Coronavirus – Economic Issues

Coronavirus – Economic Issues

K-Shaped Economic Recovery fuels diverse Inflation Dynamics in India


From UPSC perspective, the following things are important :

Prelims level: K-Shape Recovery and its Features.

Why in the News?

India is experiencing a K-shaped recovery, with uneven growth patterns. This recovery is causing divergent inflation trends, with food and rural prices rising faster than other goods and services, and urban inflation.

What is K-Shaped Recovery?

  •  A K-shaped recovery is an economic scenario in which different sectors, industries, or groups within an economy recover from a recession at markedly different rates.
  • This results in a divergent economic recovery pattern, with some parts of the economy experiencing robust growth and others continuing to struggle or even decline.

Features of K-Shaped Recovery

  • Divergent Recovery Rates: Certain sectors, such as technology and finance, may recover quickly and strongly. Other sectors, like hospitality and retail, may continue to struggle or recover much more slowly.
  • Income Inequality: High-income individuals and businesses may see significant improvements in their financial situations. Low-income individuals and small businesses may face prolonged financial hardships.
  • Sectoral Disparities: Industries that can adapt to remote work or have online business models (e.g., tech, e-commerce) thrive.

Indian Context: Consumption Patterns Post-Pandemic

  • High-End Goods Demand: Post-pandemic recovery is driven by increased demand for higher-end goods and services.
  • Mass Consumption Items: Lower-income households’ consumption of mass-market items remains relatively subdued.

 Contrast Inflation Rate:

  • Rural vs. Urban Inflation: Rural inflation is outpacing urban inflation.
  • Food Prices vs. Other Goods: Food price inflation is higher compared to inflation in other goods and services.
  • Goods vs. Services Inflation: Goods inflation is higher than services inflation.
  • Input vs. Output Prices: Input prices are rising faster than output prices.

Policy Implications

  • Sensitive Policymaking: Government policies need to be sensitive to the impact on different groups affected by supply-side shocks.
  • Careful Planning: Reforms should be carefully explained and planned to mitigate adverse impacts.


[2021] Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer.

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Coronavirus – Economic Issues

What are the Reasons for Rise in Global Debt?


From UPSC perspective, the following things are important :

Prelims level: Global Debt

Mains level: Read the attached story

global debt

Central Idea

  • Record High: The Institute of International Finance (IIF) reported that global debt reached an all-time high of $307 trillion by the end of June 2023, marking an increase of about $100 trillion over the last decade.
  • Debt-GDP Ratio: After seven consecutive quarters of decline, global debt as a share of gross domestic product (GDP) has started rising again, reaching 336%.

Understanding Global Debt

  • Global debt encompasses borrowings by governments (sovereign), private businesses, and individuals.
  • Governments borrow to cover various expenses and pay interest on past debts, while the private sector borrows primarily for investments.

Drivers of Rising Global Debt

  • Historical Trend: Both nominal global debt and the debt-to-GDP ratio have been steadily increasing over the years. The pandemic briefly halted this trend as economic activity slowed, but debt levels have been on the rise again.
  • Advanced Economies: Over 80% of the first-half increase in global debt came from advanced economies like the U.S., the U.K., Japan, and France. Among emerging markets, China, India, and Brazil saw substantial debt growth.
  • Surge Amid Rising Interest Rates: Despite expectations of declining demand for loans due to rising interest rates, global debt increased by $10 trillion in the first half of 2023. This trend is not unusual as increased savings often lead to higher debt levels when channelled into investments.

Inflation’s Impact on Debt

  • Unique Trend: More intriguing than rising debt levels is the preceding seven consecutive quarters of declining global debt as a share of GDP before 2023.
  • Inflation’s Role: The IIF attributes this decline to price inflation, which allowed governments to erode their debts denominated in local currencies through inflation. This process, known as inflating away debt, involves central banks creating new currency to pay off government debt, indirectly taxing the economy through rising prices.

Causes for Concern

  • Debt Sustainability: Rising global debt levels often raise concerns about debt sustainability, especially in the case of government debt driven by reckless borrowing for populist programs.
  • Impact of Rising Interest Rates: As central banks raise interest rates to combat inflation, governments with heavy debt burdens may struggle to service their debt. Rising rates could lead to defaults or attempts to inflate away the debt.
  • IIF Warning: The IIF warns that the global financial infrastructure is ill-prepared to handle unsustainable domestic debt levels.
  • Private Debt Concerns: Rapidly increasing private debt levels also raise alarms as they are often linked to unsustainable booms that can culminate in economic crises, particularly when such lending lacks genuine savings.
  • Looming Financial Crisis: The 2008 global financial crisis serves as a recent example of an economic boom fueled by easy credit policies, such as those by the U.S. Federal Reserve, preceding an economic downturn.


  • The surge in global debt warrants attention, given its potential implications for economic stability, sustainability, and the capacity of financial systems to address mounting debt challenges.

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Coronavirus – Economic Issues

Centre raises credit limit under ECLGS


From UPSC perspective, the following things are important :

Prelims level: ECLGS Scheme

Mains level: Not Much

The Ministry of Finance has raised the credit limit for airlines under the Emergency Credit Line Guarantee Scheme (ECLGS), making them eligible for a sum equivalent to 100% of their outstanding debt, up to a maximum of ₹1,500 crore.

Boost for Aviation sector

  • Earlier, airlines were eligible to borrow up to 50% of their credit outstanding up to ₹400 crore.
  • This is the second time the government has liberalized the scheme for the aviation sector.
  • The scheme introduced for medium and small enterprises during the outbreak of the COVID-19 pandemic was extended till March 2023 and its guarantee cover expanded by ₹50,000 crore to ₹5 lakh crore.

What is ECLGS?

  • Under the Scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company Limited (NCGTC) for additional funding of up to Rs. 3 lakh crore to eligible MSMEs and interested MUDRA borrowers.
  • The credit will be provided in the form of a Guaranteed Emergency Credit Line (GECL) facility.
  • The Scheme would be applicable to all loans sanctioned under GECL Facility during the period from the date of announcement of the Scheme to 31.10.2020.

Aims and objectives

  • The Scheme aims at mitigating the economic distress faced by MSMEs by providing them additional funding in the form of a fully guaranteed emergency credit line.
  • The main objective is to provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and NBFCs to increase access to, and enable the availability of additional funding facility to MSME borrowers.
  • It aims to provide a 100 per cent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers.

Salient features of ECGLS

  • The entire funding provided under GECL shall be provided with a 100% credit guarantee by NCGTC to MLIs under ECLGS.
  • Tenor of the loan under Scheme shall be four years with a moratorium period of one year on the principal amount.
  • No Guarantee Fee shall be charged by NCGTC from the Member Lending Institutions (MLIs) under the Scheme.
  • Interest rates under the Scheme shall be capped at 9.25% for banks and FIs, and at 14% for NBFCs.



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Coronavirus – Economic Issues

What is a ‘Black Swan’ Event?


From UPSC perspective, the following things are important :

Prelims level: ‘Black Swan’ Event

Mains level: Read the attached story

A study by the Reserve Bank of India (RBI) has spoken about the possibility of capital outflows to the tune of $100 billion (around Rs 7,80,000 crore) from India in case of a major global risk scenario or a “black swan” event.

What is a ‘black swan’ event?

  • A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.
  • These events are said to have three distinguishing characteristics –
  1. they are extremely rare and outside the realm of regular expectations
  2. they have a severe impact after they hit and
  3. they seem probable in hindsight when plausible explanations appear

When did the term originate?

  • The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001, and later popularised in his 2007 book – The Black Swan: The Impact of the Highly Improbable.
  • It is described as one of the 12 most influential books since World War II.
  • In his book, Taleb does not try to lay out a method to predict such events, but instead stresses on building “robustness” in systems and strategies to deal with black swan occurrences and withstand their impact.

Behind the metaphorical name

  • The term itself is linked to the discovery of black swans.
  • Europeans believed all swans to be white until 1697, when a Dutch explorer spotted the first black swan in Australia.
  • The metaphor ‘black swan event’ is derived from this unprecedented spotting from the 17th century, and how it upended the West’s understanding of swans.

When have such events occurred in the past?

  • Interestingly, Taleb’s book predated the 2008 global financial crisis – a black swan event triggered by a sudden crash in the booming housing market in the US.
  • The fall of the Soviet Union, the terrorist attack in the US on September 11, 2001, also fall in the same category.

Is the Covid-19 pandemic a black swan event?

  • Taleb does not agree with those who believe it to be one.
  • Rather, he called it a “white swan”, arguing that it was predictable, and there was no excuse for companies and governments not to be prepared for something like this.
  • While the outbreak of any pandemic is difficult to individually predict, the possibility of one occurring and having a major impact on systems around the world was known and documented.


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Coronavirus – Economic Issues

[pib] SVANidhi se Samriddhi Program


From UPSC perspective, the following things are important :

Prelims level: SVANidhi se Samriddhi Program

Mains level: Atmanirbhar package

The Ministry of Housing and Urban Affairs (MoHUA) has launched ‘SVANidhi se Samriddhi’ program in additional 126 cities across 14 States/ UTs.

About PM SVANidhi Scheme

  • The Pradhan Mantri Street Vendor’s Atmanirbhar Nidhi Scheme is aimed at benefiting over 50 lakh vendors who had their businesses operational on or before March 24 2020.
  • It is a Central Sector Scheme.
  • The scheme was announced by Finance Minister as a part of the economic package for those affected by the COVID-19 pandemic and lockdown.
  • The loans are meant to help kick-start activity for vendors who have been left without any income since the lockdown was implemented on March 25.
  • The scheme was valid until March 2022.

What is SVANidhi se Samriddhi Program?

  • SVANidhi se Samriddhi program was started to provide social security benefits to street vendors for their holistic development and socio-economic upliftment.
  • Quality Council of India (QCI) is the implementing partner for the programme.
  • Under the program, socio-economic profiling of PMSVANidhi beneficiaries and their families is conducted to assess their eligibility for 8 Government of India’s welfare schemes and facilitate sanctions of eligible schemes.

These schemes include:

  1. Pradhan Mantri Jeevan Jyoti Bima Yojana,
  2. PM Suraksha Bima Yojana,
  3. Pradhan Mantri Jan Dhan Yojana,
  4. Registration under Building and other Constructions Workers (Regulation of Employment and Conditions of Service) Act (BOCW),
  5. Pradhan Mantri Shram Yogi Maandhan Yojana,
  6. National Food Security Act (NFSA) portability benefit – One Nation One Ration Card (ONORC),
  7. Janani Suraksha Yojana, and
  8. Pradhan Mantri Matru Vandana Yojana (PMMVY).


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Coronavirus – Economic Issues

Highlights of the Inequality Kills Report


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Pandemic and inequality

The COVID-19 pandemic has heightened economic inequalities across the world says the Inequality Kills Report.

Try substantiating this:


Q. Extreme inequality is a form of ‘economic violence’—where structural and systemic policy and political choices are skewed in favor of the richest and the most powerful people. Critically examine.

What is the “Inequality Kills” Report?

  • “Inequality Kills: The unparalleled action needed to combat unprecedented inequality in the wake of COVID-19” is a report released in January 2022 by Oxfam, a U.K.-based consortium.
  • The report argues for sustained and immediate action to end the pandemic, address global inequality and initiate concerted measures to tackle the climate emergency.
  • The central argument of the report is that inequality is a death sentence for people that are marginalized by social and economic structures and removed from political decision-making.

Key highlights

  • Billionaire variants: Identifying this process as “the billionaire variant”, the report says that this vertical aggregation of global wealth into the hands of a few is “profoundly dangerous for our world”.
  • Pauperization: 160 million people were rendered poor during the pandemic, while the ten richest people doubled their fortunes since the start of the pandemic.
  • Vaccine apartheid: Holding governments to account the report identifies “vaccine apartheid” (unequal access to vaccines between countries) and the lack of universal vaccination programs in many countries.
  • Inflation: It also demonstrates how emergency government expenditure (estimated at $16 trillion) that was meant to keep economies afloat during this crisis, inflated stock prices.
  • Collective: This resulted in billionaires’ collective wealth increasing by $5 trillion during the pandemic.

Why does the report say that inequality kills?

  • For the writers of the report inequality is not an abstract theory.
  • Instead, they see it as institutionalized violence against poorer people.
  • Extreme inequality is a form of ‘economic violence’—where structural and systemic policy and political choices that are skewed in favor of the richest and the most powerful people.
  • This results in direct harm to the vast majority of ordinary people worldwide.

Implications of inequality

  • Crime and violence: The report identifies higher inequality with more crime and violence and less social trust.
  • Impact on marginalized: The brunt of inequality and the violence is borne, for instance, by women across the world, Dalits in India, Black, Native American and Latin persons in the US and indigenous groups in many countries.
  • Victimization of women: Pointing to the example of women, the problem runs a lot deeper as 13 million women have not returned to the workforce and 20 million girls are at risk of losing access to education.

Way ahead

The “Inequality Kills” report proposes far-reaching changes to structures of government, economy and policy-making to fight inequality.

  • Vaccine sharing: It urgently asks for “vaccine recipes” to be made open-source so that every qualified vaccine manufacturer can manufacture them.
  • Taxing the opportunists: The report then asks for governments to claw back the wealth from billionaires by administering solidarity taxes higher than 90% especially on the billionaires that have profited during pandemic.
  • Taxation reforms: The report asks for permanent cancellation of tax havens, progressive taxation on corporations and an end to tax dodging by corporations.
  • Welfare: The report then suggests that this regained wealth be redirected towards building income safety nets, universalizing healthcare for everyone, investing in green technologies and democratizing them, and, investing in protecting women from violence.


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Coronavirus – Economic Issues

The stepping stones in the post-pandemic world


From UPSC perspective, the following things are important :

Prelims level: UNCTAD

Mains level: Paper 3- Opportunities for India in post-Pandemic world


The COVID-19 pandemic has profoundly impacted lives and livelihoods across the world. Governments, global institutions, industry, academia and non-profit organisations around the world have joined hands to tackle the global challenge and help countries rebuild their economies.

Criticality of international cooperation and role for India

  • The novel coronavirus pandemic has once again highlighted the criticality of international cooperation in combating current and future challenges.
  • Areas of cooperation: Key among these include economic growth, building competitiveness of the investment climate, ensuring sustainable development paths and adapting to technology acceleration.
  • Strengthening global partnership: Building resilience to cope with the threats posed by pandemics and other man-made and natural disasters has necessitated strengthening global partnerships now more than ever.
  • Global partnerships help in building mutual trust and understanding by agreeing upon common rules and standards and sharing of best practices.

Areas to focus on

[1] Challenge of long term sustainability of growth process

  • While the world economy is rebounding strongly, the long-term sustainability of the growth process needs to be strengthened.
  • Exit from the massive stimulus packages itself may pose risks of economic and financial instability.

[2] Challenges of supply chain management:

  • The pandemic severely disrupted global supply chains and set the global trade trajectory on a downward path.
  • Even as the world emerges from the pandemic, facilitating medical supplies and essentials will continue to remain a top priority and for this, supply chains will need to be kept flowing.
  • For this year, the United Nations Conference on Trade and Development (UNCTAD) indicates an increase of 22.4% in the value of global merchandise trade compared with 2020.
  • World trade is expected to stand about 15% higher than before the COVID-19.
  • FDI flows in developing economies also increased significantly, totalling $427 billion in the first half of 2021.
  •  Cooperation on trade facilitation for enhancing open and transparent markets, technical assistance and reduction of complex process and arrangements must be promoted.

[3] Increasing competitiveness

  • Competitiveness will be key in facilitating growth and inclusive development.
  • New opportunities and avenues across potential high growth sectors such as manufacturing and start-ups must be leveraged.
  • An ecosystem of entrepreneurship and innovation with targeted policies and interventions will contribute to enhancing productivity and generating employment.

[4] Structural changes with the emergence of digital economy

  • Certain structural changes are likely to become permanent in the future and this is especially true of the digital economy
  • Equitable adaptation: The rise of telemedicine, remote work and e-learning, delivery services, etc. necessitates equitable adaptation to advanced technologies and tools, building robust infrastructure, and occupational transitions.
  • Skill development and worker training, investments in education and vocational training, and capacity building would be some key areas of focus for filling technology gaps and nurturing new and existing talent.
  • Investment in innovation: At the same time, investments in innovation will be crucial, especially during a crisis.

[5] Climate change

  • Matter of urgency: Climate change has now acquired urgency from policymakers around the world, as seen in the recent COP26 at Glasgow.
  • International alliances and cooperation on building sustainable solutions, green technology, resource efficiency, sustainable finance, etc., must be promoted to fast-track meeting the sustainable development goals and for ensuring all-round development.

Opportunities for India

  • Attaining faster growth path: India’s recent reforms, role in combating the pandemic, and startup vibrancy, among other factors, have attracted global attention and can help it attain a faster growth path, provided its integration with the world economy and trade gains strategic intensity.
  • Reliable and trusted player: With multiple strategic shifts, India’s role as a reliable and trusted player in the comity of nations stands enhanced.

Way forward

  • In the post-pandemic world, it will be critical for India to improve on its investment climate and systematically target its export capabilities across sectors and regions.
  • Ease of doing business and new free trade agreement with major markets will help it integrate closely with the world through trade and investment partnerships.


The time for India is here and it must leverage international partnerships for ensuring a robust and sustained economic growth path.

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Coronavirus – Economic Issues

Building a resilient economy


From UPSC perspective, the following things are important :

Prelims level: TRIPS waiver

Mains level: Paper 3- Sustaining recovery


To revive and sustain growth, action is needed both at the international and national levels.

Hopes of V-shaped recovery of Indian economy

  • The National Statistical Office (NSO) had recently estimated that India’s economic growth has surged to 20.1% in the April-June quarter.
  • In its recently launched Trade and Development Report 2021, UNCTAD has estimated global growth to hit 5.3% in 2021 and growth in India to hit 7.2%.
  • According to the report, India showed strong quarterly growth of 1.9% in the first quarter of 2021, on the back of the momentum of the second half of 2020 and supported by government spending in goods and services.
  • Given the inherent fragilities, India’s growth in 2021 as a whole is estimated at 7.2%, which is one of the fastest compared to most countries in the analysis.
  • But it is still not sufficient to regain the pre-COVID-19 income level.
  • However, going forward, the economy is likely to experience a deceleration of growth to 6.7% growth in 2022.

Ways to sustain growth

1) Efforts at the International level

  • To revive and sustain growth, action is needed both at the international and national levels.
  • TRIPS waiver: The report strongly supports India’s proposed temporary suspension of the World Trade Organization TRIPS waiver.
  • Waiver is considered as a necessary step to enable the local manufacture of vaccines in developing countries

2) Steps to be taken at the national level

  • Resilience: At the national level, COVID-19 has reinforced the idea that resilience is a public good and responsibility of the state.
  • It has to be delivered through a robust public sector with the resources to make the necessary investments, provide the complementary services and coordinate the multiple activities that building resilience involves.
  • Mobilising financial resources: We need a financial system that accords a more significant role to public banks, breaks up and guards against the emergence of megabanks, and exercises stronger regulatory oversight is more likely to deliver a healthier investment climate.
  • Minimum wage:  Wages are a critical source of demand and their growth can stimulate productivity and underpin a strong social contract.
  • Minimum wages and related labour legislation are needed for appropriate protection against abusive practices.
  • Policies for informal sector: Policies targeting informality are of particular importance, especially for a country like India with a large informal economy.


It is important to build a healthy, diversified economy. For this, a strong industrial policy focusing on building digital capacities is needed. A resilient economy goes beyond offering a residual category of safety nets designed to stop those left behind from falling further.

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Coronavirus – Economic Issues

Recovery takes more than reforms


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Increasing the public spending for economic recovery

The article takes an overview of the impact of the second covid wave and suggests the need for more public spending.

Impact of reforms in recovery

  • Overlapping State-level lockdowns that started in April have now lasted for almost as long as the nationwide lockdown of 2020, impacting the economy.
  • Output may well have contracted in the beginning of this year.
  • So, though recovery will eventually come, it could be W-shaped rather than V-shaped.
  • It is asserted that the economy will recover due to the reforms planned or already implemented by the government.
  • Since 1991, the term ‘reforms’ has been used to mean both policy changes that remove restrictions on private sector activity in certain areas and those that increase profits in existing lines of production.
  • Recent examples of such reforms include the Atmanirbhar Bharat Abhiyaan launched in 2020 and the significant lowering of corporate tax in 2019, respectively.
  • However, more reforms may be ineffective in spurring recovery.
  • Presently for the private sector is not undertaking investment given their expectation of the state of the economy in the near future, upon which their revenue will depend.

Public expenditure

  • In February, believing that the peak of the epidemic had been crossed, the government reverted to fiscal consolidation or the paring down of the fiscal deficit.
  •  Accordingly, it raised its budgeted expenditure by less than 1% in the last Budget.
  • But now, with a possible further contraction of the economy, to continue with the frigid fiscal stance would be disastrous.
  • Data from the Centre for Monitoring Indian Economy show that unemployment has risen in May, indicating slack demand for output.
  • With this knowledge, the private sector is unlikely to respond with alacrity to liberalising reforms.

Way forward

  • The objective is to revive the economy, public spending is the instrument and the funding must be found.
  •  It need not involve money creation.
  • India’s public debt is low by comparison with the OECD countries, and debt financing remains an option. 
  • Even if money financing is adopted, it need not cause accelerating inflation.
  • How the expansion is financed is less relevant for inflation at least in the near term. 

Consider the question “Are the economic reforms enough to ensure the recovery of the economy? Also, examine the importance of public spending for economic recovery.”


Reforms albeit important for the economy in long run, may not be much effective in an economy battered by the pandemic. What we need is public spending and welfare measures.

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Coronavirus – Economic Issues

Tackling rural economic distress


From UPSC perspective, the following things are important :

Prelims level: MGNREGS

Mains level: Paper 2- Need to strengthen the PDS and MGNREGS

The disruption caused by the second Covid wave has added to the hardship faced by the migrant workers and the rural poor. Dealing with it requires strengthening of  PDS and MGNREGS.

Distress due to second Covid wave

  • Several States have imposed lockdown amid second Covid wave which will have severe implications for the livelihoods of those in the informal sector.
  • Migrant workers and the rural poor have been facing great distress over the past one year and the crisis for food and work is only going to intensify further.
  • The migrants have again become vulnerable due to the lockdown in different cities.
  • In this context, there is an urgent need to strengthen the public distribution system (PDS) and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

Steps need to be taken

  • The government announced 5 kg free foodgrains for individuals enlisted under the National Food Security Act (NFSA), for May and June 2021.

1) Changes in PDS

  • Expand coverage: The government should expand PDS coverage immediately and include all eligible households under the schemes.
  • According to an independent study, about 100 million people are excluded from the ration distribution system owing to a dated database based on the 2011 Census.
  • Extend period: The Centre should also extend the free foodgrains programme to a year instead of limiting it to two months.

2) Expand MGNREGS

  • The Centre had allocated ₹73,000 crore for 2021-22 for MGNREGS and notified an annual increment of about 4% in wages. 
  • Both these provisions are inadequate to match the requirements on the ground.
  • The central allocation for MGNREGS is about ₹38,500 crore less than last year’s revised estimate.
  • The budget for 75-80 days of employment in the year for 6.5 crore families given the current scale of economic distress.
  • By this rationale, at the current rate of ₹268/day/person, at least ₹1.3 lakh crore will have to be budgeted.
  • The government should also re-consider its decision of a mere 4% increase in MGNREGS wages and hike it by at least 10%.


A large population is facing hunger and a cash crunch. The situation is only becoming more dire as the pandemic continues to rage on. Therefore, the Union government should prioritise food and work for all and start making policy reforms right away.

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Coronavirus – Economic Issues

COVID & Economic Inequality


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Worsening inequality amid pandemic

Pandemic hit hard the lives, livelihood and the economy. It has also worsened income inequality. The article deals with the issues of impacts of pandemic and suggests ways to revive growth the deal with income inequality.

Need to address growth and inequality issue

  • The second wave of the pandemic is spreading to rural areas also.
  • It is known that rural areas have poor health infrastructure.
  • Similar to the first wave, inequalities are also increasing during the second wave.
  • The country has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population.
  • According to the State of Working in India 2021 report of the Azim Premji University, the pandemic would push 230 million people into poverty.
  • CMIE data shows a decline in incomes and rising unemployment during the second wave.
  • U-shaped impact: The recent RBI Bulletin says that the impact of the second wave appears to be U-shaped.
  • In the well of the U are the most vulnerable — blue collar groups who have to risk exposure for a living and for rest of society to survive.

K-shaped recovery and rising inequality

  • The recovery seemed to be K-shaped during the first wave.
  • The share of wages declined as compared to that of profits.
  • A large part of the corporate sector managed the pandemic with many listed companies recording higher profits.
  • On the other hand, the informal workers including daily wage labourers, migrants, MSMEs etc. suffered a lot with loss of incomes and employment.
  • The recovery post the second wave is also likely to be K-shaped with rising inequalities.

Policies needed for higher growth and reduction in inequality

1) Vaccination and healthcare facilities

  • An aggressive vaccination programme and improving the healthcare facilities in both rural and urban areas is needed.
  • Reducing the health crisis can lead to an economic revival.
  • Vaccine inequality between urban and rural areas has to be reduced.
  • The crisis can be used as an opportunity to create universal healthcare facilities for all, particularly rural areas.
  • Other states can learn from Kerala on building health infrastructure.

2) Investment in infrastructure

  • The budget offered some good announcements relating to capital investment in infrastructure.
  • The Development Financial Institution (DFI) for funding long-term infrastructure projects is being established.
  • This can revive employment and reduce inequalities.
  • The government has to fast track infra investment.

3) Safety net for vulnerable

  • The informal workers and other vulnerable sections including MSMEs have been dealt back-to-back blows due to the first and second waves.
  • A majority of workers have experienced a loss of earnings.
  • Therefore, the government has to provide safety nets in the form of free food grains for six more months, expand work offered under MGNREGA in both rural and urban areas.
  • The government also need to undertake a cash transfer to provide minimum basic income.

Policies for growth

  • Focus on demand: On economic growth, the RBI Bulletin says that the biggest toll of the second wave is in terms of a demand shock as aggregate supply is less impacted.
  • Investment: In the medium term, the investment rate has to be increased from the present 30 per cent of GDP to 35 per cent and 40 per cent of GDP for higher growth and job creation.
  • Export: It is one of the main engines of growth and employment creation.
  • There is positive news on exports as the global economy is reviving.
  • Protectionist trade policy: In recent years India’s trade policy has become more protectionist and the country has to reduce import tariff rates.
  • Role of fiscal policy: In the near term, fiscal policy has to play a more important role in achieving the objectives of growth, jobs and equity by expanding the fiscal space by restructuring expenditure, widening the tax base and increasing non-tax revenue.

Consider the question “Two waves of the Covid pandemic have worsened the inequality. India has to address the issue of rising inequalities for achieving higher sustainable growth and the well-being of a larger population. Suggest the policies that India should follow for higher growth and reduction in inequality.”


Vaccination, expansion in rural healthcare and cash transfers should be part of the strategy to boost demand and address inequalities.

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Coronavirus – Economic Issues

What is Vaccine Tourism?


From UPSC perspective, the following things are important :

Prelims level: Not Much

Mains level: Vaccine for covid

A couple of days ago, reports emerged of a Dubai-based tour operator offering a 24-day package tour from Delhi to Moscow that has included two shots of the Russian Sputnik-V vaccine.

What is vaccine tourism?

  • In India, the term “vaccine tourism” became popular late last year when reports emerged of several tour operators offering packages to the US with the additional benefit of a vaccine shot.
  • Meanwhile, South Africans are said to be flying to Zimbabwe, Canadians and South Americans are traveling to the US for jabs, while tour operators in Europe are offering trips to Russia for Sputnik V shots.
  • It is said that Russia and the Maldives are already working on programs to offer people abroad the chance to get vaccinated during a visit; similar offerings are sprouting in the US as well.

Why is it gaining popularity?

  • In fact, vaccine tourism is an emerging trend in countries where vaccines are in short supply, or where certain groups are still restricted from being inoculated.
  • Still, there are only a few countries in the world (parts of the US, Russia, Slovakia, Zimbabwe, etc) that don’t restrict their vaccination policy to local residents.
  • Currently, it is not illegal to travel to a foreign country to get vaccinated if air travel is allowed.
  • Recently, Seychelles announced that only vaccinated visitors from India, Pakistan, and Bangladesh who have completed two weeks after their second dose are permitted to travel to and enter the island nation, with proof.

Can Indians go abroad to get vaccinated for Covid-19?

  • There may be no need for anyone from India to go abroad for vaccination since all eligible Indians will be vaccinated in the country by the end of this year – that too, at the most reasonable rates possible.
  • However, the idea of vaccine tourism is gaining momentum in India.
  • Many Indians, who fled to Dubai just before the international flight ban came into effect last month, are said to be availing of the Chinese vaccine Sinopharm shots in the UAE.

Not to be confused with Vaccine Passport

  • Sometimes, vaccine tourism is confused with vaccine passports, which is a more regulated practice gaining currency around the world.

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Coronavirus – Economic Issues

An aggressive vaccination drive holds the key to economic revival


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Economic recovery and challenges posed by second covid wave

The article highlights the challenges posed by the second wave of covid and how aggressive vaccination could help dealing with the issue.

Severe second covid wave in India

  • India’s daily new cases have surged past 1,50,000, much above the first peak.
  • In India’s first wave, the increase from 50,000 to about 1,00,000 cases took about 50 days; in the second wave, it’s taken just 13.
  • To start with, the second wave was more concentrated, with Maharashtra accounting for 60 per cent of cases.
  • While the top five states still account for about 65 per cent of cases, the reproduction (R) factor in almost 10 states is estimated to be two or higher, creating risks for a wider and more rapid spread, if unaddressed.

Lessons from the first wave

  • Policymakers, businesses and households have all learnt from the first wave and with the private sector better adapted to “live with the virus”.
  • Therefore, the economic costs should hopefully not be comparable to the first wave. Yet, they may not be trivial either.
  • The five states that account for 65 per cent of new cases also account for almost 36 per cent of GDP.
  • As virus cases have grown and restrictions have been imposed, retail and recreational mobility across these five states, is down 10 per cent since mid-March.
  • Labour market surveys have also begun to show discernable impacts on both participation and unemployment rates.

Implications of unequal recovery for developing countries

  • The IMF projects India’s FY22 growth at 12.5 per cent, this would still leave India about 8-9 per cent below the level of output that was projected pre-pandemic for the end of 2021-22.
  • The challenge for emerging markets is that, given the quantum of fiscal and monetary space expended in combating the first wave, space to respond to subsequent waves will be constrained.
  •  Owing to the fiscal support and pace of vaccinations the US will be the only large economy, apart from China, to surpass its pre-pandemic path.
  • This, resulted in increased US yields, tightened global financial conditions, induced dollar strength and triggered
  • All this makes it harder for emerging economies to respond expansively to domestic shocks.
  • In effect, the heterogeneity of the recovery across developed and emerging markets is imposing policy constraints on the latter which, ironically, will simply compound the economic divergence.

Challenges for India

  • India’s fiscal space to respond to a second wave appears constrained due to the following two factors:
  • 1) In India’s case, consolidated public debt will approach 90 per cent of GDP.
  • 2) The consolidated public sector borrowing requirements are budgeted above 11 per cent of GDP in FY22.
  • The dependence on budgeted asset sales has only increased, both as a hedge to tax revenues that could be impacted from a second wave, and as a means of protecting expenditures.
  • It will be equally crucial to leaving enough space for higher MGNREGA demand and other safety nets on account of a second wave, even while protecting capital expenditures — which generate large multiplier effects on the economy.
  • Similarly, monetary policy is already very accommodative, and with core inflation sticky and elevated, global deflationary pressures entrenched, there are natural limits to the degree of more monetary accommodation.

Aggressive vaccination is the key

  • Israel, the UK and the US have all demonstrated how aggressive vaccinations can bend the COVID-curve.
  • Therefore, the Indian government’s decision to approve a third vaccine and fast-track emergency approval for foreign-produced vaccines is unambiguously positive.
  • On the demand side, of an estimated 100-110 million population of seniors (60-plus) in India, only about 40 million have taken the vaccine over the last six weeks, suggesting a reluctance to get vaccinated.
  • But, in fact, it’s crucial to ensure the vulnerable — those whose probability of hospitalisation is the highest — are fully vaccinated to reduce pressure on the health infrastructure.

Consider the question “What are the challenges posed to the developing countries by heterogeneity of recovery across the developed and developing countries?


Vaccinations should be construed as simultaneously delivering both a positive demand and supply shock (for the economy), and a negative demand shock (for health infrastructure), thereby providing the best chance to decisively break the trade-offs between lives and livelihoods that bedevilled emerging markets all of last year.

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Coronavirus – Economic Issues

[pib] Shramshakti Portal


From UPSC perspective, the following things are important :

Prelims level: Shramshakti Portal

Mains level: Welfare of the migrant workers

The Union Minister of Tribal Affairs has launched the “ShramShakti” Portal.

Earlier we had ONORC move, now a repository for migrant workers. Keep a tab on all such updates for the welfare of migrant workers.

Shramshakti Portal

  • It is a National Migration Support Portal.
  • It will record various data including demographic profile, livelihood options, skill mapping, and migration pattern.
  • It would effectively help in the smooth formulation of state and national level programs for migrant workers.

Why need such a portal?

  • Migrants all over the country had to face after the lockdown was announced due to the pandemic caused by a coronavirus.
  • The migration of the tribal population is distress-driven and the migrants are exposed to difficult and unsafe conditions.
  • Sometimes they face trafficking or wage harassment issues including many occupational hazards at the workplace.
  • The lack of real-time data of migrants was the biggest challenge for governments in formulating effective strategies and policy decisions for the welfare of migrant workers at both source and destination states.

Benefits of the portal

  • The tribal migration repository would be able to successfully address the data gap and empower migrant workers who generally migrate in search of employment and income generation.
  • It would also help the government for linking the migrant population with the existing Welfare Scheme- under Aatmanirbhar Bharat.

A move for tribals

  • Tribal migrant workers often have low awareness about their rights and entitlements and ways to access services and social security in source and destination areas.
  • With this, they will be able to demand and access services, rights, and entitlements related to livelihood and social security at their village before migration, as well after migration at destination towns and cities.

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Coronavirus – Economic Issues

The growth India deserve


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Strategy for full recovery

The Indian economy has been showing the green shoots in the results of the third quarter. However, the recovery is far from complete. The article suggests the strategy to get to the 5 per cent trend line.

Divergent performance after lockdown

  • At the end of the third quarter, the economy is showing a hugely divergent performance.
  • Pharmaceuticals and chemicals are showing growth on their Year-To-Date numbers.
  • FMCG reached last year’s level in the second quarter.
  •  Construction equipment are showing a huge recovery, with record sales numbers in the last three months, driven by rural demand from sales to individuals.
  • Capital goods are still sluggish with YTD numbers well down on last year, but are now showing some signs of life.
  • In contrast, travel and tourism, real-estate and construction, and retail, are all still at under half last year.
  • These are high employment sectors, and salaried employment has correspondingly taken a big hit, with potentially longer term effects.

How to achieve ‘full recovery’

  • Full recovery means getting back to the trend line of growth where we would have been pre-COVID.
  • We need to aspire to grow 9 per cent for three years, which is what will get us back to our 5 per cent trend line of growth by 2024.
  • The recovery underway is solid, but we need measures to sustain and deepen it.
  • The government can do three things.

3 suggestions to sustain the recovery

1) Stimulate the economy

  • The most immediate fiscal stimulus possible is to put cash into the economy.
  • Distribute the pending tax refunds, pay the bills of all companies, pay off the arbitration awards pending where the government has lost cases, and pay state governments their pending GST dues.
  • All this will run into a few trillion rupees, and it will be cash that immediately stimulates the economy.

2) Invest in public health infrastructure

  • Some preparation is underway to distribute vaccines, but there is need to go much further.
  • Centre should finance state government efforts to build an extensive public health network so we are equipped to handle a possible second wave of the virus.
  • If we demonstrate that we are much more prepared in February and March 2021 than we were in April and May 2020, we will spread confidence.
  • Government should work in partnership with private sector hospitals.

3) Invest in inftrstructure

  • There are dozens of projects stuck as funds are not available.
  • The 20 trillion infrastructure pipeline needs to have some cash flow in it.
  • The COVID crisis revealed awful things about living conditions in slums across our cities.
  • We can put in place the right public-private programme to provide decent, accessible housing, with quick and cheap connectivity into our cities.
  • This could trigger a building boom that would stimulate demand like nothing else.

How to finance the spending: Privatisation program

  • Government can manage the resource for spending through privatisation program.
  • Our current stock market boom says that buyers are ready to invest. But public-sector stock values are still depressed.
  • The best way to see them take off is to announce that the government intends to reduce its share-holding to 26 per cent across public-sector banks, steel companies, oil companies, and every manufacturing company and hotel it currently owns.
  • To avoid opposition to such reforms, we must operate consistent with our democratic institutions.
  • We need discussion papers for public comment, the debate in Parliament, hearing out stakeholders, and compromise with the interests of state governments.

Consider the question “What are the measures India needs to take to achieve the complete recovery of the Indian economy disrupted in the wake of the pandemic.”


Unless we act now we will have a stunted recovery. We must use our economic crisis to set some bigger things right. 2021 will be a year to welcome if it returns us to the growth trajectory we deserve.

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Coronavirus – Economic Issues

India’s challenges in maintaining its viability against competitive economies


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Relocation of supply chains and challenges India faces

The article deals with the challenges India faces in attracting the relocating supply chains in the wake of the pandemic.

Is China losing its appeal

  • Some labour-intensive industries, such as textiles and apparels, have been moving to Bangladesh and Sri Lanka as labour costs in China are increasing.
  • But trends in other industries show that businesses have mostly remained in China.
  • COVID-19 crisis has resulted in firms establishing relatively small-scale operations elsewhere.
  • This is perceived as a buffer against being completely dependent on China, referred to as the ‘China +1’ strategy.

3 Reason for firms to remain in China

  •  1) Starting an enterprise and maintaining operations in China are much easier than elsewhere.
  • 2) Chinese firms are nimble and fast, which is evident from the quick recovery of Chinese manufacturing after the lockdown.
  • 3) Many global companies have spent decades building supply chains in China, getting out would mean moving the entire ecosystem.

3 Challenges facing India

  • This has led to intensification of competition among Asian countries to be ‘plus one’  in the emerging manufacturing landscape.
  • India faces three challenges in this race.

1) Increasing domestic public investment

  • First is the task of increasing domestic public investments, which have implications for both demand and supply sides.
  • In India, even before the pandemic, the growth in domestic investments had been weak,
  • This seems to be the opportune time to bolster public investments as interest rates are low globally and savings are available.
  • Private investments would continue to be depressed, due to the uncertainty on the future economic outlook.

2) Reforms in trade policy

  • India needs a major overhaul in her trade policy world trade had been rattled by tendencies of rising economic nationalism and unilateralism leading to the return of protectionist policies.
  • A revamped trade policy needs to take into account the possibility of two effects of the RCEP:
  • 1) Walmart effect: It would sustain demand for basic products and help in keeping employee productivity at an optimum level, but may also reduce wages and competition due to sourcing from multiple vendors at competitive rates.
  • 2) Switching effects: It would be an outcome of developed economies scouting for new sources to fulfil import demands, which requires firms to be nimble and competitive.
  • Trade policy has to recognise the pitfalls of the present two-track mode, one for firms operating in the ‘free trade enclaves’ and another for the rest.
  • A major fallout of this ‘policy dualism’ is the dampening of export diversification.
  • The challenge is to make exporting activity more attractive for all firms in the economy.

3) Increasing women’s participation in labour force

  • While India’s GDP has grown by around 6% to 7% per year women’s labour force participation rate has fallen from 42.7% in 2004–05 to 23.3% in 2017–18.
  • This means that three out of four Indian women are neither working nor seeking paid work.
  • Globally, India ranks among the bottom ten countries in terms of women’s workforce participation.
  • When Bangladesh’s GDP grew at an average rate of 5.5% during 1991 and 2017, women’s participation in the labour force increased from 24% to 36%.
  • India could gain hugely if barriers to women’s participation in the workforce are removed.
  • The manufacturing sector should create labour-intensive jobs that rural and semi-urban women are qualified for.

Consider the question “Relocation of supply chains offers an opportunity for India. However, it faces several challenges in attracting these relocating supply chains. What are these challenges? Suggest measures to deal with these challenges.”


