E

FFECTS

OF S O M E

M ACROECONOMIC
VA R I A B L E S E
CONOMIC

ON G ROWTH

I
Macroeconomic variables (e.g. National Income (GDP), investment
(private and public), employment rate, balance of trade, money supply and general rise in price level (inflation), interest rate, play a vital role in the economic performance of any country. The study develops an empirical framework to examine the relationship between the macroeconomic environment and trends in macroeconomic variables..

The macro economic variables that are supposed to

be associated with an improvement in higher growth rate are higher income level, higher investment rate, and real depreciation of exchange rate. The estimated significant effects of growth, income and investment provide evidence that policies designed to promote investment and growth are likely also to contribute to an improvement in economic growth.

DATA SOURCE & METHODOLOGY

Data sourceReserve Bank of India (Handbook of Statistics on Indian Economy) Various issues, National Sample Survey Organisation (NSSO)

World Bank
IMF, Various issues

MethodologyEconomic tools like correlation, regression, testing of hypothesis, observation of trends of economic variables and study of their growth and impacts on each other and overall economic performance are used.

REVIEW OF LITERATURE
The standard wisdom of macroeconomics came to be questioned with the publication of John Maynard Keynes 1936 book, The General Theory Of Employment, Interest and Money (1936). Keynesian macroeconomics put forward fiscal and monetary policy to generate effective demand in the economy. Keynes showed that faced with a recession or depression like situation, a policy maker can undertake major government expenditure programmes that can boost effective demand and can ultimately help the economy to come out of recession. For a considerable period the Keynesian revolution seemed synonymous with a weak instrument of stabilization policy.

According to Moggridge and Susan (1974) unlike the classical school, Keynes thought money is not a veil and hence an increase in the quantity of money in will not only lead to an increase in aggregate output, but, also a reduction in interest rate and exact role of money could vary with circumstances.

A diametrically opposite view on monetary policy came from Milton Friedman. Keynes and Friedman are often seen at the extreme corners of the poles while Keynes stood for government intervention, Friedman represented the superiority of market forces.. The standard economic prophesies in the 1980s increasingly favoured price stability as an exclusive objective of monetary policy. Edward Prescott and Finn Kydland (1977) had developed time inconsistency problem, which describes situation where, with passing of time, policies that were determined to be optimal yesterday are no longer perceived to be optimal today. Now there has been much comment by the media and criticism by business that the policy of hiking interest rates to combat inflation will hurt investment and growth. A rising interest rate will shave off 2% points from out 6 6.5 GDP growth rate. One firm level study by Centre for Studies in Social Science, Calcutta (Mangit 2008) shows that real interest rates do not explain private investment. However, we extend our study to examine the effects of interest rate, the inflation rate, investment and trade balance on GDP growth.

RESEARCH QUESTION
The relation between GDP and Prime Lending Rate.
Relation between Public Investment and Prime Lending Rate. Relation between Private Investment and Prime Lending Rate. Relation between GDP and Total Investment.

Relation between GDP , Total Inflation and Real lending rate.

Relation between deficit in trade balance, Exchange Rate, FDI, FII and GDP growth.

Table

ONE

The relation between GDP & PrIme LendIng Rate

ECONOMIC ANALYSIS

From table 1, we have observed that the relationship between the prime lending rate and GDP growth. We intend to focus on the statistical associations. This will give us some idea on what to expect of our growth rate, if the RBI keeps on raising the prime lending rate in the face of a sustained rise in prices. We analyse pre-reform and post-reform find that :
The association was positive and moderate in the prereform period (0.7719).

periods and

There is a negative association between them during the post reform period but much lower (-0.8519).

Pre-Liberalization GDP at Factor Cost

35000.00

30000.00
25000.00 GDP At Factor 20000.00 Cost 15000.00 10000.00 5000.00 0.00

GDP at Factor Cost

YEARS

Post-Liberalization GDP at Factor Cost

6000.00 5000.00 4000.00
GDP At Factor 3000.00 Cost

2000.00 1000.00 0.00

GDP at Factor Cost

YEARS

Table

ONE

The relation between Prime lending rate & Public investment

ECONOMIC ANALYSIS

From table 2, we have observed that the relationship between the prime lending rate and public investment. We focus on the statistical association between these two variables and give us some idea about how far changes in prime lending rate affected public investment.
We analyse pre-reform and post-reform periods and find that
: The association between public investment and prime lending rate in the pre-reform period is positive and high (0.8009). The association between public investment and prime lending rate in the post-reform period is negative and low (-0.7853).

PRE-LIBERALIZATION-TOTAL PUBLIC INVESTMENT

6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00 GDP at Factor Cost

YEARS

POST -LIBERALIZATIONTOTAL PUBLIC INVESTMENT 35000.00

TOTAL PUBLIC INVESTMENT 30000.00 25000.00 20000.00 15000.00 10000.00 5000.00 0.00 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 YEARS Series1

Table 3-The relation between Private Investment and Prime Lending Rate

ECONOMIC ANALYSIS

From table 3, we have observed that the relationship between the prime lending rate and private investment in order to focus on the statistical association between these two variables and give us some idea about how far changes in prime lending rate affected private investment. We analyse pre-reform and post-reform periods and find that :

In the pre-reform period, the association between private investment and prime lending is positive and high (0.7145).
In the post-reform period, the association between private investment and prime lending rate negative and low (-0.8326).

