Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India ranks 134th in global human development index, says UNDP report

Note4Students

From UPSC perspective, the following things are important :

Prelims level: HDI

Mains level: India's Status as Developing Country

Why in the news? 

Recently, India’s progress in the global Human Development Index (HDI), as reported by the United Nations Development Programme (UNDP)

Context-

  •  India’s ranking on the United Nations Human Development Index (HDI) improved by one position in 2022 to 134 out of 193 countries compared to 135 out of 191 countries in 2021. Switzerland has been ranked number one.

The Human Development Index (HDI)-

About 

The Human Development Index (HDI), initially introduced by the UNDP in 1990, is a statistical composite index. It measures a country’s average achievement across three fundamental dimensions:

  • Health: This dimension is represented by life expectancy at birth. It reflects the overall health and well-being of the population and their access to healthcare services.
  • Education: This dimension includes indicators such as expected years of schooling for children entering school and mean years of schooling for adults. It assesses the level of educational attainment and the availability of educational opportunities within a country.
  • Standard of Living: This dimension is measured by Gross National Income (GNI) per capita, adjusted for purchasing power parity (PPP). It reflects the economic prosperity and living standards of the population, including income levels and access to basic necessities.

Background

  • The Human Development Index (HDI) was developed by Pakistani economist Mahbub ul Haq and Indian economist Amartya Sen. It is used by the United Nations Development Programme (UNDP) to assess a country’s development as part of the Human Development Report.
  • Alongside the Human Development Index (HDI), the United Nations Development Programme (UNDP) also presents the Human Development Report (HDR) which present-
  1. Multidimensional Poverty Index (MPI),
  2. Inequality-adjusted Human Development Index (IHDI),
  3. Gender Inequality Index(GII) since 2010 and
  4. Gender Development Index (GDI) since 2014

Key Points as per Report- 

  • India’s Rank on the HDI: India moved up one rank on the Human Development Index (HDI) from 135 in 2021 to 134 in 2022, with slight improvements in life expectancy and Gross National Income (GNI) per capita.
  • Comparison with Neighbors: India ranks below its southern neighbour Sri Lanka (ranked 78) and China (ranked 75) in the High Human Development category, and below Bhutan (ranked 125) and Bangladesh (ranked 129) in the Medium Human Development category.
  • Reducing inequalities: The report highlights a reverse trend in reducing inequalities between wealthy and poor nations. Despite interconnected global societies, collective action on climate change, digitalization, poverty, and inequality is lacking, leading to a widening human development gap.
  • Challenges in Democracy: While nine in 10 people worldwide endorse democracy, over half express support for leaders who may undermine it. Political polarization and limited control over government decisions are prevalent, leading to protectionist or inward-turning policy approaches.

Action Plans as per report-

  • Multilateral Cooperation: Strengthen international cooperation and collaboration among governments, NGOs, businesses, and other stakeholders to address global challenges collectively. This could involve fostering dialogue, partnerships, and agreements that promote shared goals and responsibilities.
  • Policy Coordination: Enhance coordination and coherence in policymaking at national and international levels to ensure that policies address interconnected challenges comprehensively. This may involve integrating diverse perspectives, aligning strategies across sectors, and leveraging resources efficiently.
  • Investment in Sustainable Development: Increase investments in sustainable development initiatives that prioritize environmental conservation, social equity, and economic prosperity. This could include funding for renewable energy, education, healthcare, infrastructure, and poverty alleviation programs.
  • Empowering Communities: Empower local communities and grassroots organizations to participate in decision-making processes and contribute to problem-solving efforts. This could involve providing resources, capacity-building support, and platforms for civic engagement.
  • Promotion of Dialogue and Understanding: Foster dialogue, empathy, and mutual understanding among diverse communities to mitigate polarization and build social cohesion. This could involve promoting education, cultural exchange programs, media literacy, and initiatives that promote tolerance and respect for human rights.
  • Transparency and Accountability: Enhance transparency, accountability, and integrity in governance structures and institutions to rebuild trust and confidence among citizens. This could involve strengthening anti-corruption measures, promoting open government initiatives, and ensuring inclusive and participatory decision-making processes.
  • Investment in Education and Awareness: Invest in education, public awareness campaigns, and media literacy programs to increase awareness of global challenges, their interconnections, and the importance of collective action. This could help foster a sense of shared responsibility and mobilize public support for collaborative solutions.
  • Promotion of Inclusive Economic Growth: Promote inclusive economic growth that benefits all segments of society, reduces inequality, and creates opportunities for marginalized populations. This could involve implementing policies that support job creation, entrepreneurship, social protection, and access to essential services.
  • Resilience Building: Build resilience to global challenges such as climate change, pandemics, and economic crises by investing in preparedness, adaptation, and mitigation strategies. This could involve strengthening healthcare systems, disaster risk reduction measures, and social safety nets.
  • Advocacy and Leadership: Advocate for political leadership and commitment at all levels to prioritize collective action and address shared challenges effectively. This could involve mobilizing political will, engaging with policymakers, and holding leaders accountable for their actions.

Conclusion-

Strengthening multilateral cooperation, policy coordination, sustainable development investment, empowering communities, promoting dialogue, transparency, education, inclusive economic growth, resilience building, and advocating for leadership are vital for addressing global challenges collectively and fostering a sustainable future.

Mains PYQ-

 Q- Despite the consistent experience of high growth, India still goes with the lowest indicators of human development. Examine the issues that make balanced and inclusive development elusive.(UPSC IAS/2019)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Analysis of Centre’s Capital Expenditure and Fiscal Deficit

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Fiscal Deficit, Capital Expenditure

Mains level: NA

deficit

In the news

  • Capital Expenditure Decline: In January, the Centre’s capital expenditure saw a significant decline of 40.5%, totaling ₹47,600 crore compared to ₹80,000 crore in the previous year.
  • Fiscal Deficit Widening: By the end of January, the fiscal deficit reached 64% of the revised estimates for 2023-24. Despite challenges in expenditure, the government seems poised to meet the revised deficit target of 5.8% of GDP for the year.

What is Fiscal Deficit?

  • Definition: Fiscal deficit is the excess of total disbursements from the Consolidated Fund of India over total receipts, excluding debt repayment, within a financial year.
  • Formula: Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts).

Government Income

  • Revenue receipts: This includes tax revenues collected by the government from various sources such as income tax, corporate tax, and indirect taxes like GST.
  • Capital receipts: This encompasses borrowings, disinvestments, and other sources of income.
  • Tax revenues: Income from GST and other taxes.
  • Non-tax revenues: Including interest receipts, dividends and profits, external grants, and receipts from union territories.
  • Other non-tax revenues: Revenue from fiscal, social, and economic services.

Government Expenditure

  • Revenue Expenditure: Spending on day-to-day operations including salaries, subsidies, and interest payments.
  • Capital Expenditure: Investment in infrastructure, acquisition of assets, and long-term projects.
  • Interest Payments: Amount paid by the government as interest on its borrowings.
  • Grants-in-aid for the creation of capital assets: Funds provided for the creation of capital assets such as roads, bridges, and public buildings.

Reasons behind Fiscal Deficit

[1] Fall in Income

  • Lower tax collection: Economic slowdown, tax evasion, and GST implementation issues.
  • Impact of economic sectors shut during the pandemic: Closure of economic activities leading to decreased tax revenues.
  • Government’s missed disinvestment targets: Failure to achieve disinvestment targets resulting in lower capital receipts.

[2] Rise in Expenditure

  • Factors contributing to high inflation: High inflation rates increasing import and borrowing costs.
  • Importance of social infrastructure investment: Emphasis on social infrastructure for inclusive growth and employment.
  • External market volatilities affecting Indian expenditure: Dependency on imports exposing India to external market fluctuations.
  • Unproductive expenditures like subsidies: Essential but unproductive expenditures adding to fiscal pressure.

[3] Rise in Borrowings

  • Need for market borrowing for policy implementations: Borrowing for policy measures such as bank recapitalization, farm loan waivers, and UDAY.

Implications of Fiscal Deficit

  • Vicious circle of borrowing and repayment: Continuous borrowing to repay loans leading to a debt trap.
  • Inflation: Increased borrowing leading to higher interest rates and inflation.
  • Reduced private sector borrowing: Government borrowing reducing borrowing opportunities for the private sector.
  • Discouragement of private investment: Inflation and limited financing discouraging private investment.
  • Risk of credit rating downgrade: High borrowing increasing the risk of credit rating downgrade.
  • Limits Revenue Spending: Rising fiscal deficit affecting government allowances like dearness allowance and dearness relief.
  • Foreign Dependence: Borrowing from foreign sources increasing dependence and exposure to external fiscal policies.

Measures for Control: FRBM Act, 2003

  • The FRBM Act aims to instil fiscal discipline and ensure inter-generational equity in fiscal management, promoting long-term macro-economic stability.
  • Targets:
    1. Limit fiscal deficit to 3% of GDP by March 31, 2009.
    2. Completely eliminate revenue deficit.
    3. Reduce liabilities to 50% of estimated GDP by 2011.
    4. Prohibit direct borrowing from RBI to monetize the deficit.
  • Escape Clause: Section 4(2) of the Act allows the Centre to exceed annual fiscal deficit targets under specific circumstances, such as national security, calamity, agricultural collapse, or structural reforms.
  • Review Committee: In May 2016, a committee under NK Singh was formed to review the FRBM Act. Recommendations included targeting a fiscal deficit of 3% of GDP until March 31, 2020, reducing it to 2.8% in 2020-21, and further to 2.5% by 2023.
  • Current Targets:
    1. The latest provisions of the FRBM Act mandate limiting fiscal deficit to 3% of GDP by March 31, 2021.
    2. Central government debt should not exceed 40% of GDP by 2024-25, among other stipulations.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Key Insights: All India Household Consumption Expenditure Survey

Note4Students

From UPSC perspective, the following things are important :

Prelims level: All India Household Consumption Expenditure Survey (CES)

Mains level: Read the attached story

Why in the News?

  • Recently, the government has disclosed the broad findings of the All India Household Consumption Expenditure Survey conducted between August 2022 and July 2023.

About All India Household Consumption Expenditure Survey (CES):

  • The CES is a quinquennial (recurring every five years) survey conducted by the National Statistical Office (NSO).
  • It is designed to collect information on the consumption spending patterns of households across the country, both urban and rural.
  • The data gathered in this exercise reveals the average expenditure on goods (food and non-food) and services.
  • It helps generate estimates of household Monthly Per Capita Consumer Expenditure (MPCE) as well as the distribution of households and persons over the MPCE classes.

Key Findings of the recent Survey:

  • Rise in Monthly Per Capita Consumption Expenditure:
    • Urban: Witnessed a 33.5% increase to ₹3,510.
    • Rural: Marked a 40.42% surge to ₹2,008 since 2011-12.
  • Shift in Spending Pattern:
    • Food Expenditure: Decreased from 52.9% to 46.4% in rural households and from 42.6% to 39.2% in urban households since 2011-12.
    • Implications: Potential impact on retail inflation calculations due to reduced weightage of food prices.
  • Inclusion of Social Welfare Benefits:
    • Separate calculation for items received through schemes like PM Garib Kalyan Ann Yojana.
    • Items Included: Computers, mobile phones, bicycles, and clothing.
  • Adjusted Monthly Per Capita Expenditure:
    • Rural: ₹2,054;
    • Urban: ₹3,544 (excluding free education and healthcare sops).
  • Socio-Economic Disparities:
    • Bottom 5%: Rural – ₹1,373; Urban – ₹2,001.
    • Top 5%: Rural – ₹10,501; Urban – ₹20,824.
  • State-wise analysis:
    • Sikkim: Highest MPCE – Rural: ₹7,731; Urban: ₹12,105.
    • Chhattisgarh: Lowest MPCE – Rural: ₹2,466; Urban: ₹4,483.

Major Shifts Includes:

  • Broad-based Growth:
    • Rural-Urban Dynamics: B.V.R. Subrahmanyam, CEO of Niti Aayog, highlights that India’s growth story is “broad-based,” with rural incomes and expenditures outpacing those in urban areas.
    • Narrowing Divide: The urban-rural consumption gap has decreased from 91% in 2004-05 to 71% in 2022-23, indicating diminishing inequality.
  • Shifts in Consumption Patterns:
    • Food Expenditure: Rural households’ spending on food has fallen below 50% of their total expenditure for the first time. Lower spending on staples like pulses and cereals is accompanied by increased expenditure on consumer durables and services.
    • Income Growth: Rising expenditures on items such as TVs, fridges, and mobile phones suggest improved incomes and evolving lifestyles.
  • Changing Poverty Metrics:
    • Poverty Estimates: Based on MPCE averages, poverty levels are projected to be below 5%, according to Mr. Subrahmanyam. Informal estimates indicate a decline in poverty, with destitution nearly eradicated due to various welfare schemes.
    • Inclusive Growth: Government initiatives such as Ayushman Bharat and free education have contributed to lifting millions out of poverty, reflecting a multi-dimensional approach to poverty alleviation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Changing the growth paradigm

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gross Domestic Product

Mains level: critique of the prevailing GDP-centric approach to economic development

The Global Sustainable Development Report 2023 | United Nations in Ghana

Central Idea:

The central idea of the article is that traditional measures of economic growth, like GDP, are inadequate indicators of a nation’s well-being and development. Instead, the focus should shift towards inclusive and sustainable growth that prioritizes the welfare of citizens, particularly in countries like India where economic progress has not translated into improved living standards for all.

Key Highlights:

  • Critique of GDP-centric approach: The article highlights the limitations of relying solely on GDP growth as a measure of economic health, pointing out that it doesn’t necessarily lead to increased income or well-being for citizens.
  • Inequality and inequitable growth: Despite impressive GDP growth, India remains one of the most unequal countries in the world, indicating that the benefits of growth are not evenly distributed among its citizens.
  • Need for a new paradigm: The article argues for a shift towards inclusive and environmentally sustainable development models, especially in the face of global challenges like climate change.
  • Dependency on fossil fuels: The reliance on fossil fuels for essential materials like steel, concrete, plastics, and food production is highlighted, along with the challenges of transitioning away from them.
  • Importance of local solutions: Emphasizing the significance of community-driven, local solutions, the article suggests that India should leverage its unique strengths rather than blindly following Western development models.

Key Challenges:

  • Overcoming entrenched economic paradigms: Shifting away from GDP-centric models towards more inclusive and sustainable development approaches requires challenging existing economic frameworks and ideologies.
  • Addressing inequality: Tackling the deep-rooted inequalities in India’s economy presents a significant challenge, especially given the historical focus on GDP growth.
  • Transitioning from fossil fuels: Moving away from fossil fuel dependency poses technological, economic, and social challenges, particularly in sectors like agriculture and transportation.
  • Balancing urbanization and rural development: Reconciling the push for urbanization with the need for rural development and sustainable agriculture presents complex policy dilemmas.
  • Overcoming resistance to change: Convincing policymakers and society at large to embrace alternative development paradigms may face resistance from entrenched interests and ideologies.

Main Terms:

  • GDP: Gross Domestic Product, a measure of the total value of goods and services produced within a country’s borders.
  • Inclusive growth: Economic growth that benefits all segments of society, particularly the marginalized and vulnerable.
  • Sustainable development: Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
  • Fossil fuels: Non-renewable energy sources such as coal, oil, and natural gas, formed from the remains of prehistoric plants and animals.
  • Urbanization: The process of population concentration in urban areas, often accompanied by industrialization and economic development.

Important Phrases:

  • “Increase the size of the pie before its redistribution”: Reflects the emphasis on GDP growth over equitable distribution of wealth.
  • “One path for all”: Criticizes the uniform approach to development that privileges industrialization and urbanization over other forms of progress.
  • “Gandhian solution”: Refers to community-driven, localized approaches to development advocated by Mahatma Gandhi.
  • “Rural Bharat”: Signifies the rural heartland of India, highlighting the importance of rural communities in the country’s development.

Quotes:

  • “More GDP does not improve the well-being of citizens if it does not put more income in their pockets.”
  • “India must find a new paradigm of progress, for itself and for the world, for more inclusive and environmentally sustainable growth.”
  • “The time has come to go back to old solutions to go to the future.”

Useful Statements:

  • “Critics argue that GDP growth alone does not necessarily lead to improved living standards for citizens, particularly in countries like India where inequality persists.”
  • “Transitioning away from fossil fuels presents significant challenges, but it is essential for addressing climate change and ensuring long-term sustainability.”
  • “Local, community-driven solutions have the potential to address global challenges like climate change and inequitable economic growth.”

Examples and References:

  • The article cites India’s experience of impressive GDP growth alongside persistent inequality as evidence of the limitations of traditional development models.
  • Reference is made to the work of Vaclav Smil on the role of fossil fuels in modern economies, providing a scientific basis for understanding the challenges of transitioning to renewable energy sources.

Facts and Data:

  • India’s GDP grew at 7.2% per year during both the United Progressive Alliance and National Democratic Alliance governments, yet structural conditions leading to inequitable growth remained unchanged.
  • Sixty-four per cent of Indian citizens live in rural areas, highlighting the importance of rural development in India’s economic and social progress.

Critical Analysis:

The article provides a compelling critique of the prevailing GDP-centric approach to economic development, highlighting its failure to address inequality and environmental concerns. By advocating for inclusive and sustainable growth models, the article offers a nuanced perspective on the challenges facing countries like India in the 21st century. However, it could benefit from further exploration of specific policy recommendations and case studies demonstrating successful alternative development strategies.

Way Forward:

  • Embrace inclusive and sustainable development models that prioritize the well-being of all citizens.
  • Invest in renewable energy sources and sustainable agriculture to reduce dependency on fossil fuels and mitigate climate change.
  • Empower local communities to drive development initiatives tailored to their unique needs and challenges.
  • Reform economic policies to prioritize equitable distribution of wealth and opportunities.
  • Foster international cooperation to address global challenges like climate change and inequality.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Dravidian Model of Governance: 10 Achievements of Tamil Nadu

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dravidian Model of Governance

Mains level: Fiscal Federalism

Dravidian Model of Governance

Introduction

  • Tamil Nadu CM outlined the achievements of the ‘Dravidian Model’ government of the DMK, presenting them as blueprints for other states to follow.

Dravidian Model of Governance

  • Contribution to Indian Economy: Tamil Nadu’s contribution of nine percent to the Indian economy showcases the state’s robust economic growth.
  • GDP Ranking: Securing the second position in contributing to the Gross Domestic Product (GDP) of the nation, with a growth rate of 8.19 percent, surpassing the national average of 7.24 percent.
  • Inflation Control: The state has effectively controlled inflation, with rates falling to 5.97 percent compared to the national figure of 6.65 percent.
  • Export Preparedness: Topping the list of the Export Preparedness Index in the country, with a particular focus on leading in the export of electronic goods.
  • Industrial Investment Climate: Creating a favorable climate for industrial investment, elevating Tamil Nadu to the third position in the country from its previous rank of 14.
  • Education: Achieving the second position in the field of education and securing the first place in innovative industries.
  • Empowerment Initiatives: Prioritizing the welfare of women, young people, persons with disabilities, and marginalized communities, leading to significant improvements in their quality of life.
  • Scheme Implementations: Extensive distribution of assistance to people amounting to ₹6,569.75 crore, including initiatives like the Kalaignar Magalir Urimai Thittam, free bus travel for women, and healthcare schemes benefiting millions of citizens.

Discussion: Fiscal Federalism in India

Fiscal Federalism: Understanding the Context

  • Overview of Fiscal Federalism: Fiscal federalism delineates the financial powers and responsibilities among different levels of government.
  • Provisions Related to Centre-State Financial Relations: The Indian Constitution elaborates on tax distribution and grants-in-aid, supplemented by the role of the Finance Commission.
    1. Part XII of the Constitution: Details provisions regarding the distribution of taxes, non-tax revenues, borrowing powers, and grants-in-aid.
    2. Article 268 to 293: Specifically address financial relations between the Centre and States.
    3. Finance Commission (Article 280): Constitutional body responsible for recommending tax revenue distribution and fiscal discipline.
  • Challenges with Fiscal Transfers: Despite recommendations to increase devolution, there has been a reduction in financial transfers to states, posing challenges to fiscal autonomy.

Challenges and Concerns

  • Centralization of Fiscal Powers: The Union government’s increasing control over fiscal powers challenges state autonomy.
  • Erosion of State Tax Autonomy: Implementation of VAT and GST has diminished states’ ability to set tax rates independently.
  • Constraints on State Expenditure Flexibility: Conditional grants limit states’ discretion in allocating funds according to local priorities.
  • Uniform Fiscal Targets Neglecting State Variations: Uniform fiscal targets fail to address the diverse needs of individual states.
  • Impact of GST Implementation: The GST implementation has shifted tax burdens and reconfigured fiscal dynamics among states.

Steps towards Better Devolution of Finances

  • Re-examining Tax-sharing Principles: Finance Commissions should review tax-sharing principles to align with changing fiscal dynamics.
  • Redesigning Statutory Sharing of Indirect Taxes: Vertical and horizontal devolution mechanisms need re-evaluation to ensure equity and efficiency.
  • Calculating and Allocating Collection Costs: Methods for calculating and allocating collection costs should be devised to enhance tax efficiency.
  • Redesigning Grant Mechanisms: Existing grant mechanisms should be restructured to address evolving fiscal challenges.
  • New Institutional Structures: Establishing formal relationships between the GST Council and Finance Commission can enhance fiscal governance.

Conclusion

  • Tamil Nadu’s governance model, exemplified by Chief Minister Stalin’s comprehensive overview, underscores the state’s commitment to economic progress, social welfare, and inclusive development.
  • Despite challenges in India’s fiscal federalism, Tamil Nadu’s achievements serve as a beacon of hope, demonstrating the potential for states to thrive under effective governance models.
  • Addressing fiscal imbalances and enhancing cooperative federalism are imperative for ensuring equitable distribution of financial resources and fostering sustainable development across the nation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Tax-to-GDP ratio to hit all-time high of 11.7% of GDP in FY25

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tax-to-GDP Ratio

Mains level: NA

tax

Introduction

  • India’s tax landscape is anticipated to witness significant growth in the coming fiscal year, with the tax-to-GDP ratio expected to reach a historic high of 11.7%.
  • Revenue Secretary Sanjay Malhotra highlights the role of direct taxes in driving this uptick and emphasizes the government’s commitment to streamlining the tax regime for enhanced efficiency and reduced disputes.

Why ‘Tax-to-GDP’ Ratio matters?

  • The tax-to-GDP ratio measures a nation’s tax revenue relative to the size of its economy.
  • This ratio is used with other metrics to determine how well a nation’s government directs its economic resources via taxation.
  • Developed nations typically have higher tax-to-GDP ratios than developing nations.
  • Higher tax revenues mean a country can spend more on improving infrastructure, health, and education—keys to the long-term prospects for a country’s economy and people.
  • According to the World Bank, tax revenues above 15% of a country’s gross domestic product (GDP) are a key ingredient for economic growth and poverty reduction.

Forecasted Rise in Tax-to-GDP Ratio

  • Expected Surge: India’s tax-to-GDP ratio is projected to hit 11.7% in 2024-25, showcasing a steady increase from 11.6% in the preceding year and 11.2% in 2022-23.
  • Dominance of Direct Taxes: The surge in the tax ratio is primarily attributed to the growth of direct taxes, which are deemed more equitable.

What led to this growth?

[A] Direct Tax Collection

  • Optimistic Outlook: Revenue Secretary anticipates a rise in the adoption of the new tax regime, characterized by simplified tax structures and a higher tax-free income threshold.
  • Growth in Personal Income Tax: Personal income tax collections have witnessed a substantial 28% growth, with a projected moderation to 20%-22% by the fiscal year-end.

[B] Rationalizing GST Rates

  • Ongoing Review: A Group of Ministers (GoM) appointed by the GST Council is reviewing the rate structure, aiming to rationalize GST rates on various items.
  • Quarterly Meetings: The GST Council is expected to convene regularly to address rate rationalization, although no fixed date has been announced yet.

[C] Projected Revenue Growth

  • Modest Projections: Despite a buoyant revenue growth of 1.4% this year, projections for the following fiscal year aim for a 1.1% buoyancy, aligning with an anticipated nominal GDP growth of 10.5%.
  • Corporate Tax Dynamics: The deadline for availing the reduced corporate tax rate ends in March 2023, with a significant proportion of companies already benefitting from it.
  • Enforcement Measures: While the Department of Revenue focuses on tax administration, the Enforcement Directorate intervenes in cases related to money laundering, ensuring comprehensive enforcement mechanisms.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Wages of inequality: The income-growth gap

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Debt-to-GDP ratio

Mains level: Balancing fiscal consolidation with the need for increased government expenditure to address developmental challenges

Income Inequality - Definition, Explained, Causes, Examples

Central Idea:

The article analyzes the recent interim Union budget in India, focusing on its macroeconomic policy objectives and the challenges facing the Indian economy. It discusses the government’s efforts to reduce the debt-to-GDP ratio and stimulate GDP growth, particularly by prioritizing capital expenditure over revenue expenditure. However, it questions the effectiveness of these objectives in addressing India’s developmental challenges, especially regarding employment generation and structural transformation.

Key Highlights:

  • The budget presents a fiscally conservative approach with minimal increases in total expenditure, emphasizing capital expenditure over revenue expenditure.
  • The government aims to reduce the debt-to-GDP ratio, primarily by limiting expenditure growth rates and increasing capital expenditure.
  • The article raises concerns about the adequacy of these objectives in addressing India’s developmental challenges, particularly the need for employment generation and structural transformation.
  • It highlights the stagnation in regular wages and the dominance of self-employment, indicating a worsening income distribution and weak improvements in welfare.

Key Challenges:

  • Balancing fiscal consolidation with the need for increased government expenditure to address developmental challenges.
  • Promoting structural transformation to shift workers from self-employment to modern sectors.
  • Achieving inclusive growth that benefits all sections of society, especially marginalized groups.
  • Enhancing the effectiveness of government spending to stimulate economic growth and employment generation.

Key Terms:

  • Debt-to-GDP ratio: The ratio of a country’s total debt to its gross domestic product, indicating its ability to repay debt.
  • Capital expenditure: Spending on acquiring or maintaining physical assets such as infrastructure, machinery, and buildings.
  • Revenue expenditure: Day-to-day spending on government operations and services, including salaries, pensions, and subsidies.
  • Primary deficit: The fiscal deficit excluding interest payments on government debt.
  • Structural transformation: The process of shifting resources, including labor, from traditional sectors like agriculture to modern sectors such as manufacturing and services.

Key Phrases:

  • Fiscally conservative approach
  • Debt stability
  • Structural change
  • Employment generation
  • Inclusive growth

Key Quotes:

  • “The budget reflects a fiscally conservative approach with minimal increases in total expenditure.”
  • “The government aims to reduce the debt-to-GDP ratio, primarily by limiting expenditure growth rates and increasing capital expenditure.”
  • “The dominance of self-employment indicates a worsening income distribution and weak improvements in welfare.”

Key Examples and References:

  • Comparison of expenditure growth rates and GDP growth rates to illustrate the government’s strategy in reducing the debt-to-GDP ratio.
  • Analysis of employment data to highlight the challenges of structural transformation and income distribution.

Key Facts and Data:

  • Total budgeted expenditure, with minimal increase over the previous year.
  • Debt-to-GDP ratio currently at a certain level, targeted to be reduced to another level.
  • Stagnation in regular wages and dominance of self-employment in the workforce.
  • GDP growth rates and expenditure growth rates used to analyze the effectiveness of fiscal policies.

Critical Analysis:

The article provides a critical assessment of the interim Union budget’s macroeconomic policy objectives, highlighting potential shortcomings in addressing India’s developmental challenges. It questions the effectiveness of targeting a specific debt-to-GDP ratio and emphasizes the need for broader strategies to promote inclusive growth and structural transformation.

Way Forward:

  • Reevaluate fiscal policies to ensure a balance between debt reduction and addressing developmental challenges.
  • Prioritize investments in infrastructure and human capital to stimulate economic growth and employment generation.
  • Implement targeted interventions to support marginalized groups and promote equitable income distribution.
  • Enhance monitoring and evaluation mechanisms to assess the impact of government spending on welfare and economic development.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A rising tide lifts all boats

Central Idea:

India has experienced a significant economic transformation, becoming the world’s fastest-growing economy. The Interim Budget reflects this progress, emphasizing preventive healthcare, innovation, and medical value travel. The private sector’s rising role is crucial for economic development and improving the overall quality of life.

Key Highlights:

  • India’s rapid economic growth, outpacing the global average.
  • Successful space program and adept management of renewable and non-renewable energy.
  • Interim Budget aligns with the aspirations of a new India, emphasizing opportunities.
  • Focus on preventive healthcare, particularly the promotion of HPV vaccination.
  • Maternal and child health prioritized to enhance women’s participation in the workforce.
  • Commitment to innovation with a ₹1 lakh crore corpus for research and technology.
  • Medical value travel’s rising prominence, making India a global healthcare destination.
  • Private sector’s significant role in economic growth and shaping the future.

Key Challenges:

  • Ensuring sustained economic growth amidst global uncertainties.
  • Scaling up preventive healthcare initiatives to cover various diseases.
  • Balancing budget allocations to address healthcare needs adequately.
  • Overcoming infrastructure challenges for medical value travel.
  • Ensuring inclusive growth and managing disparities in economic development.

Key Terms:

  • HPV Vaccination: Human Papillomavirus vaccination to prevent cervical cancer.
  • Medical Value Travel: Tourism driven by healthcare services.
  • Innovation Revolution: Emphasizing technology and research for development.
  • Interim Budget: A temporary budget presented in the middle of a fiscal year.

Key Phrases:

  • “Buoyancy of metrics and spirit.”
  • “Innovation as a key pillar of development.”
  • “Medical value travel transforming the landscape.”
  • “Private sector rising beyond expectations.”

Key Quotes:

  • “No country can afford it if its citizens fall ill.”
  • “Innovation has the potential to create a significant impact at scale.”
  • “India will truly be limitless if we continue to work together.”

Anecdotes:

  • Reference to Aragonda in Andhra Pradesh, a village where HPV vaccination is being promoted.
  • Mention of ‘Heal in India’ transforming the healthcare landscape.

Key Statements:

  • “India’s space program has won the admiration of the world.”
  • “Preventive health is crucial for the overall well-being of the nation.”
  • “The private sector plays a meaningful role not just in the economy but in how we live our lives.”

Key Examples and References:

  • India’s success in achieving a 70-year life expectancy with less than 2% budgetary allocation for health.
  • The commitment of ₹1 lakh crore for innovation and technology in the Interim Budget.

Key Facts:

  • India’s economic growth rate surpassing the global average.
  • Increase in life expectancy from 53 to 70 years in the last four decades.

Key Data:

  • ₹1 lakh crore corpus for research and technology in the Interim Budget.
  • India’s growth rate compared to the global average.

Critical Analysis:

  • The article provides an optimistic view of India’s economic growth and achievements.
  • Emphasis on preventive healthcare and innovation aligns with global trends.
  • Challenges include addressing healthcare needs comprehensively and ensuring inclusive growth.

Way Forward:

  • Sustain economic growth through continued emphasis on innovation and technology.
  • Strengthen preventive healthcare initiatives for comprehensive disease prevention.
  • Address infrastructure challenges for medical value travel to enhance India’s global healthcare appeal.
  • Ensure inclusive growth, managing economic disparities effectively.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Can India become a $7 Trillion Economy by 2030?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: $7 Trillion Economy

Mains level: Read the attached story

$7 Trillion Economy

Introduction

  • The Indian government’s recent review of the economy has set an ambitious target of achieving a $7 trillion economy by 2030.
  • This article analyzes the feasibility of this goal and explores the factors that contribute to India’s economic outlook.

$7 Trillion Economy: Key Findings

  • Robust Growth: The review expects India to sustain a growth rate of 7% or higher in the fiscal years 2023-24 and beyond.
  • Economic Strengths: The government highlights significant strengths, including substantial infrastructure investments, a healthy financial sector, strong household finances, comfortable forex reserves, controlled inflation, and a decreasing fiscal deficit.
  • $7 Trillion Vision: Based on these factors, the review envisions India reaching a $7 trillion economy by 2030.

India’s Economic Journey

  • Historic Growth: India took 60 years to reach a $1 trillion economy (2007-08), achieved $2 trillion in just seven years (2014-15), and surpassed $3 trillion by 2021-22.
  • Current Status: India is now the world’s fifth-largest economy, with a GDP estimated to reach $3.7 trillion by the end of 2023-24.

Obstacles to Rapid Growth

  • Slower Growth Phase: After a period of rapid growth, India’s economy began to decelerate post-2014, exacerbated by events such as demonetization in 2016 and the pandemic-induced contraction.
  • Ambitious Targets: India had set ambitious targets of becoming a $5 trillion economy by 2024-25 and a $10 trillion economy by 2029-30, but achieving them will require overcoming challenges.
  • Growth Rate Hurdle: To reach a $7 trillion economy by 2030, India must achieve a compounded annual growth rate (CAGR) of 11.9% from 2023-24 to 2029-30, compared to the expected CAGR of 6.7% from 2013-14 to 2023-24.

Challenges Ahead

  • Global Economic Trends: Developed economies are facing declining growth due to inflation and environmental concerns, which could affect India’s export prospects.
  • Protectionism: Increasing protectionism in the global trade landscape poses challenges for India’s export-oriented growth.
  • Geo-Political Uncertainties: Geo-political tensions can fuel inflation and hinder economic growth, presenting additional hurdles.

Conclusion

  • While India’s economic potential remains substantial, achieving a $7 trillion economy by 2030 is a formidable challenge.
  • The nation must navigate global economic shifts, tackle protectionist policies, and address geo-political uncertainties to realize this ambitious vision.
  • Success will require sustained efforts and innovative strategies to drive economic growth and resilience.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A rising tide lifts all boats

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Human Papillomavirus vaccination

Mains level: India's economic growth and achievements

BJP on X: "India emerges as the fastest growing economy of the world in IMF  report with growth rate of 7.4%. https://t.co/Sta44gkaZI" / X

Central Idea:

India has experienced a significant economic transformation, becoming the world’s fastest-growing economy. The Interim Budget reflects this progress, emphasizing preventive healthcare, innovation, and medical value travel. The private sector’s rising role is crucial for economic development and improving the overall quality of life.

Key Highlights:

  • India’s rapid economic growth, outpacing the global average.
  • Successful space program and adept management of renewable and non-renewable energy.
  • Interim Budget aligns with the aspirations of a new India, emphasizing opportunities.
  • Focus on preventive healthcare, particularly the promotion of HPV vaccination.
  • Maternal and child health prioritized to enhance women’s participation in the workforce.
  • Commitment to innovation with a ₹1 lakh crore corpus for research and technology.
  • Medical value travel’s rising prominence, making India a global healthcare destination.
  • Private sector’s significant role in economic growth and shaping the future.