India’s approach to the changed scenario needs to be well-calibrated. The stage is set for a new ‘Asian Drama’. What will be India’s role in it? Well, it will not be on the basis of past accolades, for sure.

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Coronavirus – Economic Issues

Atmanirbhar Bharat Abhiyan 3.0 Package


From UPSC perspective, the following things are important :

Prelims level: Atmanirbhar Bharat Abhiyan

Mains level: Self-reliance measures

Finance Minister has announced a fresh set of relief and stimulus measures for the economy worth ₹1.19 lakh crore, including a scheme to boost re-employment chances of formal sector employees who lost their jobs amidst the COVID-19 pandemic.

Assist this newscard with:

[Burning Issues] Atmanirbhar Abhiyan Package

Atmanirbhar Bharat

  • Atmanirbhar Bharat, which translates to ‘self-reliant India’ or ‘self-sufficient India’, is the vision of our PM of making India a bigger and more important part of the global economy.
  • It doesn’t mean “self-containment”, “isolating away from the world” or being “protectionist”.
  • It calls for pursuing policies that are efficient, competitive and resilient, and being self-sustaining and self-generating.
  • The five pillars of ‘Atmanirbhar Bharat’ are stated as economy, infrastructure, technology-driven systems, vibrant demography and demand.

Highlights of the Package 3.0

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Coronavirus – Economic Issues

Growth compulsion, fiscal arithmetic


From UPSC perspective, the following things are important :

Prelims level: Fiscal deficit and government budget

Mains level: Paper 3- Impact of pandemic on Indian economy

The government faces the challenge of high fiscal deficit and declining revenue. This article discusses the challenge and suggests the way forward to deal with the situation.

Dismal growth prospects

  • At (-)23.9% contraction for the first quarter of 2020-21, India’s growth showed one of the highest contraction globally.
  • What is most surprising in the Q1 data is that the sector ‘Public Administration, Defence and other Services’ contracted at (-) 10.3%.
  • This means that there was no fiscal stimulus.
  • The 2020-21 real GDP growth for India is forecast in the range of (-) 5.8% (RBI) to (-) 14.8% (Goldman Sachs).
  • The OECD in its September 2020 Interim Economic Outlook has projected a contraction of (-) 10.2% in FY21 for India.

Challenge of decline in revenue

  • Due to a sharp contraction in nominal GDP growth, central and State tax revenue, both may contract.
  • . In the first quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6%.
  • The CAG-based data pertaining to 19 States show a contraction of (-) 45% in their own tax revenues.
  • Given the adverse impact of the lockdown, even the budgeted non-tax revenues are not likely to be realised.
  • The revenue calculations of the Budget were made on the assumption that the nominal income of the country would grow at 10%.
  • Some estimates indicate that the tax and non-tax revenue and non-debt capital receipts in the current fiscal may fall well short of the budget estimates by an amount higher than ₹5-lakh crore.
  • The combined fiscal deficit of the Centre and the States will have to make up for the shortfall in tax and non-tax revenues, if the level of budgeted expenditures is to be maintained.

Challenge of widening of fiscal deficit

  • In order for the central government to maintain the level of budgeted expenditure and also provide for additional stimulus, its fiscal deficit may have to be increased to close to an estimated 8.8% of GDP.
  • If one adds the Centre’s and States’ fiscal deficit, the combined fiscal deficit amounts to 13.8% of GDP.
  • If the nominal GDP actually contracts in 2020-21, the fiscal deficit as the percent of GDP would go up further.

Role of the RBI

  • The International Monetary Fund, in its June 2020 update of the World Economic Outlook, estimated the fiscal deficit of India and China at 12.1% of GDP.
  • India doesn’t have adequate resources to support a fiscal deficit of nearly 14% of GDP.
  • All this will therefore require substantial support from the Reserve Bank of India which will have to take on itself, either directly or indirectly, a part of the central government debt.
  • In the direct mode, the RBI takes on the debt directly from government at an agreed rate.
  • It took India long to move away from the automatic monetisation of debt.
  • Even if the RBI wants to support the borrowing programmes, it should not do so directly.
  • The indirect method is preferable as the market still sends out the signals on interest rate.
  • In both cases, the RBI is the provider of liquidity.
  • The question ultimately relates to the extent of debt monetisation that may be undertaken.
  • The country has also to guard against high inflation.

Role of government

  • The economic situation warrants enhanced government expenditure.
  • It appears that governments are withholding expenditure. That is not the right approach.
  • At the same time, there is a limit to monetisation of debt.


Perhaps the best course of action would be to keep the combined fiscal deficit at around 14% of GDP in the current year and find ways to finance it. This will have to be brought down gradually. It may take several years of normalisation.

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Coronavirus – Economic Issues

Case for principles of sound public policy


  • Due to extreme uncertainty, several adventurous prescriptions have been put forth.

Following are 4 unconventional measures and issues with them are discussed here.

1) Shoud we change the Inflation targeting regime?

  • Monetary policy committee (MPC) concluding that elevated inflation has constrained it from easing policy rates further.
  • One way out of this is for the government to relax the inflation-targeting framework.
  • This would involve greater tolerance for higher levels of inflation or by extending the period over which the MPC has to meet its inflation target.
  • Others have suggested shifting from headline to core-inflation as the nominal anchor of monetary policy or incorporating other indicators such as nominal GDP explicitly into the framework.
  • The more extreme ones talk about doing away with the inflation targeting framework altogether.

Why changing the inflation targeting regime will not be helpful

  • There is a strong argument for the MPC to look beyond the current spike in inflation and ease rates further.
  • But disagreements with either the rationale or the stance of the committee members must not be construed as disagreements with the framework.
  • Raising the tolerance threshold may sound appealing now, but it will inject a degree of uncertainty and unpredictability in monetary policy.
  • Considering that anchoring expectations around the inflation target takes time, frequent revisions are unlikely to help stabilise household expectations.
  • While explicitly signalling  will be one of deviating from a rule-based framework.

2) What we shift to Multiple Indicator Structure?

  • Such a move would bring back the situation of the pre-MPC days.
  • In pre-MPC days there was far greater uncertainty over monetary policy.
  • In pre-MPC days there was no clarity over the indicator that was dictating the stance of the RBI governor or which indicator would be given preference, and when.
  • Such proposals go against the rationale for shifting to such a framework in the first place — an inflation targeting regime.
  • Inflationg targeting regime is a well-defined anchor, is meant to facilitate greater transparency and accountability from the central bank.

Way forward

  • There must be a concerted attempt to push for more external voices in the MPC.
  • In the UK, a non-voting treasury representative sits with the MPC to discuss policy issues.

3) Should central bank effectively financing the Centre’s capital expenditure on a regular basis?

  •  This is problematic at many levels.
  • First, notwithstanding problems in estimating potential output, monetisation, even in the rarest of rare cases, should be the last resort.
  • Such an arrangement, risks tilting the balance of power in favour of the government.
  • Any government, owing to its short-term political imperatives, is likely to be seduced by the apparent simplicity of this idea.
  • Second, giving a central bank a degree of control over the government’s expenditure priorities is not a prudent approach.
  • Whatever be their policy inclinations and expenditure priorities, elected representatives have to face voters.
  • Why should unelected technocrats be in charge of determining the expenditure priorities of the government?
  • Such proposals blur the lines between fiscal and monetary policy and may lead to what some call the fiscalisation of monetary policy.

4) Should government pledge its shares in companies?

  • This raises questions. Should a sovereign pledge assets to borrow in the local currency?
  • In 1991, India had pledged gold for a foreign currency-denominated loan not a local currency loan.
  • So why the collateral? And what happens if the value of the shares pledged falls below that of the loan?


Some unconventional measures may well be needed at the current juncture. But discarding the principles of sound public policy, though it sounds appealing, could end up doing more harm than good.

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Coronavirus – Economic Issues

Reforms that will lead to economic Poorna Swaraj


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Long term prospects for Indian economy and reforms needed

The article discusses the long term and short term strategy to deal with the disruption caused by the pandemic and using it to bring about the reform in various sectors.


  • The pain of COVID is real, GST shortfall of Rs 3 lakh crore, expected new bad loans of Rs 3 lakh crore, and a 25 per cent first quarter contraction of GDP.
  • COVID will end, the last quarter was unique, and COVID has created a policy window for overdue reform.

3 Questions to be answered to determine short term measures

  • 1) Are we at the start, middle, or end of the virus?
  • This matters because life will be tentative until companies and individuals know where we are.
  • 2)Will companies will they save for a rainy day or live for today?
  • This matters because lower demand is fantastic for the environment but fatal for the economy (the paradox of thrift).
  • 3) Do we have an effective solution for professions that can’t be done without social distancing until the vaccine arrives?
  • All policy can do in the short run is ensure that disease doesn’t lead to death, unemployment doesn’t lead to hunger, and working capital problems don’t lead to bankruptcy.

Factors in favour of India in the long run

  • Our post-COVID, post-Trump, post-China, post-GST, and post US Federal Reserve economic strategy must recognise factors in our favour.
  • China’s territorial arrogance may be premature.
  • China’s credit to GDP is an unsustainable 300 per cent, many of its big companies will not survive when faced with open market, and its domestic consumption is not sufficient to substitute for global trade.
  • China’s military overreach is unifying the region and creating coalitions and alliances that they will regret but India will enjoy.
  • Muted global growth means oil prices will remain low; this is a huge macroeconomic gift for a country like India.
  • The global digitisation supercycle creates insatiable demand for software talent which would be big advantage for India.
  • Over the next few decades, most rich countries will struggle to grow.
  • This forces investors to overprice growth. And because of our past sins, India is the only big country with decades of growth left.

Reforms India need

  • Our problem is not jobs but productivity.
  • This needs compliance reform-taking an axe through our 67,000 compliances and 6,700 filings.
  • Labour law reform.
  • Banking reform: raising our credit to GDP ratio from 50 per cent to 100 per cent by licensing more banks and fixing existing ones.
  • Education reform.
  • Ease-of-doing-business reforms: reduce the number of ministries from 52 to 15.
  • Civil service reform:cut the number of people in Delhi with the rank of Secretary from 250+ to 50, a risk-averse bureaucracy must be sidestepped or overruled.

Consider the question “The disruption caused by the pandemic offers a window for India to create enduring change through economic reforms to take advantage of the opportunity provided by the pandemic. Discuss.”


We should focus on creating climate change for our entrepreneurs, firms, and citizens with reforms that will give them economic Poorna Swaraj. And take our per capita income of $2,500 to $10,000 in five years. If not now, then when?

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Coronavirus – Economic Issues

Eat Out to Help Out Scheme


From UPSC perspective, the following things are important :

Prelims level: Eat Out to Help Out Scheme

Mains level: NA

Since the lockdown began in India, different bodies representing the country’s hospitality sector have repeatedly asked the government for financial assistance to help tide over the crisis. UK’s popular Eat Out to Help Out (EOHO) Scheme can be an example of the kind of intervention in India.

Note: The ‘Eat Out to Help Out’ Scheme recently seen in news is related to Hospitality. One may get confused over Poverty and Hunger.

What is the EOHO Scheme?

  • The EOHO Scheme is an economic recovery measure by the UK government to support hospitality businesses as they reopen after the lockdown.
  • The scheme was announced as part of the Plans for Jobs summer economic update.
  • Under the EOHO Scheme, the government would subsidise meals (food and non-alcoholic drinks only) at restaurants by 50 per cent.
  • There is no minimum spending and no limit on the number of times customers can avail the offer, since the whole point of the scheme is to encourage a return to dining in restaurants.

Why was this scheme deemed necessary?

  • All over the world, the food services sector is one of the worst affected by the pandemic.
  • The top two concerns were customers avoiding restaurants for fear of contracting the virus and customers having less disposable income for dining out.
  • Instead of delivering a financial package to operators, it makes eating out more affordable for consumers directly and helps restore demand.
  • Restoring consumer demand is being seen as crucial to the UK’s economic recovery.

Can India benefit from such a scheme?

  • The main problem confronting the restaurant industry, following Unlock 1.0 in June, has been consumer fear, even as the government has remained silent about specific recovery packages aimed at the hospitality industry.
  • The government needs to work on the demand side.

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Coronavirus – Economic Issues

Differential impact of COVID and the lockdown


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Impact of covid pandemic

Though pandemic has been called as the great leveller, closer look at the impact of Covid on the marginalised section indicate otherwise. This article examines the impact of pandemic with respect to responsible factors.

The marginalised at risk

  • Preliminary data and early indirect evidence from several parts of the world indicate that the incidence of the disease is not class-neutral.
  • Poorer and economically vulnerable populations are more likely to contract the virus as well as to die from it.
  • Economic consequences of the current pandemic are likely to be most concentrated among the low wage earners.
  • Disaggregated data on COVID-19 incidence and mortality are not available for India.
  • Thus, we cannot comment on whether certain caste groups are more vulnerable to the virus than others.

Cast factor: Let’s look into CMIE survey

  • India’s lockdown was among the most stringent.
  • The first month of the severe lockdown, April 2020, witnessed a sharp rise in unemployment.
  • Let’s examine shifts in employment and unemployment rates using data from the Centre for Monitoring Indian Economy (CMIE)’s Consumer Pyramids Household Survey (CPHS) database.
  • That the proportion of employed upper castes dropped from 39% to 32% between December 2019 and April 2020, a fall of seven percentage points.
  • The corresponding fall for Scheduled Castes (SCs) was from 44% to 24%, i.e. a fall of 20 percentage points.
  • Other Backward Classes and Scheduled Tribes (STs) the fall was from 42% to 34%, 40% to 26% and 48% to 33%.
  • Thus, the fall in employment for SCs and STs was far greater in magnitude than that for upper castes.

Education factor

  • The global evidence suggests that job losses associated with COVID-19 are much more concentrated among individuals with low levels of education.
  • Those with more than 12 years of education, were much less likely to be unemployed in April 2020 than those with less than 12 years of education.
  •  Data from the India Human Development Survey for 2011-12 (IHDS-II) show that 51% of SC households have adult women who have zero years of education, i.e. are illiterate, and 27% have an illiterate adult male member.
  •  Thus, in the face of current school closures, parents of SC children would be much less equipped to assist their children with any form of home learning.

Access to technology and other factors

  • The proportion of households with access to the Internet is 20% and 10% for UC and SC households, respectively.
  •  Only 49% of SCs have bank savings, as compared to 62% of Upper Caste households.
  • Differential access to information technology, as well as disparities in the ability to invest in technology, will be critical in shaping access to online education.

Consider the question “Examine the impact of Covid on the vulnerable section of society. Suggest the measures to mitigate the impact.”


Early impacts of the pandemic-induced lockdown indicate that the resultant economic distress is exacerbating pre-existing structures of disadvantage based on social identity, and investments in education and health.

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Coronavirus – Economic Issues

Re-imagining and reinventing the Indian economy


From UPSC perspective, the following things are important :

Prelims level: Atmanirbhar Bharat Abhiyan

Mains level: Economic recovery amid coronavirus pandemic

The COVID-19 pandemic has disrupted the global economy and India is no different.  Besides the stimulus package totalling ₹20 lakh crore, a lot more needs to be done, however, to resuscitate the country’s growth engine.

Try this question:

Q.Economic reconstruction needs a multi-pronged strategy apart from economic stimulus. Discuss.

Need for a two-pronged strategy

  • At this critical juncture, India needs a two-pronged strategy to successfully navigate the current crisis and recover strongly thereafter.
  • First, minimise the damage caused by the COVID and clear a path to recovery and second, rebooting and re-imaging India by promptly exploiting new opportunities unleashed by evolving business scenarios.

Identifying the four major economic drivers:

  1. Big Business Houses which are a major contributor to GDP and large employment generators
  2. MSMEs which are the lifeline of the country, generating wealth for the middle class
  3. Startups which bring innovation and transformation to our country’s economy
  4. Approaching Indian Diasporas for driving foreign investments

Following suggestions by the author gives a way forward strategy to recover the economy:

  1. Tax incentivization

  • Big business houses should be supported by the government to reopen their operations by way of tax incentives or ease of procurement of raw materials or other goods and services on credit.
  • This will energize consumer demand and boost the functioning of the vendor or ancillary industry in the MSME sector (which has huge potential for job creation).
  1. Ensuring seamless credit flows considering NPAs

  • The RBI should consider Single One Time Window for restructuring business loans, as required, by all banks.
  • There is a high probability that non-performing assets are likely to rise once the prevailing moratorium is lifted by RBI.
  • The government and RBI also urgently need to assure banks, that their business decisions will not be questioned, to encourage credit flows.
  1. Calibrating Make in India

  • The ongoing distrust on Chinese manufacturing amid US-China spat can be very well garnered by India.
  • Making India a global trading hub – devise an incentive regime for companies setting up global trading operations from India.
  • The govt. should think of establishing self-contained “industrial cities” that earmark space for manufacturing, commercial, educational, residential and social infrastructure.
  • The Centre can prepare a five-year plan on getting at least 60 per cent of those companies, desiring to move manufacturing out of China to India.
  1. Encouraging sunrise sectors

  • It should also encourage sunrise sectors as part of re-imagining Indian economy such as battery manufacturing (storage systems)/ solar panel manufacturing.
  • The government can also consider giving impetus to “Deep Tech”-leveraged businesses — blockchain, robotics, AI, machine learning, augmented reality, big data analytics, cybersecurity, etc.
  1. Creating an ecosystem to boost startups

  • India is amongst the top start-up ecosystems globally. Several of them are in pre-Angel or Angel-Funding stages and are under significant pressure to stay afloat in view of a lack of adequate liquidity.
  • Start-ups not only help drive innovation but also create jobs, which will be very important going forward.
  • The government needs to provide significant support to the start-up ecosystem.
  1. Auto-sector reforms

  • The auto industry which contributes significantly to GDP (nearly 9%) deserves special treatment.
  • In addition to reducing GST rate, old vehicle scrap policy with tax incentives for creating a demand for new vehicles may be formulated.
  • There is a need to recognise the Auto Sales Industry channel partners as MSMEs.
  1. Plug-and-Play model for foreign investment

  • Maharashtra has created a turnkey ‘plug-and-play’ model for foreign investors.
  • Similarly, other States must get their act together, be it on land acquisition, labour laws and providing a social, environment and other infrastructure.
  • Land should be made available for projects with all necessary pre-clearances — at Centre’s level (including Environmental), State’s and Municipal dispensations.
  1. Labour law reforms

  • Reforms in labour laws do not only mean permission to hire and fire.
  • Leeway should be given to strictly enforce discipline within the factory premises and demand higher productivity.
  • The moves by U.P., M.P. and Gujarat are welcome signals.
  • The government should provide health insurance for migrant labourers as experimented by certain States.
  1. Encouraging Diaspora

  • Investments of NRIs and OCIs in India should be treated on par with those of Resident Indians as regards interest and dividend repatriation and management control of Indian companies.
  • It may be mentioned that the Chinese government had called on rich overseas Chinese to invest in China with minimum government control, and massive investments followed.
  • This has contributed to China’s prosperity and economic rise.
  • A similar investment boom can take place in India through NRIs and OCIs who have the resources and expertise in manufacturing and technology.
  1. Creating off-Shore investment centres

  • Off-Shore investment centres like Singapore can be opened in Mumbai where Indian domestic laws and taxation will not be applicable.
  • MNCs may route their investments into India through the Off-Shore Centre in Mumbai.
  • Foreign legal firms and banks along with domestic institutions can be invited to have a presence in the Off-Shore Centre.

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Coronavirus – Economic Issues

Restructuring to cushion impact on the economy


From UPSC perspective, the following things are important :

Prelims level: MPC

Mains level: Paper 3- Impact of covid and the role of government and the central bank

“The article analyses the present scenario of the economy and impact of the steps taken by the central bank and the government.” 


  • Monetary policy committee (MPC) members, through a unanimous vote, decided to keep policy rates unchanged.
  • MPC also maintained an accommodative stance.
  • This was the result of inflation hovering around 6% i.e. above the MPCs target of 4%.

Restructuring package after moratorium ends

  • Moratorium on loans ends 31 August, RBI said the way forward is a restructuring package for businesses and households.
  • Recent data released by large banks indicate that there has been a sizeable reduction in moratorium in June from 50% in April for all scheduled commercial banks (SCBs).
  • As economic activity normalizes further, the need for restructuring will be even lower.

What do the trends indicate

  • Most indicators—manufacturing and services Purchasing Managers’ Index(PMI’s) electricity output, vehicle sales, exports, imports—point to economic momentum settling at 10-15% below covid levels in the near-term.
  • The RBI’s consumer confidence survey—gauge of consumer spending—was at its lowest in May, and the one-year outlook is not promising.
  • This implies that consumption demand, especially discretionary demand, will be far lower.
  • With muted consumption, capacity utilization, which had fallen to 68.2% last December, has fallen further in the last few months.
  • Thus, investment demand is not likely to see upward momentum in the near term, even with lower interest rates.

How RBI’s intervention made the difference

  • An economic slowdown of such proportions leads to an increase in risk premium.
  • Rating upgrade to downgrade ratio of the corporate sector had fallen to 0.05 as in May from a high of 1.11 in December 2018.
  • Spread between 3-year AAA corporate bonds and sovereign bonds rose to 276 basis points on 26 March.
  • But the spread has since fallen to 50bps.
  • This was possible because of the abundant liquidity made available by RBI and credit enhancement provided by the government.

Way forward

  • RBI and the government will have to work together to revive demand.
  • Centre has already expanded its gross borrowing to ₹12 trillion.
  • Even with net tax collections at 53% of last year’s levels, the Centre has increased its spending by 13% over 2019-20.
  • The government better understand that this is the time to apply Keynesian economics.
  • Global central banks have become large buyers of sovereign debt to support the larger roles being played the governments.
  • In India, too, the Centre and states will have to spend to crowd-in private sector spending.
  • RBI’s role will be important not only as the lender of last resort but also as a buyer of government securities.
  • It has carried out its function as a central bank well, and brought a semblance of stability to financial markets.
  • It will have to do the same in the sovereign bond market.
  • More importantly, it will have to remain vigilant of impending risks to growth and inflation, and be ready to act.

Consider the question “To what extent the steps taken by the RBI and the government to stabilise the economy battered by the covid pandemic were helpful? 


As India’s central bank comes towards the end of its interest rate reduction cycle, it will have to navigate the economy through financial and macroeconomic stability. The government will also have to act in tandem with the central bank in steering the economy through this storm.



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Coronavirus – Economic Issues

Comparing fiscal responses to Covid on qualitative and quantitative basis


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- India fiscal response to Covid-19

For all the talks over the size of Atmanirbhar package, India’s response turns out to be inadequate when compared with the other countries with similar levels of per capita income. This article analyses the same.


  • India’s fiscal response is compared to countries which are similar in GDP per capita, state capacity, and structure of the labour force.
  • Before the Atmanirbhar Bharat package, India lagged significantly behind comparable developing countries.
  • As of early July, the gap seems to have narrowed.

Comparison and challenges

  •  Due to the blurring of the distinction between fiscal and monetary components, ensuring comparable and accurate figures for fiscal responses is a challenge.
  • For example, the total Atmanirbhar package is billed at 10% of GDP by the government.
  • While the headline number for India’s fiscal response in international databases is around 4% of GDP.
  • But some estimated that the new fiscal outlay is around 1.7% of GDP.
  • Vietnam, Indonesia, Pakistan, and Egypt, all while averaging less stringent measures than those in India, have announced stimulus measures that are as large or more substantial, as a share of GDP.

Demand-side interventions in the package

  • The one significant demand-side intervention in the Atmanirbhar Bharat package was ₹40,000 crore of additional outlay for the MGNREGA.
  • Most other demand-side measures involve the frontloading, consolidation, or rerouting of existing funds.

How developing countries are financing responses

  • Developing countries are resorting to drastic means to finance COVID-19 responses.
  • Actions so far include the amendment of legal budget limits.
  • Some are also exploring enhanced issuance of bonds-including a ‘pandemic bond’ by Indonesia.
  • Central banks in many emerging economies are experimenting with purchases of public and private bonds in the secondary market (quantitative easing).
  • Or some are directly purchasing government bonds on the primary market (monetising the deficit).
  • In India, the debate continues over whether the Indian government should invoke the “escape cause” in the FRBM Act.
  • Escape clause will enable the central bank to directly finance the deficit.

Cash transfer: Lessons for India

  • Demand-side interventions announced by other developing countries could provide lessons for additional measures in India.
  • Of the World Bank’s list of 621 measures across 173 countries, half were cash-based. 
  • While only 2% related to public works, a clear indication of the popularity of cash transfers over public works for income support,
  • Countries have also significantly expanded coverage of their cash transfer programmes from pre-COVID-19 levels.
  • Bangladesh and Indonesia have increased the number of beneficiaries by 163% and 111%, respectively.
  • Indonesia’s cash schemes now cover more than 158 million people or 60% of the population.
  • Additionally, the Indonesia central government has directed village authorities to focus their budgets on a cash-for-work programme.

Suggestions for India

  • India could take these actions about cash transfers into account in decisions about expanding existing transfer programmes or even creating new ones.
  • India has been a leader in employment guarantee policies with its flagship MGNREGA programme.
  • This is the right time to expand entitlements MGNREGA.
  • There is a need to introduce an urban version of the MGNREGA.
  • In India, one reason for the subdued fiscal response and the resort to monetary measures is a concern with the debt-to-GDP ratio.
  • However, aggregate demand and confidence in the economy have slumped and may not recover for many months.
  • Additional fiscal outlay -would save lives and jobs today and might prevent a protracted slowdown.

Consider the question “How India fares in comparison with other countries over its fiscal response to Covid? Also examine the utility of income support schemes related to public works against the cash transfer schemes adopted by the other countries.”


Not spending more now, therefore, might only worsen the debt-to-GDP ratio if growth remains depressed. The fiscal outlay in the form of cash and in-kind transfers and expanded public works schemes is the need of the hour.

Original op-ed:

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Coronavirus – Economic Issues

Is printing money an option to tide over the crises


From UPSC perspective, the following things are important :

Prelims level: Monetisation of debt

Mains level: Paper 3-Option to find revenue to deal with the crises.

India has been dealing with unprecedented crises-with China on border and with economy and pandemic within. Fighting these crises require resources. So, this article examines the options to raise revenue and the consequences that come with them.

Increase in financial burden to counter China

  •  The Chinese military threat calls for immediate and strategic action by our defence and foreign affairs establishments.
  • India’s war against Pakistan in Kargil in May 1999 provides hints of the financial burden of a military threat.
  • India’s defence expenditure in the war year shot up by nearly 20% from the previous year.
  •  India’s defence budget for the next financial year was 2.7% of nominal GDP, the highest in decades.
  • China is a far mightier power than Pakistan.
  • India’s defence budget has been whittled down to just 2% of GDP for the financial year 2021.
  • China’s defence budget is nearly four times larger.
  • In all likelihood, the Chinese conflict will stretch central government finances by an additional one to two percentage points of GDP.

Economics of healthcare

  •  The combined public health expenditure of States and the central government in India is a mere 1.5% of GDP.
  • While China’s is at 3% and America’s at 9%.
  • The COVID-19 epidemic is expected to linger on for another two years.
  • There is no option other than to significantly ramp up India’s health expenditure.
  • So, government will need additional funds of the equivalent of at least one percentage point of GDP to continue the fight against COVID-19.

But economy is in bad shape

  • India’s economy has four major drivers: 1) Spending on consumption. 2) Government spending. 3) Investment. 4) external trade.
  • Spending by people is the largest contributor to India’s economic growth every year.
  • For every ₹100 in incremental GDP, ₹60 to ₹70 comes from people’s consumption spending.
  • The lockdown shut off people from spending for two full months.
  • India’s economy will contract for the first time in nearly five decades.
  • With the global economy in tatters, trade is not a viable alternative to offset the loss from consumption.
  • Investment is also not a viable option at this stage since the demand for goods and services has fallen dramatically.

So, what we want is new “New Deal”

  • There are only two options to come out of this situation.
  • 1) Either put money in the hands of the needy to stimulate immediate consumption.
  • 2) Or, the government has to embark on a massive spending spree, akin to the “New Deal”.
  • New Deal was a series of programmes and projects instituted in the U.S. during the Great Depression of the 1930s.
  • Government will need to inject incremental funds of five percentage points of GDP to absorb the economic shock and kick start the spending cycle again.

Findind resources while aoiding “junk rating”

  • Additional expenditure on health, defence and stimulus package plus making up for a shortfall in revenue will lead to a fiscal deficit of 10% of GDP.
  • The only option for the government to finance its needs is to borrow copiously.
  • Borrowing will obviously push up debt to ominous levels.
  • When government debt rises dramatically, it gives rise to a “junk” crisis.
  • With rising debt levels, international rating agencies will likely downgrade India’s investment rating to “junk”.
  • Junk rating will then trigger panic among foreign investors.
  • India thus faces a tough dilemma — save the country’s borders, citizens and economy or prevent a “junk” rating.

Is printing money an option?

  • Economic theory states that if money is printed at will, it can lead to a massive spike in prices and inflation.
  • This theory has fallen flat in the past decade in developed nations such as America.
  • The U.S dollar, by virtue of being the world’s reserve currency, has in-built protection against a currency crisis that can be triggered by at-will printing of money.
  • India don’t have that protection.
  • Hence, the Reserve Bank of India can just create money at will and transfer them to government coffers electronically, some argue.
  • Whether money is printed or borrowed from others, it will still be counted as government debt.
  • And so, cannot escape a potential downgrade to a “junk” rating.

Consider the question “As the government has been dealing with the unprecedented crises, it has to explore the option of monetisation of its debt. Examine the issues with such a move.”


How India emerges from this crisis will shape not just India’s destiny but the world’s. The best course of action is to borrow unabashedly to pull India out of the crisis and deal with the consequences of a potential “junk” nation label.

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Coronavirus – Economic Issues

Different response to a different economic crisis


From UPSC perspective, the following things are important :

Prelims level: Fiscal deficit

Mains level: Paper 3- Monetary and fiscal policy response to deal with the crisis.

The economic crisis in the wake of the pandemic is different from past crises. In the past, the financial crisis led to economic shock. This time its economic shock that that is causing the financial crisis. This also means that our response to this crisis should also be different. This article elaborates on the fiscal and monetary policy response to the crisis.

Pattern followed by economic crises

  • There is a well-established pattern to economic crises in emerging markets (EMs).
  • First, because of loose fiscal and monetary policies, the economy goes into a demand overdrive.
  • Demand overdrive spikes inflation and widens the current account deficit (CAD).
  • Then, CAD is financed by foreign capital chasing the promise of even higher growth and asset prices.
  • At some point, the overdrive is perceived as unsustainable, which triggers a reassessment of growth, inflation, and financial stability.
  • Domestic and foreign investors stop new investments, large capital outflows ensue.
  • Banks stop giving new loans and rolling over old ones on fears of worsening credit quality.
  • Growth collapses and a full-blown economic crisis follows.
  • The 1995 Mexican, the 1997 Asian, the 1999 Russian, the 2008 sub-prime, and the 2013 Taper Tantrum are all examples of such crises.
  • In the case of India, the 1981-82, the 1991-92, and the 2013 crises all had the same characteristics.

Pattern in response to such crises

  • The first response is to restore confidence in policymaking.
  • It means large increases in interest rates, massive withdrawal of liquidity, and deep cuts in fiscal deficit.
  • Just before the crisis assets [which reflects in bank’s balance sheets] are severely overvalued on inflated views of growth, profits, and income prior to the crisis.
  • So, the second step is to restart the economy by restructuring the tattered balance sheets of banks, firms, and households.
  • This means debt restructuring and bank recapitalisation aided by privatisation, closures, and mergers.
  • These measures often need to be bolstered by structural reforms.
  • The economic crisis makes it easier to forge the political consensus for the reforms.

But the economic crisis caused by pandemic is different

  • Why is it different?
  • Because, before the COVID-19 outbreak far from overheating, Indian economy was slowing down.
  • The financial system had virtually shut off the flow of credit as it wrestled with its bad debt burden.
  • This is not an instance of a financial crisis turning into an economic shock weighed down by damaged balance sheets.
  • Instead, this is an instance of an economic shock that could turn into a financial crisis if the damaged balance sheets are not repaired.

So, should the response also be different?

  • Yes.
  • Do the opposite of what is done in a typical EM crisis: Cut interest rates, increase liquidity support, and allow the fiscal deficit to widen.
  • The RBI has done the first two generously, although with the coming disinflation, it needs to cut interest rates much more.
  • But, what about the fiscal policy of the government?

Fiscal policy of the government: Doing not enough

  • The government’s approach to fiscal policy, however, seems ambivalent.
  • The overall fiscal support from the government will be limited to 2 per cent of the GDP.
  • So all the revenue shortfall and the pandemic-related budgetary support must add up to 2 per cent of the GDP.
  • If the revenue shortfall is more than 2 per cent of GDP, then total spending will need to be cut.

Why fiscal policy matters for balance sheets

  • In this crisis, the causality of damage to balance sheets runs opposite.
  • Balance sheets will be damaged not because of prior excesses but because of the collapse in incomes during the lockdown.
  • Consequently, debt doesn’t need to be restructured to resume the flow of credit and get the recovery going.
  • Instead, what is needed is adequate income support to households and firms.
  • Such support will provide the needed time and space for the recovery to take hold.
  • Which, in turn, would repair much of the damage to the balance sheets.
  • But the fiscal response so far has been inexplicably restrained.

What should the government focus on

  •  What matters today is the assurance of medium-term growth and not a few higher or lower points in this year’s fiscal deficit.
  • To do that, the government needs to allow the deficit to rise.
  • This extra deficit should help accommodate the decline in revenue and also provide adequate income support.
  • Some have argued that the government, instead, needs to offset the decline on private demand by increasing public spending.
  • This is an odd argument.
  • It would mean letting demand collapse and then compensating it with higher government spending.
  • Instead, using the same resources to ensure that private demand did not decline was the more natural and efficient response.

What should be the RBI’s response

  • The RBI, too, has a very large role to play.
  • As elsewhere, it is now the only entity that has a strong enough balance sheet to provide any meaningful support.
  • The RBI is keeping markets flush with liquidity and low interest rates.
  • However, the RBI also needs to undertake extensive quantitative easing to keep bond yields from spiking given the likely large increase in deficit.
  • Because of the depth of the growth shock, bad debt will rise.
  • The natural instinct of banks is to cut back credit because of worsening credit quality.
  • To prevent this from happening, the RBI will need to extend substantial regulatory forbearance on accounting norms, provisioning rules, and, if needed, even capital requirements.
  • In addition, like the US Fed and the ECB, the RBI might also need to provide liquidity directly to corporates.
  • As of now, banks are providing liquidity to corporates supported by government guarantees as proposed now.

Consider the question “The economic crisis brought by the corona crisis is not like the ones we faced before. This crisis is about an economic shock turning into the financial crisis. So, what should be fiscal and monetary policy interventions to tackle the crisis?”


This is not a crisis like the ones before. This time around, we need to weigh not the cost of taking these measures but the cost of not taking them.

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Coronavirus – Economic Issues

We must aspire for nurturing economy


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Issues of inclusive growth

The sight of thousands of migrant workers walking thousands of kms back home after lockdown has been the watershed moment for the collective conscience of our country. This made us think about the present economic model and policies we have been adopting. So, the answer to the problems created by the present model lies in building “nurturing economy”. What is nurturing economy? Read to know…

Broadly, we can summarise the impact of pandemic as-

  • Unemployment is shooting up.
  • Supply chains of food and essentials have been disrupted.
  • Dark clouds of economic recession are on the horizon.

Invisible cost of pandemic

  • The visible cost of the pandemic in terms of the lives lost are being counted by the day.
  • But the invisible cost of hunger and impoverishment of the most vulnerable sections is yet to be effectively addressed.
  • Vulnerable section- our workers, the poor and the migrants, particularly women, are at receiving end of these invisible cost.

Health of economy before pandemic

  • The pandemic came at one of the worst possible times.
  • India’s economy has been in deep trouble since 2016.
  • In 2019-20, even before the pandemic happened, our GDP growth had dropped to 4.2 per cent, lowest growth seen in the last 11 years.
  • Even the oil prices dropped at their historic low.
  • Non-food bank credit is a good indicator of overall economic robustness.
  • By December 2019, the growth of non-food bank credit had dropped to below 7 per cent. ( lowest in the last 50 years.)

What happened to economy after the pandemic?

  • After the pandemic arrived, matters, of course, got worse.
  • In March, $16 billion of foreign capital exited the country, which is an all-time record for India.
  • India’s unemployment rate shot up to a record high of 23.8 per cent in April.
  • In the same month, Indian exports dropped by 60 per cent.
  • This was one of the biggest drops seen in any emerging market economy in the world.
  • There is a genuine risk that this year our growth will drop to an all-time low, beating the record plunge of 1979-80.

So, the pandemic has forced us to think about the building a nurturing economy, one in which Gandhiji’s Talisman is followed in word and spirit, one in which John Rawls ideas are implemented.

So, What building a nurturing economy involves?

  • Our economic and political policies must not be ends in themselves.
  • Instead, these policies should involve instruments for building a society that is secular, inclusive and nurturing.
  • It should be a society where people of all religions, caste, race and gender feel wanted and at home.
  • Environment sustainability and focus on green economy is also part of nurturing economy.
  • We should strive to create a society that respects knowledge, science and technology, and culture.

Threefold crisis emerging out of our exploitative behaviours

  • The outcome of our exploitative behaviour is a threefold crisis which describes India’s current predicament.
  • 1) Rising poverty and unemployment despite abundance.
  • 2) Rising intolerance and violence.
  • 3) Environmental catastrophe.

Consider the question “Pandemic and the predicament of migrant labours has highlighted the lack of inclusive growth in our economy. And we must look for the solution to such shortcomings in our approach. In light of this, suggest the changes that our economy must embrace to ensure inclusive growth.”


Our ambition should not be to make India the richest nation in the world. India should be an example of an equitable society, where people are not abandoned without income and work, where no one feels the insecurity of being a minority, and of being discriminated against.

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Coronavirus – Economic Issues

Who is afraid of monetisation of deficit?


From UPSC perspective, the following things are important :

Prelims level: Discretionary fiscal policy, automatic stabiliser

Mains level: Paper 3- Monetisation of debt

Rating agencies influence the decisions of investors. So, when any economy is downgraded by them, it’s certainly a cause for concern. But to restart the economic engines, governments need to spend more by borrowing. This article suggests the way to achieve both: avoiding downgrade and increasing spending. How? Read to know…

To worry or not to worry: Issue of downgrading by rating agencies

  • Some economists urged the government amid covid pandemic to go out and spend without worrying about the increase in public debt.
  • They said the rating agencies would understand that these are unusual times.
  • If they did not and chose to downgrade India, we should not worry too much about it.
  • Well, the decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3 should come as a rude awakening.
  • The present rating is just one notch above the ‘junk’ category.
  • Moody’s has also retained its negative outlook on India, which suggests that a further downgrade is more likely than an upgrade.
  •  The downgrade, Moody’s says, has not factored in the economic impact of the pandemic.
  • Any further deterioration in the fundamentals from now on will push India into ‘junk’ status.

Here is why we should be worried about a downgrade

  •  Whatever the failings of the agencies, in the imperfect world of global finance that we live in, their ratings do carry weight.
  • Institutional investors are largely bound by covenants that require them to exit an economy that falls below investment grade.
  • If India is downgraded to junk status, foreign institutional investors, or FIIs, will flee in droves.
  • The stock and bond markets will take a severe beating.
  • The rupee will depreciate hugely and the central bank will have its hands full trying to stave off a foreign exchange crisis.
  • That is the last thing we need at the moment.

So, what is the way out? Try for an upgrade!

  • We have to put our best foot forward now to prevent a downgrade and bring about an upgrade instead.
  • To do so, we need to note the key concerns that Moody’s has cited in effecting the present downgrade to our rating: slowing growth, rising debt and financial sector weakness.
  • These concerns are legitimate.

Bleak prospects

  • Many economists as also the Reserve Bank of India (RBI) expect India’s economy to shrink in FY 2020-21.
  • The combined fiscal deficit of the Centre and the States is expected to be in the region of 12% of GDP.
  • Moody’s expects India’s public debt to GDP ratio to rise from 72% of GDP to 84% of GDP in 2020-21.
  • The banking sector had non-performing assets of over 9% of advances before the onset of the pandemic.
  • Weak growth and rising bankruptcies will increase stress in the banking sector.

