Introduction

Undesirable situations that exist in the macroeconomy, largely because one or

more of the macroeconomic goals are not satisfactorily attained. The primary
problems are unemployment, inflation, and stagnant growth. Macroeconomic
theories are designed to explain why these problems emerge and to recommend
corrective policies.
Macroeconomic problems arise when the macroeconomy does not satisfactorily
achieve the goals of full employment, stability, and economic growth.
Unemployment results when the goal of full employment is not achieved.
Inflation exists when the economy falls short of the stability goal. These
problems are caused by too little or too much demand for gross production.
Unemployment results from too little demand and inflation emerges with too
much demand. Stagnant growth means the economy is not adequately attaining
the economic growth goal. Each of these situations is problematic because
society is less well off than it would be by reaching the goals
Importance of Macroeconomics
It helps to understand the functioning of a complicated modern economic
system. It describes how the economy as a whole functions and how the level of
national income and employment is determined on the basis of aggregate
demand and aggregate supply.
It helps to achieve the goal of economic growth, higher level of GDP and higher
level of employment. It analyses the forces which determine economic growth of
a country and explains how to reach the highest state of economic growth and
sustain it.
It helps to bring stability in price level and analyses fluctuations in business
activities. It suggests policy measures to control inflation and deflation.
It explains factors which determine balance of payment. At the same time, it
identifies causes of deficit in balance of payment and suggests remedial
measures.
It helps to solve economic problems like poverty, unemployment, inflation,
deflation etc., whose solution is possible at macro level only, i.e., at the level of
whole economy.
With detailed knowledge of functioning of an economy at macro level, it has
been possible to formulate correct economic policies and also coordinate
international economic policies.
Last but not the least merit is that macroeconomic theory has saved us from the
dangers of application of microeconomic theory to the problems of the economy
as a whole.
REVIEW OF LITERATURE
Since 1991, the Indian economy has pursued free market liberalisation, greater
openness in trade and increase investment in infrastructure. This helped the
Indian economy to achieve a rapid rate of economic growth and economic
development. However, the economy still faces various problems and
challenges.

1. Inflation
Fuelled by rising wages, property prices and food prices inflation in India is an
increasing problem. Inflation is currently between 8-10%. This inflation has been
a problem despite periods of economic slowdown. For example in late 2013,
Indian inflation reached 11%, despite growth falling to 4.8%. This suggests that
inflation is not just due to excess demand, but is also related to cost push
inflationary factors. For example, supply constraints in agriculture have caused
rising food prices. This causes inflation and is also a major factor reducing living
standards of the poor who are sensitive to food prices. The Central Bank of India
have made reducing inflation a top priority and have been willing to raise
interest rates, but cost push inflation is more difficult to solve and it may cause a
fall in growth as they try to reduce inflation.
2. Poor educational standards
Although India has benefited from a high % of English speakers. (important for
call centre industry) there is still high levels of illiteracy amongst the population.
It is worse in rural areas and amongst women. Over 50% of Indian women are
illiterate. This limits economic development and a more skilled workforce.
3. Poor Infrastructure
Many Indians lack basic amenities lack access to running water. Indian public
services are creaking under the strain of bureaucracy and inefficiency. Over 40%
of Indian fruit rots before it reaches the market; this is one example of the supply
constraints and inefficiencys facing the Indian economy.
4. Balance of Payments deterioration.
Although India has built up large amounts of foreign currency reserves the high
rates of economic growth have been at the cost of a persistent current account
deficit. In late 2012, the current account reached a peak of 6% of GDP. Since
then there has been an improvement in the current account. But, the Indian
economy has seen imports growth faster than exports. This means India needs to
attract capital flows to finance the deficit. Also, the large deficit caused the
depreciation in the Rupee between 2012 and 2014. Whilst the deficit remains,
there is always the fear of a further devaluation in the Rupee. There is a need to
rebalance the economy and improve competitiveness of exports.
5. High levels of private debt
Buoyed by a property boom the amount of lending in India has grown by 30% in
the past year. However there are concerns about the risk of such loans. If they
are dependent on rising property prices it could be problematic. Furthermore if
inflation increases further it may force the RBI to increase interest rates. If
interest rates rise substantially it will leave those indebted facing rising interest
payments and potentially reducing consumer spending in the future
6. Inequality has risen rather than decreased.
It is hoped that economic growth would help drag the Indian poor above the
poverty line. However so far economic growth has been highly uneven benefiting
the skilled and wealthy disproportionately. Many of Indias rural poor are yet to
receive any tangible benefit from the Indias economic growth. More than 78

