INDIA AHEAD OF JAPAN IN PURCHASING POWER PARTY

Data released by the international Monetary shows that India’s GDP in ‘purchasing power parity (PPP) terms stood at US dollars 4.46 trillion in 2011, marginally higher than Japan’s 4.44 trillion dollars, making India the third biggest economy after the US and China . 

India’s share in world GDP in terms of PPP stood at 5.65 per cent in 2011 against Japan’s 5.63 per cent. This gap is expected to widen significantly in the next five years as IMF estimates India’s share in world GDP to grow to 8.09 per cent compared with 4.8 per cent for Japan. 

The GDP of USA in terms of PPP in 2011 stood at 15.1 trillion dollars and that of china at 11.3 trillion dollars, however, per capita GDP of India was behind these three economies. It was a mere US 3, 694 dollars compared to 48, 387 of USA, 34, 740 of Japan and 8, 382 of China.

Comparative Rating Index of Sovereigns (CRIS): The Ministry of Finance has developed a comparative Rating Index of Sovereigns (CRIS) and also released an estimation of CRIS over the last five years for different nations belonging to different blocs of the world. 

The index enables a comparison with various countries’ sovereign ratings using Moody’s ratings and data of nations given by IMF. India’s score has risen from 23.81 in 2007 to 24.65 in July 2012. In other worlds, in relative terms, Indian has become a better investment destination by 3.52 per cent. India’s rank in terms of CRIS moved up from 61^st position in 2007 to 54^th in July 2012, out of 101 economies. The improved score is partly due to the decline in scores of some European nations leading to deterioration of the world average by over 4.8 per cent. 

Paraguay, Indonesia and Peru were the countries that registered the maximum increase in their ratings between 2007 and 2012 while Portugal, Ireland and Pakistan witnessed the biggest fall in the Index.

All the BRICS countries recoded improvements in their ranks as well as index value. Among other economies recording increase were Israel, Saudi Arabia, Botswana, Philippines, Uruguay, Lebanon and Bolivia. 

Interestingly, though the US score rose from 32.11 to 32.79, it slipped in ranking to 13^th position form being on top of the chart in 2007.

Gini Coefficient: it is a coefficient based on the Lorenz curve showing the degree of inequality in a society. It is measured as follows. 

G= Area between the Lorenz curve and 45˚line

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     Area above the 45 line

If the frequency distribution is equal i.e. if there is perfect equality in the society, the Lorenz Curve coincides with the 45˚ line and G= Zero similarly if there is perfect inequality, G will be equal to 1. Thus, depending upon how far the Lorenz curve moves away from 45˚ line, there will be greater inequality the father the curve moves away from the 45 ˚ line.  

Recent Trends in GDP Growth Rate

GDP growth rate, measured by the value of all goods and services produced during a year, crashed to a nine-year low of 6.5 per cent in 2011-12 against 8.4 per cent in 2010-11 as per data released by CSO. The last quarter growth rate from January to March, 2012 was the worst at 5.3 per cent in the last 36 quarters. The manufacturing sector contracted 0.3 per cent during the quarter while the services sector grew 8.5 per cent against 9.2 per cent in the corresponding quarter last year, Investment dropped to 5.5 per cent against 7.8 per cent. 

Expenditure estimates showed private consumption expenditure growth had dropped marginally to 6.1 per cent in the last quarter of 2011-12 from 6.4 per cent in the previous quarter. Investment has fallen form a peak of 38 per cent of GDP some years ago to 29.5 per cent in 2011-12. It was 30 per cent in 2010-11.

Year –wise growth rate of GDP in percentage terms in the five years of the Eleventh Plan period form 2007-08 to 2011- 12 was 9.3 per cent in 2007-08, 6.7 per cent in 2008-09, 8.4 per cent in 2009- 10 per cent in 2010-11 and 6.5 per cent in 2011-12 which gives an average GDP growth rate of 7.86 per cent for the Eleventh five year plan which is well short of the plan target of 9 per cent. 