Fiscal deficit and growth: two concerns of rating agencies

  • The government’s focus thus far has been on reassuring the financial markets that the fisc will not spin out of control.
  • It has kept the ‘discretionary fiscal stimulus’ down to 1% of GDP.
  • That 1%  figure is most modest in relation to that of many other economies, especially developed economies.
  • ‘Discretionary fiscal stimulus’ refers to an increase in the fiscal deficit caused by government policy as distinct from an increase caused by slowing growth, the latter being called an ‘automatic stabiliser’.
  • Keeping the fiscal deficit on a leash addresses the concerns of rating agencies about a rise in the public debt to GDP ratio.
  • But it does little to address their concerns about growth.
  • The debt to GDP ratio will worsen and financial stress will accentuate if growth fails to recover quickly enough.
  • The government’s stimulus package relies heavily on the banking system to shore up growth.
  • But there is only so much banks can do.
  • More government spending is required, especially for infrastructure.

So, government need to increase fiscal stimulus without increasing public debt

  • We need to increase the discretionary fiscal stimulus without increasing public debt.
  • The answer is monetisation of the deficit, that is, the central bank providing funds to the government.
  • These fears are based on misconceptions about monetisation of the deficit and its effects.

What monetisation of debt mean?

  • A common misconception is that it involves ‘printing notes’.
  • But that is not how central banks fund the government.
  • The central bank typically funds the government by buying Treasury bills.
  • As proponents of what is called Modern Monetary Theory point out, even that is not required.
  • The central bank could simply credit the Treasury’s account with itself through an electronic accounting entry.
  • What is base money? When the government spends the extra funds that have come into its account, there is an increase in ‘Base money’, that is, currency plus banks’ reserves.
  • So, yes, monetisation results in an expansion of money supply.
  • But that is not the same as printing currency notes.

But expansion of money supply leads to inflation, what about that?

  • It could be that the expansion is inflationary.
  • This objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment.
  • In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.

No difference in borrowing from banks or RBI directly:MMT

  • Exponents of the Modern Monetary Theory (MMT) make a more striking point.
  • They say there is nothing particularly virtuous about the government incurring expenditure and issuing bonds to banks instead of issuing these to the central bank.
  • The expansion in base money and hence in money supply is the same in either route.
  • The preference for private debt is voluntary.
  • MMT exponents say it has more to do with an ideological preference for limiting government expenditure.
  • Central banks worldwide have resorted to massive purchases of government bonds in the secondary market in recent years, with the RBI joining the party of late.
  • These are carried out under Open Market Operations (OMO).
  • The impact on money supply is the same whether the central bank acquires government bonds in the secondary market or directly from the Treasury.

So why the shrill clamour against monetisation of public debt?

  • OMO is said to be a lesser evil than direct monetisation because the former is a ‘temporary’ expansion in the central bank’s balance sheet whereas the latter is ‘permanent’.
  • But we know that even so-called ‘temporary’ expansions can last for long periods with identical effects on inflation.
  • What matters, therefore, is not whether the central bank’s balance sheet expansion is temporary or permanent but how it impacts inflation.
  • As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with.

Way forward

  • We now have a way out of the constraints imposed by sovereign ratings.
  • The government must confine itself to the additional borrowing of ₹4.2 trillion which it has announced.
  • Further discretionary fiscal stimulus must happen through monetisation of the deficit.
  • That way, the debt to GDP ratio can be kept under control while also addressing concerns about growth.

Consider the question “Examine the issues involved in the direct monetisation of the debt by the government to fund the spending in  the wake of covid pandemic.”


The rating agencies should be worrying not about monetisation per se but about its impact on inflation. As long as inflation is kept under control, they should not have concerns — and we need not lose sleep over a possible downgrade.

Back2Basics: Automatic stabiliser

  • Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle.
  • Automatic stabilisers will influence the size of government borrowing.

Discretionary fiscal policy

  • Keynesian Perspective: Keynes noted that in a recession, confidence falls and the private sector cut back on spending and investment.
  • Therefore, we see a rise in private savings and a fall in aggregate demand. This can worsen the recession.
  • This is why Keynes advocated government borrowing – to make use of these surplus savings.
  • Keynes argued that automatic stabilisers may not be enough, and the government should specifically find public sector projects to inject money into the circular flow.
  • This is known as discretionary fiscal policy.

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Coronavirus – Economic Issues

The contours of economic recovery


From UPSC perspective, the following things are important :

Prelims level: Fiscal deficit. Monetisation of debt

Mains level: Paper 3- Quality of fiscal deficit

This article analyses the various aspects of the stimulus package announced by the government. It gives a broad idea about the borrowing and fiscal deficit of the government. Where the fiscal deficit should be spent? Which area the announced reforms should focus on? You’ll be able to answer these questions after reading the article.

Contraction of the Indian economy

  •  Many analysts have recently predicted a contraction for the Indian economy.
  • Goldman Sachs/ICRA and Nomura, in their recent assessments, have forecasted India’s growth to contract by (-)5.0 per cent and (-)5.2 per cent, respectively.
  • Even the RBI assesses that growth in the current year may be in the negative zone although it has not given a specific number.
  • The World Bank has predicted growth in the range of 1.5 to 2.8 per cent.
  • In order to relate budgetary magnitudes to GDP, we also need an idea of the magnitude of nominal GDP growth.
  • In the current year, this is expected to be at least 4 per cent points less than the rate of growth at 10 per cent as assumed in the 2020-21 budget.

Let’s clear the misunderstanding about the stimulus

  • One misunderstanding about the “stimulus” must also be cleared.
  • Any increase in government expenditure over and above the base level acts as stimulus.
  • This is the traditional Keynesian approach.
  • It made no distinction between different types of expenditures.
  • It is only later studies that made a distinction based on the size of fiscal multipliers.

How much will be the gross borrowing and fiscal deficit?

  • The Centre has already announced an increase in gross borrowing for 2020-21 from INR 7.8 lakh crore to Rs. 12 lakh crore.
  • This may lead to a fiscal deficit of about 5.7 to 5.8 per cent of GDP.
  • This may only be enough to provide for the considerable shortfall in the budgeted tax and non-tax revenues and non-debt capital receipts, which is also being estimated by a number of analysts to be in the range of Rs 18 lakh crore, implying a shortfall of Rs 4.45 lakh crore.
  • This shortfall is 2.08 per cent of GDP.
  • The Centre’s fiscal deficit will have to be further increased to accommodate the additional burden on the 2020-21 budget arising on account of the stimulus package.

Let’s divide stimulus package into budgetary and non-budgetary part

  • The series of measures announced by the FM are a mix of i) already budgeted expenditure,ii) additional expenditure, iii) extension of credit facility with government guarantee for certain select sectors and a host of reform measures.
  • Analytically, the overall stimulus package of Rs 20.97 lakh crore can be divided into a budgetary and a non-budgetary part.

1) Non-budgetary part

  • The non-budgetary part, accounting for nearly 85 per cent of the overall package.
  • Non-budgetary part consists mainly of liquidity enhancing measures for banks and NBFCs which may facilitate the financial sector in playing a key role to kickstart the economy.
  • The credit guarantee provided by the government under the various schemes announced recently is of central importance in this context.
  • In fact, for certain schemes, the government has come forward to provide 100 per cent guarantee, which should quicken the pace of credit sanction and delivery by banks.
  • Production of goods and services is inter-related in an economic system.
  • Once production starts, different sectors will be mutually supporting since different industries and service providers are locked in an input-output system.

2) Budgetary part and fiscal deficits

  • The budgetary part amounts only to about 15 per cent of the overall package.
  • This can be further divided into government expenditure which was already budgeted in the 2020-21 budget and expenditures constituting genuine additionality.
  • The genuine additionality component is only 10 per cent of the package equivalent to 1 per cent of GDP.
  • Adding this to the enhanced level of 5.7 per cent of GDP, the Centre’s fiscal deficit may be close to 6.7-7 per cent of GDP.
  • This will maintain the level of budgeted expenditure while providing for the additional cost of the announced fiscal stimulus.
  • In fact, the fiscal deficit will be even higher if the current year’s GDP is lower than that of the previous year.

Composition of government expenditure matters

  • With this high fiscal deficit, the composition of government expenditure becomes critical.
  • Some of the establishment expenditures and subsidies, especially those linked to petroleum prices like fertiliser and petroleum subsidies, may be reduced.
  • While expenditure on health-related items may be increased.
  • The central government has announced freezing of increments of DA and dearness relief components in the case of salaries and pensions respectively.
  • In fact, the government should be doing much more to relieve the plight of migrant workers.

What is budgetary contribution for infrastructure?

  • According to the National Infrastructure Pipeline, the Centre’s budgetary contribution to infrastructure is estimated at 1.25 per cent of GDP on an annual basis.
  • This is less than 18 per cent of the estimated fiscal deficit of the Centre in 2020-21, indicating a very poor quality of fiscal deficit.
  • One dimension of expenditure restructuring should be to frontload infrastructure spending, including that on health infrastructure
  • Which will be helpful in taking advantage of the higher multiplier effects associated with capital expenditures.
  • Investment augmentation is also demand supporting and employment and income generating.

Support to demand

  • Support to demand will come not only from the Centre but also from the states and the public sector undertakings.
  • States have been allowed to borrow an additional 2 per cent of their respective GSDPs subject to certain conditions.
  • In fact, at the present juncture, these conditions are not required since the enhancement of the borrowing limit is for one time while the reforms linked to conditions are permanent in nature.
  • In any case, states should be encouraged to support demand by going up to the full extent of the enhanced limit.

Why the monetisation of debt is unavoidable?

  •  The combined fiscal deficit of the Centre and states alone may amount to close to 12 per cent of GDP in 2020-21.
  • Besides, the total public sector borrowing also includes the borrowing by central and state public sector undertakings.
  • Thus, the total Public Sector Borrowing Requirement may well exceed available sources of financing consisting of i) the financial savings of the household sector, ii) savings of the public sector iii) net capital inflows.
  • In this context, monetising debt has become unavoidable.
  • The Centre must be forthcoming on these issues while recognising that extraordinary situations call for extraordinary solutions.

Reforms should be sector-specific

  • In the case of reforms, we have reached a new stage.
  • General reforms cutting across industries and sectors have been critical in the early stages.
  • The earlier regime of controls and permits had to be brought to a close.
  • But now reforms have to focus on specific sectors.
  • Applying the general principles of liberalisation to sectors such as agriculture and, more particularly, agricultural marketing, power sector, and telecom have assumed importance.
  • Labour market reforms are needed across all the states.
  • But labour reforms are introduced better when the economy is in the upswing.
  • Consensus building is critical before introducing labour reforms.
  • Land markets need to be freed up consistent with the concerns of small and marginal farmers.

Consider the question “The fiscal stimulus and the promise of reforms announced by the government would be instrumental in bringing the Indian economy devastated by the Covid-19 pandemic back on track. Comment.”


Fiscal deficit should be used to create infrastructure ensuring that the quality of fiscal deficit is not poor. At the same time, reforms announced should be sector-specific and consensus-based in case of labour laws.

Back2Basics: AT&C losses

  • Distribution loss consists of two parts: a. Technical loss and b. Commercial loss.
  • It is also called AT&C loss.
  • AT&C loss is nothing but the sum total of technical and commercial losses and shortage due to non-realization of billed amount.
  • AT&C Loss = (Energy input – Energy billed) * 100 / Energy input.

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Coronavirus – Economic Issues

Using COVID crisis to reorient India towards reforms


From UPSC perspective, the following things are important :

Prelims level: Provision for various sectors in stimulus package

Mains level: Paper 3-Comparison of of stimulus package of India with other economies.

Following the announcement of relief and stimulus package, the debate began over its various aspects. This article assesses the various aspects of the package and draws comparison with the package announced by the other countries. So, how does India fare compared with other countries?

Fiscal component of  stimulus package

  • According to the IMF-PT (policy tracker), the fiscal component of the Indian package is estimated to be at least 3.5 per cent of GDP as expenditure for poor households, migrant workers and agriculture.
  • There is an additional 0.5 per cent of GDP for states to spend unconditionally, bringing the fiscal package excluding loans to businesses to at least 4 per cent of GDP.
  • The support for businesses (MSMEs) is estimated to be 2.7 per cent of GDP.
  • Of this, at least 2 per cent of GDP is in the form of 100 per cent credit guarantees and equity infusion.

Comparison with major emerging economies

  • Among major developing economies, only Brazil -8 per cent of GDP– and Peru -7 per cent of GDP– have a fiscal stimulus higher than the 5 per cent level for India.
  • The Brazil estimate includes about 3 per cent of GDP as working capital loans to businesses and households.
  • The fiscal support level for some important emerging economies is — China 2.5 per cent of GDP and Indonesia 3.5 per cent.

Why it is difficult to segregate the stimulus package?

  • While comparing the fiscal stimulus packages across countries, it is important to understand that such packages are in the nature of additional spending and tax reliefs.
  • Which can work directly through aggregate demand or indirectly by mitigating risk and enhancing access to fund.
  • Access to fund is ensured in the nature of credit guarantees to financial institutions and non-financial enterprises
  • A large number of fiscal stimulus packages announced by different countries contain credit guarantees to financial institutions, SMEs, and agriculture.
  • Hence, it is difficult to segregate fiscal stimulus into its pure and impure components.
  • Most economists, and international organisations, recognise that fiscal stimulus consists of both the pure and impure.
  • And includes three broad items — a direct “above-the-line” component, a “below-the-line” component and guarantees of various forms primarily credit.
  • The choice of using only one component of the fiscal stimulus is selective and highly inappropriate.

India as a positive fiscal stimulus outlier

  • To put the packages into perspective, the average of all fiscal measures in the G24 developing economies is equal to 3.6 per cent.
  • No matter how the calculation is done, India is a positive fiscal stimulus outlier; by IMF-PT calculations.
  • The stimulus is close to the largest among major emerging market economies.

So, how much rich countries are spending?

  • The rich nations are spending more — they can afford to. Japan announced what may be the upper limit to the expansion — 21.1 per cent of GDP.
  • However, this does include large elements of loans and credit guarantees.
  • Through a combination of several fiscal measures (tax deferrals, credit guarantees, etc.) the US has pledged close to 13 per cent of GDP.
  • The European Union, on average, has pledged 4 per cent of GDP.
  • The average for advanced countries is around 6 per cent of GDP.

Significance of monetary policy change made by RBI

  • The monetary policy change in India is quite significant.
  • The change paves the way for internationally competitive monetary policy.
  •  That is, real interest rates comparable to those prevalent in competitor economies.
  • The repo rate now stands at 4 per cent, with inflation well contained.
  • This is substantially a much different, and much-improved RBI response than that what occurred in 2008-09.
  • At that time, as a monetary counter to the financial crisis, the RBI reduced the repo rate by 425 basis points to 4.75 per cent.
  • This was done over seven months and the prevailing CPI inflation rate was 10 per cent.

Economic reforms as a part of stimulus package

  • India has announced several economic reforms as a part of the stimulus package.
  • These are long-awaited — freeing up of the labour market, allowing farmers to sell their produce and land to who they choose, removal of archaic laws like the Essential Commodities Act, with the promise of more to come.
  • This is not an empty promise — the Centre will advance another 1.5 per cent of GDP to states to expand spending.
  • This advance will be conditional on them for undertaking long-pending reforms.
  • The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures.


The Indian fiscal package is reformist, well-disciplined and provides focused support; and if needed, there is still room for additional measures. We should use the crisis to re-orient India towards its long-awaited destiny.

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Coronavirus – Economic Issues

How effective is the stimulus package to revive the supply chains?


From UPSC perspective, the following things are important :

Prelims level: Upstream and downstream sectors

Mains level: Paper 3-Disruption in supply chains and ways to ensure their recovery.

Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.

Disruption in supply chains and decline in output

  • Much of the decline in output is due to supply chain disruptions generated by the lockdown.
  • Government spending can do little to alleviate this.
  • Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
  • In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.

Let’s understand how supply chains work

  •  Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
  • These machines are used to sow seeds, harvest crops, and transport fuel.
  • Finally, the harvested crops are used by downstream sectors to produce flour and bread.
  • At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.

So, how lockdown affected the supply chains?

  • Under the lockdown, numerous inputs have not moved from their producers to their users.
  • These disruptions may not at first generate a reduction in consumer goods like bread.
  • However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
  • And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
  • Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
  • How far is the long run? This is difficult to say; there may be some variation across goods.

Impact of labour shortage on supply chains

  • The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
  • Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
  • This is because of the higher labour intensity of production in India.
  • To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
  • Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.

Adapting and Adjusting to the new reality

  • As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
  • The world supply chain must adapt.
  • Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
  • But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
  • Furthermore, the investments must be guided by price signals.
  • Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
  • As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
  • As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
  • The key to economic recovery lies in millions of such adjustments.
  • Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.

How fiscal stimulus would disrupt the recovery of supply chains?

  • Market adjustment processes are likely to be disrupted by government stimulus packages.
  • Governments spend by printing money, raising debt, or increasing taxes.
  • Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
  • When governments print money, they draw resources through inflation.
  • Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
  • Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
  • As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.

A lesson from West Germany after WW II

  • The experience of West Germany after World War II has a useful lesson for India.
  • Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
  • This destruction of the supply chain devastated the German economy.
  • Per person food production fell to about half of its pre-war level.
  • Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
  • West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
  • By 1950, per capita income in West Germany had reached its pre-war level.

Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”


The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.

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Coronavirus – Economic Issues

The perils of the liquidity push


From UPSC perspective, the following things are important :

Prelims level: Liquidity, demand side, supply side, LTRO

Mains level: Paper 3- Way out to restart the economy,

Whether to focus on demand side or supply side is the dilemma policymakers dealing with the financial crises have always faced. If we look closely, the focus of the package announced by the government is on the supply side and pushing liquidity in the economy. This article examines the various measure announced in the package and elaborated why such measures are likely to fail.

Focus on credit and liquidity in the package

  • The government has relied heavily on measures aimed at pushing credit to banks, non-banking financial companies (NBFCs) and businesses big and small.
  • These are expected to use borrowed funds to lend to others, make payments falling due, compensate employees even while under lockdown, and otherwise spend even while not earning.
  • The thrust is to get the Reserve Bank of India (RBI) and other public financial institutions to infuse liquidity and increase lending by the financial system.
  • RBI offered the financial institution capital for longer periods at a repo or policy interest rate that has been cut by more than a percentage point to 4%.

Let’s understand liquidity and its role in crisis

  • The Prime Minister in his speech calling for a “self-reliant India” identified, besides land, labour and laws, “liquidity” as among the areas of focus of the package.
  • What is liquidity: In economic and business parlance, liquidity refers to ease of access to cash.
  • A liquid asset is one that can be easily sold for or replaced with cash.
  • And a liquid firm or agent is a holder of cash, a line providing access to cash, or assets that can be easily and quickly converted to cash without significant loss of value.
  • In periods of crisis, individuals, small businesses, firms, financial institutions and even governments tend to experience a liquidity crunch.
  • Relaxing that crunch is a focus of the government’s crisis-response package.
  • So, the government has given a much larger role to enhancing liquidity than it does either to direct transfers.

So, let’s look at steps taken by the government to ensure liquidity

1. LTRO and issues with it

  • Among the first steps taken by the RBI was the launch of special and ‘targeted’ long term repo operations (TLTROs).
  • LTROs allowed banks to access liquidity at the repo rate to lend to specified clients.
  • One round of such operations, which was relatively more successful, called for investment of the cheaper capital in higher quality investment grade corporate bonds, commercial paper, and non-convertible debentures.
  • What went wrong? That funding allowed big business, varying from Reliance and L&T to financial major HDFC, to access cheap capital to substitute for past high-cost debt or finance ongoing projects.
  • There is little evidence that this is triggering new investment decisions.

2. Focus on saving NBFCs and why it failed to give the desired result?

  • The second round was geared to saving NBFCs, whose balance sheets were under severe stress even before the COVID-19 strike.
  • NBFCs were finding it difficult to roll over the short-term debt they had incurred to finance longer-term projects.
  • Banks were wary about lending to these NBFCs.
  • Banks feared that their clients could default in amounts that would bring the viability of these institutions into question.
  • Those fears were confirmed when Franklin Templeton announced that it was shutting down six of its funds.
  • Franklin Templeton set off redemption requests across the NBFC sector, as investors rushed to take back their money.
  • This happened at a  time when the ability of these institutions to mobilise funds to meet these demands had been impaired.
  • Not surprisingly, banks were unwilling to respond when liquidity was infused to target lending to the NBFCs.

3. More intermediaries and credit guarantee by the government

  • Building on these initial liquidity infusion efforts, the COVID-19 package identified more intermediaries.
  • These intermediaries include the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank.
  • The intermediaries were expected to refinance lending by the banks to different sections.
  • To persuade the banks and other intermediaries to take up these offers when the clients they must lend to MSME, street vendors, marginal farmers, etc. are themselves stressed, in some instances the government offered them partial or full credit guarantees in case their clients defaulted.
  • The government also sought to persuade the RBI to lend directly to NBFCs against their paper.

Why the above 3 measure won’t succeed?

  • These measures, which are only marginally effective even in the best of times, will not work during this crisis.
  • Consider a bank or NBFC lending to small business.
  • With economic activity either at a complete stop or at a fraction of the normal, those who can access credit would either not borrow or only do so to protect themselves and not use the funds either to pay their workers or buy and stock inputs.
  • Even after the lockdown is lifted, the compression of demand resulting from the loss of employment and incomes would be considerable.
  • It would be aggravated by the fact that spending by a fiscally conservative government would fall sharply because of a collapse in revenue collections.
  • Faced with sluggish demand, firms are unlikely to meet past and current payments commitments and help the revival effort, just because they have access to credit.
  • This would mean that credit flow would actually not revive.
  • This danger is even greater because the government has been measly with its guarantees.
  • The government doesn’t want to accumulate even contingent liabilities that do not immediately affect the fiscal deficit.

Increasing the disposable income

  • Another component of the “liquidity” push is the measures that temporarily increase the disposable income of different sections.
  • Such measures include advance access to savings like provident fund contributions, lower tax deduction at source, reduced provident fund contributions and moratoriums on debt service payments for a few months.
  • These measures are expected to provide access to cash inflows and reduce cash outflows, to induce agents to meet overdue payments or just spend to enhance the incomes of others.
  • These are marginal in scope, if relevant at all.
  • They have been combined with non-measures like adding on pending payments such as income tax refunds to spike “liquidity provision”.

Way forward

  • What is needed now is government support in the form of new and additional transfers to people in cash and kind, and measures such as wage subsidies, equity support and spending on employment programmes.
  • That, as many have acknowledged, would require debt financed spending by the government, with borrowing at low-interest rates from the central bank or a “monetisation” of the deficit.
  • Unfortunately, obsessed as it is with fiscal conservatism and tax forbearance, the government is unwilling to take that route.

Consider the question “Every stimulus package provokes a debate for its emphasis on either supply-side or the demand side. Examine the provision in the stimulus package announced by the government which focuses on the supply side. What are the issues with supply-side focus in the package?”


Overall, the “transmission” of the supply side push from these monetary policy initiatives for relief and revival is bound to be weak. Given the circumstances, the liquidity push, even if partially successful, would only culminate in eventual default, as borrowers use the debt to just stay afloat in the absence of new revenues.

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Coronavirus – Economic Issues

Neglect of demand side


From UPSC perspective, the following things are important :

Prelims level: Demand side and supply side in the economics

Mains level: Paper 3- Why is it necessary to focus on the demand side in stimulus package?

What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

Why stakeholders are not happy with the package?

  • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
  •  Marketing reforms and infrastructure creation are distant promises.
  • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
  • In their experience, lenders are not always supportive in extending loans.
  • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
  • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
  • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
  • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
  • Ironically, there is little for public health, already in a dilapidated state.
  • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

Government expenditure in the fiscal stimulus

  • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
  • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
  • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
  • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
  • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

Focus of the package: supply side

  • It is clear that the design of this relief package seeks to focus on the supply side.
  • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
  • Focus is not on the demand side by stepping up government expenditure.
  • This is done with the aim of minimising the cost to the government.
  • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

So, let’s understand why focus on supply side is flawed strategy

  • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
  • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
  • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
  • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
  • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
  • For this reason, the fiscal stimulus should have been much larger.

Excessive concerns over fiscal deficit

  • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
  • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
  • The conclusion drawn, wrongly, is that there is no fiscal space.
  • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
  • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

Monetising the deficit  and issues involved in doing so

  • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
  • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
  • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
  • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
  • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
  • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
  • For one, their ethics and integrity have seen steady erosion.
  • Moreover, how many sovereign governments will they downgrade?
  • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”


If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

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Coronavirus – Economic Issues

Focus on supply side


From UPSC perspective, the following things are important :

Prelims level: MSME

Mains level: Paper 3- Credit problems faced by MSMEs

Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.

Issue of neglect of demand side

  • The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
  • Structural reforms — the COVID-19 package was no exception.
  • Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
  • The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.

So, let’s focus on Demand vs. Supply side debate

Low growth in credit to MSME

  • A demand shock typically leads to a rise in both volume and the price.
  • A supply shock not only hurts the volume but also leads to price rise.
  • In banking, a good proxy for the price of credit is the spread.
  • Spread is difference between lending rate and the funding rate  repo rate or deposit rates for the banks.
  • The spread reflects the risk premium banks charge to their customers.
  • The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
  • That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
  • The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
  • At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
  • The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
  • Rising spreads with lower credit volume provide a clear sign that credit supply is broken.

What a paper by Nobel laureates on MSME says?

  • Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
  • The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
  • They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
  • If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.

So, how will the recently announced package help MSEs?

  • Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
  • Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.

2 Measures to increase consumer demand and issues involved

1. Direct transfers schemes

  • No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
  • In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.

But is cash-transfers the ultimate solution to recovery?

  • In fact, the PMJDY account balance has increased.
  • The increase is from close to Rs 1,17,000 crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
  • This is a massive jump of close to Rs 18,000 crore.
  • Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
  • In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
  • So the rise in balances is not mechanical.

So, why are they not spending?

  • It’s not that people covered under PMJDY are comfortable financially.
  • A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
  • For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
  • A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
  • The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!

2. What about providing cheap credit to customers?

  • Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
  • In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP, investments, and unemployment.
  • On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.

Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”


To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.

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Coronavirus – Economic Issues

Stimulus package aims to turn the crisis into opportunity


From UPSC perspective, the following things are important :

Prelims level: Aggregate demand

Mains level: Paper 3- Stimulus package to address demand side and supply side problems

Economic disruption caused by the corona crisis stems from both-demand side and supply side. So, the stimulus package announced was expected to address the issues on both sides. This article breaks downs the various elements of the package in demand-side as well as supply-side measures. We also know aggregate demand is not just consumption demand. So, this fact was also considered while deciding the demand-side measures.

Twin mantra of stimulus package

  • 1) To ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid.
  • 2) To convert this crisis into an opportunity by implementing bold structural reforms.
  • Such reforms will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy.

Impact on demand side as well as supply side

  • The present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09.
  • It has seriously impacted both the supply and demand side of the economy.
  • The government’s response has been to effectively address both these aspects.

Government’s four-fold response to address supply-side problems

1. Ensuring food security

  • To ensure that the government declared agriculture and all related activities as essential services.
  • This permitted the successful harvesting and efficient procurement of the critical Rabi crop.
  • It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.

2. Preventing cash/liquidity crunch

  • Preventing the pressing cash/liquidity crunch was necessary to avoid insolvencies and bankruptcies.
  • An immediate moratorium was announced on their debt servicing obligations to commercial banks.
  • This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended.
  • MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM.
  • These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail.
  • The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures.
  • It will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.

3. Reforms in agriculture and manufacturing sector

  • The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing.
  • Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced.
  • Defence production and exports will get a new fillip with the liberalisation measures.
  • Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence.

4. Credit to street vendors

  • Finally, this is a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families.
  • Under which street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital.

Understanding the aggregate demand

  •  It is important to point out that aggregate demand is made up of- i) consumption, ii) investment iii) demand for intermediate goods.
  • So,  the cash-in-hand of consumers is not the only means for reversing the declining demand in the economy.
  • Therefore, additional credit lines provided to MSMEs, vendors or farmers will contribute to the strengthening of aggregate demand.

Government’s response to address demand-side problems

  • A significant number of measures were announced to hike consumption demand directly as well.
  • Among these are:
  • Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts.
  • Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent.
  • Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities.
  • Rs 30,000 crore for construction workers.
  • Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers.
  • These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.

Consider the question “The stimulus package announced by the government in the wake of pandemic sought to address both the demand side as well as supply-side problems. Examine the various components of package and other reforms announced in the economy.”


Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post-COVID-19 period.

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Coronavirus – Economic Issues

India and China after pandemic


From UPSC perspective, the following things are important :

Prelims level: Various components of the economic package

Mains level: Paper 3- Impact of pandemic on India economy.

The article broadly discusses the impact of the pandemic on the Indian economy. While the package has been declared to alleviate the economic pain, the government faces the challenge of finding the resources to plug the gaps. Though pandemic erupted from China, it successfully controlled it. This along with the its calibrated approach towards strategic progression is going to stand China in good stead.

Grappling with the “unknown unknowns”

  • Several weeks before the advent of the COVID-19 pandemic, India’s Minister for External Affairs delivered a lecture.
  • In the lecture, he had observed that “what defines power and determines national standing is also no longer the same. Technology, connectivity and trade are at the heart of the new contestations.”
  • He did mention a point about “known unknowns”.
  • But the pandemic has forced us to face the “unknown unknowns”.
  • Within a few weeks, his prediction would be overtaken by a tectonic shift in the global situation thanks to a virus and a pandemic.

Impact on India’s economy

  • What distinguishes the present pandemic from earlier ones is its economic impact.
  • The economic impact is perhaps even more threatening than the human costs involved.
  • In the case of India, all forecasts have had to be shredded.
  • Job losses have been massive, specially in urban areas.
  • India’s exports in the month of April, for instance, were the worst in the past 30 years.

Finding resources for the stimulus package

  • Well before pandemic India had been witnessing a persistent economic downward slide.
  • Prime Minister Narendra Modi’s announcement of a ₹20-lakh crore stimulus package was, hence, timely.
  • Even though economists now believe that in real terms it amounts to around 2% of GDP rather than 10% .
  • Finding resources for even this stimulus package will, however, not be easy.
  • The Centre’s finances are not in the best of health. It has already had to resort to a second tranche of $1 billion loan from the World Bank to support COVID-19 relief measures.
  • The finances of States are, to say the least, in a perilous state.
  • Questions are, thus, bound to be raised as to whether adequate funds would be forthcoming for relief purposes.

China’s calibrated approach: Strategic progression

  • Since its early recovery, China has followed a calibrated approach — one that stems from a policy of deliberate strategic progression conceived over the years.
  • It may be worthwhile to understand the facts so as to underscore the gap that currently exists between China and India.
  • In 2015, China’s President, Xi Jinping, had floated the idea of “a Community of Common Destiny of Mankind”.
  • In this, he outlined China’s viewpoint on aspects such as economic globalisation and the information technology revolution.
  • The Belt and Road Initiative — which encompasses policy, infrastructure, trade, financial, and people-to-people connectivity, and, implicitly also, security ties — was an adjunct to it.
  • The 19th National Congress of the Communist Party of China (2017), thereafter, gave its assent, considering it essential to enable China to achieve pre-eminence status within the global order.
  • Ever since, China has focused on-
  • i) attaining economic and technological progress.
  • ii) defining how power would be determined in the new globalised era through devising new international norms in many emerging domains such as cyber, space, artificial intelligence, etc.
  • China also set about rewriting international rules, premised not so much on governing where global goods are made, but on setting standards that define production, exchange and consumption.
  • China Standards 2035 plans to set new standards with regard to the Industrial Internet of Things (IoT) and define next-generation information technology and biotechnology infrastructure.
  • China is hoping, to reap the “early bird” advantage, even as other industrial nations struggle to recover from the devastation caused by the COVID-19 pandemic.
  • Internationalisation of Chinese standards would provide China a clear advantage by providing it an opportunity to set the standards in emerging industries such as high-end equipment manufacturing, unmanned vehicles, new materials, cybersecurity and the like.
  • This would enable it gain a dominant position in the global economy.

India must plan well to cope with the China challenge

  • Mounting an effective challenge to China at this time would require a well-conceived and carefully calibrated plan of action by India.
  • As of now, this is not evident.
  • India and China will certainly emerge from the pandemic more diminished than previously, but to varying extents.
  • Each country will, no doubt, suffer an economic setback.
  • But while both nations would be among the very few that would still have a positive growth rate in the near future.
  • Which is 1% in the case of China and 1.8% in the case of India, according to the International Monetary Fund.
  • Given the size of China’s economy, it does not translate into a massive shift in India’s favour.

Consider the question “Economies across the world have been bruised by the corona pandemic. There have also been talks of India being the beneficiary of changes in the global supply chains. In light of this, examine the issues and challenges that India may face in this regard.”


India would more than welcome some of the entities exiting China, but there are no “green shoots” to suggest that such a shift has, or is, about to take place. Many alternatives are available to these companies and it would be excessively optimistic on our part to hold on to the belief that India is the only alternative choice for most of them.

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Coronavirus – Economic Issues

Exploring the avenues to fill the budgetary gaps


From UPSC perspective, the following things are important :

Prelims level: Investment rate, purchasing power

Mains level: Paper 3- Option to raise the money for package.

What are the options available with the government to fill up the budgetary gaps created by the stimulus package? Well, one seems to be exercising its disinvestment or privatisations plans. But like always disinvestment comes with its own set of issues. The next could be raising the taxes and duties on the fuels. But this will defeat the very purpose of the package. Third option is borrowing. But borrowing in the external currency is another problem story. Let’s figure this all out with this article….

Containing the fiscal deficit through privatisation

  • Government is apparently hopeful that money could come partly from the new privatisation programme.
  • Finance Minister recently said that privatisation — a policy that has already gained momentum in the last budget, would now be the order of the day.
  • According to the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.
  • The PSEP is a strategic move intended to rationalise the public sector.
  •  Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue from GST among other things was declining.
  • And this void could only partly be filled by alternative sources of tax revenues such as that on fuel.
  • Today, the government needs this money in order to contain the fiscal deficit.
  • So, the privatisation programme has suddenly been expanded.
  • The Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year.

Progress made so far on disinvestment process

  • Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India.
  • In addition to selling stakes in the Container Corporation of India, THDC and NEEPCO.
  • The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year.
  • It now wants it completed earlier. Some estimate say that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore.
  • Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.

Issues with privatisation

  • The revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
  • Privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers?
  • Excessive political interference with the private sector makes owning an ex-government entity risky.
  • A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs.
  • If they were allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
  • This could foster crony capitalism and may even result in the making of oligarchs.

Where else can the government find the money it needs?

1. Increasing tax and duties on fuel

  • Government has already increased the excise duty on petrol and diesel by Rs 3 per litre — the steepest hike since 2012.
  • The government imposed additional taxes while global crude oil prices fell.
  • As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
  • Such a move would contradict the very idea of a relief and stimulus package anyway. Why?
  • An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand.
  • Low demand and lowest investment rate:  Even before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle.
  • And that’s why their investment rate had never been this low, in the 21st century at least.

2. Borrowing money and issues with it

  • Even if some privatisation helps India financially, it seems that the country will need to borrow money.
  • External borrowing, however, is problematic. There are three issues with external borrowing-
  • 1) The only way governments pay back external borrowings is by wisely using borrowed capital to drive high GDP growth and generating revenues.
  • Which is unlikely to happen any time soon as a recession is round the corner.
  • 2) The rupee is at its lowest level compared to the US dollar.
  • Any more devaluation will only make it harder for the government to pay back its debt.
  • Since external borrowings must be paid back in borrowed currency, exports and foreign reserves or gold reserves are generally the only two reliable options.
  • The third one being borrowing more to pay back the previous debts — a slippery slope to pay government debt.
  • However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
  • Other countries may also move towards “atmanirbharta” and over-regulate imports.
  • 3)  Indian industries are already a bit debt-laden.
  • Following factors compelled industries to resort to overseas borrowing-
  • i)The risk in the banking sector, tight liquidity in debt markets,
  • ii) Comparatively lower international borrowing rates
  • iii) The RBI’s ECB rationalising measures.
  • More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects — deterring foreign investments in the process.

3. Foreign reserves and other options

  • On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs.
  • The rest may have to come from privatisation, taxation, loans and more international aid.
  • Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.
  • India may help others, but it needs aid too.

Consider the question- “The government had to declare the relief and stimulus package in the wake of corona crisis. This expenditure leads to budgetary gaps. What are the options with the government to close this gap? Examine the issues associated with these options.”


The government must weigh each option with due consideration and explore all the possible avenues. Options like privatisation or borrowing must be exercised with caution. As these decisions could have severe consequences for the economy in the future.








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Coronavirus – Economic Issues

Where the “fiscal space” debate should focus?


From UPSC perspective, the following things are important :

Prelims level: Primary deficit, AQR

Mains level: Paper 3- Factors to be considered while deciding the size of stimulus package.

The article focuses on the “fiscal space” debate in India. So, what is this debate? This debate is focuses upon the size of the fiscal deficit this year in India, ways that could be used to finance it and upper limit of this deficit etc. But the author argues that we should focus on debt/GDP trajectory in the subsequent years. Besides this, he suggests what our policy intervention comprise.

Monetary policy and fiscal policy: Efficacy Vs. Space debate

  • In response to the economic disruption caused by Covid-19, monetary policy has moved swiftly and aggressively in many economies.
  • But questions remain on its incremental efficacy.
  • With a high level of uncertainty around, risk-averseness is evident in the financial systems.
  • This risk-averse tendency reduces the efficacy of lower rates and higher liquidity.
  • So, while monetary policy may have space, how much efficacy will it have?
  • Fiscal policy i.e. spending by the governments can have much efficacy.
  • But how much space does it have? Therein lies the debate.

Focus on Debt/GDP trajectory, not on level

  • The “fiscal space” debate in India has centred exclusively on this year’s deficit and how it will be financed.
  •  But a more holistic assessment of fiscal space should focus on two factors 1) the government’s inter-temporal budget constraint 2)  how India’s debt/GDP evolves in the coming years.
  • These two are the factors that rating agencies and foreign investors will eventually focus on.
  • Following are the question that debate should focus on.
  • How much will India’s debt/GDP jump up this year?
  • More importantly, what happens thereafter?
  • Will debt/GDP keep rising year after year? Or will it start declining?
  • As research has found, it’s typically the trajectory of debt/GDPmore than the level — that impacts future growth.

Evolution of debt

  • The evolution of debt is essentially a function of three variables:
  • 1) The primary deficit.
  • 2) Nominal GDP growth
  • 3) The government’s cost of borrowing.
  • The higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.
  • High growth allows countries to “grow out” of their debts.
  • In contrast, high primary deficits worsen the debt burden.

Where does India stand?

  • India comes into COVID-19 with a debt/GDP of about 70 per cent.
  • A primary deficit across the Centre and states of about 2.5 per cent of GDP including the Centre’s extra-budgetary resources. — based on the Revised Estimates for 2019-20.
  • A weighted average sovereign borrowing cost of about 7.5 per cent (on the stock of debt) and an estimated pre-COVID nominal GDP growth of 7.5 per cent in 2019-20.
  • In other words, the favourable gap between growth and borrowing costs had closed.
  • With this backdrop, one can simulate what happens to debt/GDP in the coming years under different growth, fiscal and interest-rate scenarios.
  • What do we find?
  • Even under relatively benign scenarios –nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year- India’s debt/GDP will balloon towards 80 per cent by the end of the year.
  • But India will not be alone. Public debt is expected to balloon all over the world.
  • Instead, what will matter for sustainability is the trajectory of debt thereafter.
  • Does debt/GDP come down or keep going up in subsequent years?

 Fiscal space depends on potential growth in coming years

  • The subsequent trajectory of Debt/GDP depends overwhelmingly on medium-term growth.
  • Consider the following two scenarios and refer to the figure given below-
  • 1. Fiscal Deficit 6%
  • Consider that this year’s combined fiscal deficit widens by 6 per cent of GDP.
  • But the primary deficit is then consolidated back to 2 per cent of GDP in the next 3 years.
  • And as long as nominal GDP is 10 per cent in the medium term which corresponds to real GDP growth of 7 per cent.
  • Debt/GDP gets on to a constantly declining path after the third year.
  • This suggests a bigger fiscal intervention is sustainable but only if medium-term growth prospects are lifted in tandem.
  • 2. Fiscal Deficit 3%
  • Consider that this year’s deficit widens by “just” 3 per cent of GDP.
  •  But medium-term nominal GDP growth settles at 8 per cent that is, real GDP growth of 5 per cent.
  • Debt/GDP rises relentlessly for the next decade towards 90 per cent of GDP.