million homes do not have electricity. 33% (268million) of the population live on
less than $1 per day. Furthermore with the spread of television in Indian villages
the poor are increasingly aware of the disparity between rich and poor. (3)
7. Large Budget Deficit
India has one of the largest budget deficits in the developing world. Excluding
subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past
year. It still allows little scope for increasing investment in public services like
health and education.

8. Rigid labour Laws

As an example Firms employing more than 100 people cannot fire workers
without government permission. The effect of this is to discourage firms from
expanding to over 100 people. It also discourages foreign investment. Trades
Unions have an important political power base and governments often shy away
from tackling potentially politically sensitive labour laws.
9. Inefficient agriculture
Agriculture produces 17.4% of economic output but, over 51% of the work force
are employed in agriculture. This is the most inefficient sector of the economy
and reform has proved slow.
10. Slowdown in growth
2013/14 has seen a slowdown in the rate of economic growth to 4-5%. Real GDP
per capita growth is even lower. This is a cause for concern as India needs a high
growth rate to see rising living standards, lower unemployment and encouraging
investment. India has fallen behind China, which is a comparable developing
economy

Macroeconomic Methodology
Here is the draft introduction and conclusion to my chapter on economics as history rather
than physics.
Economists love to dress up as physicists. We like to put theories into the form of equations.
However, there are important differences between physics and economics, and these
differences are particularly pronounced in the case of macreconomics
1. Politicians and journalists want answers to questions such as, How many jobs will (or did)
a certain stimulus proposal create? However, it is not possible to give reliable answers to
such questions. Economists who purport to do so are misrepresenting the state of knowledge
that actually exists.
2. Economists would like to know which theories are ruled out by the data and which theories
are supported by the data. However, our ability to make statements along these lines is quite
limited.

3. I believe that the study of macroeconomic events is going to have to be comparable to the
study of revolutions, wars, or other historical events. There will be many plausible causal
factors per event.
4. It will not necessarily be the case that the best explanations for macroeconomic events will
be a single model that uses the same causal factors for every event. Instead, each important
macroeconomic event may have important idiosyncratic elements involved.
5. Many very different explanations for an event will be consistent with the data.
6. Neither the use nor non-use of equations will ensure clarity or logical consistency.
Confusion may be embedded in verbal descriptions of macroeconomic theories. Confusion
also may be embedded in equations.
7. Neither verbal descriptions nor equations express verifiable relationships. Macroeconomic
hypotheses will contain assumptions that will be highly contestable.

A Macro economic Analysis of India

(presentation of data)
Published: 23, March 2015
The Indian Economy is the eleventh largest economy in the world by nominal GDP and the
fourth largest by purchasing power parity (PPP). Following the strong economic reforms the
country began to develop at a fast-paced economic growth, as free market principles were
initiated in 1990 for international competition and foreign investment. Economists predict
that by 2020, India will be among the leading economies of the world. An economy that was
characterised by extensive regulation and protectionism in pre-liberalisation era (Pre-1991),
India as a country has moved toward a market-based economy and is fairing quite strongly.
The Indian economy at this point is still a small economy as its contribution to the global
trade is still very small (1.5%). Past decade has seen India grow at a rapid pace and within the
last 5-6 years, India has increased its contribution from 1.1% to 1.5% and the trend is
expected to continue. As quoted by many economists, one of the major factors that contribute
to this success story has been the demographic dividend whereby 50% of the population is
below the age of 25 and about 65% hovers below 35 years of age.

