The document discusses India's strong economic growth in recent years, with GDP growth averaging over 8.5% since 2003 and expected to be around 8.5% in 2007-2008. Inflation has also increased but remains under control at around 5%. Interest rates are expected to rise to control inflation. The strengthening economy has boosted investor confidence but India still faces challenges in sustaining growth, reducing poverty and population growth, and developing infrastructure and education.

1. ECONOMIC ANALYSIS
Economics experts and various studies conducted across the globe envisage India and China to
rule the world in the 21st century. For over a century the United States has been the largest
economy in the world but major developments have taken place in the world economy since
then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian
giants- India and China. Here we will focus on Indian economy as the growth has
GDP : The strengthening of economic activity in the recent years has been supported by persistent
increase in gross domestic investment rates from 22.9 per cent of GDP in 2001-02 to 33.8 per cent in
2005-06. It may also be noted that over 95 per cent of investment in the country during this period was
financed by the domestic savings. The expected real GDP growth in 2007-08 is around 8.5 per cent.
Agricultural GDP growth doubled to around 4 per cent in 2006-07 and is particularly important in Indian
context.
Interest Rates : In an open economy, the domestic interest rate is influenced by international rates, which
in case of India has been on the upswing since 2004. India's interest rates are expected to go up in the
medium term. A higher interest rate may be needed to control the anticipated higher inflation. With
indications of a further hike in the US and the European Central Bank's interest rates, it is more likely that
India will follow suit. Because if India's economic growth is to keep up with that of other countries in a
deregulated market environment, it has to adopt the interest cycle of the global economy.
Inflation : Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upward
trend with intermittent decreases. However, average inflation in the 52 weeks ending on February 3,
2007 remained at 5 per cent. A spurt in inflation like in the current year has been observed in the recent
past in 1997-98, 2000-01, 2003-04 and 2004-05.

2. Inflation, with its roots in supply-side factors, was accompanied by buoyant growth of money and credit
in 2005-06 and 2006-07 so far. While GDP growth accelerated from 7.5 per cent to 9.0 per cent between
2004-05 and 2005-06, the corresponding acceleration in growth of broad money (M3) was from 12.3 per
cent to 17.0 per cent. Year-on-year, M3 grew by 21.1 per cent on January 19, 2007. The industrial
resurgence and upswing in investment was reflected in, and sustained by, growth of gross bank credit (as
per data covering 90 per cent of credit by scheduled commercial banks), for example, to industry
(medium and large) at 31.6 per cent and for housing loans at 38.0 per cent in 2005-06. It was also
observed in year-on-year growth of gross bank credit at 32.0 per cent in September 2006, albeit
marginally down from 37.1 per cent in 2005-06. Reconciling the twin needs of facilitating credit for
growth on the one hand and containing liquidity to tame inflation on the other remained a challenge. RBI
put a restraint on the rapid growth of personal loans, capital market exposures, residential housing beyond
Rs. 20 lakh and commercial real estate loans by more than doubling the provisioning requirements for
standard advances under these categories from 0.40 per cent to 1.0 per cent in April 2006.
Simultaneously, it increased the risk weight on exposures to commercial real estate from 125 per cent to
150 per cent.
Fiscal Policy : Managing fiscal discipline in the midst of competitive demands on public resources and
tax expenditures vis-à-vis varied and often conflicting expectations of stake holders is a complex exercise.
The last three years’ fiscal results, particularly measured against the deficit targets, demonstrate the
effectiveness of managing resources. It is reassuring that deficits have been contained within the
mandated limits. The upswing in growth has appeared to have propelled the economy to ‘take-off’, and it
has been accompanied with a reduction in fiscal deficit from a level of 5.9 per cent of GDP in 2002-03 to
3.7 per cent of GDP in 2006-07. During the same period, revenue deficit has declined from 4.4 per cent of
GDP to 2.0 per cent of GDP. Tax-GDP ratio which was 8.8 per cent in 2002-03 has go up to 11.4 per cent
in 2006-07. The improvement in deficit indicators has been achieved through improvement in tax-GDP
ratio.
Investor’s Confidence : Indian economy has achieved what it has been hoping for quite some time.
Perhaps at no time during the post-liberalization period, Indian economy has shown such kind of
optimism. It is poised to enhance its real economic growth rate in the current year, holding a huge reserve
of foreign exchange that is rather unprecedented, interest rates at an all time low and inflation very much
under control, increasingly robust corporate performance, strong operational performance from the
banking sector, surge in the stock prices and a whole range of reforms right from new norms for issuance
in the primary markets to the setting up of a central listing authority to benchmarking Indian stock
exchanges with the international best practices. All these factors have boosted investor confidence in the
economy.
Employment : Both growth of population and labour force have shown substantial decrease. This is a
positive signal. Little Growth in the organised sector employment has been noticed in the private sector.
Public sector has shown a negative growth. Significant employment generation took place in the tertiary
sector particularly in services industries. Substantial employment growth was observed in the small and
unorganised sector, i.e., in small and tiny enterprises. Self-employment and casual labour continued to
play a pivotal role in rehabilitation of the unemployed.