Key takeaway: focus on medium-term growth

  • This suggests even a relatively-conservative fiscal response this year becomes unsustainable if medium-term growth prospects are diminished.
  • Small changes in medium-term growth have large implications for fiscal sustainability.
  •  How much fiscal space India has to respond in the crisis year will depend crucially on what potential growth is likely to be in the coming years.
  • The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.
  • Put more starkly, the fiscal debate between “need” and “affordability” is endogenous.
  • The medium-term sustainability of any fiscal package this year will depend on the nature of growth-enhancing interventions and reforms that accompany it.

So, what could the interventions comprise?

1. Keep small business afloat

  • Policy must ensure that all viable enterprises can survive the pandemic.
  • If economically-viable but illiquid small and medium enterprises go under, the implications both for unemployment and India’s underlying production capacity could be severe.
  • The government’s credit-guarantee scheme is, therefore, very important and should hopefully induce banks to provide much-need working capital to keep small businesses afloat.

2. Reforms in the finance sector

  • It is important to jump-start a risk-averse financial sector into funding an economic recovery, more broadly.
  • Last week’s bond market interventions which involved special liquidity and partial guarantee funds are important to ease conditions at the financial periphery.
  • Over time, however, liquidity must give way to capital and reform.
  • Following steps will be crucial to strengthening the financial sector-
  • 1)Pre-emptively recapitalising public sector banks for growth and resolution capital.
  • 2) Conducting an AQR for the NBFC sector after pandemic.
  • 3) Then converting well-run NBFCs into banks to avail of a stable deposit franchise.
  • 4) Modifying the incentives under which public sector banks operate.
  • Higher potential growth is only feasible if the financial sector is able to fund it.

3. Reforms in the other sectors

  • Real reforms must accompany those in the financial sector.
  • The government’s announcement on unshackling agriculture — if carried through to its logical conclusion — is potentially game-changing for farmers and will be a landmark reform for the sector.
  • As COVID-19 hastens the reorganisation of supply-chains within Asia, India must seize the moment to integrate into the Asian supply chain.
  • Revisit a Special Export Zone (SEZ) model with the appropriate regulatory environment to avoid the pitfalls of the past.
  • Path dependence will be key. If the first one or two SEZs succeed, it would create a powerful demonstration effect both externally to help attract more firms into India.
  • And internally inducing different states to compete to create their own SEZs to drive jobs and investment.

4. Social infrastructure and ways to pay for it

  • If the virus has taught the world anything, it’s the criticality of social infrastructure.
  • India will not be able to fundamentally alter its growth potential without crucial investments in health and education.
  • The government’s announcement to boost health spending is, therefore, very welcome.
  • But how will this be paid for? This is where policy must get creative.
  • Existing assets on the public sector balance sheet must be aggressively monetised to fund growth-enhancing investments in physical and social infrastructure.
  • This will simultaneously take the pressure off the fiscal and financial sectors, and deliver a productivity-enhancing swap on the public sector balance sheet.

The article is helpful to consolidate the basic understanding of the macroeconomic parameters of economy. Consider the question asked by UPSC last year “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments”


Higher potential growth is the antidote to many pressures, from incomes to jobs to debt sustainability. To the extent this unprecedented crisis creates political space and capital to reform, the opportunity must be seized.

Back2Basics: Nominal GDP

  • Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. 
  • GDP is the monetary value of all the goods and services produced in a country.
  • Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

Primary Deficit

  • Primary deficit refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings.
  • It indicates the borrowing requirements of the government, excluding interest.
  • It also shows how much of the government’s expenses, other than interest payment, can be met through borrowings.

Debt/GDP ratio

  • The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).
  • By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
  • Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

AQR- Asset Quality Rating

  • An asset quality rating refers to the assessment of credit risk associated with a particular asset, such as a bond or stock portfolio.
  • The level of efficiency in which an investment manager controls and monitors credit risk heavily influences the rating bestowed.
  • And because asset quality is an important determinant of risk that profoundly impacts liquidity and costs, analysts go to great lengths to make sure they issue the most accurate evaluations possible.
  • After all, their pronouncements can greatly affect the overall condition of a business, bank, or portfolio for years to come.

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Coronavirus – Economic Issues

Atmanirbhar Abhiyan Package


From UPSC perspective, the following things are important :

Prelims level: GDP rankings

Mains level: Paper 3- Atmanirbhar Bharat Abhiyan

The article examines the various aspects of the recently announced Atmanirbhar Bharat Abhiyaan (ANBA). But before digging deeper into the ANBA the author ruminates over India’s growth (GDP) story. Reasons for India’s failure to deliver on the economic empowerment are also examined. In the end, the relation between the free economies and the welfare states is examined.

The good and the bad of India’s GDP story

  • India crossed the UK two years ago, France last year, and will cross Germany and Japan in the next five years. (In terms of nominal GDP)
  • That will leave only America and China ahead of us.
  • But India’s per capita GDP story is on a different track.
  • We once equalled Korea (1960) and China (1997) but today there are 138 countries ahead of us.
  • The COVID-19 lockdown and the stories of pain inflicted on migrant workers exposes how per capita GDP is more important for our citizens than total GDP.

A take on Economic empowerment

  • Ramchandra Guha, in his book- Gandhi: The Years that Changed India, suggests that while other patriots had used Swaraj to signify national independence, Gandhiji made India aware of its true or original meaning, Swa-Raj, or self rule- both political and economic.
  • Our collective political Swaraj hasn’t always translated into individual economic Swa-Raj because of inadequate formalisation, industrialisation, urbanisation, financialisation, and skilling.

Atmanirbhar Bharat Abhiyaan(ANBA) – A step towards Swaraj

  • The Atmanirbhar Bharat Abhiyaan (ANBA) policy announcements are important moves in meeting Gandhiji’s vision of individual self-reliance and recognising poverty as the worst form of violence.
  • ANBA targets avoiding unemployment becoming hunger and illiquidity becoming insolvency.
  • The agriculture package of Rs 1.63 lakh crore included farm-gate and aggregation point infrastructure, fisheries, animal husbandries, and others like animal vaccination, micro food enterprises.
  • The non-bank liquidity package of Rs 5.94 lakh crore included MSMEs, NBFCs, MFIs, housing finance companies, power discoms, and others (PF, tax relief).
  • The migrant and farmer package of Rs 3.16 lakh crore included concessional credit via kisan credit card, farmer working capital, affordable housing, and others (food, street vendors, microloans).
  • The welfare and health package of Rs 1.85 lakh crore included women and pensioner benefits, MNREGA, emergency health response, and others like food, financial security.
  • RBI’s liquidity measures of Rs 5.24 lakh crore included two phases of targeted long-term repo operations, CRR cut, marginal standing facility limit increase, refinancing facilities, and mutual fund special liquidity facility.
  • The reform to the Essential Commodities Act, APMCs and contract farming directly impact prosperity as 45 per cent of our agricultural labour force generates only 14 per cent of GDP.

How ANBA maintained fiscal health?

  • ANBA is also important for what it is not. It’s not fiscal profligacy-i.e. the government is spending with due care for fiscal deficit figures.
  • Total spending may be higher if the loans for which government has stated to stand as a guarantor turns NPAs (for ex. MSMEs loans).
  • But for now, it marginally raises our already difficult fiscal deficit.
  • It’s not an institutional assault — RBI’s role in ANBA keeps it away from the political minefield that the US Federal Reserve has entered.
  • The US Fed is buying the bonds sold by corporations (i.e. Fed is spending itself) while the RBI has only lent the money to banks.
  • There is a recognition that RBI has lending powers, not spending powers.
  • It’s not a mindless public sector expansion: The end of monopolies (public sector monopoly) and new public-private partnership opportunities signal pragmatism and efficiency targeting.
  • It’s not waiting for potential COVID upsides: it makes us worthy if risky global just-in-time supply chains get replaced by resilient just-in-case diversification.
  • It’s not shutting off India from the world i.e. Atmanirbhar is not isolationist policy.
  • It creates new openness to ideas, investment, and trade.

What is on agenda for ANBA 2.0?

  • The unfinished agenda for ANBA 2.0 includes following-
  • Civil service reform-the steel frame has become a steel cage.
  • Government reform-Delhi doesn’t need 57 ministries and 250 people with Secretary rank.
  • Financial reform-sustainably raising credit to GDP ratio from 50 per cent to 100 per cent.
  • Urban reform-having 100 cities with more than a million people rather than 52.
  • Education reform-our current regulator confuses university buildings with building universities.
  • Skill reform-our apprentice regulations are holding back employers and universities.
  • Labour reform-our capital is handicapped without labour and labour is handicapped without capital.

Welfare state and free economies

  • A modern state is a welfare state with formal private jobs.
  • The idealisation of Scandinavian social democracies forgets that their dense social security nets are underwritten by remarkably free economies.
  • The World Bank Ease of Doing Business scale ranks Denmark third, Norway seventh, and Sweden 12th of 190 countries.
  • Despite — or thanks to — America’s capitalism, its central government spends 37 per cent of GDP while India’s spends 14 per cent.
  • And its ferocious fiscal pandemic response involves $3 trillion government borrowing in the next three months.
  • People suggest the US can sustain its welfare state because it has the world’s reserve currency.
  • But America can afford its welfare state because of the productivity of its cities, companies and citizens. Consider the following-
  • New York’s GDP equals Russia with 6 per cent of the people and 0.00005 per cent of the land.
  • The $4.5 trillion revenue of its 25 largest companies is more than Germany’s GDP.
  • Its per capita income is $55,000.
  • India’s welfare state does not lack intentions but lacks resources.
  • No amount of CSR, philanthropy, or government borrowing can provide the resources for the care of our weak, vulnerable, and unlucky that will flow from more productive cities, firms, and citizens.
  • This is what ANBA hopes to achieve.

Consider the question “Far from being an isolationist, Atmanirbhar Bharat Abhiyan seeks to make India a welfare state with more productive cities, firms and citizens. Comment.”


India missed the manufacturing export train that China boarded but another may be coming.  Policy reform is not the solving of a sum but the painting of a picture — 90 days after the lockdown ends, we need ANBA 2.0 to finish the job.

Back2Basics: Just in time inventory

  • The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules.
  • Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs.
  • This method requires producers to forecast demand accurately.

Just in case inventory

  • Just in case (JIC) is an inventory strategy in which companies keep large inventories on hand.
  • This type of inventory management strategy aims to minimize the probability that a product will sell out of stock.
  • The company that utilizes this strategy likely has a hard time predicting consumer demand or experiences large surges in demand at unpredictable times.
  • A company practicing this strategy essentially incurs higher inventory holding costs in return for a reduction in the number of sales lost due to sold-out inventory.

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Coronavirus – Economic Issues

Private: Atmanirbhar Abhiyan Package

Today we decode parts of the “20 lakh crore” Economic Package.

Fair warning though. It’s a long  journey to walk!

  • The COVID-19 pandemic and the prolonged national lockdown have brought the Indian economy to a standstill.
  • The various announcements made by the Finance Minister concluded the relief measures undertaken in five tranches by the government as part of the economic package announced by PM Modi for ‘Atmanirbhar Bharat’.

Impacts of COVID-19 on Economy: Broad Picture

Given an uncertain future for the rest of the year, it can be clearly seen that the Indian economy is contracting.

  • Fall in GDP: That is, it will produce less in 2020-21 than it did in 2019-20. This means the Gross Value Added across sectors — agriculture, industry and services — will fall.
  • Fall in income:
  • As incomes fall, three things will happen.
  • One, individuals will cut down their expenditure. In particular, all discretionary expenditure — be it an additional pack of cigarettes or a new car or a house — will come down sharply.
  • Two, seeing overall demand fall, businesses, which were already not investing, will likely postpone their investments further.
  • Three, the government revenues will take a massive hit. This means that if the government wants to maintain its level of fiscal deficit (the gap between what it earns as revenues and what it spends), it will have to cut its overall expenditure this year.
  • These three types of “expenditures” — by individuals, businesses and government — essentially make up the GDP of India.
  • Exports will fall: There is a fourth component called net exports (that is, the net of exports and imports), but with the global demand plummeting as well, this too is unlikely to help matters.

Atmanirbhar Bharat: With a special package

  • PM has announced a special economic package and gave a clarion call for Self-reliant India.
  • This package, taken together with earlier announcements by the government during COVID crisis and decisions taken by RBI, is to the tune of Rs 20 lakh crore, which is equivalent to almost 10% of India’s GDP.
  • The package will also focus on land, labour, liquidity and laws. It will cater to various sections including cottage industry, MSMEs, labourers, middle class, and industries, among others.

Complete details of the package

First Tranche: Rs 5,94,550 crore

  • The first set of relief measures announced by Nirmala Sitharaman focused on enabling the Indian economy’s backbone – MSMEs that employ around 11 crore people and have a GDP share of approximately 29 per cent.
  • Out of the 16 announcements made by the minister, six were dedicated to the MSME segment to infuse liquidity.
  • This included Rs 3 lakh crore collateral-free loans and Rs 50,000 crore equity infusions for MSMEs through Fund of Funds.
  • Liquidity relief measures worth Rs 30,000 crore were also announced for NBFCs, HFCs etc. and Rs 90,000 crore for power distribution companies.
  • The minister also advised states and regulatory authorities for extending the registration and completion date of real estate projects under RERA to de-stress developers and ensure completion of projects for home buyers to get their booked houses on time.

Second tranche – Rs 3,10,000 crore

  • FM’s second tranche of measures catered to migrant workers and street vendors.
  • The minister introduced ‘one nation one ration card’ to allow migrant workers to buy ration from any depot in the country.
  • A special credit facility of Rs 5,000 crore was announced to support around 50 lakh street vendors who will have access to an initial Rs 10,000 working capital.
  • The minister also said that close to Rs 2 lakh crore will be given to farmers through Kisan credit cards while 2.5 crore farmers, including fishermen and animal husbandry farmers, would be able to get institutional credit at a concessional rate.
  • The government allowed states to fund the food and shelter facilities to migrant workers from the disaster response fund that would cost Rs 11,000 crore to the centre.

Third tranche – Rs 1, 50,000 crore

  • The third tranche of the measures worth Rs 1.5 lakh crore focused on the agriculture and allied sectors including dairy, animal husbandry and fisheries as the government announced steps to strengthen the overall farm sector.
  • Sitharaman announced Rs 1 lakh crore agriculture infrastructure funds for farm-gate infrastructure including using it for setting up cold chains and post-harvest management infrastructure.
  • Other key announcements made by the minister included Rs 20,000 to be provided to fishermen through PM Matsya Sampada Yojana, and Rs 10,000 crore to formalize micro food enterprises.
  • Rs 4,000 crore for herbal cultivation, a Rs 15,000 crore Animal Husbandry Infrastructure Development Fund, Rs 500 crore for bee-keeping related infrastructure development were other packages announced by the minister.

Fourth and fifth tranches – Rs 48,100 crore

  • The fourth instalment comprised of reforms for sectors including coal, minerals, defence production, air space management, airports, MRO, distribution companies in UTs, space sector, and atomic energy.
  • She announced easing utilization of the Indian air space to reduce air travel cost.
  • The minister also announced the commercial mining in the coal sector and privatizing discoms in metros to streamline their functions for better accountability.

  • The minister allocated an additional Rs 40,000 crore for the MGNREGA for job creation in India’s hinterland. The government had earlier allocated Rs 61,000 crore in the budget for this financial year.
  • She also announced the formulation of a new Public Sector Enterprises Policy that would allow for consolidation of the PSU firms in strategic sectors.
  • Each sector would have up to four such firms while state-owned enterprises will be privatized.

Is this a new package?

  • The PM did not give the details, but he specified that this calculation of Rs 20 lakh crore includes what the government has already announced and the steps taken by the RBI.
  • This means the total amount of additional money — that is over and above what the government would have spent even in the absence of a COVID crisis — will not be Rs 20 lakh crore. It would be substantially less.
  • PM has included the actions of RBI, India’s central bank, as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy).
  • A rough estimate suggests that the RBI’s decisions have provided additional liquidity of Rs 5-6 lakh crore since the start of the Covid-19 crisis.

What is the approach adopted?

  • The measures taken up are largely in line of –

1) Giving a strong supply-side push by boosting the availability of capital on easy terms

2) Keeping income and wage support schemes to the minimum

3) Empowering constituencies ranging from farmers and workers to businesses

  • Above all, the government seems to be keen on keeping the damage to the fiscal as low as possible.
  • The fiscal impact of the Rs. 20-lakh crore packages is estimated by economists at between 2-3% of GDP.
  • This includes withdrawals from provisions already made in the Budget for this fiscal.

Idea behind the Atmanirbhar

  • The pillar on which the package rests is liquidity support so that businesses can be revived. This, in turn, is expected to set the economic cycle back in motion.
  • The option of a demand-side stimulus through a resort to deficit financing seems to be reserved for a future date.
  • This could be in case if the infection does not subside or a second wave begins prompting another lockdown.


Significance of self-efficiency and self-reliance

  • Global supply chains have been disrupted and all nations have become preoccupied with meeting their own challenges.
  • The importance of local manufacturing, local market and local supply chains was realized during the pandemic time. All our demands during the crisis were met ‘locally’.
  • Now, it was a ripe time to be vocal about the local products and help these local products become global.
  • For instance, the supply chain and global manufacturing controlled by Chinese economy got disrupted due to COVID. Thus there is a need to become self-reliant for essential goods and service like N95 masks, ventilators etc.
  • Restrictions on travel and mobility have meant tight controls over the flow of goods, services and labour across international, state and district borders.
  • The international economic order is changing; the possibility of greater economic cooperation is diminishing. So the emphasis should be on the need to leverage India’s inner potential.
  • The Self-Reliance neither signifies any exclusionary or isolationist strategies but involves the creation of a helping hand to the whole world.
  • This is neither an economic nationalism or a rejection of globalization, but a call for a new form of globalization — from profit-driven to people-centric which takes into account the needs of labours, vulnerable and have nots.

Positives of the package

  • In the numbers provided, the government has tried to project a ‘maximum bang for minimum buck’ approach.
  • Most support measures have translated into forms of regulatory relief, broader liquidity support or are reflected in its contingent liabilities, rather than in the form of explicit budgetary support.
  • It seems the Union government has very craftily used the COVID-19 pandemic crisis to plough through long pending, deep-rooted structural reforms. That should be welcomed.

Other welcome moves

  • The government has done well in increasing the budget for MGNREGA by two-thirds, adding another Rs. 40,000 crore.
  • With migrants now returning to their villages, MGNREGA can be leveraged to keep them occupied with meaningful work.
  • The demand of States for higher borrowings limit has also been granted but with clear reform milestones that they have to meet.
  • The government has also used the opportunity to unleash some much-needed reforms in agriculture marketing.
  • The measures also include –

1) opening up more sectors for private participation

2) enhancing foreign direct investment in defence

3) corporatizing the monolith Ordnance Factory Board, and so on

On contract farming

  • The Centre is considering introducing a law on contract farming under the Contract Act of 1872 to enable farmers to directly engage with processors, aggregators, large retailers and exporters in a fair and transparent manner.
  • It would allow private players to invest in inputs and technology in the agricultural sector.


  • Criticisms of the package
  • Yet, many have openly questioned the ability of this economic package to either provide adequate immediate relief to the most distressed sections of the economy or indeed stem the rapid decline in India’s GDP growth.
  • There are multiple fronts where this package is seen as inadequate. Let us discuss that-

1) Old demand met with conditions

  • The package contains several generic announcements which should ideally, has been a part of a normal economic agenda.
  • The industry has been demanding a package to the tune of 7% to 8% of India’s GDP of over $2.8 trillion since a long time.
  • There was nothing unusual given that similar packages have been announced by other countries to mitigate the damage done to their economies.
  • So, a package of the size of almost 10% of the GDP was offered like a masterstroke but without coming clear on the source of funding and oversight provision.

2) Bluff over MSMEs

  • Since MSMEs have been the hardest hit, being the main employers of industrial workers, their plight is grim.
  • It is small businesses that give traction to entrepreneurial activities in the unorganised sector where migrants from rural India mostly work.
  • The redefinition of MSMEs has been long-pending and cannot be called a reform.
  • There is nothing for the States to look forward to that can serve the immediate purpose.

3) No stakeholders consulted

  • Ideally, after the first round of an insufficient package, the government should have begun consultations with parliamentarians, states and industry representatives to prepare a well-thought-out relief package.
  • States which have been at the forefront of the war against COVID-19 have not been given the required funds to help them cope with the public health emergency.
  • They have however shouldered the high influx of returning migrant labourers from industrial locations.

4) Job losses unaddressed

  • India’s great middle class, which is also suffering, has found no solace either; nor is it likely that they will get anything substantial from this package.
  • A large number of workers in the organised sector are facing heavy pay cuts, job losses, a sharp fall in income, and uncertainty.
  • The expansion of MGNREGA, has a negative aspect, as it could impact labour availability, as rural migrants may not rush back for jobs (construction, transport most impacted).

5) Farmers’ plight ignored

  • The package nowhere mentions resuming normal procurement operations.
  • Farmers are finding it difficult to get the minimum support price (MSP) for their produce; a majority of them are in debt and face many obstacles.
  • Many APMCs are shut with no signs to begin normal operations. Middlemen and Adhatiyas are plunging in to purchase the produces far below the MSP.

6) Migrant workers ignored

  • The first national lockdown was announced in the most dramatic manner late in the evening and without adequate notice.
  • This created panic among migrants and painful displacement began which could have been avoided by offering the industry a timely financial package on the eleventh hour.
  • Economic desperation might leave poor workers with no choice but to return to work. But many of them are truly worried about getting infected.
  • Though Shramik Express trains were flagged off from certain destinations to take back migrant workers to their home States, but there was another shock — the charges levied by the Indian Railways.
  • Now India faces the loss of lives and livelihoods against the backdrop of the ruling dispensation’s apathy towards the poor and the disadvantaged.

7) Healthcare needs more attention

  • Our healthcare delivery system in most States is extremely fragile.
  • One wonders, for instance, whether Bihar can handle the consequences if the virus begins to spread with the return of millions of migrant workers back to the State.
  • Many other States also face a similar plight given the poor state of primary healthcare facilities.
  • The pandemic has exposed a hard truth: most private healthcare providers seem to be incapable of and unwilling to help even during a national crisis.

8) Undue pressure on Banks

  • Indian MSMEs have little access to risk capital, and hence raise it from banks, calling it loans. RBI has lent billions to banks to refinance those loans.
  • It will never get its money back. The FM has, for the first time, showing some awareness of the problem.
  • But the solution is weird. GoI will facilitate— whatever that means — provision of Rs 20,000 crore as subordinate debt. That is debt that does not have to be paid until all other loans have been repaid.
  • In other words, banks will be asked to give loans with an informal guarantee that they are gifts unless the bankrupt firm starts making huge profits someday.

9) Broader reforms lack the spark

  • India’s self-reliance package to match global stimulus numbers is perhaps the driver for the claim of a large package (USD 280bn, 10% of GDP).
  • India does not have fiscal buffers hence a large fiscal stimulus would have been a bold bet – as that could have impacted ratings and currency, if not executed properly.
  • Not much was discussed on land, labour reforms, tax rationalization or on any coherent plan to invite foreign manufacturing.
  • The government’s defence indigenization plan is not new and has been poorly executed in the past and that is also the case with commercial mining for coal.

10) Ignoring demand stimulus

  • The problem with this approach is that there is now a desperate need for demand stimulus; the government has focussed on supply-side push.
  • A strategy to drive consumption may have worked better under prevailing conditions.
  • The options could have been suspending GST for a couple of months or at least cutting rates temporarily, combined with a liquidity boost.

What needs to be done at this immediate hour?

1) Food and cash transfers first

  • The immediate need is to provide free food and cash transfers to those rendered incomeless.
  • Putting money in the hands of the poor is the best stimulus to economic revival, as it creates effective demand and in local markets.
  • Hence, an immediate programme of food and cash transfers must command the highest priority.

2) Revamp MGNREGA work

  • Millions of migrant workers have endured immense hardships to trudge back home, and are unlikely to return to towns in the foreseeable future.
  • Employment has to be provided to them where they are, for which the MGNREGS must be expanded greatly and revamped with wage arrears paid immediately.
  • And permissible work must include not just agricultural and construction work, but work in rural enterprises and in care activities too.
  • The revamped MGNREGS could cover wage bills of rural enterprises started by panchayats, along with those of existing rural enterprises, until they can stand on their own feet.

3) The urban focus

  • In urban areas, it was absolutely essential to revive the MSMEs.
  • Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after our proposed cash transfers run out.
  • The best way to overcome both problems would be to introduce an Urban Employment Guarantee Programme, to serve diverse groups of the urban unemployed, including the educated unemployed.
  • Urban local bodies must take charge of this programme and would need to be revamped for this purpose.

4) The ‘care’ economy

  • The pandemic has underscored the extreme importance of a public health-care system, and the folly of privatization of essential services.
  • The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.
  • The “care economy” provides immense scope for increasing employment. Vacancies in public employment, especially in such activities, must be immediately filled.
  • Anganwadi and Accredited Social Health Activists/workers who provide essential services to the population, including during this pandemic, are paid a pittance and treated with extreme unfairness.

5) Increasing revenue

  • All the tasks mentioned in the package could be financed by printing money. But in the medium term, public revenues must be increased.
  • This is not because there is a shortage of real resources which, therefore, has to take from other existing uses through taxation.
  • Rather, since much-unutilized capacity exists in the economy, the shortage is not of real resources; the government has to just get command over them.
  • A combination of wealth and inheritance taxation and getting multinational companies to pay the same effective rate as local companies through a system of unitary taxation will garner substantial public revenue.

6) Looping in foreign capital

  • It would be argued that this might cause large financial outflows, which the country can ill-afford.
  • Contrarily, even foreign capital is more likely to be attracted to a growing economy than one in sharp decline because of a lack of stimulus.
  • Also, a fresh issue of special drawing rights by the IMF (which India has surprisingly opposed along with the United States) would provide additional external resources.

Steps to achieve the goal of self reliance:

  • Investment in education and skilling to be raised to 6% of GDP. Sciences need to be strengthened from school level. This will enhance research capabilities in higher education
  • State funded R&D investment through PSU’s, universities and research institutions like DRDO, ICAR. This has to include basic research. About 3-5% of GDP is state funding for R&D in South Korea, Taiwan, Singapore. This can be a benchmark.
  • Focus on areas of electric vehicles, photovoltaics, artificial intelligence, robotics, UAVs, biotechnology
  • Policy framework to promote private sector investment in R&D needs to be taken up. R&D activities can be included as part of Corporate Social Responsibility (CSR) activities.
  • Promoting industry-academia-research institutions linkages.
  • Stronger public health system which aids in improving efficiency of the economy and boosts expenditure on education and thus self reliance.


  • The coronavirus disease pandemic has offered India a valuable lesson on the importance of self-reliance and self-sufficiency that we must aspire to attain the twin goals.
  • Self-reliance will prepare the country for tough competition in the global supply chain, and it is important that the country wins this competition.
  • It will not only increase efficiency in various sectors but also ensure quality.
  • In sum, the package has several notable features not all of which are COVID-19 relief. But, the government has clearly refused to borrow and spend more on boosting demand.
  • If the strategy of boosting supply works, it is fine. However, if it does not work on expected lines, the government will be faced with a bigger problem down the line.

Try this:

Q. The palpable unsustainability of the earlier globalisation surfaced after the COVID outbreak means that growth in India in the coming days will have to be sustained by the home market. Examine.


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Coronavirus – Economic Issues

Tale of two crises: Global Financial Crisis (GFC) and Corona Financial Crisis (CFC)


From UPSC perspective, the following things are important :

Prelims level: CDS, CDO, ABS, MBS

Mains level: Paper 3- Difference between 2008 financial crisis and financial crisis caused due to Covid-19.

Not all financial crises are the same. And this is more so about the two crises that we have been witness to – the 2008 Global Financial Crisis (GFC) and the current Corona Financial Crisis (CFC). The author points out the four key difference in the two crises. These four difference also mean that the solution for 2008 GFC may not be the solution for the present CFC. But why is it so? Read to know more…

1. Origin of the two crises

  • The GFC originated in the financial sector.
  • In GFC, banks and financial intermediaries got carried away by irrational exuberance and recklessly piled on risk.
  •  CDS, CDO, MBS, ABS and various other became the villains in the GFC drama as it unfolded in the rich countries.
  • As people lost their wealth and savings in the financial meltdown, demand collapsed and growth slumped.
  • The contagion, which originated in the financial sector, spread to the real economy.
  • In contrast, the CFC came from outside the economic system.
  • The first impact came by way of a supply shock as China-centred supply chains broke down.
  • And then as countries ordered lockdowns and economies shut down, demand slumped.
  • The ensuing distress in the real economy led to distress in the financial system.

So, how origin of the crisis matter for its resolution?

  • Restoring the faith in the financial system was key to the resolution of GFC.
  • Which meant rescue and rehabilitation of banks and other financial institutions.
  • Once that task in the financial sector was accomplished, repair of the real economy fell in place.
  • The demand came back, supply resumed and growth picked up.
  • In contrast, the central challenge in the resolution of the CFC is to beat the pandemic, and that solution has to come from science.
  • Only when there is public confidence that the incidence of the pandemic has been brought down to a low-level equilibrium, will there be a resolution in both the real and financial economies.
  • We are seeing that even during this crisis, just like in 2008, governments are coming out with fiscal stimulus packages and central banks with monetary stimulus packages.
  • But these are not solutions to the pandemic; they are just holding operations till the central problem is resolved.

2. No one country hold key to solution

  • The second difference between the two crises arises from the asymmetry of the solutions.
  • The GFC originated in the subprime mortgage sector of the US and then, rapidly engulfed the world.
  • The CFC originated in the Hubei province of China and rapidly engulfed the world.
  • But the similarity ends there.
  • For the resolution of the GFC, restoring financial stability in the US was necessary, and a sufficient condition for restoration of financial stability everywhere.
  • But the situation with the CFC is different.
  • Every country needs to control the pandemic within its borders.
  • But that is not sufficient because the virus can hit back from across the border.
  • No country is safe until every country is safe.

3. Policy interventions involve a dilemma

  • How the policy interventions interact with one another makes for the third difference between the two crises.
  • During the resolution of the GFC, solutions in the financial sector and in the real economy reinforced each other.
  • For example, to mitigate the crisis, the RBI cut rates and intervened in the forex market, the government extended special concessions for housing and real estate sectors to provide stimulus in the real economy.
  • There was synergy in these actions.
  • In contrast, in managing the challenge of the CFC, what we are seeing is tension between the various sets of policy actions.
  • The effort to contain the pandemic is exacerbating the challenges in both the real economy and the financial sector.
  • The more stringent the lockdown to save lives, the more extensive the loss of livelihoods.
  • Managing this tension is by far the biggest dilemma for governments battling the crisis.

4. No single large economy to keep the world afloat

  • The global financial crisis, although it was called “global” did not affect all countries equally.
  • China was less affected even as all rich countries were in a financial meltdown.
  • In fact, one of the less acknowledged facts of the 2008 crisis is that it was the stimulus provided by China that kept the global economy afloat.
  • In contrast, now all rich and big economies are weighed down by the virus, and there is not a single large economy to keep the rest of the world afloat.

Consider the question “Analyse the key differences in the Global Financial Crisis of 2008 and the financial crisis caused by the Covid-19.”


If pandemics are going to be more frequent, as is now suspected, it is all the more important that there is a more enforceable global protocol on early warning and information sharing. For all their differences, the GFC and CFC are similar in one respect — they both teach us life-enhancing lessons. The GFC forcefully reminded us that greed and avarice will only bring tears in the end. The CFC is teaching us that the force of nature is bigger than the combined force of our science and technology.

Back2Basics: Credit Default Swap (CDS)

  • A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks.
  • The buyer of a CDS makes periodic payments to the seller until the credit maturity date.
  • In the agreement, the seller commits that, if the debt issuer defaults, the seller will pay the buyer all premiums and interest that would’ve been paid up to the date of maturity.

Collateralised Debt Obligations (CDO), MBS and ABS

  • To create a CDO, investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt.
  • These assets are then repackaged into discrete classes or tranches based on the level of credit risk assumed by the investor.
  • These tranches of securities become the final investment products: bonds, whose names can reflect their specific underlying assets.
  • For example, mortgage-backed securities (MBS) are comprised of mortgage loans.
  • And asset-backed securities (ABS) contain corporate debt, auto loans, or credit card debt.
  • CDOs are called “collateralized” because the promised repayments of the underlying assets are the collateral that gives the CDOs their value.
  • Mortgage-backed securities played a central role in the financial crisis that began in 2007 and went on to wipe out trillions of dollars in wealth, bring down Lehman Brothers, and roil the world financial markets.
  • In retrospect, it seems inevitable that the rapid increase in home prices and the growing demand for MBS would encourage banks to lower their lending standards and drive consumers to jump into the market at any cost.

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Coronavirus – Economic Issues

Economic stimulus package for Agriculture


From UPSC perspective, the following things are important :

Prelims level: Atmanirbhar Bharat Abhiyan

Mains level: Economic stimulus for Agri sector

FM has announced plans to enact a central law to permit barrier-free inter-State trade of farm commodities and ensure a legal framework to facilitate contract farming under the third tranche of the Atmanirbhar Bharat Abhiyan economic stimulus package.

Try this question:

‘Doubling Farmer’s Income’ and ‘USD 5 trillion economy’  seems more like slogans today in wake of COVID pandemic. Comment on the statement with keeping in view the Atmanirbhar Bharat Abhiyan of the government.

Details of the package

  • The third tranche included plans to invest ₹1.5 lakh crore to build farm-gate infrastructure and support logistics needs for fishworkers, livestock farmers, vegetable growers, beekeepers and related activities.
  • The Centre will deregulate the sale of six types of agricultural produce, including cereals, edible oils, oilseeds, pulses, onions and potatoes, by amending the Essential Commodities Act, 1955.
  • Stock limits will not be imposed on these commodities except in case of national calamity or famine or an extraordinary surge in prices.
  • The Centre is considering introducing a law on contract farming under the Contract Act of 1872 to enable farmers to directly engage with processors, aggregators, large retailers and exporters in a fair and transparent manner.
  • It would allow private players to invest in inputs and technology in the agricultural sector.

Must read:

[pib] Atmanirbhar Bharat Abhiyan (Self-reliant India Mission)

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Coronavirus – Economic Issues

How the economic package will play out for MSMEs?


From UPSC perspective, the following things are important :

Prelims level: Measures announced for MSMEs

Mains level: Paper 3- Significance of MSMEs and measures for supporting the MSME during corona crisis.

Recently, a stimulus package worth 20 lakh crore was announced by the government. How effective will these measures prove for the MSMEs? How the liquidity issue plaguing the NBFCs is sought to be solved? Finally, what are the issues with the package? All such question are dwelled upon here!

Why ensuring flow of credit is important?

  • While assessing policy measures during the lockdown there are two over-arching principles one must keep in mind
  • One, the flow of funds will slow down with economic activity.
  • Two, firms do not go bankrupt because of insolvency, but because of lack of access to funds also called liquidity.
  • World over policymakers are pulling out all stops to make sure that the flow of credit continues.
  • Of the Rs 20-lakh-crore economic support announced by the Prime Minister on May 12, we have details for about Rs 16 lakh crore.
  • Monetary and financial interventions taken by the government and the RBI to provide credit to those who need it make up more than 90 per cent of it.

Limited impact of RBI’s measures

  • Most of the measures announced by the RBI earlier have not had the desired effect.
  • The quantum of cheap funds being made available being more or less the same as the increase in the amount being deposited in the RBI every night by banks.
  •  Just reducing the cost of funds (i.e. lower Repo rate and LTRO) had no impact on the volume and cost of the credit they provided.
  • This happened due to the heightened risk aversion in banks.

So, how government sought to address this problem?

  • The series of measures announced to provide credit support to the micro, small and medium enterprises (MSMEs) attempts to address this gap.
  • For MSMEs that have been servicing their loans so far new loans up to 20 per cent of the current outstanding credit will be fully backstopped by the government.
  • That is, if there is a default, the government will pay the bank.(i.e. act as a backstop).
  • So, how backstop by the government could help?
  • The move could lead to immediate credit creation, as guarantees are available only for loans extended in the next six months.
  • Also, the lenders have zero risk, and the borrowers are most likely stressed and would want these funds.
  • It is possible if not likely that firms will use these loans to just pay interest and cover losses.
  • But if so, that in a way is the purpose of this scheme — the government absorbing losses upfront rather than the likely larger lost taxes and potential bank bailouts if there is a bankruptcy.
  • For the government, the costs of this guarantee would be spread over several years, with at most 10 per cent incurred in this fiscal year.

Move to provide liquidity to NBFCs

  • The two schemes together, targeting to provide Rs 75,000 crore of liquidity to non-banking finance companies (NBFCs), may be a bit less successful.
  • The special purpose vehicle that is to provide liquidity to NBFCs provides funds for three months at a time, may succeed in addressing problems like an NBFC defaulting due to lack of liquidity.
  • But it may not suffice to get them to grow.
  • The partial credit guarantee given to banks’ loans to NBFCs may be more effective for a subset of NBFCs.
  • But as it is only available to public sector banks, it would depend on their willingness and ability to extend new loans.

Fund to provide equity for MSMEs

  • The Rs 50,000 crore fund to provide equity for MSMEs, with a corpus of Rs 10,000 crore being provided by the government, which would then be leveraged, is an interesting initiative.
  • Losses incurred in the current lockdown are depleting risk capital.
  • Replenishing if not growing that is paramount to restoring India’s growth potential.
  • While global as well as local private equity and venture capital funds would continue to explore and invest in smaller firms, such a fund can scale up the funds availability significantly.

Issues with the package

  • The natural limitation of the policy interventions thus far is that they only affect enterprises in the formal sector and in agriculture.
  • The problems in informal non-agricultural enterprises may stay unaddressed, and remain an impediment on growth.
  • While less than 10 per cent of the announcements thus far has been the fiscal cost.
  • One senses a fiscal caution in government measures that is overdone, and could hurt more than it helps. (avoiding direct expenditure)

Stability: of bond market and value of rupee

  • Two things minimised the volatility in the bond market: 1) pre-announcing the additional bond issuance for the year 2) giving an implicit assurance that additional deficits would be financed separately.
  • Even though that potentially means the RBI purchasing government bonds, the rupee has been remarkably stable.
  • There was fear that fiscal spending financed by the central bank would be frowned upon and drive currency weakness.

Consider the question-“MSME sector forms the backbone of Indian economy. List challenges it faces in present times. Critically analyse whether the current stimulus package is suitable to boost growth in this sector.”


The road ahead remains unclear, but it is likely that the economic damage is already much larger than the measures undertaken so far. A continued focus on reforms and on sustaining India’s growth potential will be critical in preventing macroeconomic instability.

Back2Basics: The two schemes announced for NBFCs

  • The FM announced a Rs 30,000-crore liquidity scheme for NBFCs.
  • The government will buy debt papers by NBCs, MFIs and HFCs.
  • The buying of papers will be fully guaranteed by the government of India.
  • Under this scheme investment will be made in both primary and secondary market transactions in investment-grade debt paper ofNBFCs/HFCs/MFIs.
  • The move is seen providing liquidity support for NBFCs and mutual funds and create confidence in the market.
  • The FM also announced Rs 45,000 crore partial credit guarantee scheme (PCGS) 2.0 for NBFCs.
  • Existing PCGS scheme will be extended to cover borrowings such as primary issuance of bonds/ CPs of such entities.
  • The first 20 per cent of loss will be borne by the government of India.

50000 Crore fund for MSMEs

  • Finance Minister Nirmala Sitharaman announced Rs 50,000-crore equity infusion through Fund of Funds for MSMEs.
  •  The Fund of Funds will be set up with a corpus of Rs 10,000 crore.
  • The Fund of Funds will be operated through a mother fund and a few daughter funds.
  • The fund structure will help leverage Rs 50,000 crore at daughter-fund levels.
  • This will help MSMEs expand size as well as capacity.
  • It will encourage MSMEs to get listed on the main board of stock exchanges, the government said.
  • Based on the recommendations of UK Sinha Committee, the Fund of Funds was first announced in the Union Budget on February 1, 2020.
  • An investment of Rs. 10,000 crore was proposed in the Budget for the scheme.


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Coronavirus – Economic Issues

What self-reliant economy means?


