishing correlation............................................................................11
Sources.....................................................................................................................................11
Sources
Macro Economics is a subject which deals with the behavior of the economy as a whole,
with boom and recession, the economy’s total output of goods and services, the growth of
output, the rates of inflation and unemployment, the balance of payment, and exchange rates.

The three major aims of macro economics are:

1. Stability of prices
2. Growth of output
3. Reducing unemployment

Over the period after independence there have been a number of changes in the Indian
economy and all have contributed some role or the other in making the economy what it is
today and where it stands in the global market.

Growth

The growth rate of an economy is the rate at which the GDP of the country is growing. GDP
(Gross Domestic Production) consist consumption of goods in the boundaries of the country,
all the expenditure made by the government in the economy and investments made in the
economy. This gives us an equation:

GDP = C + G + I

Reasons which causes the increase in GDP overtime:

1. Increase in the sources of the economy that is the labor and investment in the fixed
assets like buildings and machines
2. If the productivity of the factors of production increases it results in the increase in
GDP

Method used to calculate the GDP:


GDP has been calculated by taking the growth rate of the economy over the previous year all
across the period of 1950 to the year 2009.

Factors affecting the GDP:


1950-1955
After independence, India was facing a severe crisis of food for the population and in the
first 5 year plan India leader Jawaharlal Nehru concentrated on the agriculture sector that
gave a boost to the Indian economy to grow as well as it made available food for the citizens
of the country.
Still there were a lot of problems in the system of the Indian economy and there was a severe
food crisis in Bihar because there was license raj prevailing at that time in the country and
farmers were victim of that system.

1956-1960
Till 1960, India was having balance of payment problem and because of that India could not
borrow money from other countries. In the second 5 year plan concentration was more on the
industrial growth so that people get more jobs and production of the country increase.

1961-1970
In the year 1962, the growth rate of Indian economy declined because of the war with China.

Then in the year 1965 there was another dip in the growth rate due to the Indo-Pak war. Also
USA became familiar to Pakistan and thus withdrew the foreign aid from the country and it
resulted in further dip in the growth in the decade 1960-1970.

Moreover the droughts in the years 1965 and 1966 added to the problem of the economy.

1971-1980
Further in the year 1971, there was another war with Pakistan which jolted the economy and
resulted in steep decline in the growth rate of the economy.

In the year 1975 there was emergency declared by the Prime Minister Indira and that again
led to drop in GDP.

By the end of the decade there was considerable growth in the GDP and it covered the drop it
faced during the first half of the decade.

1990 Onwards:
India’s merchandise trade grew rapidly during this period due to the economic reforms
adopted. India’s merchandise exports have grown at a 12.5% annual rate since the start of its
reform period in 1991, lifting its share of total world trade from 0.5% (to which level it had
declined, after 43 years of the deliberate pursuit of autarchy by Nehru and his successors,
from 2.2% in 1948) to 0.9% (and 1.4% of world trade excluding intra-EU and NAFTA trade)
by 2004. India ranked 24th among the world’s 25 largest economies in terms of its share of
world trade. India started exporting goods like jewellery, textiles, garments, etc.

Tariffs were also reduced as per the MRTP act in function and India started earning foreign
exchange with all this.

IT sector also grew at a very high pace in India and that became one of the major
components to the growth of GDP of India.

Economy of India is comparatively less energy consuming as most of the population of the
country resides in villages and there the means of living are not that much and energy
consumption is very less. But at the same time India is 6th largest consumer of oil and that’s
why the GDP of the country dipped in the year 2001 to 2003 because of the rise in oil prices
during that period.

FDI flows in India are modest rising from $2.2bn in 2000 to $4.3bn in 2003.

Overall seeing in the past few years the growth rate of GDP in India has been increasing and
it has increased very rapidly in the beginning of the decade 2000-2010.

Inflation:
In an economy there are prices rising or decreasing every year or month. Or in other sense if
we say we can buy less goods and services with the same amount of money that we have
now and after a year. This effect is termed as inflation.

Calculation of Inflation:
GDP at factor cost can be calculated in 2 ways, one is at the current price and other is at the
market price. The GDP at the current price which is also known as the Real GDP and the
GDP at the constant price which is also known as the nominal GDP are used to calculate the
inflation rate in an economy.

