Macroeconomic Factors Affecting Mutual Fund Industry in India

The macroeconomic factors are the major determinant of the growth of an economy. Analyzing the macroeconomic factors gives an idea of the current economy position and a projection of the future of the economy based on which we decide the future of a particular industry. The various macroeconomic factors responsible for mutual fund industry in Indiaare as follow:

India’s economic performance

India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. About three-fifths of the work force is in agriculture, leading the United Progressive Alliance (UPA) government to articulate an economic reform program that includes developing basic infrastructure to improve the lives of the rural poor and boost economic performance. The government has reduced controls on foreign trade and investment. Higher limits on foreign direct investment were permitted in a few key sectors, such as telecommunications. However, tariff spikes in sensitive categories, including agriculture, and incremental progress on economic reforms still hinder foreign access to India's vast and growing market.

Privatization of government-owned industries remains stalled and continues to generate political debate; populist pressure from within the UPA government and from its Left Front allies continues to restrain needed initiatives. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. India achieved 8.5% GDP growth in 2006, and again in 2007, significantly expanding production of manufactures. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. The strong growth combined with easy consumer credit and a real estate boom fueled inflation concerns in 2006 and 2007, leading to a series of central bank interest rate hikes that have slowed credit growth and eased inflation concerns. The huge and growing population is the fundamental social, economic, and environmental problem.

During the fiscal years 1980-81 to 1990-91, the average GDP growth rate was 5.38 per cent (Source: Handbook of Statistics, RBI). In comparison, the average growth rate between 1990-91 and 2006-07 was 6.23 per cent, an increase of less than one percentage point.

China had galvanized the economy to such an extent that they had an inexplicably long run of double-digit real GDP growth rate. Indiahas never achieved a double-digit growth rate.

Growth of industrial sector, from a low of 2.7% in 2001-02, revived to 7.1% and 7.4% in 2002-03 and 2003-04, respectively, and after accelerating to over 9.5% in the next two years, touched 10% in 2006-07. Within industry, the growth impulses in the sector seem to have spread to manufacturing. Industrial growth would have been even higher, had it not been for a relatively disappointing performance of the other two sub-sectors, namely, mining and quarrying; and electricity, gas and water supply. Since 1951-52, industry has never consistently grown at over 7% per year for more than three years in a row before 2004-05. Year-on-year, manufacturing, according to the monthly Index of Industrial Production (IIP) available until December 2006, has been growing at double digit rates every month since March 2006, with the solitary exception of the festive month of October.

Agricultural growth decelerated from an average of 3.39 per cent in the pre-reform period to 2.77 per cent. Even the industry didn't really do too well. The average growth rate was lower by nearly 0.57 per cent, as it decelerated from 6.72 per cent to 6.15 per cent.

A agricultural sector that supports nearly 70 per cent of the country's population has seen a steady decline. A slide that even reforms failed to stem. India's agricultural productivity, in most cases, is one of the lowest in the world Per capita availability of food grain is falling as population is growing faster than food grain production. Deplorable rural infrastructure leads to India wasting an amount of food grain that is more than half of Australia's food grain production. India's agriculture is still so very highly monsoon dependent.

The service sector as its average growth rate increased by more than 1.48 percentage points, from 6.33 per cent to 7.81 per cent. In case of agricultural produce, unlike oil, producers do not always benefit from rising price because of wrong policies and bad infrastructure.

Between 2002-03 and 2006-07, the Indian economy grew at an average rate of 8.6 per scent. High growth, recorded during the last few years, seems to be more cyclical in nature than structural. Strong global growth, benign inflationary situation and ample liquidity sloshing around caused by a loose monetary policy, both globally and in India, led to this strong growth.

With the American economy slipping into recession and inflation becoming a major concern world-wide, Indiais on the verge of a slowdown. Indiadoes not seem to have reached a stage where continued high growth will not trigger inflationary pressure, unlike China which sustained a scorching pace for a much longer period of time on the back of clearly improving productivity. Indiadoes not seem to have gained much by way of improving productivity that would have ensured sustained high growth. A mere five-year-long high GDP growth is seemingly choking the economy via inflation.

The sustainability of growth would also depend on high savings rate. However, a closer look at the composition of India's savings rate does seem to suggest that the recent spurt in the rate has more to do with cyclical factor than real structural improvement.

GDP (purchasing power parity): $2.989 trillion (2007 est.)

GDP (official exchange rate): $1.099 trillion (2007 est.)

GDP - real growth rate: 9.2% (2007 est.)

GDP - per capita (PPP): $2,700 (2007 est.)

GDP - composition by sector: agriculture: 17.6%
                                                  industry: 29.4%
                                                  services: 52.9% (2007 est.)

Global Economy

The global economy impacts on the mutual funds in Indiain various ways. The trading on the global level faces the different issues with the relative to their local problems of the countries. The countries have their own policies, constrains, etc. Some of the countries mentioned below their impacts on the Mutual funds in India.

United States of America (US): The USmarket is the major market has impact on the Indian market. The slowdown of the USeconomy is the major concern facing by the Indian economy. The Indian economy has the major dependency on imports and exports of the US dollar by the various industries like IT, Pharmacy, etc. US faced the economy crisis after the Iraqwar. The US fiscal policy shuffled and became weaker after the war which forces the US government to increase the taxes. The US slowdown will cuts the interest rates can impact to the Indian economy as the difference of the US interest and India interest will be increase the capital flow will be decrease accordingly.

Japan was already weak with a negative quarter of gross domestic product – a broad measure of the economy in 2007. Most of its growth came from exports, which are now uncertain. Japanese consumers seem reluctant to spend, and business investment is muted as exports slow and population declines.

Australia and Canadahad strong currencies driven by the commodity boom, now looking tired. They might escape if the “BRIC” story had remained intact and the large emerging economies of Brazil Russia, Indiaand Chinacontinued to grow. However, the Chinese and Indian economies face issues of stock market and real-estate bubbles, inflation, social unrest and too-rapid credit expansion. They, too, are more fragile, and when money began to seek safety, they no longer seemed a safe haven.