Key Challenges:

  • Ensuring sustained economic growth amidst global uncertainties.
  • Scaling up preventive healthcare initiatives to cover various diseases.
  • Balancing budget allocations to address healthcare needs adequately.
  • Overcoming infrastructure challenges for medical value travel.
  • Ensuring inclusive growth and managing disparities in economic development.

Key Terms:

  • HPV Vaccination: Human Papillomavirus vaccination to prevent cervical cancer.
  • Medical Value Travel: Tourism driven by healthcare services.
  • Innovation Revolution: Emphasizing technology and research for development.
  • Interim Budget: A temporary budget presented in the middle of a fiscal year.

Key Phrases:

  • “Buoyancy of metrics and spirit.”
  • “Innovation as a key pillar of development.”
  • “Medical value travel transforming the landscape.”
  • “Private sector rising beyond expectations.”

Key Quotes:

  • “No country can afford it if its citizens fall ill.”
  • “Innovation has the potential to create a significant impact at scale.”
  • “India will truly be limitless if we continue to work together.”

Anecdotes:

  • Reference to Aragonda in Andhra Pradesh, a village where HPV vaccination is being promoted.
  • Mention of ‘Heal in India’ transforming the healthcare landscape.

Key Statements:

  • “India’s space program has won the admiration of the world.”
  • “Preventive health is crucial for the overall well-being of the nation.”
  • “The private sector plays a meaningful role not just in the economy but in how we live our lives.”

Key Examples and References:

  • India’s success in achieving a 70-year life expectancy with less than 2% budgetary allocation for health.
  • The commitment of ₹1 lakh crore for innovation and technology in the Interim Budget.

Key Facts:

  • India’s economic growth rate surpassing the global average.
  • Increase in life expectancy from 53 to 70 years in the last four decades.

Key Data:

  • ₹1 lakh crore corpus for research and technology in the Interim Budget.
  • India’s growth rate compared to the global average.

Critical Analysis:

  • The article provides an optimistic view of India’s economic growth and achievements.
  • Emphasis on preventive healthcare and innovation aligns with global trends.
  • Challenges include addressing healthcare needs comprehensively and ensuring inclusive growth.

Way Forward:

  • Sustain economic growth through continued emphasis on innovation and technology.
  • Strengthen preventive healthcare initiatives for comprehensive disease prevention.
  • Address infrastructure challenges for medical value travel to enhance India’s global healthcare appeal.
  • Ensure inclusive growth, managing economic disparities effectively.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A political, feel-good statement

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Disinvestment

Mains level: The Finance Minister's Budget speech

Budget Highlights 2024: Rooftop solarisation, housing for middle class | Latest News India - Hindustan Times

Central Idea:

The Finance Minister’s Budget speech focuses on claiming credit for a decade of economic growth, moderate inflation, and social welfare. However, the analysis reveals a mix of positives and concerns, emphasizing the need for addressing challenges like employment, wage growth, and dependence on China for industrial inputs.

Key Highlights:

  • The Budget attributes post-COVID growth revival to public infrastructure investment, proposing an 11% rise in capital expenditure.
  • Public infrastructure investments, especially in highways and communications, have contributed to GDP growth in the post-pandemic years.
  • The Budget extends a 50-year interest-free loan scheme for States and introduces a similar scheme for private sector innovation and R&D with a ₹1 lakh crore corpus.
  • The Budget applauds the scheme to set up rooftop solar in 1 crore households.
  • The claim of doubled FDI inflow is challenged, highlighting that much of it has gone into services rather than substantial manufacturing.

Key Challenges:

  • Despite positive growth indicators, the employment situation remains grim, with stagnant regular salaried employment and a rise in unpaid family labor.
  • Real wages in agriculture have declined, indicating that the benefits of economic growth have not been equitably distributed.
  • There is a concern about premature de-industrialization, with a rise in the agriculture workforce and a decline in manufacturing employment share.
  • Growing dependence on China for industrial inputs poses a strategic risk, despite initiatives like ‘Make in India’ and ‘Atmanirbhar Bharat Abhiyaan.’

Key Terms:

  • Crowding-out: The displacement of private investment due to high levels of public investment.
  • Disinvestment: The sale or liquidation of government assets in the public sector.
  • Geopolitics: The influence of geographical factors on international relations and politics.

Key Phrases:

  • “All is well” – The political message emphasizing optimism about the future.
  • “Premature de-industrialization” – A concern that the economy is losing its industrial base too soon.

Key Quotes:

  • “The Budget claimed that FDI inflow during 2014-23 doubled to $596 billion compared to the previous 10 years. This is misleading.”
  • “The political message in the Budget was ‘all is well’ and the coming days will be better.”

Key Statements:

  • “The long term growth of a poor, over-populated economy lies in the structural transformation of its workforce away from rural/agriculture to modern industry and services.”
  • “The Budget is an account of the achievements of the last decade of this regime, with a promise to press ahead with the same.”

Key Examples and References:

  • The rise in public infrastructure investments contributing to GDP growth.
  • The widening trade deficit with China despite ‘Make in India’ initiatives.

Key Facts and Data:

  • The FDI inflow ratio to GDP peaked in 2007-08 and has not regained that level.
  • India’s industrial output and investment growth rate has decelerated over the last 5-7 years.

Critical Analysis:

The Budget seems complacent about aggregate growth but overlooks concerns such as employment, wage growth, and dependence on China. The focus on claiming credit for past achievements raises questions about addressing existing challenges.

Way Forward:

  • Prioritize inclusive growth to ensure benefits reach a larger section of the population.
  • Address employment challenges by promoting structural transformation from rural to urban sectors.
  • Strategically reduce dependence on China for critical industrial inputs.
  • Enhance the effectiveness of schemes like interest-free loans for innovation and R&D to boost long-term economic growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

K-Shaped Recovery Debate: A Closer Look at the SBI Research

Note4Students

From UPSC perspective, the following things are important :

Prelims level: K-Shaped Recovery

Mains level: Read the attached story

K-Shaped Recovery

Introduction

  • The Economic Research Department of the State Bank of India (SBI) recently released a study titled “Debunking K-shaped recovery,” addressing the ongoing debate about the post-pandemic recovery in India and its alleged K-shaped nature.
  • This debate has significant implications for the country’s widening inequality.

What is K-Shaped Recovery?

  • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
  • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
  • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
  • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

SBI Challenging Conventional Wisdom

  • Controversial Message: The report’s key message suggests a potential “conspiracy” against India’s growth, raising eyebrows about the credibility and intent of the economic evaluation.
  • Message Summary: It questions the validity of the K-shaped recovery concept, calling it “flawed” and driven by certain vested interests who are uncomfortable with India’s ascendancy on the global stage.

Re-evaluating Economic Well-Being

  • Parameters under Scrutiny: The report challenges traditional parameters used to assess economic well-being.
  • New Considerations: It highlights patterns in income, savings, consumption, expenditure, and policy measures designed to empower the masses through technology-driven solutions, questioning the reliance on outdated indicators like 2-wheeler sales or land holdings.

Shaping a Narrative

  • Polarized Environment: In a time of heightened polarization and India’s emergence as a major economy, the report’s language, including phrases like “fanning interests” and “renaissance of the new global south,” appears to align with current political narratives.
  • Narrative Shift: The report introduces a new narrative, emphasizing the reduction of inequality in India.

Claims on Inequality

  • Inequality Reduction: The report asserts that income inequality has decreased, citing the Gini coefficient of taxable income, which fell from 0.472 to 0.402 between FY14 and FY22.
  • Limited Sample: However, the research relies on “taxable income” from a small fraction (around 5%) of the population, primarily those paying income tax, making it less representative of the informal workforce and the broader economy.
  • Food Orders as Proxy: The study also uses Zomato food orders, primarily from semi-urban areas, to challenge claims of economic distress.

Representativeness Concerns

  • Focus on Formal Sector: The SBI research primarily centers on the formal sector, which represents a privileged minority within the Indian economy.
  • Inequality Debate: This focus mirrors the crux of the inequality debate, where those excluded from economic growth continue to lag behind, while those already well-off experience significant growth.

A Different Perspective

  • Contrasting Reports: In 2022, another report, “The State of Inequality in India,” commissioned by the Economic Advisory Council to the Prime Minister, highlighted rising inequality in the country.
  • Unimaginable Disparities: It noted that an individual earning a monthly wage of Rs 25,000 was among the top 10% of earners, underscoring the stark income disparities.

Conclusion

  • While the SBI research provides a unique perspective on India’s economic recovery and inequality, its focus on a limited sample from the formal sector raises concerns about its representativeness.
  • The broader discourse on inequality remains critical, emphasizing the need for a more comprehensive understanding of the diverse economic landscape in India.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Gini Coefficient: A Deeper Dive into the SBI Income Inequality Report

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gini Coefficient

Mains level: Not Much

Gini Coefficient

Introduction

  • A recent report by the State Bank of India (SBI) has illuminated a significant decline in income inequality in India over the past decade.
  • This report, which analyzes taxpayer data, indicates a substantial reduction in the Gini coefficient, a widely accepted measure of income inequality.

What is the Gini Coefficient?

  • The Gini Coefficient, often referred to as the Gini Index or Gini Ratio, is a measure of income or wealth inequality within a specific population, region, or country.
  • It assigns a numerical value between 0 and 1.
  • 0 represents perfect income or wealth equality (everyone has the same income or wealth), and 1 signifies perfect inequality (one person or household has all the income or wealth, and everyone else has none).
  • To calculate the Gini Coefficient, income or wealth data is typically arranged in ascending order, from the poorest to the richest individuals or households.
  • A Lorenz curve is plotted, which is a graphical representation of the actual income or wealth distribution. It compares the cumulative income or wealth of the population to the cumulative share of the population.
  • The Gini Coefficient is calculated by measuring the area between the Lorenz curve and the line of perfect equality. This area is then divided by the total area under the line of perfect equality.

Gini Coefficient and Income Inequality

  • Gini Coefficient: The Gini coefficient measures income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).
  • Reported Decline: The Gini coefficient has dropped from 0.472 in 2014-15 to 0.402 in 2022-23, marking a nearly 15% reduction in income inequality.

Examining Income Inequality across Employment Types

  • Taxpayer Data Limitation: The SBI report focuses on taxpayer data, potentially excluding a significant portion of income earners.
  • Significant Majority below Tax Threshold: Approximately 80% of income earners earn less than ₹2.5 lakh per annum, the minimum taxable amount.

A Closer Look at the Gini Coefficient

  • Preliminary Analysis: Data from the 2017-18 and 2022-23 Periodic Labour Force Surveys (PLFS) is analyzed to evaluate changes in income inequality among various employment categories.
  • Gini Coefficient Trends: While the Gini coefficient decreases slightly from 0.4297 to 0.4197, the changes are minimal.
  • Disaggregated Gini: The Gini coefficient falls for regular wage and casual wage workers but rises for the self-employed, though the shifts are modest.

Uncovering Income Polarization

  • Beyond the Gini Coefficient: Income polarization becomes evident when examining the top 10% compared to the bottom 30% of income earners.
  • Divergence in Income Growth: The top deciles witnesses’ faster income growth (around 7.23%) compared to the bottom 20% and even the third decile. In contrast, the bottom decile experiences the slowest growth (approximately 1.67%).
  • The 90/10 Ratio: The ratio of incomes between the 90th percentile (top 10%) and the 10th percentile (bottom 10%) rises from 6.7 in 2017-18 to 6.9 in 2022-23, indicating increased income disparity.
  • Variation among Employment Types: The 90/10 ratio falls for wage earners but significantly increases for the self-employed, particularly among top earners.

Analyzing the Changes

  • Preliminary Assessment: While this analysis offers initial insights, further research is needed to comprehensively understand these trends.
  • Impact of Women’s Participation: The rise in women’s labor force participation, primarily in low-paid self-employed roles, may explain the increased polarization among income earners.
  • Tax Data Limitations: Taxpayer data might not capture the pace of inequality reduction among the broader population.
  • Complex Inequality Dynamics: Reduction in the Gini coefficient conceals income divergence, and future growth may either mitigate or exacerbate this disparity.

Conclusion

  • The SBI report’s revelation of declining income inequality in India is a positive development.
  • However, a deeper examination of income distribution across employment types and deciles unveils a more complex picture.
  • Income polarization, particularly among the self-employed, challenges the overarching narrative of reduced inequality.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

States are spending. The economy is waiting

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Capital Expenditure

Mains level: States should continue prioritizing capital expenditure for sustained economic growth

Finance Commission - Issues related to devolution of resources - Civilsdaily

Central Idea:

State governments in India have navigated fiscal challenges caused by the Covid-19 pandemic, with a focus on fiscal consolidation. Despite borrowing flexibility granted by the Union government, states kept their fiscal deficits under control in 2021-22 and 2022-23. However, there has been a notable shift in spending priorities in 2023-24, with an emphasis on capital expenditure, reflecting positive economic growth prospects.

Key Highlights:

  • States, accounting for over three-fifths of total government spending, traditionally focused on revenue expenditure but increased capital expenditure significantly in 2023-24.
  • The ratio of capital outlay to total expenditure reached an eight-year high at 14.1%, indicating a growth-enhancing strategy.
  • A 45.7% increase in capital outlay, fueled by timely disbursements from the Union government and buoyant state revenues, contributed to this shift.
  • The Union government’s proactive release of tax devolution and approval of capital assistance schemes played a crucial role.
  • Despite the healthy growth in state revenues, a 29.2% decline in grants from the Union government led to a reliance on market borrowings.
  • Record-high gross market borrowings during the first nine months of the year were primarily directed towards capital expenditure.

Key Challenges:

  • A shortfall in grants from the Union government led to tepid overall revenue growth, necessitating increased market borrowings by the states.
  • Achieving the aggregate fiscal deficit target of 3.1% of GDP may be challenging due to the reliance on market borrowings and a potential slippage.

Key Terms and Phrases:

  • Fiscal Deficit: The difference between government expenditure and revenue.
  • Capital Expenditure: Money spent on creating or acquiring assets with long-term benefits.
  • Revenue Expenditure: Regular spending on operational costs like salaries, pensions, and subsidies.
  • Tax Devolution: Allocation of tax revenues from the Union government to states.
  • Market Borrowings: Funds raised by states through the issuance of bonds in the financial market.

Key Quotes and Statements:

  • “States’ capital expenditure is being fueled by an interplay of two forces…”
  • “The quality of their expenditure — ratio of capital outlay to total expenditure — stands at 14.1%, an eight-year high…”
  • “The Union government has been proactive in releasing the advance instalments of tax devolution…”
  • “Despite this healthy growth in states own revenues, their overall revenue receipts have grown at an average pace of 5.5%…”

Key Examples and References:

  • The advance release of monthly tax devolution and timely disbursements of funds for the special scheme on capital assistance.
  • Approval of capital expenditure worth and released under the special assistance scheme till November 2023.
  • Record-high gross market borrowings during the first nine months of the year.

Key Facts and Data:

  • Aggregate fiscal deficit target for states: 3.1% of GDP.
  • Ratio of capital outlay to total expenditure: 14.1%, an eight-year high.
  • Gross market borrowings by states during the first nine months of the year.

Critical Analysis:

  • The shift towards capital expenditure indicates a positive economic outlook and potential for growth.
  • The reliance on market borrowings due to a decline in grants poses a fiscal challenge.
  • Achieving the fiscal deficit target might be challenging, with a potential slippage.

Way Forward:

  • States should continue prioritizing capital expenditure for sustained economic growth.
  • Improving efficiency in tax administration and formalizing the economy can enhance revenue.
  • Collaboration between Union and state governments for stable fiscal management is crucial.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

First Advance Estimates of India’s GDP out

Note4Students

From UPSC perspective, the following things are important :

Prelims level: First Advance Estimates of GDP

Mains level: Read the attached story

advance estimate

Introduction

  • Growth Projection: India’s GDP is projected to grow by 7.3% in the financial year 2023-24, as per the First Advance Estimates (FAEs) released by the government.
  • Comparison with Previous Year: This rate is slightly higher than the 7.2% growth recorded in 2022-23.

What is Gross Domestic Product (GDP)?

  • Definition: GDP quantifies the total monetary value of all goods and services produced within a country’s borders in a specific time frame, typically annually.
  • Difference from GNP: GDP is distinct from Gross National Product (GNP), which measures the value of goods and services produced by a country’s nationals, regardless of the production location.

First Advance Estimates of GDP

  • Introduction and Timing: First introduced in the financial year 2016-17, the First Advance Estimates (FAE) are released at the beginning of January.
  • Nature of Estimates: They represent the initial official projections of GDP growth for the financial year, published before the year concludes.
  • Data Exclusion: Notably, the FAE do not include formal GDP data for the third quarter (October to December), which is released with the Second Advance Estimates (SAE) at the end of February.

Significance of FAE

  • Election Year Context: With Lok Sabha elections due in April-May, the FAEs gain additional significance, although a full-fledged Union Budget will not be presented this year.
  • Budgetary Relevance: The FAE are crucial for the Union Finance Ministry’s budgetary planning for the next financial year, as the SAE are published after the budget is finalized.
  • Focus on Nominal GDP: For budget-making, the emphasis is on nominal GDP (the observed variable), including both its absolute level and growth rate.
  • Real vs. Nominal GDP: Real GDP, adjusted for inflation, is a derived metric, whereas all budget calculations commence with nominal GDP.

GDP Growth Analysis

  • Real GDP Growth: The real GDP (adjusted for inflation) is expected to reach nearly Rs 172 lakh crore by March 2024.
  • Comparison with Modi’s Tenure: The GDP has grown from Rs 98 lakh crore at the start of Prime Minister Modi’s first term to almost Rs 140 lakh crore at the beginning of his second term.
  • Growth Rate Trends: The estimated 7.3% growth for 2023-24 is higher than most forecasts, indicating a strong economic recovery. However, there’s a noticeable deceleration in growth during Modi’s second term compared to the first.

Factors Driving India’s Growth

  • Private Final Consumption Expenditure (PFCE): Accounting for almost 60% of GDP, PFCE is expected to grow by 4.4% in the current year.
  • Gross Fixed Capital Formation (GFCF): Investment spending, the second-largest growth engine, has grown by 9.3% this year.
  • Government Final Consumption Expenditure (GFCE): Government spending growth has been slower, at 3.9% in the current year.
  • Net Exports: The negative growth in net exports indicates a higher import-than-export rate, which has increased by 144% this year.

Concerns and Challenges

  • Private Consumption: Muted private consumption, especially in rural India, remains a concern.
  • Investment Spending: A significant portion of investment spending is still driven by the government, with private consumption remaining subdued.
  • Government Spending: Government spending growth has been relatively low in the second term of Modi’s government.
  • Net Exports: The negative growth in net exports, though a mild improvement over the two terms, still indicates an imbalance in trade.

Conclusion

  • Economic Recovery: The 7.3% growth rate suggests a robust economic recovery post-pandemic.
  • Balanced Growth: The need for balanced growth across all sectors, especially in boosting private consumption and investment, is critical for sustainable development.
  • Future Prospects: The ongoing economic policies and reforms will play a crucial role in shaping India’s growth trajectory in the coming years.

https://indianexpress.com/article/explained/explained-economics/gdp-data-advance-estimates-9099092/

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The dispute on India’s debt burden

Note4Students

From UPSC perspective, the following things are important :

Prelims level: FRBMA

Mains level: adhering to fiscal correction paths

IMF cautions India on govt debt vulnerabilities, Centre disagrees

 

Central Idea:

The article discusses concerns raised by the International Monetary Fund (IMF) regarding India’s long-term debt sustainability and the reclassification of its exchange rate regime. It emphasizes the need for prudent debt management, considering potential adverse circumstances, and explores challenges India faces in credit ratings and fiscal responsibility.

 

Key Highlights:

  • IMF expresses concerns about India’s long-term debt sustainability, projecting government debt to be 100% of GDP by 2028 under adverse circumstances.
  • The reclassification of India’s exchange rate regime by the IMF raises questions about the country’s currency management.
  • Challenges in managing public debt, maintaining credit ratings, and potential fiscal slippage in the face of increased subsidies and expenditure.

 

Key Challenges:

  • Long-term risks associated with India’s considerable investment needs for climate change mitigation and resilience to natural disasters, as highlighted by the IMF.
  • India faces challenges in enhancing credit ratings despite being the fastest-growing major economy, attributed to weak fiscal performance and burdensome debt stock.
  • The possibility of fiscal slippage in FY24 due to increased expenditure on employment guarantee schemes and subsidies, posing a challenge to fiscal correction.

 

Key Terms:

  • Article IV consultation report
  • Debt sustainability
  • Exchange rate regime
  • Fiscal Responsibility and Budget Management Act (FRBMA)
  • Credit ratings

 

Key Phrases:

  • “Long-term risks are high due to considerable investment needs for climate change mitigation and resilience.”
  • “Challenges in enhancing credit ratings despite being the fastest-growing major economy.”
  • “Fiscal slippage attributed to higher expenditure on employment guarantee schemes and subsidies.”

 

Key Quotes:

  • “IMF’s worst-case scenario projections for India need to be viewed in the context of the persistent debt conundrum in developing nations.”
  • “India’s stronger fundamentals are undermined by the government’s weak fiscal performance and burdensome debt stock, according to rating agencies.”

 

Key Statements:

  • “The Finance Ministry refutes IMF projections as a worst-case scenario and not fait accompli.”
  • “India’s public debt-to-GDP ratio has barely increased, but it remains higher than levels specified by the FRBMA.”

 

Key Examples and References:

  • The IMF’s projections on India’s government debt and exchange rate regime from the annual Article IV consultation report.
  • India’s credit rating remaining unchanged at ‘BBB-‘ since 2006, indicating the lowest investment grade.
  • India Ratings and Research’s report on the possibility of fiscal slippage in FY24.

 

Key Facts:

  • Global public debt reached a record USD 92 trillion in 2022, with developing countries, including India, contributing almost 30%.
  • Despite being the fastest-growing major economy, India’s sovereign investment ratings have remained unchanged since August 2006.
  • India’s public debt-to-GDP ratio is higher than levels specified by the Fiscal Responsibility and Budget Management Act.

 

Critical Analysis:

The article critically examines the IMF’s concerns and India’s challenges in debt management, credit ratings, and fiscal responsibility. It discusses the potential impact of increased subsidies on fiscal slippage and the need for short-term fiscal correction.

 

Way Forward:

  • Prudent debt management to address long-term sustainability concerns raised by the IMF.
  • Enhance credit ratings by improving fiscal performance and addressing burdensome debt stock.
  • Navigate short-term challenges, such as fiscal slippage, by adhering to fiscal correction paths and avoiding worst-case scenarios.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A new economics for inclusive growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: na

Mains level: inclusive growth

Elements of Inclusive growth - INSIGHTSIAS

Central idea 

The central idea urges a reevaluation of India’s economic strategy, emphasizing the necessity to shift from an exclusive focus on high-end skills to inclusive growth. It underscores the mismatch between skills, jobs, and incomes and advocates prioritizing the small-scale manufacturing sector to foster sustainable and locally enriched economic development. The article suggests seizing the opportunity to attract producers and meet unmet needs for India’s growth.

Key Highlights:

  • The book “Breaking the Mould: Reimagining India’s Economic Future” suggests a shift from manufacturing to exporting high-end services, challenging traditional economic strategies.
  • The mismatch between skills, jobs, and incomes is identified as a major obstacle to India’s growth, reflecting in social and political demands for better wages and security.
  • The growth pattern focusing on high-end skills has not generated sufficient decent jobs for the majority of India’s population.

Key Challenges:

  • The Achilles heel of India’s economy is insufficient jobs and incomes, evident in demands from various sectors for fair wages and social security.
  • A critical mismatch between skills, jobs, and incomes poses a significant challenge to India’s growth and economic well-being.
  • The reliance on high-end skills has not translated into enough decent jobs for the majority, hindering inclusive growth.

Key Terms and Phrases:

  • Leapfrogging manufacturing in favor of exporting high-end services.
  • Mismatch between skills, jobs, and incomes.
  • “India was Shining” era and its economic implications.
  • Inclusive and sustainable economic growth.
  • Small-scale and informal manufacturing sector.
  • The importance of richness of economic activity within local webs.

Key Quotes:

  • “India cannot afford to neglect its small-scale and informal manufacturing sector any longer.”
  • “Investing in education and skills for ‘high end’ manufacturing and services will not benefit the masses if they cannot be employed.”
  • “There are no shortcuts to inclusive economic growth.”

Key Statements:

  • The book’s recommendation challenges India’s traditional approach to economic development.
  • The focus on high-end skills has not translated into inclusive growth or sufficient employment opportunities.
  • Policymakers must reimagine the path for India’s growth and prioritize inclusive economic growth.

Key Examples and References:

  • Reference to the book “Breaking the Mould: Reimagining India’s Economic Future” by Raghuram Rajan and Rohit Lamba.
  • Examples of social and political demands for better wages and security in various sectors.
  • Mention of the mismatch between India’s skills development and job creation.

Key Facts and Data:

  • 60% of Indians are classified as “economically weaker sections” entitled to job reservations.
  • India invested in world-class institutions of science and engineering 70 years ago.
  • The growth pattern focusing on high-end skills has not generated sufficient decent jobs for India’s masses.

Critical Analysis:

  • The article critiques the existing economic growth pattern for its failure to generate inclusive and sustainable development.
  • Emphasis on the importance of inclusive economic growth and challenges posed by the mismatch between skills and jobs.

Way Forward:

  • Policymakers need to reimagine India’s growth path with a focus on inclusive economic growth.
  • There are no shortcuts, and investments in the small-scale and informal manufacturing sector are crucial for sustainable development.
  • India should leverage its unmet needs to attract producers and make more for India in India, thereby growing jobs and incomes.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Century of Change in Indian Villages: Insights from Longitudinal Studies

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Longitudinal Studies

Mains level: Read the attached story

Central Idea

  • Historical Surveys: Starting in 1916-17, Gilbert Slater initiated a series of surveys in five Tamil Nadu villages, marking the beginning of a century-long study of rural India.
  • Unique Village Studies: Palakurichi and Palanpur stand out as unique Indian villages extensively studied over a century and decades, respectively.

Methodology and Evolution of Village Studies

  • Initial Approach: Slater’s students, natives of the surveyed villages, used questionnaires to understand the socioeconomic conditions of rural households.
  • Subsequent Surveys: These villages were revisited for studies in subsequent years, including 1936-37, 1964, 1983, 2004, and 2019, providing a longitudinal perspective.

Significance of Longitudinal Studies

  • Contrast with Cross-Sectional Surveys: Unlike the National Sample Survey Office’s cross-sectional surveys, village studies are longitudinal, focusing on in-depth analysis over time.
  • Objective: The aim is to trace changes in the specific village over time, providing micro-level insights that complement macro-level data.

Key Findings from Recent Surveys

  • Economic Shifts: The 2019 survey of Palakurichi revealed a decline in agriculture’s dominance, with only 43.3% of the workforce engaged in farming, down from 85% in 1983.
  • Diversification of Workforce: Similar trends were observed in Palanpur, with a significant shift from agriculture to non-farm jobs over the decades.

Changing Social Dynamics

  • Diminished Dominance of Traditional Landholders: In both Palakurichi and Palanpur, traditional upper caste landholders’ power has declined, with middle castes and Dalits gaining more land ownership.
  • Economic and Social Mobility: These changes reflect broader social and economic mobility within these rural communities.

Policy Implications and Challenges

  • Land Leasing Practices: As some communities move away from agriculture, land leasing becomes common, often based on oral agreements to avoid legal complications.
  • Need for Policy Reforms: There’s a need for policies that balance the interests of landowners and tenant farmers, encouraging investment in land improvement.
  • Sustaining Agricultural Productivity: With rural India becoming less dependent on agriculture, ensuring continued or improved farming practices on existing agricultural lands is crucial.

Conclusion

  • Insights from Micro-Level Studies: Longitudinal village studies offer valuable insights into the patterns of change in rural India, informing policy and understanding of rural dynamics.
  • Balancing Agricultural and Non-Agricultural Growth: These studies highlight the need for balanced development policies that support both agricultural sustainability and non-farm employment opportunities.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI reports reduced risk of Stagflation in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Stagflation

Mains level: Read the attached story

stagflation

Central Idea

  • The Reserve Bank of India (RBI) officials have reported a decreased risk of stagflation in India, now estimated at 1%, down from 3% in August

What is Stagflation?

Details
Definition   An economic condition characterized by stagnant growth, high unemployment, and high inflation.
Indian context Fluctuating growth rates; periods of slowdown have raised concerns about stagnation.
Inflation Dynamics in India Historically high at times, often driven by rising food and fuel prices.
Supply Shocks Vulnerable to global oil price fluctuations and agricultural supply shocks (e.g., monsoon variability).
Past Episodes Elevated stagflation risks were noted during the Asian Crisis, Global Financial Crisis, taper tantrum, and COVID-19 pandemic.

Methodology for Assessing Stagflation

  • Two-Pronged Approach: RBI assessment utilized two methods: analyzing periods of low economic growth with high inflation, and employing ‘at-risk’ frameworks, namely “Inflation at Risk” (IaR) and “Growth at Risk” (GaR), using quantile regression.
  • Determinants of Stagflation: Key factors identified include supply-side shocks, commodity price spikes, tighter financial conditions, and currency depreciation.

Key Risk Factors for India

  • Financial Conditions and Rupee Depreciation: Financial conditions and the depreciation of the rupee against the U.S. dollar are significant risk factors for stagflation in India.
  • Empirical Evidence: The integrated IaR and GaR frameworks corroborate these findings, although the impact of crude oil prices on domestic fuel prices has limited predictive power for stagflation.
  • Global Concerns: Post-pandemic, higher commodity prices and the U.S. dollar’s appreciation raised global stagflation concerns.

Back2Basics: Economic Conditions: Definitions and Concepts

Explanation
Depression A sustained, long-term downturn in economic activity.

Characterized by significant decline in GDP, high unemployment, low spending, and reduced industrial output.

Deflation A general fall in the price level of goods and services over some time, indicating negative inflation rates.
Disinflation A decrease in the rate of inflation, i.e., a slowdown in the rate at which prices increase.

Example: Inflation rate falling from 8% to 6%.

Reflation Economic measures, such as increasing money supply or reducing taxes, aimed at stimulating the economy to reach its long-term growth trend after a downturn.
Skewflation A situation where the price of some items rises significantly while others remain stable.

Example: Seasonal rise in the price of onions while other prices are stable.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s jobs crisis, the macroeconomic reasons

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Kaldor-Verdoorn

Mains level: addressing the skills gap and improving the quality of the workforce

Burning Issue] Jobless growth in India - Civilsdaily

Central idea 

The article discusses the challenge of “jobless growth” in India, where the employment growth rate remains unresponsive despite increased GDP and value-added growth rates. It emphasizes the unique characteristics of India’s jobless growth regime, involving a high Kaldor-Verdoorn coefficient, and calls for a distinct policy focus on employment in addition to the traditional emphasis on GDP growth.

Key Highlights:

  • The article discusses the distinction between wage employment and self-employment, emphasizing the challenge of inadequate labor demand, particularly for regular wage work in the formal sector.
  • India’s historical employment scenario includes open unemployment, high levels of informal employment, and a stagnant growth rate of salaried workers in the non-agricultural sector.
  • The lack of employment opportunities in the formal sector is attributed to factors such as output growth, labor productivity, and the introduction of labor-saving technologies.

Key Challenges:

  • India faces the challenge of “jobless growth,” where the employment growth rate remains unresponsive despite a rise in GDP growth and value-added growth rates.
  • The article highlights the connection between labor productivity growth rate and output growth rate, contributing to the phenomenon of jobless growth in India.
  • The distinct form of jobless growth in India, characterized by a higher than average Kaldor-Verdoorn coefficient, poses a qualitative challenge for macroeconomic policies.

Key Terms:

  • Kaldor-Verdoorn coefficient: A measure reflecting the responsiveness of labor productivity growth rate to output growth rate.
  • Dual economy structure: An economic structure characterized by the coexistence of a modern and traditional sector, often seen in developing countries.
  • Mahalanobis strategy: A development strategy that prioritizes heavy industrialization to overcome the constraints on output and employment.

Key Phrases:

  • “Jobs generally refer to relatively better-paid regular wage or salaried employment.”
  • “The lack of opportunities is reflected by a more or less stagnant employment growth rate of salaried workers in the non-agricultural sector.”
  • “The positive effect of output growth rate on employment fails to counteract the adverse effect of labor-saving technologies in the Indian jobless growth regime.”

Key Quotes for value addition:

  • “The Indian economy has historically been characterized by the presence of both open unemployment as well as high levels of informal employment.”
  • “Jobless growth in India makes the macroeconomic policy challenge qualitatively different from other countries.”

Key Examples and References:

  • Reference to the Mahalanobis strategy focusing on heavy industrialization as a policy for overcoming constraints on output and employment.
  • Mention of the higher than average Kaldor-Verdoorn coefficient in India’s non-agricultural sector as a distinctive feature of jobless growth.

Key Facts:

  • India’s employment growth rate in the formal non-agricultural sector has remained unresponsive despite significant increases in GDP and value-added growth rates.
  • Jobless growth in India is associated with a high Kaldor-Verdoorn coefficient, indicating a strong connection between labor productivity growth rate and output growth rate.

Critical Analysis:

  • The article critically examines the traditional presumption that increasing the output growth rate would be a sufficient condition for increasing the employment growth rate in the formal sector.
  • It highlights the need for a separate policy focus on employment, including both demand and supply side components, in addition to the focus on GDP growth.

Way Forward:

  • Advocate for policies addressing the skills gap and improving the quality of the workforce to make automation less attractive for firms.
  • Propose direct public job creation as a demand-side component of employment policies.
  • Suggest reorienting the macroeconomic framework to finance employment-related expenditures, including increasing the direct tax to GDP ratio and improving compliance.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Call for Reform in Sovereign Credit Rating Process  

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Sovereign Credit Ratings

Mains level: Not Much

Central Idea

  • India’s Chief Economic Adviser, V Anantha Nageswaran, emphasizes the need for reform in the sovereign credit rating process.
  • The aim is to accurately reflect the default risk of developing economies and reduce their funding costs.

What are Sovereign Credit Ratings?

  • A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
  • It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
  • The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.
  • S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest possible investment grade, but with a stable outlook.

India’s Pursuit of a Credit Rating Upgrade

  • Current Rating: India is at the lowest possible investment grade but is seeking an upgrade due to improved economic metrics post-pandemic.
  • Government Engagement: Continuous efforts are being made to engage with global credit rating agencies for an improved rating.

Challenges in the Current Rating Methodology

  • Opacity and Impact: CEA points out the opaqueness in rating methodologies and the difficulty in quantifying the impact of qualitative factors.
  • Bandwagon Effects and Biases: The significant presence of qualitative factors leads to cognitive biases and concerns about the credibility of ratings.

India’s Engagement with Rating Agencies

  • Meetings with Top Agencies: Finance ministry officials have met with representatives from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings.
  • Current Ratings: While S&P and Fitch rate India at BBB, Moody’s rates it at Baa3 with a stable outlook.