Inflation rate = Nominal GDPReal GDP

In this method, the inflation is calculated as Nominal GDP being divided by the Real GDP
because the Nominal GDP is calculated at the current prices and the real GDP is calculated at
the constant prices. Thus we can find out what will be the ratio of the prices that we have to
pay today for the same quantity for what we had to pay years back.

GDP Deflator is a means of calculating the inflation rates and it eliminates the problem of
the shifting bases as it is in the case of calculating the inflation using the Consumer Price
Index or the Producer’s Price Index. These are the other two methods used to calculate the
inflation rate but in this case due to the non availability of the data from any of the reliable
source we have to go for the GDP deflator as the measure of inflation.

The above graph shows the inflation rate in Indian economy which is continuously rising
over the period since 1950 to 2009. But when we look at the cumulative average growth rate
over the decades for the periods we observe that the inflation rates are increased at a very
high average rate in the decade 1951-1960. It has grown more or less constantly in the 4
decades from 1961 to 2000.

In the current period starting from the year 2001 the inflation has been declining at an
average of 4.5% per annum.
4 2

14 22

24 8

34 5

44 3

54 1

64 2

74 2

84 2

94 1

104 3

114 2

124 2

134 2

144 1

154 1

If we make a frequency distribution table and graph we see that for maximum period the
GDP Deflator was between 14 and 24 and rest all the time it was more or less than this.
Observing the data we see that GDP deflator was growing at a very less rate for 4 decades
and now its growth has declined in this decade.

The increase of demand of goods over the supply causes inflation. One of the major causes
of inflation in economy is the money supply which increases liquidity in the market and
raises prices of goods causing inflation.

Thus the central bank and the government always look to it that the inflation is under control
and for this they uses different measures namely monetary and fiscal policy.

Under monetary policies RBI increases or decreases the money supply in the market to
control the flow of the money in the economy.

In fiscal policy, government imposes taxes and gives subsidies to control the prices and
inflation.
Reasons for inflation in the Indian economy:
1990-2000
1. Exceptional economic growth in the period 1991-1998
2. Genuine supply shortage in agricultural growth due to lack of irrigation facility and
irregular climate change caused due to Afghan war.
3. High liquidity of money during this period

2000 onwards
The growth rate of inflation during this period has gone down but the inflation has been still
rising. Major reasons of inflation change during this period in India are:

1. Reduction in fuel subsidies in the country


2. The price of basic goods such as lentils, vegetables, fruits and poultry were expected
to slow their rise in this period. The price of various manufactured goods also fell in
2007, and this contributed to a reduced inflation rate.

Unemployment
Unemployment rate measures the fraction of work force who are out of work and are looking
for a job to do.

Unemployment in rural and urban areas with


gender difference
Rural Urban
Year Male Female Male Female
1973 1.2 0.5 4.8 6
1978 2.2 5.5 6.5 17.8
1983 2.1 1.4 5.9 6.9
1988 2.8 3.5 6.1 8.5
1990 1.6 0.8 4.4 3.9
1992 1.6 1.2 4.6 5.5
1993 1.8 1.3 4.55 6.1
1994 2 1.4 4.5 6.7
1995 1.2 0.5 3.7 4.1
1996 1.5 0.8 4 3.6
1997 1.6 0.9 3.9 5.1
1998 2.4 2 5.3 8.1
2000 2.1 1.5 4.8 7.1
2001 1.6 0.6 4.2 3.8
2002 1.4 2 4.2 4.9
2003 1.9 1 4.3 4.4
2004 2.4 2.2 4.6 8.9
2005 2.1 3.1 4.4 9.1
2006 2.5 2.2 4.8 7.9
NOTE: The data for unemployment is available only in the different rounds done by NSSO
and is available for only a certain number of years. Therefore to understand the
unemployment trend in India interpolation method has been used to fill the gaps in the data
available over a period of 1973 to 2006.

As the graphs show us, the unemployment in India has increased for women in both the areas
that is rural and urban in the period 1973-1978 and after that is has declined again in the year
1983.