MACRO-ECONOMIC
INDICATORS
Macroeconomic Indicators
Our analysis has been based on the study of following Macro-economic indicators.
Gross Domestic Product

Unemployment
Fiscal Policy
Monetary Policy
Exchange Ratio

Gross Domestic Product

The GDP growth rate for India has been consistently positive from 2003 onwards (Exhibit 1)
which indicates a booming economy. We also find that the Indian economy has been quite
sturdy and it abated the recessionary pressures quite well. If we analyse the Q-o-Q growth
rate from 2008 onwards, we find that even though India did indeed see a slowdown but the
recession never really occurred in India (Exhibit 2).

The economy seems to be back on track with rising GDP

growth rate in the year 2010.
If we classify the GDP growth sector wise (Exhibit 3) then we find that over the last decade
the Services sector has been the major contributor. Though the Agriculture sector employs
more than 50% of the employed people, its contribution toward GDP has been hovering in
the 15% bracket.

In fact the contribution from the Agriculture sector has

been dipping down and it is one of the challenges that
Indian economy face.
Unemployment
The unemployment rate in India has been on the higher side. The problem is primarily
attributed to structural issues and both - rising population and the inefficiencies of the labour
market are concerns of the economy. Also there are seasonal unemployment trends in India.
The economy absorbs more than 50% of employment in the agriculture sector which is
seasonal by nature. If we consider the other sectors then level of education and vocational
training are significant issues.

Fiscal Policy
The Five year plans are an important indicator of government's fiscal policy and the direction
ahead for the growth of the country. This is the reason we have started the analysis by doing a
study of the 11th Five year plan.

11th Five year plan (2007 - 12)

It was developed in the context of four important dimensions:

Quality of life
Generation of productive employment
Regional balance and
Self-reliance.

Key areas of focus Income & Poverty in India:

Accelerate growth rate of GDP from 8% to 10% and then maintain at 10% in the 12th Plan in
order to double per capita income by 2016 - 17.
Increase agricultural GDP growth rate to 4% per Year to ensure a broader spread of benefits
Create 70 million new work opportunities.
Reduce educated unemployment to below 5%.
Raise real wage rate of unskilled workers by 20 percent.

Infrastructure:
Ensure Electricity connection to all villages and BPL households by 2009 and round - the clock power by the end of the Plan.
Ensure all - weather road connection to all habitation with population 1000 and above (500 in
hilly and tribal areas) by 2009, and ensure coverage of all significant habitation by 2015.
Connect every village by telephone by November 2007 and provide broadband connectivity
to all villages by 2012.
Provide homestead sites to all by 2012 and step up the pace of house construction for rural
poor to cover all the poor by 2016 - 17.
The other major areas of focus are education, health, woman and children, environment.

Fiscal Policy: Trend and Implications

In order to minimize the impact of the global slowdown on the Indian economy, the
Government introduced fiscal expansionary measures in the 2008-09 and 2009-10. The aim
was to enhance public expenditure so as to boost demand and spur the process of
development and economic revival. This could be seen with the Indian economy recording a
GDP growth rate of 7.4 percent during the fiscal year 2009 - 10. The government decreased