PRE-LIBERALIZATION-TOTAL PRIVATE INVESTMENT

TOTAL PRIVATE INVESTMENT

900 800 700 600 500 400 300 200 100 0

1 3 5 7 9 11 13 15 17 19 21 YEARS

Total Private Investment YEAR

TOTAL PRIVATE INVESTMENT

POST-LIBERALIZATION-TOTAL PRIVATE INVESTMENT

7000.00 6000.00 5000.00

4000.00
3000.00 2000.00 1000.00 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 TOTAL PRIVATE YEARS INVESTMENT

Table 4-GDP and Total Investment

ECONOMIC ANALYSIS

From table 4, we have observed that the relationship between GDP and Total investment in order to focus on the statistical association between these two variables and give us some idea about how far changes in prime lending rate affected private investment.

We analyse pre-reform and reform periods and find that :

We have the association between GDP and total investment as positive both in pre-reform and post-reform period.

post-

In the post-reform period, the association between GDP and total investment (0.9957) is higher than in the prereform period (0.9779).

PRE-LIBERALIZATION-TOTAL INVESTMENT AND GDP AT FACTOR COST

6000.00 5000.00 4000.00 3000.00 2000.00 1000.00 0.00 1 2 3 4 5 6 7 8 9 10 11 Total Investment GDP at Factor Cost

POST-LIBERALIZATION-TOTAL INVESTMENT AND GDP AT FACTOR COST

35000 30000 25000 20000 15000 10000 Series1 Series2

5000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Table 5-The relation between REPO RATE, REVERSE REPO RATE AND PRIME LENDING RATE

CONOMIC

NALYSIS:

From table 5, we have observed that the relationship between Repo rate, Reverse rate and Prime Lending Rate in order to focus on the statistical association between these two variables and give us some idea about how far changes in prime lending rate affected Repo rate and Reverse rate. We analyse post-reform period and find that :

The relationship between repo rate and prime lending rate in postreform period shows a negative association(-0.1803), and, relationship between Reverse repo rate and prime lending rate in post-reform period shows a positive association(0.1849). So, upward or downward changes in the repo rate do not affect prime lending rate. When the RBI, for a policy measure, revised the repo rate either upward or downward, commercial banks did not respond to the policy by revising the prime lending rate.

POST-LIBERALIZATION-PLR,REPO RATE AND REVERSE REPO RATE

14 12 10 PLR,REPO RATE, REVERSE REPO RATE 8 6 4 2 0 PLR REVERSE REPO RATE REPO RATE

YEARS

Table 6-The Relationship Between GDP, Real Interest Rate and Inflation Rate

ECONOMIC ANALYSIS
We analyse pre-reform and post-reform and find that:

From table 5, we have observed that the relationship between GDP, Real Rate of Interest and Inflation Rate n order to focus on the statistical association between these two variables and give us some idea about how far changes in the real interest rate affected the GDP and the Inflation rate. periods

We have calculated, as well as observed, that the overall association between our growth and inflation is negative.

In the pre-reform period the association is positive (0.352).

But, in the post-reform period the association is rather strongly negative (-0.4654).

GROWTH OF GDP,REAL INTEREST RATE AND INFLATION RATE

GROWTH OF GDP,REAL INTEREST RATE AND INFLATION RATE

10

12

14

0 10 0 5 Pre-liberalisation 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 YEARS -5

15

20

POST-LIBERALIZATION- GROWTH OF GDP,REAL INTEREST RATE AND INFLATION RATE 16

PRE-LIBERALIZATION- GROWTH OF GDP, REAL INTEREST RATE AND INFLATION RATE

YEARS

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 353704 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Inflation Rate Based on WPI

Real Lending Rate based on WPI Growth Of GDP

Inflation Rate Based on WPI

Growth of GDP

Real Lending Rate based on WPI

Table 7: Relationship between Current Account Deficit, Exchange Rate and Inflation

ECONOMIC ANALYSIS

For the Current Account Balance, we notice that the data is available only for the post-reform period. We have observed in our table that there had been continuous deficit in trade account of balance of payments.

The deficit in trade account (in commensurate with) the high import bill in terms of foreign exchange on importing oil and gold.

Trade Balance(= Total Exports-Total Imports)

2007-08

1990-91

1995-96

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2008-09

2009-10

2010-11

-20 -40 -60 -80 -100 -120 -140 -160 -180 -200

2011-12

Trade Balance(= Total Expotrs-Total Imports)

CONCLUSION:
From the data tables, we can infer that the first half of the period i.e., 1990-91 to 1999-2000 GDP growth was around 5-7% with a steady increase in investment, share of investment in the private sector increased to two-third of the total investment, while inflation during the first two years of this period was on an average above 15%, though for the rest of the decade it was below 10%. For the second half of this period, i.e., from 2000-01, the GDP growth rate was around 8-9%, reaching its peak at 9.56% in 2006-07. Though after a year, Indian economy showed a downfall with a growth rate of 6.72% . Share of the private sector in investment remained the same.

The inflation rates during this period, we will see that during the first half it was below 5% and rose above it during 2006-07 but never crossed 10%. But during November, 2009 to June 2010, it was well above 15%, though it increases slowly during the later part of that financial year.
Recently the RBI argued that it was left with only very little space for further easing of monetary policy in this current financial year. The Trade account and current account deficit risks would continue to stay, though a fall in global-commodity prices blocked temporary respite to it. The CAD-GDP ratio for the last 5 years was expected to be around 5%, which is twice the sustainable level.

B IBLIO GRAPHY
ARTICLES
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