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4
THE NEW POLICY
ECONOMIC REFORM MEASURES
Budget
Outside the budgets
Objectives
Reducing government deficit
Containment of inflation
Reduction of current account deficit
Balance of payments
Raising GDP Growth to around 6%
5
THE NEW POLICY
Liberalisation
Budget
Outside the budgets
Objectives
Reducing government deficit
Containment of inflation
Reduction of current account deficit
Balance of payments
Raising GDP Growth to around 6%
6
LIBERALISATION
The new economic policy provides freedom to the
entrepreneur to enter any industry, produce any
product, and earn any amount of money.
liberalisation measures are
Licensing abolished, except for 13 industries.
Licensing for al-most all bulk drugs abolished.
Limit for foreign equity stake has been hiked to 51 per
cent.
Basic telecommunication services opened to private
participation, including foreign investments.
Minimum lending rates for amounts exceeding Rs.2 lakh
abolished. 7
LIBERALISATION
Liberalisation measures are
SLR reduced to 31.5 per cent to make more credit available to the
commercial sector.
Import duties on capital goods reduced to 15 per cent on export
related capital goods and 25 per cent for project imports and most
capital goods.
MODVAT extended to capital goods and petroleum products.
Corporate tax reduced from 45 per cent for widely held companies
and 50 per cent for closely held companies to 40 per cent for
domestic companies
8
LIBERALISATION
Liberalisation measures are
Five year tax holidays for new industrial units set up in backward
areas
Major overhaul of the excise tax structure – specific to advalorem
duties
Reforms in custom duties
Rupee made fully convertible in current account through LERMS
(liberalised Exchange Rate system)
CCI abolished
FERA relaxed
Setting up private banks allowed
Private investment is allowed in Power sector
Automatic approval for 100% EOU and Units in EPZs
Exports 9
PRIVATISATION
Widening the scope and role of private sector in
economic activities
Market friendly
Core competencies
Competitive edge
Customer satisfaction
Restructuring of Public sector
Public sector 17 to 6
foreign investment upto 51 per cent.
10
GLOBALISATION
Integrate our economy with the world economy
11
STABILISATION
Bringing down price level from around 14% to single
digit figure
Reducing fiscal deficit to 4% of GNP
Improving the supply of food stocks through PDS
Liberalizing imports
Avoiding wasteful expenditure
Improving productivity
Sustaining growth
Raising productivity/ offsetting cost increases
12
INTRODUCTION
Trends vs. Cycles: Tendencies
Short Term Cyclical fluctuations (Project) => Trend
Classify every uptrend as cyclical (‘overheating’)
Long Term Trends
Medium Term Performance: 2003-04 to 2007-08
Short Term: Inflation – Global cost push
Role of Policy reform:
Sustaining growth
Raising productivity/ offsetting cost increases
7%
5%
3%
1%
1955
1957
1959
1969
1971
1973
1983
1985
1987
1995
1997
1999
2001
2009
2011
1951
1953
1961
1963
1965
1967
1975
1977
1979
1981
1989
1991
1993
2003
2005
2007
-1%
-3%
GdpmpGr GdpGrTrend GdpTndHpf
-5%
8%
7%
6%
5%
4%
3%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
8%
PcGdp
G
r PcGma5y
o 7%
w
t
h 6%
r
a 5%
t
e
4%
(
%
)
3%
2%
1999-00