Unemployment is lowest for women in the year 1973 in rural areas and in the year 1995 in
urban areas

Reasons for unemployment in India:


1. Lack of Self Awareness: People are not clear about their own talents, skills and
passion. Hence they try things which don't fit them - imitate and fail.
2. High Risk Aversion: People don't want to fail. Hence they do not try new things. If
software is demanded; we find IT Engineers; if Electrical Electronic Sector seems to
have a growth we find EEEs.
3. There are lot of people working on one single field and there is over production from
one field. Therefore the field gets quickly saturated and will be unable to support
additional people.
4. Limited demand for unskilled and semi skilled labour
5. Problems in maintaining the continued employability of labor force
6. Demand for multi skilling
7. Increase in demand for skilled labor on account of technological development and up
gradation and changes in the organization of work

Measures taken to eliminate unemployment in India:


1. Employment planning in India
2. Poverty alleviation and employment generation program

EMPLOYMENT GENERATION IN INDIA


• 7% of the total employed are in the organized sector i.e., unorganized sector
dominates in the employment scenario.
• Additional employment generation in the organized sector is not significant
i.e., scope for additional wage employment in the organized sector continued
to be less.
• Significant employment generation took place in the tertiary sector
particularly in services industries.
• Substantial employment growth was observed in the small and unorganized
sector, i.e., in small and tiny enterprises.
• Self-employment and casual labor continued to play a pivotal role in
rehabilitation of the unemployed.
1. Considering the problems of employment and unemployment situation in the country
Planning Commission set up a Task Force under the chairmanship of Dr. M.S.
Ahluwalia to go into the details of the employment generation taking place in the
economy and suggest measures for creation of 100 million jobs (10 million per year)
in a period of 10 years.
2. A special group in the Planning Commission was constituted under the Chairmanship
of Dr. S.P.Gupta, Member, Planning Commission to suggest strategies and program
in the Tenth Plan for creating gainful employment opportunities for one crore people
per year during each year of the Tenth Plan. The special group has also submitted its
report in May 2002.

Correlation between growth and unemployment:


Method used for establishing correlation
As we correlate the two terms, we get that when the GDP grows, there is a reduction in
unemployment in the economy. Because the GDP can be increased by better utilization of
the resources in the economy, the GDP will grow when the labor in an economy get more
employment. To find out the relationship between the growth and the unemployment the data
above about the rural and urban areas male and female unemployment is filled for the
remaining years also through interpolation and then a correlation is found between the
unemployment rates and the growth rates calculated by using the CORREL function in
EXCEL.

This gives us a negative correlation in the growth of GDP and the unemployment rate.

Rural Urban
Male Female Male Female
-0.224 -0.339 -0.167 -0.265
Thus we can see that there is stronger correlation between the work force of rural areas
unemployment and growth rate of GDP. This is because 70% of the population lives in rural
areas and they are the biggest contributors to the GDP. So if their income goes down, GDP
also goes down. Also the rural areas people are more affected by the GDP change than the
workforce of the urban areas. The statistics here give us the clear picture of the above fact.

Sources
1. http://unstats.un.org/unsd/demographic/products/indwm/statistics.htm#Popu
lation
Data available
2. http://www.mospi.gov.in/
Data available for unemployment but it is available in different rounds report which
has to be read and downloaded separately. Data taken for all the rounds available
and put in together. Gaps filled through interpolation.
3. www.unescap.org/Stat/meet/keyindic/india_current_manpower.pdf
Data available for manpower in the country
4. Status of Gender-Differentials and Trends in India Population, Health,
Education and Employment by Barun Kumar Mukhopadhyay and Prasanta
Kumar Majumdar
5. Status Of Employment And Unemployment Statistics In India, Dr. R.N.
Pandey,
Joint Director, C.S.O, Ministry of Statistics & Programme Implementation, New
Delhi
6. China and India in the world economy, Paper presented to the international
conference of commercial bank economists, Marriott Resort, Costa do
Sauipe, bahia, Brazil, 7th Juky 2005
7. Economic Growth and Convergence in India by Kshamanidhi Adabar
8. Politics of Economic Growth in India, 1980-2005 Part II: The 1990s and
Beyond
9. http://en.wikipedia.org/wiki/Economic_history_of_India
10. Macro Economics by Dornbusch, Ficher and Startz, 9th Edition, 2009