Parameters and Issues in Sovereign Rating

  • Typical Parameters: Agencies consider factors like growth rate, inflation, government debt, and political stability.
  • Qualitative Component: Over half the ratings are determined by qualitative factors, often non-transparent and perception-based.
  • Dominance in Ratings: Institutional Quality, often measured by World Bank’s Worldwide Governance Indicators (WGIs), is a significant determinant for developing economies.
  • Issues with WGIs: These metrics are non-transparent, perception-based, and may not represent a sovereign’s willingness to pay.

CEA’s Recommendations  

  • Need for Transparency: Sovereigns are expected to be transparent; similarly, rating agencies should make their processes clear and avoid untenable judgments.
  • Potential Benefits: Enhanced transparency could lead to more reliance on hard data and possible credit rating upgrades for many sovereigns.
  • Access to Private Capital: Improved ratings can help developing countries access private capital crucial for addressing global challenges like climate change.
  • India’s Export Targets: With initiatives like production-linked incentives and Make in India, India aims for a $2 trillion export target by 2030.

Conclusion

  • Advocacy for Change: Nageswaran’s comments highlight the need for a more equitable and transparent sovereign credit rating process.
  • Broader Implications: Such reforms could not only benefit developing economies like India by reducing funding costs but also contribute to a more accurate and fair global financial system.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Private: India’s Economic Outlook for 2024: Challenges and Opportunities

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not Much

Mains level: Read the attached story

outlook

Central Idea

  • The past three years have been marked by extraordinary events, including a pandemic, wars, and economic upheavals, impacting global and Indian economies.
  • The year 2024 is crucial with elections in 40 countries, including India’s Lok Sabha elections, which are expected to influence economic policies.

Indian Economy: Prospects amidst Challenges

  • Pre-Election Stimulus Impact: Anticipated government spending before the elections could temporarily boost consumption, influencing the debate on economic models and potentially reinvigorating growth.
  • Persistent Concerns: Issues like food inflation, rural sector sluggishness, and leveraging the demographic dividend in the technology era remain challenging.

Economic Forecasts and Government Expenditure

  • Growth Predictions: Goldman Sachs forecasts a growth spurt in early 2024, driven by pre-election spending, with private investment expected to pick up later in the year.
  • Capex and Rural Growth: Economists warn of a potential slowdown in government capital expenditure as elections approach, which could impact rural growth and consumption.

India’s Economic Performance and Key Indicators

  • GDP Trends: The FY24 Q2 GDP data showed positive trends, with construction growth, double-digit expansion in mining and electricity, and a surge in the investment rate to 30%.
  • Market Confidence: The confidence of domestic investors in listed companies and new listings highlights a robust market, though limited to formal sector firms.

Structural Economic Issues and Unemployment

  • Narrow Growth Base: The Indian economy faces challenges like a small consuming class, low bank credit-to-GDP ratio, and a lack of skilled workers.
  • Unemployment Rates: The Centre for Monitoring Indian Economy (CMIE) reported a high unemployment rate of 9.2% in November 2023, reflecting persistent job market issues.

Policy and Reform Outlook

  • Pending Reforms: Key areas for post-election reforms include labor, land, agriculture, and a shift in electricity policy towards thermal/nuclear energy.
  • CEA’s Views on Growth: Chief Economic Adviser V Anantha Nageswaran emphasizes the role of private capital formation in driving economic growth and sustainable consumption.

Global Economic Context and India’s Position

  • Resilience Amidst Volatility: Despite global challenges, India’s economy shows resilience with strong fundamentals and healthy corporate and bank balance sheets.
  • External Factors: Concerns include volatile food inflation, high global sugar prices, and the impact of US fiscal policies on emerging markets like India.
  • FPIs and Economic Stability: Foreign Portfolio Investors (FPIs) have shown renewed interest in India, indicating confidence in the country’s economic stability.

Conclusion

  • Strategic Economic Management: India faces the challenge of balancing immediate economic needs with long-term structural reforms.
  • Navigating Uncertainties: The country must navigate global economic shifts and domestic policy changes while preparing for potential unforeseen events.
  • Opportunities Ahead: Despite uncertainties, India’s strong economic fundamentals provide a basis for optimism and growth in the coming year.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India Tops Global Remittance Inflows in 2023: World Bank Report

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Remittance inflows data

Mains level: Read the attached story

remittance

Central Idea

  • In 2023, India witnessed the highest remittance inflows globally, amounting to USD 125 billion.
  • The surge was influenced by various factors, including India’s currency agreement with the UAE.

World Bank’s Analysis on Remittance Growth

  • Report Findings: The World Bank’s report indicates a slowdown in remittance growth in India to 12.4% in 2023, down from 24.4% in 2022.
  • Increased Share in South Asia: India’s share in South Asian remittances is expected to rise to 66% in 2023 from 63% in 2022.

Global Remittance Scenario

  • Other Leading Countries: Following India, the top remittance-receiving countries are Mexico (USD 67 billion), China (USD 50 billion), the Philippines (USD 40 billion), and Egypt (USD 24 billion).
  • Significance in GDP: In economies like Tajikistan, Tonga, Samoa, Lebanon, and Nicaragua, remittances form a substantial part of the GDP, highlighting their critical economic role.

Contributing Factors for India

  • Key Drivers: Declining inflation and robust labor markets in high-income countries contributed to increased remittances.
  • Major Sources: Significant remittance flows came from the US, the UK, and Singapore, as well as from the GCC, particularly the UAE.
  • UAE’s Role: The UAE is the second-largest source of remittances to India, accounting for 18% of the total.

India-UAE Currency Agreement Impact

  • February 2023 Agreement: The agreement to promote local currency use in cross-border transactions and interlink payment systems has boosted remittances.
  • Dirhams and Rupees Usage: The use of dirhams and rupees in transactions is expected to channel more remittances through formal channels.

Global Remittance Trends

  • Growth in Low- and Middle-Income Countries: Remittances to these countries grew by an estimated 3.8% in 2023.
  • Future Concerns: There is a risk of real income decline for migrants in 2024 due to global inflation and low growth prospects.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Hindutva Rate of Growth: Debates and Comparisons in the Indian Economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Hindutva Rate of Growth

Mains level: Read the attached story

Central Idea

  • A popular orator and a Parliamentarian, introduced the term “Hindutva rate of GDP growth” during the discussion.
  • This term is distinct from the ‘Hindu rate of growth’, a phrase coined by economist Raj Krishna in 1982 to describe India’s modest growth rate of 3.5%.

Understanding the ‘Hindutva Rate of Growth’

  • Argument: The MP attributed India’s recent economic growth, including a 6.3% GDP growth rate, to the policies of Prime Minister Narendra Modi, aligning spending with ‘Dharma (the order)’.
  • Historical and Religious Context: He linked economic transformations to key events in India’s history, including the Ram Temple movement and the Supreme Court’s Babri Masjid judgment.

Comparative Analysis of Growth Rates

  • Per Capita Income Disparity: Despite high GDP growth rates, India’s per capita income remains low compared to developed countries.
  • Post-Covid Growth Calculation: 7.8% ‘Hindutva rate of growth’ refers to the average GDP growth post-Covid, excluding the year of the pandemic.
  • Comparison with ‘Hindu Rate of Growth’: Including the Covid year in calculations, the growth rate closely resembles the criticized ‘Hindu rate of growth’.

Economic Growth during Different Governments

  • Growth under Modi vs. UPA: The average GDP growth rate under PM Modi is 5.8%, compared to 6.8% under the Congress-led UPA.
  • Impact of Global Crises: Both governments faced major global crises, with the UPA dealing with the Global Financial Crisis and the Modi government facing the Covid-19 pandemic.
  • Historical Growth Trends: Comparing growth rates across different eras, including PM Vajpayee’s and PM Narasimha Rao’s tenures, provides a broader perspective on India’s economic trajectory.

Conclusion

  • Similarity to Historical Growth Rates: The ‘Hindutva rate of growth’ closely aligns with historical growth rates, challenging its portrayal as a significant departure from the past.
  • Electoral Implications: The discussion raises questions about the role of economic performance in India’s electoral politics, especially in the context of the BJP’s focus on ‘Hindutva’.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Calibrating a strategy for India’s future growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Key Facts and Data, Incremental Capital-Output Ratio (ICOR)

Mains level: India's growth prospects amidst global challenges

India's economic growth may slow down to 7.3 per cent in 2019: Moody's -  The Hindu BusinessLine

Central idea

The passage discusses India’s growth prospects amidst global challenges, emphasizing the need for a recalibrated growth strategy due to deglobalization trends. It highlights the shift from an export-led approach, focusing on domestic drivers and the importance of sustaining domestic savings and investment rates for a 7% plus real growth.

Key Highlights:

  • Growth Projections: India’s growth for 2023-24 projected by RBI at 7%, IMF and World Bank at 6.3%. Strong performance in the first two quarters supports the likelihood of meeting the RBI’s projection.
  • Deglobalization Impact: Geopolitical conflicts and deglobalization trends pose challenges, affecting supply chains, international settlements, and global demand for exports.
  • Export-led Growth Shift: India’s export-led growth strategy faces challenges as the share of GDP from exports fluctuates, prompting a need for a recalibrated growth strategy.

Key Challenges:

  • Dependence on Global Exports: Challenges arise from reduced global demand, disruptions in supply chains, and geopolitical conflicts impacting international settlements.
  • Domestic Savings Concerns: A decline in household sector savings poses a risk to India’s growth potential, potentially affecting resources available for government and corporate investment.

Key Terms and Phrases:

  • Deglobalization: Movement away from global interconnectedness.
  • Incremental Capital-Output Ratio (ICOR): The amount of capital required for an additional unit of output, influencing achievable growth.
  • Periodic Labour Force Survey (PLFS): Source of data on employment trends and ratios.

Key Quotes:

  • “Many ongoing geopolitical conflicts… have created a climate of sanctions.”
  • “India will have to rely relatively more on domestic growth drivers.”
  • “Facilitating absorption of productivity-enhancing technologies… would add to overall growth.”

Key Examples and References:

  • Export Growth: Fluctuations in export share from 2003-04 to 2022-23 highlight the challenges of sustaining an export-led growth strategy.
  • Labour Force Trends: PLFS data indicates an increase in the worker population ratio but emphasizes the need for high non-agricultural growth to absorb released labor from agriculture.

Key Facts and Data:

  • Nominal Saving Rate: Estimated at 29% in 2022-23, highlighting the critical role of domestic savings.
  • Nominal Investment Rate: Around 29% in 2022-23, with a need to increase to 35% for sustained growth.

Critical Analysis:

  • Dependency on Global Conditions: The passage stresses the impact of changing global conditions on India’s growth strategy, urging a shift towards domestic drivers.
  • Savings and Investment Link: Emphasizes the importance of domestic savings in supporting a 7% plus real growth, highlighting concerns about a fall in household sector savings.

Way Forward:

  • Enhanced Employment Strategies: Allocation of resources for training and skilling India’s growing working-age population is crucial.
  • Climate-Friendly Growth: Mitigate adverse impacts on potential growth by emphasizing service sector growth, known for being relatively climate-friendly.
  • Fiscal Responsibility: Adherence to fiscal responsibility targets is critical for sustaining growth, reducing the fiscal deficit, and managing debt-to-GDP ratios.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The GDP surprise: India on the up and up

Note4Students

From UPSC perspective, the following things are important :

Prelims level: PLI Scheme

Mains level: sustained economic recovery

US Economic Forecast Q3 2023 | Deloitte Insights

Central idea

The Indian growth story remains a beacon of hope. The economy is unlikely to slow down in line with other major economies of the world as the government continues to undertake reforms.

Key Highlights:

  • Economic Growth: The Indian economy expands by 7.6% in Q2, challenging doubts on post-pandemic macroeconomic resilience.
  • Manufacturing Surge: The manufacturing sector grows robustly at 13.9%, indicating positive outcomes from policy initiatives and credit stabilization.
  • Corporate Health: Corporate books show impressive bottom-line growth, reflecting broad-based economic recovery.
  • Capex Intentions: Historic capex intentions with new investment announcements reaching Rs 37 lakh crore in 2022-23, signifying increased private sector participation.
  • Agricultural Transformation: Agriculture grows by 1.2%, with a shift towards allied activities reducing dependence on traditional farm income.
  • Banking Support: Banks increasingly finance the entire agri value chain, with agri loans growing by 15.4% in 2022-23.
  • Services Sector Moderation: Services sector growth moderates to 5.8%, influenced by low growth in trade, hotels, transport, and communication.
  • Consumption Patterns: Private consumption decelerates to 3.1%, possibly impacted by higher inflation, expected to pick up in the third quarter.
  • Government Investments: Government consumption and investments register healthy growth, with gross fixed capital formation increasing by 11%.

Key Challenges:

  • Global Growth Risk: Risk of softer global growth, especially in the US and Euro region, may impact India’s exports and economic momentum.
  • Consumer Sentiment Woes: Consumer sentiments in major economies worsen amid growing uncertainty, potentially affecting global trade.

Key Terms and Phrases:

  • Macro-economic Resilience: India’s ability to withstand and recover from economic shocks.
  • PLI Scheme: Production-Linked Incentive scheme aimed at boosting manufacturing in specific sectors.
  • Corporate Balance Sheets: Financial health and performance of businesses.
  • Capex Intentions: Plans and commitments for capital expenditures.
  • Allied Activities in Agriculture: Diversification into areas like dairy and fisheries within the agriculture sector.
  • Gross Fixed Capital Formation: Investment in fixed assets contributing to economic growth.
  • Consumer Sentiments: Public attitudes and feelings regarding economic conditions and spending.
  • Global Trade Headwinds: Challenges and obstacles affecting international trade.

Key Quotes:

  • “The Indian growth story remains a beacon of hope.”
  • “The economy is unlikely to slow down in line with other major economies of the world.”

Key Statements:

  • Manufacturing sector growth indicates an uptick triggered by government expenditure, policy initiatives, and credit stabilization.
  • Agriculture’s increased focus on allied activities reduces dependence on traditional farm income.
  • Historic capex intentions and private sector participation signal a strong economic recovery.

Key Examples and References:

  • New investment announcements hitting a high of Rs 37 lakh crore in 2022-23, showcasing increased private sector participation.
  • Agriculture loans by banks increase by 15.4% in 2022-23, indicating growing support for the agri value chain.

Key Facts and Data:

  • Indian economy grows by 7.6% in Q2, marking two consecutive quarters of 7% plus growth.
  • Manufacturing sector grows at a robust 13.9%, reaching a nine-quarter high.
  • New investment announcements hit Rs 37 lakh crore in 2022-23, compared to Rs 20 lakh crore in 2021-22.
  • Agriculture grows by 1.2% in Q2, with allied activities contributing significantly.

Critical Analysis:

  • The robust economic growth raises questions about the accuracy of forecasts doubting India’s resilience.
  • The manufacturing sector’s strong performance indicates positive outcomes from government initiatives and policies.
  • Private sector participation in capex reflects confidence in the economic recovery.
  • Increased focus on allied activities in agriculture showcases a shift in the sector’s dynamics.
  • The potential risk of softer global growth highlights external factors influencing India’s economic trajectory.

Way Forward:

  • Continued government reforms and support for economic growth.
  • Monitoring and addressing potential risks from softer global growth.
  • Sustaining the positive momentum in manufacturing and capex through policy measures.
  • Emphasizing the role of allied activities in agriculture for a diversified income base.
  • Nurturing consumer sentiments and encouraging private consumption for sustained economic recovery.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Dollarization and Economic Policy: The Case of Javier Milei’s Argentina

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dollarization

Mains level: NA

Central Idea

  • Argentina faces over 100% inflation and widespread poverty, prompting public support for Milei’s unique economic policies.
  • This has prompted the newly elected Javier Milei replacing the peso with the dollar, abolishing the Central Bank, and cutting government spending.

Concept of Dollarization

  • Dollarization is the process by which a country adopts a foreign currency in addition to or instead of its national currency.
  • Here are 2 types of dollarization:
  1. Full Dollarization: This occurs when a country adopts a foreign currency (such as the US dollar) as its sole legal tender. In this scenario, the foreign currency completely replaces the domestic currency for all financial transactions.
  2. Partial Dollarization: In this case, the foreign currency is used alongside the national currency. It often happens unofficially, where residents hold a significant portion of their assets or conduct a large number of their transactions in the foreign currency.

Motive behind Argentine move

  • Hyperinflation Solution: Dollarization could break the cycle of rising prices and money supply, as the dollar is not easily manipulated for political gains.
  • Growth Potential: By using dollars, economies might focus on exports and attract foreign investment, benefiting from the dollar’s stability.

Potential Challenges

  • Loss of Monetary Policy Control: Adopting the dollar means losing the ability to control the money supply through domestic monetary policy.
  • Dependence on Export Promotion: Economies must rely solely on export promotion for economic stability, as currency depreciation is no longer an option.

Ecuador’s Experience  

  • Economic Turnaround: Ecuador, after adopting the dollar, saw significant improvements in GDP growth, poverty reduction, and inflation control.
  • Oil and Gas Reserves: Ecuador’s success was partly due to its natural resources, which helped maintain a steady dollar inflow.
  • Beyond Dollarization: Ecuador’s economic prosperity was also due to effective fiscal policies and government interventions in the oil sector.
  • Social Spending: Increased social spending played a crucial role in translating economic gains into societal benefits.

Comparative Analysis: Greece and the Euro

  • Euro Adoption in Greece: Greece’s adoption of the euro initially spurred growth but later limited its fiscal and monetary policy options.
  • Austerity Measures: The Eurozone crisis forced Greece into austerity, highlighting the risks of adopting an external currency without policy autonomy.

Conclusion

  • Not a Panacea: Dollarization, while potentially stabilizing, is not a standalone solution and requires complementary domestic policies.
  • Argentina’s Uncertain Future: With Milei’s intent to slash government spending and abolish the Central Bank, Argentina’s economic future under his administration remains uncertain.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A $5 trillion economy, but for whom?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Pradhan Mantri Garib Kalyan Ann Yojna.

Mains level: India's ambitious pursuit of a $5 trillion GDP by 2028

Towards $5 Trillion Economy by 2025 – Transforming India

Central idea

The article critically examines India’s ambitious pursuit of a $5 trillion GDP by 2028, juxtaposing it with Japan’s economic trajectory. It highlights concerns about wealth disparity, inclusivity in high-tech sectors, and questions the impact on marginalized citizens.

Key Highlights:

  • Extension of Welfare Scheme: Prime Minister Modi’s announcement to extend the Pradhan Mantri Garib Kalyan Ann Yojna by five years.
  • Concerns about Hunger: Raised concerns about persistent hunger despite the ambitious target of achieving a $5 trillion GDP by 2028.
  • Japan’s Economic Challenges: Comparison with Japan’s economic growth and the social challenges faced, including suicide rates and social withdrawal.
  • Reliance on GDP Growth: Emphasis on India’s economic growth relying on capital, productivity, and labor.
  • Wealth Disparity: Identification of significant wealth disparity, with 1% of the population owning a substantial portion of the nation’s wealth.
  • Government’s Economic Tools: Government’s identification of sectors and tools, such as the digital economy, fintech, and climate change initiatives.

Key Challenges:

  • Impact on Marginalized Citizens: Expressing concerns about the potential adverse impact on marginalized citizens in the race towards a $5 trillion economy.
  • Wealth Inequality: Highlighting the wealth disparity issue, with 1% of the population owning a significant portion of the nation’s wealth.
  • Inclusivity in High-Tech Sectors: Concerns about the ability of a large segment of the population to participate in cutting-edge sectors such as AI, data science, and fintech.
  • Lack of Per Capita Income Estimates: Criticism regarding the absence of estimates on India’s per capita income at the $5 trillion GDP mark.

Key Terms and Phrases:

  • Pradhan Mantri Garib Kalyan Ann Yojna: Specific welfare scheme providing free foodgrains.
  • Hikikomori: Term referring to severe social withdrawal in Japan.
  • Kodokushi: Japanese term for lonely deaths.
  • GST (Goods and Services Tax): Mention of the significant contribution from the bottom 50% of the population.
  • Inclusive Growth: Government’s emphasis on growth that includes all segments of society.
  • Insolvency and Bankruptcy Code: Part of the identified tools for achieving the $5 trillion goal.
  • Make in India: Mention of one of the identified sectors for economic growth.
  • Start-Up India: Highlighting a sector emphasized for achieving economic targets.
  • Production Linked Incentives: Part of the government’s strategy for economic growth.

Key Examples and References:

  • Japan’s Societal Challenges: Referring to suicide rates, social withdrawal, and lonely deaths in Japan as examples.
  • Wealth Distribution Statistics: Citing wealth distribution statistics from Oxfam.
  • Minister Chaudhri’s Identification: Referring to the government’s identification of tools and sectors for achieving the $5 trillion goal.
  • Per Capita Income Comparison: Comparing per capita income between Japan, China, and India.

Key Facts and Data:

  • Welfare Scheme Extension: Mentioning the extension of the Pradhan Mantri Garib Kalyan Ann Yojna.
  • Japan’s Economic History: Referring to Japan’s economic history and challenges post-2008.
  • Wealth Distribution Data: Citing wealth distribution data from Oxfam.
  • GST Contribution: Highlighting the significant contribution of different income groups to GST.

Critical Analysis:

  • Societal and Economic Impact: Analyzing the potential impact of the $5 trillion goal on marginalized citizens and society.
  • Wealth Disparity and Inclusive Growth: Critical evaluation of wealth distribution and the need for inclusive economic policies.
  • Capability Mismatch: Examining the mismatch between targeted sectors/tools and the capabilities of a significant population segment.
  • Per Capita Income Concerns: Critically assessing the absence of estimates on per capita income and concerns about the inequality index.

Way Forward:

  • Addressing Wealth Disparity: Emphasizing the need to address wealth disparity through inclusive economic policies.
  • Ensuring Inclusive Growth: Focusing on ensuring that economic growth benefits all segments of the population.
  • Skill Development and Education: Highlighting the importance of skill development and education to enable participation in emerging sectors.
  • Regular Assessment and Recalibration: Emphasizing the need for regular assessment and recalibration of economic goals to align with societal well-being.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

In a world beset by economic uncertainty, India is a beacon of hope

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indian Inflation

Mains level: Economic Resilience and Stability

Central idea

The article discusses positive economic indicators in India, including potential GDP growth, easing inflation, and successful festive season trading. It emphasizes the need for careful monitoring of oil prices, external demand, political developments, and continued policy coordination to sustain economic resilience and growth.

Key Highlights:

  • Macroeconomic Positivity: November brings positive trends in India’s macroeconomic perspective, with optimism about second-quarter GDP growth.
  • Geopolitical Developments: Ceasefire agreement between Israel and Hamas and a summit between U.S. President Joe Biden and China’s President Xi Jinping signal positive global geopolitical shifts.
  • Inflation Trends: Global inflation rates, particularly in the U.S. and the European Union, ease, contributing to reduced bond yields and increased equity market performance.
  • Indian Economic Signals: India experiences a decline in retail inflation and wholesale price index, with encouraging signals from festive season trading.

Key Challenges:

  • Continued Monitoring: Factors such as oil prices, external demand, and political developments require continued monitoring for potential impacts on India’s economic trajectory.
  • Global Trade Weakness: The global trade environment remains weak, with projections indicating a decline in world trade growth.
  • Political Influences: Focus on general elections after state election results may influence government and private sector activities.
  • Policy Coordination: Maintaining monetary and fiscal policy coordination is crucial, considering global risks and persistent inflation threats.

Key Terms:

  • GDP (Gross Domestic Product)
  • Inflation
  • Bond Yields
  • Geopolitics
  • Macro and Financial Stability
  • GST (Goods and Services Tax)
  • Fiscal Deficit
  • OPEC+ (Organization of the Petroleum Exporting Countries and allies)

Key Phrases:

  • “Economic Resilience and Stability.”
  • “Sequential Changes for Meaningful Analysis.”
  • “Crucial Policy Coordination in a Shock-Prone World.”

Key Examples and References:

  • Geopolitical Shifts: Ceasefire agreement between Israel and Hamas, U.S.-China summit.
  • Global Inflation Trends: Positive trends in global inflation rates.
  • Indian Economic Signals: Decline in retail inflation, wholesale price index, and record festive season retail trading.

Key Facts and Data:

  • U.S. Inflation: Consumer price index at 3.2% in October.
  • EU Inflation: Drops to 2.9% from 4.3%.
  • Indian Inflation: Retail inflation at a four-month low of 4.9%.
  • Expected GDP Growth: India’s GDP growth for Q2 expected to exceed 6.5%.

Critical Analysis:

  • Emphasis on Fundamentals: Need for sound macroeconomic fundamentals and close monitoring of economic indicators.
  • Identification of Challenges: Recognition of potential challenges such as oil price fluctuations, weak external demand, and political uncertainties.
  • Policy Coordination: Importance of monetary and fiscal policy coordination in navigating a complex economic environment.

Way Forward:

  • Economic Resilience: Continued focus on maintaining economic resilience and stability.
  • Monitoring and Response: Continuous monitoring and responsive measures for global and domestic economic challenges.
  • Policy Emphasis: Continued emphasis on policy coordination for sustained growth.
  • Preserving Global Standing: Importance of prudent economic management for preserving India’s relative global standing.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Listen to the people, not the numbers

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP growth

Mains level: non-monetized contributions within families and communities.

Mere Paas Sarkaar Hai' - Vikalp Sangam

Central idea

India faces an income stagnation crisis despite overall GDP growth, with inadequate job quality. The global economic landscape calls for a paradigm shift towards sustainability and localized enterprises. Recognizing and valuing informal caregiving is crucial for a more equitable and economically inclusive future.

Key Highlights:

  • Indian Economic Landscape: In the Indian economic landscape, the primary issue lies in the stagnation of incomes, not a lack of growth. Despite favorable GDP figures, there is a growing demand for job reservations, transcending caste and religion.
  • Debates and Doubts in Economic Discourse: Economists are embroiled in a debate over job creation, casting doubts on the authenticity of government data. The discourse extends to attributing the current job challenges to the policies of the present government.
  • U.S. Economic Discontent: The U.S. economy, despite positive headline numbers, faces widespread dissatisfaction among citizens. This discontent takes center stage in the lead-up to the presidential elections, with concerns about fair wages and executive compensation.
  • Call for a Paradigm Shift: A paradigm shift is urged, emphasizing a departure from conventional growth metrics to address environmental and social concerns. The call for local, green, and organic initiatives signals a quest for a sustainable economic future.
  • Recognition of Caregiving: There is a notable plea to recognize the economic and societal value of caregiving, challenging the prevailing economic paradigm that overlooks the contributions of informal work, particularly by women.

Key Challenges:

  • Quality Jobs in India: The transition from agriculture to manufacturing in India lacks the creation of quality jobs. The prevalent scenario involves insecure, temporary employment with insufficient pay across various sectors.
  • Global Economic Landscape at a Crossroads: The global economic landscape is at a crucial juncture, necessitating innovative economic ideas. The preference for local economic webs over extensive global supply chains is indicative of a shift towards sustainability.
  • Undervaluation of Caregivers: Caregivers, predominantly women, continue to be undervalued economically. The informal caregiving sector lacks acknowledgment, perpetuating societal disparities.
  • Distortion in Economic Measurements: The distortion of economic measurements rooted in 20th-century concepts poses a challenge. The fixation on GDP growth eclipses the diminishing value of human care, leading to a skewed representation of economic health.

Key Terms and Phrases:

  • “Economies of Scope”: Emphasizes a shift towards determining enterprise viability based on diversity rather than scale, promoting local businesses’ adaptability.
  • “Social Enterprises”: Underscore businesses contributing to social value alongside economic efficiency, reflecting a desire for a more holistic approach to economic success.
  • “Informal Work Undervaluation”: Critique highlights economists’ oversight of the economic significance of informal caregiving, emphasizing the need for a broader perspective.
  • “Paradigm Shift in Policy”: Advocates for inclusive policymaking, centering on the voices of marginalized communities to address systemic issues.

Key points:

  • Indian Workforce Transition: Concerns about the quality of jobs in India are substantiated by a significant workforce transition from agriculture to labor-intensive sectors, marked by temporary and insecure employment.
  • U.S. Economic Dissatisfaction: In the U.S., despite positive economic indicators, dissatisfaction among citizens remains a pressing issue. Presidential engagement with autoworkers underscores concerns about fair wages and wealth distribution.

Critical Analysis:

  • Economic Paradigm Distortion: The economic paradigm distortion reveals a prioritization of GDP growth over the diminishing societal value of caregiving. This recognition sets the stage for a necessary reevaluation of economic priorities.
  • Reforming Economic Measurements: The call for reforms in economic measurements underscores the urgency of adapting metrics to reflect the desired forms of work and enterprises for the future.
  • Neglect of Informal Caregiving: Neglecting the economic value of informal caregiving underscores the need for a paradigm shift in acknowledging the non-monetized contributions within families and communities.

Way Forward:

  • Transition to Local Economic Webs: The emphasis on transitioning from global supply chains to local economic webs signals a shift towards sustainability, environmental responsibility, and community-focused practices.
  • Reforming Economic Measurements: Reforming economic measurements is essential to align with a broader understanding of valuable work, moving beyond GDP as the sole indicator of economic health.
  • Recognition of Caregivers: Advocating for the recognition and valuation of caregivers indicates a need for societal and economic perspectives to evolve, appreciating the importance of caregiving.
  • Inclusive Policymaking: Inclusive policymaking, with a focus on marginalized voices, is pivotal for addressing systemic issues and fostering a more equitable economic landscape. Listening to the diverse experiences of workers, farmers, entrepreneurs, and women should guide future policy formulations.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

State of the economy — temper the euphoria

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Projected GDP Growth

Mains level: economic success after the COVID-19 pandemic

INDIA'S EXTERNAL TRADE RECOVERS STRONGLY IN 2021-22

Central idea

The article highlights India’s economic challenges, including concerns about post-COVID recovery sustainability, vulnerabilities to geopolitical shifts, a growing dependency on Chinese imports, and a decline in industrial growth rates. The central idea revolves around acknowledging these challenges and the imperative for strategic interventions to ensure long-term economic resilience and growth

Key Highlights

  • GDP Growth and Recovery: India’s GDP projected to grow by 6.3% in 2023-24, showcasing post-COVID recovery. Positive signs of resilience, but concerns persist about employment quality and inflation.
  • Geopolitical Shifts and Vulnerabilities: Globalization ended in 2022-23, exposing India to geopolitical vulnerabilities. Calls for a reevaluation of economic strategies to navigate changing global dynamics.
  • Trade Deficit with China: India grapples with a soaring trade deficit with China. Strategic threat due to dependency on Chinese imports; calls for diversification.
  • Industrial Woes and Growth Rates: Industrial growth rates, especially in capital goods, have regressed. Decline in key sectors signals a threat to overall economic stability.
  • Public Sector Investment: Public sector investment appears stagnant despite reported growth. Doubts about credibility underscore the need for transparent reporting.
  • Social Development Challenges: India’s Human Development Index (HDI) ranking has slipped. Recognition of challenges in social development, prompting a need for improved strategies.

Challenges

  • Sustainability Concerns Post-COVID Recovery: Quality and sustainability of post-COVID recovery raise concerns, necessitating comprehensive strategies.
  • Vulnerabilities to Geopolitical Shifts: Geopolitical vulnerabilities impact India’s economic stability, demanding adaptation of economic policies.
  • Dependency on Chinese Imports: Rising trade deficit with China poses economic frailty, urging the urgent need to diversify imports.
  • Decline in Industrial Growth: Regression in industrial growth rates, especially in capital goods, requiring targeted interventions for revitalization.

Key Phrases and Terms for making mains answer value added

  • Post-COVID Resilience: Short-term economic success after the COVID-19 pandemic.
  • Geopolitical Realignment: Recognition of shifts in global dynamics impacting India’s economic strategies.
  • Trade Deficit Dynamics: China’s influence on India’s economic vulnerabilities due to a soaring trade deficit.
  • Industrial Regression: Decline in growth rates, especially in capital goods, signaling industrial challenges.
  • Credibility of Public Sector Investment: Doubts raised about the accuracy of reported public sector investment growth..

Analysis of the article in balanced way for mains score improvement

  • Short-Term Success vs. Long-Term Resilience: Balancing short-term GDP growth with the need for sustainable and inclusive recovery.
  • Adapting to Geopolitical Realities: Necessity to adapt economic policies to navigate geopolitical shifts and ensure stability.
  • Diversification for Economic Stability: Addressing the trade deficit challenge by diversifying imports and promoting self-reliance.
  • Revitalizing Key Sectors for Growth: Targeted interventions required to revitalize industrial growth, especially in crucial sectors.

Key Data and Facts

  • Projected GDP Growth (2023-24):3%
  • Trade Deficit with China: Strategic Threat
  • Industrial Growth Decline: Capital Goods
  • HDI Ranking (2021): Decline

The Way Forward

  • Sustainable and Inclusive Growth: Develop comprehensive strategies for sustained and inclusive growth post-COVID.
  • Adaptive Economic Policies: Adapt economic policies to navigate evolving global dynamics and ensure stability.
  • Diversification and Self-Reliance: Diversify imports and boost domestic production for economic self-reliance.
  • Targeted Interventions for Industrial Revitalization: Implement targeted interventions to revitalize key industrial sectors and stimulate overall economic growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Centre-State Disputes: Implications on India’s Economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Centre-State Financial Relations

Mains level: Read the attached story

Central Idea

  • In India, disputes between the Central and State governments regarding economic policies have a long history, but in recent years, they have escalated in both frequency and intensity, taking on the character of ‘persistent frictions’ within the federal system.
  • These disputes have significant implications for India’s economy and its federal structure.

Current Context

  • Impact of Economic Reforms: Economic reforms since 1991 have relaxed many controls on investments, granting some autonomy to States. However, States still rely on the Centre for revenue receipts.
  • Shift from ‘Give and Take’ to Hardened Stance: Recent State resistance has transformed the cooperative Centre-State relationship into a more rigid and confrontational dynamic.

Emerging Conflict Areas

  • Homogenization of Social Sector Policies: Conflicts arise over the homogenization of social sector policies, where States seek greater discretion, but central agencies push for uniformity.
  • Functioning of Regulatory Institutions: Differences emerge regarding the functioning of regulatory institutions, leading to conflicts over jurisdiction.
  • Powers of Central Agencies: Central agencies attempt to increase their influence, often imposing their preferences on States.

Economic Consequences of Interference

  • Crowding Out State Investments: Centralization of planning and implementation limits States’ flexibility in infrastructure development. This has resulted in reduced State investments, particularly in projects like roads and bridges.
  • Fiscal Competition: Frictions with the Centre have spurred fiscal competition between States and the Centre. States compete with each other and with the Centre, leading to complexities in welfare provisioning.
  • Inefficiencies Due to Parallel Policies: Frictions have resulted in parallel policies, where either the Centre or States duplicate each other’s efforts. For example, some States have rolled back from the National Pension System (NPS) due to fiscal concerns.