indirect taxes in order to insulate the vulnerable sections of the economy from the impact of
economic slowdown. This resulted in reduced revenue receipts. The increased spending
against reduced revenue receipts has resulted in increase of fiscal deficit to 6.8 %.The gross
tax to GDP ratio decreased from 12% to 10.9% and 10.3% in 2008 - 09 and 2009 - 10. The
total expenditure to GDP ratio increased from 14.4% in 2007 - 08 to 15.9% and 16.6% in
2008-09 to 2009-10.
Post July 09 the focus was shifted to the path of fiscal consolidation with emphasis on
structural fiscal reforms and prudent fiscal management with improvement in the economic
situation. Without putting at risk the revival process, the Government is looking at exit
strategies with improvement in economic conditions. The fiscal budget of 2010 - 11 has been
presented against this backdrop. Accordingly fiscal deficit in 2010-11 has been reduced to 5.5
per cent of GDP. The gross tax revenue is increased by .4% (10.8% for 2010-11) and the total
expenditure is reduced by .6% (16% for 2010-11). Also the non-plan expenditure as
percentage of GDP has been reduced from 11.3 per cent in 2009-10 to 10.6 per cent in 201011. At the same time, adequate resources for plan expenditure have been provided at 5.4 per
cent of GDP in 2010-11 as against 5.3 per cent in 2009-10. The correction in composition of
expenditure would translate into deployment of borrowed resources largely for plan
expenditure (97.8 per cent in BE 2010-11 against 81.1% in 2009-10). Also it is estimated that
subsidy expenditure as percentage of GDP would decline from 2.1 per cent in 2009-10 to 1.7
per cent in 2010-11.
Greater emphasis has been laid on increasing revenue. Direct tax code has been introduced
with widened tax slabs, reducing the burden on the lower income groups but has also resulted
in increased revenue due to the Laffer curve principle (Exhibit 5). The policy for indirect
taxes in recent years has been to achieve fiscal consolidation through an improvement in the
tax-GDP ratio. This is sought to be achieved through the widening of tax base and removal of
exemptions coupled with moderation in the rates of tax. The revenue from central excise duty
is set to increase due to increase in standard rate from 8% to 10%. Steps are being taken to
move to a comprehensive Goods and Services Tax (GST) both at the Centre and in the States.
By addressing the problems of cascading and double taxation, this key reform in the realm of
indirect taxation is expected to contribute significantly to efficiency and growth in the
economy which, in turn, would augment the buoyancy of tax collections.
Though the revenue base has not yet increased to the level of 2007-08, still, by doing
expenditure reforms and with the help of disinvestment proceeds, the Government is able to
bring down the fiscal deficit.

The government through fiscal policy has provided

stimulus to boost economic growth during slowdown.
Once the growth has been restored has shifted its focus to
fiscal consolidation.
MONETARY POLICY
An analysis of the Monetary Policy of India over the past 3 years can be done as an analysis
of 3 different phases (Exhibit 6).

Pre Global Slowdown: Inflation is high and RBI has been increasing all the three rates
During Global Slowdown: Inflation is still high and RBI has decreased the three rates
drastically
Post Global Slowdown: RBI is increasing the rates gradually and trying to curb the inflation
through its monetary measures.
The monetary policy is controlled by Reserve Bank of India (RBI). The primary focus of the
policy makers has been to maintain a balance between the growth of the economy and the
inflation.
We have tried to understand the various measures of RBI by applying the Complete
Keynesian Model. Another important concept which has helped us in our understanding is the
Philips Curve which suggests that the boom in the economy and the inflation are positively
correlated. The measures to increase the unemployment also tend to increase the inflation in
the economy.

So we find that by increasing the money supply, though

the production increases, inflation also increases and vice
versa.
Looking at the inflation chart (Exhibit 7) we find the rationale of RBI's monetary policy over
the last three years.
In order to counter the inflation, RBI increased the rates in the early 2008 but as the global
slowdown set in, the focus became the growth of the economy and hence the rates were
decreased drastically (Exhibit 6). As the global economy is recovering, they are now
increasing the rates gradually trying to maintain the balance of growth and the inflation.