3. TRADE POLICY
India’s economic performance has continued to be impressive since 2001-02 and growth has
been particularly rapid since 2003-04 averaging over 8.5% with around 9% in 2006-07. This
performance is largely due to unilateral trade and structural reforms, in particular in services
provided by India. Rapid economic growth has also resulted in an improvement in social
indicators such as poverty and infant mortality.
India is preparing herself for becoming an economic superpower, and it must expedite socio-
economic reforms and take steps for overcoming institutional and infrastructure bottlenecks
inherent in the system. Availability of both physical and social infrastructure is central to
sustainable economic growth.
Since independence Indian economy has thrived hard for improving its pace of development.
Notably in the past few years the cities in India have undergone tremendous infrastructure up
gradation but the situation in not similar in most part of rural India. Similarly in the realm of
health and education and other human development indicators India's performance has been far
from satisfactory, showing a wide range of regional inequalities with urban areas getting most of
the benefits. In order to attain the status that currently only a few countries in the world enjoy
and to provide a more egalitarian society to its mounting population, appropriate measures need
to be taken.
All these issues show that India is growing and it still has tremendous opportunity to grow even
at a faster rate.
MONETARY POLICY
The RBI is the central bank of India and decides on the monetary policy. Monetary policies are
related to the rules framed by the RBI to control the liquidity, inflation and interest rates. It uses
different types of tools such as Cash reserve ratio, statutory liquidity ratio, Repo rate etc. to
control the inflation and liquidity in the economy.
The liquidity in the economy has increased sharply in the year 2004 that is why the inflation
during that time period also increased with a higher rate. To miyigate the inflation RBI
effectively used the CRR tool and has been increasing the CRR since then. At a value of less
than 5% during 2003, CRR now stands at 7%. The RBI is now able to restrain the inflation
whithin 4%.
Liquidity conditions remained fairly comfortable up to early September 2006 with the unwinding
of the Central Government surplus balances with the RBI and continued intervention in the
foreign exchange market to maintain orderly conditions. During 2006-07, up to September 8,
2006, RBI had not received any bid for repo under Liquidity Adjustment Facility (LAF) and the
continuous flow of funds under reverse-repo indicated a comfortable liquidity position. In 2005-

4. 06, the reverse repo rate had been raised by 25 basis points each time on April 29 and October
26, 2005, and on January 24, 2006 to reach 5.50 per cent. In 2006-07, it was raised again by 25
basis points each time on June 9 and July 25, 2006. There was some tightness with the onset of
the festival season and due to high credit expansion and outflows on account of advance tax
payment. From mid-September through October, 2006, while RBI had to provide
accommodation to some banks through repo facility, with reverse repo operations
simultaneously, in net terms, RBI absorbed liquidity from the system.
CRR
8.00
7.00
6.00
5.00
4.00
3.00
2.00
CRR
1.00
0.00
Exchange Rate
Indian Rupee against the USD remained stable between Rs 40.00/41.00. Indian Rupee traded
mostly below Rs 41.00 in June 2007. Throughout the month Rupee gained against the USD but
remained volatile and crossed Rs 41.00 exceptionally in only one trading session. The rupee
ranged between Rs 40.47/41.01 averaging at Rs 40.8 in June 2007, showing weakness towards
the last trading sessions of the month. The central bank continues to maintain its limited
intervention in the forex market until the inflationary pressures are minimized. In June 2007 INR
against the Euro demonstrated less volatility than it did against the USD. It peaked at Rs 55.09
and remained above Rs 55.00 level in the penultimate trading sessions before attaining a level
below Rs 55.00. However it averaged at Rs 54.7 in June2007.

5. Challenges faced by Indian Economy
Currently Indian economy is facing these challenges:
Sustaining the growth momentum and achieving an annual average growth of 7-8 % in
the next five years.
Simplifying procedures and relaxing entry barriers for business activities.
Checking the growth of population; India is the second highest populated country in the
world after China. However in terms of density India exceeds China as India's land area
is almost half of China's total land. Due to a high population growth, GNI per capita
remains very poor. It was only $ 2880 in 2003 (world bank figures).
Boosting agricultural growth through diversification and development of agro processing.
Expanding industry fast, by at least 10% per year to integrate not only the surplus labour
in agriculture but also the unprecedented number of women and teenagers joining the
labour force every year.
Developing world-class infrastructure for sustaining growth in all the sectors of the
economy.
Allowing foreign investment in more areas
Effecting fiscal consolidation and eliminating the revenue deficit through revenue
enhancement and expenditure management.
Empowering the population through universal education and health care. India needs to
improve its HDI rank, as at 127 it is way below many other developing countries'
performance. The UPA government is committed to furtering economic reforms and
developing basic infrastructure to improve lives of the rural poor and boost economic
performance. Government had reduced its controls on foreign trade and investment in
some areas and has indicated more liberalization in civil aviation, telecom and insurance
sector in the future.