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Making the economy self reliant.

‘Atma-nirbhar’ has become a buzzword after PM Modi mentioned it in his speech. This article analyses the policy statement announced by the PM that focuses on self-reliance of the country in the future.  So, what exactly the term self-reliance could include? what are the areas in which India is dependent on other economies? Read the article to know more about these issues.

Policy statement of 1991

  • In 1991, only four policy statements were made —the end of licence-permit Raj, steep cuts in fiscal deficit and tariffs,  and devaluation of the Rupee.
  • With four policy measures, the economy was pulled out of a crisis and placed on a new growth path.
  • The key to 1991 was the political articulation of a vision that went beyond platitudes.

What is there in the PM’s vision statement?

  • The PM’s vision statement had four elements.
  • First, a step up in public spending and investment, aimed at promoting the welfare and raising the investment rate.
  • Second, policy reforms aimed at making the domestic economy more globally competitive.
  • Third, a long-term structural shift making the economy more “self-reliant” and less dependent on the world economy.
  • The fourth wheel of this new growth engine will be Lockdown Model 4 that is to be announced in a few days.

 Commitment of political leadership: key to spending and investment

  • Increased public spending will certainly boost demand and generate employment in the short term and add to infrastructure capacity in the medium term.
  • Policy reform, including changes in land, labour and other policies, could yield results in the medium term.
  • But for now, investors will wait and watch to test the sincerity and efficiency of governments at the Centre and in the states.
  • They will wait to see how the various policy steps being announced by the FM get implemented — how quickly and how efficiently.
  • The government can meet with success if investors, consumers and other economic agents believe in the commitment of the political leadership and the capability of the administration to deliver.

Focus on the self-reliance

  • PM has said that his version of self-reliance does not imply isolationism and inward-orientation.
  • His version of self-reliance will inject greater self-confidence in the people by reducing the country’s dependence on other nations.
  • Theotonio Dos Santos, defined dependence as a situation in which a country’s economy is “conditioned by the development and expansion of another economy”. 
  • He said that to be self-reliant the growth process of an economy “should not become dominated or dependent on another economy”.

So, on which economies is India excessively dependent?

  • 1. The oil-exporting economies.
  • Oil and gas account for a bulk of India’s imports.
  • Whatever new sources of energy India may tap in the foreseeable future, it will remain import-dependent for energy.
  • Fortunately, for India, the global crude oil and gas markets are likely to remain buyers’ markets for some time to come.
  • 2. Dependence on foreign exchange.
  • Second is the dependence on foreign exchange inflows both in the form of remittances, mainly from the Gulf and the US, and financial flows into capital markets.
  • It is not clear how the new Modi strategy of self-reliance proposes to deal with this dependence.
  • If anything, India is seeking more FDI and external debt.
  • 3. Defence equipment.
  • The third dependence is on imported defence equipment, mainly from Russia, the US, Israel and France.
  • 4. Electronic and pharmaceuticals.
  • Fourth, import dependence in electronic goods and pharmaceuticals, mainly from China.
  • Thus far, government policy does not address these dependencies.
  • The immediate focus of PM’s self-reliance seems to be China.

How to turn import dependence into import power?

  • Post-Deng Xiaoping China established long ago that for a large economy, it is possible to be both self-reliant and globalised at the same time.
  • Trade in itself does not create dependence if a country is able to grow both exports and imports.
  • China has demonstrated the geo-economic power of both exports and imports by making trade partners dependent on it on both counts.
  • When China refuses to buy wine and beef from Australia, it is using its import power, not demonstrating its import dependence.
  • If an economy is willing to live without those imports or can substitute them with domestic production, then it is not badly hurt.

So, what are the lessons for India?

  • It is export dependence that can make even a large economy vulnerable.
  • It is China’s dependence on US markets that President Donald Trump has aimed to reduce by waging a trade war.
  • India has never had such export dependence on any one country.
  • Indian government’s hope that multinational companies exiting China will relocate to India can only make India more export-dependent since these MNCs aim to sell globally.
  • Making India less dependent on China cannot be the only measure of self-reliance.

Consider the question “For India, it is not trading dependence that makes India vulnerable but the inadequacy of its human capital. Comment”


For India to be truly self-reliant and self-confident, public investment in education, human capability and research and development has to increase.

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Coronavirus – Economic Issues

A plan to revive the broken economy


From UPSC perspective, the following things are important :

Prelims level: MGNREGA

Mains level: Paper 3- Employment issues caused due to economic disruption of the pandemic.

The article suggests ways to revive the economy while keeping in mind the livelihood issues of the vulnerable section of society. Urgent concern should be addressed by the food and cash transfer, after that for livelihood in the rural area MGNREGA can be of great help. In the urban area, a  scheme based on the lines of MGNREGA is suggested. In the end, some ways to increase revenue are suggested.

Food and cash transfers

  • Providing every household with ₹7,000 per month for a period of three months and every individual with 10 kg of free foodgrains per month for a period of six months is likely to cost around 3% of our GDP (assuming 20% voluntary dropout).
  • This could be financed immediately through larger borrowing by the Centre from the Reserve Bank of India.
  • The Centre should also clear outstanding Goods and Services Tax compensation.
  • Food and cash transfer are doable for the following reasons.
  • First, foodgrains are plentiful, as the Food Corporation of India had 77 million tonnes, and rabi procurement could add 40 million tonnes.
  • Second, because of the lockdown restrictions multiplier effect would be less. (so, fewer concerns about inflation)
  • Third, cash transfers in many spheres will only enable current demand to continue (such as payment of house rent to continue occupancy) and not create any fresh demand.
  • Fourth, when greater normalcy finally allows demand held back during lockdown to the surface, output could also expand because of resumed economic activity.
  • Finally, putting money in the hands of the poor is the best stimulus to an economic revival, as it creates effective demand and in local markets.
  • Hence, an immediate programme of food and cash transfers must command the highest priority.

Need for changes in MGNREGA

  • Millions of migrant workers have gone back home, and are unlikely to return to towns in the foreseeable future.
  • Employment has to be provided to them where they are, for which the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) must be expanded greatly and revamped with wage arrears paid immediately.
  • The 100-day limit per household has to go.
  • Work has to be provided on demand without any limit to all adults.
  • And permissible work must include not just agricultural and construction work, but work in rural enterprises and in care activities too.
  • The revamped MGNREGS could cover wage bills of rural enterprises started by panchayats, along with those of existing rural enterprises, until they can stand on their own feet.
  • This can be an alternative strategy of development, recalling the successful experience of China’s Township and Village Enterprises (TVEs).
  • Public banks could provide credit to such panchayat-owned enterprises and also assume a nurturing role vis-à-vis them.
  • Pandemic highlighted unsustainability of the earlier globalisation.
  • Which means that growth in India in the coming days will have to be sustained by the home market.
  • Since the most important determinant of growth of the home market is agricultural growth, this must be urgently boosted.
  • The MGNREGS can be used for this, paying wages for land development and farm work for small and medium farmers.
  • Also the government support through remunerative procurement prices, subsidised institutional credit, other input subsidies, and redistribution of unused land with plantations is possible.
  • Agricultural growth in turn can promote rural enterprises, both by creating a demand for their products and by providing inputs for them to process.
  • Both these activities would generate substantial rural employment.

Focus on urban area

  • In urban areas, it is absolutely essential to revive the Micro, Small and Medium Enterprises (MSMEs).
  • Simultaneously, the vast numbers of workers who have stayed on in towns have to be provided with employment and income after our proposed cash transfers run out.
  • The best way to overcome both problems would be to introduce an Urban Employment Guarantee Programme, to serve diverse groups of the urban unemployed, including the educated unemployed.
  • Urban local bodies must take charge of this programme and would need to be revamped for this purpose.
  • “Permissible” work under this programme should include, for the present, work in the MSMEs.
  • This would ensure labour supply for the MSMEs and also cover their wage bills at the central government’s expense until they re-acquire robustness.
  • It should imaginatively also include care work, including of old, disabled and ailing persons, educational activities, and ensuring public services in slums.

The CARE economy: Public health, education, employment

  • The pandemic has underscored the extreme importance of a public health-care system, and the folly of privatisation of essential services.
  • The post-pandemic period must see significant increases in public expenditure on education and health, especially primary and secondary health including for the urban and rural poor.
  • The “care economy” provides immense scope for increasing employment.
  • Vacancies in public employment, especially in such activities, must be immediately filled.
  • Anganwadi and Accredited Social Health Activists/workers who provide essential services to the population, including during this pandemic, are paid a pittance and treated with extreme unfairness.
  • We must improve their status, treat them as regular government employees and give them proper remuneration and associated benefits, and greatly expand their coverage in settlements of the urban poor.
  • These could easily come within the total package announced by the Prime Minister, which could be financed by printing money.
  • But in the medium term, public revenues must be increased.
  • This is not because there is a shortage of real resources which, therefore, has to be taken from other existing uses through taxation.
  • Rather, since much-unutilised capacity exists in the economy, the shortage is not of real resources; the government has to just get command over them.

Suggestions to increase public revenue

  • A combination of wealth and inheritance taxation and getting multinational companies to pay the same effective rate as local companies through a system of unitary taxation will garner substantial public revenue.
  • They will also reduce wealth and income inequalities which have become horrendous.
  • A 2% wealth tax on the top 1% of the population, together with a 33% inheritance tax on the wealth they bequeath every year to their progeny, could finance an increase in government expenditure to the tune of 10% of GDP.
  • It would be argued that this might cause large financial outflows, which the country can ill-afford.
  • Contrarily, even foreign capital is more likely to be attracted to a growing economy than one in sharp decline because of a lack of stimulus.
  • Also, a fresh issue of special drawing rights by the International Monetary Fund which India has surprisingly opposed along with the United States would provide additional external resources.
  • These additional resources, would suffice to finance the institution of five universal, justiciable, fundamental economic rights:1) the right to food, 2)the right to employment, 3)the right to free public health care, 4)the right to free public education and 5)the right to a living old-age pension and disability benefits.

Consider the question, “The economic disruption caused by the pandemic threatens the progress made on the front of inclusive growth. Suggest the measures to ensure the livelihood of the economically vulnerable section of the society in the aftermath of the pandemic in rural and urban areas.”


The broken economy must be rebuilt in ways to ensure a life of dignity to the most disadvantaged citizen. The ways suggested here shows how to achieve that.

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Coronavirus – Economic Issues

JDY or NREGA card: What is better option for cash transfers?


From UPSC perspective, the following things are important :

Prelims level: JAM

Mains level: Paper 3- Issues associated with JAM and options to deal with them.

JAM Trinity is one of the flagship policy of the government. In times of COVID crisis, this article highlights some limits of JAM trinity. Issues of inclusion error, exclusion error and even problem of transparency with JAM accounts are discussed. The NREGA cards instead of Jan Dhan account is suggested as the better option. Why is it so? Read to know more…

High hopes from JAM

  • The original formulation, in 2015, mentioned two possible forms of the JAM trinity: mobile banking and post office payments.
  • The second option never made much progress.
  • So, Aadhaar-enabled mobile banking became the supreme goal.
  • In January 2017, NITI Aayog CEO Amitabh Kant predicted the imminent demise of all cash-transfer paraphernalia other than mobiles.
  • These hopes reached new heights as the JAM project latched on to another flourishing narrative, universal basic income (UBI).
  • If you want to make cash transfers to everyone, what better platform can you have than Aadhaar, India’s unique biometric ID, doubling up as a permanent financial address?

Corona crisis belied the hopes from JAM

  • In the early days of the crisis, JAM was often invoked sometimes along with UBI as a possible tool of emergency relief.
  • But when the time actually came to make cash transfers to the poor, JAM turned out to be of little use.
  • The JAM had not gone beyond some fancy digital-payment systems for the privileged.
  • Poor people were still running from pillar to post to collect their meagre benefits from old-fashioned bank accounts.
  • Some also use the services of “business correspondents”, but those have little to do with JAM.
  • Sure enough, long bank queues and related hardships started to emerge, especially in rural areas where the density of banks is relatively low.
  • In a Dalberg survey conducted last month in 10 states, only 25% of poor households reported that it was “easy” to access cash benefits.

NREGA job Cards: A better option than Jan Dhan Account

  • The lead cash-relief measure in the national relief package consists of monthly transfers of ₹500 to women’s JDY accounts.
  • But is that a good idea?
  • Let’s compare women’s JDY accounts with another possible basis for cash transfers, at least in rural areas: the list of households that have a National Rural Employment Guarantee Act (NREGA) job card.
  • The numbers of accounts are roughly comparable: about 14 crore for NREGA job cards, and 12 crore or so for women’s JDY accounts in rural and semi-urban.

JDY approach fares poorly on the following 3 counts

1. Lack of transparency and clarity

  • JDY accounts are a mighty mess – the NREGA job-cards list is far more transparent and well-organised. 
  • During the frantic initial JDY wave, in 2014-15, banks opened JDY accounts en masse to meet the targets. Banking norms were not followed always.
  • Later on, a large proportion of JDY accounts – 40% in March 2017, down to 19% in January 2020– went “dormant” as customers were unable or unwilling to use them.

2. Large exclusion error

  • The cash transfers to women’s JDY accounts are likely to involve large exclusion errors.
  • According to a recent Yale study, less than half of poor adult women have a JDY account, an even lower proportion, 21%, know that they have a JDY account.
  • The NREGA job-card list is likely to have much better coverage of poor households.
  • The natural complementarity between NREGA and social security pensions covering more than four crore persons under the National Social Assistance Programme alone would further help to reduce exclusion errors.

3. Large inclusion error

  • Inclusion errors are also likely to be larger in the JDY approach.
  • Job cards are meant for rural workers, JDY accounts are for everyone.
  • National Election Studies 2019 data show that JDY beneficiaries tend to be better-off than NREGA beneficiaries. ( and still, they would get benefits i.e. inclusion error)
  • Earlier survey data suggest that the probability of having a JDY account is more or less the same for poor and non-poor households.

Comparison on reliability basis

  • There have been significant issues e.g. delayed, rejected, blocked or diverted payments with NREGA payments, often related to Aadhaar.
  • But then, numerous “direct benefit transfer” schemes –social security pensions, scholarships, maternity benefits, among others have faced similar problems, also reflected in official transaction data.
  • Both the Aadhaar Payment Bridge System(APBS) and the Aadhaar-enabled Payment System (AePS) are shot through with technical glitches.
  • Transfers to women’s JDY accounts are unlikely to be more reliable than transfers to job-card holders.

Cash in hand option

  • As far as effective payment is concerned, there is a further argument in favour of the NREGA job-cards list.
  • Unlike JDY accounts, it lends itself to the “cash-in-hand” method on-the-spot payment in cash, instead of bank payments as a possible fallback.
  • The reason is that the job-cards list is a transparent, recursive household list with village and gram panchayat identifiers, while the list of JDY accounts is an opaque list of individual bank accounts.
  • Cash-in-hand may seem like the antithesis of JAM, but this option may become important in the near future if the banking system comes under further stress.
  • There are precedents of effective use of the cash-in-hand method, notably in Odisha for pension payments, and in various states for NREGA wage payments.
  • Several states including Andhra Pradesh, Odisha and Tamil Nadu have already resorted to cash-in-hand for relief payments during the lockdown.

Consider the question, ” The need for financial inclusion is far more in times of corona crisis. Discuss opportunities and challenges with respect to policies like JAM trinity during corona pandemic. Suggest other alternatives for such transfers.”


There is nothing compelling about the use of women’s JDY accounts for cash relief. In fact, it is a bit of a shot in the dark. The government do well to consider other options for further relief majors, including a switch to the NREGA job-cards list in rural areas.

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Coronavirus – Economic Issues

[pib] Atmanirbhar Bharat Abhiyan (Self-reliant India Mission)


From UPSC perspective, the following things are important :

Prelims level: Atmanirbhar Bharat Abhiyan

Mains level: Significance and need for such a mission

The PM has announced the Atma-nirbhar Bharat Abhiyan (or Self-reliant India Mission) and said that in the days to come the government would unveil the details of an economic package — worth Rs 20 lakh crore or 10% of India’s GDP in 2019-20 — aimed towards achieving this mission.

Try a question:

‘Doubling Farmer’s Income’ and ‘USD 5 trillion economy’  seems more like slogans today in wake of COVID pandemic. Comment on the statement with keeping in view the Atmanirbhar Bharat Abhiyan of the government.

Atmanirbhar Bharat: With a special package

  • PM has announced a special economic package and gave a clarion call for Self-reliant India.
  • The package will provide a much-needed boost towards achieving self-reliance.
  • This package, taken together with earlier announcements by the government during COVID crisis and decisions taken by RBI, is to the tune of Rs 20 lakh crore, which is equivalent to almost 10% of India’s GDP.
  • The package will also focus on land, labour, liquidity and laws. It will cater to various sections including cottage industry, MSMEs, labourers, middle class, and industries, among others.

Five pillars of a self-reliant India

PM iterated that a self-reliant India will stand on five pillars viz.

1) Economy, which brings in quantum jump and not incremental change

2) Infrastructure, which should become the identity of India

3) System, based on 21st-century technology-driven arrangements

4) Vibrant Demography, which is our source of energy for a self-reliant India and

5) Demand, whereby the strength of our demand and supply chain should be utilized to full capacity

Is this a new package?

  • The PM did not give the details, but he specified that this calculation of Rs 20 lakh crore includes what the government has already announced and the steps taken by the RBI.
  • This means the total amount of additional money — that is over and above what the government would have spent even in the absence of a Covid crisis — will not be Rs 20 lakh crore.
  • It would be substantially less.


  • That’s because the PM has included the actions of RBI, India’s central bank, as part of the government’s “fiscal” package, even though only the government controls the fiscal policy and not the RBI (which controls the ‘monetary’ policy).
  • Government expenditure and RBI’s actions are neither the same nor can they be added in this manner.

What did the RBI provide earlier?

  • A rough estimate suggests that the RBI’s decisions have provided additional liquidity of Rs 5-6 lakh crore since the start of the Covid-19 crisis.
  • Add this to the Rs 1.7 lakh crore of the first fiscal relief package announced by the Centre on March 26. Together, the two already account for 40 per cent of the Rs 20-lakh crore package.
  • That leaves an effective amount of Rs 12 lakh crore.
  • However, if the government is including RBI’s liquidity decisions in the calculation, then the actual fresh spending by the government could be considerably lower than Rs 12 lakh crore.
  • That’s because RBI has been coming out with long term bond-buying operations (long term repo operation or LTRO, to infuse liquidity into the banking system) worth Rs 1 lakh crore at a time.
  • If for argument’s sake, RBI comes out with another LTRO of Rs 1 lakh crore, then the overall fiscal help falls by the same amount.

Why shouldn’t RBI’s package be included in the overall package?

  • That is because direct expenditure by a government — either by way of wage subsidy or direct benefit transfer or any, immediately and necessarily stimulates the economy.
  • In other words, that money necessarily reaches the people — either as someone’s salary or someone’s purchase.
  • But credit easing by the RBI — that is, making more money available to the banks so that they can lend to the broader economy — is not like government expenditure.
  • That’s because, especially in times of crisis, banks may take that money from RBI and elsewhere and, instead of lending it, park it back with the RBI.

Back2Basics: Long Term Repo Operations (LTRO)

  • The LTRO is a tool under which the RBI provides 1-3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
  • Funds through LTRO are provided at the repo rate.
  • But usually, loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
  • According to the RBI, the LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
  • The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.

What are Repo and Reverse Repo rates?

  • The repo rate is the rate at which the RBI lends money to the banking system (or banks) for short durations.
  • The reverse repo rate is the rate at which banks can park their money with the RBI.
  • With both kinds of the repo, which is short for repurchase agreement, transactions happen via bonds — one party sells bonds to the other with the promise to buy them back (or repurchase them) at a later specified date.
  • In a growing economy, commercial banks need funds to lend to businesses.
  • One source of funds for such lending is the money they receive from common people who maintain savings deposits with the banks. Repo is another option.

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Coronavirus – Economic Issues

Relaxation in labour laws due to COVID-19 outbreak and their impacts


From UPSC perspective, the following things are important :

Prelims level: Various laws mentioned

Mains level: Lockdown and its impacts on Labour

  • Amid the coronavirus-induced lockdown, an increasing number of states that include Uttar Pradesh, Madhya Pradesh, Rajasthan and Gujarat have pushed through changes to their labour laws by way of amendments — ordinances or executive orders.
  • They aim to provide some sort of blanket exemption to employers from labour laws.

Practice Question

Q. Multiplicity of Labour laws in India has done little to address the plight of Labourers. Critically comment in context to the nationwide lockdown imposed due to the coronavirus outbreak.

What is the move all about?

  • Most states cleared an ordinance exempting businesses from the purview of most labour law provisions for the next three years.
  • However, labour laws related to bonded labour, deployment of women and children and timely payment of salaries are not changed.

Changes in the law

  • The changes in the labour laws will apply to both the existing businesses and the new factories being set up in the state.
  • Similarly, the Madhya Pradesh government has also suspended many labour laws for the next 1000 days.
  • Few important amendments are:
  • Employers can increase working hours in factories from 8 to 12 hours and are also allowed up to 72 hours a week in overtime, subject to the will of employees.
  • The factory registration now will be done in a day, instead of 30 days. And the licence should be renewed after 10 years, instead of a year. There is also the provision of penalty on officials not complying with the deadline.
  • Industrial Units will be exempted from majority of the provisions of the Industrial Disputes Act, 1947.
    • Organisations will be able to keep workers in service at their convenience.
    • The Labour Department or the labour court will not interfere in the action taken by industries.
    • Contractors employing less than 50 workers will be able to work without registration under the Contract Labour (Regulation and Abolition) Act, 1970.

 Major relaxations to new industrial units are:

    • Exempted from provisions on ‘right of workers’, which includes obtaining details of their health and safety at work, to get a better work environment which include drinking water, ventilation, crèches, weekly holidays and interval of rest, etc.
    • Exempted from the requirement of keeping registers and inspections and can change shifts at their convenience.
    • Employers are exempt from penalties in case of violation of labour laws.

Rationale Behind the Changes in Labour Laws

  • States have begun easing labour laws to attract investment and encourage industrial activity.
  • To protect the existing employment, and to provide employment to workers who have migrated back to their respective states.
  • Bring about transparency in the administrative procedures and convert the challenges of a distressed economy into opportunities.
  • To increase the revenue of states which have fallen due to closure of industrial units during Covid-19 lockdown.
  • Labour reform has been a demand of Industries for a long time. The changes became necessary as investors were stuck in a web of laws and red-tapism.
  • Businesses and economic activities have slowed down due to which labour welfare has also been affected due to the national lockdown.

What are the Indian Labour Laws?

  • Labour falls in the Concurrent List and there are many laws enacted by the Centre that a state cannot just brush aside.
  • Estimates vary but there are over 200 state laws and close to 50 central laws. And yet there is no set definition of “labour laws” in the country.

Their types

Broadly speaking, they can be divided into four categories. Refer to the image.

  • The main objectives of the Factories Act, for instance, are to ensure safety measures on factory premises and promote the health and welfare of workers.
  • The Shops and Commercial Establishments Act, on the other hand, aims to regulate hours of work, payment, overtime, a weekly day off with pay, other holidays with pay, annual leave, employment of children and young persons, and employment of women.
  • The Minimum Wages Act covers more workers than any other labour legislation.
  • The most contentious labour law, however, is the Industrial Disputes Act, 1947 as it relates to terms of service such as layoff, retrenchment, and closure of industrial enterprises and strikes and lockouts.

Why are labour laws often criticised?

  • Indian labour laws are often characterized as “inflexible”. Most of them are inadequate to make the sector formalized.
  • At present 90% of India’s workers are parts of the informal economy. The Chart shows, even the organised sector are increasingly employing workers without formal contracts.
  • Others have also pointed out that there are too many laws, often unnecessarily complicated, and not effectively implemented. This has laid the foundation for corruption and rent-seeking.

Issues with the recent relaxation


  • The state of UP has summarily suspended almost all labour laws including the Minimum Wages Act.
  • Hence this move is characterized as “creating an enabling environment for exploitation”.
  • That’s because far from being a reform, which essentially means an improvement from the status quo, the removal of all labour laws will not only strip the labour of its basic rights but also drive down wages.
  • For instance, what stops a firm from firing all existing employees and hiring them again at lower wages.
  • For one, as Chart 3 shows, even before the Covid-19 crisis, thanks to the deceleration in the economy, wage growth had been moderating.
  • Moreover, there was always a wide gap between formal and informal wage rates. For example, a woman working as a casual labourer in rural India earns just 20% of what a man earns in an urban formal setting.
  • If all labour laws are removed, most employment will effectively turn informal and bring down the wage rate sharply. And there is no way for any worker to even seek grievance redressal.


  • Moreover, far from pushing for a greater formalization of the workforce, this move will in one go turn the existing formal workers into informal workers as they would not get any social security.

3. Will reduce demand in the economy

  • Scrapping labour laws to save on labour costs will not help start the economy but will do exactly the opposite.
  • It will reduce wages, lower earnings (particularly of low wage workers) and reduce consumer demand.

4.Unlikely to spur economic growth?

  • Theoretically, it is possible to generate more employment in a market with fewer labour regulations.
  • However, as the experience of states that have relaxed labour laws in the past suggests, dismantling worker protection laws have failed to attract investments and increase employment.
  • It is unproven if they can cause an increase in worker exploitation or deterioration of working conditions. However, in the long run, employment will not increase, because of several reasons.

5. Enacted without any scrutiny:

  • Usually, any change in an Act follows a rigorous process of public consultation, scrutiny by committees of Parliament, and debates in the House before being approved.
  • The changes described here have not gone through such a process.
  • However, most of these have a three-month time limit, and any extension would need to be approved by the legislature.

What else could have been done?

1.Allow two shifts

  • There is already too much-unused capacity. Firms are shaving off salaries up to 40% and making job cuts. The overall demand has fallen. Which firm will hire more employees right now, he asked.
  • If the intention was to ensure more people have jobs, then states should not have increased the shift duration from 8 hours to 12 hours.
  • They should have allowed two shifts of 8-hours each instead so that more people can get a job.
  • This move and the resulting fall in wages will further depress the overall demand in the economy, thus hurting the recovery process.

2.Partnered with the industry

  • Most governments have done across the world have partnered with the industry and allocated 3% or 5% of the GDP towards sharing the wage burden and ensuring the health of the labourers.
  • Moreover, beyond labour regulations, firms face a lot of other hurdles like the shortage of skilled labour and the weak enforcement of contracts etc.
  • Time demands to secure the labour most than their employers.

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Coronavirus – Economic Issues

New approach to the revival of economy


From UPSC perspective, the following things are important :

Prelims level: NPA, IBC.

Mains level: Paper 3- Novel approach needed to deal with the bankruptcy problem.

As our attention now shifts to the revival of the economy, we have to take stock of the damage to the economy. As recently as 2008 we have faced a financial crisis, but this crisis is bigger in the scale and our fiscal health is weaker than it was at the time of the 2008 crisis. So, to deal with the situation we have to adopt a novel approach. What should be the approach? Read further to know.

From 2014 to Covid-19 in finance and banking

  • TBS challenge: As far back as December 2014, the banking sector and infrastructure firms had come under financial stress, a problem that was termed the Twin Balance Sheet (TBS) challenge.
  • By December 2019, the problem had spread to the NBFC and real estate sectors, raising the number of stressed balance sheets to four.
  • Following the Covid-19 shock, the problem of stressed balance sheets will spread across the economy.

How bad is the damage likely to be?

  • Reports suggest that around one-third of industrial and service firms have applied for moratoria on their bank loans.
  • If only a quarter of these deferred loans eventually go bad, then the stock of non-performing assets (NPAs) would increase by Rs 5 lakh crore.
  • Senior bank officials have been quoted as estimating that the stock of NPAs could increase by as much as Rs 9 lakh crore.
  • In this case, we would be looking at NPAs of Rs 18 lakh crore, equivalent to around 18 per cent of current loans outstanding.

So, how is the situation different from 2008 financial crisis?

  • At one level, the answer is simple: The shareholders of the financial institutions, which in most cases means the government.
  • But this is where the ubiquity of the balance sheet problem comes in.
  • When the TBS challenge first materialised, after the Global Financial Crisis of 2008-09, the government had a relatively strong balance sheet.
  • Deficits were low, and the consolidated debt-GDP ratio, having fallen by 17 percentage points over the previous 7 years, stood at just over 60 per cent of GDP.
  • So, fiscal room was available, allowing the government to recapitalise the PSU banks.
  • This time, the government’s financial position will be quite different.
  • Central and state government deficits and debts will increase dramatically this year.
  • Revenues, already slowing, have been decimated by the Covid crisis, while expenditures have increased.
  • Add in a slowly recovering economy, and it becomes clear that the fiscal position will remain weak for some considerable time.
  • What are the options with the government? The government will want to pass the burden onto the corporate and household sectors, in the form of higher taxes, more arrears, and possibly higher inflation.
  • But these sectors will resist, for they have financial problems of their own.

2 ways to minimise the size of the loss

  • It will be tempting to delay recognising the problem, pushing it into the future, by allowing banks not to classify bad loans as NPAs, and barring them from taking defaulters to the IBC system.
  • But this would be the wrong approach and there are two ways to minimise the loss.
  • 1. Prevent bankruptcies from occurring.
  • To do this, banks will need to identify the firms that are viable, and lend them the funds they need to tide them over the immediate crisis.
  • But banks are reluctant to bear the risk of making such loans.
  • So, the government might need to create a guarantee fund to support lending.
  • 2. When firms default, resolve as quickly as possible
  • Speed is necessary because the financial position of stressed firms tends to worsen over time.
  • By definition, stressed firms have poor cash flows and can’t obtain much in the way of loans from banks.
  • So, they don’t have enough money to fund their operations properly.
  • Which means that over time their underlying business deteriorates, destroying the firms’ market value.
  • While public attention focuses on the size of the NPAs, a much more important number is the recovery rate — the degree to which the banks can recover on these loans.
  • And the only way to maximise the recovery rate is to sort out the bad loans speedily.
  • The economy will reap an additional benefit since the resolved firms will be able to contribute to the recovery.

Consider the question “As the economy stares at the destruction caused by the pandemic certain novel measures to salvage the economy are necessary. In light of this statement suggest the measures that the government should take to avoid the NPA problem from mounting.”


A new approach is consequently needed. The immediate problems created by the crisis must be addressed, decisively and quickly. Then the attention will have to turn to address the pre-COVID legacy balance sheet problems.

Back2Basics: What is NPA?

  • A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
  • Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
  • Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  • Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

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Coronavirus – Economic Issues

Economy and the challenges ahead


From UPSC perspective, the following things are important :

Prelims level: GVA, Fiscal deficit

Mains level: Paper 3- Extent of damage to various sectors of the economy and challenges ahead for the government.

Various projections of growth paint a grim picture of the Indian economy as well as the global economy. This article analyses the sector-wise impact and comes with the GVA projections for 2020-21. The government has to deal with serious challenges like financing huge fiscal deficits. So, what will be the growth rate for 2020-21 and what will be the size of GVA? Read to know!

Projections of growth and uncertainty

  • Various institutions have assessed India’s growth prospects for 2020-21 ranging from 0.8% (Fitch)to 4.0% (Asian Development Bank).
  • This wide range indicates the extent of uncertainty and tentative nature of these forecasts.
  • The International Monetary Fund (IMF) has projected India’s growth at 1.9%, China’s at 1.2%, and the global growth at (-) 3.0%.
  • The actual growth outcome for India would depend on: 1) the speed at which the economy is opened up 2) the time it takes to contain the spread of virus, and, 3) the government’s policy support.

Health of India economy before the crisis

  • India slid into the novel coronavirus crisis on the back of a persistent economic downslide.
  • There was a sustained fall in the saving and investment rates with unutilised capacity in the industrial sector.
  • In 2019-20, there was a contraction in the Centre’s gross tax revenues in the first 11 months during April 2019 to February 2020, at (-) 0.8%.
  • These trends continue to beset the Indian economy in this crisis.

Growth prospects for 20-21 from the output side

  • In 2019-20, which would serve as the base year, India may show GVA growth of about 4.4%,
  • This is well below the Central Statistics Office’s second advance estimate of 9%.
  • The IMF’s GDP growth estimate for 2019-20 is at 2%.
  • GVA is divided into eight broad sectors. Although all sectors have been disrupted, some may be affected less than the others. We divide the output sectors in four groups.
  • Group A- This group is likely to suffer minimum disruption.
  • Agriculture and allied sectors, and public administration, defence.
  • Despite some labour shortage issues, agriculture sector may show near-normal performance.
  • The public and defence services have been nearly fully active, with the health services at the forefront of the the COVID-19 fight.
  • For the group A sectors, it may be possible to achieve 90% of the 2019-20 growth performance.
  • Group D- This group is likely to suffer maximum disruption.
  • This includes, trade, hotels, restaurants, travel and tourism under the broad group of “Trade, Hotels, Transport, Storage and Communications”.
  • This sector may be able to show 30% of 2019-20 growth performance.
  • Group B
  • This comprises sectors which may suffer average disruption showing 50% of 2019-20 growth performance.
  • These sectors are mining and quarrying, electricity, gas, water supply and other utility services, construction, and financial, real estate and professional services.
  • Group C
  • In this group come manufacturing which has suffered significant growth erosion in 2019-20.
  • It is feasible to stimulate this sector by supporting demand.
  • In this case a 40% performance factor on the average growth of the preceding three years is applied.

So, what are the estimates for 2020-21 GVA?

  • Considering these four groups together, a GVA growth of 2.9% is estimated for 2020-21.
  • Realising this requires strong policy support, particularly for the manufacturing sector which has a weight of 17.4%.
  • It is also based on the assumption that the Indian economy may move on to positive growth after the first quarter.
  • In the first quarter, GVA growth will be negative.

Policy support for the growth

  • Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
  • The Reserve Bank of India has also opened several special financing facilities.
  • These measures need to be supplemented by an appropriate fiscal stimulus.
  • Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
  • This may result in savings of ₹37,000 crore for the Centre and about ₹82,000 crore for the States, together amounting to 6% of GDP.
  • There is also talk of substantially reducing non-salary defence expenditure.
  • With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
  • These expenditure cuts are contemplated to keep the fiscal deficit under some control.

Fiscal stimulus and fiscal deficit

  • Fiscal stimulus can be of three types:
  • 1) Relief expenditure for protecting the poor and the marginalised.
  • 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
  • 3) Bailouts for industry and financial institutions.
  • The Centre had earlier announced a relief package of ₹1.7-lakh crore.
  • The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
  • Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
  • Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
  • These expenditures will have high multiplier effects.
  • Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.


  • Financing of the fiscal deficit poses a major challenge this year.
  • On the demand side, the Central (6.0%) and State governments (4.0%) and Central and State public sector undertakings (3.5%).
  • These together present a total public sector borrowing requirement (PSBR) of 13.5% of GDP.
  • Against this, the total available resources may at best be 9.5% of GDP.
  • The gap of 4.0% points of GDP may result in increased cost of borrowing for the Central and State governments.

Consider the question, “Examine the sector-wise damage caused to the economy due to Covid-19 pandemic. What were the fiscal and monetary measures taken to mitigate the damage and challenges faced by the government in meeting the required revenue demands.”


The gap in requirement of resources and availability may be bridged by enhancing net capital inflows including borrowing from abroad and by monetising some part of the Centre’s deficit. The monetisation of debt can at best be a one-time effort. This cannot become a general practice. 

Back2Basics: What is GVA?

  • GVA it is a measure of total output and income in the economy.
  • It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
  • It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
  • While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
  • Both measures need not match because of the difference in treatment of net taxes.
  • GDP = GVA + taxes on products – subsidies on products

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Coronavirus – Economic Issues

Is the perpetual bond a suitable option to raise money?


From UPSC perspective, the following things are important :

Prelims level: Perpetual bonds.

Mains level: Paper 3- What are the option available with the government to raise the money to fight the covid pandemic?

The government is exploring ways to raise money to deal with the destruction caused by COVID pandemic. One of the suggestion is the monetisation of fiscal deficit. But this article looks into an alternative approach of issuing bonds based on the idea of Consol bond issued by the British government during WW 2. So, how much amount needs to be raised? and why a perpetual bond like Consol bond is a suitable option for India? Read to know!

A gathering financial storm

  • India projected a deficit of ₹7.96-lakh crore in the Budget before the pandemic.
  • Adding to the above concern: 1) Off-balance sheet borrowings of 1% of GDP. 2) The overly excessive target of ₹2.1 lakh crore through disinvestments.
  • Thus, financial deficit number is set to grow by a wide margin owing to corona crisis.
  • There will be revenue shrinkage from the coming depression that will most certainly be accompanied by a lack of appetite for disinvestment.

Need for stimulus package and measures taken by the RBI

  • In addition to the expenditure that was planned, the government has to spend anywhere between ₹5-lakh crore and ₹6-lakh crore as a stimulus package.
  • The stimulus provided by the government so far and recent announcements by the Reserve Bank of India (RBI) achieved little.
  • All the RBI’s schemes are contingent on the availability of risk capital, the market for which has completely collapsed.
  • The government and the RBI have tried several times to increase lending to below investment grade micro, small and medium enterprises, but have come up short each time.
  • Furthermore, while the 60% increase in ways and means limits for States is a welcome move, many States have already asked for doubling the limits due to the shortages in indirect taxation collections from Goods and Services Tax, fuel and liquor.
  • The government and the central bank need to understand that half measures will do more harm than good.

What is the Consol Bond?

  • Consol bond is a form of British government bond that has no maturity and that pays a fixed coupon.
  • Consols are basically rare examples of actual perpetual bonds.
  • The bonds were issued in 1917 as the government sought to raise more money to finance the ongoing cost of the First World War.

So, why bond like Consol Bonds is a good option for India?

  • There is no denying the fact that the traditional option of monetising the deficit by having the central bank buy government bonds is one worth pursuing.
  • Citizens’ active participation is ensured in Consol Bond type alternative.
  • Furthermore, with the fall of real estate and given the lack of safe havens outside of gold, the bond would offer a dual benefit as a risk-free investment for retail investors.
  • When instrumented, it would be issued by the central government on a perpetual basis with a right to call it back when it seems fit.
  • An attractive coupon rate for the bond or tax rebates could also be an incentive for investors.
  • The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth.

The solution of bond offered here could be a valuable addition in points to the answer to the question which asks about the ways to raise money. Consider the question, “Economic devastation caused by the COVID pandemic has forced the government to explore the various ways to raise the money. Discuss the options available with the government and issues associated with the options.”


Politicians and epidemiologists across the world have used the word “war” to describe the situation the world is currently in. So, to raise the money to fight this war against Covid-19, we can take the cue from past and issue bond based on the Consol bond.

Back2Basics: What is fiscal deficit?

  • A fiscal deficit is a shortfall in a government’s income compared with its spending.
  • The government that has a fiscal deficit is spending beyond its means.
  • A fiscal deficit is calculated as a percentage of gross domestic product (GDP).
  • There can be different types of deficit in a budget depending upon the types of receipts and expenditure we take into consideration. Accordingly, there are three concepts of the deficit, namely-
  • Revenue deficit = Total revenue expenditure – Total revenue receipts.
  • Fiscal deficit = Total expenditure – Total receipts excluding borrowings.
  • Primary deficit = Fiscal deficit-Interest payments.
  • Primary deficit shows how much government borrowing is going to meet expenses other than interest payments.
  • Thus, zero primary deficits mean that the government has to resort to borrowing only to make interest payments.
  • To know the amount of borrowing on account of current expenditure over revenue, we need to calculate the primary deficit.
  • Thus, the primary deficit is equal to fiscal deficit less interest payments.

Perpetual Bonds

  • A perpetual bond, also known as a “consol bond” or “prep,” is fixed income security with no maturity date.
  • This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable.
  • However, the major benefit of them is that they pay a steady stream of interest payments forever.
  • Perpetual bonds exist within a small niche of the bond market.
  • This is mainly due to the fact that there are very few entities that are safe enough for investors to invest in a bond where the principal will never be repaid.
  • AT-1 bonds which were recently in news due to YES bank failure is an example of a perpetual bond.


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Coronavirus – Economic Issues

Stimulus package conundrum


From UPSC perspective, the following things are important :

Prelims level: Fiscal deficit.

Mains level: Paper 3- Stimulus package to tackle the covid-19 impact.

There are many suggestions and expectations around the stimulus package deal to revive the economy crippled post corona pandemic. While everyone agrees over the need of stimulus but there are several opinions and suggestion around the various aspects of the package like size, time, source of revenue etc. But we must be mindful of the pitfalls and constraints while thinking about the stimulus package. So, what are the suggestion and expectation and what are the limitations? Read to know!