Exchange Rate and India

Exchange rate stability is an important indicator of a country's economic strength. Consistent
fall or fluctuation in exchange rate adversely affects the balance of payments of a country.
India was under fixed exchange rate regime till March 1992. The exchange rate of the Rupee
was determined and adjusted by the Central Bank (Reserve Bank of India). The Rupee was
adjusted to a basket of currencies, comprising of currencies of important trade partners of
India like US, Britain, Japan etc. The exchange rate was determined by the government and
enforced by pegging operations (intervention in the currency market) and exchange controls
by the central bank.
Today India is under managed float (dirty float) regime. Exchange rate is determined by
demand and supply of currency for trade and international investments in the country, both
FDI and FII. A drastic appreciation or depreciation of the rupee is not desirable. An
appreciation in the value of rupee will make our exports less competitive in the global market
hence reducing GDP. Depreciation in the value of rupee will result in increased import
spending especially for price elastic goods like oil. Hence RBI intervenes when required by

buying and selling foreign exchange, to protect the economy from the dangers of volatile
foreign capital and sudden depletion of reserves.

CONCLUSION
Calling unemployment, inflation, the business cycle, foreign exchanges, and long-term
economic growth "problems" suggests a search for solutions. To some observers, the only
obvious problem-solver around is the government. And that suggests then that government
policy should be the focus of discussion. But of course the optimal government policy may be
to have no policy. In the long run a central question in macroeconomics is: What kinds of
policies, if any, should the government set to cure macroeconomic problems? Another, more
fundamental question, is: what is society's vision of the macroeconomic promised land?

SUMMARY
1) Macroeconomics is the study of the whole economy.
2) Unemployment is a waste of resources and a demoralizing human experience. Since it is
difficult to determine the number of unemployed, official unemployment figures must be
regarded cautiously.
3) Inflation and unemployment are the "twin evils" of the macroeconomy. Inflation is a rise
of prices in general. Inflation is especially hard on people who live on a fixed income, though
it helps others. Inflation causes uncertainty and there is the danger of inflation running away
to become hyperinflation.
4) Macroeconomic magnitudes (such as inflation and unemployment) move up and down, in
what is described as a "business cycle." The instability of the economy is a major
macroeconomic problem.
5) The value of the dollar vis a vis other currencies fluctuates causing fluctuations in imports
and exports.
6) Economies rise and fall from year to year, but the past two centuries they have grown.
Growth rates vary from country to country. The question that underlies much of
macroeconomic thinking, is: How to improve the growth rate of an economy?
7) Economic policies are the solutions that governments bring to the macroeconomic
problem. Yet good policies are hard to find. A bad policy may be worse than nothing at all.

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Macroeconomic objectives
Broadly, the objective of macroeconomic policies is to maximize the level of national
income, providing economic growth to raise the utility and standard of living of participants
in the economy. There are also a number of secondary objectives which are held to lead to the
maximization of income over the long run. While there are variations between the objectives
of different national and international entities, most follow the ones detailed below:
1. Sustainability - a rate of growth which allows an increase in living
standards without undue structural and environmental difficulties.
'Economic growth' will be studied later on in this book.
2. Full employment - where those who are able and willing to have a job
can get one, given that there will be a certain amount of frictional,
seasonal and structural unemployment (referred to as the natural rate of
unemployment).
3. Price stability - when prices remain largely stable, and there is not rapid
inflation or deflation. Price stability is not necessarily the same as zero
inflation, but instead steady levels of low-moderate inflation is often
regarded as ideal. It is worth noting that prices of some goods and
services often fall as a result of productivity improvements during periods
of inflation, as inflation is only a measure of general price levels. However,
inflation is a good measure of 'price stability'. Zero inflation is often
undesirable in an economy. ("Internal Balance" is used to describe a level
of economic activity that results in full employment with no inflation.)
4. External Balance - equilibrium in the Balance of payments without the
use of artificial constraints. That is, the value of exports being roughly
equal to the value of imports over the long run.
5. Equitable distribution of income and wealth - a fair share of the
national 'cake', more equitable than would be in the case of an entirely
free market. Like the other economic objectives, the distribution of income
is a partly subjective or normative issue
6. Increasing Productivity - more output per unit of labour per hour. Also,
since labor is but one of many inputs to produce goods and services, it
could also be described as output per unit of factor inputs per hour.
7. Thermal Equilibrium - equilibrium in the Balance of payments without
the use of artificial constraints. That is, exports roughly equal to imports
over the long run.