1993-4
1995-6
1996-7
1998-9
2001-2
2004-5
2006-7
2007-8
1992-3
1994-5
1997-8
2000-1
2002-3
2003-4
2005-6
02 August 2008 General: AV 19
Fig 4: Per Capita Consumption
Per Capita Consumption
7%
6%
G
r
o 5%
w
t
h 4%
r
3%
a
t
e 2%
(
%
1%
)
0%
2001-2
1992-3
1993-4
1994-5
1995-6
1996-7
1997-8
1998-9
2000-1
2002-3
2003-4
2004-5
2005-6
2006-7
2007-8
1999-00
35%
30%
25%
20%
15%
18.0%
18%
16%
14%
12%
8%
7.0%
6.1% 6.2%
6% 5.3% 5.6%
5.0% 4.7% 4.5%
4%
2%
0%
91-2to97-8 98-9 to 02-3 03-4to07-8
50% 47.8%
40%
34.0%
30% 26.9%
20%
11.6% 12.0%13.6%
10% 5.4%
0%
92-3to97-8 97-8 to 02-3 02-3to07-8
-10% -7.6%
PFCEdm GDCF GFCE Net exports -14.7%
-20%
35%
Investment- Ratios (% of GDP)
30%
25%
20%
15%
2005-6@
2006-7*
2001-2
2004-5
2007-8
2002-3
2003-4
30
F FDI Inbound FDI Outbound
D
I
25
(
U
S
20
$
b 15
i
l
l
i 10
o
n
)
0.0%
1.0%
2.0%
3.0%
5.0%
6.0%
7.0%
02 August 2008
1980
1981
1982
1983
1984
1985
1986
1987
NDP/Lhp
General: AV
1988
1989
1990
1991
1992
1993
Kstock/Lhp
1994
1995
1996
1997
1998
TFPGhp
1999
2000
2001
2002
2003
Sources of Growth
2004
2005
2006
2007
29
Sector Drivers
Manufacturing
GDP/Value Added
Investment: GCF, GFCF
Communication
Competition and efficiency
Trade, Agriculture, Construction
Labor intensive
other services
7% trade
14%
communication
11%
real
estate,ownership of
dwellings & business construction agriculture(crop)
services 10% 10%
8%
Construction
1.5 1.3 1.0 1.0 1.4 1.2 -0.4
Telecommunication
2.2 0.5 0.6 0.6 0.4 0.5 -1.7
All Food
60%
50%
40%
30%
20%
10%
0%
-10%
750
850
350
450
550
650
950
02 August 2008
2005M4
2005M5
2005M6
2005M7
2005M8
2005M9
2005M10
2005M11
2005M12
2006M1
2006M2
General: AV
2006M3
2006M4
2006M5
2006M6
2006M7
2006M8
Palm oil
2006M9
2006M10
2006M11
2006M12
2007M1
2007M2
World Price of Palm Oil ($/MT)
2007M3
2007M4
2007M5
2007M6
2007M7
2007M8
2007M9
2007M10
2007M11
2007M12
2008M1
2008M2
2008M3
2008M4
2008M5
2008M6
Global Supply: Edible Oil(Palm)
37
90
60
70
80
130
100
110
120
140
150
02 August 2008
2005M4
2005M5
2005M6
2005M7
2005M8
2005M9
2005M10
2005M11
2005M12
2006M1
2006M2
General: AV
2006M3
2006M4
2006M5
2006M6
2006M7
PironOre
2006M8
2006M9
2006M10
2006M11
2006M12
2007M1
2007M2
2007M3
World Price of Iron Ore(cents/MT)
2007M4
2007M5
2007M6
2007M7
2007M8
2007M9
2007M10
2007M11
2007M12
2008M1
2008M2
2008M3
2008M4
2008M5
2008M6
Global Supply Shock: Iron Ore
38
180
200
100
120
140
160
220
240
260
02 August 2008
2005M6
2005M7
2005M8
2005M9
2005M10
2005M11
2005M12
2006M1
2006M2
2006M3
2006M4
General: AV
2006M5
2006M6
2006M7
2006M8
2006M9
2006M10
2006M11
2006M12
2007M1
2007M2
Poil
2007M3
2007M4
2007M5
Global Oil Price Index (IMF)
2007M6
2007M7
2007M8
2007M9
2007M10
2007M11
2007M12
2008M1
2008M2
2008M3
2008M4
2008M5
2008M6
Global Supply Shock: Oil Price
39
Rate of Growth: Iron Ore & Oil
100%
PironOre Poil
80%
60%
40%
20%
0%
-20%
02 August 2008
03.04
03.06
03.08
03.10
03.12
04.02
04.04
Pman
04.06
04.08
04.10
General: AV
04.12
Pfl
05.02
05.04
05.06
05.08
Pprf
05.10
05.12
06.02
06.04
06.06
06.08
Pprnf
06.10
06.12
07.02
07.04
07.06
Pmnrl
07.08
07.10
07.12
08.02
08.04
08.06
Contribution to change in WPI
41
Acceleration in Inflation during 2008 H1 over 2007 H1:
Contribution of different commodities
WPI Inflation during H1 2007 (i.e. from December
2006 end to June 2007 end) was 2.7%.
