Macroeconomic Analysis of the Indian Economy - Assignment Example

? Macroeconomic analysis of the Indian economy Group Supervisor: May 22, Macroeconomic analysis of the Indian economy Introduction Investment identifies risk taking and therefore requires a close analysis of the involved environment before making a decision on whether to invest or not, and in which economy to invest. This is because investments’ viabilities vary by environmental factors. Investing in a country that has no room for growth would for example stagnate an investment, especially if it is a large scale venture, while an economy that offers growth prospects promises success in production and marketability. Stability in an economy that can be determined by macroeconomic factors such as inflation, political stability, and economic policies also determines an investment’s success in an economy. Exploration of these factors in an economy is therefore fundamental to the business’ intended investment and this paper analyzes macroeconomic environment in India, one of the economies that the organization can consider for its investments. Economic indicators Analysis of India’s macroeconomic indicators is significant to the investment decision because of the scope of macroeconomics that explains “behaviour and performance” of the economy from a wider perspective, national approach (Dwivedi 2012, p. 8). Understanding the economy’s behaviour will indicate its trend and offer basis for forecasting future trends, a factor that will allow the company to identify the probability of involved risks and advantages of investing in the economy. Developed knowledge over the economy’s performance potentials will also indicate its ability to supports the investment’s performance because a weak or declining economy can rarely facilitate growth of a business. Macroeconomic indicators such as domestic gross product and its growth, unemployment, inflation, consumer price index, foreign direct investment, exchange rate and current account balance, fiscal and monetary policies, and international trade form a basis of this report’s analysis. Further, the report reviews the country’s political and technological environments and their potential effects on the organization’s proposed investment (Dwivedi 2012, p. 8). Gross domestic product Gross domestic product indicates an economy’s productivity and possible investment advantages from the economy. High gross domestic product shows positive prospects and increasing trend implies a growing economy with investment opportunities and high demand for utilities among its citizens (Dwivedi 2012, p. 55). India’s gross domestic product is relatively high; it has been estimated at about $ 1867 billion and its possible implications on the proposed investment can be explored from its trend. Trend in the country’s economic data for the past eight years identifies an increasing gross domestic product and this shows an increasing productivity level. The economy reported gross domestic product at about $ 834 billion in 2006, a value that increased to about $ 949 billion in the fiscal year ended in 2007, and $ 1238.6 billion in the fiscal year ended 2008. The economy’s gross domestic product recorded $ 1867.4 billion by the year. This trend identifies the economy’s growth potentials and it is therefore suitable for the proposed investment. The increasing trend also means availability of utilities and employment opportunities (Exim Bank 2013, p. 1). Service industry is the most active in the economy followed by the industrial sector. The service industry contributes more than half of the economy’s gross domestic product with the industrial and agricultural sector as the other major contributors. A review of the gross domestic product by sectors over the past eight years further identifies a decline in significance of the agricultural sector to the economy and an increase in significance of the service industry’s significance. Significance of the industrial sector has however been constant. The agricultural sector and its allied sectors contributed more than 18 percent of the economy’s gross domestic product in the fiscal year ended 2006 but the contribution to the economy reduced to 14 percent in the fiscal year ended 2013. The service industry however increased its contribution to the economy from less that 54 percent in the year ended 2006 to more than 58 percent in the fiscal year ended 2013. This trend identifies viability of the service industry for the investment (Exim Bank 2013, p. 1). Trend in the economy’s consumption also offers a basis for deciding which sector invests in. Past trends indicates that higher percentage of the country’s consumption is in the private sector. The sector consumes more than half of the country’s production and this percentage has been increasing steadily. For example, it was reported at 58.3 percent, 59.2 percent, and 59.7 percent during the economic years ended 2011, 2012, and 2013 respectively. Increment in consumption in the private sector has also directly proportional to change in the country gross domestic product (Eaindustry 2013, p. 1). The trend in growth of the economy’s gross domestic product therefore identifies it as a good investment zone. Its private utilities in the service industry are the most viable opportunities for investment in India’s economy. Unemployment rates Another important macroeconomic factor to investment is unemployment rate, the percentage of a population that is actively searching for employment opportunities but cannot find jobs. High unemployment rates identify availability of human resource for the proposed venture but it similarly indicates lower consumer’s purchase power and therefore lower demand for products. The unemployment rate in India is significantly low, below five percent. The average usual principal status unemployment for the economic year ended 2010 was 2.5 percent before adjustment and two percent after adjustment. Unemployment rates also vary by gender and area of residence. Unemployment rate in the economy however varies by locality and is higher in urban areas than in rural areas, an indicator that establishing the investment in an urban area is likely to recruit a wider human resource base than in a rural area (Eaindustry 2013, p. 5). The low unemployment rates that correspond with the economy’s growing potential therefore identify potential threat to availability of labour for the proposed investment. This also offers a threat to expansion and unless necessary policies and measures are formulated to ensure expanded labour force for the growing economy, investment will require strong internal human resource strategies (Dwivedi 2012, p. 494). Inflation Inflation refers to the general persistent rise in commodity prices with time. Its trend in India’s economy identifies volatility and it cannot be forecasted with confidence. It was for instance about eight percent in the fiscal year ended 2009 before falling to less than four percent in the year ended 2010. The rate then rose to 9.5 percent in the year 2011 and then fell to 8.94 percent in the year ended 2013. Such volatility identifies change in money value and may lead to loss in the investment (Eaindustry 2013, p. 11; Dwivedi 