Inevitable Interdependence

  • Article 258A: The Centre relies on States for the implementation of many laws and policies, particularly in concurrent spheres.
  • Preserving Interdependence: In a large, diverse, developing society like India, interdependence between the Centre and States is inevitable and needs to be maintained.

Conclusion

  • The growing Centre-State disputes in India’s federal system have far-reaching economic implications.
  • Balancing autonomy and cooperation between the Centre and States is essential for the nation’s economic growth and effective governance.

Back2Basics:

Centre-State Financial Relations

 

Article 268 to 281 Distribution of taxes between the Central Government and States, specifying various taxes and their sharing.
Article 282 Allows the Central Government to provide grants-in-aid to States for specific purposes, including welfare programs.
Article 293 Regulates borrowing powers of States, requiring Presidential consent for external borrowing to ensure fiscal discipline.
Article 280 Establishes the Finance Commission, which recommends tax revenue and grants distribution between the Centre and States.
Goods and Services Tax (GST) Governed by the Constitution (One Hundred and First Amendment) Act, 2016, and associated laws, transforming taxation in India.
Fiscal Responsibility and Budget Management (FRBM) Act Guides fiscal discipline and management by setting fiscal targets for both Central and State Governments.
Inter-State Council Established under Article 263

Acts as a forum for dialogue between the Central Government and States on various issues.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Acknowledge India’s economic successes too

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Statistical data

Mains level: Growth sectors

Indian Economy To Grow By 7-7.8 Pc In FY23 Despite Global Headwinds:  Experts - Goodreturns

Central idea

India’s robust economic growth faces challenges in digital inclusion, governance equity, and managing post-COVID-19 effects. Government initiatives, encompassing reforms, infrastructure focus, and poverty alleviation, drive progress. Recognizing successes and addressing shortcomings is vital for informed public discourse and sustained development momentum.

Key Highlights:

  • Impressive Economic Growth: India’s post-COVID-19 economic growth is remarkable, with FY2023 showing a YoY growth of 7.2%, the fastest among major economies.
  • Policy Reforms Driving Growth: Government initiatives, including economic liberalization, Insolvency and Bankruptcy Code (IBC), demonetization, GST, and corporate tax reduction, have propelled India’s economic trajectory.
  • Inclusive Growth Focus: The government’s commitment to “Sabka Saath Sabka Vikas” reflects in poverty alleviation, rural welfare, and inclusive growth measures, leading to improved living standards.
  • Multidimensional Poverty Reduction: NITI Aayog’s report indicates a significant reduction in multidimensional poverty, with 13.5 crore Indians escaping poverty between 2015-16 and 2019-21.
  • Agricultural Success: Support for agriculture has resulted in unprecedented growth in fruits, vegetables, dairy, livestock, and fishery, enhancing the nutritional value of the food basket.

Challenges:

  • Critique of Growth Metrics: Some critics argue for using compound annual growth rates post-COVID-19, questioning the validity of YoY growth rates as a true measure of economic progress.
  • Long Road to High-Income Status: Acknowledging the challenges, India recognizes the need for sustained efforts to achieve high-income status and a high quality of life for its citizens.

Key Phrases for mains value addition:

  • “Fastest-growing major economy”: The tagline emphasizes India’s rapid economic growth in the global context, driven by its large size and robust domestic demand.
  • “Sabka Saath Sabka Vikas”: The government’s inclusive growth mantra focusing on uplifting people above the poverty line through various support initiatives.
  • “Multidimensional Poverty”: NITI Aayog’s report highlights a significant decline in multidimensional poverty, reflecting comprehensive progress.

 

Analysis:

The article underscores the importance of considering YoY growth rates as a measure of post-pandemic progress and highlights the success of government reforms in driving economic growth and inclusive development.

Key Facts/Data for value addition:

  • India is the fifth largest economy globally and projected to become the third largest by 2027.
  • The Capex budget of the central government has risen from 1.6% of GDP in FY19 to 2.7% in FY23, further budgeted to increase to 3.3% in FY24.

Government Measures Since 2014:

  • Government initiatives post-2014 aim to boost the economy, including liberalization, the Insolvency and Bankruptcy Code, demonetization, GST rollout, and corporate tax reduction.
  • In FY22, a substantial Capex program and state-level resource support aimed to bridge infrastructure gaps and attract private corporate investment.

Poverty Alleviation and Rural Welfare:

  • Government commitment to ‘Sabka Saath Sabka Vikas’ reflects a focus on inclusive growth, poverty reduction, skill development, and infrastructure enhancement.
  • NITI Aayog’s report highlights a significant reduction in multidimensional poverty, particularly in rural areas, with improved living standards and health indicators.

Innovative Way Forward:

  • Digital Inclusion for Economic Growth: Accelerate digital inclusion strategies to empower citizens, enhance education, and facilitate online business, fostering economic growth.
  • Green Infrastructure Development: Prioritize sustainable and green infrastructure projects, aligning with global environmental goals, to ensure long-term economic resilience.
  • Blockchain for Financial Inclusion: Leverage blockchain technology to enhance financial inclusion, enabling secure and transparent transactions, especially in rural and underserved areas.
  • AI-driven Skill Development: Implement artificial intelligence (AI) in skill development programs, customizing learning paths and enhancing employability in emerging sectors.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The household debt challenge

Central idea

The article discusses the surge in household debt in India, emphasizing the need to assess its sustainability through the Debt Service Ratio (DSR). Despite the high DSR, comparisons with global trends reveal both challenges and potential adjustments. The analysis suggests extending the maturity period as a key strategy and calls for collaborative efforts between regulators and lenders to manage the impact of rapid debt growth.

Key Highlights:

  • Surge in Household Debt: Household debt in India reached 5.8% of GDP in FY23, the second-highest annual increase since Independence.
  • Debt Service Ratio (DSR): The sustainability of debt is questioned by examining the Debt Service Ratio (DSR), measuring the proportion of income used to repay debt-related obligations.
  • Indian Household DSR: India’s household DSR was approximately 12% in FY23, consistently increasing over the past two decades and higher than most advanced economies.
  • Comparison with Advanced Economies: India’s DSR is higher than that of advanced economies like China, France, the UK, and the US, indicating higher household leverage.
  • Long-Term Trends: Despite the high DSR, Indian households have experienced improved borrowing terms over the past decade, with longer maturity periods and falling interest rates.

Challenges:

  • Rapid Debt Growth: The rapid growth in household debt, especially non-housing loans, raises concerns about sustainability and potential future challenges.
  • Threshold Level: The article raises questions about the threshold level of household debt in India and the time frame before reaching a critical point.
Prelims focus

 

The Debt Service Ratio (DSR) is like a measure of how much of your money goes into repaying debts. It looks at the portion of your income used to pay off things like loans and interest. A lower DSR is better because it means you have more money left for other things after handling your debts. So, it’s a way to see if people can comfortably manage their debt payments based on their income.

 

Analysis:

  • Effective Interest Rates: The combination of higher interest rates and shorter debt tenure contributes to India’s higher DSR compared to advanced economies.
  • Global Comparison: India’s household DSR is compared with Nordic countries and other nations, indicating both challenges and potential room for adjustment.

Key Data:

  • Household Debt-to-Income Ratio: Jumped to 48.1% in FY23 from 42.2% in FY19, suggesting a significant increase in a short period.
  • DSR Trends: India’s DSR has consistently increased over the past three years, reflecting a rising burden on households.

Key Terms:

  • Debt Service Ratio (DSR): Measures the proportion of income used to repay debt-related obligations.
  • Residual Maturity: The remaining time until a debt obligation is due to be paid.
  • Household Leverage: The ratio of household debt to income, indicating the financial burden on households.

Way Forward:

  • Increase Residual Maturity: Extending the maturity period for borrowers is suggested as an effective way to reduce the debt burden on Indian households.
  • Collaboration between Regulators and Lenders: Urges regulators and lenders to collaborate to distribute the impact of debt growth over time, avoiding sudden hindrances to economic growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why the Lewis Model has worked in China, not in India?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Lewis Model

Mains level: Read the attached story

Central Idea

  • In 1954, the renowned Saint Lucian economist, Sir William Arthur Lewis, presented a groundbreaking theory that suggested developing countries with a surplus labor force could achieve significant industrialization.
  • He envisioned a shift of labor from subsistence agriculture to the expanding manufacturing sector.
  • However, the Indian experience over the years has shown that this model has not unfolded exactly as Lewis had anticipated.

What is the Lewis Model?

  • Lewis’s Theory: Sir William Arthur Lewis’s influential essay, ‘Economic Development with Unlimited Supplies of Labor,’ proposed that countries with surplus labor could industrialize by paying wages just high enough to attract workers away from family farms.
  • Key Assumptions: The model assumed that higher wages in the manufacturing sector would match the additional output produced, leading to the creation and expansion of industries without limits.
  • Bottlenecks: The primary constraints to this labor transfer were the availability of capital and natural resources, which these countries often lacked relative to their population.

India’s Deviation from the Model

  • Historical Perspective: In the early 1990s, agriculture employed about two-thirds of India’s workforce.
  • Limited Impact of Manufacturing: While the share of agriculture in employment declined to 48.9% by 2011-12, manufacturing’s share only marginally increased from 10.4% to 12.6% during the same period.
  • Recent Trends: The farm sector’s share increased temporarily due to the Covid-19 pandemic, reaching 46.5% in 2022-23.
  • Manufacturing’s Decline: Conversely, manufacturing’s share dropped to 11.4% in 2022-23.
  • Shift within Subsistence Sectors: Labor movement primarily occurs within subsistence sectors, such as low-paid services and construction, rather than towards manufacturing or high-productivity services.

lewis model

State-Level Variations

  • Gujarat’s Exception: Gujarat stands out with nearly 24% of its workforce employed in manufacturing, mirroring Lewis’s model.
  • Industry and Agriculture: Gujarat’s workforce in agriculture remains relatively high compared to other states.

China’s Model vs. India’s Reality

  • China’s Success: China leveraged surplus rural labor to become “the world’s factory” during the late 20th century.
  • India’s Challenges: India still has surplus labor working in subsistence sectors, but the path to conventional employment opportunities is narrowing.
  • Technological Disruption: Manufacturing is increasingly capital-intensive, incorporating labor-saving and labor-displacing technologies.
  • New Economic Development Model: NITI Aayog is exploring alternative avenues for job creation, emphasizing activities related to agriculture, such as aggregation, processing, transportation, and bio-based industries.
  • Bio-Based Opportunities: Crop residues, bio-fuels, bio-based products, and supply chain services offer potential employment options linked to agriculture.

Conclusion

  • India’s journey towards economic transformation has deviated from the classic Lewis model.
  • The changing nature of manufacturing and the need for a reimagined labour transition call for innovative approaches that recognize the country’s unique circumstances and opportunities in sectors beyond traditional agriculture.
  • NITI Aayog’s exploration of alternative development models signifies a shift toward addressing contemporary challenges and fostering sustainable economic growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Bidenomics and Global Economic Landscape in 2024

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Bidenomics

Mains level: NA

Central Idea

  • The year 2024 is poised to be a momentous one for the global economy, marked by significant elections in some of the world’s largest economies, including India, Russia, the UK, the EU, and the US.
  • “Bidenomics” is the nickname for the economic vision of President Joe Biden. It’s used to convey his administration’s economic gains, policies and plans.

Bidenomics and its Relevance

  • Policy Shifts: The potential election outcome in the US could have far-reaching consequences, especially concerning ‘Bidenomics’—President Biden’s distinctive economic policy approach.
  • Radical Departures: Trump’s policies diverged significantly from established US and global norms, with actions like withdrawing from the Paris Climate Agreement and adopting protectionist trade policies against nations like China.
  • Bidenomics: President Biden introduced a policy shift aimed at reversing decades of economic trends, emphasizing income equality and reducing the influence of big corporations.
  • 3 major aspects of Bidenomics:
  1. Public Investments: Focus on smart investments in infrastructure and clean energy.
  2. Empowering Workers: Prioritizing workers’ rights and education to strengthen the middle class.
  3. Promoting Competition: Encouraging competition to reduce costs and foster small business growth.

Performance of Bidenomics

  • Macro Indicators: On a macroeconomic level, Bidenomics has shown positive results, as indicated by GDP growth, unemployment rates, and inflation trends.
  • GDP Growth: The US has outperformed major developed nations in terms of GDP growth, with a rapid post-pandemic recovery.
  • Unemployment: Unemployment rates have decreased significantly under Biden’s leadership, with job creation outpacing the number of job seekers.
  • Inflation: However, inflation spiked due to external factors but has since moderated.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What’s the link between GDP growth and employment in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: SWI report and its findings

Mains level: The relationship between economic growth and employment in India, Reasons, challenges, and framework for change

What’s the news?

  • A recent report, SWI 2023, has brought to light the disconcerting disparity between India’s relentless pursuit of GDP growth and the stark reality of inadequate job creation.

Central idea

  • In the realm of policy decisions, a fundamental question often arises: Should the focus be on accelerating economic growth or ensuring widespread employment opportunities? A recent report, India is Broken and the State of Working India 2023, draws insights on how India’s growth trajectory impacts employment, emphasizing the need to consider various social factors in this equation.

The State of Working India 2023 (SWI) Report

  • SWI 2023, focusing on a long-term perspective, analyzes data from 1983 to 2023, emphasizing social identities like caste, gender, and religion.
  • It highlights how GDP growth benefits are distributed unevenly among various segments of society.
  • The quality of jobs created is a crucial aspect of distinguishing between regular-wage jobs and self-employment.

The relationship between economic growth and employment in India

  • Job Creation Challenge: The report emphasizes that job creation remains one of India’s most significant macroeconomic challenges. Despite the pursuit of high GDP growth, the report suggests that the correlation between economic growth and employment generation has weakened over time.
  • Weakening Employment Elasticity: Employment elasticity, which measures the extent to which employment grows when GDP grows by one unit, has consistently declined since the 1980s. This decline indicates that a 1% increase in GDP now results in less than a 1% increase in employment.
  • Recent Trends: The period from 2017 to 2021 showed a notable improvement in employment. However, this improvement came with nuances. While employment numbers increased, it’s essential to distinguish between jobs created due to economic growth and those created out of necessity (self-employment).
  • Quality of Jobs: The SWI 2023 report underscores the importance of considering the quality of jobs created. Not all employment opportunities are equal, and the report highlights the prevalence of self-employment, which often lacks regular wages and job security.
  • Impact on Women: The changing employment landscape disproportionately affects women. Although women accounted for half of the lost employment during the specified period, they received only a third of the increase in formal employment. This shift also saw more individuals turning to self-employment due to economic distress.
  • Uncorrelated Growth: The report’s broader takeaway is that over the long run, GDP growth and employment growth have been uncorrelated in India. This suggests that policies solely oriented towards achieving higher GDP growth rates may not necessarily lead to accelerated job creation.

The dominance of GDP growth

  • For years, India’s national discourse has been dominated by the pursuit of high GDP growth rates as the primary indicator of economic progress.
  • The belief has been that rapid economic growth will naturally lead to increased employment opportunities.
  • However, recent developments challenge this conventional wisdom, prompting us to reconsider our priorities.

The US perspective

  • In contrast to India’s GDP-centric approach, the United States, the world’s largest economy, places a strong emphasis on employment levels.
  • The Chairman of the US Federal Reserve, Jay Powell, consistently highlights the importance of achieving full employment while maintaining price stability.

Why does India not prioritize employment to the same degree?

  • Historical Perspective: India’s approach to economic development has been influenced by its post-independence history. When India gained independence in 1947, it faced widespread poverty, and economic growth was seen as a means to uplift the masses.
  • Development Paradigm: India adopted a development paradigm that prioritized industrialization and capital-intensive sectors. The belief was that as industries expanded, they would naturally absorb labor.
  • Policy Framework: India’s economic policies, especially since the 1991 economic reforms, have largely centered on liberalization, privatization, and globalization. These policies aimed to attract foreign investment and promote private sector growth, often with an emphasis on manufacturing and services. While these policies aimed at increasing overall economic output, they did not always address the issue of employment directly.
  • Data Focus: Economic policymakers often rely on GDP growth as a quantifiable and easily measurable metric to gauge economic performance. Employment data can be more complex to collect and interpret, and the focus on GDP growth has made it the primary indicator of success.
  • Political Considerations: Political leaders and parties have, at times, used the promise of high GDP growth as a way to gain popular support and demonstrate economic progress to the electorate. This political narrative has reinforced the emphasis on GDP growth.
  • Globalization Trends: The global trend toward globalization and competitiveness has also influenced India’s priorities. The country has sought to position itself as a global economic player, and this often involves pursuing policies that align with international economic norms, including a focus on GDP growth.
  • Lack of Comprehensive Social Safety Nets: India’s social safety nets and social security systems have historically been limited in coverage and effectiveness. As a result, there may be a perception that focusing on GDP growth is essential to lifting people out of poverty, as job opportunities are seen as the primary means of economic betterment.

A Framework for Change: Rethinking India’s Growth Strategy

  • Promote labor-intensive manufacturing:
    • Encourage industries that have the potential for labor-intensive manufacturing, such as textiles, electronics assembly, and agro-processing.
    • Implement policies and incentives to attract investments in these sectors, as they can create a significant number of jobs.
  • Invest in skill development and training.
    • Establish comprehensive skill development programs to enhance the employability of the workforce.
    • Collaborate with industries to design training programs that align with their specific needs, ensuring that workers are adequately prepared for available job opportunities.
  • Support Micro, Small, and Medium Enterprises (MSMEs):
    • Provide targeted support to MSMEs, which often generate substantial employment.
    • Simplify regulations and reduce bureaucratic hurdles for MSMEs to encourage their growth.
  • Green Manufacturing and Sustainable Industries:
    • Explore opportunities in green manufacturing and sustainable industries, aligning with global trends toward environmentally friendly practices.
    • Invest in renewable energy, eco-friendly technologies, and sustainable agriculture, which can create employment while contributing to environmental goals.
  • Infrastructure Development in Rural Areas:
    • Develop infrastructure in rural areas to facilitate economic activities and job creation outside of urban centers.
    • Improve connectivity, transportation, and access to markets to boost rural employment opportunities.
  • Focus on the formalization of jobs:
    • Implement policies that encourage the formalization of employment, including ensuring written contracts and providing benefits to workers.
    • Address labor market informality to improve job quality and security.
  • Gender-Inclusive Policies:
    • Develop and enforce policies that promote gender equality in the workforce.
    • Encourage women’s participation in the labor market through initiatives such as affordable childcare facilities and measures to reduce workplace harassment.
  • Social Safety Nets:
    • Strengthen social safety nets to provide a cushion for workers during periods of economic volatility.
    • Ensure that unemployment benefits, healthcare, and retirement provisions are accessible and effective.
  • National Employment Policy:
    • Develop and implement a comprehensive national employment policy that outlines a long-term vision and strategy for job creation.
    • Address both the supply and demand sides of the labor market and promote the quantity and quality of employment.
  • Global Trade and Export Promotion:
    • Actively engage in global trade and export promotion, which can stimulate economic growth and create jobs.
    • Identify and target export-oriented industries with growth potential.
  • Decentralized Economic Development:
    • Promote economic decentralization by encouraging the development of regional and local economies.
    • Invest in infrastructure, skills, and entrepreneurship in underdeveloped regions to reduce regional disparities.

Conclusion

  • The time has come for India to reconsider its economic priorities. While GDP growth remains important, a greater emphasis on job creation, especially quality employment, is crucial for sustainable and inclusive development. The findings of the SWI 2023 report offer a compelling case for Indian policymakers to shift their focus towards strategies that prioritize employment generation, ensuring that the benefits of growth are shared by all segments of society.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The tax base is growing – government shouldn’t waste the opportunity

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Basic concepts

Mains level: Growing tax base, recent trends, opportunities and challenges

What’s the news?

  • India sees a surge in taxpayer base amidst tax policy challenges; a stable tax-to-GDP ratio raises questions on fiscal maneuverability and economic growth prospects.

Central idea

  • In the lead-up to each budget, the Union government cites limited tax revenues as a spending constraint. Recent years have seen a surge in direct and indirect tax payers, challenging the idea that only a small segment contributes. This should ideally raise the tax-to-GDP ratio, yet tax rate cuts and pandemic disruptions have limited fiscal gains, hinting at a deliberate shift to a low-tax regime.

What is meant by fiscal maneuverability?

  • It refers to the government’s ability to adjust its revenue and expenditure policies in response to changing economic conditions, budget constraints, and policy goals.

What is Tax-to-GDP Ratio?

  • The Tax-to-GDP ratio is a financial indicator that measures the total tax revenue collected by a government as a percentage of its overall GDP for a specific period, typically a fiscal year.
  • This ratio is used to assess the level of taxation relative to the size of the economy.
  • A higher Tax-to-GDP ratio suggests that a larger portion of a nation’s economic output is being collected in the form of taxes.

What Factors Have Led to the Government’s Limited Fiscal Maneuverability Before Budgets?

  • The common refrain: Historically, the Union government has often cited its limited tax revenues as a significant constraint on its ability to maneuver effectively in the run-up to budgets.
  • Steady increase in tax base: It’s noteworthy that there has been a consistent increase in both direct and indirect tax payers over recent years.
  • Economic context: This expansion in the tax base has occurred during a phase of slower, uneven economic growth.
  • Impact of tax cuts and disruptions: Despite the increase in taxpayers, cuts in both direct and indirect tax rates (including GST) and pandemic-induced economic disruptions have limited the fiscal gains from this surge in taxpayers.

How Has the Taxpayer Base Evolved in Recent Years?

  • Growth in the taxpayer base: The tax base has shown substantial growth in recent years, challenging the belief that only a small section of society pays taxes.
  • Direct tax base expansion: The number of companies paying tax grew by about 43 percent, from 7.46 lakh to 10.7 lakh, between the assessment years 2014–15 and 2022–23.
  • Individual taxpayers: Individual taxpayers increased by 65 percent over the same period, rising from 5.38 crore to 8.9 crore.
  • Role of small taxpayers: It’s important to note that a significant number of these new tax payers have incomes less than Rs 5 lakh.

Trends and Factors in the Expansion of the Indirect Tax Base

  • Indirect tax base growth: The number of active GST payers increased from 1.2 crore in 2019 to 1.4 crore by June 2023.
  • Composition: About 80 percent of these taxpayers are proprietorships, with another 10 percent being partnerships.
  • Incentives for registration: Smaller establishments are incentivized to register under GST to avail of the input tax credit.
  • Indirect tax impact: The growth in the indirect tax base may also be influencing the increase in direct tax payers.

Impact of Tax Rate Reductions

  • Corporate tax rate reduction: In September 2019, the government announced a cut in the corporate tax rate for existing companies from 30 percent to 22 percent.
  • Impact on revenue: As per government figures, the revenue loss on account of this corporate tax reduction was Rs 1.28 lakh crore in 2019–20 and Rs 1 lakh crore in 2020–21.
  • Corporate tax-to-GDP ratio: The corporate tax-to-GDP ratio declined from 3.5 percent in 2018–19 to around 3.1 percent by 2022–23.
  • Personal income tax rebates: In the interim budget of 2019, the government announced that individual taxpayers with taxable income up to Rs 5 lakh would get a full tax rebate.
  • Personal income tax-to-GDP ratio: The personal income tax-to-GDP ratio increased from 2.5 percent in 2018–19 to 3 percent by 2022–23.
  • Increase in zero tax liability: Notably, the number of individuals with zero tax liability also increased from 2.9 crore in 2019–20 to 5.16 crore in 2022–23, which may limit the gains from an expansion in the tax base.

What are the challenges?

  • Revenue Sustainability: A challenge arises in ensuring that the gains from an expanding tax base translate into sustainable revenue streams. Despite the increase in taxpayers, tax cuts and disruptions may limit the fiscal benefits.
  • Tax Evasion and Avoidance: Addressing tax evasion and avoidance remains a significant challenge. Although the formalization of the economy makes tax evasion more complicated, it requires effective measures to combat tax evasion further.
  • Balancing Tax Cuts: The reduction in tax rates, such as the corporate tax cut, has implications for government revenue. Striking a balance between encouraging economic growth through lower taxes and maintaining adequate fiscal resources is a constant challenge.
  • Targeted Spending: As the government’s fiscal space expands with a growing tax base, it faces the challenge of allocating resources effectively. Prioritizing and targeting spending on key development objectives while avoiding wasteful expenditures is essential.

Future Prospects

  • Fiscal Sustainability: With an expanding economy and tax base, there is potential for improved fiscal sustainability. If managed effectively, this can provide the government with more resources to meet its long-term financial commitments.
  • Development Opportunities: The growth in the tax base offers opportunities for increased public investment in critical sectors, fostering economic development, and improving the overall quality of life for citizens.
  • Reduced Reliance on Borrowing: An increased tax base can reduce the government’s reliance on borrowing to meet budgetary needs, potentially leading to lower interest payments and debt management challenges.
  • Incentive for Formalization: As more individuals and businesses enter the tax net, there’s a natural incentive for greater formalization of the economy. This can reduce the size of the informal sector and promote economic stability.
  • Policy Flexibility: A broader tax base can provide the government with greater policy flexibility. It can consider adjustments to tax rates, exemptions, and deductions to support specific policy goals, such as promoting investment or addressing income inequality.
  • Enhanced Economic Growth: With appropriate fiscal policies, the increased revenue potential from a growing tax base can contribute to sustained economic growth, job creation, and poverty reduction.

Conclusion

  • The government’s strategic choices regarding tax rates have influenced the country’s tax landscape, expanded the taxpayer base while maintained stable tax-to-GDP ratios. As India’s economy continues to evolve, these gains should not be squandered through excessive giveaways but rather strategically allocated to promote sustainable development and economic growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

China’s economic slowdown, its ripple effect

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: China’s economic slowdown, its ripple effect, Economic Growth Comparison with India

Central Idea

  • The recent news of China’s economic slowdown has sparked a range of responses. China’s concerns about stagnation and the middle-income trap have shifted to fears of deflation, raising global implications. To comprehend the root causes and gravity of China’s current economic dilemmas, it is crucial.

Background: Unstable Growth and Strategic Choices

  • Premier Wen Jiabao’s Concerns (2007): Premier Wen Jiabao raised alarms in 2007, highlighting instability, imbalances, a lack of coordination, and unsustainability as China’s economic challenges.
  • 2008 Global Financial Crisis Strategy: China responded to the 2008 crisis by investing heavily in infrastructure (railways, highways, energy, and construction) to maintain double-digit growth and stabilize the economy.
  • Deferred Structural Issues: While this strategy spurred growth, it deferred addressing issues like low consumption, regional disparities, and inadequate social security measures.
  • Leadership Imperative for Growth: The need to sustain prosperity for domestic legitimacy drove China’s focus on high growth rates, even if it meant overlooking structural concerns.

Current Realities

  • Transition to the New Normal: President Xi Jinping’s 2017 shift focused on quality-of-life issues, acknowledging the limitations of export-driven, investment-heavy growth.
  • Acceptance of Slower Growth: China entered the new normal, accepting slower growth rates and requiring adjustments in economic expectations.
  • Challenges in Transition: Slower export growth due to rising labor costs from increased wages and social security investments led to unemployment challenges.
  • Balancing Priorities in the New Normal: Adapting to the “new normal” entails managing the delicate balance between sustainable growth, addressing structural issues, and maintaining social stability.

Escalating Challenges and the Evergrande Crisis

  • Trade War and De-risking Impact: The escalation of challenges was fueled by the impact of the US-China trade war and the implementation of de-risking strategies. These factors introduced complexities to China’s economic landscape.
  • Evergrande Crisis Unveiled: The Evergrande crisis, spanning from 2020 to 2023, emerged as a significant event exposing vulnerabilities within China’s housing sector. The crisis highlighted potential issues of misregulation and systemic risk.
  • Path-Dependency Concerns: The Evergrande crisis exacerbated concerns about China’s economic dependence. The fear of a crash landing became more pronounced, underscoring the importance of addressing structural challenges.
  • Complexity of Structural Problems: The challenges faced by Evergrande shed light on broader structural issues present within China’s economy. The crisis revealed the intricate interplay of development challenges and regulatory oversights.
  • Policy Implications and Regulatory Oversight: The Evergrande crisis triggered discussions about the need for stronger regulatory oversight and effective policy responses. Stabilizing the housing market has emerged as a critical concern for the government.

China’s economic slowdown and its ripple effect

  • Global Trade Impact: China’s economic slowdown has implications for global trade. As one of the world’s largest economies and trading partners, China’s reduced economic activity affects international trade flows, impacting both suppliers and consumers worldwide.
  • Commodity Markets: The slowdown has led to decreased demand for commodities such as crude oil, cement, and steel. China’s status as a major consumer in these markets has caused a cooling of prices, impacting countries that rely on exporting these commodities.
  • Supply Chain Disruptions: China plays a critical role in global supply chains. Its economic slowdown and disruptions in production have affected supply chain dynamics, causing delays and disruptions for companies worldwide.
  • Investor Sentiments: China’s economic challenges have led to cautious investor sentiments. Uncertainties about the Chinese economy have influenced global financial markets and investment decisions.
  • Global Economic Growth: China’s slowdown contributes to lower global economic growth rates. The country’s reduced demand for goods and services affects other economies, particularly those that heavily depend on exports to China.
  • Regional Trade Partners: Neighboring countries that have strong economic ties with China, such as those in Asia, are directly impacted by China’s slowdown. Reduced demand for their exports to China affects their economies as well.
  • Currency Exchange Rates: China’s economic slowdown can impact currency exchange rates. Fluctuations in China’s economic performance can influence the value of its currency, affecting exchange rates globally.

Future Outlook

  • State-Owned Enterprises (SoEs) Challenges: State-owned enterprises, due to preferential treatment and political networks, pose ongoing challenges. Their resistance to change and reliance on political influence can hinder necessary reforms for economic growth.
  • Evergrande Crisis and Systemic Issues: The Evergrande crisis exposed vulnerabilities within China’s housing sector and revealed potential systemic issues. Addressing these challenges is crucial to preventing further disruptions in the economy.
  • Middle-Income Trap and Value Chain Advancement: The looming middle-income trap poses a dilemma for China’s economic trajectory. To avoid stagnation, China must navigate this challenge and advance its position in the global value chain, which requires innovation and upgrading industries.
  • Economic Growth Comparison with India: Despite the challenges, China’s projected 5% growth rate still surpasses India’s anticipated 6.1% growth rate. China’s size and economic influence make this growth rate significant and impactful on global markets.

Conclusion

  • China’s economic challenges underscore the need for strategic decisions in a shifting landscape. Achieving growth while addressing internal imbalances and global uncertainties remains a formidable task. As China’s economy evolves, its choices will resonate on the international stage, reshaping the perception of its rise and risk appetite.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The cost of meals rose by 65% in five years, wages by just 37%

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Thalinomics concept

What’s the news?

  • The growing chasm between wages or salaries and the cost of living has given rise to a distressing scenario: the affordability of vital food commodities is under threat.

Central idea

  • In Mumbai, the cost of a vegetarian thali surged 65% in five years, while income for laborers and salaried workers in urban Maharashtra increased only 37% and 28%, respectively. This discrepancy is making essential food items unaffordable, leading to compromised meals.

What is Thalinomics?

  • Thalinomics is a term coined by an Indian economist and former Chief Economic Adviser to the Government of India, Arvind Subramanian.
  • It refers to a concept that involves analyzing changes in the cost of a vegetarian thali (a meal consisting of a variety of dishes served on a single plate) to gain insights into the trends and dynamics of food inflation and affordability.
  • It involves tracking the prices of key ingredients that constitute a thali, such as cereals, pulses, vegetables, and other essential items.
  • This concept is particularly relevant in countries like India, where food affordability and inflation are significant concerns for a large population.

Key insights: A case study of Mumbai and urban Maharashtra

  • Rising Cost of Thali: The cost of preparing a home-cooked vegetarian thali in Mumbai has increased significantly by 65% over the past five years. This increase is attributed to rising prices of essential ingredients like rice, dal, vegetables, and other items that constitute a thali.
  • Income Growth: Over the same five-year period, the average wage earned by casual laborers in urban Maharashtra increased by 37%, while the average salary of regular salaried workers increased by 28%. These income growth rates reflect the changes in earnings for these two categories of workers.
  • Disparity Between Costs and Income: While the cost of a thali increased by 65%, income growth for casual laborers and salaried workers was significantly lower, at 37% and 28%, respectively.
  • Affordability Challenge: The disparity between rising costs and income growth has resulted in essential food items becoming increasingly unaffordable for households. This affordability challenge can lead to reduced portion sizes or a compromise in the variety and nutritional quality of meals.
  • Impact on Budget Share: The study also analyzes the portion of monthly wages or salaries required to afford two thalis every day for a month. This share increased from 22.5% of a casual laborer’s monthly earnings in 2018 to 27.2% in 2023. For salaried employees, it increased from 9.9% to 12.8% over the same period.
  • Incomplete Data: Data limitations, particularly regarding the absence of certain ingredients like spices and ghee in the analysis, This suggests that the actual cost of making a thali could be even higher than the calculated figures.

Key aspects of the relationship between thali prices and inflation

  • Inflation and Ingredient Prices: The prices of ingredients like rice, dal, vegetables, and oil can be affected by inflation. If the prices of these essential ingredients rise due to inflationary pressures, the overall cost of preparing a thali would increase.
  • Food Inflation: The cost of a thali, which is composed of various food items, is directly influenced by food inflation. If there’s high food inflation, it can significantly impact the affordability of thalis and other meals.
  • Supply and Demand Dynamics: Inflation can be driven by supply and demand imbalances. If there’s a shortage of certain ingredients due to supply disruptions (e.g., poor harvests or transportation issues), prices can rise. Similarly, changes in consumer demand patterns can affect the prices of specific ingredients, further impacting thali costs.
  • Monetary Policy: Central banks often use monetary policy tools to control inflation. Interest rate adjustments, money supply regulation, and other measures can impact inflation rates. High inflation rates can lead to increased production costs for farmers and manufacturers, which may trickle down to the prices of thali ingredients.
  • Income Effects: Inflation can impact consumers’ purchasing power. When inflation outpaces income growth, households might need to allocate a larger portion of their income to cover basic expenses like food. This can particularly affect lower-income households, leading to affordability challenges for items like thalis.
  • Regional Variation: Inflation rates can vary regionally and even locally. Different regions might experience different rates of inflation due to factors like supply chain disruptions, local economic conditions, and government policies.
  • Government Policies: Government policies such as subsidies, import/export regulations, and agricultural policies can influence ingredient prices and, consequently, the cost of preparing a thali. These policies can impact the supply and availability of key ingredients.

