GROWTH AND DEVELOPMENT OF THE INDIAN MACROECONOMY

Uma, N Kalyanaraman
International Journal of Business and Administration Research Review   unpublished
Introduction Economic growth can be defined as the change or expansion of an economy in quantitative terms over a period of time. Economic development, on the other hand, is a much broader concept. As per Todaro and Smith (2009:16) development is "a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction of inequality and the eradication of poverty." Though GDP growth is
more » ... sidered as the backbone of economic growth of any country, a comprehensive study of other macroeconomic indicators like money supply, exchange rates and inflation rates is also required in order to assess a country's economic growth and development. India has been a bit of a laggard in the process of economic reforms .The process of economic reforms was initiated in full earnest only in the early 1990s through a chain of reforms which were aimed at making the country more globally competitive .The new economic reforms called the Liberalization, Privatization and Globalization model (LPG) model led to the dawn of hitherto unprecedented changes making India one of the fastest growing economies in the world. (Goyal 2006) . As per data from the world bank India's average annual growth rate has been around 7% after the 1990s .Considering that India's economy hardly grew in the first half of the twentieth century and grew at a sluggish rate of around 3% post independence, this recent acceleration in growth is quite remarkable ( Kohli, 2006) . Literature Review The relationship between macroeconomic indicators and growth has been a subject of interest for researchers for many decades. Some of the earlier studies by Kormendi and Meguire (1985) and Barro (1991) present interesting and fascinating results for a variety of macroeconomic variables to explain growth. The stock market is considered to be a popular leading macroeconomic indicator of any economy. Many believe that large decreases in stock prices are reflective of a future recession, whereas large increases in stock prices suggest future economic growth. (Comincioli and Wesleyan, 1996).Many studies have used stock markets as a leading indicator in studying economic growth of countries. Billson, Brails ford and Hooper (2001) analyzed the impact of selected macroeconomic variables like money supply, inflation, industrial production, exchange rates on stock markets of twenty emerging economies. Their research pointed to a model that local factors were more relevant in determining growth and commonality in exposures across markets could not be expected. Another interesting study by Bhattacharya and Mukherjee (2002) found a causal relationship between stock prices and macroeconomic factors in India. Levy Yeyati and Sturzenegger (2003) did an extensive study on the impact of exchange rates on growth of 183 developing countries .Their study showed that exchange rate regimes had a strong impact on real economic performance and that fixed exchange rates were linked to slow growth rates. Basher and Sardosky (2006) examined the impact of oil prices on the stock indices of twenty emerging economies and found strong evidence that oil price risk impacts stock price returns in emerging markets Though the impact of macroeconomic variables on growth of developed countries has been studied extensively, the interest of researchers in developing economies like India has taken wings only over the last decade. Basu and Maertens (2007) outlined the phenomenal growth story of India from the 1950s till 2005 through a comprehensive study which shed light on the phenomenal GDP growth, imports and exports of India. The study outlined the reasons for the emergence of India as a powerful nation in the global economy. An analysis of the relationship between stock market development and economic growth for the Indian economy by Deb and Mukherjee (2008) found strong evidence of a causal flow from the stock market development to economic growth. Further studies of macroeconomic indicators and the Indian stock market by Singh (2010) concluded that though IIP, exchange rate and WPI strongly influenced the Indian stock markets, only IIP results could be used to predict the stock market movement. An evidence of a long run relationship between macroeconomic variables like exchange rates, interest rates, inflation rates and the stock markets in India was found by Pal and Mittal (2011) . Aizenman and Sengupta (2013) explain that India's growth is based on the convergence of a middle ground between the three policy objectives of exchange rate stability and financial integration buffered by sizeable international reserves. Though studies have explored the relationship between macroeconomic indicators and growth factors influencing the Indian economy, most of them have focused on a relatively limited number of macroeconomic indicators. Studies showing the impact of a broad spectrum of major macroeconomic variables on the growth of the Indian economy over the last decade are still limited in number. The advantage of studying a broader spectrum of macroeconomic indicators is that it helps to understand the interrelationship between these variables and their significance in the Indian growth story.
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