2012, p. 440). Exchange rate Exchange rate for India’s currency is relatively stable as data on its time series rate against the United States Dollar indicate. The data by Exchange Rates over the past six months indicates significant stability with a variability of about one Indian rupee about the average rate against the dollar. The data that identifies an average rate of 54.3897 INR per US Dollar recorded a minimum of INR 53.1415 and a maximum of INR 55.7102 per dollar and the minimal disparity identifies significant stability of the local currency that can be projected against other major currencies. The inference can be made with confidence because the United States dollar is popular and is used in many other economies. The stability further identifies low financial risks that could rise from multi currency transactions such as importation and exportation transactions that must be settled in foreign currencies (Bishop, Parrott, Martie and Miller 2012, p. 161, 162; Exchange Rate 2013, p. 1). Current account balance Current account balance, the net value of economic transaction in an economy’s international trade, is another macroeconomic factor for determining viability, sustainability, and productivity of an investment in India. The indicator shows values of imports and exports for a country and therefore indicates the country’s link with the global economy. The country’s current account balance has been negative; an indication of more imports than exports, but its average value is almost neutral. A neutral current account further explains an open economy to the global market that will allow the company the freedom of exploring the international markets for its raw materials, and finished products (Ohri 2009, p. 255; Trading Economics 2012, p. 1). Fiscal and monetary policies Financial regulations in India also identify diversified monetary policies to ensure stability. The cash reserve ratio, a percentage of commercial banks’ deposits that they must keep with the Reserve Bank, plays many roles towards ensuring economic stability. It regulates the banks’ liquidity and determines their ability to lend money and this controls inflation rates by regulating amount of cash flow into the economy. The ratio also ensures the banks’ stability by controlling liquidity risks that is dangerous to customers such as investors who may keep their money with the banks. This is because the help percentage of the banks’ deposits by the Reserve Bank offers confidence in the banks’ going concern. The same security achieved through requirements that commercial banks in the country purchase government bonds and securities. Other applied monetary policies in the economy include bank rate regulations; control of money supply and “open market operations” and their roles ensures economic stability that offers a favourable investment environment (Saleem 2010, p. 137, 134- 135). The Reserve Bank of India also oversees many fiscal policies that aim at ensuring that the economy’s resources are adequate to facilitate economic ventures and to increase investments rates in the economy. The policies also provide for incentives to motivate private sector economic initiatives and this can particularly offer the organization a start up advantage. Fiscal policies by the Reserve bank also promote investment efficiencies besides ensuring a stable economy and these objectives are achieved through “taxation policy,” “public expenditure policy,” “public debt policy,” and “deficit financial policy” (Saleem 2010, p. 141). International trade India is actively involved in international trade and records one of the highest import and export values across the globe. Its average monthly imports, reported in billions of US dollars were about 38.7 in 2011 with almost similar average in 2012. Its monthly export values is also significant in the global market as it is one of the highest among individual countries’ export values and these identifies significant participation in international trade towards the organization’s benefits from globalization (Eaindustry 2013, p. 25, 26). Political environment Political environment in India is favourable to the investment. It has for example ensured liberalization of the economic environment, promoted privatization, and removed trade barriers towards global trade (Jain, Trehan and Trehan, p. 21, 22). The country’s level of technology is however, poor but necessary technology for the investment’s success can be imported into the country (Gupta and Gupta 2010, p. 90). Price stability and foreign direct investment Consumer price index is another significant indicator for evaluation. Consumers prices have been gaining stability over the past years and this further ascertain stability in money value. The country’s consumer index is however high and this communicates high living standards besides high ability to spend. Further, the high propensity to spend communicates high local demand for the investment should it be done in India. Foreign direct investment into the economy has been increasing and the trend identifies recognition of the country’s investment potentials by global investors. Consistent increase in foreign direct investment inflow supports the concept of developing investment interest in the economy (Eaindustry 2013, p. 13). Conclusion The macroeconomic indicators therefore identify positive investment prospects with the Indian economy because the indicators have been improving in the past years. The economy’s gross domestic product, exchange rate, current account balance, foreign direct investment, and consumer price index indicate increasing stability. In addition, the country’s political environment, accessibility to the global economy, and its investment oriented fiscal and monetary policies identify its suitability to the company’s proposed investment. Its inflation rate and the low unemployment rate, however, raise concerns of potential economic challenges. Poor technology may further challenge the investment, but technology can be imported. This report therefore recommends the Indian economy for the proposed investments because of the diverse economic advantages that outweighs the possible disadvantages. Reference list Bishop, S Parrott, C Martie, C and Miller, R 2012, Kaplan AP Macroeconomics/Microeconomics 2013-2014, Kaplan Publishing, 2012, New York. Dwivedi, D 2012, Macroeconomics, Tata McGraw-Hill Education, New Delhi. Eaindustry, Key economic indicators: April, 2013 Office of the Economic Adviser, Retrieved May 22, 2013, . Exchange Rate, Indian Rupees (INR) to 1 US dollar (USD), Exchange rate, Retrieved May 22, 2013, < http://www.exchange-rates.org/history/INR/USD/T >. Exim Bank, India’s macroeconomic indicators, Exim Bank, Retrieved May 22, 2013, < http://www.eximbankindia.com/ind-eco.pdf >. Gupta, K and Gupta, R 2010, India Economy, Atlantic Publishers & Dist, New Delhi. Jain, T Trehan, M and Trehan, R 2009, Business environment, FK Publications, New Delhi. Ohri, T 2009, Introductory microeconomics and macroeconomics, FK Publications, New Delhi. Saleem, S 2010, Business environment, Pearson Education India, New Delhi. Trading Economics 2012, India- National statistics, Trading Economics, Retrieved May 22, 2013, . Read More