Implications of the higher cost of a thali

  • Nutritional Impact: The rising cost of thali ingredients can lead to compromised nutritional intake as households might cut back on certain items to manage expenses. This can result in inadequate diets and potential health implications.
  • Affordability Strain: As thali prices escalate, households may face financial strain by allocating a larger portion of their income to food expenses. This can limit their ability to save, invest, and engage in non-essential expenditures.
  • Dietary Diversity: Increased thali costs can potentially lead to reduced dietary diversity as households might opt for cheaper, less nutritious alternatives, affecting overall dietary quality.
  • Balanced Meals: Higher thali costs might lead to smaller portions or fewer items in the thali, disrupting the balance of a typical meal and potentially impacting satiety and nutritional completeness.
  • Quality of Life: Reduced dietary quality due to affordability challenges can have broader implications for individuals’ quality of life, health, and overall well-being.
  • Economic Struggles: For households with limited disposable income, the burden of increased thali costs can exacerbate economic struggles and hinder progress.

Way forward

  • Policy Interventions: Implement policies to address the widening gap between thali costs and income growth, ensuring that essential food remains affordable.
  • Income Enhancement: Focus on raising wages for casual laborers and salaried workers to match the rising cost of thalis.
  • Affordability Measures: Establish measures to mitigate the impact of expensive thalis on households, considering subsidies or targeted assistance.
  • Nutrition Awareness: Launch campaigns to educate households about maintaining nutritious diets even when faced with affordability challenges.
  • Gender-Inclusive Approach: Address gender disparities by formulating policies that empower women economically.
  • Data-Driven Approach: Base policies on accurate and up-to-date data on food prices, wages, and consumption patterns.
  • Food Security Initiatives: Strengthen food security programs to ensure access to nutritious food despite thali cost increases.
  • Policy Evaluation: Continuously assess the effectiveness of policies in addressing thali affordability and overall well-being.

Conclusion

  • The shifting dynamics between escalating costs and relatively stagnant income pose a serious challenge to maintaining a nutritionally balanced diet. As prices continue to rise, a more comprehensive approach is crucial to ensuring that affordable nutrition remains within reach for all strata of society.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Inflation: Dealing with the surge

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Inflation trends

Mains level: Inflation and its impact

Central idea

  • In recent weeks, a notable surge in vegetable prices has acted as a harbinger of a potential increase in overall inflation, as gauged by the consumer price index. This inflationary trend, if sustained, could breach the upper threshold of the Reserve Bank of India’s (RBI) targeted inflation framework.

Inflation Trend Analysis

  • Initial Indications of Upward Movement: The recent surge in vegetable prices over the past few weeks served as an early signal of an impending inflationary trend. These signs prompted expectations of an escalation in overall inflation, as gauged by the consumer price index, during the months of July and August.
  • Confirmed by Official Data Release: The National Statistical Office’s data release on Monday solidified these apprehensions. Headline retail inflation surged to a 15-month high of 7.44 per cent in July, marking a substantial increase from the 4.87 per cent recorded in June.
  • Food Prices as the Main Catalyst: Dissecting the data, it becomes evident that the major driving force behind this surge has been the elevated food prices. The consumer food price index soared to 11.51 per cent in July, significantly up from the 4.55 per cent reported the previous month.
  • Core Inflation and Goods/Services Inflation Trends:
    • Core Inflation: Excluding the volatile food and fuel components, core inflation has shown a moderation trend, as noted by ICRA.
    • Goods and Services Inflation: Both goods (excluding food) and services inflation have demonstrated a softening trend, indicating a certain degree of stability.

Food Categories and Their Impact

  • Vegetables: This category experienced a staggering price rise of 37.3 per cent, serving as a primary contributor to the overall increase.
  • Spices: Prices of spices surged by 21.6 per cent, further accentuating the inflationary pressure within the food segment.
  • Pulses and Products: With an inflation rate of 13.2 per cent, pulses and related products added to the upward trend in food prices.
  • Cereals and Products: A rise of 13 per cent in this category also contributed to the overall surge in food inflation.

Central Bank’s Perspective

  • Early Warnings Heeded: Recognizing the potential implications for overall inflation, the Reserve Bank of India (RBI) took swift action during its recent monetary policy committee meeting.
  • Proactive Forecast Revision: In a preemptive move, the RBI adjusted its inflation projection for the second quarter upwards. The initial estimate of 5.2 per cent was revised to 6.2 per cent, reflecting the central bank’s readiness to address the imminent inflationary pressure.
  • Confirmation through Data: The RBI’s perspective received validation with the release of official data by the National Statistical Office. The subsequent surge in headline retail inflation to a 15-month high of 7.44 per cent in July, from the previous month’s 4.87 per cent, bolstered the central bank’s concerns.
  • Food as a Key Driver: The central bank’s analysis correctly identified that the main driver behind this inflationary surge was the escalating food prices. The consumer food price index’s significant rise to 11.51 per cent in July, compared to 4.55 per cent in the previous month, reinforced the central bank’s focus on this critical aspect.

Impact of the inflation trends

  • Consumer Affordability: The surge in vegetable prices contributes to overall inflation, impacting consumers’ ability to afford essential goods. As prices rise, individuals might need to allocate more of their budget to food, potentially reducing spending on other items.
  • Budgetary Strain: Higher food prices, particularly vegetables, strain household budgets, affecting families’ purchasing power. This burden is often more pronounced for lower-income households, potentially leading to trade-offs in spending and impacting overall consumption patterns.
  • Cost-Push Inflation: The rise in food prices, driven by vegetables and other factors, can lead to cost-push inflation. This occurs when higher production costs are passed on to consumers, causing a general increase in the price level across various sectors.
  • Wage Pressure: Elevated inflation can lead to demands for higher wages by workers to maintain their real income levels. Businesses might face challenges managing increased labor costs, potentially affecting profitability.
  • Monetary Policy Adjustment: The Reserve Bank of India (RBI) might need to consider adjusting its monetary policy to address the rising inflation. This could involve raising interest rates to control demand and curb price increases, potentially impacting borrowing costs and investments.

Conclusion

  • Despite optimism about a forthcoming correction in vegetable prices, the economy remains vulnerable to external shocks such as crude oil price fluctuations. The committee’s continued vigilance and strategic policy responses will be pivotal in managing inflationary pressures and maintaining economic stability.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

China’s Deflation: A cause for concern?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Deflation

Mains level: Read the attached story

deflation

Central Idea

  • China’s recent bout of deflation, marked by a decline in consumer prices for the first time in over two years, has sparked debates about its implications and causes.
  • This article delves into the intricacies of deflation, its potential impact on economic growth, and the unique circumstances driving deflation in China.

Understanding Deflation

  • Deflation Defined: Deflation refers to a sustained decrease in the general price level of goods and services within an economy.
  • Historical Context: Historically, the terms “inflation” and “deflation” were linked to changes in the money supply, with “inflation” representing a rise and “deflation” a fall in money supply.

Concerns Associated with Deflation

  • Economic Slowdown: Many economists view deflation as an indicator of dwindling demand for goods and services, potentially leading to an economic slowdown.
  • Demand-Supply Dynamics: Falling prices may prompt consumers to delay purchases, hampering demand and triggering a ripple effect throughout the economy.
  • Resource Utilization: A certain level of inflation is deemed necessary for optimal resource utilization, ensuring full economic potential is realized.

Varied Perspectives on Deflation

  • Positive Instances: Some economies have experienced deflation during periods of robust growth. Japan witnessed increased real income levels despite persistent deflation.
  • Economic Crises: Deflation can arise during economic crises when cautious spending and resource reallocation occur.
  • Consumer Demand and Prices: Some economists argue that consumer demand dictates prices, rather than the other way around.

China’s Deflation Scenario

  • Policy Measures: China’s central bank maintained low interest rates to stimulate demand amid the post-pandemic recovery.
  • Property Sector Turmoil: China’s pre-pandemic property sector challenges, affecting GDP contribution, may be a root cause of the current deflationary trend.
  • Complex Factors: While liquidity may not be the core issue, comprehensive analysis of money supply and monetary transmission is necessary to determine the underlying cause.

Deflation and India

Period Causes Impact on India
Great Depression (1930s) Global economic downturn, reduced demand Agricultural and industrial contraction, falling prices
Post-Independence (1950s-1960s) Supply-side constraints, monetary policy Agricultural fluctuations, efforts to control inflation
Global Oil Crisis (1970s) Surge in oil prices, cost-push inflation Economic slowdown, increased costs, reduced demand
Economic Reforms Era (1990s) Transition to market-oriented economy, policy measures Sectoral slowdown, reduced demand, short-term deflation
Global Financial Crisis (2008-2009) Global financial crisis, economic slowdown Reduced consumer spending, limited deflationary impact

 

Repercussions of Chinese Deflation

[A] Positive Impacts:

  • Cheaper Imports: If Chinese goods become cheaper due to deflation, it could lead to lower import costs for India, benefiting consumers and businesses that rely on Chinese imports.
  • Lower Input Costs: Reduced prices for raw materials and intermediate goods from China could lower production costs for Indian industries that depend on these inputs.
  • Global Supply Chains: If Chinese deflation reduces the cost of production within global supply chains, Indian businesses integrated into these chains might experience cost savings.
  • Improved Trade Balance: Cheaper Chinese imports can contribute to a more favorable trade balance for India, especially if it leads to reduced import bills.

[B] Negative Impacts:

  • Export Competition: Cheaper Chinese exports due to deflation could increase competition for Indian exports in international markets, potentially affecting certain Indian industries.
  • Import Dumping: A flood of cheap Chinese goods into the Indian market could harm domestic producers, leading to job losses and economic strain.
  • Investment Flows: A slowdown in China’s economy caused by deflation might lead to reduced investor confidence and affect foreign direct investment (FDI) flows to India.
  • Currency Effects: If China’s central bank devalues its currency to boost exports in response to deflation, it could lead to a stronger Indian rupee, impacting India’s export competitiveness.
  • Commodity Prices: Reduced demand for commodities from China due to deflation could lead to lower global commodity prices, affecting Indian exporters of raw materials.

Conclusion

  • China’s encounter with deflation amidst efforts to boost demand and stabilize its economy presents a multi-faceted challenge.
  • Understanding the nuances of deflation, its interaction with demand dynamics, and China’s unique economic landscape are vital.
  • As China navigates its path forward, policymakers must consider the interplay of factors, including the property sector’s impact and broader economic goals.

Back2Basics:

Terminologies related to PRICE RISE

Inflation Sustained increase in the general price level of goods and services in an economy over time, leading to reduced purchasing power of money.
Deflation Sustained decrease in the general price level of goods and services, often resulting in reduced consumer spending and economic stagnation.
Hyperinflation Extremely rapid and uncontrollable increase in prices, eroding the value of money and disrupting economic stability.
Stagflation Simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation, contrary to traditional economic theories.
Creeping Inflation Gradual increase in the general price level at a rate of 1-3% annually, considered normal and manageable.
Galloping Inflation High inflation ranging from 10% to several hundred percent per year, eroding savings and economic planning.
Demand-Pull Inflation Rise in prices due to demand exceeding supply, often occurring during periods of strong economic growth.
Cost-Push Inflation Increase in prices caused by higher production costs, such as rising wages or raw material expenses.
Built-In Inflation Cycle of rising prices and wages as workers demand higher wages to match inflation, contributing to a continuous cycle.
Structural Inflation Inflation resulting from supply and demand imbalances due to structural factors like technology changes or market conditions.
Open Inflation When rising prices are publicly acknowledged and factored into economic decisions, including wage negotiations.
Suppressed Inflation Prices rise but are officially reported at a lower rate due to government intervention, subsidies, or price controls.
Repressed Inflation Artificially keeping prices low through government controls despite demand exceeding supply, leading to potential future price spikes.
Disinflation Decrease in the rate of inflation, indicating the general price level is still rising but at a slower rate, often a transition to more stable inflation levels.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Services PMI at 13-Year High

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Purchasing Managers' Index (PMI)

Mains level: NA

Central Idea

  • India’s services sector has exhibited significant growth, as reflected by the S&P Global India Services Purchasing Managers’ Index (PMI), which reached a 13-year high of 62.3 in July.
  • The recovery is driven by increased demand, new business opportunities, and robust export orders.
  • However, challenges such as rising input costs and cautious output pricing indicate a nuanced landscape.

Service Sector

The service sector, also known as the tertiary sector, includes a wide range of economic activities that are focused on providing intangible goods and services to customers.

Some examples of activities that fall under the service sector include:

  1. Hospitality and tourism: This includes activities such as hotels, restaurants, travel agencies, and tour operators.
  2. Retail and wholesale trade: This includes businesses that buy and sell goods, such as supermarkets, department stores, and online retailers.
  3. Financial services: This includes banks, insurance companies, and investment firms.
  4. Professional and business services: This includes activities such as legal services, accounting, consulting, and advertising.
  5. Information and communication technology: This includes activities such as software development, telecommunications, and data processing.
  6. Healthcare and social assistance: This includes activities such as hospitals, clinics, nursing homes, and social services.
  7. Education and training: This includes activities such as schools, colleges, universities, and vocational training.
  8. Transportation and logistics: This includes activities such as shipping, warehousing, and distribution.

 

Purchasing Managers’ Index (PMI)

  • PMI is an indicator of business activity — both in the manufacturing and services sectors.
  • The S&P Global India Services PMI is compiled by S&P Global from responses to questionnaires sent to a panel of around 400 service sector companies.
  • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
  • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

How is the PMI derived?

  • The PMI is derived from a series of qualitative questions.
  • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

How does one read the PMI?

  • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
  • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
  • If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.

Recent Feat Achieved

  • Output Levels: The survey-based index shows that output levels experienced the fastest growth since June 2010, driven by robust demand and increased new business gains.
  • Job Creation: Despite the surge in workload, job creation remained modest, with a “slight” pace of hiring. Firms employed a mix of part-time, full-time, permanent, and temporary staff.
  • Rising Input Costs: Input costs recorded the fastest increase in 13 months, primarily due to higher food, labor, and transportation expenses.
  • Output Price Dynamics: On the other hand, firms displayed caution in their output pricing strategy, with output prices increasing at the slowest rate in three months. This approach could be attributed to the desire to secure new contracts.
  • Overseas Expansion: Export orders received a significant boost, with firms reporting the second-fastest increase in export orders since the inception of the index in September 2014.
  • Key Growth Sources: Countries like Bangladesh, Nepal, Sri Lanka, and the UAE emerged as key sources of growth in export orders.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s Economic Ascent: From Top 10 to Top 3 Economies

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's economic growth

economic

Central Idea

  • India is set to become the world’s third-largest economy by FY28, two years earlier than projected, according to economists at SBI Research.
  • Prime Minister highlighted India’s remarkable economic progress during his tenure.

India’s Economic Growth Trajectory

  • Actual progress: India’s Gross Domestic Product (GDP) has grown by an impressive 83% between 2014 and 2023, a close second to China’s growth rate of 84% during the same period.
  • Financial Crisis Impact: While India’s economy was affected by the 2008-09 Global Financial Crisis its resilience was significantly better than that of European countries, contributing to its growth advantage over them.
  • Stagnation of Competing Countries: Many other top 10 economies have struggled to maintain significant growth rates, allowing India to overtake them. Ex. the UK’s total GDP grew by only 3%, France’s by 2%, Russia’s by 1%, while Italy’s GDP stagnated, and Brazil’s GDP even contracted by 15% during the same nine-year period.

India’s Projected Growth

economic

  • India’s Prospective Rank: According to forecasts from the International Monetary Fund (IMF), India is expected to become the third-largest economy globally by 2027, overtaking both Germany and Japan.
  • India’s Growth Advantage: Even with a more moderate growth rate of 6% per annum, India’s GDP in 2027 will be approximately 38% higher than its 2023 level.
  • Recessing countries: Japan and Germany are projected to achieve only a 15% increase over the same period, enabling India’s ascendancy to the third rank.
  • Challenges of Catching up: The gap between China and the US (the top two economies) and India’s GDP remains substantial.
  • Digitalization and Global Sentiment: Positive aspects include increased digitalization of the economy and the opportunity to attract investments due to negative global sentiment towards China.

Issues with such growth: Per Capita GDP Disparity

  • Aggregate vs. Per Capita Numbers: While India’s aggregate GDP growth has been impressive, it is essential to consider per capita GDP figures to understand the actual prosperity of the country’s citizens.
  • Low Per Capita GDP: India’s per capita GDP, at $2,600 per annum, remains the lowest among the top 10 economies and lags considerably behind the countries it has overtaken, such as the UK, Brazil, and Italy.

Reasons for such disparity

  • Pandemic Devastation: MSMEs, contributing 30% to India’s GDP and employing 110 million people, have been hit hard by the pandemic. Government surveys suggest that around 9% of these enterprises have shut down due to COVID-19.
  • Inflation: The decimation of MSMEs has resulted in core inflation, giving pricing power to a few large companies and burdening consumers with increased costs.
  • Unemployment Woes: The struggles of MSMEs are a significant reason behind India’s failure to reduce unemployment rates, leading many towards the rural job guarantee scheme for paid work.
  • Manufacturing-Led Economy: India’s inability to build a manufacturing-led economy remains a challenge, affecting job creation.
  • Factor Market Reforms: Successive governments have struggled to implement meaningful factor market reforms in land and labor laws.

Conclusion

  • Addressing the hidden crisis will require sustained efforts from the government, focused on supporting MSMEs and implementing crucial reforms.
  • Taking timely and decisive action is essential to propel India towards a more stable and inclusive economic future.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Concerns of High Fiscal Deficit and Public debt for Indian Economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Key concepts

Mains level: Fiscal deficit, public debt its impact and Fiscal consolidation measures

What’s the news?

  • The Indian economy grapples with a soaring fiscal deficit and public debt, posing a critical challenge to its financial stability. With impending state and general elections in 2023 and 2024, the electoral budget cycle could worsen the debt situation, raising questions about its sustainability.

Central idea

  • The escalating levels of fiscal deficit and public debt in India have been a persistent concern, even before the COVID-19 pandemic hit. Although there has been some recovery in the post-pandemic period, projections indicate that returning to pre-pandemic debt levels in the medium term seems unlikely.

What is meant by fiscal deficit?

  • A fiscal deficit refers to the difference between a government’s total expenditures and its total revenues (excluding borrowings) during a specific period, usually a fiscal year.
  • It is a crucial component of a country’s fiscal policy and represents the amount of money the government needs to borrow to meet its expenditure commitments when its total expenses exceed its total revenue.

What is meant by public debt?

  • Public debt represents the total amount of money that a country’s central government owes to various creditors, whether individuals, financial institutions, or foreign governments, at a specific point in time.
  • It is the cumulative result of past fiscal deficits and surpluses. Public debt includes all outstanding government borrowings, including both short-term and long-term debt.

What is meant by financial repression?

  • Financial repression is an economic term used to describe government policies and regulations that manipulate interest rates, capital flows, and other financial instruments to channel funds towards the government’s debt obligations and other strategic priorities.
  • It typically involves measures aimed at reducing the cost of government borrowing and raising funds for public spending, often at the expense of savers and investors.

India’s fiscal deficit and public debt

  • One of the Highest Debt Levels: Even before the COVID-19 pandemic, debt levels were among the highest in the developing world and emerging market economies.
  • Fiscal Deficit: The fiscal deficit in 2020–21 increased to 13.3% of GDP and has receded to 8.9% in the post-pandemic period.
  • Public Debt: The aggregate public debt relative to GDP was 89.6% in 2020–21 and decreased to 85.7% after the economy started recovering from the pandemic.
  • Debt-to-GSDP Ratios in Specific States: The debt-to-GSDP ratios in specific states: Punjab (48.9%), West Bengal (37.6%), Rajasthan (35.4%), and Kerala (close to 33%)

Impact of financial repression

  • High Debt and Interest Payments:
  • Financial repression may lead to higher government debt levels as it facilitates borrowing at low-interest rates. As a result, interest payments on the accumulated debt can become a significant burden on the government’s finances.
  • On average, interest payments constitute over 5% of GDP and 25% of revenue receipts in India. This surpasses government expenditures on critical sectors like education and healthcare, hindering investments in essential infrastructure and human development.
  • State-Specific Concerns: Certain states in India, such as Punjab, Kerala, Rajasthan, and West Bengal, are particularly affected by high Debt-to-GSDP ratios. The debt burden in these states poses challenges for managing finances and implementing developmental initiatives.
  • Constraints on Fiscal Policy: Elevated debt levels resulting from financial repression can limit the government’s ability to implement counter-cyclical fiscal policies during economic downturns. This constraint can hinder the government’s capacity to respond effectively to shocks and economic challenges.
  • Distorted Financial Market: Government interventions, such as the SLR requirement, can create imbalances in the allocation of funds, affecting the availability of credit for productive sectors like manufacturing.
  • Impact on Sovereign Rating and External Borrowing: Persistently high deficits and debt levels can lead to lower sovereign ratings by rating agencies. A low sovereign rating can increase the cost of external commercial borrowing, making it more expensive for the government to raise funds from international markets.
  • Burden on Future Generations: Excessive debt accumulation can lead to intergenerational equity issues, with future citizens having to repay the debt and interest accrued during the period of financial repression.

Way forward: Financial Consolidation

  • Fiscal Responsibility and Budget Management (FRBM) Rules: Enforce and strengthen the existing FRBM rules to ensure prudent fiscal management. Adhering to these rules can help control deficits and prevent excessive debt accumulation.
  • Targeted Interventions: Implement targeted interventions to reduce the debt burden while addressing critical needs such as education, healthcare, and infrastructure development. For instance, the government can allocate funds specifically to boost primary education and healthcare access in states with high debt burdens, such as Punjab, Kerala, Rajasthan, and West Bengal.
  • Infrastructure Investments: Prioritize investments in physical infrastructure, human capital, and green initiatives to enhance economic productivity and foster sustainable development. For example, investing in renewable energy projects can support the green transition while creating employment opportunities.
  • Enhance Tax Collection and Compliance: Improve tax administration and compliance to increase government revenue. Utilizing technology for cross-matching of GST and income-tax returns can enhance tax collection efficiency and curb tax evasion.
  • Fiscal Reforms at the State Level: Encourage states to adopt responsible fiscal policies and avoid excessive borrowing. For example, the central government can provide incentives to states that adhere to fiscal discipline and implement reforms to improve fiscal health.
  • Disinvestment and Efficient Asset Management: Pursue disinvestment and strategic asset management to optimize government resources and reduce the need for excessive borrowing. For instance, the government can consider divesting non-essential government assets and utilizing funds from asset sales efficiently. Instead of pouring money into BSNL, which may be better served by private sector expertise, the government can explore disinvestment options.
  • Market-Based Interest Rates: Gradually transition towards market-driven interest rates on government borrowing to ensure a more efficient allocation of capital in the financial market. This can help improve credit availability for the private sector.
  • Encourage Private Sector Participation: Promote private sector participation in critical sectors, allowing the government to focus on its core functions. For instance, the government can encourage private investment in infrastructure projects through public-private partnerships (PPPs).
  • Focus on Cash Transfers: Consider providing targeted cash transfers instead of subsidies for specific commodities and services. Cash transfers can be more efficient at redistributing resources without causing unintended distortions in relative prices.
  • Medium-Term Fiscal Consolidation: Develop and implement a medium-term fiscal consolidation plan to gradually reduce the fiscal deficit and public debt levels sustainably. This plan can include specific targets for debt reduction and deficit control.

Conclusion

  • Financial repression’s adverse effects, along with the heavy costs of high deficits and debt, necessitate responsible policy interventions and fiscal consolidation. Emphasizing technological advancements and prudent economic policies will be vital in tackling the debt burden and ensuring long-term fiscal sustainability.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A roadmap to eliminate poverty in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Economic indicators and concepts

Mains level: India's economic growth, Indicators, future prospect and challenges

What’s the news?

  • With the receding impact of Covid-19 and hopeful prospects for an amicable resolution to the Russia-Ukraine War, India must now focus on charting its future growth strategy

Central idea

  • India’s current per capita income estimated at $2,379 in 2022-23, which needs to be raised by nearly six times over the next 25 years. This ambitious goal will pave the way for a higher standard of living and the eradication of poverty. However, achieving this vision requires a comprehensive understanding of the challenges ahead and the necessary actions to overcome them.

What is per capita income?

  • Per capita income refers to the average income earned by individuals in a specific geographic area. It is calculated by dividing the total income of a population by the total number of individuals in that population.
  • Per capita income provides an indicator of the average standard of living and economic well-being within a given population.

What is Gross Fixed Capital Formation (GFCF)?

  • GFCF refers to the total value of investment in fixed assets within an economy, such as machinery, equipment, buildings, and infrastructure, during a specific period.
  • It represents the net increase in the stock of fixed capital goods.
  • GFCF is an essential component of aggregate demand and is considered a driver of economic growth.
  • Higher levels of investment in fixed assets contribute to increased production capacity, improved productivity, and long-term economic development.
  • The GFCF ratio is often expressed as a percentage of GDP, indicating the proportion of total investment in fixed assets relative to the size of the economy.

What is incremental capital-output ratio (ICOR)?

  • The ICOR is an economic indicator that measures- amount of investment required to generate an additional unit of output.
  • It represents the ratio between the change in capital investment and the corresponding change in output or GDP.
  • It provides insights into the efficiency of capital utilization and the productivity of investment in an economy.
  • A lower ICOR indicates that a smaller amount of investment is required to generate a given increase in output, indicating higher efficiency and productivity of capital.
  • A higher ICOR suggests that a larger amount of investment is needed to achieve the same level of output growth, indicating lower efficiency of capital utilization.

Growth Target and Investment Requirements

  • To sustain continuous growth of 7 percent over the next 25 years, India must maintain a GFCF rate of 28 percent.
  • According to the latest release of NSO, the GFCF rate in current prices for 2022-23 is 29.2 per cent of GDP.
  • While the commonly assumed incremental capital-output ratio (ICOR) of 4 suggests improved capital efficiency, recent trends indicate an average ICOR of 4.65 from 2016-17 to 2022-23.
  • Acknowledge the evolving ICOR and work towards an estimated investment rate of 30-32 percent of GDP.
  • Both public and private investments, especially from the corporate and non-corporate sectors, need to increase.
  • Direct investments into sectors that promote growth and generate employment opportunities
  • Welcoming Foreign direct investment in emerging technological sectors

What global factors at present poses challenges?

  • The overall climate for peacenecessary for growthdeteriorated- Ukraine-Russia conflict.
  • Prolonged tension and conflicts- negative impact on global stability and economic growth.
  • Shifting attitude of some countries towards global trade.
  • Developed countries, which previously advocated for free trade, are now imposing restrictions on importschallenges for developing countries like India, particularly as they strive to compete in the world market.
  • Supply disruptions of critical imports, such as oil, can cause setbacks for developing and developed countries alike.
  • The absorption of new technologies, such as Artificial Intelligence (AI)- impact on the industrial structure and employment landscape– challenge for populous countries like India
  • Balancing economic growth with environmental sustainability may require compromises and adjustments in the growth rate.

What strategy India must follow to sustain its growth?

  • India’s economic transformation in 1991 marked a departure from the past, embracing a more market-oriented approach.
  • India needs to adopt a multi-dimensional approach that encompasses agriculture, manufacturing, and exports.
  • Given India’s strength in the services sector, it is essential to preserve and enhance this advantage.
  • Prepare to absorb new technologies, including Artificial Intelligence (AI),
  • Reorienting the educational system to equip students with required skills and
  • Identifying labour-intensive economic activities to address potential job losses due to adoption of technology

Conclusion

  • India has made significant strides in building a strong and diversified economy over the past 75 years. However, India’s per capita income remains low compared to many countries, emphasizing the need for sustained growth. By addressing domestic challenges, seizing opportunities, and prioritizing inclusive development, India can realize its vision of a prosperous and equitable future.

Also read:

Why Indian manufacturing’s productivity growth is plummeting and what can be done?

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Standing Committee on Statistics (SCoS) to review all NSO Data

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NSO

Mains level: Read the attached story

Central Idea

  • Revamping the SCES: Standing Committee on Economic Statistics (SCES) set up in late 2019 faced criticism for data quality issues in previous surveys.
  • Broader Mandate: The government establishes the Standing Committee on Statistics (SCoS) to replace the SCES, with a mandate to review all surveys conducted under the National Statistical Office (NSO).

Standing Committee on Statistics (SCoS): Composition and Mandate

  • Chairperson: Pronab Sen, India’s first chief statistician and former chairman of the National Statistical Commission (NSC), appointed as the chair of the new committee.
  • Membership: SCoS consists of 10 official members and four non-official members, including eminent academics.

Need for SCoS

  • Concerns from Economic Advisory Council: Members, including Bibek Debroy, called for an overhaul of India’s statistical machinery.
  • Lack of technical Expertise: SCoS aims to address critiques by providing technical advice on survey design and methodology.
  • Issues with Indian Statistical Service: Questions raised about the expertise of the Indian Statistical Service in survey design.

Roles and Responsibilities of the SCoS

  • Reviewing Framework and Results: SCoS is responsible for reviewing the framework and results of all surveys conducted under the NSO.
  • Data Gap Identification: SCoS identifies data gaps in official statistics and develops strategies to fill those gaps.
  • Use of Administrative Statistics: Committee mandated to explore the use of administrative statistics to improve data outcomes.

Back2Basics: National Statistical Office (NSO)

(a) Historical Background:

  • The NSO was established in 1950 as the Central Statistical Office (CSO) under the Ministry of Planning.
  • It was later renamed the National Sample Survey Office (NSSO) in 1970 and subsequently became the NSO in 2019.
  • Over the years, it has evolved to become the primary statistical agency in India.

(b) Organizational Structure:

  • The NSO consists of several divisions and units responsible for different statistical functions.
  • These include the Survey Design and Research Division, Field Operations Division, Data Processing Division, National Accounts Division, Price Statistics Division, and Social Statistics Division, among others.

(c) Key organizations under NSO: Central Statistical Office (CSO)

  • The CSO is a part of the NSO and focuses on macroeconomic statistics and national income accounting.
  • It is responsible for producing key economic indicators such as the Gross Domestic Product (GDP), Index of Industrial Production (IIP), Consumer Price Index (CPI), and Wholesale Price Index (WPI).

(d) Important Surveys Conducted

  • Population Census: The NSO conducts a decennial Population Census in collaboration with the Registrar General and Census Commissioner of India. The census collects data on population size, composition, and other demographic characteristics.
  • National Sample Survey (NSS): The NSS is a large-scale household survey conducted by the NSO to collect data on various socio-economic aspects. It provides valuable information on employment, consumer expenditure, poverty, education, health, and other important indicators.
  • Economic Census: The NSO conducts the Economic Census periodically to collect data on the number of business establishments, their distribution across sectors and regions, employment, and other relevant economic variables.
  • Annual Survey of Industries (ASI): The ASI is conducted by the NSO to collect data on the performance and structure of the industrial sector in India. It covers various aspects such as employment, wages, production, and financial indicators.
  • Agricultural Census: The NSO conducts the Agricultural Census periodically to collect comprehensive data on agricultural holdings, cropping patterns, land use, irrigation, livestock, and other relevant agricultural variables.
  • Health and Morbidity Survey: The NSO conducts surveys on health and morbidity to gather data on healthcare utilization, access to healthcare services, prevalence of diseases, and other health-related indicators.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why Indian manufacturing’s productivity growth is plummeting and what can be done?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Challenges faced by India's manufacturing sector, declining productivity, and its impact on employment and economy

What is the news?

  • According to a recent study Productivity growth in Indian manufacturing has been slowing since the 1990s, with a more pronounced decline in the years leading up to the Covid-19 pandemic. Exploring the causes behind this decline is crucial to develop effective strategies for revitalizing the sector.

Central idea

  • India’s manufacturing sector has long been a matter of concern for policymakers and the subject of extensive academic research. The government has consistently aimed to increase the share of manufacturing in the country’s GDP. However, despite efforts to promote manufacturing, the sector’s contribution and overall employment has remained stagnant.

Key Facts about Manufacturing Productivity in India

  • Slowing Growth: Productivity growth in India’s manufacturing sector has been declining since the 1990s, with a significant acceleration in the mid-2010s and leading up to the Covid-19 pandemic.
  • Gap with the United States: India’s manufacturing productivity per worker is considerably lower compared to the United States. In 2020, it was only around a fifth of the productivity level in the US.
  • Regional Disparities: There are wide variations in manufacturing productivity across Indian states. Western and Central Indian states tend to have higher average productivity, while Southern and Eastern states have lower productivity levels. This contrasts with the GDP per capita rankings, where Southern states generally have higher incomes than their Western and Central counterparts.

Potential reasons behind the decline in manufacturing productivity

  • Slow Manufacturing Sector Growth: The overall growth rate of India’s manufacturing sector has been decreasing, particularly since around 2015. This sluggish growth can limit the opportunities for productivity improvement and hinder overall sector performance.
  • Insufficient Investments: Inadequate investments in technology, infrastructure, and research and development (R&D) can hamper productivity growth. Limited capital expenditure by firms may result in outdated machinery, inefficient processes, and lower productivity levels.
  • Skill Mismatch: The manufacturing sector requires a specific skill set, and a mismatch between the skills possessed by the labor force and the skills demanded by the industry can impede productivity. The lack of trained and skilled workers in areas such as advanced manufacturing techniques, automation, and specialized operations may contribute to lower productivity levels.
  • Informality and Informal Labor Market: The prevalence of informal employment in the manufacturing sector can hinder productivity growth. Informal workers often lack access to training, social security benefits, and stable employment conditions, which can lead to lower productivity levels compared to formal employment arrangements.
  • Regulatory Challenges: Cumbersome regulatory processes, including complex labor laws, bureaucratic red tape, and regulatory compliance burdens, can hamper productivity growth. These challenges may discourage investment and hinder the adoption of efficient production practices.
  • Infrastructure Deficiencies: Inadequate infrastructure, such as poor transportation networks, unreliable power supply, and limited access to technology and connectivity, can negatively impact manufacturing productivity. Insufficient infrastructure can increase costs, disrupt supply chains, and hinder efficiency in production processes.
  • Inefficient Supply Chains: Weak linkages and coordination within supply chains can contribute to lower productivity in manufacturing. Challenges such as fragmented value chains, inefficient logistics, and inadequate coordination between suppliers, manufacturers, and distributors can result in delays, increased costs, and reduced overall productivity.
  • Lack of Innovation and Technology Adoption: Limited emphasis on innovation, research, and development, as well as a slower adoption of advanced technologies, can constrain productivity growth in the manufacturing sector. Insufficient investment in technological upgrades and a reluctance to adopt new manufacturing techniques can lead to lower productivity compared to global standards.

Implications of Declining manufacturing productivity 

  • Economic Growth: Declining manufacturing productivity can hinder overall economic growth.
  • Reduced Competitiveness: Declining productivity in manufacturing can erode a country’s competitiveness in the global market. This can lead to a decline in exports and an increase in imports, negatively impacting the trade balance and potentially affecting the overall economic stability of a nation.
  • Employment and Labor Market Challenges: Lower productivity can result in reduced job creation within the manufacturing sector, leading to unemployment or underemployment.
  • Technological Progression: When productivity declines, the incentives for firms to invest in research and development or adopt new technologies may diminish, leading to a slower pace of technological advancement within the manufacturing sector.
  • Industrial Development and Diversification: A decline in productivity can hinder the growth and diversification of the manufacturing sector, limiting its ability to contribute to overall industrial development.
  • Investment and Innovation: Declining productivity in manufacturing can discourage investment and innovation within the sector.
  • Sectoral Shifts: Declining manufacturing productivity may result in a shift towards other sectors of the economy. If manufacturing becomes less competitive and less productive, resources and investments may be redirected to other sectors such as services.