Concerned over the slowest GDP growth rate in nine years, the Prime Minister set up an investment Tracking System to ensure that projects of not hit snags. The system would monitor all private sector projects costing over Rs. 1000 cores, while all public sector projects over Rs. 1000 cores will be tracked by the National Manufacturing competitiveness Council. Private sector projects would be tracked by the Department of financial services in the Ministry of Finance. 

Major factors which pulled down growth were slowdown in consumption high prices, weakening investment, industrial sluggishness, poor infrastructure, falling rupee, overall policy paralysis and the Euro zone crisis.

Limitations of National Income Estimation in India

There are various conceptual and practical problems in measuring national’s income in India. These are (i) Non- availability of reliable statistical data. Even data collected through National Sample Survey (NSS) are costly, inadequate and have a time- lag. (ii) Mass illiteracy so that people are not able to respond to various queries. (iii) Existence of non-monetized consumption due to which monetary value of the transactions cannot be calculated, (iv) prevalence of parallel economy due to which back money generation goes unaccounted and the national income is under- estimated, (v) Lack of occupational Specialization i.e. some people hold multiple jobs, such as seasonally unemployed agricultural labour and this distorts data. 

The National statistical Commission has been actively engaged in improving he database and ensuring more broad criteria for national income calculation making it more realistic. 

Purchasing power parity: To compare economic statistics across countries, the data must first be converted into a common currency. Unlike conventional exchange rates showing parity between US dollar and say, Indian rupee, Purchasing Power Parity (PPP) rates of exchange allow this conversion to take account of price difference between countries. For example they tell us how much of a basket of internationally traded goods and services can be bought with Indian rupee in India vis-à-vis how much of the same basket can be bought in the United states with the help of a U.S. dollar. Thus, while conventional exchange rate may tell us that Rs. 48 is equal to one US dollar, the purchasing Power Parity exchange rate may show this parity at Rs. 20 = one US dollar by eliminating differences in international price levels. In very simple terms, it would imply for example that one kilo of apples in India cost Rs. 20 while they cost one dollar in the United States. PPP method aids comparisons of real values for income, poverty, inequality and expenditure patterns. In other words, PPP is a rate of exchange that accounts for price differences across countries allowing international comparison of real output and income. India has GDP of 3, 526 billion US dollars in PPP terms.

Measurement of National income

There are there methods of measuring national income.

1.       Value added method (also called product method)

2.       Income method.

3.       Expenditure method.

In value added method, the final goods and services produced in the economy are taken into account. Here we include (a) Consumer goods (b) Gross domestic private investment (c) Production in government sector (d) Net exports (i.e. exports – imports).

The income method measures national income from the side of the payments made to the factors of production. The sum of compensation of employees, rent, interest and profits paid to the owners of factors of production and net factor income earned from abroad taken together is the National income computed through income method.

The expenditure method measures the final expenditure on gross domestic product. Final expenditure on GDP consists of (a) prove final consumption expenditure; (b) government final consumption expenditure; (c) gross fixed capital formation’ (d) change in stocks; and (e) not exports of goods and services.

The three methods mentioned above are used to measure the same physical output at three phases i.e. production (Production Method) distribution (income Method) and disposition (expenditure Method) phases. All the three methods give us the same national income figures. However the result depends on data and estimation. Data on expenditure are usually not available. They, there is a possibility of under estimation of GDP while using expenditure method.

The first estimated of National income was prepared by Dadabhai nJauroji for the year 1867- 8. The first scientific estimate was made by prof……. V. K.R.V. Rao for the year 1931-32. The first official estimates of National income for the Indian Union were prepared and by ministry of Commerce, Government of India in the year 1948- 49. The Central Statistical organization (CSO) Department so statistics, ministry of Planning and Programmed Implementation, is entrust with the work of estimating the National income of India. Also, detailed sectoral sata has been prepared. For example, in agriculture and allied activities, several horticultural and floricultural crops as well as crops produced in foreyard / backyard of houses have been included .the base year for calculation National income is 2004- 2005.

India entered the club of the worlds’ hottest growth economies by clocking a GDP growth rate of 9.6 per cent in 2006 – 2007. The only time the economy grew at a faster pace was in 1988- 1989 when the GDP growth rate touched 10.5 per cent recovering from a crippled drought in the previous year.