1. Supply-side constraints on stimulus

  • It is argued that a fiscal stimulus package has to follow the timeline.
  • But you cannot ‘stimulate’ an economy during a supply-side lockdown.
  • And that there are ‘announcement effects’ — both good and bad — that go with the stimulus.
  • So, any ‘good stimulus’ can only come into effect post lockdown and extensive consultations are on with everyone for that.

2. What should be the size of the stimulus package?

  • While thinking about the stimulus, we cannot forget that government revenues too will be seriously hit.
  • The government revenue will be hit by 2-3% of GDP, given that disinvestment target itself is 1% of GDP and the realisation is likely to be close to zero in the current financial year.
  • So, the effective fiscal deficit is going to be somewhere around 7.5 % if you take into account all the off-balance sheet borrowings.
  • The U.S. government has set aside $2 trillion for bailouts or 9% of its GDP.
  • India’s starting point is going to be at around 7.5% of GDP fiscal deficit, then how much more can we afford on top of that?
  • On top of this is all the ‘merit expenditure’ on health and direct income support to the poor cannot be reduced.
  • Can we still formulate a stimulus package comprising 10% of GDP, to be footed by the Central government alone?

  Monetising the deficit and debt-to-GDP ratio

  • From 1947 to 1997, the Central government always routinely monetised its deficit, without leading to high rates of inflation, much less hyperinflation.
  • The Fiscal Responsibility and Budget Management (FRBM) limits are hardly a success and routinely all governments have broken the barrier.
  • Other countries with huge debt-to-GDP ratios like Japan (>200%) and U.S. (125%) get away with barely a rap on the knuckles.
  • But India is pulled up for minor slippages on a 70% debt-GDP ratio.

3. Should we pay attention to needs and forget about affordability?

  • Some have argued that bailouts should be based on need and not affordability.
  • Can printing money be a solution out of this situation?
  • Possible dangers of printing money: The currency could plunge, inflation soar high and rating agencies could downgrade us to junk.
  • So, shouldn’t there be a more nuanced approach to what constitutes a ‘good’ stimulus?

4. The problem of low credit flow despite high liquidity

  • There is a lot of liquidity in the economy, but limited credit is flowing due to anaemic lending.
  • Thus, another mantra being espoused is that bank managers should be incentivised to lend and the government should indemnify loans given during this period.
  • This could well lead to bogus companies springing up overnight to grab the stimulus in collusion with banks.
  • The government owes about ₹1 lakh crore on tax refunds and also had promised to make up for any difference to the States, if the GST did not grow by 14% per annum.
  • This is the time for it to transfer this to the States as a grant, for one year, to offset the revenue loss to States.

5. Should we go to the IMF?

  • There is talk of going to the International Monetary Fund (IMF).
  • Do we really need the IMF’s bailout which comes with conditions when there is no foreign exchange crisis for financing rupee expenditure?
  • Moreover, there is a perceived global stigma attached to doing so.
  • Won’t the conditionality-led cure be worse than the disease?

Consider the following question based on the issue “Economic crises accentuate the role of governments. Covid-19 has not been different. In light of the above statement, discuss the various issues that the government faced while coming up with a stimulus package to revive the economy. What are the sources of revenue to be tapped by the government?”


Fate is what happens to us. Destiny is what we make in spite of our fate. India’s destiny appears relatively safe, if we cast the mind’s eye around the globe. Lifting the lockdown will be the first step towards a good stimulus and one does need to un-handcuff a billion people to save their lives too.

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Coronavirus – Economic Issues

Pathways to design a resilient economy


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- India economy in the post Covid world.

The pandemic of COVID is a watershed moment in the way we look at the world. Truly, the future vocabularies will consist of ‘Pre COVID world’ and ‘Post COVID world’. Undoubtedly, the economic system shall be deeply affected by the COVID wave. The focus of this article is to redesign our economy through new 7 golden rules in the aftermath of Covid-19. As we read these ideas we also come across the faults that lie at the bottom of the present system. This is our opportunity to design a resilient and just system. So, what is the way forward to achieve this? Read to know!

  • When complex systems come to catastrophes, they re-emerge in distinctly new forms.
  • The COVID-19 global pandemic is a catastrophe, both for human lives and our complex
  • Economists cannot predict in what form the economy will emerge from it. But we can develop principles for what lies ahead.

7 Radical ideas to build back economy

The COVID-19 catastrophe has challenged the tenets of economics that have dominated public policy for the past 50 years.

Here are seven radical ideas emerging as pathways to build a more resilient economy and a more just society.

1. Time to rethink GDP as a measure of growth

  • The obsession with GDP as the measure of progress has been challenged often, but its challengers were dismissed.
  • Now, Nobel laureates in economics-Joseph Stiglitz, Amartya Sen, Abhijit Banerjee, Esther Duflo and others-are calling upon to rethink the fundamentals of economics, especially the purpose of GDP.
  • A five-point ‘de-growth’ manifesto by 170 Dutch academics has gone viral amidst the heightened Internet buzz during the lockdown.
  • Goals for human progress must be reset.

2. Opening boundaries is not always good

  • Boundary-lessness is a mantra for hyper-globalisers. Boundaries, they say, impede flows of trade, finance, and people.
  • However, since countries are at different stages of economic development, and have different compositions of resources, they must follow different paths to progress.
  • According to systems’ theory, sub-systems within complex systems must have boundaries around them, be permeable ones, so that the sub-systems can maintain their own integrity and evolve.
  • This is the explanation from systems science for the breakdown of the World Trade Organization (WTO).
  • In WTO system, all countries were expected to open their borders.
  • Opening borders caused harm to countries at different stages of development.
  • Now COVID-19 has given another reason to maintain sufficient boundaries.

3. Role of the government is indispensable

  • Ronald Reagan’s dictum, “Government is not the solution… Government is the problem”, has been upended by COVID-19.
  • Even capitalist corporations who wanted governments out of the way to make it easy for them to do business are lining up for government bailouts.

4. Problems caused by marketization

  • The “market” is not the best solution.
  • Money is a convenient currency for managing markets and for conducting transactions.
  • Whenever goods and services are left to markets, those who do not have money to obtain what they need are at loss.
  • Moreover, by a process of “cumulative causation”, those who have money and power can acquire even more in markets.
  • The “marketization” of economies has contributed to the increasing inequalities in wealth over the last 50 years, which Thomas Piketty and others have documented.

5. Focus on citizen welfare, not consumer welfare

  • In economies, human beings are consumers and producers. In societies, they are citizens.
  • Citizens have a broader set of needs than consumers.
  • Citizens’ needs cannot be fulfilled merely by enabling them to consume more goods and services.
  • They value justice, dignity, and societal harmony too.
  • Economists’ evaluations of the benefits of free trade, and competition policy too, which are based on consumer welfare alone.
  • Such evaluations fail to account for negative impacts on what citizens value.

6. Competition Vs. Collaboration

  • Competition must be restrained: Collaboration is essential for progress.
  • Faith in “Darwinian competition”, with the survival of only the fittest, underlies many problems of modern societies and economies.
  • Blind faith in competition misses the reality that human capabilities have advanced more than other species’ have, by evolving institutions for collective action.
  • Further progress, to achieve the Sustainable Development Goals will require collaboration among scientists in different disciplines and among diverse stakeholders, and collaboration among sovereign countries.
  • Improvement in abilities to share and govern common resources have become essential for human survival in the 21st century.

7. Public ownership of technologies

  • We are living in an era of knowledge.
  • Just as those who owned more land used to have more power before, now those who own knowledge have more power and wealth than the rest.
  • Intellectual property monopolies are producing enormous wealth for their owners, though many were developed on the back of huge public investments.
  • Moreover, powerful technologies can be used for benign or malign purposes.
  • It is imperative to evolve new institutions for public ownership of technologies and for the regulation of their use.

How to walk the talk?

  • COVID-19 has revealed structural weaknesses in the global economy. Putting more liquidity in the system as was done in case of 2008 crisis will not be sufficient.
  • The system is in the need of paradigm change.
  • 1. Coordination among experts
  • Experts need to work together with keeping in mind the larger picture.
  • The economic system cannot be redesigned by domain experts devising solutions within their silos.
  • 2. Focus on innovation
  • Innovations are required at many levels to create a more resilient and just world.
  • Innovations will be required in business models too, not just for business survival but also to move businesses out of the 20th-century paradigm that “the business of business must be only business”. 

The UPSC can ask a question based on the issues discussed here. Consider this question- “COVID has upended the global economy in such a way that it would need an overhaul. The basic tenets of the global economic order would undergo a revaluation. In light of the above statements examine the factors that contributed to the vulnerability of the Indian economy. Suggest the ways to make it more resilient and just.”


The redesign of economies, of businesses, and our lives, must begin with questions about purpose. What is the purpose of economic growth? What is the purpose of businesses and other institutions? What is the purpose of our lives? What needs, and whose needs, do institutions, and each of us, fulfil by our existence?

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Coronavirus – Economic Issues

Globalisation 2.0 after Covid-19


From UPSC perspective, the following things are important :

Prelims level: Various economies of the world and their share in the world economy.

Mains level: Paper 3- Impact of pandemic on globalisation.

The article discusses the future of the Globalisation after Covid-19. Globalisation 2.0 which has been dominated by China will see several changes in the post-pandemic world. Investment decisions and Global Value Chains would undergo a paradigm shift. The article is concluded by expressing the hope that pandemic doesn’t end  Globalisation 2.0 but it will certainly usher in the new rules of capitalism.

Globalisation 2.0 and issues with the flow of labour

  • What is Globalisation 2.0? In strictly economic terms, globalisation is about the free movement of capital, goods and labour across national borders.
  • Globalisation 2.0 began in the early 1980s and has lasted for four decades.
  • Under the 2.0 phenomenon, the labour flows were never as free as the movements of capital and goods.
  • This is because one does not necessarily see who produced the goods or capital coming into the borders.
  • But migrants are distinguishable, one can directly observe how ethnically, racially, religiously different they are from the mainstream.

Rise of right-wing politics in the US and UK due to labour flows

  • Labour flows is a major reason for triggering right-wing politics of nativism in present times.
  • Donald Trump directed his political campaign against non-white immigrants, especially Hispanics and Muslims.
  • He criticised businessmen who, in search of lower costs, had made China the destination of their accumulated investments, transferring jobs away from America’s industrial heartland.
  • Thus, his policies to levy higher tariffs to curtail freer trade. These policies made sure that the American corporations bring capital back to the US.
  • In Europe, a similar politics has been led by the UK, though less vociferously.

How China has benefited from Globalisation 2.0?

  • In 1980, China was the 48th largest economy in the world: with GDPs at roughly $200 billion, Indian and Chinese economies were similar in size.
  • In 2018, China, with a GDP of $13.6 trillion, was the second-largest economy in the world, behind the US ($20.5 trillion). But far ahead of Japan ($4.9 trillion), Germany ($4.0 trillion), Britain ($2.8 trillion), France ($2.8 trillion) and India ($2.7 trillion).
  • Not only in terms of GDP, but China had also become the largest trading nation in the world by 2018:
  • Exports: worth $2.5 trillion, substantially ahead of the US ($1.6 trillion).
  • FDI in China: In 2018, China attracted over $203 billion worth of net FDI, much more than India ($42 billion), and second only to the US ($258 billion).

Is COVID-19 a sign of ending Globalisation 2.0?

  • Despite the pure economic logic of how easy it is to manufacture at scale in China, the global leader today are more concerned about the political overtones.
  • Given all the doubts about how China handled the information about the origins of the virus in Wuhan, anger against China in world capitals is evident.
  • Such anger can have impact on the rules of globalisation.
  • Strict regulation of labour laws: We can expect labour flows will now be more strictly regulated than before.
  • Political risks in investment decisions: Western investors will also have to factor in political risks in their investment decision-making.
  • National security concern: New concerns like what if China threatens supply disruptions for critical materials.
  • Instead of chasing lower labour costs, investors will either bring capital back to domestic shores or geographically restructure their supply chains.
  • To summarize it, Globalisation will not end, but it will be pushed into greater retreat. Thus, changing the rules of the BIG game of capitalism.

A question based on the impact of the pandemic on the global trade, issues associated with and opportunities for India could be asked in the Mains Paper 3.

Also the Idea of Globalisation is important from the aspect of paper 1 and Essay. “Globalisation’ vs ‘Nationalism’ was one of the topic in Essay paper in 2009.


For the foreseeable future, economic efficiency, the cornerstone of market-based systems, will not be high on priority. Politics will drive new economic policies, not market-based rationality.

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Coronavirus – Economic Issues

RBI’s job involves trade-offs, not conflicts


From UPSC perspective, the following things are important :

Prelims level: Role of the RBI.

Mains level: Paper 3- Role of the RBI and trade-offs involved in its decisions.

The article discusses three things for the RBI to follow in fulfilling its role, these are- 1) Prudence 2) Flexibility 3) Acting within the mandate. Besides that, problems the RBI has been facing are also discussed. These things are discussed against the backdrop of Covid-19.

Role of the RBI

  • A central bank like the RBI must replace intellectual certainty with the continuous debate over their actions.
  • RBI’s job involves complex trade-offs — next quarter vs quarter century, growth vs stability, and mandates vs expectations.
  • A global anthropological shock-like COVID makes these trade-offs — they are not conflicts — even harder.
  • The RBI must remember three things — acting prudently to balance the next quarter and quarter century, acting flexibly to blunt this economic cataclysm, and acting within their mandate to ensure institutional legitimacy and immunity.

These three things are discussed below-

1. Acting prudently

  • If everybody believed that in the long run we are all dead, we would never sit under trees planted by people who had no chance of sitting under them.
  • The coronavirus is a human tragedy but a central bank must not act like a commercial bank because that would compromise the balance between today and tomorrow.
  • A narcissism — bordering on solipsism — already reflects in global debt levels that steal from our grandchildren.
  • More importantly, India doesn’t have the economic strength to copy the US Federal Reserve’s $2.3 trillion offer to lend to businesses of all sizes and sorts.
  • And run anything close to this year’s expected US fiscal deficit of 15 per cent of GDP, or sustain Japan’s public debt levels at 240 per cent of GDP.
  • We are all in the same storm but we are all not in the same boat.

2. Acting flexibly within the mandate

  • Renaissance physician Paracelsus had important advice for central banks; the dose makes the poison.
  • Anything powerful enough to help has the power to hurt; handling the inevitable tensions between the RBI’s dual mandate of growth and stability requires continuous work.
  • Our inflation targeting regime is a macroeconomic gift to India.
  • But recognising that is hardly inconsistent with acknowledging that inflation’s secular decline has many parents, some economic models are useful but all are incomplete, and the fog of war involves making second-best choices as long as they are reversible, proportional, and accountable.
  • Central banks often undertake liquidity management while leaving policy rates unchanged; current actions are not a conspiracy to undermine the MPC or its interest rate corridor (between reverse repo rate and MSF rate with repo rate midpoint targeting and call rate operating target).
  • They are a pragmatic encouragement for banks to lend to clients rather than lend Rs 7 lakh crore to the RBI.
  • Other virus flexibility includes repayment moratoriums (with 10 per cent provisions), bad loan accounting forbearance (despite past experience of breaking the thermometer doing little for the fever) and bank windows for NBFC/Mutual Fund liquidity.
  • Listening is hardly compromise.
  • Especially if accompanied by a will to unwind liquidity, asymmetry and forbearance when the planet’s gap year ends.

3. Follow the mandate

  • Central bank governance is a fine balance; they function best when they don’t declare separation from the government and they aren’t considered a part of the finance ministry.
  • The difficulty of balance isn’t uniquely Indian.
  • The RBI must build on its track record of wisely balancing the trade-offs between depositors vs borrowers, companies vs banks, and stability vs growth.
  • And it must continue to stay out of the government’s domain.
  • The central bank crisis role debate is skewed by the great book, Lords of Finance, by Liaquat Ahamed that shows how central bankers of the 1920s failed to fight the Great Depression.
  • History matters but nobody knows if this is the beginning or ending of the virus.
  • Yet the global central bank COVID toolbox has been substantial; buying corporate bonds, making corporate loans, cutting interest rates, conducting open market operations, and reducing reserve ratios.
  • Additionally, banks have been permitted to grant loan moratoriums, hold less capital, restructure loans, pay lower deposit insurance premiums and delay bad loan recognition.
  • The emergency authority under Section 13 of the US Federal Reserve Act being used — prematurely — also exists in Section 18 of the RBI Act.
  • But emergency powers are the last resort. We are not there yet.
  • The recovery being V-shaped, U-shaped, or Bathtub-shaped is only modellable after the lockdown.

Pre-existing problems facing the RBI

  • The RBI’s COVID balm is constrained by pre-existing conditions in Indian banking, which are given below-
  • Bad loans which peaked at Rs 14 lakh crore but still large.
  • Inadequate competition- scheduled commercial bank numbers have hovered between 90 and 100 since 1947.
  • Private bank governance- CEO so powerful that boards and shareholders are weak.
  • Public sector bank governance- shareholder so powerful that boards and CEOs are weak.
  • And the RBI’s own game (process, technology and human capital in regulation and supervision).
  • All these must be tackled with urgency when normalcy returns.

A question based on the role of the central bank can be asked by the UPSC. Consider the following question “Crises have always tested the utility of central banks, be it the Great Depression, 2008 financial crisis or Covid-19. In light of this statement, explains the trade-offs involved in the RBI’s decisions and how shocks like Covid-19 makes these trade-offs even harder.”

Way forward

  • Supplementing India’s fiscal and monetary policy interventions by announcing two bold reform plans — 90-day flick-of-pen and one-year structural — that tackle overdue reforms in labour, education, cities, finance, compliance, and civil services, will catalyse hope among employers, employees, banks, and overseas investors.


Creating a prosperous India needs many things. One of them is an independent, accountable, and boundaried central bank that listens.


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Coronavirus – Economic Issues

Pandemic calls for deep-set forces and scientific concepts of development for building a modern economy


From UPSC perspective, the following things are important :

Prelims level: e-VTOLs.

Mains level: Paper 3- Recovery strategy after Covid-19 and adoption of green technologies.

The article discusses the recovery strategies for India. There are three examples from the past from which we can draw the lessons. 1) Recovery of the US and Europe after the World Wars 2) Recovery of Japan after World War 3) China’s stimulus package after the 2008 financial crisis. In the case of the first two, climate change was not the factor. But in case of the 2008 financial package, China emphasised green technologies and was benefited from it. Drawing on China’s example, the article suggests three pronged strategy for India’s recovery taking into account the climate change factor.

Decisions on recovery and lessons from the past recovery frameworks

  • The decisions and directions taken by states from hereon will be judged ruthlessly by historical lenses.
  • Though India has managed the pandemic with relative precision, we cannot deny an impending emergence of a new socio-economic order, where the recovery is going to be hard-earned.
  • This is not the first time the world has faced an economic crisis and won’t be the last.
  • Can a country like India, which might be one of the few countries to come out of the crisis without a recession, take lessons from past recovery frameworks?
  • Recovery frameworks: Even though the very nature of the current health crisis is much different from the past crises like World Wars and their repercussions in Europe, the US and Japan.
  • But the evidence shows that ambitious recovery plans made these nation-states more prosperous than the pre-crisis period.

Recovery lessons form the western world after the World Wars

  • Hurt by the two World Wars and a Great Depression in between, the western world demonstrated unprecedented recovery to attain post-war full employment and stabilized income levels.
  • Almost thirty years between World War II and 1973 recession (“Glorious Thirties“), the countries like the US, Canada, Germany, and France experienced a golden period of growth.
  • In the US, the labour productivity grew at 2.82% per year which meant that productivity doubled every 25 years thanks to better machines driven by electricity and internal combustion engines, better education and massive capital investment.
  • The world wars accelerated technological innovations in energy, manufacturing and vastly improved the labour pool.

Recovery of Japan after World War

  • Severely hit by the war, Japan’s miraculous growth from 1950 to 1990 is another example of a state using great adversity to propel itself towards prosperity.
  • Post-war liberalization was augmented by multilateral trade agreements and export promotion schemes.
  • That propelled the Japanese economy to dizzying heights making it the second-largest economy at the time.
  • Apart from fiscal stimuli, immense efforts went into strengthening human capital by promoting R&D and skilling activities.
  • Suddenly, Japan becomes one of the most ingenious economies churning out one innovative product after another in fields like electronics.
  • In addition, pioneering quality systems made Japan the first Asian economy to become a developed state.

Recoveries based on values and technological innovations

  • All the above recoveries are rooted in modern values like create, explore and meet challenges.
  • While large investments garner a lot of attention, role played by massive skilling and resultant technological innovation should not be forgotten.
  • Skilling and innovation enabled creating goods and services of the future.

Climate change and recovery

  • These successful recovery plans did not have the responsibility to plan for an impending climate change hanging over our head by a thread.
  • The times were different; the needs were different: more importantly, the evidences were not as irrefutable as now.
  • A 2018 study titled ‘Earth’s future’, estimated that India will lose 10% of its GDP annually in a 3°C scenario and lose 14% of its GDP annually in a 4°C scenario in the long term.
  • And the time to act is ‘now’, as consequences of inaction are existential.

China’s stimulus after the 2008 crisis with a focus on green technologies

  • Fast-forwarding to the 21st century, the 2008–09 Chinese economic stimulus plan pumped in $586 billion to manage the crisis.
  • With serious money of $586 billion going into upgrading selected industrial sectors to firm up its presence in the global value chains (GVC).
  • Interestingly, a sizeable portion went into green technologies.
  • China understood that if the world is provided with affordable green technologies at scale, the states will incentivize the increasingly eco-aware consumers to buy these products.
  • Catalyzed by plans like “Ten Cities, Thousand Vehicles and “Thousand Talents Program (TTP)” and generous state incentives, China became a global leader in e-vehicles.
  • Chinese-made buses started roaming famous cities across the world, the roads traditionally dominated by European makers.
  • Powered by generous capital infusion, China also attained leadership in solar panels, batteries and associated supply chains in a short period setting up a sustainable growth module.
  • A lesson in fiscal prudence: The 2008–09 Chinese economic stimulus plan is also criticized for raising the Chinese debt levels, hence giving us lessons in fiscal prudence.

Should India opt for a green recovery module?

  • Can a developing India afford to allocate a significant portion of its precious resources towards a green recovery module?
  • Unbridled economic growth and sustainable development are not mutually exclusive.
  • In fact, we might not have a choice, given the movement of global supply chain towards green technologies and tightening screws around strict sustainability standards.
  • European Commission, for instance, has announced that every euro into the recovery plan will be linked to green recovery.

A three-pronged approach is suggested for recovery

1. Investment and incentives for green economic activities in the selected sectors

  • First, ambitious investment and incentives in catalyzing futuristic green economic activities in selected sectors.
  • Developing, manufacturing and deploying low carbon products could help India create more jobs: the kind of jobs that will survive into the future.
  • With Giga scale battery and solar manufacturing plans already underway, there is a huge demand globally for sustainable supply chain of even traditional sectors such as textiles.
  • India could choose 5 sectors where it can fill the sustainability vacuum helping the sub-continent emerge as a new global leader in those sectors.
  • India has the potential to scale-up currently ready technologies like e-VTOLs (intra-city electric aerial mobility), which will upend the global mobility modules, increasing the profitability of growing Indian e-mobility supply chain.
  • Companies like Hyundai who have already announced manufacturing of e-VTOLs should be attracted to India.
  • Crisis situations often provide policy windows, where all the stakeholders are empowered, and historically time-consuming decisions are fast-forwarded.
  • If India manages to efficiently remove regulatory bottlenecks and creates standards for e-VTOLs before anyone else, it will take a huge chunk of the global future mobility pie.
  • Similar initiatives for other strategic sectors could be carried out.

2. Resolve regulatory and on-ground legacy issues

  • Aggressively resolving on-ground legacy issues and challenges.
  • Shackles around entrepreneurship from labour laws to clearances regimes should be broken one by one.
  • It could be done by leveraging the cooperative and competitive federalism evidenced through the crisis under the able leadership of the Hon’ble Prime Minister.
  • And the current policy window might be an ideal opportunity for Indian democracy to deliver.

3. Focus on skilling people

  • Third, a big-ticket omni-channel skilling architecture should be instituted.
  • Universities should be empowered and enabled to come up with new-age educational programmes to serve futuristic industries.
  • A special focus should be given to develop enough trainers to train the millions of Indian youth getting ready for the labour market every year, in new-age skills.
  • Adequate online-offline training courses must be designed in a way that it does not affect daily wages drastically.
  • The big-ticket vocational programmes, specially directed at the informal sector which constitute more than 90% of the total workforce, has the potential to employ displaced and poor labourers.
  • A strategic skill committee may be empowered to dynamically identify key skills and tweak the training modules.
  • This can be integrated with the Ministry of Environment’s Green Skill Development Program to train 10 million youth by 2030.

The issues discussed here are important for achieving sustainable and inclusive growth. A question based on this theme was asked by UPSC in 2019.

Consider the question “It is argued that the strategy of inclusive growth is intended to meet the objectives of inclusiveness and sustainability together. Comment on this statement.”


The current pandemic calls for deep-set forces and scientific concepts of development for building a dynamic and modern economy. Green growth is one such concept that will add a new dimension to the economic dynamism of the sub-continent helping it serve the aspirations of its citizens.

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Coronavirus – Economic Issues

It is time to design clear rules for departure from accepted norms of fiscal prudence


From UPSC perspective, the following things are important :

Prelims level: Deficit financing through the RBI. Deflation.

Mains level: Paper 3- Necessity of stimulus package and risks involved in it.

This editorial spells out the size of the stimulus package that would be required to restart the economy. It also discusses the possible sources that the government could tap to raise the revenue. Such huge expenditure is likely to result in the huge fiscal deficit which would necessitate that the stimulus is time-bound and transparent.

Prospects of substantially negative growth

  • Arvind Subramanian has likened the current economic situation to a “pralay (deluge)”.
  • A deluge in which the government should spend more than even what it ought to in a rainy day.
  • India, the former chief economic adviser said that India must plan for a “substantially negative” growth this year that might require an additional fiscal expenditure of Rs 10 lakh crore.
  • Corporate indebtedness was already high before the lockdown.
  • Insolvency cases will mount further.
  • Even companies facing no significant cash flow issues wouldn’t invest in uncertain public health as well as the demand-constrained environment.
  • Banks, too, aren’t going to lend, no matter how much liquidity the Reserve Bank of India (RBI) may infuse.
  • The burden of non-performing assets, which is set to get heavier in the coming months, makes it impossible for them to finance an economic recovery.
  • Last, but not the least, are faced with layoffs and pay cuts, they would rather save and will be afraid to spend.

Importance of government spending in the current situation

  • Under the circumstances, the onus for ensuring that the wheels of the economy start moving lies on the government.
  • There’s no guarantee of it happening even with all lockdown restrictions being lifted.
  • Without somebody to spend, the economy is in real danger of contraction, which will, in turn, worsen the problem of businesses going bust, joblessness and loan defaults that can spread to the entire financial services industry.

No “3F” constraints and risk of deflationary shocks

  • The one consolation today is that India is not saddled with its traditional “3F” constraints — food, fuel and foreign exchange — which were triggers for inflation and balance of payments crises.
  • On the contrary, public foodgrain stocks are at an all-time high, global oil prices have crashed and there is no run on the rupee, unlike during the “taper tantrum” period of May-August 2013.
  • Risk of deflationary shock: The risks, if at all, are tilted more towards demand-side “deflationary shocks” than supply-side inflation concerns.

How will the government manage the resources?

  • The finances of both the Centre and states are in a mess, with receipts from tax and non-tax sources hardly covering even existing expenditures.
  • But governments enjoy sovereign borrowing powers that allow fund-raising at rates below that of triple A-rated instruments issued by private corporates, more so in the present risk-averse scenario.
  • Also, there is the option of deficit financing (“printing money”) through the RBI subscribing to primary auctions of government securities.
  • There are, of course, costs in such powers being exercised.
  • Past precedents — whether the issuance of ad hoc Treasury Bills to the RBI prior to April 1997 or the stimulus package post the 2008 global financial crisis — do not inspire confidence.

A question based on the stimulus package and its consequences can be framed, for ex- “Do you agree with the view that a stimulus package by the government to restart the economy is necessary? What are the options with the government to raise the money for such a package? What could the consequences of such a package on the economy in the future?”


This is the time to design clear rules for departure from accepted norms of fiscal prudence. Any stimulus has to be transparent and time-bound.

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Coronavirus – Economic Issues

Ease legal constraints on fiscal expenditure


From UPSC perspective, the following things are important :

Prelims level: FRBM Act provisions.

Mains level: Paper 3-Legal provisions for the fiscal consolidation that needs to be changed for the the stimulus package in the wake of corona pandemic.

The article discusses the two legal provisions that need to be changed in order to provide a fiscal stimulus of the size that could save the economy from collapse. Other major concern after the package would be the inflationary pressure resulting from government spending.

The urgency of the fiscal package by the Centre

  • The longer the Centre dithers over a big-bang fiscal package to counter the adverse economic fallout of covid-19, the closer it risks pushing India’s economy to the precipice of disaster.
  • The nationwide lockdown has more or less paralysed commercial activity, our exit path looks dreadfully long-winded, and the distress being seen right now could just be an early sign of what is to come.
  • The suffering of citizens will likely expand once the shutdown’s second-order effects, which operate with a lag, begin to kick in.
  • Estimates of ₹10 trillion needed by way of fiscal relief, once seen as too much by some, could yet turn out to be too little.
  • Either way, preparatory work in terms of legal enablers should be done alongside the arithmetic

Legal constraints in the way of the stimulus programme

  • There are two major constraints that we need to be relieved of—if only temporarily—for a stimulus programme to take shape.
  • The first is the Fiscal Responsibility and Budget Management (FRBM) Act of 2003.
  • And the second is the amendment done in 2016 of the Reserve Bank of India Act to give legislative cover to a flexible inflation-targeting framework that set our central bank the task of keeping India’s retail price index within a certain band.
  • Both of these were aimed at long-term economic stability but made no allowance for a robust fiscal response to the kind of crisis we now face.
  • It would be best if these were tweaked appropriately by a special session of Parliament.
  • If not, then ordinances should be issued to suspend specific restrictions for a while.

Projections of fiscal deficit

  • Under the budget presented in February, the Centre’s fiscal deficit for 2020-21 was projected at 3.5% of gross domestic product (GDP).
  • This included a half percentage point deviation from the FRBM glide path allowed by the law’s contingency clause.
  • Total expenditure was placed at a little over ₹30.4 trillion, and receipts at ₹22.4 trillion-plus.
  • With tax revenues and asset-sale realizations expected to fall short, the fiscal gap could widen to about ₹10 trillion even without any extra spending.
  • Drastic cuts in expenditure could save some money, but even if a heavy axe is wielded on expenses, the government’s deficit this year would have to exceed twice the legal limit for a stimulus that saves the economy from collapse.
  • If this turns out to be a year of negative growth, as some fear, effecting a revival will only get harder.
  • For pre-emptive action, the government should use its parliamentary clout to permit a limitless deficit for 2020-21.

A question based on the limits placed by the FRBM Act and the changes brought by the amendment to the RBI Act which mandated RBI with managing the inflation could be asked by the UPSC.

Prospects of inflationary pressure and RBI’s mandate

  • An effort to spend our way out of an economic morass could prove inflationary if too much cash ends up chasing too few goods and services.
  • As we have undergone both demand and supply shocks, opinion is divided on whether prices will go haywire.
  • This risk would depend on how much cash gets pumped around at what point in time and the pace at which supplies are restored.
  • In other words, the inflation outlook is highly uncertain.
  • But should prices threaten to rise, it would be counterproductive of the central bank to tamp them down by tightening credit.
  • As of now, RBI’s mandate is to keep inflation at 4%, with a tolerance band of 2% on either side.
  • This target is valid till March 2021, but needs to be reviewed right away to let the central bank focus on growth.
  • The acceptable range could be widened and the time limit to achieve the goal lengthened as a special reprieve.


A few tweaks of the law must go alongside calculations of a stimulus package designed to relieve economic distress. The government should act on these quickly to save the day.

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Coronavirus – Economic Issues

Recovery from COVID-19 is an opportunity to create economies that are more resilient and fair


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Creating economy that is resilient and fair.

This article discusses the three principles which could form the basis for recreation of the economy devastated by the Covid-19. The first is adopting the economies of “scope” instead of economies of scale. The second is about governance and focus on bottom-up approach. And third is about empowering the people.

Impact of Covid-19 on the ideology of globalisation

  • The history of the globalisation has turned out to be very brief.
  • In 2020, the global COVID-19 pandemic has forced millions of Indians to return to their villages.
  • Jetsetters have been locked in their gated communities.
  • Global supply chains have been broken apart.
  • People are scrambling for essentials from local suppliers.
  • The ideology of globalisation has hit realities on the ground.

Recovery from COVID-19 is an opportunity to create economies that are more resilient and fair. The following three architectural principles must apply.

1. Replace economies of scale by the economies of scope

  • COVID-19 has settled, for now, the debate between free-trade evangelists and advocates of industrial policy.
  • The vulnerability of global supply chains: A complex global economy in which local producers obtain scale (and lower costs) by supplying products for global markets is vulnerable to shutdowns anywhere.
  • The resilience of local economies: Local economies that have a variety of capabilities within them, albeit on smaller scales, are more resilient.
  • Therefore, local economic webs must be strengthened, in preference to global supply-chains.
  • “Make in India,” which was dismissed by free traders as a reversion to pre-1991 economic policies, has become a necessity.
  • Make in India is necessary to maintain supplies of essentials and to create employment for the hundreds of millions of Indians with fragile incomes who have been badly shaken by the lock-down of the Indian economy.

2. Local systems solution to global problems

  • Local systems solutions are essential for global systemic problems.
  • Privatisation: Garrett Hardin had coined the expression, “The Tragedy of the Commons”, in 1968.
  • The Tragedy of the Commons is a term for the proposition that a resource that belongs to everybody will not be cared for by anybody.
  • This supported policies to privatise public property, ostensibly for the benefit of everybody and became the dominant school of economics from the 1970s onwards.
  • A different explanation: Elinor Ostrom, who was awarded the Nobel Prize for economics in offered a different explanation for the tragedy of the commons.
  • She argued that common resources are well-managed when those who benefit from such resources the most are in close proximity to them.
  • For her, the tragedy occurred when external groups exerted their power (politically, economically or socially) to gain a personal advantage.
  • Bottom-up approach: She was greatly supportive of the “bottom-up” approach to issues: Government intervention could not be effective unless supported by individuals and communities.
  • The world is facing challenges of ecological sustainability and persistent inequalities, which seem to get worse with the prevailing paradigm of economic growth.
  • These challenges are described in the 17 Sustainable Development Goals (SDGs).
  • They cut across national boundaries.
  • They also span several domains of expertise and institutional mandates.
  • The final, 17th goal states the principle by which all the goals will be achieved — “partnerships”.

Actions theory Vs. Systems thinking

  • Action theory: The prevalent action theory, used by governments, businesses and philanthropic organisations to solve complex problems, focuses on breaking complex problems into components and then tackling the components in separate silos.
  • Problems caused by the actions theory: This widely prevalent theory of action has contributed greatly to causing the systemic, interconnected problems the SDGs now aim to address.
  • What is systems thinking: Effective action to address multiple challenges together requires “systems thinking” — that is, a systemic vision spanning across the problems.
  • Systems thinking is essential, amongst experts at the top and amongst partners on the ground.
  • Several organisations are promoting collaborative action with systems thinking on the ground in India.
  • Kudumbashree in Kerala has proven the power of community action.
  • The Foundation for Ecological Security, guided by Elinor Ostrom’s ideas, is working in many Indian states.
  • Dainik Bhaskar is promoting “SDG chaupals” in Indian villages.

3.  Empowering the people

  • The third principle for the new economy is, empower the people, the fundamental requirement for genuine democracy.
  • India’s Constitution seeks self-governance in India’s towns and villages.
  • These are not being implemented by governments and policy experts who do not want to give up power to the people.
  • India lives in its villages, Mahatma Gandhi had said. Most of India still does.
  • And many, who had migrated to cities looking for jobs, are returning, shaken by the pandemic.
  • Gandhi was a systems thinker. For Gandhi, the global village was an abstract concept.
  • This cannot be realised until local villages and towns become harmonious communities, where people live in harmony with each other and with nature around them.

The corona crisis has laid bare some of the problems associated with globalisation. It has forced a rethink of the economic policies and model adopted by the world. Against this backdrop, a question can be asked by the UPSC that demands the analysis of problems that have surfaced and solutions. For ex. “Covid-19 pandemic has brought into a sharp focus some inherent problems associated with the globalisation. In this context suggest the ways to make the Indian economy resilient to such shocks and fair to all the sections of society”


COVID-19 marks the end of the economics’ paradigm of the Washington Consensus. New models of economies, and new rules of global governance, must be bottom-up, not top-down. That’s how the whole world can move from relief, to recovery, and into resilience.

Back2Basics: What was the Washington Consensus?

  • The Washington Consensus refers to a set of free-market economic policies supported by prominent financial institutions such as the International Monetary Fund, the World Bank, and the U.S. Treasury.
  • A British economist named John Williamson coined the term Washington Consensus in 1989.
  • The ideas were intended to help developing countries that faced economic crises.
  • In summary, The Washington Consensus recommended structural reforms that increased the role of market forces in exchange for immediate financial help.
  • Some examples include free-floating exchange rates and free trade.

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Coronavirus – Economic Issues

It will take fiscal boldness now to relieve financial distress


From UPSC perspective, the following things are important :

Prelims level: Money multiplier.

Mains level: Paper 3- Government spending to sustain the economy hit by the corona crisis.

The article discusses the fiscal response of the government to deal with the corona crisis. Fiscal response to the 2008 financial crisis was higher in terms of GDP percentage. Also, a comparison with emerging peer economic indicates that India might be running the tighter fiscal policy in the time of crisis. The article suggests higher spending by going beyond the traditional fiscal space.

A possible explanation for moderate fiscal response by the government

  • The Indian government has till now come up with an insipid fiscal response to the ongoing economic crisis.
  • Long battle: One view is that the government does not want to fire all its bullets in what threatens to be a long battle. It wants to time its interventions.
  • Weak public finances: The other possible explanation for this fiscal timidity is that India has entered this crisis with weak public finances.

Comparison with finances at the 2008 financial crisis

  • The combined official fiscal deficit of the Union plus state governments was at its lowest level in many decades.
  • The economic boom of the preceding four years had led to higher tax collections pouring into the treasury.
  • The massive increase in spending announced in the budget of February 2008 was with an eye on the national election scheduled a year later, rather than in anticipation of a coming storm.
  • Then followed the second wave of fiscal expansion after the North Atlantic financial crisis hit Indian shores seven months later.
  • Back then, India’s effective fiscal stimulus over two years was a substantial 4.3% of gross domestic product (GDP).
  • In 2020, the crisis-driven spending plan announced by the government so far is less than 1% of GDP.
  • There could yet be a big fiscal push in the coming days.

Tighter fiscal policy in crisis compared to other emerging economies

  • Some of the budget estimates released a few days ago by the International Monetary Fund are telling.
  • In 2018, the total fiscal deficit of the Indian government as a proportion of GDP was 2.4 percentage points higher than the average for Asian emerging markets.
  • India is expected to end 2020 with a total fiscal deficit that will be 2.5 percentage points lower than Asia’s average.
  • In other words, India ran a looser fiscal policy compared to the rest of Asia in normal times, but is likely to run a tighter fiscal policy than its regional peers in a crisis year.
  • Something similar can be seen in estimates for public debt.
  • Asian public debt as a proportion of GDP is expected to go up by nine percentage points in 2020.
  • The comparable figure for India is 2.9 percentage points. (These estimates are being cited with full knowledge that forecasting models break down during extreme events.)

Funding extra expenditure through money creation

  • Lack of traditional fiscal space should not hold the government back in a crisis situation.
  • There are many options outside the consensus macro playbook.
  • Money creation: A commonly cited option right now is funding extra expenditure through money creation rather than borrowing.
  • The size of the Reserve Bank of India (RBI) balance sheet as a percentage of nominal GDP is close to its 35-year average.
  • There is scope for printing more money right now.
  • Lower inflationary pressure: And the inflationary consequences are likely to be muted because of the lower velocity of money amid a demand collapse.
  • Public finances in the future: Getting public finances back on track is a battle that lies in the future.
  • A rapid recovery in economic activity would be the best solution.
  • Otherwise, history tells us that countries have brought down their public debt numbers through some combination of financial repression, austerity, higher taxes and inflation.
  • Some element of capital controls could also be back in play.