What can be done? 

  • Boost Investments: Encouraging both domestic and foreign investments in the manufacturing sector can help upgrade infrastructure, improve technology adoption, and enhance productivity. This can be achieved through attractive investment policies, tax incentives, and easing of regulatory procedures.
  • Skill Development and Training: Focusing on skill development programs tailored to the manufacturing sector can address the skill mismatch and enhance the capabilities of the workforce. Collaborating with educational institutions and industry associations to design training programs and apprenticeships can ensure a skilled labor force.
  • Infrastructure Development: Prioritizing infrastructure development, including transportation networks, power supply, logistics, and digital connectivity, is essential for improving productivity. Investment in infrastructure projects can create an enabling environment for manufacturing activities and reduce operational inefficiencies.
  • Regulatory Reforms: Streamlining regulatory processes, reducing bureaucratic complexities, and simplifying labor laws can create a business-friendly environment. Establishing a favorable regulatory framework can attract investments, foster innovation, and enhance productivity in the manufacturing sector.
  • Research and Development (R&D): Encouraging R&D activities and innovation in the manufacturing sector can lead to technological advancements and productivity gains. Collaborations between industry, research institutions, and academia can facilitate knowledge transfer and promote innovation-driven manufacturing.
  • Entrepreneurship and Start-up Ecosystem: Supporting entrepreneurship and nurturing a vibrant start-up ecosystem in manufacturing can bring fresh ideas, innovation, and competitiveness. Providing access to finance, mentorship programs, and incubation support can encourage entrepreneurial growth and drive productivity.
  • International Collaborations: Strengthening international collaborations and partnerships can facilitate knowledge exchange, technology transfer, and best practice sharing. Engaging with global manufacturing networks can help Indian manufacturers learn from successful models and adapt to global standards.

Conclusion

  • The findings of this study underscore the urgent need for policy interventions to address the challenges faced by India’s manufacturing sector. Encouraging investments in workers, improving labor market conditions, and promoting a conducive business environment are crucial steps that can help revitalize India’s manufacturing sector, enhance productivity, and lift millions out of poverty.

Also read:

Revisiting India’s Manufacturing Dilemma: A Call for Comprehensive Ecosystem Development

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A macro view of the fiscal health of States

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Key economic concepts

Mains level: Fiscal imbalance and its impact on an economy

Central Idea

  • In India, the States play a crucial role in revenue mobilization, government expenditure, and borrowing. Understanding their fiscal situation is essential for drawing evidence-based conclusions about the country’s overall fiscal health.

Relevance of the topic

Despite the decrease in fiscal deficits, it remains important to address the challenges associated with fiscal imbalances, including persistence of revenue deficits in many States

Revise key concepts Fiscal deficit, revenue deficit, Debt-to-GDP ratio etc

Fiscal imbalance and its impact on an economy and thereby social welfare.

The fiscal imbalance at present

  1. Reduction in Fiscal Deficit:
  • There has been a significant reduction in fiscal deficits at both the Union and State levels. The Union’s fiscal deficit decreased from 9.1% of GDP in 2020-21 to 5.9% in 2023-24 (BE).
  • The aggregate State fiscal deficit also decreased from 4.1% of GDP in 2020-21 to 3.24% in 2022-23 (RE).
  • Major States are expected to achieve a fiscal deficit of 2.9% of GDP in 2023-24 (BE).
  1. Revenue Deficit Challenge:
  • Despite the reduction in fiscal deficits, there is persistence of revenue deficits in many States.
  • Out of the 17 major States analyzed, 13 have a deficit in the revenue account for the fiscal year 2023-24 (BE).
  • Seven States, namely Andhra Pradesh, Haryana, Kerala, Punjab, Rajasthan, Tamil Nadu, and West Bengal, experience fiscal deficits primarily driven by revenue deficits.
  1. High Debt-to-GSDP Ratios: Some of the States with revenue deficits also have high debt-to-GSDP ratios. This indicates that these States have accumulated significant levels of debt relative to their Gross State Domestic Product (GSDP).

The Impact of fiscal imbalance on an Economy

  • Macroeconomic Instability: Fiscal imbalances, such as high fiscal deficits and revenue deficits, can lead to macroeconomic instability. Large deficits may increase government borrowing, which can put upward pressure on interest rates, crowd out private investment, and potentially lead to inflationary pressures. This instability can hinder economic growth and create uncertainty in the business environment.
  • Increased Debt Burden: Persistent fiscal imbalances often result in increased government debt levels. High levels of public debt can have adverse consequences, including increased debt servicing costs, reduced fiscal flexibility, and potential credit rating downgrades. A higher debt burden can also limit the government’s ability to invest in critical areas such as infrastructure, education, and healthcare.
  • Reduced Public Investments: Fiscal imbalances may necessitate fiscal consolidation measures, such as expenditure cuts and reduced public investments. This can impact critical areas of public spending, including infrastructure development, social welfare programs, and public services. Reduced investments can hinder long-term economic growth and development.
  • Limited Policy Space: Fiscal imbalances can limit the government’s ability to implement countercyclical fiscal policies during economic downturns. A high debt burden or constrained fiscal capacity may prevent the government from effectively using fiscal stimulus measures to boost aggregate demand and support economic recovery.
  • Pressure on Social Welfare: Fiscal imbalances may lead to reductions in social welfare programs and public services. Austerity measures implemented to address fiscal imbalances can disproportionately affect vulnerable populations and hinder efforts to address income inequality and social welfare needs.
  • Investor Confidence and Credit Ratings: Persistent fiscal imbalances can erode investor confidence and negatively impact the country’s credit ratings. A lower credit rating can increase borrowing costs, discourage foreign investment, and limit access to international capital markets.
  • Inter-Generational Equity: Fiscal imbalances, particularly when driven by high levels of public debt, can have inter-generational equity implications. The burden of repaying debt and managing fiscal imbalances may fall on future generations, impacting their ability to invest, save, and achieve sustainable economic growth.

Reducing Revenue deficit: Way forward

  • Link Interest-Free Loans to Revenue Deficit Reduction: Implement a mechanism where interest-free loans provided by the Union Government to States are linked to a reduction in revenue deficits. This incentivizes States to prioritize revenue generation and reduce reliance on borrowed funds for revenue expenditure.
  • Defined Time Path for Revenue Deficit Reduction: Establish a clear timeline and targets for reducing revenue deficits in States. This includes setting specific goals for revenue deficit reduction and developing a credible fiscal adjustment plan to achieve those targets.
  • Performance Incentive Grants: Introduce performance incentive grants to reward States that effectively reduce their revenue deficits. The grants can be designed based on the recommendations of previous Finance Commissions, considering factors such as the extent of deficit reduction, fiscal discipline, and efficient revenue management.
  • Fiscal Adjustment and Expenditure Rationalization: Encourage States to undertake fiscal adjustment measures to align revenue and expenditure. This involves conducting a detailed analysis of expenditure patterns, prioritizing essential spending, and identifying areas for rationalization and efficiency gains.
  • Strengthen Revenue Mobilization: Enhance efforts to improve revenue mobilization by implementing measures such as broadening the tax base, improving tax administration and compliance, and exploring new revenue sources. This includes ensuring effective collection of Goods and Services Tax (GST) and non-GST revenues.
  • Public Financial Management Reforms: Strengthen public financial management systems to enhance transparency, accountability, and efficient utilization of resources. This includes improving budgeting processes, expenditure tracking, and financial reporting mechanisms to monitor and control revenue and expenditure.
  • Long-Term Revenue Planning: Develop a comprehensive long-term revenue plan that aligns with the country’s development goals. This involves forecasting revenue trends, identifying potential revenue sources, and implementing policies that support sustainable revenue generation over the long term.
  • Capacity Building: Invest in building the capacity of State governments in revenue management, tax administration, and expenditure control. This includes providing training and technical assistance to enhance their skills and capabilities in managing revenue deficits effectively.
  • Public Awareness and Participation: Conduct public awareness campaigns to educate citizens about the importance of revenue generation, fiscal discipline, and the impact of revenue deficits on public services. Foster public participation in budgeting processes to promote transparency and accountability.
  • Regular Monitoring and Reporting: Establish a robust monitoring and reporting mechanism to track the progress of revenue deficit reduction efforts. Regularly assess and report the performance of States in revenue mobilization and deficit reduction to ensure accountability and facilitate necessary corrective actions.

Prelims mark enhancerDeficit Financing in India | Financing | EconomicsDebt to GDP Ratio - What Is It, Formula & Calculation

Conclusion

  • Effectively managing revenue deficits is crucial for achieving fiscal balance and sustainable economic growth. By adopting a macro view and implementing appropriate measures and incentives, India can consolidate revenue deficits in its States. This would ensure fiscal stability, stimulate State-specific growth, and maintain macroeconomic stability at the national level

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Greedflation and its Counter Arguments

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Greedflation

Mains level: NA

greedflation

Central Idea: Greedflation

  • The concept of “Greedflation” has emerged, suggesting that corporate greed for higher profits is a significant cause of the high inflation experienced in the United States since the pandemic.
  • Proponents of this theory argue that increased corporate profit margins have contributed to rising prices.
  • However, many economists question the validity of this narrative and offer alternative explanations for inflation.

Inflation and Business Pricing

  • Pricing Dynamics: Businesses set prices based on consumer willingness to pay, aiming to maximize profits.
  • Consumer Influence: Consumers ultimately determine the market price through their buying decisions.
  • Market Competition: Businesses unable to sell products at high prices must lower prices to clear their stock.

Inflation as a Macro-Level Phenomenon

  • Widespread Price Rise: Inflation refers to a general increase in the price level across the economy.
  • Corporate Influence on Prices: Corporations can impact overall prices by reducing supply, but there is no evidence of deliberate output reduction.
  • Monetary Policy and Inflation: The expansionary monetary policy of the U.S. Federal Reserve, combined with supply-chain disruptions, explains recent inflation.

Rising Corporate Profit Margins

  • Rising Costs vs. Consumer Prices: Input costs have risen faster than consumer goods prices, leading to unexpected profit margin growth.
  • Corporate Profits vs. Wider Economy: Large corporations may have benefited from smaller business closures during the pandemic, but they represent a small portion of the overall economy.
  • Profit Margins and Inflation: Rising profit margins do not directly cause high inflation; prices are determined by buyers, not sellers.

Critique of “Greedflation” as Cost-Push Inflation

  • Cost-Push Inflation Comparison: Greedflation is likened to cost-push inflation theories that attribute price increases to rising input costs.
  • Consumer Influence on Costs: The cost of inputs is indirectly determined by consumers through competitive bidding in the market.

Conclusion

  • The notion of greedflation, attributing high inflation to corporate greed, lacks support from economists who emphasize the influence of consumer behaviour and macroeconomic factors.
  • While rising profit margins of corporations may indicate market dominance, they do not directly drive inflation.
  • Instead, factors such as monetary policy and supply disruptions better explain the recent inflationary pressures experienced in the United States.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What the Indian economy needs to complete with China

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various Economic indicators

Mains level: India's economic position compared to China and the Lessons learned from China

Central Idea

  • The Indian economy has reached a milestone, surpassing $3.5 trillion in size, reminiscent of China’s position in 2007. While India shows similarities with China, such as comparable per capita income, the two countries diverge significantly in their growth drivers. This divergence has implications for India’s growth trajectory and its ability to achieve upper middle-income status.

Relevance of the topic

India lags behind China on multiple fronts such as investment ratios, export performance, labor force participation, and manufacturing employment. For instance, Female Labor Force Participation of China is 61% (2022) whereas in India it stands at 24% (2022).

The stark disparities provide valuable insights to analyze and propose strategies for India’s future development in areas like investment promotion, export competitiveness, and inclusive growth.

India’s positive growth

  • Economic Size: The Indian economy has recently crossed $3.5 trillion in size, according to Moody’s. This indicates a significant expansion of the economy and reflects positive growth.
  • Per Capita Income: India’s per capita income is projected to rise from $2,379 in 2022 to $2,601 in 2023, as estimated by the International Monetary Fund (IMF). This upward trend indicates an improvement in individual income levels and suggests positive growth in the economy.
  • Exports: India’s exports of goods and services exceeded $770 billion in 2022-23. This demonstrates the country’s ability to compete in the global market and generate revenue through international trade.
  • Investment Momentum: While India’s investment ratio has been lower than China’s, there are signs of activity picking up in certain sectors after a slowdown induced by the twin balance sheet problem. This indicates positive momentum in investment and the potential for future growth.
  • Services Sector: India has witnessed a growth in the services sector, particularly in areas such as IT and business process outsourcing (BPO). The expansion of the services sector contributes to economic growth and job creation.
  • Increase in Formal Manufacturing: India aims to boost formal manufacturing, which has higher productivity compared to other sectors. The focus on manufacturing can lead to increased employment opportunities and overall economic growth.
  • Rise in Female Labor Force Participation: Although India’s female labor force participation rate remains lower than China’s, there have been efforts to increase women’s participation in the workforce. This can contribute to enhanced productivity, economic empowerment, and overall growth

Comparison: India’s economic position with China

Aspect China (2007) India (2023)
GDP Size Comparable to India $3.5 trillion
Per Capita Income $2,694 $2,601 (estimated)
Investment-to-GDP Ratio Average 40% Average around 33%
Exports $1.2 trillion (goods) $770 billion (goods and services)
Tariff Rate 10.69% (2003) to 5.32% (2020) 25.63% (2003) to 8.88% (2017)
Labor Force Participation Rate Almost 73% Estimated around 50% (2022)
Female Labor Force Participation 66% (2007) to 61% (2022) 30% (2007) to 24% (2022)
Passenger Car Sales 6.3 million 3.8 million
Manufacturing Productivity Twice as productive as transport Less productive than industry and construction

The disparities between India and China

  • Investment Ratio: China’s investment-to-GDP ratio averaged 40% between 2003 and 2011, while India’s investment ratio during the same period averaged around 33%. This indicates that China had a higher level of investment, which contributed to its rapid economic growth.
  • Export Performance: In 2022-23, India’s exports of goods and services surpassed $770 billion, while China’s exports had already crossed $1.2 trillion in 2007. China’s deeper integration with the global economy and higher export volumes indicate a more robust export-driven growth model compared to India.
  • Tariff Rates: China experienced a decline in tariff rates, with the simple mean falling from 10.69% in 2003 to 5.32% in 2020. In contrast, India’s tariff rate decreased from 25.63% in 2003 to 8.88% in 2017 but has risen thereafter. China’s lower tariff rates have facilitated its emergence as a global supply chain hub.
  • Labor Force Participation: China had a considerably higher labor force participation rate, with almost 73% in 2007, while India’s rate stood at around 50% in 2022. The disparity, primarily driven by female labor force participation, impacts spending capacity and economic growth potential.
  • Sectoral Employment: Both countries have similar sectoral distribution, but China experienced a faster decline in agricultural employment compared to India. India’s challenge lies in finding alternative employment opportunities for its declining agricultural workforce, with the construction and service sectors historically providing more jobs than formal manufacturing.

Implications of these disparities for future development of India

  • Growth Trajectory: The disparities in investment ratios indicate that India may face challenges in achieving rapid economic growth and reaching its developmental goals without increasing investment levels.
  • Export Competitiveness: The disparities in export performance suggest that India needs to enhance its global competitiveness to expand its export base and capitalize on international trade opportunities.
  • Job Creation: The disparities in labor force participation rates, particularly the low female participation rate, have implications for employment generation and inclusive growth in India.
  • Sectoral Shift: The slower decline in agricultural employment compared to other sectors raises concerns about the need for alternative employment opportunities for the declining agricultural workforce
  • Investment Climate: The disparities in investment ratios underscore the importance of creating a favourable investment climate in India to attract domestic and foreign investments necessary for sustained economic growth.

Lessons learned from China

  • Emphasis on Investment: China’s high investment-to-GDP ratio played a crucial role in its rapid economic growth. India can benefit from prioritizing investments in infrastructure, industries, and human capital development to drive economic expansion and productivity.
  • Export-Led Growth: China’s success in becoming a global manufacturing and exporting powerhouse highlights the importance of export-led growth. India can focus on enhancing its export competitiveness, diversifying export markets, and promoting value-added exports to boost economic growth and job creation.
  • Trade Liberalization: China’s gradual reduction of tariffs and its efforts to integrate into global supply chains helped it become a major player in international trade. India can learn from this and work towards reducing trade barriers, improving trade infrastructure, and actively participating in regional and global trade agreements to enhance its integration into the global economy.
  • Manufacturing Development: China’s strategic focus on developing its manufacturing sector contributed significantly to its economic growth and job creation. India can prioritize the growth of formal manufacturing, foster a business-friendly environment, and provide targeted support to enhance manufacturing capabilities and competitiveness.
  • Infrastructure Development: China’s investments in infrastructure, such as transportation networks, energy systems, and telecommunications, played a vital role in supporting its economic growth. India can invest in modernizing and expanding its infrastructure to create a solid foundation for economic development and attract further investments.
  • Human Capital Development: China’s emphasis on education, skills training, and research and development (R&D) has contributed to its technological advancement and innovation capabilities. India can focus on improving the quality of education, enhancing vocational training programs, and promoting research and development to nurture a skilled workforce and foster innovation.
  • Long-Term Planning: China’s long-term development plans, such as its Five-Year Plans, provided a roadmap for sustained economic growth and policy continuity. India can develop comprehensive and strategic plans that align with its development goals and ensure consistent implementation of economic policies.
  • Infrastructure for Special Economic Zones (SEZs): China’s establishment of SEZs played a pivotal role in attracting foreign direct investment and promoting export-oriented manufacturing. India can learn from this model and develop specialized zones with the necessary infrastructure, incentives, and supportive policies to attract investments and promote targeted sectors.

Conclusion

  • In the coming years, India’s growth may continue at a moderate pace, even if low- and semi-skilled job creation in manufacturing falls short. However, achieving the explosive growth witnessed by China between 2007 and 2021 would require increased investment activity, a resurgence in exports (particularly goods), a rise in female labor force participation, and greater employment opportunities in formal manufacturing. India must strive to replicate the success story of its neighbor if it aims to achieve rapid economic advancement.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s Middle Class: Estimation, Expansion and Economic Impact

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Middle class woes in India

middle class

Central Idea

  • Estimating India’s middle class: This article delves into the estimation of India’s middle class, a crucial indicator of household consumption and the economy’s health.

Key points of discussions

  • Lack of clarity in defining the middle class: The absence of a clear definition results in diverse estimations, based on subjective judgments or income ranges and consumption benchmarks.
  • Importance of expanding the middle class: Despite the impact of the existing middle class, the focus is shifting towards significant expansion to unleash India’s economic potential.

Understanding a Genuine Middle Class

  • Characteristics of a genuine middle class: It entails stable and resilient consumption patterns, enabling them to weather economic downturns without significantly reducing consumption.
  • Implications for investors and the economy: A stable and resilient middle-class demand instills investor confidence, leading to job creation and reinforcing the middle class. Surplus income contributes to overall savings.
  • Continuous income improvement: A strong foundation for continuous income growth within the middle class drives higher-quality consumption and stimulates diverse and high-quality supply responses.

Features of the Indian Middle Class

  • Stable income
  • Higher levels of education and skills
  • Limited disposable income for discretionary spending
  • Homeownership aspirations
  • Access to credit and financing
  • Affordability of consumer durables and comforts
  • Prioritization of healthcare and insurance
  • Emphasis on savings and investments
  • Associated with upward social mobility
  • Value placed on education and success
  • Active civic engagement

Estimating India’s Genuine Middle Class

middle class

  • Discrepancy in popular estimates: Popular estimates tend to overstate the middle class’s size, obscuring the actual extent.
  • Concentration within the richest deciles: India’s genuine middle class is primarily concentrated within the richest 10 to 20 percent of households rather than uniformly distributed.
  • Concerns about occupation profiles: Instability characterizes the occupation profiles of the richest deciles, with a reliance on small agricultural land and informal non-agricultural occupations.
  • Limited upward mobility: Chief wage earners in the richest deciles demonstrate limited potential for upward mobility into higher-skilled occupations.

Issues faced by the Indian Middle Class

  • Income Stagnation: Many middle-class individuals in India struggle with stagnant income levels, with limited opportunities for significant wage growth or promotions.
  • Rising Cost of Living: The increasing cost of essential goods and services, including housing, education, healthcare, and transportation, often outpaces income growth, putting financial strain on the middle class.
  • Inflationary Pressures: Inflation rates impact the purchasing power of the middle class, making it challenging to maintain their standard of living and meet their financial obligations.
  • Job Insecurity: Middle-class individuals face concerns about job security, as economic uncertainties and technological advancements lead to changes in job markets and potential layoffs.
  • Healthcare Expenses: Rising healthcare costs and limited access to quality healthcare put a significant burden on the middle class, impacting their financial well-being and ability to seek necessary medical care.

Consequences of Limited Middle-Class Expansion

middle class

  • Economic implications: The limited expansion of the middle class hinders the economy from reaching its fullest potential in terms of consumption, investments, and job creation.
  • Inequality concerns: A small middle class contributes to income inequality, as a significant portion of the population remains deprived of upward mobility and economic opportunities.
  • Overreliance on the affluent: The concentration of economic power and consumption within the richest deciles may result in skewed market dynamics and limited inclusivity.

Strategies for Expanding the Middle Class

  • Enhancing education and skill development: Investing in education and skill-building initiatives to equip individuals with the qualifications needed for higher-skilled occupations.
  • Promoting entrepreneurship and small businesses: Creating an enabling environment for entrepreneurial growth, which can generate jobs and foster economic resilience within the middle class.
  • Strengthening social safety nets: Developing robust social safety nets to provide support during economic downturns and help individuals bounce back without significant setbacks.
  • Addressing informal employment: Implementing policies that promote formalization of employment, providing stability and better benefits for workers.

Way forward

  • Strengthen financial literacy: Implement comprehensive programs, accessible resources, and collaborations to improve understanding of personal finance.
  • Promote entrepreneurship and innovation: Foster an ecosystem with resources, mentorship, and support for middle-class individuals starting businesses.
  • Build social safety nets: Establish comprehensive programs for unemployment benefits, healthcare coverage, and retraining support during economic shocks.
  • Foster social dialogue: Create platforms for inclusive discussions, partnerships, and collaborations between policymakers, businesses, and the middle class.
  • Prioritize work-life balance: Advocate for family-friendly policies, flexible work arrangements, and support for well-being and productivity.
  • Support family-friendly policies: Implement policies for affordable childcare, parental leave, and flexible work arrangements to support work-life balance.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI Monetary Policy Update

Note4Students

From UPSC perspective, the following things are important :

Prelims level: RBI Monetary Policy Committee

Mains level: Read the attached story

rbi monetary policy

Central Idea

  • This article discusses the recent policy review by the MPC (Monetary Policy Committee) and its implications for India’s economy.
  • The MPC is responsible for making decisions regarding the repo rate and determining the policy stance to achieve specific economic objectives.

Key highlights by RBI

  • Repo Rate: Kept unchanged at 6.50%
  • Standing Deposit Facility (SDF) Rate: Remains unchanged at 6.25%
  • Marginal Standing Facility (MSF) Rate and Bank Rate: Unchanged at 6.75%
  • Target Inflation: Medium-term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2%

RBI Monetary Policy Committee

Purpose Make decisions on monetary policy in India
Constituted by RBI Act, 1934
Objective Maintain price stability and foster economic growth
Members
  • 3 officials from the RBI,
  • 3 external members appointed by the Government of India
Chairperson Governor of the RBI
Decision Factors
  • Economic and financial developments
  • Inflation trends
  • Macroeconomic conditions
Key Tools Policy interest rate (Repo rate)

Policy stance

Impact of Decisions
  • Borrowing costs
  • Liquidity in the banking system
  • Overall economic environment

 

Various MPC tools

Description
Repo Rate Rate at which the central bank lends money to commercial banks
Reverse Repo Rate Rate at which the central bank borrows money from commercial banks
Cash Reserve Ratio (CRR) Portion of banks’ deposits that they must hold as reserves with the central bank
Statutory Liquidity Ratio (SLR) Percentage of certain assets that banks are required to maintain in their portfolio
Open Market Operations (OMOs) Buying and selling of government securities by the central bank in the open market
Marginal Standing Facility (MSF) Facility allowing banks to borrow funds overnight from the central bank against eligible securities
Liquidity Adjustment Facility (LAF) Repo and reverse repo rates used by banks to manage their liquidity needs
Policy Stance and Communication MPC’s approach to monetary policy and communication of decisions and outlook

Key outlooks

  • GDP growth and inflation forecasts: GDP growth forecasts provide insights into the expected pace of economic expansion, while inflation forecasts help gauge price stability and purchasing power.
  • Stability of forecasts: The MPC’s latest review indicates relatively little change in the GDP growth and inflation forecasts, reflecting a consistent outlook for the economy.
  • Goldilocks metaphor for the economy: The reference to a Goldilocks moment alludes to an ideal state where the economy operates optimally, striking a balance between high inflation (too hot) and faltering GDP growth (too cold). RBI surveys on consumer confidence and inflation expectations suggest a positive and favourable economic environment.

Positive Developments

  • Surprising GDP growth: India’s GDP growth in FY23 exceeded the RBI’s expectations, reaching 7.2% instead of the projected 7%.
  • Decrease in headline retail inflation: Retail inflation dropped to 4.7% in April, marking the lowest reading since November 2021.
  • Consumption recovery and private investments: The anticipation of a robust Rabi crop production and a normal monsoon, combined with the government’s emphasis on capital expenditure, suggests a potential increase in consumption levels and private investments.
  • Increase in consumer confidence: Consumer confidence is gradually improving, while Indian families expect inflation to stabilize at a more manageable level.

Major considerations

  • Expected deceleration in GDP: Despite positive indicators, the MPC anticipates a slowdown in GDP growth from 7.2% to 6.5% in FY24, with professional forecasters projecting an even lower growth rate of 6%.
  • Consumer confidence still in negative territory: While consumer confidence metrics show improvement, they remain below the 100 mark, indicating prevailing pessimism among the public.
  • Headwinds and potentially economic challenges: Various factors, including weak global demand, volatility in global financial markets, geopolitical tensions, and the potential impact of El Nino on the monsoon, pose potential risks to India’s economy.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s GDP: Post-Pandemic Growth and Investment Challenges

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's economic growth and other indicators

Mains level: Investment and Growth prospect and impact on GDP, future growth

growth

Central Idea

  • India’s GDP level is still 5 percent below its pre-pandemic trajectory, despite recording an average growth rate of 8 percent over the past two years. This indicates the lasting impact of the pandemic and highlights the need for sustained growth of over 7-8 percent to avoid further GDP loss.

Factors Contributing to Sluggish Investment and Growth

  • Global Trade Stagnation: Since the global financial crisis, global trade has experienced a slowdown, affecting India’s export-oriented industries and reducing foreign direct investment (FDI) inflows.
  • Uncertain Economic Environment: Economic uncertainties, both domestic and global, have led to a cautious approach from businesses, resulting in lower investment levels. Factors such as policy volatility, regulatory hurdles, and geopolitical tensions contribute to this uncertainty.
  • Decline in Corporate Investment: Corporate investment as a percentage of GDP has declined from its peak of nearly 14.5 percent in 2007-08 to around 10.5 percent. This decline can be attributed to factors like sluggish demand, high corporate debt, and a lack of investor confidence.
  • Slowdown in Residential Housing: The slowdown in the real estate sector, particularly residential housing, has adversely impacted overall investment. Factors such as liquidity issues, regulatory changes, and subdued demand have led to reduced investment in the sector.
  • Falling Small and Medium-Sized Enterprise (SME) Investment: Investment from SMEs, which play a crucial role in driving economic growth and job creation, has witnessed a decline. Barriers such as limited access to credit, regulatory complexities, and lack of technological capabilities hamper their investment potential.
  • Insufficient Public Sector Compensation: While the central government has increased public sector investment, the overall public sector investment as a percentage of GDP has remained unchanged at 7 percent since the global financial crisis. This lack of compensation from the public sector has limited its ability to boost overall investment levels.
  • Lack of “Crowd-in” Effect: The public sector’s inability to “crowd-in” private investment has contributed to sluggish growth. Despite efforts to stimulate private investment, the overall investment climate and business environment need further improvements to attract private players.
  • Economic Challenges and Policy Reforms: India faces challenges such as demographic shifts, falling productivity, high indebtedness, structural inflation, and interest rates. These factors affect investor sentiment and may hinder investment and growth prospects.

Impact of Sluggish Investment and Growth on GDP

  • Lower Economic Output: With reduced investment, businesses have fewer resources to expand operations, develop new products, and create employment opportunities. This, in turn, limits the overall output and growth potential of the economy.
  • Unutilized Capacity: Slower investment hampers the utilization of existing productive capacity in various sectors. This underutilization leads to inefficiencies, decreased productivity, and a reduced contribution to GDP growth.
  • Employment Generation: When businesses are hesitant to invest and expand, it results in limited employment opportunities. This can lead to higher unemployment rates, underemployment, and reduced household incomes, negatively impacting consumer spending and overall economic growth.
  • Impaired Productivity: A lack of investment hampers productivity-enhancing measures such as adopting advanced technologies, improving infrastructure, and fostering innovation. Insufficient investment in research and development, training, and upgrading of machinery and equipment can lead to lower productivity levels.
  • Reduced Business Confidence: When businesses lack confidence in the economy’s future prospects, they may delay or scale back investment plans, impacting productivity and growth. This can create a cycle of low investment and weak growth, further undermining business confidence.
  • Fiscal Challenges: Reduced tax revenues and increased demand for social welfare programs can strain public finances, making it challenging for the government to allocate resources for critical development projects, infrastructure, and public services that contribute to economic growth.
  • Macroeconomic Imbalances: Sluggish investment and growth can lead to macroeconomic imbalances, such as a higher fiscal deficit, current account deficit, and inflationary pressures. These imbalances can negatively affect the overall stability of the economy and impede sustained and inclusive growth.

Factors Influencing Future Growth

  • Policy Reforms and Ease of Doing Business: The implementation of structural reforms and policies that promote ease of doing business can have a significant impact on future growth. Streamlined regulations, transparent governance, and business-friendly policies attract investment, foster entrepreneurship, and drive economic expansion.
  • Infrastructure Development: Adequate and modern infrastructure, including transportation networks, power supply, digital connectivity, and social infrastructure, is crucial for sustainable economic growth.
  • Human Capital Development: Investing in education, skill development, and healthcare contributes to the development of a skilled workforce, which is essential for innovation, productivity, and long-term economic growth.
  • Technological Advancements and Digitalization: Embracing emerging technologies and fostering digitalization can boost productivity, enhance efficiency, and spur innovation. Investments in research and development, digital infrastructure, and technological adoption can drive future growth in sectors such as manufacturing, services, and agriculture.
  • Trade and Global Integration: Expanding international trade and deepening economic integration can open up new markets, attract investments, and drive economic growth. Participation in regional and global trade agreements, removing trade barriers, and diversifying export markets can enhance competitiveness and create new opportunities for growth.
  • Sustainable Development and Climate Change Mitigation: Transitioning towards sustainable practices, renewable energy, and green technologies can contribute to long-term growth while addressing environmental challenges. Investing in climate change mitigation and adopting sustainable practices can attract investments and promote responsible and inclusive growth.
  • Financial Inclusion and Access to Credit: Promoting financial inclusion and ensuring access to affordable credit for businesses and individuals can fuel entrepreneurial activities, stimulate investment, and support consumption-led growth.
  • Political Stability and Good Governance: Political stability, effective governance, and the rule of law provide a conducive environment for economic growth. Sound institutions, transparent decision-making processes, and the fight against corruption inspire confidence among investors and foster long-term economic development.

Supply Chain Relocation

  • “China + One” Strategy: The supply chain relocation trend known as the “China + One” strategy involves companies diversifying their manufacturing and sourcing activities by establishing additional production facilities outside of China.
  • Limited Absorption Capacity: While economies like India, Mexico, and Vietnam stand to benefit from the “China + One” strategy, their absorption capacity for large-scale relocations may be limited. These economies might not have the infrastructure, skilled workforce, or supporting ecosystem to absorb a significant influx of relocation investments.
  • Size Matters: Inward FDI into China has remained substantial, indicating its continued attractiveness as a manufacturing hub. The sheer size of China’s market, its infrastructure, and established supply chains make it challenging for other economies to fully replace or surpass its role as a global manufacturing powerhouse.
  • Security-Driven Relocation: Another aspect of supply chain relocation involves security concerns, particularly in advanced technology sectors such as advanced semiconductors, AI, and quantum computing. Countries, especially in the West, may relocate supply chains related to these emergent technologies to regions considered within their “circle of trust,” often referring to NATO and close allies.

Climate Change and Investment Opportunities

  • Renewable Energy: The transition to a low-carbon economy presents significant investment opportunities in renewable energy sources such as solar, wind, hydro, and geothermal power. Investments in renewable energy infrastructure, research and development, and technology advancements can drive the growth of clean energy industries and contribute to decarbonization efforts.
  • Energy Efficiency: Investments in energy-efficient technologies and practices can help reduce greenhouse gas emissions and lower energy consumption. Energy-efficient buildings, smart grids, efficient transportation systems, and industrial processes offer attractive investment opportunities that promote sustainability and cost savings.
  • Sustainable Infrastructure: Developing sustainable infrastructure, including green buildings, eco-friendly transportation systems, waste management facilities, and water conservation projects, presents opportunities for investment. Sustainable infrastructure projects can enhance resilience, reduce environmental impacts, and contribute to sustainable development goals.
  • Green Finance and Investment Products: The growing demand for sustainable investments has led to the emergence of green finance and investment products. These include green bonds, sustainable funds, and impact investments that prioritize environmental, social, and governance (ESG) factors. Investing in such financial products can align with climate change mitigation goals while generating financial returns.
  • Carbon Capture and Storage (CCS): Investments in CCS technologies and infrastructure can help capture and store carbon dioxide emissions from industrial processes, power generation, and other sectors. CCS offers potential solutions to reduce emissions in industries that are challenging to decarbonize and can contribute to achieving climate goals.
  • Circular Economy: Shifting towards a circular economy model, which focuses on reducing waste, recycling materials, and promoting resource efficiency, presents investment opportunities. Investments in waste management, recycling facilities, and innovative circular business models can drive sustainability and reduce the environmental impact of traditional linear production and consumption systems.
  • Sustainable Agriculture and Forestry: Investments in sustainable agricultural practices, precision farming technologies, agroforestry, and sustainable forestry management contribute to climate change mitigation and adaptation. These investments can enhance food security, conserve biodiversity, and promote sustainable land use.