Inflation during H1 2008 (i.e. from December 2007
end to June 2008 end) was 9.9%(est).
Of the 7.2% increase in inflation this year, 2/3rd was
due to 3 sets of commodities:
Edible oils (including) oils seeds and oil cakes)
Iron and Steel (including iron ore)
Mineral Oils and refinery products
-2%
4%
0%
2%
6%
8%
2007.01
2007.02
2007.03
2007.04
2007.05
General: AV
2007.06
2007.07
IndiaWpi
2007.08
2007.09
2007.10
UsaPpi
2007.11
2007.12
2008.01
2008.02
2008.03
2008.04
2008.05
2008.06
Inflation in India (WPI) and USA(PPI)
43
Inflation: India-WPI Manf, UK-PPI
Manf, USA PPI Ind
16%
UsPpiInd UkPpiMnf IndWpiMf
14%
12%
10%
8%
6%
4%
2%
0%
2007.01
2007.02
2007.05
2007.06
2007.08
2007.09
2007.12
2008.01
2008.04
2008.05
2007.03
2007.04
2007.07
2007.10
2007.11
2008.02
2008.03
2008.06
-2%
% 3
)
-1 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-3
1%
7%
9%
3%
5%
Mumbai Isec: AV
01q1
01q2
01q3
01q4
02q1
02q2
02q3
02q4
03q1
03q2
CPI unml
03q3
03q4
04q1
04q2
04q3
04q4
05q1
05q2
Pfce def
05q3
05q4
06q1
06q2
06q3
06q4
07q1
07q2
07q3
07q4
08q1
CPI(unme) & Gdp Pvt Cons deflator
46
Monetary Policy and Inflation
Cost Push and Monetary accommodation!
Monetary Policy includes exchange rate policy
Important only for its effect on objectives
Monetary Policy Objectives
Production/Growth & Inflation – emphasis varies
Socio-Political Tolerance level of Inflation
Primary Focus Today- Inflation & Expectations
Capital flows main driver of RM gr. (prt. Q4 2007-8)
M3 gr. exceeded peaks of 92.10 (98.10) in 07.10
M3ma gr. exceeded peaks of 95.04 and 98.04 in 07.01
02 August 2008 General: AV 47
t
r
e
h
o
o
w
) (
M
M
11%
13%
15%
17%
19%
n 21%
23%
02 August 2008
94.05
94.10
95.03
95.08
96.01
96.06
96.11
97.04
97.09
98.02
98.07
General: AV
98.12
99.05
99.10
2000.03
2000.08
2001.01
2001.06
2001.11
M3
2002.04
2002.09
2003.02
2003.07
2003.12
2004.05
M3rlc
2004.10
2005.03
2005.08
2006.01
2006.06
2006.11
2007.04
2007.09
2008.02
2008.07
0%
2%
4%
6%
8%
Monetary Accommodation?
18%
10%
12%
14%
16%
20%
t
r
r
e
e
h
n
o
o
g
y
) (
M
48
Real Interest Rate Convergence: US-India
8
I 6
n
t
e
r
4
e
s
t
r 2
a
t
e
(
% 0
)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-2
-4
F 4%
l
o
w
3%
s
(
%
2%
G
D
P
)
1%
0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-1%
P
a
y 3%
m
e
n
t 2%
s
B
a 1%
l
a
n
c 0%
e 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(
%
G
-1%
D
P
)
-2%
Goods &Services Def Curnt Act Def