Budget Mogul

Gautam Hariharan Gaurav Gaba Team Tequila Shots MDI, Gurgaon

Analysis
Major strength is tourism sector which is a major source of revenue Income from tourism increased by 26.7 % in 2011 12 Income from tourism per GDP consistently hovered at 2 % on average, rising from 1.8 % in 2010 - 11 to 2 % in 2011 -12 Foreign trade deficit is growing - Trade deficit is a quarter of GDP Trade deficit increased by 15 % in 2011 12 Real GDP(in Basic prices) is following W shaped curve with annual percentage (%) change increasing and decreasing alternately

Analysis
The following graph illustrates the contributions of the three main sectors

to the economy
350 300 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011

Service (bn rs) Industry (bn rs) Agriculture (bn rs)

Fig 1

Analysis
Contribution of service sector to GDP is increasing continuously

Risen from 199.91 billion in 2003 04 to 319.1 billion in 2011 - 12

The industrial sectors continued poor performance is of concern ->76.5 billion in 2003 04 to 92.7 billion in 2011 12 Agriculture contribution increased from 165.8 billion in 2003 04 to 228.1 billion in 2011 - 12 It is basically an agrarian and service based economy Agriculture and Industry offset each other Annual percentage change in one sector -> Opposite change in other sector in almost all years

Analysis
The following graph illustrates the between savings and investment as percentage of GDP
Gap between Gross Domestic Savings and Gross Investment/GDP (%age)
30

25

20

15

Gap between Gross Domestic Savings and Gross Investment/GDP (%age)

10

0 2006 2007 2008 2009 2010

Fig 2

Analysis
Gross Consumption/GDP is very high-> Hovered in the range of 90 %

throughout the period

Consumption is the main growth driver Consumption growth has contributed to GDP growth significantly offsetting net exports negative effects Both investment and net exports contribute little to growth and is of concern Gap between gross domestic savings and investment per GDP at -22.8 in 2011 12 Less saving leads to less money for investment Savings need to improve to boost investment

Analysis
Money supply (M2) growth is outpacing economic growth which leads to inflation as more money chases the same amount of goods
35 30 25

20
Inflation CPI (%age) 15 10 5 0 2006 2007 2008 Money Supply (%age)

Fig 3

2009

2010

2011

As can be seen in graph when money supply increased at a rapid rate it led to higher inflation This country GDP growth has not kept pace with the money supply

Analysis
Inflation remains high due to high remittances inflows and also due to increase in salaries and wages especially during 08/09 and 09/10 Salary increased by 10.9 % in 07 08, 10.5 % in 08 09, 20.2% in 09 10 and 19.1 % in 2011 12

Wages increased by 16.9 % in 08 00, 16.3 % in 09 10, 24.0 % in 10 11

and 29.8 % in 2011 12 Remittance income risen from 54.2 bn in 03 04 to 330.9 bn in 11 - 12

Led to increase in aggregate demand while the production has not kept pace
Remittances growth was low during 06 07, 09- 10, 10 - 11 which had an impact on current account balance as it was negative

Analysis
The increase of public expenditure is driven by current expenditure Recurring expenditure has increased drastically during 11 12 by 50.8 % where as capital expenditure saw a sharp dip by 41.7 % during the same period

This means that the government is unable to spend money in the area
that is essential in creating strong base for economic growth Domestic revenue is not enough to finance recurrent expenditure

This is inefficient financial planning and management

Analysis
Major source of revenue is tax revenue -> 13.2 % Tax Revenue / GDP in 11 -12

Non tax revenue component is less about 2.3 % per GDP in 11 - 12which
means government share in GDP is low
35 30 25 20 15 10 5 0 2006 2007 2008

Export (%age of GDP) Import (%age of GDP)

Fig 4

2009

2010

2011

Analysis
Foreign exchanges reserves have been increasing consistently and rose by 35.3 % in 11 - 12 Capacity of reserves to cover import of goods and services has been decreasing from 10 months in 08 09 to 8.3 months in 11 - 12 signifying that imports are increasing at a fast rate Export have been very volatile, fluctuating heavily needs to be controlled The country is a net importer evident from the graph where imports outweigh the exports by fair margin

Exchange rate against US dollar depreciated by around 10 percent to

79.4 in 11 -12 Still country is unable to boost exports (no inventory of goods to take advantage of weak rupee)

Analysis
Higher remittance inflows and net transfers led to

Current account balance becoming 2 percent of GDP in 2011 12 It was negative the past two years(2009.10,2010-11)

Balance of payments was Rs 80 billion in 2011 12 which was higher than

previous years Inflation

Analysis
Total outstanding Debt /GDP has decreased considerably since 2002

There has also been decline in outstanding foreign debt from 2002 to
2011 -12 Therefore, the government can take foreign loan for investment purposes Banks continued liquidity problems that limit private credit expansion Share of the private sector in the banking sector credit has increased from 67.4% in 2002/03 to 81.1% in 2011/12 But the GDP has been growing at a slow pace by 4.6 % in 11 - 12 which indicates that government needs to increase its spending to boost GDP Also Private sector credit/GDP has been increasing but GDP hasnt kept pace

Tourism Industry Service Sector Agriculture Remittances from abroad Forex Reserves Current account balance

Poor financial planning and management(Less saving for investment ) Net Importer -> Low Exports Less growth of industry sector

Strengths

Weaknesses

Opportunities
Capitalize on tourism Attract FDI Increase in government spending to boost investment and GDP

Threats

Volatile Exports Decreasing capital expenditure Trade deficit Inflation