Conclusion

  • India’s economic recovery from the pandemic has been encouraging, but the gap between current GDP levels and the pre-pandemic trajectory needs to be addressed. To achieve sustained growth, India must focus on revitalizing private investment, improving the investment climate, and actively participating in the global transition to a low-carbon economy. Only then can India mitigate the long-term scarring effects of the pandemic and ensure a prosperous future.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Also read:

Indian Economic Growth Prospects: A Comprehensive Analysis

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Revisiting India’s Manufacturing Dilemma: A Call for Comprehensive Ecosystem Development

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's Services and manufacturing sector

Mains level: India's Manufacturing versus Services Debate, performance, challenges and way forward

Manufacturing

Central Idea

  • The ongoing debate regarding India’s preferred path for economic growth, whether it should prioritize manufacturing or services, has resurfaced in public discussions. While India’s software exports previously flourished, questioning why the services sector couldn’t spearhead the nation’s progress. In light of the disappointing manufacturing growth post the 1991 economic reforms, it becomes evident that a structural obstacle inhibits the sector’s progress

Unfulfilled Promises of Manufacturing Reforms

  • Limited Increase in Manufacturing Share: Despite the economic reforms of 1991, which were primarily focused on manufacturing, there was not a significant increase in the share of manufacturing in the economy. The expected growth and expansion in the sector did not materialize as anticipated.
  • Rising Income Inequality: Although there have been qualitative improvements in the range and quality of products manufactured in India since 1991, the limited expansion of manufacturing in proportion to the overall economy has resulted in a rising income inequality. The benefits of these improvements have not been distributed equitably across the population.
  • Persistence of Structural Challenges: Despite policy initiatives and reforms focused on manufacturing, the sector continues to face deep-rooted structural challenges. These challenges have impeded the sector’s growth and hindered its ability to reach its full potential. There is a need for a comprehensive approach to address these underlying issues.
  • Limited Demand Constraints: Manufacturing growth is constrained by demand considerations, which are largely independent of supply-side reforms. Household demand for manufactured goods is closely linked to the satisfaction of basic necessities such as food, housing, health, and education. The dominance of food expenditure in a significant portion of Indian households limits the growth of demand for other manufactured products.
  • Educational Gap and Skill Development: India lags behind successful manufacturing nations in terms of educational outcomes. Poor performance in international assessments and low literacy and numeracy levels among Indian children highlight the need for significant improvements in the education system.
  • Insufficient Focus on Ecosystem Development: The economic reforms of 1991 primarily focused on policy changes but overlooked the need for a comprehensive ecosystem to support manufacturing growth. This ecosystem should encompass aspects such as schooling, training, infrastructure, and supportive policies. A more holistic approach is required to build a conducive environment for the manufacturing sector to flourish.

Recent Initiatives and Underwhelming Performance

  • Make in India: Launched in 2014, this initiative aimed to promote manufacturing in India and attract foreign direct investment (FDI). Despite its ambitious goals, the initiative has not yielded the expected results in terms of substantial manufacturing growth and contribution to the economy.
  • Production-Linked Incentive (PLI) Scheme: This scheme, introduced more recently, provides production subsidies to incentivize the manufacturing of specific products. While announced with fanfare, the article highlights that the record of these schemes has been unimpressive.
  • Low Manufacturing Growth: The first advance estimates for 2022-23, as mentioned in the article, indicate a manufacturing growth rate of only 1.3% for the year. This growth rate lags behind agriculture and major segments of the services sector, suggesting a lack of substantial progress in manufacturing.

The Need for a Manufacturing Push in India’s economy

  • Job Creation: Manufacturing sectors have the potential to generate a significant number of jobs, particularly for the growing workforce in India. The government and policymakers recognize the importance of manufacturing in addressing the unemployment challenge and providing livelihoods for the population.
  • Economic Growth: A vibrant manufacturing sector can contribute to overall economic growth. By expanding manufacturing, India can increase its GDP and strengthen its position as a global economic player. A robust manufacturing base can enhance productivity, attract investments, and drive economic development.
  • Private Sector Readiness: The finance minister, in addressing corporate leaders, emphasizes that the private sector needs to be ready to contribute to the manufacturing push. The private sector’s active involvement is seen as crucial for driving manufacturing growth.
  • Public Investment: The government’s increased capital expenditure in the last Union Budget is expected to support the private sector by raising aggregate demand. This investment in infrastructure and other sectors can provide a stimulus to manufacturing and create an enabling environment for its expansion.

Demand Constraints and the Role of Food

  • Household Expenditure: Demand for manufactured goods is influenced by household expenditure patterns, which are largely determined by the satisfaction of basic necessities such as food, housing, health, and education. These necessities take up a significant share of household expenditure and are considered non-discretionary expenses that cannot be postponed.
  • Food Expenditure: Food occupies a large share of expenditure for a substantial section of Indian households. The high share of food expenditure leaves a smaller portion of disposable income available for spending on other goods and services, which can constrain the growth of demand for manufactured products.
  • Negative Relationship with Per Capita Income: Globally, there is a strong negative relationship between per capita income and the share of food in household expenditure. Wealthier countries, such as the United States and Singapore, tend to have lower shares of expenditure allocated to food. In contrast, India, with its lower GDP per capita, experiences a larger share of food expenditure, which can limit the growth of demand for manufactured products.
  • Manufacturing Demand Implications: The dominance of food expenditure in household budgets suggests that the demand for manufactured goods is closely linked to the satisfaction of basic needs. As households prioritize spending on food, housing, health, and education, the demand for other manufactured products may be constricted, affecting the growth potential of the manufacturing sector.
  • Export Potential: Smaller countries in East Asia have achieved significant manufacturing growth by relying on global markets rather than relying solely on their domestic markets. By diversifying into exports, manufacturers can tap into broader consumer markets and mitigate the constraints imposed by domestic demand limitations.

Exports as a potential solution for the manufacturing sector

  • Overcoming Limited Domestic Market: Exporting provides a significant opportunity for the manufacturing sector to overcome the constraints of a limited domestic market. By tapping into global markets, manufacturers can reach a larger customer base and increase their sales potential beyond domestic demand alone.
  • Diversification of Markets: Exporting allows manufacturers to diversify their markets and reduce dependency on a single market. This helps mitigate risks associated with fluctuations in domestic demand or economic conditions in the home country.
  • Global Competitiveness: To succeed in the export market, manufacturers need to focus on enhancing their global competitiveness. This includes factors such as product quality, innovation, pricing, branding, and customer service. Manufacturers must strive to offer products that meet international standards and are competitive in terms of cost and quality.
  • Infrastructure and Logistics: Manufacturers need reliable transportation networks, including roads, railways, and ports, to move their goods to international markets. Access to efficient seaports, airports, and customs facilities helps streamline export processes and reduce turnaround times.
  • Cost of Production: Manufacturers need to ensure that their cost structure, including labor, raw materials, energy, and overheads, is competitive compared to other exporting countries. Cost-efficient production methods and economies of scale can contribute to enhancing export competitiveness.
  • Trade Agreements and Market Access: Engaging in trade agreements and securing preferential market access can provide manufacturers with a competitive advantage. By accessing markets with reduced tariffs or trade barriers, manufacturers can improve their competitiveness and expand their export opportunities.
  • Export Promotion and Support: Governments can play a crucial role in supporting exports through export promotion initiatives, financial incentives, export credit facilities, and market intelligence services. These measures help manufacturers navigate export procedures, access information on international markets, and avail financial assistance to expand their export capabilities.

Conclusion

  • India’s economic growth requires careful consideration of the manufacturing versus services debate. While the services sector has played a significant role, a comprehensive ecosystem supporting manufacturing is crucial. Only through concerted efforts and holistic reforms can India truly unlock its manufacturing potential and secure long-term economic prosperity.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Also read:

Urban-rural manufacturing shift: A mixed bag

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s GDP expanded 6.1% in 2022-23’s last quarter

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Trends in India's GDP Growth

Mains level: Read the attached story

gdp

Central Idea

  • The National Statistical Office (NSO) has released provisional national income data revealing that India’s GDP growth in the January to March 2023 quarter reached 6.1%.
  • This growth in the fourth quarter is the fastest among major economies, indicating better prospects for the current year compared to previous expectations.

Key Highlights

(1) Manufacturing Sector Growth Slows, Despite Q4 Rebound

  • Gross Value Added (GVA) in the economy rose by 7% in 2022-23, compared to 8.8% in the previous fiscal year.
  • Manufacturing GVA growth declined significantly, reaching only 1.3% compared to 11.1% a year ago.
  • The sector experienced a rebound of 4.5% in the final quarter after six months of contraction, but overall growth remained subdued.

(2) Agri and Services Sectors Propel Economic Growth

  • The agricultural GVA grew by 4% in 2022-23, an increase from 3.5% in the previous year.
  • Financial, real estate, and professional services sectors experienced a 7.1% growth in GVA, compared to 4.7% in 2021-22.
  • Trade, hotels, transport, and communication sectors, along with services related to broadcasting, witnessed a marginal increase of 14% in GVA.

(3) Revised GDP and GVA Figures Reflect Changes in Economic Performance

  • The NSO revised GDP and GVA numbers for the first half of 2022-23, with slight decreases, but the third-quarter figures were slightly increased.
  • The first quarter’s GDP growth in 2022-23 is now pegged at 13.1%, followed by 6.2% in the second quarter and 4.5% growth in the third quarter.
  • GVA growth estimates for the first and second quarters were revised to 11.9% and 5.4% respectively, while the third quarter GVA growth increased to 4.7% from the earlier estimate of 4.6%.

(4) Consumer Sentiment and Consumption Growth

  • Despite a slight uptick in private final consumption expenditure to 2.8% in Q4 from 2.2% in Q3, consumption growth remained muted.
  • This contradicted the uptick in consumer sentiments as per the RBI’s consumer confidence survey, highlighting the disparity between sentiment and actual spending.

(5) Outlook and Challenges for Future Growth

  • Maintaining growth above 6% will be challenging amid a global economic slowdown, according to economists.
  • Higher-than-expected GDP growth in the previous year may temper growth expectations for the current year, with the government and central bank projecting around 6.5% growth.
  • Pent-up demand that supported growth previously may not be as strong, and private sector investment needs to pick up since exports are not expected to contribute significantly to growth.

What can we as an Aspirant infer?

  • The resilience of the Indian economy and its promising trajectory despite global challenges is often highlighted in news.
  • This article justifies this perception about better performance of Indian Economy.

Conclusion

  • To sustain and enhance economic growth, focus on stimulating private sector investment to complement the performance of agriculture and services sectors.
  • Addressing the challenges in the manufacturing sector and boosting consumer confidence can lead to increased consumption and overall economic expansion.
  • Efforts to diversify and promote exports should be prioritized to contribute to future growth and reduce dependence on domestic consumption.

Tap to read more about:

[Static Revision] National Income Determination, GDP, GNP, NDP, NNP, Personal Income

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The Need for a New Economic Paradigm in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Global Solutions Summit

Mains level: Global economic and political divisions, Needs for new economic paradigm

Paradigm

Central Idea

  • In the pursuit of communal and caste politics, India’s focus on the economy has been overshadowed. However, the growing divide among classes is silently reshaping the Indian electorate, with more than 50% of the population being left behind by economic growth. It is essential to address the economic concerns of all citizens, regardless of caste and religion, and embrace a new paradigm of economics.

The Global Solutions Summit

  • Global Solutions Summit, 2023 held at Berlin.
  • The theme at the Global Solutions Summit this year, was a new paradigm for the economy.
  • Its backdrop was the rising tensions in the east between the United States and China, and the war in the west between the North Atlantic Treaty Organization (NATO) and Russia
  • The dominant G-7 countries, representing only 15% of the world’s population, exert undemocratic pressure on other nations, raising concerns about global democracy.
  • The think tanks of the G-20 and other countries at the summit called attention to global problems of climate change, increasing economic inequalities within and among countries, and the effects of the financial and trade sanctions imposed by the most powerful nation, which are affecting the other 85% most of all.

Prevalence of Political and economic divisions in societies worldwide

Political Divisions

  • Ideological divisions: Political ideologies such as conservatism, liberalism, socialism, and populism can create stark divisions in society, with contrasting views on the role of government, individual rights, and social policies.
  • Partisan politics: Political parties and their supporters often exhibit deep divisions, especially during elections and policy debates, based on party affiliations, policy preferences, and competing interests.
  • Identity politics: Divisions along the lines of race, ethnicity, religion, gender, and other social identities can shape political landscapes, with groups advocating for their specific interests and rights.
  • Regional disparities: Regional differences in economic development, cultural norms, and historical grievances can lead to political divisions, with demands for greater autonomy or regional representation.

Economic Divisions

  • Income inequality: The unequal distribution of wealth and income can create divisions between the rich and the poor, with implications for access to resources, opportunities, and social mobility.
  • Urban-rural divide: Disparities between urban and rural areas in terms of economic opportunities, infrastructure, and public services can lead to economic divisions and political differences.
  • Global economic disparities: The divide between developed and developing countries, as well as within countries, contributes to economic divisions, with implications for trade, investment, and development policies.
  • Labour market divisions: Differences in employment opportunities, wages, and working conditions can create divisions between different sectors of the economy, such as skilled and unskilled workers or formal and informal sectors.

Evolution of Economic Systems

  • Traditional Economy: In traditional economies, production is based on customs, traditions, and barter systems. It typically revolves around subsistence agriculture, hunting, gathering, and small-scale artisanal activities. This system is prevalent in agrarian and indigenous societies.
  • Command Economy: Command economies emerged with the rise of centralized governments and planned economies. The state assumes control over the means of production, distribution, and resource allocation. Central planning and government directives determine economic activities and resource allocation. The Soviet Union under communism is an example of a command economy.
  • Market Economy: Market economies are characterized by decentralized decision-making and the interaction of supply and demand forces in determining prices, resource allocation, and production decisions. Private ownership of property, individual freedom, and competition play crucial roles. Free-market capitalism, as advocated by Adam Smith, is a key model of a market economy.
  • Mixed Economy: Most modern economies are mixed economies that combine elements of both market and command systems. In a mixed economy, the government intervenes to regulate markets, provide public goods and services, and address market failures. The extent of government intervention varies across countries and can range from social welfare programs to industrial regulations.
  • Socialist Economy: Socialist economies emphasize social ownership and collective decision-making in economic activities. The means of production are typically owned by the state or workers’ collectives. The aim is to reduce inequality and ensure equitable distribution of resources. Examples include the former Soviet Union and China under Mao Zedong.
  • Market Socialism: Market socialism blends elements of market economies with socialist principles. It allows for private ownership and market mechanisms but aims to maintain social equity through state intervention, wealth redistribution, and public ownership of key industries. Some Scandinavian countries, such as Sweden and Norway, incorporate aspects of market socialism.
  • Post-Industrial Economy: The post-industrial economy is characterized by a shift from manufacturing and heavy industry to service-based industries, information technology, and knowledge-based sectors. It is driven by innovation, technological advancements, and the growing importance of intellectual capital.

Need to reform the GDP-centric model

  • Inadequate Measure of Well-being: GDP (Gross Domestic Product) measures the monetary value of all final goods and services produced within a country’s borders. However, it fails to capture important aspects of well-being, such as the distribution of wealth, social indicators, environmental sustainability, and quality of life.
  • Overemphasis on Economic Growth: The GDP-centric model places excessive focus on economic growth as the primary indicator of success. While economic growth is important, it should not be the sole measure of a nation’s progress.
  • Ignoring Income Inequality: GDP growth does not necessarily translate into equitable distribution of wealth and income. It often perpetuates income inequalities, as the benefits of growth may disproportionately accrue to a few privileged individuals or groups.
  • Unsustainable Resource Consumption: The GDP-centric model often encourages unsustainable patterns of resource consumption and production. It fails to account for the environmental costs and depletion of natural resources associated with economic activities.
  • Neglecting Non-Monetary Factors: The GDP-centric approach overlooks non-monetary factors that contribute to overall well-being, such as health, education, social capital, cultural heritage, and quality of life. These factors are critical for human development and should be considered alongside economic indicators to provide a comprehensive assessment of progress.
  • Inaccurate Reflection of Informal Economy: The GDP-centric model struggles to capture the contributions of the informal economy, which often represents a significant portion of economic activity in many countries. Informal sector workers and their economic contributions remain largely unaccounted for in traditional GDP calculations.
  • Need for Alternative Metrics: There is a growing need for alternative metrics and indicators that capture a broader range of factors affecting well-being, such as the Human Development Index (HDI), Genuine Progress Indicator (GPI), Sustainable Development Goals (SDGs), and well-being indices. These metrics consider social, environmental, and economic dimensions to provide a more holistic understanding of progress.

Need for a New Economic Paradigm in India

  • Rising Inequality: India faces significant income and wealth inequalities, with a large portion of the population left behind by economic growth. The current economic system has failed to adequately address these inequalities and provide equal opportunities for all citizens.
  • Unemployment and Job Creation: India has been grappling with high unemployment rates and a lack of sufficient job opportunities, especially for its burgeoning youth population. The existing economic model needs to be reimagined to prioritize job creation, skill development, and entrepreneurship to harness the demographic dividend effectively.
  • Sustainable Development: Environmental degradation, climate change, and resource depletion are pressing challenges for India. A new economic paradigm should prioritize sustainability and integrate environmental considerations into economic decision-making.
  • Social Welfare and Human Development: While economic growth is essential, it must be accompanied by investments in social welfare and human development. Access to quality education, healthcare, housing, and social security are critical for the well-being of citizens. A new economic paradigm should prioritize human development indicators alongside economic indicators to ensure the holistic development of the population.
  • Agricultural Distress: India’s agricultural sector faces various challenges, including farmer distress, low productivity, and lack of market access. The new economic paradigm should address these issues by promoting sustainable agriculture, improving rural infrastructure, enhancing farmers’ income, and ensuring food security.
  • Digital Transformation and Innovation: India is experiencing a digital revolution, with rapid technological advancements and a growing digital economy. The new economic paradigm should leverage the potential of digital transformation and innovation to drive inclusive growth, improve governance, and enhance competitiveness in the global economy.
  • Governance and Transparency: Enhancing governance, promoting transparency, and curbing corruption are essential for sustainable economic development.

Conclusion

  • India urgently needs a new economic paradigm that addresses the concerns of its citizens. The focus should shift towards inclusivity and social justice, rather than perpetuating economic inequalities. Reforms must prioritize the well-being of all, and economists should revaluate their current models to create a more equitable and sustainable future for India.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Also read:

Assessing the Indian Economy: A Fuzzy Picture with Bright Spots

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Managing Inflation and Ensuring Food Security in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Inflation and challenges overall food and nutrition security

Inflation

Central Idea

  • India’s recent decline in consumer price index (CPI) inflation and food price inflation has brought a degree of comfort to the Reserve Bank of India (RBI). However, the challenge lies in managing inflation while aiming for a GDP growth of 6 to 6.5 percent in FY24. Collaborative efforts between the RBI and the Government of India are crucial to achieving this twin objective.

Current Inflation Scenario

  • The CPI inflation for April 2023 stood at 4.7 percent, with food price inflation even lower at 3.84 percent.
  • Maintaining overall inflation below 5 percent and GDP growth above 6 percent throughout the year would be a commendable achievement.

Importance of Managing Food Inflation

  • Managing food inflation is crucial due to its significant weightage in the consumer price index (CPI) basket in India. The food and beverages component holds the highest weightage of 45.86% among G20 countries.
  • Food inflation directly impacts the cost of living for the general population, particularly vulnerable sections that spend a significant portion of their income on food.
  • High food inflation can lead to increased household expenses, lower purchasing power, and a decline in the overall standard of living.
  • Food inflation can also have social and political implications, as rising food prices can cause public unrest and dissatisfaction.
  • Effective management of food inflation contributes to maintaining price stability, ensuring food affordability, and supporting macroeconomic stability.

Implications of Monsoon Season

  • Agricultural Production: The monsoon is crucial for agricultural production as it provides the majority of the water needed for irrigation. A normal or above-normal monsoon season supports adequate water availability, leading to higher crop yields and increased agricultural output. Conversely, a below-normal monsoon can lead to drought-like conditions, affecting crop productivity and agricultural incomes.
  • Food Prices: The monsoon significantly influences food production, particularly for rain-fed crops. Insufficient rainfall can lead to lower agricultural output, resulting in reduced supplies and higher food prices. Inadequate monsoon rains can impact staple crops such as rice, wheat, pulses, and oilseeds, leading to inflationary pressures on food prices.
  • Rural Economy: As agriculture plays a vital role in the rural economy, the monsoon directly impacts rural livelihoods and income levels. A good monsoon season can boost rural incomes, increase agricultural employment opportunities, and stimulate rural consumption. Conversely, a poor monsoon can lead to income losses, lower agricultural wages, and reduced rural demand.
  • Hydroelectric Power Generation: The monsoon contributes to water reservoirs, which are essential for hydroelectric power generation. Adequate rainfall ensures sufficient water levels in reservoirs, supporting electricity generation from hydroelectric plants. Inadequate monsoon rains can result in lower water levels, impacting power generation and potentially leading to electricity shortages.
  • Groundwater Recharge: The monsoon plays a crucial role in replenishing groundwater levels. Adequate rainfall helps recharge aquifers, which are vital sources of water for irrigation, drinking water, and industrial use. Insufficient monsoon rains can lead to depleted groundwater levels, affecting agriculture, water availability, and overall water security.
  • Economic Growth: The performance of the agricultural sector, influenced by the monsoon, has implications for overall economic growth. Agriculture contributes significantly to India’s GDP and employment. A good monsoon season can stimulate rural demand, enhance agricultural productivity, and contribute to higher economic growth. Conversely, a poor monsoon can dampen agricultural output, impacting overall economic performance.
  • Fiscal Impact: The monsoon season also has implications for government finances. Adequate rainfall supports agricultural production and reduces the need for government interventions such as subsidies or price support measures. In contrast, a poor monsoon can strain government resources, necessitating increased spending on irrigation infrastructure, relief measures, or support to affected farmers.

What are the challenges in milk inflation?

  • Supply-side Factors: Milk inflation is influenced by supply-side dynamics. Factors such as adverse weather conditions, including drought or floods, can impact the availability of fodder and water for cattle, leading to reduced milk production. Any disruptions in the supply chain, such as transportation issues or logistical challenges, can also affect the supply of milk and contribute to inflationary pressures.
  • Disease Outbreaks: Disease outbreaks among cattle, such as lumpy skin disease, foot-and-mouth disease, or other health issues, can affect milk production. These outbreaks may result in a decrease in the number of healthy and productive cattle, leading to a decline in milk output and subsequently driving up milk prices.
  • Fodder Prices: The cost of animal feed, such as fodder, plays a significant role in milk production costs. Fluctuations in fodder prices can impact the overall cost of maintaining dairy cattle. If fodder prices increase due to factors like supply-demand imbalances, weather conditions, or changes in agricultural practices, it can contribute to higher milk prices.
  • Input Costs: Various input costs involved in milk production, such as labor, veterinary services, and energy costs, can affect the overall cost structure. Increases in input costs, including wages, veterinary medicines, or energy prices, can exert upward pressure on milk prices.
  • Import Dependence: In some cases, countries may rely on milk imports to meet domestic demand. If the import costs increase due to factors like changes in international prices, trade policies, or exchange rate fluctuations, it can contribute to higher domestic milk prices.
  • Market Structure and Competition: The market structure and competition within the dairy industry can impact milk prices. If the market is concentrated with a limited number of dominant players, it may lead to less competition, allowing suppliers to exercise greater pricing power. This can contribute to higher milk prices for consumers.
  • Government Policies and Regulations: Government policies and regulations related to milk production, procurement, and pricing can influence milk inflation. Policies such as subsidies, import restrictions, quality standards, or pricing mechanisms can affect the overall supply-demand dynamics and pricing in the milk market

Way ahead

  • Focus on buffer stocking policy: To tackle cereal inflation, using the buffer stocking policy more proactively is important. Unloading excess stocks in open market operations can be an effective tool in managing cereal inflation.
  • Preemptive policy actions: It is important to implement policy actions in a preemptive manner rather than being reactive to events. This includes timely unloading of excess stocks and adjusting import duties to maintain price stability.
  • Monitor and address external shocks: Given that food price inflation can be triggered by external shocks like droughts and supply chain disruptions, it is crucial to closely monitor such factors and take appropriate measures to mitigate their impact.
  • Strengthen milk production: To address milk inflation, efforts should be made to address factors like the lumpy skin disease and high fodder prices that have strained milk production. Policies supporting the growth and sustainability of the milk industry should be implemented.
  • Lower import duties on fat and skimmed milk powder (SMP): By reducing import duties to around 10 to 15 percent, there could be an increase in imports of fat and SMP, which may help in controlling milk and milk product prices.

Conclusion

  • By effectively managing inflation, implementing proactive policies, and fostering collaboration between the RBI and the Government of India, India can navigate the challenges of inflation management, ensure economic stability, and promote sustainable development in critical sectors.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Assessing the Indian Economy: A Fuzzy Picture with Bright Spots

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indian economics indicators, facts , reports etc.

Mains level: Assessment of the Indian economy, Concerns and way ahead

Economy

Central Idea

  • The Indian economy is in a state of ambiguity, with different viewpoints and statistics painting a fuzzy picture. While some argue that India is well-positioned to be an economic superpower, the true picture is not that straightforward.

An assessment of the Indian economy based on various factors

  1. Inflation:
  • According to the MPC meeting minutes, inflation is under control, but households are witnessing an increase in the prices of goods and services.
  • While the base effect will bring down the inflation numbers, households still complain of having a cumulative inflation of over 18 per cent in the last three years.
  1. Growth:
  • The growth picture is ambivalent, with the new normal appearing to be 6-7 per cent.
  • While some argue that India is the fastest-growing economy, this is only true if smaller nations are excluded.
  • There is not too much optimism about being on track for the 8 per cent-plus growth rate, which we were used to earlier.
  1. Exports: While there has been satisfaction expressed by the new heights achieved in the exports of goods and services, exports of merchandise are not too satisfactory. For example, if refinery products are excluded from the export’s basket, there has been a fall in FY23.
  2. Investment:
  • The official position is that investment is picking up in the private sector, but data on all funding sources show that there is a slowdown.
  • Bank credit is buoyant more on the retail end than manufacturing. Debt issuances are dominated by the financial sector with manufacturing lagging.
  • External Commercial Borrowings (ECBs) have slowed down mainly due to the higher cost of loans.
  1. Consumption: The consumption picture is also fuzzy, with nominal consumption growing by 16 per cent in FY23, but this is pushed up by inflation, and pent-up demand for both goods and services post the full removal of the lockdown in 2022.
  2. Employment:
  • The average unemployment rate is around 7.5 per cent, but the concern is more on the labour participation rate, which has been coming down. This indicates a growing population in the working age group that is not interested in working.
  • Start-ups have not yet been job creators to the degree that was expected, given the push by the government over the years.
  1. Banking sector: The banking sector has emerged stronger with lower NPA levels and improved profitability, which implies that as and when the economy gets into the take-off mode, banks will be well-equipped to provide the funds.

Facts for prelims: Basics

External Commercial Borrowings (ECBs):

  • ECBs are loans obtained by entities in one country from non-resident lenders in another country.
  • ECBs provide an alternative source of funds for borrowers, enabling access to international capital markets.
  • They are primarily used by companies, banks, or other entities to finance activities, investments, or expansion plans.
  • The borrowing and utilization of ECBs are subject to guidelines and regulations set by the borrowing country’s central bank or regulatory authority.
  • The regulatory framework aims to control external debt, manage foreign exchange exposure, and ensure financial stability.

 What are the concerns?

  • Employment Generation: The decline in the labor force participation rate and layoffs in certain sectors raise significant challenges in terms of job creation and reducing unemployment levels.
  • Manufacturing Competitiveness: The decline in merchandise exports (excluding refinery products) indicates potential hurdles in enhancing the competitiveness of the manufacturing sector and expanding exports.
  • Execution of Investment Intentions: The gap between investment intentions and actual investments is a concern as it indicates potential bottlenecks or challenges in translating investment plans into action.
  • Consumption Growth and Affordability: Affordability issues due to inflation impacting real consumption growth raise concerns about sustained consumer demand.
  • Export Diversification: The dependence on a few economies for exports and the potential impact of a global economic slowdown on Indian exports are concerns. Diversifying export destinations and exploring new markets can help reduce vulnerability to global economic fluctuations and strengthen export resilience.
  • Effective Implementation of Banking Sector Reforms: While improvements have been observed in the banking sector, concerns about funding sources and the need for increased credit flow to the manufacturing sector indicate ongoing challenges.

Economy

Way ahead

  • Focus on inflation control: While the MPC has managed to keep inflation under control from a policy perspective, efforts should continue to address the impact of rising prices on households. Measures to enhance supply chain efficiency, promote competition, and reduce production costs can help alleviate inflationary pressures.
  • Promote sustainable and inclusive growth: While the current growth rate is positive, efforts should be made to achieve higher and more inclusive growth. This can be done by investing in infrastructure development, skill development programs, and initiatives that support the growth of MSMEs (Micro, Small, and Medium Enterprises).
  • Boost exports: Enhancing the competitiveness of Indian goods and services in global markets is crucial for a robust export sector. Continued efforts to improve the ease of doing business, implement the Production-Linked Incentive (PLI) scheme effectively, and diversify export destinations can help boost exports.
  • Facilitate investment: Policy measures should focus on encouraging private sector investment and reducing funding bottlenecks. This can involve improving the ease of doing business, simplifying regulatory processes, and providing incentives for both domestic and foreign investments.
  • Strengthen consumer demand: Initiatives to support consumer demand can include income support programs, targeted subsidies, and measures to enhance consumer confidence. Reducing the impact of inflation on household budgets and boosting purchasing power can help drive consumption growth.
  • Address unemployment and labor force participation: Policies aimed at promoting skill development, entrepreneurship, and job creation can help address unemployment concerns. Encouraging sectors with higher labor-intensive potential, such as manufacturing and services, and supporting start-ups and MSMEs can be vital in generating employment opportunities.
  • Continue banking sector reforms: While the banking sector has made progress in reducing NPAs and improving profitability, ongoing reforms should be sustained to strengthen the sector further. Maintaining prudent lending practices, enhancing risk management frameworks, and promoting transparency and governance will be essential.
  • Foster domestic innovation and technology adoption: Encouraging innovation, research and development, and technology adoption can boost productivity and competitiveness across sectors. This can be achieved through policies that promote collaboration between industry and academia, provide incentives for innovation, and invest in digital infrastructure.
  • Maintain macroeconomic stability: Ensuring fiscal discipline, sound monetary policy, and a stable regulatory environment will be crucial for sustaining macroeconomic stability. This can help maintain investor confidence and provide a conducive environment for economic growth.

Conclusion

  • The Indian economy’s broad numbers look statistically realistic, but the triad of employment, consumption, and private investment has to bear fruit. Domestic initiatives have to drive the story forward, as the world economy slows down.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get the Prelims prep Toolkit!

Also read:

Indian Economic Growth Prospects: A Comprehensive Analysis

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Rural Real Wage Growth In India: The Importance of Accurate Data analysis

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CAGR

Mains level: Significance of accurate rural wage data

Central Idea

  • Rural real wage growth is a crucial indicator of the well-being of individuals, particularly the poor, in India. Jean Dreze, a respected economist claims that rural real wage growth in India has been sluggish despite rapid economic growth. However as per Surjit Bhalla another economist, Dreze’s findings are based on weak statistical analysis and incomplete data. Surjit Bhalla’s and presents his own findings, which suggest higher wage growth rates for construction workers, non-agricultural laborers, and agricultural laborers.

Contrast results for instance

  • For construction workers, Dreze obtains a rate of growth (CAGR) of just 0.2 per cent (actually 0.15 per cent); However, CAGR stands at eight times larger at 1.2 per cent.
  • For non-agricultural labourers (porters and loaders) the same yawning divergence: Dreze obtains 0.3 per cent, whereas it stands 1.2 per cent, and for agricultural labourers, 0.9 per cent vs 1.5 per cent.

What is CAGR?

  • CAGR stands for Compound Annual Growth Rate. It is a measure used to calculate the average growth rate of an investment over a certain period of time, assuming that the investment has grown at a steady rate each year.
  • It takes into account the effect of compounding, which means that the investment’s growth in one year is added to the base value of the investment, and the total amount is then used to calculate growth for the next year.
  • CAGR is often used in finance to compare the performance of different investments or to forecast future growth.

Why are the two results so different?

  • Differences in Method of Estimation: Dreze uses semi-log regression on eight observations to estimate the compound annual growth rate (CAGR) for each of three male occupations. His estimate of CAGR is not even significant at the 11 per cent level of confidence for two of these occupations – construction and non-agricultural laborers. Dreze does not uses a population-weighted average of year-on-year growth for each of the 38 sex-occupation categories to estimate CAGR accurately.
  • Differences in Time Period of Analysis: Surjit Bhalla also criticizes Dreze’s chosen time period of analysis, 2014-2021. As per Surjit Bhalla, that no study combines pre-Covid and Covid years without even a mention of the difference. Surjit Bhalla presents data for three time periods, including the normal 2014-2018, Covid 2019-2021, and all years 2014-2021.

Why accurate rural wage data is important?

  • Poverty alleviation: Rural wage data is used to determine the poverty levels in a country, and accurate data is essential for effective poverty alleviation policies.
  • Income inequality: Accurate rural wage data can help policymakers understand the level of income inequality in rural areas and design policies to reduce it.
  • Agricultural productivity: Rural wage data is used to assess the productivity of the agricultural sector, which is a key source of income for rural households.
  • Labor market trends: Accurate rural wage data helps policymakers understand the trends in the rural labor market, such as changes in demand for different types of labor, and design policies to support employment growth.
  • Minimum wage determination: Accurate rural wage data is necessary for determining minimum wages for rural workers, which is important for protecting the rights of workers and reducing labor exploitation.
  • Social protection: Rural wage data is used to design social protection programs such as cash transfers, food subsidies, and public works programs to support the poorest households in rural areas.
  • Macro-economic policy: Rural wage data is used to inform macro-economic policies such as inflation targeting and monetary policy, as well as to evaluate the effectiveness of such policies on rural households.

Conclusion

  • The issue of rural real wage growth in India is complex and requires a nuanced understanding of data selection, treatment, intensity, and estimation. There is need for a more comprehensive set of data and a different method of estimation.

Mains Question

Q. What is Compound Annual Growth Rate (CAGR). Why do you think, accurate rural wage data is so important?

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get Prelims prep Toolkit!

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Indian Economic Growth Prospects: A Comprehensive Analysis

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Initiatives for private investment and labour force participation

Mains level: India’s Growth Prospects, Private Investment and challenges

Growth

Central Idea

  • India has had an established track record of high growth, with an average annual GDP growth of 6.6% in the decade leading up to the Covid-19 pandemic. In fiscal 2023, India is seen growing at 7%, making it the fastest-growing large economy. But with an imminent global slowdown and the full manifestation of the lagged impact of interest rate hikes since May 2022, the economy is expected to decelerate and grow at 6% in fiscal 2024.

