3/6/13

Mrunal [Economic Survey Ch1] Introduction, GDP FC MC relation (part 1 of 3) Print

[Economic Survey Ch1] Introduction, GDP FC MC relation (part 1 of 3)

1. 2. 3. 4. 5. 6. 7. 8.
Introduction Why Economic Survey = Boring? Timeframe Link between GDP FC/MC? Why India cant bounce back easily? Crude oil prices Forex Reserve Mock questions

Introduction
Finally economic survey is released. (free download English click me for Hindi click me) For UPSC, economic survey is important, because just like yearbook, this one also provides you with truckload of facts for MCQs, and fodder for descriptive/essay/interview. Even for SBI PO, this is important, because lot of MCQs come from current based economy + fodder necessary for GDPI stage.

Why Economic Survey = Boring?

On HBO, Star movies, they show movie for 15-20 minutes and advertisement for 5 minutes. But on Zee Cinema, 9x etc. channels, they show advertisements for 20 minutes and movie for 5 minutes.= movie is shown in between advertizements. (advertisements are not shown in between movies.) Thats the first reason why economic survey is boring, because it gives facts/fodder in between useless numbers and data. Second reason why economic survey is boring, because the authors assume that youre already aware of the basic economic terms, concepts and the connections in between. Therefore, to enjoy the first chapter, make sure you already know following terms and concepts, if not click on the given links Current Account Deficit Fiscal http://mrunal.org/2012/05/economy-current-account-deficithow-to.html http://mrunal.org/2012/09/economy-fiscal-deficit-fiscal1/5

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Mrunal [Economic Survey Ch1] Introduction, GDP FC MC relation (part 1 of 3) Print

consolidation Fiscal stimulus Fiscal cliff, Sub prime crisis GDP calculation GDP @market price and Factor cost Inflation

consolidation-kelkar.html http://mrunal.org/2011/04/economy-q-fiscal-stimuluspackage.html http://mrunal.org/2012/11/economy-fiscal-cliff-meaningreasons-implications-on-us-and-indian-economy-explained.html http://mrunal.org/2012/02/economy-iip-index-of-industrial.html http://mrunal.org/2011/04/economy-q-gdp-at-factor-cost-andmarket.html http://mrunal.org/2012/08/economy-inflation-demand-pull.html

Now lets start with the gist of first chapter from Economic Survey. (Ive further subdivided it into three articles, else itll lead to information overload= boredom + frustration.)

Timeframe
2007 200810 Sub prime crisis in USA. Impact felt across the globe. Government of India injects fiscal stimulus. Leads to boost in consumption. Government of India partially withdraws the fiscal stimulus. Because Government wanted to start fiscal consolidation. + rise in global crude prices etc. leads to inflation. RBI increases rates = Interest on EMI / Loans increased = demand for consumer goods decreased. Businessmen find it hard to get loans. + global prices of crude high as usual. Thanks to inflation, People start investing in gold. = less money for business investment + crude price high = CAD = rupees value declines.

201011

201112

Feb Economic survey is released. 2013 When there was global financial crisis, Government of India and RBI gave monetary and fiscal stimulus (e.g. giving tax-soaps to industries, higher depreciation on commercial vehicles, lowered interest on loans etc.) This lead to increase in consumption. => later inflation. Now to curb the inflation, RBI sharply raised the borrowing rates = again problem, it slowed down the demand.
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Link between GDP FC/MC?

GDP at factor cost (FC)= GDP at market prices MINUS indirect taxes PLUS subsidies. GDP (FC)=GDP(MP) indirect taxes + subsidies. in years of sharply higher growth, GDP growth @MP >> GDP at FC. In the years of slowdown, GDP @MP << GDP @FC. Why? Because when there is slowdown, indirect taxes falldown and subsidy burden on Government increases.

Why India cant bounce back easily?

Few years back, America faced the sub-prime crisis and recession. But now it seems to be slowly getting back on track. But if we look @India, it seems as if inflation and slowdown is going to continue forever! Why cant India bounce back quickly? Reasons are following First, International investors and their risk taking. Compared to American Economy, the Indian economy is more exposed this shifts of foreign investors. (the whole GAAR, Vodafone controversy, retrospective taxation, policy paralysis, environmental clearances ruined the mood of foreign investors.) If they pump in money, Indian economy quickly improves, when they pull out money suddenly, our rupee weakens against dollar = crude oil becomes costly.
Second, Indias import bill is strongly tied to the price of oil.

Third, because of ongoing inflation, people prefer to invest in gold. Gold import= CAD = rupee weakens = crude oil import becomes expensive =even more problems.

Rupee weakening?
Suppose on Jan 2012: $1= Rs.50 And on Feb 2012: $1=Rs.60
That means rupee has weakened and dollar has strengthened. But is it good or bad? Theoretically, for Importers = bad. Because now theyve to pay more money to import same quantity of goods. And for Exporters, call centers= good. Because they get more rupee.(even if theyre paid same amount of dollars.) Ok so Rupee weakens = good for exporters. But here is the problem: US, EU still not fully recovered from slowdown, so the demand of Indian goods and services, is not as high as it was few years back. So export sector isnt really doing great. On the other hand, imports are getting more and more expensive, especially crude oil => petrol diesel become expensive= inflation.

Crude oil prices

In the global market, the price of crude oil have increased last year. It could be because of two things
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1. The demand of petroleum has increased globally. In a way this is good, because it shows the economy of USA/EU etc slowly getting better. (otherwise they wouldnot be importing so much). So in a few months, the demand of indian exports should increase. = this is a good Development. 2. The crude oil price has increased due to geopolitical reasons (Iran blockade, Libya crisis etc.) If this is the main reason for rise in crude oil price= this is a bad Development. Bottomline is that India cannot take the external environment (recovery of US/EU economies, crude oil politics of middle east) for granted.

Forex Reserve
Indias foreign exchange reserve, is made up of following components 1. Foreign currency assets 2. Gold 3. SDR and RTP in IMF. As per Economic Survey, Forex reserve is: March 2012 $294.4 January 2013 $295.5 As you can see, there is hardly any increase in Forex reserve during this time. Why? One reason is current account deficit (esp. gold+petroleum) second is that foreign investors are not pumping enough money due to policy bottlenecks.

Mock questions
Q1. Which of the following is correct formula? a. b. c. d. GDP (Market Price)=GDP(Factor Cost) + indirect taxes + subsidies. GDP (Market Price)=GDP(Factor Cost) indirect taxes subsidies. GDP (Factor Cost)=GDP(Market Price) + indirect taxes subsidies. GDP (Factor Cost)=GDP(Market Price) indirect taxes + subsidies.

Q2. Which of the following is correct statement? 1. In the period of high growth, GDP (Market Price) is greater than GDP (Factor Cost) 2. During economic slowdown, GDP (Market Price) is less than GDP (Factor Cost)
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Mrunal [Economic Survey Ch1] Introduction, GDP FC MC relation (part 1 of 3) Print

Choice a. b. c. d. Only 1 Only 2 Both None

Q3. Which of the following is/are not a component of Foreign Exchange reserve of India? 1. 2. 3. 4. Gold Foreign currency assets Special drawing rights in IMF Diamonds

Choice a. b. c. d. Only 1 and 3 Only 2 and 2 Only 3 and 4 Only 4

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