Student/s Name: Venkatachalam Rajagopalan Batch: B Roll No/s: B11134

Module Name: Economics for Financial Markets Introduction: What is GDP? As an indicator of the performance, health and well-being of an economy, we could say that the Gross Domestic Product (GDP) is the godfather of all indicators. It is a primary indicator, a monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, Governments activities, investments and exports less imports that occur within a defined territory, and so also, the affect of other economic indicators. Essentially, it portrays the growth of the economy as a whole. On the other hand, Inflation, our criteria of evaluation and comparison in this study to be precise, is the most misunderstood phenomenon in economics. We all know that the prices of commodities rise and fall over time due to the demand and supply pulls and pushes. Say for example, the prices of onions rising over a period of time due to shortage in supply and the increase in demand is an indirect indication to the consumers to consume less of those commodities which are facing a shortage and more of those which are available easily. It is also an indication to the producers to produce more of those commodities which are facing a shortage and less of what is available in plenty. In simple terms, it is a sustained increase in the prices of commodities over a period of time. The threat of inflation to the common man is when the price rise in commodities is not accompanied by an equivalent rise in the cost of labour. In our country, the inflation is considered on the Wholesale Price Index (WPI) with base year as 2004-05.

Report & Analysis: Amidst what is turning out to be a complex scenario across the economy, 2011 has been eventful with rate hikes, extremely volatile stock markets and the results and expectations being disturbed time and again. The entire globe is facing the effects of situations prevailing in Europe due to the Sovereign Debt crisis and in the United States of America due to high levels of unemployment and poor growth. India is no exception to it.

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The economic slowdown across countries in the world began with the Subprime Crisis back in 2008. Three quarters towards the end of 2008 and the beginning of 2009 saw a fall in the growth of the Indian Economy. But despite the global pressures, India braved all the odds to record a growth rate of 6.1 per cent and subsequently 5.8 per cent in the last quarter of 2008 and the first quarter of 2009 respectively. Second fastest growing economy in the world after China, and could sustain the economic slowdown in a better way. India is considered as one of the best players in the world economy in the past few decades, but rapidly increasing inflation and the intricacies in administering the world's biggest democracy are acting as the major hurdle in the field of development. Why is this so? In every nation, there are agencies entrusted with the task of both forecasting inflation and trying to adopt policies that keep inflation under control. A nations central bank does this along with the Ministry of Finance. In our country, the Reserve Bank of India (RBI) supports the Government of India (GOI) in the above task. Let us take an approach of curbing the food inflation first. In controlling the overall inflation, the food prices may not be as important as it would have been in the past. However, controlling food inflation is important in itself because such a large segment of the Indian population continues to be poor and any inflationary pressures or increase in the prices of food would surely hurt them disproportionately. The biggest issue is the basic commodities food grains, kerosene and LPG, which are supported through Government subsidies. This has huge effects and implications on the efficiency, on the fiscal policies of the Government. For instance, let us consider food grains being hoarded when the food grains were being diverse, or sold off at highly illegal prices to the poor and vulnerable through the Public Distribution (PDS) system. Close to 40 per cent of the food grains to reach the poor through PDSs was lost to leakage, damage or diversion. This is highly unacceptable as it tends to bloat the fiscal expenditure of the Government with increased subsidies and distribution measures. The latest being the Food Security Bill passed by the Government of India aiming to provide food security to the poor, seeking to give cheaper food grains to 63.5 per cent of the countrys population. Fruits and vegetables and items like egg, milk and meat have kept the food inflation on the higher side for two fiscals thus far, which has started easing and has dropped to a threeand-a-half year low of 6.6 per cent in December 2011, as compared to 8 percent in the previous week as onion, potato, vegetables and wheat became cheaper (Economic Times). Food inflation has dropped sharply in the last one month giving the much needed relief to common people and the policymakers who have been struggling for almost the last two years to control the

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general price rise. This going hand in hand with this is the inflation in India, which has remained stubbornly hovered around 9 per cent for the past two years (Inflation trends, chart 1). This has asked the central bank, Reserve Bank of India, which has increased the interest rates thirteen times in the past one-and-a-half years. But this has still not reduced the inflation as a plunging rupee hitting a record low against the dollar, has increased the cost of fuel and manufactured products. India, which imports about 75 per cent of its oil and runs a current account deficit, faces grave challenge due to the falling rupee. Even as the food prices wane and the food inflation is reducing, the RBI is still finding it difficult to reverse the interest rate hikes that have reduced the growth (as shown in the GDP figures) in the third-largest economy in Asia. Certainly not saying that inflation is directly affecting growth (GDP v/s Inflation, chart 2). The policies and measures taken by the above mentioned agencies as a part of its monetary and fiscal policies are the basic reason due to which the growth is affected. As shown in Table 1, India which was growing at 9.4 per cent in the first quarter of 2010 has slowed down to 6.9 per cent in the penultimate quarter of the current fiscal. This is mainly due to the above mentioned factors as well as a poor industrial growth portrayed by the Index of Industrial Production (IIP), which came down a two year low in September 2011 standing at 1.9 per cent as compared to 6.1 per cent in the same month last year. This is mainly due to the rising interest rates as mentioned above which is taking its toll on industrial investments as well as consumer demand. As a result, a continued fall in the sales of major automobiles in the penultimate quarter of 2011 saw the industrial output post near zero growth of 1.99 per cent and a negative growth of (-)5.1 per cent. Table 1:

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GDP, thus far has been hampered and the prospects for the countries growth in the near future is said to be better by the Finance Ministry. Inferences: Food inflation turned negative in late December for the first time in many years as prices of vegetables like onion and potato declined; a development that may prompt the Reserve Bank to go for rate cuts at its next monetary policy review in January, 2012. Food inflation, measured by the wholesale price index (WPI), plunged to (-) 3.36 per cent as on December 24. This is the first time in almost six years that food inflation has shown a decline on an annual basis. RBI, which has raised interest rates 13 times since March, 2010 to contain inflation, has already paused rate hike in its December mid-quarter policy review. The central bank is scheduled to announce next policy review on January 24. So as per the analysis and the prospects, it is quite clear that if the December inflation data follows the same lines as the food inflation then we can expect a rate reversal by the RBI in its review, which would see a better prospect for growth in the next fiscal i.e. 2011-12. The GDP has been forecast at 7 per cent, lower from 8.5 per cent (source: TOI)
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by the Government. However, if the situation in the Europe with infusion of fresh capital by the European Central Bank (ECB) to the European banks and if the situation of employment and growth also stabilizes in the United States (US) of America, along with Indias strong fundamentals could achieve the 9 per cent growth in the long run. Maintaining growth momentum in the economy with price stability is one of the biggest challenges for the Government. With demand side pressures moderating and credit policy also set to ease up, the inflation would surely decline in this fiscal and we could see better growth prospects here ahead. References:
GDP Data, Google (Public Data Domain) : Finance Trading Economics : http://www.tradingeconomics.com/india/ Food Inflation: Economic Times http://articles.economictimes.indiatimes.com/2011-12-09/news/30498143_1_aditinayar-food-inflation-base-effect Yahoo news: http://in.news.yahoo.com/food-inflation-drops-6-6-percent070805392.html IIP: CCIL Economic Research http://www.ccilindia.com/Research/CCILPublications/MacroEconomicUpdates WPI: Office to the Economic Advisor http://eaindustry.nic.in/Key_Economic_Indicators/Key_Economic_Indicators.pdf The Times of India - http://timesofindia.indiatimes.com/business/india-business/

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