Need for increasing discretionary government spending

  • The collapse in tax revenues as the economy is shut down will automatically lead to a rise in India’s fiscal deficit.
  • However, there is a need for an increase in discretionary government spending as well.
  • Economists have shown that spending multipliers are higher than tax multipliers in India.
  • In other words, the increase in economic output for every unit increase in the fiscal deficit is higher when the government spends rather than changes tax rates.
  • State’s spending Vs. Union spending: Spending by states gives more bang for the buck than equivalent spending by the Union government.

“Below the line measures” to support the economy

  • Also, there are options other than direct spending to support the economy.
  • Countries such as Germany, the UK, Italy, France and South Korea have complemented traditional fiscal expansions with “below the line” measures such as loans and guarantees to companies.
  • In an excellent recent study, analysts estimate that more than half of Indian corporate balances sheets will be unable to meet expenses with zero revenues.
  • They are careful to point out that their analysis is based on extreme assumptions that there is no fall in their wage bills, no revenues, and no access to fresh credit.

One of the common suggestions we have been coming across is the spending by the government by printing money. In this article, the second important suggestion is below the line measures. Take note of these measures and options available with the government.

Way forward

  • The poor need income support for their very survival. That should be at the top of any democratic government’s list of
  • However, protecting Indian companies from a financial collapse also matters, because otherwise, the economy will see a reduction in its capital stock, which will be needed both for a rapid recovery as well as job creation once the worst is over.
  • There are contagion risks in financial markets as well, going by what has happened to some mutual funds that were invested in bonds.


These are extraordinary times that require extraordinary measures. The danger from a delayed fiscal programme is that hysteresis may set in, as companies run out of money and supply chains are broken, damaging our economic prospects in the medium term.



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Coronavirus – Economic Issues

The universal delivery of food and cash transfers by the state amid Covid-19


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 2- Provision and suggestions to reduce the impact of corona crisis on the poor.

This focus of this article is on the universal delivery of food and cash transfer amid corona pandemic. There are some estimates of the cost of universal cash transfer and food delivery in the article and suggestion to ensure universal delivery.

Universal food and cash delivery is needed

  • The immediate need for universal food and cash delivery is by now obvious and urgent.
  • Across the country, there are reports of people — migrant workers, local workers, peasants, pastoralists, fisherpeople, vendors, ragpickers, and the destitute — facing extreme hardship, even starvation, because their livelihoods have been extinguished by the lockdown.
  • These have created further an unprecedented humanitarian crisis, as millions of households with depleted savings have no way to access food and other basic necessities over the coming weeks.
  • The threat of infection from COVID-19 makes even harder their coping mechanisms.
  • In these dire circumstances, it is essential for the state to directly provide the basic means of survival to anyone who needs it.
  • This must be in both cash and kind. Food access is the most important.
  • But because of the closure of economic activity and the absence of any livelihood opportunity, this must be combined with cash transfers to tide over this period and the immediate aftermath.
  • Food transfers must be provided for at least six months, and cash transfers for at least three months, though these can be extended depending on the period of lockdown.
  • Because of the severity of the crisis and the high probability of widespread hunger and descent into poverty, these transfers must be universal, made available to every person who needs them, without relying on exclusionary criteria, existing lists or biometric identification.

The points mentioned below give us the ideal of food-grain stocks with India. And there are also the estimates of how much would be required if we decide to go for universal delivery of food. The data given below is important from Mains perspective.

How much will be the cost of universal food delivery?

  • Consider first free universal provisioning of 10 kg of grain (wheat or rice) per person per month.
  • This is likely to be availed of by at most around 80 per cent of the population.
  • With an estimated population of 1.3 billion, providing this for six months would require 62.4 million tonnes of grain.
  • This is a maximal estimate — the actual requirement would be lower.
  • Stocks with the FCI: The FCI is currently holding 77 million tonnes of foodgrain stocks, compared to buffer stock norms of 24 million tonnes.
  • It is expected to procure another 40 million tonnes from the current rabi harvest.
  • It could easily release and allow the free distribution of foodgrain of 5 million tonnes and still have foodgrain stocks of 54.5 million tonnes, if the expected rabi procurement targets are met.
  • Cost of storing grains: Furthermore, it is costly for the FCI to store this grain. The current costs of storage are estimated to be Rs 5.60 per kilogramme per year or Rs 2.80 for six months.
  • This means that by releasing 4 million tonnes to feed the hungry of India over the next six months, the FCI would actually be saving Rs 17,472 crore, assuming that these idle stocks would have persisted.
  • But even if these were sold, the costs are the revenue that would have been earned.
  • This is difficult to estimate but by using Finance Minister’s estimates in Budget we get a (maximal) figure of Rs 1,17,000 crore.

Cost of universal cash transfer

  • In addition, a proposed cash transfer of Rs 7,000 per month for three months to every household, assuming again that 80 per cent of households would receive this.
  • With five persons per household, this expenditure would be Rs 4,36,800 crore.
  • The two transfers together amount to Rs 5,53,800 crore, or around 9 per cent of currently estimated GDP.

Financing the expenditure through fiscal deficit

  • This sum of Rs. 5,53,800 is not a forbidding sum.
  • A great part of the responsibility to make these resources available vests with the Union government.
  • But whatever taxes are introduced in a supplementary budget that has become unavoidable, the expenditure incurred has to be financed immediately through a fiscal deficit.
  • Given the massive deflationary pressures and a complete collapse of economic activity, there is a strong case for financing the additional public expenditure through deficit financing or borrowing directly from the RBI.
  • This is required both for coping with the pandemic and for softening the blow of the lockdown.

Following two suggestions are important suggestions for the delivery of food and cash in case we don’t have reliable data.

How to ensure universal delivery of food?

  • The question arises of how universal delivery of these food and cash transfers is to be ensured.
  • Existing lists are inadequate for the purpose because they significantly underestimate and exclude those who should be beneficiaries.
  • For example, at least 100 million people are excluded from access to food under the National Food Security Act based on the 2011 Census.
  • The most effective way of dealing with the food emergency is to provide food delivery at doorsteps or neighbourhood collection points to anyone who asks for it, with a simple marker such as the indelible ink used during elections to serve as the indicator of receipt.

How to endure universal delivery of cash?

  • For cash transfers, the matter is more complicated.
  • In rural India, MGNREGA job cards and pensions cover most households and allow bank payments.
  • The urban poor include migrants, contract and casual workers mostly in small and medium enterprises, daily wagers, domestic workers, self-employed persons like street vendors, sex workers and ragpickers, and the destitute including homeless people.
  • But there is no comprehensive record of the urban poor because the state has instituted no effective mechanisms to secure labour rights or social security rights to most urban workers.
  • The urban poor build and service the city, surviving without rights and a hostile or indifferent state.
  • The legally-mandated registration of inter-state migrants and construction workers in practice excludes most because their employers with the connivance of the state don’t wish to be bound to secure their rights.
  • The humanitarian emergency created by the pandemic and lockdown entails universal cash transfers again to every adult who presents herself to designated officials in decentralised offices.
  • For those who have accessible bank accounts, the funds can be credited to these accounts.
  • For others, the Odisha system, whereby pensions are disbursed as cash in hand at pre-specified times, maybe a useful model to follow.
  • This also can be adopted with indelible ink as proof of receipt.

Employment schemes after cash transfers

  • The income transfers must quickly give way to an expanded rural employment guarantee scheme, and a new urban employment programme.
  • These urban employment programs include caregiving and building water supply, sanitation and shelter for the urban poor.
  • Private hospitals also need to be nationalised at least for the duration of the pandemic.


The working and poor people should not be made to bear the burden of the pandemic. There is a need for a bold resolve, by central and state governments, to literally reach the last person, rural or urban, with the food and cash they require to survive with dignity.



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Coronavirus – Economic Issues

East India will require heavy investment to tide over the post-Covid loss of livelihood


From UPSC perspective, the following things are important :

Prelims level: Consumption expenditure.

Mains level: Paper 3- The lack of employment opportunities is one the biggest challenges facing eastern states and Covid-19 pandemic has made it the pressing issue. What are the reasons for the problem? Suggest the ways to deal with the problem.

The article discusses the issue of migrant labourers and the problems eastern states could face due to the return of labourers and the lack of employment opportunities in these states. The return of migrant labourers may lead to the mechanisation in the states where they worked. A relief-cum-stimulus package at least 5% of the GDP is suggested by the author.

IMF’s projections for the economy

  • The IMF’s projections for GDP growth for this year seem to be either in the negative or below 2 per cent for almost all major countries of the G-20 group.
  • India could do a little better compared to the other BRICS nations, but its growth will most likely be below 2 per cent.
  • This, of course, is under an optimistic scenario.
  • Many experts reckon that India could also go into negative GDP growth this year if it does not reboot the economy properly and in time.

The problem of collapse in demand

  • The Centre and the Reserve Bank of India are trying to remove all roadblocks so that factories and farms can resume operations.
  • The focus is largely on the supply side — how to ease restrictions and how to increase liquidity in the system for resuming production.
  • It may not take too long as the real problem is the collapse in demand.
  • And that demand may not pick up easily as the virus is likely to stay with us for quite some time.
  • We could have lockdowns again if there is a surge in infection.
  • This will surely limit our travel and restrict our shopping for non-essentials.
  • However, there is one demand that can easily revive — that of food.

Why food demand matters?

  • The NSSO survey of consumption expenditures for 2011-12 revealed that about 45 per cent of the total expenditure of an Indian household is on food.
  • For the poor, the NSSO reckoned, this figure was about 60 per cent.
  • We do not have information about the consumption patterns in 2020, guess is that about 35-40 per cent of the expenditure of an Indian household is on food and for a poor household, this figure is around 50 per cent.
  • Herein, lies the scope to reboot the economy.

Labour shortage and mechanisation

  • The sudden announcement of the nationwide lockdown gave labours no time to go back to their families.
  • They lost their jobs and incomes and having spent whatever little savings they had, these workers have been reduced to penury.
  • The Centre and states, despite their best efforts, have not managed to address the problem of hunger of these workers.
  • Even civil society has not managed to bridge the gap.
  • The migrant labourers may well have lost their trust in the state, and once the lockdown is lifted, most of them are likely to rush back to their families in villages.
  • And, it could be some time before they are back in the cities — that is, if they return at all.
  • So, farms and factories, especially the MSMEs in the relatively developed states of western, southern and north-western India are likely to face labour shortages for many months, perhaps years.
  • This could lead to more mechanisation of farms and factories in these states.
  • In Punjab, for example, most of the wheat harvesting is already done by combined harvesters.
  • Now even paddy harvesting could be done by mechanised harvesters.

The double challenge for states which are home to migrants

  • However, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour comes, will face a double challenge.
  • Their agriculture, with tiny farm holdings, is already saddled with a large labour force — this comprises 45 to 55 per cent of the total labour force of these states.
  • Non-farm income from wages and salaries, through migrant labour, was an important source of income for households in these states.
  • This is now severely hit. In all probability, the per capita rural incomes of these states could shrink, at least in the short run.
  • This could lead to poverty and increase hunger and malnutrition.
  • How does one then reboot the economy and also address hunger and malnutrition?

The lockdown and the subsequent plight of the migrant labourers brought to the fore uneven development in the country. The points mentioned below suggest the ways to address this problem. A question based on this issue could be asked by the UPSC, for ex- “The issue of migrant labourers amid Covid-19 pandemic highlighted the uneven development in the country. In this context, state the reasons which led to the uneven development of various regions of the country. Suggest ways to address the problem”.

The requirement of a special investment package for eastern states

  • A special investment package — like the Marshall Plan of USA in 1948 — for the eastern belt of India is required.
  • Investment should be used to build better infrastructure, agri-markets and godowns, rural housing, primary health centres, schools and enhances people’s skills.
  • The package will go a long way to revive the economy and augment the incomes of the migrant workers.
  • Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to the growth engines of agriculture as well as the MSME sector.
  • Building better supply chains for food directly from farm-to-fork, led by the private sector, will enhance the export competitiveness of agriculture.
  • It will also ensure a higher share of farmers in the consumers’ rupee.
  • Long-term demand-driven growth: Such broad-based development in a relatively underdeveloped region of the country will lay the foundations of a long-term, demand-driven, growth of the industry in India.
  • The all India relief package of Rs 1.7 lakh crore announced by the central government earlier, which is about 0.8 per cent of the country’s GDP, is too small to reboot the economy.


If India has to bounce back quickly, it needs a much bigger relief cum stimulus package — certainly not below 5 per cent of GDP. And, it should focus more on the eastern belt, where the issue is that of survival.

Back2Basics: Marshall Plan, 1948

  • The Marshall Plan, also known as the European Recovery Program, was a U.S. program providing aid to Western Europe following the devastation of World War II.
  • It was enacted in 1948 and provided more than $15 billion to help finance rebuilding efforts on the continent.
  • The brainchild of U.S. Secretary of State George C. Marshall, for whom it was named, it was crafted as a four-year plan to reconstruct cities, industries and infrastructure heavily damaged during the war and to remove trade barriers between European neighbours – as well as foster commerce between those countries and the United States.

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Coronavirus – Economic Issues

Lockdown with a human face: Immediate focus should be on alleviating hardships of poor, vulnerable groups


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- What measures are necessary to revive the economy after corona crisis?

The article deals with the policy response to the crisis. Reducing the pain inflicted on the poor and vulnerable section should be the priority. The size and nature of the stimulus package is also discussed in the article.

The dilemma of lives Vs. livelihood

  • As the coronavirus spreads, severe dilemmas haunt policymakers.
  • Testing of lockdown? Even the scientific community is confused and does not seem to know whether the South Korean model of more intensive testing is preferable to the European model of a complete lockdown.
  • The economic crisis that we are facing today is very different from any crisis that we have encountered recently.
  • This is the first economic crisis in recent memory to have been triggered by a non-economic factor — a pandemic.
  • A lockdown essentially amounts to limited economic activity and this results in throwing temporary workers and daily wage earners out of employment.
  • Migrant labour falls in this category.
  • According to the 2011 census, the number of migrant workers under the category, “migrants for work/employment” was 41.42 million.
  • This number must have grown substantially by now.
  • The impact of the lockdown has fallen very heavily on the poor and vulnerable groups.
  • We need to bear this in mind while evolving the strategy to combat the virus.

Expenditure during the pandemic

  • First, medical and healthcare expenditure, which includes the money spent on extension of hospital facilities, employment of additional medical and healthcare workers, costs of testing on a much wider scale and the purchase of accessories like personal protection equipment, ventilators and testing kits.
  • The expenditure under this category is a “must” and there can be no compromise on it.
  • The length of the battle will decide the cost.
  • Second, the expenditure involved in taking care of the people thrown out of employment, and other vulnerable sections of the population.
  • Third, stimulation expenditure aimed at restarting the economy. Here, the financial system presided over by the RBI will play an important role. But the government also has a role.

Two issues to consider while deciding on the lockdown

  • The “life” versus “livelihood” dilemma pertains to the lockdown policy.
  • A tight lockdown over an extended period may save lives by curtailing the progress of the virus.
  • But at the same time, it places several segments of society under severe hardship.
  • With the lack of economic activity, many will go hungry.
  • In this context, the government must look at two issues.
  • First, it must consider to the extent to which the lockdown can be relaxed while keeping in mind the priority of restricting the spread of the virus.
  • The government has recently announced some relaxations.
  • This is a welcome step. However, it must keep this concern under continuous consideration. It must explore other options on the medical front as well.
  • For example, will more testing make it possible to reduce restrictions?
  • Second, if the lockdown is a “compulsion”, we need to pay adequate attention to the plight of people who have been affected adversely.
  • The government had earlier announced certain measures to help some segments of society.
  • With the lockdown being extended, it is necessary to raise the levels of relief, and also cover segments of society not covered earlier — migrant labour, for example.

The following points about the stimulus package are appearing repeatedly in most of the article on economic damage to the economy. They are also relevant from the UPSC perspective. A question based on it,  like “What steps were taken by the government to revive the Indian economy in the aftermath of the corona crisis?” can be asked.

What should be the nature of the stimulus package?

  • There is much talk about a “stimulation package” to revive the economy.
  • The financial system will have to lead the charge.
  • Additional expenditure: Expectations regarding additional expenditures by the government vary from 2 per cent of the GDP to 5 per cent of the GDP.
  • Normal sources of financing will not be adequate to meet this order of expenditure.
  • Many analysts felt that the figure of 3.5 per cent of the GDP as the fiscal deficit, indicated in the budget for 2020-21, would be exceeded.
  • The pandemic will necessitate an increase in expenditure.
  • Moreover, with the decline in economic activity, revenues will also go down.
  • The revenue projections were made on the assumption that the nominal income growth would be 10 per cent.
  • But this is unlikely to be achieved. The nominal income growth is likely to be 7 per cent, at best.
  • Given the increase in expenditures and the slowdown in revenue collection, the borrowing programme will exceed significantly over what was indicated in the budget.
  • The monetisation of debt is inevitable and it will have its own consequences.
  • Provisions for states: The brunt of the expenditures will be borne by the state governments and therefore, the Centre must allocate additional resources to them.
  • They may also be allowed additional borrowing above 3 per cent of the state domestic product.

What will be the overall growth rate for India?

  • In the first quarter of 2020-21, the GDP growth rate will be negative.
  • Agricultural performance during the year could be the same as in 2019-20 as the rainfall is expected to be normal.
  • The developed world may go through a recession over the year.
  • Thus the external sector may not be of much help.
  • It is quite possible for the economy to have a V-type recovery from the second quarter of 2020-21.
  • On that assumption, the overall growth rate for the year can be 3 per cent. This is an optimistic estimate.


To return to the present, the focus of the government has to be two-fold. It must act vigorously to contain the virus, explore the possible alternatives to complete lockdown. Second, it must take all actions to provide adequate help to the poor and the needy including the migrant workers. Lockdown, as necessary, must be with a human face.


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Coronavirus – Economic Issues

Restarting the coronavirus-hit economy


From UPSC perspective, the following things are important :

Prelims level: Reproduction number-with respect to pandemic.

Mains level: Paper 3- What was the extent of damage caused by the Covid-19 to the India economy?

The theme of the article is the restarting of the Indian economy. Striking the right balance between livelihood and the spread of the virus is important for India. While India has been doing well on the curbing of the spread of the virus, its economy remains in the complete shutdown. So, we must restart our economy and this article offers some suggestions to do so and some trends that our economy is showing are discussed here.

Striking the balance between the economy and the spread of the virus

  • One critical problem is striking the right balance between curbing the spread of the virus and keeping the economy functioning.
  • We cannot have the poor, the labourers and the migrants bear the brunt of the effort to contain the spread of the virus.
  • And nor do we want to weaken the foundations of the economy so much that we emerge from the pandemic onto an economic wasteland.
  • The choice between lives and economy is also a choice between lives and lives.

Appreciation of India’s effort to curb the virus

  • India’s effort to curb the spread of the virus has received appreciation — not just the state of Kerala, which has got accolades from around the world, but the country as a whole.
  • The incidence of COVID-19 remains low in India.
  • Of every 10 million people, there are as yet 5 lives lost in India.
  • Comparison with the world: This is vastly lower, not just compared to Belgium, which tops the list with 5,180 fatalities for every 10 million people, but many other nations, such as the United States with 1,370 fatalities, Spain with 4,550, Italy with 4,080 and the UK with 2,550 fatalities.

One of the many puzzles associated with the Covid-19 is variation shown by it in fatality rate across the globe. Following are some figures about it.

Worldwide variation in the fatality rate

  • To be fair, the low fatality, per 10 million population, is not specific to just India.
  • We have comparably low figures currently in almost all African and South Asian nations.
  • Thus, it is seven for Bangladesh, three for Sri Lanka, nine for Pakistan, two for Tanzania, one for Nigeria, and 0.3 for Ethiopia.
  • No one fully understands these huge differences between Europe and North America, on the one hand, and Africa and South Asia, on the other.
  • Isolation of nation, not a factor: This cannot be because these nations are more isolated.
  • Bangladeshis are among the most globally scattered people and Ethiopia has huge interactions with China, but the fatality rates are low in both countries.
  • Why is this so? The short answer is we do not know.

Defeating the virus by keeping reproduction number below one

  • It is important to realise that the risk cannot be cut to zero — nothing in life is a zero-risk activity.
  • To defeat the virus, the aim has to be to keep the “reproduction number”, or R-0, down to less than one.
  • R-0 refers to the number of people, on average, who get infected by each infected person.
  • When R-0 reaches less than one in any given region, such as is the case in Kerala, we know that the incidence of the disease is winding down in that region.

Following points are important from the UPSC perspective. A question can be framed on the economic damage of the Covid-19, opportunities provided by it, its implications for the vulnerable section of the society, unemployment, international trade, changes in the economic policies of the government etc.

Coming out of lockdown: Economic policy challenge

  • The economic policy challenge is about how to come out of the lockdown.
  • This has to be done carefully, but quickly.
  • The stringency of India’s lockdown at top: A study by researchers at the University of Oxford, of the stringency of lockdowns in 73 countries, places India right on top.
  • For a short while, this is worth it, and also impressive for a populous nation like India.
  • Not desirable position: The top rank on the stringency index is not something any country will want to occupy for long.
  • That will have a devastating effect on the poor and damage the nation’s long-run economic prospects.

Trends in the Indian economy

  • Unemployment rate at an all-time high: There are studies showing that India’s unemployment rate is now at 24 per cent, an all-time high.
  • Biggest ever capital outflow in a month: March also saw the biggest outflow of capital from the nation ever recorded in one month — roughly $15 billion left the nation.
  • This also happens to be the largest capital outflow from any emerging economy in March.
  • Clearly, global players are reacting to the fact that the economy is not functioning.
  • Rupee at an all-time low: These sentiments have weakened the Indian rupee, which is now at an all-time low.
  • Some of these problems are inevitable in this dystopian world; we can deal with these problems for a short while.
  • Global trade: If these trends persist, India would end up ceding space to other nations in global trade, exports and business, and the suffering will be huge on the working classes.

Way forward in opening the economy

  • Once this phase of the lockdown ends on May 3, we will have to start opening businesses, allowing the private sector, especially the informal enterprises and small firms, to operate.
  • Rule of behaviour: There will have to be rules of behaviour in place, such as social distancing, masks, hand-washing, but we have to begin to facilitate poor labourers to reach their place of work, and our farms and factories to function.
  • Focus on participation, not permission: We have to encourage the rules of behaviour to continue by “participation” and not by bureaucratic “permission”.
  • India has a long history of the “permit raj”, where all businesses were beholden to the bureaucracy for what they did.
  • This had a tendency to strangle all but a few big firms and had held up the nation’s economic growth for long.


India stands at an important juncture. A misstep at such moment could turn the course of history for the nation. So, the right steps at various fronts from containing the spread to the reopening of the economy are required from the government.

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Coronavirus – Economic Issues

Fiscal empowerment of States


From UPSC perspective, the following things are important :

Prelims level: Ways and means advances, limit on the states for borrowing.

Mains level: Paper 3- Discuss the ways to ensure that the States do not face lack of resource in fight against Covid-19?

The article elaborates on the central role played by the States in the fight against Covid-19. The article emphasises the role that States can play in the implementation of the various measures to tackle the epidemic and economic revival of the country. It also highlights the lack of resources at the States’ disposal and reasons for the lack such as revenue loss in the lockdown and lower devolution by the Central Government. In the end, there is a suggestion to increase the borrowing limit of the States’.

Time to relax fiscal constraints on the States

  • The speed of economic revival will depend on how long it will take to revive economic activities and the volume of stimulus through public spending the government is able to provide.
  • It now appears that the lockdown will be lifted in stages and the recovery process will be prolonged.
  • The country is literally placed in financing a war-like situation.
  • The government will have to postpone the fiscal consolidation process for the present, loosen its purse strings and finance its deficits substantially through monetisation.
  • This is also the time for the government to announce relaxation in the States’ fiscal deficit limit to make them effective participants in the struggle.

The following points highlight the importance of States in dealing with the crisis. The federal structure of India comes to the fore here. The UPSC can aks question on this theme, for example, “Discuss the important role played by the States in dealing with the Covid-19 and how it underscores the federal character of the Indian polity?”

The important role played by the States

  • Prioritise health spending: It is also important for the States to realise the importance of health and prioritise spending on health-care services.
  • Being closer to the people, the States have a much larger responsibility in fighting this war.
  • Public health, as well as public order, are State subjects in the Constitution.
  • Acts invoked for lockdown: Some States were proactive in dealing with the COVID-19 outbreak by involving the Epidemic Diseases Act, 1897, even before the Government of India declared a universal lockdown invoking the Disaster Management Act, 2005.
  • Of course, the Centre under Entry 29 of the Concurrent List has the powers to set the rules of implementation which states, “Prevention of the extension from one State to another of infectious or contagious diseases or pests affecting men, animals or plants”.
  • Implementation at the ground level: While Central intervention was done to enable, “consistency in the application and implementation of various measures across the country”, the actual implementation on the ground level will have to be done at the State level.
  • Furthermore, States are better informed to decide the areas and activities where relaxations should be done as the coronavirus curve is flattened.
  • Coordination: Hopefully, there will be better coordination between the Union and State governments instead of claiming credit and apportioning blame.

Covid-19 has made clear the neglect and poor state of health in India. The UPSC can frame the question based on the health infrastructure and expenditure on it. The question can be framed on the following lines “Covid-19 has highlighted India’s lack of preparedness and the poor health infrastructure in the country. What are the reasons for it? Give suggestions to improve it.”

Neglect of the health-care sector in the country

  • The pandemic has underlined the historical neglect of the health-care sector in the country.
  • Expenditure on health as a percentage of GDP: The total public expenditures of Centre and States works out to a mere 3% of GDP.
  • In 2017-18, in per capita terms, the public expenditure on medical and public health varied from an abysmal ₹690 in Bihar and ₹814 in Uttar Pradesh to the highest of ₹2,092 in Kerala.
  • The centrally sponsored scheme, the National Health Mission, is inadequately funded, micromanaged with grants given under more than 2,000 heads and poorly targeted.
  • The focus of “Ayushman Bharat” has been to advocate insurance rather than building wellness centres.

Economic revival by the States

  • Besides protecting lives and livelihoods, States will have to initiate and facilitate economic revival, and that too would require substantial additional spending.
  • Hand holding small and medium enterprises which have completely ceased production, providing relief to farmers who have lost their perishable crops and preparing them for sowing in the kharif season are other tasks that require spending.
  • In fact, States have been proactive. Kerala came out with a comprehensive package allocating ₹20,000 crores to fight the pandemic.
  • Almost all States have taken measures to provide food to the needy besides ramping up health-care requirements.

Lack of resources and revenue loss suffered by the States

  • While the requirement of States for immediate expenditures is large, they are severely crippled in their resources.
  • In the lockdown period, there has virtually been no economic activity and they have not been able to generate any revenue from State excise duty, stamp duties and registration fees, motor vehicles tax or sales tax on high-speed diesel and motor spirit.
  • The revenue from Goods and Services Tax is stagnant and compensation on time for the loss of revenue has not been forthcoming.
  • As the recovery process will be staggered, it is doubtful whether tax revenues will register any positive growth in 2020-21.
  • Not surprisingly, the State has decided to monetise land through auctions to get money besides regularising unauthorised constructions by paying high fees.

Lower tax devolution from the Centre

  • The position regarding tax devolution from the Centre is even more precarious.
  • To begin with, the tax devolution in the Union Budget estimate is lower than the Commission’s estimate by ₹70,995 crores.
  • In fact, the Budget estimate for 2020-21 itself is a huge overestimate when seen against the 11-month actual collections in 2019-20.
  • The required growth to achieve the Budget estimate is 33.3% over the annualised actual collection.
  • The projections are that the growth of nominal GDP in 2020-21 will be just about 4%.
  • And if the tax revenue increases by the same rate, devolution to the States would be lower by ₹2.2-lakh crore than the Finance Commission’s estimate.
  • This results in a loss of ₹9,173 crores for Tamil Nadu, ₹9,000 crores for Andhra Pradesh, ₹8,000 crores for Karnataka, ₹4,671 crores for Telangana, and ₹4,255 crores for Kerala.
  • Supplementary report by the Finance Commission: There is a strong case for the States to go back to the Finance Commission with a request to make and give a supplementary report.

Of late, the poor fiscal health of the States has been in the news. Following are some of the factors that are responsible for it. A question can be asked with relation to this problem like “The States are facing fiscal constraints owing to the lack of revenue. What are the reasons for it? What are the options available to help the States to deal with such a situation?”

Problems faced by the States in raising resources

  • There is only a limited scope for expenditure switching and reprioritisation now.
  • Limited space for borrowing: Their borrowing space too is limited by the fiscal responsibility and budget management limit of 3% of Gross State Domestic Product (GSDP).
  • High yield no the State bonds: Faced with an acute fund crunch, Kerala floated 15-year bonds but was faced with a huge upsurge in the yield to 8.96%.
  • Increase in the WMA limit: The announcement by the Reserve Bank of India on the increase in the limit of ways and means advances by 60% of the levels prescribed in March 31 could help States to plan their borrowing better.
  • But that is too little to provide much relief.


It is important for the Central government to provide additional borrowing space by 2% of GSDP from the prevailing 3% of GSDP. This is the time to fiscally empower States to wage the COVID-19 war and trust them to spend on protecting lives, livelihoods and initiate an economic recovery.

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Coronavirus – Economic Issues

Super-power rivalries exacerbated by coronavirus pandemic offer India an opportunity


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3-What economic measures and reforms are needed to deal successfully with the crisis.

The article discusses three fronts on which actions are required viz- health, economy and geopolitics. How much the global economy is going to be affected? how the US-China rivalry would affect the recovery? what the lack of global coordination means? all such questioned are discussed here.  It also suggests actions that India should take to deal with the crisis.

Many unknowns than knowns about Covid-19

  • The virus currently has many more unknowns than knowns.
  • We don’t know for sure how it spreads, whether people can get re-infected, whether it is mutating, whether the hot weather kills it, and what the real fatality rate is.
  • We don’t know for sure how far we are from an anti-viral.
  • We know that we are at least 18 months away from having a vaccine that works and is available at scale.
  • Till an anti-viral is found, economic activity will be constrained, and this will affect people, industries and countries in disparate ways.

The extent of damage to the global economy

  • Loss of ten trillion dollars: The global economy is set to lose close to ten trillion dollars because of the “self-induced coma” it has been put into — to use Paul Krugman’s evocative phrase.
  • Loss of effectiveness of monetary policy: The preceding global financial crisis (GFC) has exhausted the efficacy of monetary tools.
  • In addition, corporates globally are leveraged to the tune of $12 trillion.
  • The slump in demand: The accompanying oil price collapse, beginning due to a spat between producers Saudi Arabia and Russia have been compounded by a precipitous slump in demand.
  • The Chinese economy can’t help as it did during the GFC, as it is hemmed in itself.
  • Even if it could, there is too much global suspicion of China to allow it to do so. So, countries will largely be on their own.

Tensions between the US and China

  • The tensions between the US and China have escalated into a full-scale superpower crisis after the virus spread.
  • Since 2010, there has been great concern in the US about China’s rise.
  • China’s muscular foreign policy together with its aggressive stance on multiple issues, most importantly on technology and technology standards, has created conflict.
  • The coronavirus is spreading in the US in an election year and smashing its economy.
  • The virus infected over three-quarter of a million people in the country and killed more than 40,000.
  • After this, China could be seen as enemy number one in the US.

No global coordination

  • No wonder then that at a time when the world yearns for global coordination, there is almost none — in healthcare responses and economic coordination.
  • Multilateral agencies, especially the WHO and UN, suffer a complete loss of credibility.
  • India needs to chart its own course in these turbulent times.
  • If India takes the requisite actions it may come out well.

Following suggestions are important from the UPSC perspective. The suggestions deals with three fronts-health, economic and geopolitics.

How India could come out of the crisis?

  • India needs to act at three levels — health, economic and geopolitical.

1. Actions at the health level

  • The Union Ministry of Health and Family Welfare has done well to stem the spread of the infection.
  • It has sensitised the public, introduced the concept of social distancing and isolation in the most challenging situations.
  • Now it must test at scale and isolate.

2. Actions at the economic level

  • Indians cannot afford to stay locked much longer.
  • We are too poor and too many of us live on a day-to-day basis — not even on a paycheck to paycheck basis.
  • Economic activity will be subdued in the near-term, but it must be “unlocked”.
  • The current IMF projections suggest that India will have the highest growth rate in the world this year.
  • Oil prices have collapsed, really helping our balance of payments.
  • Our food stocks are plentiful, the rabi crop has been good, and the prognosis for the monsoon is positive.
  • Low inflationary pressure: This, together with the fact that aggregate demand is down, will dampen inflationary impulses.
  • The “new RBI” has acted boldly and strongly.
  • It has taken prompt actions to reduce rates, increase liquidity, adjust prudential norms, allow moratoriums, and protect financial entities.
  • Indian is better placed: The weakened rupee will help our exports and with a debt to GDP ratio of about 73 per cent, along with better growth prospects, India is relatively better placed than several other countries.
  • We should, therefore, not unduly worry about our credit rating. This both allows and actually requires the government to act on the fiscal front.
  • The government needs to implement the following four steps to spur the economy.
  • (1) It should do so by “printing money” given the moderated inflation
  • (2) It needs to provide additional direct benefit transfers of Rs 2,000 every month for three months to Jan Dhan accounts, together with foodgrains release from the FCI, to the tune of around Rs 65,000 crore, to alleviate people’s miseries.
  • (3) It needs to protect MSMEs directly by providing them working capital (with an RBI backstop) and, like in the UK, provide 80 per cent of the salary to employees of the “GST-paying MSMEs” for six months.
  • (4) It needs to launch a massive public works programme outside the Budget as suggested by the chairman of CII’s National Committee of Infrastructure and PPP, Vinayak Chatterjee.
  • This fund should be earmarked for infrastructure and a quarter of its budget should be set aside for strengthening and upgrading primary health centres.
  • The allocation should not be less than Rs 200,000 crore.
  • Push through pending reforms: The government should take advantage of the crisis to push through much needed pending reforms in agriculture-especially those pertaining to APMC), power-pricing and discoms, banks-government ownership at 30 per cent and bad banks.
  • Revenue from private gold: Given the paucity of tax revenues, the government could also consider having the PM making an appeal for private gold from people and temples.
  • It could target 1,000 tonnes of gold worth $30 billion and offer a five per cent tax-free return repayable ($1.5 billion a year) after 10 years, in rupees or gold.

3. Actions at the geopolitical level

  • India can come out ahead if we act now.
  • Super-power rivalries will create opportunities to replace China as a major supplier to the US and Japan.


The battle to deal with the corona disaster has to be fought on many fronts. India must form a strategy and act on various front i.e. health, economic and geopolitical- to be victorious at the end.

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Coronavirus – Economic Issues

What is Helicopter Money?


From UPSC perspective, the following things are important :

Prelims level: Helicopter Money, Quantative easing

Mains level: Not Much

With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao earlier this month has said helicopter money can help states come out of this crisis.

Various monetary policy tools are being considered to boost consumer demand in the economy which is stricken by the coronavirus pandemic. Helicopter Money is one such tool.

What is Helicopter Money?

  • This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
  • It involves printing large sums of money and distributing it to the public. American economist Milton Friedman coined this term.
  • It basically denotes a helicopter dropping money from the sky.
  • Friedman used the term to signify “unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.”
  • Under such a policy, a central bank “directly increases the money supply and, via the government, distributes the new cash to the population with the aim of boosting demand and inflation.”

Is helicopter money the same as quantitative easing (QE)?

  • Quantitative easing involves the use of printed money by central banks to buy government bonds.
  • But not everyone views the money used in QE as helicopter money.
  • It sure means printing money to monetize government deficits, but the govt has to pay back for the assets that the central bank buys.
  • It’s not the same as bond-buying by central banks “in which bank-owned assets are swapped for new central bank reserves.
  • Helicopter money is also different from a central bank directly financing the debt of a government.

Pros and cons of helicopter money


  • Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.
  • Generally, helicopter money boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
  • While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.


  • Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
  • A country’s central bank sets its interest rates to reach economic growth targets.
  • However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan).
  • Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
  • One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market.
  • As more money is printed and supply increases, the value of the domestic currency could significantly decrease.
  • It could also discourage speculators from buying the currency as it is less likely to perform well.

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Coronavirus – Economic Issues

Economy in lockdown: On India’s worst-case scenario


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- A stimulus package to deal with the economic disruption of pandemic is suggested by various experts. What should be its size and how effective it would be in your opinion?

This op-ed discusses the latest projections by the IMF. The latest projection and suggestions by IMF are the bleak reminder of economic disruption we have been experiencing.

IMF discards its previous projections

  • Less than two months ago, IMF had asserted that “global growth appears to be bottoming out” (i.e. announcing the worst is over).
  • But the pandemic induced ‘Great Lockdown’ has forced the IMF to junk all its previous projections for economic output in 2020.
  • Faced with the stark reality of sweeping shutdowns of almost entire economies worldwide, the fund last week acknowledged that the current “crisis is like no other”.
  • The IMF slashed its projection by 6.3 percentage points from its January forecast for 3.3% growth to a 3% decline.
  • This is the sharpest contraction in world output since the Great Depression of the 1930s.
  • Comparison with 2009 slowdown: In contrast, the recession of 2009 saw world output contract by a mere 0.1%.
  • The IMF was blindsided by the comments from Chinese authorities and WHO.
  • Which is clear from the fact that as recently as February 22, the fund’s chief, Kristalina Georgieva, told G20 Finance Ministers that “global growth would be about 0.1 percentage points lower” than forecast in January.
  • China’s GDP, she projected, would expand by 5.6% this year, 0.4 percentage points slower than assumed in January.

Latest projections for China by the IMF

  • Last week, the IMF slashed China’s forecast to a growth of 1.2%, citing data on industrial production, retail sales, and fixed asset investment that, it said, suggested a contraction of about 8% in the first quarter.
  • China reported a 6.8% first-quarter contraction.
  • Still, in projecting an annual expansion in Asia’s largest economy, the fund is rather optimistically foreseeing a sharp rebound in activity over the rest of the year.

The following data of the revised projections gives us an idea about the extent to which the crisis has been damaging the economy. There are also suggestions about the strategy to deal with the crisis and that includes a stimulus package.

Projections and suggestions for India

  • On India, the IMF has cut its projection for growth in the fiscal year that started on April 1, from January’s 5.8%, to 1.9%.
  • This projection is base on two assumptions given below.
  • 1. This again appears predicated on the fund’s baseline scenario that assumes that the pandemic would ‘fade in the second half of 2020’, allowing containment efforts to be unwound and economic activity to normalise.
  • 2. Another key assumption by the IMF’s economists is the availability of policy support to nurture the revival once activity restarts.
  • Suggestion for India: Jettisoning its storied fiscal conservatism, the IMF’s chief economist, Gita Gopinath, has advocated ramping up a broad-based and coordinated stimulus once the disease has been contained.
  • Such measures would help avoid the errors of the Great Depression years when premature efforts to prune budget deficits prolonged the downturn.
  • Inadequate fiscal measures in India: In this context, India’s fiscal measures pale in terms of scale when compared with what several other nations have undertaken.


Given the size of the informal sector in India as well as the anticipated prolonged disruption in labour supply even in more formal parts of the economy, the Centre needs to proactively commit to a substantial stimulus package in order to ensure that once the economy reopens, it has the legs to run.

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Coronavirus – Economic Issues

How the RBI is handling ‘The Great Lockdown’?


From UPSC perspective, the following things are important :

Prelims level: Various terms mentioned in the newscard

Mains level: RBI measures to boost the pandemic stricken economy

To deal with the crippling effects of the pandemic on the economy the government has unveiled certain fiscal measures. After announcing the first round of monetary measures the RBI has unveiled the second round of policy announcements to align itself with the government in its efforts to review the economy. Following are the measures announced by the RBI in its second such announcement.

  • The IMF has called the ongoing economic crisis due to Covid-19 as “The Great Lockdown” and termed it to be the worst recession since the Great Depression.
  • The total estimated loss to global economic growth is pegged at $9 trillion — more than three times India’s GDP.
  • However, while the rest of the world is certain to contract, India is hoping to be one of the few countries that expand their overall GDP, regardless of how small that increase may be.
  • In this regard, both the Centre and state governments, as well as the RBI, have been coming out with policy announcements that mitigate economic distress.