For the first time since independence, the economy grew at an average rate of 9.3 per cent over three year period (2005- 2006 to 2007- 2008) The yearly 2008 – 09 was marked by a severe global crisis due to which India’s GDP growth rate came down to 7 per cent The economy recovered wit a growth rate close to 8 per cent in 2009 – 10 and 8.4 per cent in 2010-11 but slumped back in 2011- 12 with just 6.5 percent growth rate.

NATIONAL INCOME, Gross Domestic Product

 National income is an expression of the current achievements of an economy in monetary terms. These achievements are expressed in terms of all the goods and services that the economy produces during the course of a given year. National income or Gross Domestic Product is used as a measure of economic growth and reflects the productive power of an economy to turn out goods and services for the satisfaction of human wants.

In the context of calculating national income of a country, the most commonly used concepts are Gross Domestic Product (GDP) and the Gross National Product (GNP) . GDP is the sum total of the market value of all final goods and services produced within duplication. On the other hand, GNP is defined as GDP plus net factor income earned from abroad during the year. Net factor income implies income earned by ways of, say what Indians earn abroad minus what foreigners ear in India on account of factor services provided viz., labour services, capital services, rental etc. Thus, Net Factor Income from abroad= income received from abroad for rendering factor services – income paid for the factor services rendered by foreigners in a country. In India, GDP is greater than GNP because net factor income from abroad is negative (i.e. income paid to the foreigners is larger than income received from abroad for rendering actor services).

The difference between Gross Domestic Product and Net Domestic Product is the value of the consumption of fixed capital i.e. the value of depreciation viz. wear and tear and technological obsolescence. Similarly from Gross National Product, we can derive Net National Product by deducting the value of depreciation.

It is also important to note that from GDP/ GNP at market value (expressed by the symbol GDP mp/GNP mp) one can derive factor cost by deducting the value of Net Indirect Taxes. Not Indirect taxes is equal to Indirect Taxes paid minus Subsidies received. Thus, factor cost gives the sum of incomes that go to factors of production viz. rent + wages + interest + profit + mixed income of the self- employed + net factor income from abroad. It is in fact, the Net National income at Factor Cost which is popularly called National Income.

National Income at Constant / Current Prices: If goods and services are valued at prices prevailing in the current year for which national income is calculated, it is called National Income at current prices. On the other hand, if goods and services are valued at constant prices i.e. with reference to some base year in the past, it gives National income at constant prices. National income at constant prices eliminates the effect of rising prices and therefore it is called real national income. The process of converting National Income at current prices into national Income at constant prices is known as the technique of National Income deflator. The term per capita income means total national income divided by the total population of a country. Thus, an increase in national income in absolute terms does not necessarily mean an increase in per capita income as the later is inversely proportional to the rate of growth of population.

National income and various other aggregates like GDP, GNP, per capita income etc. are calculated by the Central Statistical Organization (CSO).

 

BRICS SUMMIT (NEW DELHI, MARCH 2012)

 BRICS group is the first one of major developing countries that does not involve any developed country. BRICS nations absorb 53 per cent of all inflows of overseas capital and account for 18 per cent of global trade.

The term BRIC (excluding South Africa which joined in 2010) was coined by Goldman Sach’s chief economist Jim O’ Neill in 2002 who predicted that they would become the biggest economies in the world by 2027. But, even as they reach the halfway mark, the BRICS already account for half of the globe’s economic growth. This fast pace of growth has thrown up huge opportunities for investors. A 100 US dollar invested in 2001 would be worth 674 in 2012 if invested in Brazil’s stock marked, 451 in China 459 in India and 414 in Russia against 112 that would have been earned from investing in America.                                                                                                                                         

BRIC was formed in 2009 and its first meet took place in 2009 in Russia. The fourth meet place in New Delhi, India in March 2012. Major resolutions of this meet were as follows:

(1)    To reform the world’s aging financial system to reflect the growing role of the BRICS. The slow pace of the IMF quota and governance reforms and BRICS focus on recasting global financial system in favour of emerging and developing economies was the heart of the resolution.  

(2)    BRICS should start to settle their trade contracts using local currencies which will take another step towards breaking the US dollar’s hegemony over global trade. Russia and China have already introduced mutual settlements of trade contracts in their respective national currencies and a similar deal was signed with India. The summit saw the signing of two pacts on promoting trade transactions in local currencies, which included the enabling master agreement for (a) extending credit facilities in local currencies and (b) BRICS multilateral letter of credit confirmation facility agreement

(3)    BRICS nations agreed to explore setting a joint BRICS Development Bank – a proposal floated by India, similar to the World Bank or the European Bank for Reconstruction and Development that would invest in infrastructure and promote deeper economic integration between the members.

(4)    Setting up of a BRICS exchange in Futures.

(5)    An ambitious target to scale intra-BRICS trade from 230 billion US dollars to 500 billion dollar by 2015.

The BRICS report was prepared by experts from all BRICS countries under the leadership of Kaushik Basu, India’s Chief Economic Ad visor. The report maps out synergies among economies of BRICS countries to accelerate mutual trade and investment.

While most of the deals signed were economic, the BRICS are also pushing world order. They want a bigger say in the IMF as well as the UN where they feel they play a junior role that is not representative of their growing economic clout on the world stage. In this regard, the Delhi summit marked an advance as the five countries managed to harmonies a common minimum position to advocate dialogue and diplomacy to resolve the Iranian unclear impasse and warned the West against any escalation of the conflict that will flow from military adventurism.

Causes of crisis

 1.       Global financial meltdown of 2008 which spread to the banking and financial sector making it difficult for some of them to finance government bonds and forcing banks to insist on maturity proceeds.

2.       Collapse of tourism in some of these countries as a result of squeezing of financial markets in the aftermath of global financial meltdown. This has affected Greece much more than others. 

3.       High welfare payments doled out by some of these countries in the form of retirement benefits, old age pension, social welfare programmes and such other facilities which have dented government finances.

4.       Europe’s problems are fundamentally a question of which governments have taken steps to become competitive and which have not. Greece, Portugal and Ireland had progressively lost competitiveness vis-à-vis their main trading partners in the Suro area. Germany is an example of how big dividends of reforms can be it structural adjustment is made a strategic priority and implemented with patience. Thus, failure to carry out structural Reforms and privatization has been an important factor. 

5.       Debt- ridden countries have failed to strike a balance between cutting deficit and promoting growth. Economic risks have been aggravated by deterioration in confidence and a growing sense that policy makers do not have the conviction or are simply not willing to take decisions that are needed. There is a mismatch of fiscal and monetary policy in the sense that there is fiscal tightening along with monetary tightening. Ideally, there should have been monetary loosening as done by Bank of England and the Fed in US. What European central Bank has done is monetary tightening by raising rates twice during 2011.

6.       Monetary Union itself is also responsible as debt-ridden countries cannot take any independent step with respect to Euro, like devaluation or increasing/ decreasing money supply and interest rates.

7.       Market- driven refinancing in these countries implies much of the dept is also held by private investors and banks. This in sharp contrast to India’s Sovereign debt which his largely held by public sector banks and financial institutions. Private investors have lower risk taking capacity.

Some global experts feel that the risk of recession far outweighs the risk of inflation in these countries. As such, a loose monetary policy can help, thought it may cause some inflationary pressures. Budget cutting in debt-ridden Europe has been coupled with reluctance by the European Central Bank to stimulate growth by monetary easing like the Fed has done in the US. Instead the ECB has raised interest rates twice in 2011 to contain inflation. This has sucked hundreds of billions of dollars out of the European economy that may be edging towards recession. This approach has no doubt been successful line helping to keep debt problems of Greece from spreading to Europe’s larger economies. But the one- size- fits- all approach in Europe may ignore the tradeoff between government austerity and growth.

Consequences of Eurozone debt crisis for the zone itself could be as follows:

1.       It could kill weak banks.

2.       Monetary union may be in danger.

3.       Fate of Euro as a currency hangs in balance

4.       Along with US debt problems, it could hasten double dip recession.

Some of the important structural measures to address the crisis could be a big push to supply side reforms from freeing trade to slashing red-tapism and getting rid of excessive regulation, better coordination of fiscal and monetary policies, and well designed privatization scheme.