UPSC can frame the question based on the measures announced by the RBI like “What measures were announced by the RBI to deal with Covid-19 impact on the economy?”. Also, pay attention to various terms and their effect on the economy from the macroeconomic point of view. That understanding helps us to answer the question based on basic concepts.

What are the announcements made by RBI?

A) Cutting Reverse-Repo Rate

  • To begin with, the RBI has cut the reverse repo rate further by 25 basis points (100 basis points make up one full percentage point).
  • The reverse repo rate now stands at 3.75 per cent while the repo rate is 4.40 per cent.
  • The idea behind repeatedly cutting reverse repo more than the repo is to incentivise banks to borrow from it at low rates and lend it forward to customers.

B) Targeted Long Term Repo Operations

  • RBI has announced another TLTRO of Rs 50,000 crore but this time it has mandated that 50 per cent of this amount borrowed by the banks must go to small and mid-sized NBFCs and Micro Finance Institutions (MFIs).
  • Again, the benefits of this move are two-fold. One, it provides more liquidity.
  • More importantly, it also provides it targeted to those institutions that are most hit by the economic slowdown and, as such, most in need of funds to survive themselves.

C) Credit to NBFCs and MFIs

  • All India financial institutions (AIFIs) such as the NABARD, etc. will be provided special refinance facilities for a total amount of Rs 50,000 crore by the RBI.
  • This credit will help the end consumer, especially in the rural sector, small industries, and housing finance companies.

D) Expanding Ways and Means Advances (WMAs)

  • On the issue of providing liquidity and fulfilling its role as “the lender of last resort”, the RBI also announced that it will provide more funding to state governments — under the WMA facility.
  • The WMA is essentially is a facility by which state governments borrow from the RBI to meet the shortfall between their revenues and their expenditure.
  • But the WMA is a short-term measure, only meant for exigencies.

E) Easing NPA norms

  • Apart from easing liquidity in the system like in the past, the other focus has been to provide an easier regulatory regime.
  • The global lockdown has almost completely halted economic activity.
  • Under the circumstances, it is natural that business will struggle to pay back their loans and there will be a steady accretion of non-performing assets (NPAs) across the board.
  • Similarly, to ensure that loans given to real estate projects, that are getting delayed due to the crisis, do not turn into NPAs, the RBI provided an extension of another year before they are recognised as NPAs.

F) Easing LCR norms

  • Lastly, given the stress on the system and the demand for cash, the RBI has allowed Scheduled Commercial Banks to reduce their Liquidity Coverage Ratio from 100 per cent to 80 per cent with immediate effect.
  • The LCR essentially mandates the amount of cash that a bank is required to keep with itself.
  • At 100 per cent LCR, a bank would have been required to keep 100 per cent of the net cash it expects to flow out of the bank over the next 30 days.
  • With this being reduced to 80 per cent, banks would have more cash to deal with.

Though no direct question on monetary policy was asked in the recent past,  understanding the basic concepts stands us in good stead while writing the related answer in the exam. So, the terms mentioned above like-TLTRO, WMAs etc. are important from exam point of view.

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Coronavirus – Economic Issues

Economic liberalisation and its faults


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- How the Covid-19 brought into focus the faults of economic liberalisation.

The article describes the problems economic liberalisation has created. Covid-19 has exposed these problems even as developed countries faced shortages of masks and ventilators. The focus is on China’s dominance as a manufacturing hub and its implication for the world and India.

Background of the end of the ‘Licence Raj’ in India

  • Manmohan Singh’s 1991-92 Budget speech marked the beginning of the end of the ‘Licence Raj’ in India.
  • The Budget also announced the reduction of import duties and paved the way for foreign-manufactured goods to flow into India.
  • Following this, most of the manufacturing sector was opened up to foreign direct investment.
  • India’s industrial policy was virtually junked, and policymakers and the political leadership became contemptuous of the idea of self-reliance.

Shifting of the base in developing countries

  • In the late 1980s, transnational corporations started shifting the production base to smaller companies in developing countries, especially Asia.
  • The reason for this shift was cheap labour and raw materials.
  • Developed countries supported the move because shifting the polluting and labour-intensive industries suited them as long as ownership remained with their companies.
  • Development of global supply chains: The world witnessed the development of global supply chains in many products starting with garments.

The dominance of China in the global supply chain is at the root of trade war between the US and China. The outbreak of Covid-19 has added it a new dimension and has forced many countries to reframe their trade policies. And India is no different. This makes it an important topic for UPSC. A question can be framed from an impact angle or the US-China trade war angle.

The emergence of China as a global manufacturing hub

  • Though many developing countries participated in the global production/value/supply
  • The substantial value addition in developing countries happened in a few production hubs, of which China emerged to be a major one.
  • Decentralised to localised production: Manufacturing shifted from a decentralised production system spread across different counties to just a few locations.
  • The countries like China defied the logic of supply/value chains ensuring substantial value addition for themselves.
  • They even carried out backward integration and thus emerged as global manufacturing hubs for certain products.
  • In the case of health products, China became the global supplier of active pharmaceutical ingredients (API), personal protective equipment (PPE), and medical devices diagnostics.

What were the implications of China’s dominance in a fight against Covid-19?

  • China’s dominance has major implications for the  COVID-19 outbreak.
  • The resultant loss of manufacturing base has affected the ability of many governments, including of developed countries, to put up an effective response to the crisis.
  • The U.K. Prime Minister asked the country’s manufacturers to produce ventilators in order to provide care for critical COVID-19 patients.
  • Similarly, the U.S. President invoked the Defense Production Act of 1950 to ramp up N95 mask production.
  • Under this legislation, the U.S. President can direct U.S. manufacturers to produce goods according to the directions of the government.
  • Similarly, the French Health Minister stated that the country may nationalise vaccine companies if necessary.
  • Spain nationalised all its private hospitals.
  • Israel and Chile issued compulsory licences to ensure that medicines are affordable.
  • Lack of preparedness and dependence: This exposes the poor state of preparedness and dependence on imports for essential goods required to meet the challenge of any major disease outbreak.
  • This shows that what is good for the company may not be good the country in all circumstances.
  • So, the overwhelming objective of private sector-led economic growth has proved to be disastrous.

Pay attention to the impact on India. The following two points are very important.

How economic liberalisation affected India’s ability?

  • In India, economic liberalisation has damaged the government’s capacity in two ways.
  • 1. It incapacitated the government to respond to emergencies based on credible information.
  • The dismantling of the ‘Licence Raj’ resulted in the elimination of channels of information for the government, which is crucial to make informed policy choices.
  • For example, it took the government several meetings to determine the production capacity of various pharmaceutical companies.
  • Similarly, there were difficulties in finding out India’s production capacity of PPE, medical devices and diagnostics.
  • 2. The logic and policies of economic liberalisation seriously undermined the manufacturing capabilities of health products in India.
  • The short-sighted policy measures, with the objective of enhancing profitability of the private sector, allowed the import of raw materials from the cheapest sources and resulted in the debasing of the API industry, especially in essential medicine.
  • According to a report of the Confederation of Indian Industry (CII), nearly 70% of India’s API import is from China.
  • The CII report lists nearly 58 API where the dependence is 90% to 100%.
  • The disruption in the supply of API due to the COVID-19 outbreak has impacted the production of not only medicines required for COVID-19 patients, but also of other essential medicines in India.
  • As a cost-effective producer of medicines, the world is looking to India for supply, but it cannot deliver due to its dependence on China.
  • This dependence has also forced India to impose export restrictions on select medicines.
  • Similar dependence exists with regard to PPE, medical devices and diagnostic kits.
  • The 100% dependence on Reagents, an important chemical component for testing, is limiting the capacity of the government from expanding testing because the cost of each test is ₹4,500.
  • Dangers of dependence: In the name of economic efficiency, India allowed unconditional imports of these products and never took note of the dangers of dependency.

Loss of jobs and poor working conditions

  • Destruction of manufacturing base: Global supply/production chains destroyed the manufacturing base in developed and developing countries.
  • That also resulted in the loss of jobs and poor working conditions in these sectors.
  • Developing countries were asked to ease their labour protection laws to facilitate global production and supply chains popularly known as global value chains.
  • As a result, people were forced to work in precarious working conditions without any social security net.
  • This created an unorganised army of labourers and is preventing many developing country governments from effectively offering relief.


A virus has made us rethink our obsession with the economic efficiency theory. It implores us to put in place an industrial policy to maintain core capacity in health products so that we can face the next crisis more decisively.

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Coronavirus – Economic Issues

[pib] Operation Lifeline UDAN


From UPSC perspective, the following things are important :

Prelims level: Operation Lifeline UDAN

Mains level: Not Much

To ensure a steady supply of essentials, even in the most remote locations, the Union Civil Aviation Ministry launched ‘Lifeline Udan’.

Don’t get confused or correlate this with Ude Desh ka Aam Nagrik (UDAN) Scheme. The name clearly indicates that it is an HADR like operation. Whats HADR? Humanitarian Assistance and Disaster Relief

Op. Lifeline Udan

  • Under this operation, flights are being operated to transport essential medical cargo to remote parts of the country amid the lockdown to support India’s fight against Covid-19.
  • The flights have been operated by Air India, Alliance Air, Indian Air Force, Pawan Hans and private carriers.
  • The cargo compulsorily supplies goods such as regents, enzymes, medical equipment, testing kits and PPE, masks, gloves and other essential items as applicable by the State and UT Governments.
  • Air India is shouldered to operate dedicated scheduled cargo flights to other countries for transfer of critical medical supplies, as per the requirement.

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Coronavirus – Economic Issues

Lock, don’t shut


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 2- Lockdown is not an end in itself, allowing the movements of goods and operations of industrial units should be considered.


Economy is a living machine — cannot be simply turned off and on. Even in lockdown, it needs to be kept alive.

Movement of goods exempted

  • Essential and non-essential distinction removed: It is, welcome that the Centre has now exempted transportation of all goods from the lockdown’s provisions, without distinction of “essential” and “non-essential”.
  • When goods aren’t the culprit — it didn’t make sense, in any case, to allow bureaucrats and local authorities to decide what is essential and hold up trucks carrying material deemed non-essential.
  • One cannot expect officials or state border police to have intimate knowledge of production processes and inputs that go into every good, essential or otherwise.
  • The purpose of a lockdown is to minimise physical human interaction and maintain social distancing even if people have to meet.
  • Blocking movement of goods, far from achieving that objective, only results in overcrowding and snarls at check posts.

How allowing Industrial establishment to operate matters?

  • Allowing industrial establishment to operate: There’s no reason why even industrial establishments cannot be permitted to run during the lockdown.
  • Again, it shouldn’t matter whether these units are producing essential or non-essential goods. What matters is only social distancing.
  • Right step by the Punjab government: The Punjab government has taken the right step of permitting all factories in the state to resume operations, subject to their being able to provide in-house lodging, food and medical facilities to workers and ensure no overcrowding at the plant.
  • Mass exodus could have been avoided: Most factories today, whether in Punjab, Haryana and Delhi or Maharashtra, Gujarat and Tamil Nadu, are manned by migrant labourers from Bihar, Uttar Pradesh and other eastern states.
  • Had measures to retain this workforce within or close to the premises of factories been in place — instead of a blanket order to shut down — the current situation of a mass exodus of labourers and the attendant risk of COVID-19 transmission may have been avoided.
  • Difficulty in getting the labour back: It isn’t going to be easy for the closed units to get this labour back even when the lockdown ends.


  • The economy needs to be kept alive: An economy is ultimately a living machine — one that cannot simply be turned off and on. Even in lockdown, it needs to be kept alive and whirring.
  • Difficulty in resumption: The danger from mechanically ordered closure of activities is that resumption becomes difficult. Rebuilding broken supply chains is easier when things are allowed to run even if at low key so that the system can respond when demand returns.
  • Lockdown is not an end in itself: Combating COVID-19 should obviously be the government’s top priority now. Lockdown is a necessary part of that strategy, but cannot be an end in itself. It is necessary primarily for social distancing, which can also be achieved without bringing the wheels of commerce to a complete halt.

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Coronavirus – Economic Issues

What the RBI has done to provide relief for the ongoing Coronavirus outbreak in India


From UPSC perspective, the following things are important :

Prelims level: Banking rates and markets instrument.

Mains level: Paper 3- Steps taken by the RBI to revive growth and provide stability to economy.


The RBI’s Governor’s ‘bazooka’ announcement earlier today has seen the usually conservative institution and its head pull out the big guns in word and action.

Four steps taken by the RBI

  • One, increase the liquidity in the system.
  • Two, make sure the lower policy rate is transmitted. Steps one and two are linked.
  • Three, give a three-month window for a payback on all term loans.
  • Four, take steps to reduce volatility and provide stability.
  • Big cut in repo rate: He announced a big cut in the repo rate by 75 basis points (100 basis points make a per cent, so three-quarters of a percentage point) to 4.4%.
  • What is the repo rate? Repo rate is the rate at which the banks borrow from the RBI. Banks give ‘eligible securities’ they hold for cash that RBI gives as an overnight loan.
  • Banks pay the repo rate as interest for this borrowing.

First two steps of the RBI: Increasing liquidity and ensuring policy rate transmission

  • Why lower repo rate matters? When the repo rate is high, banks find it costly to borrow and in turn raise the price of loans to their borrowers.
  • Reducing interest for the system: A low repo rate has the overall effect of reducing interest rates for the system. Lower rates make it easier for entrepreneurs to take loans for working capital and for households for homes, vehicles and so on.
  • Issue of policy rate transmission: Previous rate cuts have not been ‘transmitted’ by the banks who have not reduced lending rates and have preferred to keep money with the RBI at the ‘reverse repo rate’.
  • What is reverse repo rate? This is the rate at which banks lend to the RBI.

How RBI is ensuring transmission now?

  • The RBI has now reduced the reverse repo rate by 90 basis points to 4%.
  • This cut in reverse rape sharper than the one on the repo rate to encourage banks to borrow from the RBI rather than lend to it.
  • How reverse repo rate matters? Banks have preferred to deposit money with the RBI rather than lend it out with an average daily amount of ₹3 trillion being kept with the RBI.
  • A reduction of the reverse repo to 4% makes it unattractive to banks to park it with the RBI and banks will be nudged to lend.
  • Why bank lending matters for business? Bank lending provides the needed oxygen to businesses for their working capital and longer-term loans.
  • Read this as a measure to help banks take the decision to lend rather than play it safe by keeping money with the RBI.

How lock-down slows down the economy?

  • Rush to safety for money: If people are in a lock-down, the wheels of the economy begin to grind down and there is a rush to safety for money in the system.
  • Freezing of the markets market: Investors begin to redeem their shares, bonds and mutual funds. These redemptions cause a fire sale of assets. Finally, when there are no buyers, markets begin to freeze.

What are the measures taken by RBI to stabilise the market?

  • To keep the wheels of the markets well-oiled with cash, the RBI has made ₹3.74 trillion available. This it has done using four weapons.
  • The first measure: It has used targeted long-term repo operations.
  • RBI will lend money to banks (a total of ₹1 trillion) that can be invested in bonds and other forms of lending instruments.
  • What is a hold-to-maturity way? Under the hold-to-maturity way, the portfolio is valued not on the market price but on what the price should be given the rate of interest of the bond, the holding period and the rating of the bond.
  • Basically, it allows trades to happen at a price that is not confused with the current pandemic in the market.
  • The second measure: The RBI reduced the cash reserve ratio (CRR) by a full percentage point down to 3% for a year.
  • The CRR is the percentage of demand and time deposits banks have to keep with the RBI.
  • Why CRR and not SLR was reduced? There is another 18.25% of deposits that is also not used for lending under the Statutory Liquidity Ratio (SLR), further reducing the money banks have to lend.
  • RBI has reduced the CRR to 3%, freeing up ₹1.37 trillion for banks to lend. CRR has been chosen rather than SLR because this increases ‘primary liquidity’ with the banks a bit better.
  • Not only is there CRR rate down, banks now need to maintain 80% of the limit on a daily basis instead of 90% till June 26, 2020.
  • The third measure: ₹1.37 trillion will be made available under the emergency lending window called the marginal standing facility (MSF).
  • Banks will now be able to borrow 3% of their deposits under this window, up from the current 2%. Basically, RBI is willing to lend more than before.
  • How much more? ₹1.37 trillion under this window.

The third step of the RBI: Regulatory forbearance

  • What is the regulatory forbearance?

    What this means is that as economic activity grinds to a slowdown, people will not be able to pay back the loans they have taken for no fault of theirs.

  • This could be businesses with loans, households with EMIs on home loans and others with what are called ‘term loans’.
  • RBI will allow a moratorium of three months for loan repayment.
  • This is a relief especially for small entrepreneurs who have been forced to shut shop and for employees whose incomes have stopped since their place of work is shut.
  • It is good that the RBI has looked at the retail part of the market along with the corporate sector for once.
  • Working capital loans don’t come under the ‘term loan’ category, and these borrowers can defer paying interest for three months till June 2020.

The fourth step of the RBI: Measures to reduce volatility in the exchange rate

  • Fourth is a measure to reduce the volatility of the price of the rupee in international markets by allowing banks to deal in off-shore non-deliverable rupee derivative markets.
  • It looks like reform using the crisis to bring about this long-awaited change.


We don’t know if measures taken by the RBI and the government are enough. But what is comforting is that the government and the RBI are working in tandem to deal with this giant killer of a virus.

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Coronavirus – Economic Issues

Let’s use follower’s advantage


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 2- Learning from the experience of South Korea in designing the policies to deal with coronavirus.


How this coronavirus pandemic threat will pan out no one knows but what we do know is that the intensity of the challenge and its impact on our well-being will depend greatly on how we reach out to ordinary people, and the policies we implement.

Historical perspective and comparison

  • Compared to the fatality numbers of some earlier pandemics, such as the Asian flu, 1957-58 (1.1 million dead) and Hong Kong Flu, 1968 (2 million dead), the fatality numbers of the current coronavirus pandemic are, as yet, nowhere near.
  • One of the most comprehensive studies on the pandemic, by the Imperial College of London, shows that the “case fatality rate”, or fatality among those who get coronavirus is 0.9 per cent — this means a 99.1 per cent survival rate among the people who get it.
  • What makes this pandemic special is that it is happening in the age of digital connectivity and greater scientific knowledge than we have ever had.
  • We can inform people quickly and take big steps to contain it.
  • But this also has a danger we have never faced.
  • Policy actions can have a mega backlash on the economy.
  • We are in uncharted territory — never before have we taken the kind of collective action against a pandemic as we are doing now.

Time to collectively confront our common humanitarian challenge

  • Using the experience of South Korea: There is some evidence from history, and from the country that has been the most successful in dealing with this pandemic —South Korea.
  • The country’s success has saved lives, protected the economy from undue damage, boosted the popularity of the Korean President Moon Jae-In across political divides and raised the global standing of South Korea.
  • France’s President Emmanuel Macron and Sweden’s Prime Minister Stefan Lofven have consulted Moon Jae-In for advice.
  • We have some evidence and estimates about the kind of damage this pandemic can do.
  • China’s industrial production in January-February 2020 declined by 5 per cent compared to a year ago.
  • Goldman Sachs has estimated that the US’s GDP growth could decline 24 per cent for the second quarter this year.
  • Data are coming in on recent US unemployment claims climbing by 30 per cent.
  • This is clearly time to put political differences aside, and collectively confront our common humanitarian challenge.

Designing policy to deal with the pandemic

  • Economic implications: In designing policy, it is important to realise that all interventions to contain the pandemic have economic implications.
  • Some people react to this by saying that our first priority is to save lives, not the economy. This is a mistake. The two are not separate matters.
  • A poorly-executed policy can damage the economy and this can end up taking more lives than the original problem.
  • Examples of policy doing damage to lives: We have examples of the damage policies can do from history. In 1958, Mao Zedong initiated the Great Leap Forward to boost China’s production. This unleashed the biggest famine in modern times, which resulted in 20 to 40 million deaths.
  • The Bengal Famine of 1943 occurred with no decline in food production but there were disruptions in supply chains from the farms to those who needed food.
  • The death toll was two to three million. Such evidence from the past warns us that policies not designed well can cause more deaths than the pandemic itself.

Three lessons from South Korea

  • We already have three lessons from Korea, which are being widely discussed in newspapers and the media around the world.
  • First, you need strong leadership.
  • Second, it is critically important to have trust between society and government. There is only that much you can do if people do not cooperate.
  • Third, the need is for nuanced policies, with the government having the courage to make course correction as it goes along.

Way forward

  • First, trust can be a casualty with the lockdown. There are reports of the police wielding the baton too quickly on ordinary vendors, small grocers and sellers. They need to explain to people so that they begin to actually cooperate, instead of complying only when under observation. That is the key difference between a trusting society and a trustless one.
  • The government cannot be a substitute for the private firms: To believe that small traders and private firms can be substituted by the government is the mistake Communist China made in the 1960s and 1970s, before the arrival of Deng Xiaoping.
  • An example of the importance of specialised knowledge — this applies to the US as well — pertains to the role of cash grants to the poor. Such grants work well in normal times but may need to be supplemented with the direct support of food and medical services.


Some say that the Korea analogy is of no use to us because it is a relatively small country. It is true that everything will not apply here. But on the other hand, Korea and Hubei province of China are very comparable. Korea’s population is 52 million, Hubei’s is 58 million. The number of people who died of the virus in Korea is 126. The figure for Hubei is 3,160. Korea, of course, had the follower’s advantage since the virus struck there later. But we too have that advantage.

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Coronavirus – Economic Issues

Dressing a wounded economy


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Measures to mitigate the impact of steps taken to deal with the coronavirus on Indian economy.


There are going to be the economic impact of the actions designed to combat the virus. The two major tools that the government has available before it are monetary policy and fiscal actions.

Impact of virus and additional slowdown

  • The impact of the coronavirus pandemic is now felt by almost every country.
  • First, there are the health effects of the virus.
  • Second is the economic impact of the various actions that have to be taken to combat the virus.
  • The world is experiencing an additional slowdown on top of the contracting tendencies already present and India is no exception.
  • The economic impact on India can be traced through four channels: external demand; domestic demand; supply disruptions, and financial market disturbances.

Impact on export

  • As the economies of the developed countries slow down (some people are even talking of recession), their demand for imports of goods will go down.
  • This lower demand will affect our exports which are even now not doing well.
  • In fact, after six months of negative growth, it was only in January that Indian exports showed positive growth.
  • The extent of decline will depend on how severely the other economies are affected. Not only merchandise exports but also service exports will suffer.
  • Besides these, the IT industry, travel, transport and hotel industries will be affected.

Oil price factor

  • The only redeeming feature in the external sector is the fall in oil prices.
  • India’s oil import bill will come down substantially.
  • But this will affect adversely the oil-exporting countries which absorb Indian labour. Remittances may slow down.

Supply disruption

  • To ward off the spread of the coronavirus, the government has declared a lockdown of the country.
  • As passengers travel less, the transportation industry, road, rail and air, is cutting down schedules, sometimes drastically.
  • This will affect in turn several other sectors closely related to them. The laying off of non-permanent employees has already started.
  • As people, in general, buy less, shops stock less, which in turn affects production.
  • Perhaps retail units will be first to be affected and they will, in turn, transmit this to the production units.
  • One is unable to make an estimate of the reduction in economic activity at this point.
  • If the situation is not reversed soon, there can be a serious decline in the growth rate during 2020-21.
  • Supply disruptions can occur because of the inability to import or procure inputs.
  • The break in supply chains can be severe. It is estimated that nearly 60% of our imports are in the category of ‘intermediate goods’.
  • Imports from countries which are affected by the virus can be a source of concern.
  • The domestic supply chain can also be affected as the inter-State movement of goods has also slowed down.

Financial market issue

  • Financial markets are the ones which respond quickly and irrationally to a pandemic such as the coronavirus pandemic. The entire reaction is based on fear.
  • The stock market in India has collapsed. The indices are at a three-year low.
  • Foreign Portfolio Investors have shown great nervousness and the safe haven doctrine operates.
  • In this process, the value of the rupee in terms of the dollar has also fallen.
  • The stock market decline has a wealth effect and will have an impact on the behaviour of particularly high wealth holders.
  • How does the government deal with this sudden decline in economic activity which has come at a time when the economy is not doing well? The two major tools that are available are monetary policy and fiscal actions.

Two major tools with government- Monetary Policy and Fiscal Action

  • Monetary policy: In a situation like this can only act to stimulate demand by a greater push of liquidity and credit.
  • The policy rate has already been brought down by 135 basis points over the last several months. There is obviously scope for further reduction.
  • But our own history, as well as the experience of other countries, clearly show that beyond a point, a reduction in interest rates does not work.
  • It is the environment of the overall economy that counts. Credit may be available. But there may not be takers.
  • Any substantial reduction of policy rate can also affect savers. Interest is a double-edged sword.
  • What the RBI needs to do? IT needs to go beyond cutting the policy rate.
  • A certain amount of regulatory forbearance is required to make the banks lend.
  • Even commercial banks on their own will have to think in terms of modifying norms they use for inventory holding by production units.
  • Repayments to banks can be delayed and the authorities must be willing to relax the rules.
  • Any relaxation of rules regarding the recognition of non-performing assets has to be across the entire business sector.
  • The authorities must be ready to tighten the rules as soon as the situation improves. This is a temporary relaxation and must be seen as such by banks and borrowers.
  • Fiscal Policy: Fiscal actions have a major role to play. Once again, the ability to play a big role is constrained by the fact that the fiscal position of the government of India is already difficult.
  • Even without the pandemic, the fiscal deficit of the Central government will turn out to be higher than that indicated in the budgets for 2019-20 and 2020-21.
  • Revenues are likely to go down further because of the virus-related slowdown in economic activity.
  • In this context, the ability to undertake big-ticket expenditures is
  • But there are some ‘musts’. The virus has to be fought and brought down. All expenditures to test and to take care of patients must be incurred.
  • Now that private hospitals are allowed to test, the cost of the people going to private hospitals must also be met by the government.
  • The involvement of private hospitals has become necessary. It is mentioned that a test costs ₹4,500. The total cost can be substantial if the numbers to be tested run in the thousands and more.
  • This may sound exaggerated. But we must be prepared so that we avoid the tragedy of Italy.
  • Therefore, the first priority is to mobilise adequate resources to meet all health-related expenditures which includes the supply of accessories such as masks, sanitisers and materials for tests.
  • The challenge is not only fiscal but also organisational.

Mitigating the impact on the job sector

  • Serious concerns have been expressed about people who have been thrown out of employment. These are mostly daily-wage earners and non-permanent/temporary employees.
  • In fact, some of the migrant labour have gone back to home States. We must appeal to the business units to keep even non-permanent workers on their rolls and provide them with a minimal income.
  • Some relief can be thought of by the government for such business units even though this can be misused.
  • However, in general, in the case of sectors such as hospitality and travel, the government can extend relief through deferment of payments of dues to the government.
  • Issues in making cash transfer universal: There is talk of providing cash transfer to individuals. There is already a programme for rural farmers with all the limitations.
  • For a system of cash transfer to be workable, it has to be universal.
  • At this moment when all the energies of the government are required to combat the virus, to institute a system of universal cash transfer will be a diversion of efforts.
  • The burden on the government will depend upon the quantum of per capita cash transfer and the length of the period.
  • The government should advise all business units not to retrench workers and provide some relief to them to maintain the workers.
  • A supplemental income scheme for all the poor can be thought of once the immediate problem is resolved.
  • Provision of food and other essentials must be made available to the affected as is done at the time of floods or drought. States must take the initiative.


The fiscal deficit is bound to go up substantially. The higher borrowing programme will need the support of the RBI if the interest rate is to be kept low. The monetisation of the deficit is inevitable. The strong injection of liquidity will store up problems for the next year. Inflation can flare-up. The government needs to be mindful of this. All the same, the government must not stint and go out in a massive way to combat the virus. This is the government’s first priority.

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Coronavirus – Economic Issues

PM Gareeb Kalyan Scheme


From UPSC perspective, the following things are important :

Prelims level: PM Gareeb Kalyan Scheme

Mains level: Coronovirus outbreak and its mitigation

Union Finance Minister has announced the Pradhan Mantri Garib Kalyan Scheme, under which the government would provide a relief package of Rs 1.7 trillion to the underprivileged, poor and migrant workers affected by a lockdown amid the Covid-19 crisis.

PM Garib Kalyan Scheme

  • PM Gareeb Kalyan scheme is to have two parts — cash transfer and food security.
  • The package aims to take care of the welfare concerns of the poor and migrant workers who have been suffering because of a nationwide lockdown.

Two silos of the scheme

1) PM Gareeb Kalyan Anna Yojana

  • 800 million poor people in the country to get 5 kg of rice/wheat per month free of cost, in addition to the 5 kg they already get.
  • Additionally, each household to get 1 kg of preferred dal for free for the next three months

2) Cash transfer scheme

It has nine sub-parts

  • Farmers: First instalment of the PM-KISAN payment of Rs 2,000 to be frontloaded; move to benefit 87 million
  • MGNREGS: Wage increased from Rs 182 to Rs 202 per day. A wage increase to benefit 50 million families, as there will be about 2000 increase in their income
  • Poor widows, aged, and divyang: Ex-gratia of Rs 1,000 for the next three months, in two instalments. 30 million people to benefit. transfers to be done through direct benefits transfer (DBT)
  • Women with Jan Dhan Yojana accounts: 200 million to benefit from Rs 500 ex-gratia for the next 3 months
  • Beneficiaries of the Ujjwala scheme: 80 million households benefit from the gas cylinders provided under the scheme. These beneficiaries will get free cylinders for three months in view of the disruption the coronavirus lockdown will cause.
  • Women in self-help groups: 6.3 million SHGs get up to Rs 10 lakh collateral-free loans under the Deen Dayal Upadhyaya National Rural Mission scheme. The cap has been doubled to Rs 20 lakh. The move will benefit 70 million households
  • Organised sector workers: Two parts to this. First, the Government of India will pay the EPF contribution of both employee and employer for the next three months. This will be for all those establishments which have up to 100 employees, 90 per cent of whom earn less than Rs 15,000 a month
  • Construction workers: States to be directed to utilise the Rs 31,000 crore welfare fund for building and construction workers for the benefit of 35 million workers in the midst of the coronavirus crisis
  • District mineral fund: State govts. to be urged to utilise this fund for medical screening, medical testing and providing health care services in the wake of the coronavirus crisis

Other initiatives

  • Insurance cover for healthcare workers attending to Covid-19 patients: Rs 50 lakh per person.
  • Two million health workers to benefit from the insurance scheme.
  • In what will benefit 8 million employees and 400,000 establishments, the EPFO regulation will be amended to allow the withdrawal of up to 75 per cent of their corpus as non-refundable advance, or three months’ salary, whichever is less.

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Coronavirus – Economic Issues

Corona, crude and credit


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- How should India use the windfall from the fall in oil.


Amid the gathering global crisis, its time India minds its own house.

Panic and dislocation in Global markets

  • Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
    • Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
  • Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.

What are the three global shocks?

  • Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
  • Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
    • The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
    • Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
  • Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
    • Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
    • A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
  • India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
    • Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.

Implications for India’s macroeconomic stability

  • Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
    • 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
    • The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
  • Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
    • Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
  • Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
    • Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
  • Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
  • CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.

The growth offset conditioned on coronavirus spread

  • The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
    • If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
  • A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
    • If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
    • Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
  • The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
    • The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
  • Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.

Way forward

  • Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
    • A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
  • Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
    • Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
  • Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.


Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.


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Coronavirus – Economic Issues

Medicine and frontiers


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Dominance of China in international trade and its implications for national security.


Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

Implications of the coronavirus disruption in China

  • Global dependence on China in focus: As the coronavirus spreads far and wide, the global dependence on China for drugs and medical supplies has come into sharp focus.
  • The argument for domestic production of medicine: In both the US and Europe, the shortage of essential drugs to treat the victims of the virus is strengthening the arguments for restoring some domestic production of pharmaceuticals.
  • National security implications: Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

China’s dominance in pharmaceutical production

  • Two factors that contributed to China rise:
    • Active state support from Beijing and-
    • Western drug companies eager to shift production to cheaper destinations has facilitated China’s emergence as the most important global source for pharmaceutical products and medical devices.
  • Global dependence on China for drugs: America and Europe are said to import nearly 80 per cent of their antibiotics from China.
    • India’s dependence for API: India is also an important supplier of generic drugs to the Western world, but it is itself dependent on massive imports of active pharmaceutical ingredients (APIs) from China.
    • Impact on India: The reduction in supplies from China after the virus breakout has been accentuated by the recent decision of Government of India to limit the export of common drugs like paracetamol.
  • How the US is responding to dominance? Well before the current crisis, there had been warnings in the US about the national security risks from the massive reliance on external sources for basic medicines.
    • Weaponising the dominance: Late last year, the US-China Security Review Commission, established by the US Congress, pointed to the prospects of China weaponising its dominance over pharmaceutical production and its massive consequences for healthcare in the US.
    • Government support in China: The report also pointed out that the Chinese government promotes and protects the nation’s pharmaceutical companies to the disadvantage of foreign competitors and that leaves other nations little leverage with China.
  • Need to limit the exposure to China in other sectors: While the current international focus is on the supply chains in the pharmaceutical sector, there has been growing recognition of the need to limit the expansive exposure to China in many different sectors.

National security argument of the dominance

  • National security dimension of trade war: Trump’s case for bringing manufacturing back to America — by challenging the traditional framework of international trade — was not just economic.
    • It also had a strong national security argument — that the US cannot rely on China for servicing its national security needs in a range of sectors from digital components and drugs.
  • What supporters of the globalisation said? Supporters of economic globalisation had countered these arguments by saying that tight interdependence will reduce the incentives for taking unilateral advantage by nations.
  • China using trade dominance into leverage: The critics have pointed to the fact that China was turning its role as the “world’s factory” into powerful leverage.
    • Why did the West start regarding China as a challenge? The Chinese decision to stop rare earth exports to Japan during 2010 in relation to a minor political dispute had led many to put up red flags.
    • Since then, China’s greater political assertiveness and challenge to Western dominance in critical areas have strengthened the case in the West to regard China as a challenge if not an outright threat.
  • De-coupling gaining traction: As the bipartisan political consensus in the US and Europe in favour of a strong economic partnership with China began to break down in recent years, the case for de-coupling has gained much traction.

How using economic leverage for strategic gains undergone changes?

  • Use of economic leverage and stockpiling: The history of statecraft suggests that it was quite common for states to use economic leverage for strategic gains.
    • Use of strategy during the cold war: Through the Cold War, both America and Russia sought to corner strategic resources around the world. They also adopted policies for stockpiling special materials for use during conflicts. Sustaining a strategic petroleum reserve, for example, was a major priority for the US during the Cold War.
  • Changes due to globalisation: The importance of hoarding resources at home and denying it to one’s adversaries seemed to diminish amidst great power harmony and economic globalisation that flourished after the Soviet Union collapsed.
    • Recent challenges due to weakening of globalisation: The erosion of that moment in the last few years has set up new tensions between the competing imperatives on Western governments.
  • Capital vs. Security issue: While the logic of security compels the state to limit strategic economic exposure, the logic of capital demands policies that reduce costs of production and increase the margins of profit.
    • This tension has been at the heart of the recent Western debates on the China question.


While the world finds ways to deal with the Chinese dominance in the other sector, meanwhile, in the health sector, large continental entities like the US, Europe and India are likely to insure against over-reliance on a single source for life-saving drugs. They are likely to find ways to shorten the supply chains, expand domestic production and explore coordination among like-minded nations.

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Coronavirus – Economic Issues

Monetary policy can’t combat the COVID-19 impact


From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Is expansionary monetary policy enough to deal with the impact of COVID-19?


Central banks the world over are devising the strategies to deal with the impact of COVID-19 on their economies.

How the Central banks are responding?

  • US Fed’s response: The huge 50 basis points cut in rates by the U.S. Federal Reserve to lift economic sentiment hit by COVID-19 has disrupted central banking worldwide.
  • Pressure on other Central banks to follow suits: Even as analysts debate whether a monetary policy response is a right strategy, central banks across the world are feeling the pressure to follow suit to the largest rate cut by the Fed since 2008.
  • How banks are responding? Central banks of Australia and Malaysia have cut rates already while others such as the Bank of Japan, Bank of England and the European Central Bank are contemplating joining the caravan.

How the RBI is responding?

  • First line of economic defence: With monetary policy turning out to be thede facto first line of economic defence against the ill-effects of the virus, the focus in India has turned to the Reserve Bank of India’s response.
  • Hope of rate cut: Yields on 10-year government securities fell by as much as 0.12% in the hope of a rate cut by the RBI and they stayed soft.
  • But what are the central bank’s options?
    • No unilateral rate adjustment: Unlike other countries, the legal framework in India after the setting up of the Monetary Policy Committee (MPC) is such that the RBI cannot unilaterally adjust rates.
    • The MPC will have to meet and deliberate on the situation before the call to cut rates is taken and such a call will have to be based on an assessment of inflation in the economy.

Is a rate cut the right response?

  • Impact of the virus on the supply side: The first-order impact on the global economy of the spreading virus is a disruption to trade and to global supply chains.
    • With China being the factory of the world, the clampdown in that country has already disrupted supplies of products ranging from cell phone components to bulk drugs and auto components.
    • Factory lines across the world could freeze as supply chains get disrupted.
  • Limits of Monetary policy to deal with the supply-side problem: Monetary policy is excellent to address demand shocks but is a blunt tool when it comes to addressing supply-side issues.
    • Where to spend? People may be encouraged to spend more due to a rate cut but what will they spend on if products go scarce, travel convulses and public spaces such as movie theatres and malls become no-go areas?
  • The rate cut will boost the sentiments only: A rate cut can, at best, help to boost sentiment but that again will be transient as the market’s reaction after the Fed rate cut proves.
    • Expansionary monetary policy cannot improve the situation: The Swedish central bank’s deputy governor Anna Breman has rightly questioned the logic of a rate cut as a response to the coronavirus impact pointing out that an expansionary monetary policy cannot improve the situation.
  • How the RBI might respond? The sentiment being what it is, the RBI may find itself under increasing pressure to act. Given the MPC constraint, it may well choose to do what it did in the February monetary policy– unleash other weapons in its armoury to give the same effect as a rate cut.
    • Thus, we may well see the central bank announcing another tranche of long-term repo operation, akin to the ₹1 lakh crore that it announced in February.
    • That will mean that banks will gain access to three-year funds at the repo rate of 5.15%, much lower than the market rate.
    • And then, there’s Operation Twist which the RBI employed to good effect in December, softening rates at the long end of the yield curve.

Would any of these measures yield any response?

  • Doubtful results: It’s doubtful if any of these measures can address the hit to economic growth. The virus has undoubtedly surfaced at a very wrong time for the Indian economy which is showing hesitant signs of a return to growth.
  • Which sectors will be impacted the most? The impact will be felt on more than one front. Industries such as pharmaceuticals, electronics and automobiles could be headed for trouble given their high dependence on Chinese inputs.
  • Government’s response: While the government is said to be formulating a response, including the possibility of airlifting supplies, the practicality of this solution needs to be watched as also its impact on costs for the industries concerned.

Impact on exports and offsetting factor of oil import

  • The biggest problem: The bigger problem could be from a fall in exports, which accounts for 20% of the GDP.
  • Which exporters would feel the heat? If the developed world tips into recession due to the virus, exporters of products ranging from petroleum and textiles to leather and gems and jewellery will feel the heat.
  • Oil offset due to fall in oil prices: The offsetting factor, of course, will be a lower oil import bill due to the sharp fall in oil prices. This may also have a benevolent effect on inflation.
  • But there will be other headaches for the central bank if the developed world embarks on monetary expansion. The RBI will be faced with the challenge of staunching inflows of hot money coming in search of the higher returns available in India.


  • Hot money concern for RBI: There will be other headaches for the central bank if the developed world embarks on monetary expansion. The RBI will be faced with the challenge of staunching inflows of hot money coming in search of the higher returns available in India.
  • Opportunity in the crisis: As with every crisis, there’s also an opportunity here. Economic growth is bound to suffer in the short-term but there could be long-term spin-offs if domestic industry and government get their acts right.
    • Supply chains can be localised through fresh investments and India can bid to be an alternative to China in the global value chain.
  • India can be an option to China for global supply chain: The COVID-19 crisis has only underlined in red the lesson that global corporations learnt when trade war broke out between the U.S. and China- the global supply chain needs alternative options to China. India is eminently qualified to assume that role. If only our policymakers and industrialists rise up to the challenge.



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