Indian economic growth prospects

  • Growth accounting: Growth accounting provides a useful framework to analyse medium-term prospects by decomposing their drivers into the contribution of capital, labour and efficiency.
  • Economic growth next five years: Indian economy expected to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour.
  • Changing growth model: The growth model is changing to an infrastructure and manufacturing-driven one.
  • Capital spending: The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.
  • Investment ratio: Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.
  • Contribution of productivity to growth: The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).

What is holding back a swift and broad-based lift in private investments?

  • Economic uncertainty, primarily, and geopolitical events to a lesser extent.
  • Sustainability challenge looms for the manufacturing sector as manufacturing and infrastructure growth are carbon-intensive.
  • Low-quality skilling of the workforce is holding back its contribution to growth.
  • Quality and the skilling of the workforce
  • Falling labour force participation of women

What is holding back in Labour’s contribution to growth?

  • Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group, this cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back.

Why private investment is essential for Indian economic growth?

  • Capital formation: Private investment helps in creating capital formation, which is essential for economic growth. It helps in building infrastructure, creating jobs, and generating income, which in turn drives consumer spending and boosts economic growth.
  • Innovation: Private investment is often associated with innovation and technological advancements. Companies that invest in research and development (R&D) can develop new products and processes that can boost productivity and create new markets. This, in turn, can lead to increased profits and more investment in R&D, creating a virtuous cycle of innovation and growth.
  • Employment: Private investment creates jobs, which is critical for economic growth and development. When companies invest in new projects or expand their operations, they often need to hire additional workers, which reduces unemployment and boosts consumer spending.
  • Foreign investment: Private investment is also an important driver of foreign investment. When companies invest in India, they often bring new technology, skills, and expertise that can help boost local industries and drive economic growth.
  • Tax revenue: Private investment can also help increase tax revenues, which can be used by the government to fund public goods and services such as education, healthcare, and infrastructure.

Steps taken by the government to encourage private investment

  • Investment-Friendly Policies: The Indian government has launched several investment-friendly policies, such as Make in India, Start-up India, and Digital India, to encourage private investment in the country.
  • Infrastructure Development: The government is investing heavily in infrastructure development, including roads, railways, airports, and ports, to create a conducive environment for private investment.
  • Tax Reforms: The Indian government has implemented several tax reforms, such as the Goods and Services Tax (GST), to simplify the tax structure and make it more investor-friendly.
  • FDI Liberalization: The government has liberalized foreign direct investment (FDI) norms in several sectors, including defense, insurance, and retail, to attract more foreign investment.
  • Insolvency and Bankruptcy Code (IBC): The government has implemented the Insolvency and Bankruptcy Code (IBC), which has made it easier for businesses to exit, and has increased investor confidence in the Indian economy.
  • Production Linked Incentives (PLI): The government has launched the Production Linked Incentives (PLI) scheme to encourage manufacturing in India and make it more competitive globally.
  • Easing of Business Regulations: The Indian government has eased several business regulations to improve the ease of doing business in the country and attract more private investment.
  • Skill Development: The government has launched several initiatives, such as Skill India and Pradhan Mantri Kaushal Vikas Yojana, to develop the skills of the Indian workforce and make it more attractive to investors.

Facts for prelims: Steps taken by the government to encourage labour force participation of women

Initiatives

Description

Maternity Benefit Programme A scheme to provide financial assistance to pregnant women and lactating mothers for their health and nutrition needs.
Pradhan Mantri Ujjwala Yojana A scheme to provide LPG connections to women from Below Poverty Line households.
National Urban Livelihood Mission A programme to provide self-employment opportunities and skill development training to urban poor women.
National Rural Livelihood Mission A scheme to provide self-employment opportunities and skill development training to rural women.
Mahila E-Haat A digital platform to provide a market for women entrepreneurs to sell their products online.
Beti Bachao Beti Padhao A campaign to address the declining child sex ratio and to promote education among girls.
Sukanya Samriddhi Yojana A savings scheme for the girl child to ensure their education and marriage expenses are taken care of.

 Way ahead

  • Focus on green transition: As the manufacturing and infrastructure growth are carbon-intensive, so it’s important to have a significant and simultaneous focus on green transition. Having a high sustainability quotient can only embellish India’s credentials as a production destination.
  • For instance: Research suggests that between fiscals 2023 and 2027, over 15 per cent of India’s capex could be towards green initiatives involving renewable energy, transportation, altering the fuel mix, and green hydrogen. In the fragmented geopolitical milieu, which is shifting towards supply-chain diversification and friend shoring, India can attract foreign investments.
  • Enhancing labour force participation of women: The labour force participation of women is falling. This will have to be reversed through employment policies and investing in the health and education of women.
  • For instance: According to a World Bank report in 2018, India could add 1.5 percentage points to its GDP growth by improving the participation of women in its workforce.

Growth

Conclusion

  • India is going to become a $5 trillion economy by fiscal 2029, given the current growth dynamics. However, the impact of climate risk mitigation will be felt across revenue, commodity prices, export markets, and capital spending. To win the growth marathon, India’s focus must be sharp on the drivers of pace.

Mains Question

Q. Highlight India’s growth prospects in the next five years? Discuss the significance of private investment for economic growth and enlist factors that holding back the private investment.

Get an IAS/IPS ranker as your personal mentor for UPSC 2024 | Schedule your FREE session and get Prelims prep Toolkit!

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Inflation in India is Driven by Food Prices

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Inflation, WPI and CPI

Mains level: Inflation trends in India

Inflation in India

Central Idea

  • The recent trajectory of inflation in India is attributed to the pricing power of five big corporates or ‘Big 5’ according to former Deputy Governor of Reserve Bank of India, Viral Acharya. However, the argument is flawed as the Indian inflation is different from the rest of the world, and it is driven by food price inflation. While corporate pricing power does exist, it is limited, and the extent to which it drives overall inflation is still debatable.

The factor of food price inflation

  1. Divergence between Indian and Western inflation rates is not new:
  • Sudden surge of Inflation in India: After the global financial crisis of 2008, Indian inflation surged higher than the economies of the US and UK due to food price inflation caused by negative agricultural shocks and high procurement price hikes.
  • Core inflation: Food-price inflation tends to feed into core inflation, so it would be hasty to conclude that Indian inflation is higher than the West today due to corporate pricing power.
  • Food price inflation: Evidence suggests that in India, food price inflation affects core inflation, and food price inflation enters costs of the non-agricultural sector.
  1. Corporate pricing power in India:
  • Corporate pricing power and overall inflation: Corporate pricing power exists in Indian industry, but the extent to which it drives overall inflation in India is debatable. The question is how much corporate power is driving inflation beyond its obvious role in elevating the price level.
  • Prices of food: To measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
  • Inflation control strategy: India’s inflation control strategy needs to address the challenge of ensuring the production of food at affordable prices.
  1. Comparing WP inflation with CP inflation
  • Comparing WP inflation with CP inflation is to acquiesce in a mismatch.
  • The commodity basket corresponding to CP includes items that do not enter the wholesale price index, so we would be comparing apples with oranges.

Inflation in India

The argument is based on a short time period

  • WP inflation has eased considerably in the six months preceding March 2023, but CP inflation has not. However, a mismatch between WP and CP inflations is not new.
  • So, the maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 may just be a compensating mechanism, i.e., the rising input cost of the retail sector is being passed on with a lag.

Facts for prelims: WP inflation VS CP inflation

Aspect Wholesale Price (WP) Inflation Consumer Price (CP) Inflation
Definition Measures the change in average price level of goods sold by producers at the wholesale level Measures the change in average price level of goods and services purchased by households
Captures Changes in prices of goods before they reach the retail market Changes in prices of goods and services at the retail level
Indicator of Early indicator of changes in overall price level of economy Inflation that households experience in their day-to-day lives
Impact Affects production cost and supply chain Affects purchasing power of consumers
Calculation Based on price changes of goods sold in bulk to retailers or other businesses Based on price changes of goods and services purchased by households
Usage Used by policymakers to monitor changes in cost of production and production-level inflation Used by policymakers to monitor inflation and make decisions related to monetary policy
Examples Wholesale prices of raw materials, oil, and other commodities Retail prices of food, clothing, transportation, and other consumer goods and services

Rising food prices driving current inflation

  • Over 75% of the direct contribution to inflation in the first three quarters of the financial year came from sectors in which the Big 5 are unlikely to be represented in a big way.
  • The contribution of food products alone was close to 50% in most time periods.
  • Rising food prices are driving current inflation in India.

The current inflation control strategy

  • Considerable rise in food prices: In India, food prices have only risen, and in recent years their rate of inflation has been very high. For all the reforms since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably.
  • What matters most to public must be considered: In the context, to measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
  • Current strategy restricted to using the interest rate to dampen aggregate demand: India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand. This strategy avoids addressing the challenge of ensuring the production of affordable food.
  • Question mark on RBI’s ability to control inflation: The RBI has been unable to control even the core inflation which central banks are assumed to be able to control. A recent intervention explaining core inflation in India has highlighted the RBI’s inability to control inflation.

Conclusion

  • Inflation is being discussed only in terms of core inflation, which excludes the inflation in food and fuel prices because these prices tend to fluctuate and even out the changes, so it is assumed that they do not require a policy response. However, this assumption is flawed in the context of India’s economy, as food and fuel prices have a significant impact on the economy and people’s livelihoods. Therefore, limiting the discussion to core inflation ignores the role of corporate pricing power and the impact of food and fuel prices on the economy.

Mains Question

Q. What is the factor that primarily drives inflation in India? Highlight the relationship between food price inflation and overall inflation in India?

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI’s Pause On Repo Rate Hike: Concerns Over Inflation And Global Pressures Remain

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Basic concepts

Mains level: RBI's pause on rate hikes, reasons and implications

RBI

Central Idea

  • The RBI has decided to not increase the repo rate amid continuing hikes by important central banks such as the US Federal Reserve (Fed) and European Central Bank (ECB), and domestic inflation concerns. However, if incoming data point to rising inflation risks, this decision could prove to be only a pause in the rate hiking cycle.

The RBI’s decision to pause on rate hikes

  • The RBI feels that money market rates have effectively risen more than the 250-basis-point yank in the repo rate since May 2022, and hence it decided to pause and assess the impact of rate hikes.
  • The key reason behind the MPC decision is the expectation of a decline in inflation to 5.2% in the current fiscal, driven by a healthy rabi crop, normal monsoon, moderating international commodity prices, and the impact of rate hikes.
  • The RBI acknowledges the upside risks and stated its readiness to fight any unexpected rise in inflation.

Impact on GDP growth

  • The RBI expects GDP growth to slow to 6% from 7% this fiscal as slowing global growth, domestic interest rates, and messy geopolitics bite.
  • Slowing global growth will be net negative for India’s exports, and the growing dependence on commodity exports makes India more vulnerable to global growth volatility.
  • Fiscal 2024 will, therefore, test the resilience of India’s domestic demand amid rising interest rates.

Reasons for the expected cooling of consumer inflation

  • Fuel inflation expected to reduce: Fuel inflation is expected to reduce to 3% from a high of over 10% in the current fiscal because some easing of crude oil prices is likely as global growth slows down.
  • Decline in core inflation: Slowing domestic growth will ease core inflation from very sticky levels of over 6% last fiscal to 5.5% in the current one. However, the decline in core inflation will be limited as input cost pressures have not dissipated. To protect their margins, firms will continue to pass on input costs to end-consumer. Services inflation will also continue to exert pressure as the rotation of consumption demand from goods to services continues.
  • Moderate food inflation: Food inflation, which has a high weightage in the Consumer Price Index and has driven headline inflation in the past, is projected to moderate to slightly below 5%, assuming a normal monsoon. However, food inflation has always been volatile and carries upside risks largely because of climate-related factors affecting agriculture output and prices.

How slowing global growth will have a negative impact on India’s exports?

  • The impact of the growth slowdown in the US and Europe is deeper than the recovery in China: The US and Europe have a combined GDP that is twice that of China. Therefore, the impact of the growth slowdown in the US and Europe will be deeper than the recovery in China. This will have a negative impact on India’s exports to the US and Europe.
  • India’s exports to the US and Europe are more than to China by a factor of six: India exports more to the US and Europe than to China by a factor of six. Therefore, the negative impact of the growth slowdown in the US and Europe will be felt more by India than by China.
  • India’s growing dependence on commodity exports makes it more vulnerable to global growth volatility: India’s exports of petroleum products and steel are growing, and this makes India more vulnerable to global growth volatility. As global growth slows down, demand for commodities is likely to decline, which will have a negative impact on India’s exports.

External vulnerabilities

  • India’s external vulnerability is expected to decline with a narrower current account deficit (CAD) and modest short-term external debt.
  • The CAD is expected to narrow to 2% of GDP this fiscal from an estimated 2.5% last fiscal.

Conclusion

  • The RBI’s decision to pause on rate hikes is driven by expectations of a decline in inflation. However, inflation risks remain, and the impact of rate hikes on GDP growth is expected to be significant. India’s external vulnerabilities are expected to decline, but the banking turmoil playing out amid interest rate hikes by important central banks and elevated debt levels remains a risk. The RBI’s decision to pause on rate hikes will be closely watched, and further rate hikes may be necessary if inflation risks persist.

Mains Question

Q. Enumerate the factors that led RBI to pause on rate hikes, and discuss the potential risks and impacts on the Indian economy?

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Current Paradigm of Economics In India Is Inadequate

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Indian economy challenges

Central Idea

  • The current paradigm of economics in India is inadequate in providing solutions to the three major economic challenges the country is facing. The economists need to break out of their self-referential silo and examine the science of complex self-adaptive systems.

The Poly-crisis faced by India

  • The Indian government is grappling with three economic challenges at the same time:
  1. Management of inflation,
  2. Trade agreements, and
  3. Employment
  • Economists do not have a systemic solution for this poly-crisis. Consensus among them has broken down even about solutions to its separate parts.

Lessons from China and Vietnam

  • Foreign investment in China: China and India opened their economies to global trade around the same time, some 35 years ago. Since then, China attracted foreign investment that was many times more than in India, and the incomes of its citizens increased five times faster.
  • Vietnam emerging as more attractive destination: To attract investors, India must compete with other countries. Vietnam is often cited as a country that is proving to be more attractive than India to western and Japanese investors. However, when looking into Vietnam, they rediscover what was learned from China.
  • High levels of human development: When both countries opened to foreign investors China before Vietnam, they had already attained high levels of human development, with universal education and good public health systems.

The Problem with the Current Paradigm

  • There are some fundamental flaws in the current paradigm of economics.
  • Economists often cite Tinbergen’s theory, which states that the number of policy instruments must equal the number of policy goals. This is a mechanical and linear view of how a complex system works.
  • In complex organic systems, root causes contribute to many outcomes. The behaviour of the system cannot be explained by linear causes and effects. The causes interact with each other, and effects also become causes.

Facts for prelims: What is Tinbergen’s theory?

  • Tinbergen’s theory states that the number of policy instruments (P) must be equal to the number of policy goals (G), in order to achieve the desired outcome.
  • In other words: P = G
  • This means that for each policy goal, there should be at least one policy instrument to achieve it.
  • For example, if the policy goal is to reduce inflation, then there should be a policy instrument such as interest rate changes to achieve that goal. Similarly, if the policy goal is to promote employment, then there should be a policy instrument such as job creation programs to achieve that goal. Tinbergen’s theory emphasizes the importance of having a clear and consistent policy framework to achieve desired outcomes

Crises and the Inadequacy of the System

  • Policies that fit one country may not fit the needs of others: Macro-economists search for global solutions, but trade and monetary policies that fit one country may not fit the needs of others. Their needs have emerged from their own histories.
  • Emphasis on data trends: Economists arrive at solutions by comparing data trends of different countries, and in their models, people are numbers. Economists do not listen to real people, whereas politicians try to at least.
  • For instance: The inadequacy of the current paradigm was revealed by several crises in this millennium, the 2008 global financial crisis, inequitable management of the global COVID-19 pandemic, and the looming global climate crisis.

Conclusion

  • A new economics is required to solve the poly-crisis faced by India. A movement to change the paradigm of economics’ science to bring perspectives from the sciences of complex self-adaptive systems has begun even in the West. India’s economists must step forward and lead the change towards a new economics paradigm based on the sciences of complex self-adaptive systems. India’s policymakers will have to find a way to strengthen the roots of the economic tree while harvesting its fruits at the same time, and the current paradigm of economics cannot provide solutions.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Growth Prospects: India Better Positioned Than China

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India and China's Comparative Growth prospects

India

Central Idea

  • The Chinese government’s growth target of 5% for 2023 has disappointed observers, given that it is lower than last year’s target and below the expected GDP growth for India in 2023. This is all the more surprising if one considers that India is benefiting from the positive impact of the country reopening after COVID-19 lockdowns while China should benefit from its reopening only this year.

Reasons for China’s lower growth target?

  • Risk of undershooting growth target again: The Chinese government does not want to run the risk of undershooting its growth target again, as it happened in 2022.
  • Weak external demand and doubts about private investment: Even if consumption is recovering, external demand remains weak and it is hard to know whether private investment will indeed rise given the doubts about the role of the private sector in the Chinese economy as well as increasingly cautious sentiment being expressed by foreign investors.
  • Real estate sector dragging down growth: The real estate sector is still dragging down growth.

Sustainable growth

  • The Chinese government recognizes that too high a growth rate is no longer desirable, as it only aggravates financial imbalances.
  • Instead, they are promoting sustainable growth, which involves a structural shift of the Chinese economy and the implementation of tighter regulatory measures to contain financial risks and achieve more social objectives, such as a green economy and food security.

Job creation and foreign investment

  • China emphasises the importance of job security as an objective of sustainable growth, with a higher target for new jobs set by the Chinese government.
  • China’s recent charm offensive to retain foreign direct investment in China is an important source of job creation, given the country’s concern about the job market, especially young workers.
  • However, investors are looking at new pastures, with India likely to be a major beneficiary. Foreign investors are beginning to contribute more substantially to job creation in India, which could pose challenges for China as it tries to hold on to foreign direct investment within the country.

Comparison of India and China’s growth prospects

  • The growth prospects of India and China, with a focus on job creation and competition for foreign direct investment.
  • while India and China may not be too different in size and population, growth prospects differ substantially.
  • The Chinese government’s cautious growth targets are consistent with the current challenges facing the Chinese economy, but they face more competition than before, especially from India, which has a larger market size and labor pool.
  • This pattern of India’s resilient growth and China’s cautious growth targets will accelerate in the next few years, especially if the reshuffling of the value chain continues, pushed by geopolitics and high costs in China.

Conclusion

  • The Chinese economy could be facing structural deceleration while India enjoys the benefits of its demographic dividend. China’s structural deceleration and tighter regulatory measures may also affect its future growth prospects. As a result, India may be better positioned for sustained growth compared to China in the coming years.

Are you an IAS Worthy Aspirant? Get a reality check with the All India Smash UPSC Scholarship Test

Get upto 100% Scholarship | 900 Registration till now | Only 100 Slots Left


 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

NSO’s New Data: India’s GDP Growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Economic indicators, GDP and current trends

Mains level: India's GDP growth

GDP

Central Idea

  • The National Statistical Office (NSO) has released a new set of data on India’s annual and quarterly national income, providing a final assessment of the COVID-19 pandemic’s impact on the country’s GDP growth. The latest numbers and sector-wise performance, highlighting areas of growth and contraction.

Recovery since pre-COVID year

  • Advance estimates: NSO’s second advance estimate (SAE) shows a contraction of (-) 5.7% in 2020-21, lower than its first advance estimate (FAE) at (-) 7.7%.
  • Benefited sectors: Manufacturing, construction, and financial sectors benefited the most in the revised estimate.
  • GDP growth: Real GDP in the COVID-19 year amounted to ₹136.9 lakh crore, higher than the earlier assessment of ₹134.4 lakh crore. GDP grew by 9.1% in 2021-22 and 7% in 2022-23.
  • Negative growth in 2020: The compound annual average growth rate between 2019-20 and 2022-23 was 3.2%. Comparison with other countries, including China, Bangladesh, and Vietnam, shows India’s negative growth rate in 2020.

Back to basics: Advanced estimates

  • Advance estimates refer to the preliminary projections made by the government regarding the likely economic growth, inflation, or other macroeconomic indicators of a country for a given period. These estimates are usually released a few months before the actual data for the period becomes available.
  • Advance estimates are based on various economic indicators such as industrial production, agricultural output, exports, and consumption expenditure, among others. These indicators are used to extrapolate the economic activity for the full period, based on which the government makes its initial projections.

GDP

Sector-wise Performance

  • Overall GVA in 2022-23 is higher by 11.3% compared to 2019-20.
  • Mining and quarrying sector still shows a contraction at (-) 0.3%.
  • Trade, hotels, transport, etc., show weak growth of 4.3%.
  • Construction sector shows higher-than-average growth at 18.6%.
  • Manufacturing sector also shows robust growth at 14.8%.
  • Financial, real estate, etc., grew at 14.3%.
  • Agriculture sector grew at 12%.
  • Government final consumption expenditure (GFCE) grew at 7.4%.
  • Gross fixed capital formation and private final consumption expenditure (PFCE) increased by 17.7% and 13.1%, respectively.

Investment and Capacity Utilization

  • Gross fixed capital formation to GDP ratio in nominal terms increased to 29.2% in 2022-23 from 28.6% in 2019-20.
  • Real investment rates increased to 34% in 2022-23 from 31.8% in 2019-20.
  • Estimated incremental capital output ratio (ICOR) decreased to 4.9 in 2022-23 from 8.5 in 2019-20.
  • Capacity utilization ratio in the manufacturing sector was only 70.3% in 2019-20, but it increased to 73.5% in the first half of 2022-23.
  • Subdued growth implies lower capacity utilization and higher ICOR.

Quarterly Growth and Projections

  • Q3 2022-23 saw a decline in real GDP growth to 4.4% from 6.3% in Q2 and 13.2% in Q1.
  • Growth rate in Q3 and expected growth rate in Q4 are quite low.
  • High frequency indicators point towards improved economic activity.
  • PMI manufacturing in January and February 2023 remained above its long-term average.
  • PMI services increased to a near 12-year

GDP

Conclusion

  • the NSO’s latest data on India’s GDP growth provides a final assessment of the COVID-19 pandemic’s impact on the country’s economy. The NSO’s data shows that India’s economy is recovering, albeit at a slower pace, from the COVID-19 pandemic.

Are you an IAS Worthy Aspirant? Get a reality check with the All India Smash UPSC Scholarship Test

Get upto 100% Scholarship | 900 Registration till now | Only 100 Slots Left


 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India bats for Sovereign Credit Rating upgrade

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Sovereign credit rating

Mains level: Read the attached story

credit

Central idea: India is seeking an upgrade to its sovereign credit rating, currently at the lowest-possible investment grade, as it believes its economic metrics have improved considerably since the pandemic.

What are Sovereign Credit Ratings?

  • A sovereign credit rating is a measure of a country’s creditworthiness, or its ability to meet its financial obligations.
  • It is an assessment of the credit risk associated with a country’s bonds or other debt securities.
  • The rating is assigned by credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings.

India’s current ratings

  • S&P and Fitch rate India ‘BBB-‘ and Moody’s ‘Baa3’, all indicative of the lowest-possible investment grade, but with a stable outlook.

What does BBB mean?

  • A ‘BBB’ rating indicates that expectations of default risk are currently low.
  • The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.

What is a Rating Agency?

  • Rating agencies assess the creditworthiness or potential of an equity, debt or country.
  • Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
  • They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
  • In simpler terms, these reports help investors gauge if they would get a return on their investment.

What do they do?

  • The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
  • Their reports are sold and published in financial and daily newspapers.

What grading pattern do they follow?

  • The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
  • Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
  • Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
  • Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
  • Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.

Significance of such ratings

  • Access to Capital: Higher credit ratings mean that a country can access capital at a lower cost, while lower ratings indicate that borrowing costs will be higher.
  • Investment Decisions: Investors use credit ratings as a tool to evaluate a country’s creditworthiness and assess the level of risk associated with investing in that country.
  • Economic Growth: Higher credit ratings typically lead to increased foreign investment, which can create jobs, boost productivity, and stimulate economic growth.
  • International Trade: Countries with higher credit ratings are viewed as more stable and trustworthy, making them more attractive trading partners for other countries.
  • Reputation: Countries with lower credit ratings may be seen as less reliable or stable, which can negatively impact diplomatic relationships and political influence.

Criticism of the rating agencies

  • Credibility: Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
  • Bias: These agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
  • Fouled metrics: The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
  • Erroneous: They were charged for methodological errors and conflict of interest on multiple counts.

Why is India seeking upgrade in its credit ratings?

  • Improved creditworthiness: These ratings are used to judge a country’s creditworthiness, often impacting its borrowing costs.
  • Stable indicators: India has series of stable parameters such as economic growth rate, inflation, general government debt and short-term external debt as a percentage of GDP, and political stability, among others.

Measures taken to improve ratings

  • India aims to cut its fiscal deficit to 5.9% of GDP next fiscal year, from the 6.4% target for the current year that ends March 31, and to further reduce that to 4.5% in the next three years.
  • India’s Economic Survey has forecast growth of 6% to 6.8% for 2023-24, which would make it one of the world’s fastest-growing major economies.

Are you an IAS Worthy Aspirant? Get a reality check with the All India Smash UPSC Scholarship Test

Get upto 100% Scholarship | 900 Registration till now | Only 100 Slots Left

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India close to Hindu Rate of Growth: Raghuram Rajan

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Hindu Rate of Growh

Mains level: Read the attached story

hindu

Central idea: Former RBI Governor Raghuram Rajan has warned that India is “dangerously close to the Hindu rate of growth”.

What is Hindu Rate of Growth?

  • The “Hindu Rate of Growth” is a term used to describe the slow growth rate of the Indian economy between the 1950s and the 1980s.
  • It was coined by the Indian economist Raj Krishna in the 1970s.
  • During this period, the Indian economy grew at an average rate of around 3.5% per year, which was much lower than other developing countries like South Korea, Taiwan, and Hong Kong.
  • The term is considered controversial as it suggests that the slow growth rate was a result of cultural or religious factors rather than economic policies and structural issues.
  • However, the term is still used in academic and policy discussions to refer to the slow growth of the Indian economy during this period.

Features of Hindu Rate of Growth

The then features which led to the coining of this term were-

  • Low GDP growth rate: The term refers to the period from the 1950s to the 1980s when India’s economy grew at an average rate of around 3.5% per year, which was much lower than other developing countries.
  • Slow Industrialization: The industrial sector was dominated by a few public sector companies, and the private sector was heavily regulated.
  • Stagnant Agriculture: There was little investment in agriculture, and the sector was not given much priority in government policies.
  • License Raj: India had a socialist economic model with heavy government regulation. The License Raj system required permits and licenses for businesses, creating a bureaucratic and corrupt system that hindered innovation and entrepreneurship.
  • Import Substitution: India followed a policy of import substitution, where the government tried to develop domestic industries by protecting them from foreign competition. This led to a lack of competition, low quality of products, and high prices.
  • Inefficient Public Sector: The public sector dominated the economy, but it was inefficient, unproductive, and plagued by corruption. Public sector companies were often overstaffed and poorly managed, resulting in low productivity.
  • Lack of Foreign Investment: India was not attractive to foreign investors during this period, and there was little foreign investment in the economy. The government imposed strict controls on foreign investment, and the regulatory environment was not conducive to foreign investment.

Concerns flagged by Rajan

Rajan noted that India’s economic growth rate had been declining even before the COVID-19 pandemic hit the country.

(a) Decline in GDP growth rate

  • India’s economic growth rate had fallen to 4.5% in the September quarter of 2019, before the pandemic hit in early 2020.
  • During the pandemic, the Indian economy contracted sharply, with GDP falling by 7.7% in the 2020-21 fiscal year.
  • The economy has rebounded somewhat, with the IMF forecasting GDP growth of 9.5% for the current fiscal year.

(b) Lower growth potential than hyped

  • However, Rajan noted that India’s potential growth rate is likely to be lower than in the past, due to factors such as an aging population, a decline in the working-age population, and sluggish investment.
  • He also cited the country’s poor performance on human development indicators, such as education and health, as a constraint on growth.

Key suggestions

  • Rajan called for measures to address the structural factors that are holding back growth, such as investment in infrastructure and education, and improving the ease of doing business in India.
  • He also emphasized the importance of macroeconomic stability and maintaining fiscal discipline, to avoid inflation and currency depreciation.
  • He also called for measures to address inequality, such as better targeting of subsidies to those who need them most.

Conclusion

  • Overall, Rajan’s remarks suggest that India faces significant challenges in maintaining high levels of economic growth, and that structural reforms will be needed to address these challenges.

 


Are you an IAS Worthy Aspirant? Get a reality check with the All India Smash UPSC Scholarship Test

Get upto 100% Scholarship | 900 Registration till now | Only 100 Slots Left

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Current Account Deficit (CAD): Desirable and Undesirable Components

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Current Account Deficit

Mains level: CAD and deficit financing

CAD

Central Idea

  • As per the RBI’s quarterly statistics, the current account deficit (CAD) widened to 4.4 per cent of GDP in the second quarter of 2022-23, down from 2.2 per cent in the preceding quarter. This marks a reversal from an unusual surplus of 0.9 per cent of GDP in 2020-21. In the third quarter of this financial year, while the merchandise trade deficit has widened, the CAD may witness a fall.

Get your Rs 10,000 worth of UPSC Strategic Package for FREE | PDFs, Zoom session, Tests, & Mentorship

What is Current Account Deficit (CAD)?

  • Current Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers
  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

Components of Current Account

  1. Trade Deficit
  • Trade Deficit = Imports – Exports
  • A Country is said to have a trade deficit when it imports more goods and services than it exports.
  • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
  • A trade deficit represents an outflow of domestic currency to foreign markets.
  1. Net Income
  • Net Income = Income Earned by MNCs from their investments in India.
  • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
  • Net income is measured by Payments made to foreigners in the form of dividends of domestic stocks, Interest payments on bonds and Wages paid to foreigners working in the country.
  1. Net Transfers
  • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners. It also Includes Remittances, Gifts, Donation etc.

CAD

India’s CADs have both desirable and undesirable components

  • Desirable:
  • A desirable deficit is a natural reflection of rising investment, portfolio choices and the demographics of the country.
  • If CADs can be financed by stable capital inflows, such as FDI inflows, they are desirable as they are less prone to capital flight.
  • Stable capital flows are desirable as they allow debtor countries, such as India, to utilize and allocate them into sectors that may yield long-term productive gains and foster higher economic growth.
  • Undesirable:
  • Large and persistent CADs can be undesirable if they reflect bigger problems such as poor export competitiveness and are financed by unstable financing.
  • If deficits are financed by volatile capital flows such as portfolio flows, there may be a cause of concern. Portfolio flows are capricious and more susceptible to reversals in case of any global financial shock.

The countercyclical nature of India’s CAD: A matter of concern

  • Dominance of external shocks: Research suggests that the country’s CAD rises when output falls rather than when demand rises, indicating the dominance of external shocks.
  • For instance: If oil prices rise, and as oil is an input in the production process, it raises the cost of production and leads to a fall in economic growth. In this case, CADs rise with falling growth due to both the inelasticity of oil import demand as well as its major share in India’s total imports.

Remarks to be Noted

  • Remittances and services exports have provided a counter-balance to rising merchandise trade deficits.
  • India’s services exports grew at 23.5 per cent in 2021-22.
  • While capital flows are pro-cyclical and react negatively to contractionary monetary policy by the Fed, remittances have exhibited remarkable stability.

Challenges and a Way ahead

  • The composition of financing is crucial. While FDI inflows were enough to finance the deficit in 2021-22, these inflows have been weak in the current fiscal year.
  • Over the medium term, policymakers need to arrest the negative spillovers from the slowdown in global trade on merchandise exports.
  • Further rate hikes by the US Fed may lead to capital outflows leading to additional exchange rate market pressures. This could be challenging in the current situation as a weaker currency, coupled with a sticky import basket will lead to imported inflation.
  • Policy measures thus must facilitate exports by focusing on structural reforms to improve trade competitiveness, alongside which the government must sign free trade agreements.

CAD

Conclusion

  • India is currently facing the twin-deficit problem of high fiscal and CADs. While aggressive fiscal consolidation may be undesirable in the face of rising fears about a global slowdown, a comfortable external environment can be maintained by ensuring stable financing, along with using exchange rates as a shock absorber to weather the adverse global economic situation.

Mains Question

Q. Explain the concept of Current account deficit? India’s CAD have both desirable and undesirable components. Discuss.

Attempt UPSC 2024 Smash Scholarship Test | FLAT* 100% OFF on UPSC Foundation & Mentorship programs

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

‘BIMARU’ Tag: What does this term mean?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: BIMARU states

Mains level: Read the attached story

Central idea: While addressing a summit in UP, PM recalled the tag of ‘BIMARU’, once used to describe the state.

What are BIMARU states?

  • The term “BIMARU” is an acronym formed from the first letters of five states – Bihar, MP, Rajasthan, and UP – that were believed to be economically and socially backward in the 1980s and 1990s.
  • The term was popularized by economist Ashish Bose in the 1980s to describe the poor economic and social indicators of these states.
  • He coined this term in a paper presented to then-PM Rajiv Gandhi.
  • These states were characterized by low literacy rates, poor infrastructure, high poverty rates, and low levels of industrialization.
  • The term “BIMARU” itself is an amalgamation of the Hindi words “bimar” (sick) and “ru” (a suffix meaning “land of”).

Behind the slang name ‘BIMAR’

The BIMARU states of Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh are characterized by several economic and social features that distinguish them from other states in India. Some of these features include:

  • Low per capita income: These have traditionally had low per capita income levels compared to other states in India, with Bihar having the lowest per capita income among Indian states.
  • High poverty rates: They have a high percentage of people living in poverty, with Bihar and Uttar Pradesh having some of the highest poverty rates in the country.
  • Low literacy rates: They have lower literacy rates than the national average, with Bihar having the lowest literacy rate among Indian states.
  • Poor healthcare indicators: They have traditionally had poor healthcare indicators, with high infant and maternal mortality rates.
  • Agriculture-based economy: These states are primarily agricultural states, with a significant percentage of the population engaged in agriculture and related activities.
  • Significant population: They are among the most populous states in India, with Uttar Pradesh being the most populous state in the country.

Overall, the BIMARU states have traditionally lagged behind other states in India in terms of economic and social development, although in recent years, there has been progress in improving development indicators.

Persisting challenges

These states still face significant challenges, including high levels of poverty and unemployment.

  • Still a national laggard: There is still a significant development gap between these states and the more developed regions of the country. For example, in 2019-20, per capita income in Bihar was only about a third of the national average, and in UP, only about half of the population has access to basic sanitation facilities.
  • High Population: The share of BIMARU states in the absolute increase in India’s population during 2001-26 will be of the order of 50.4 per cent while the share of the south will be only 12.6 per cent.

How are these states faring now?

  • In recent years, some of these states, such as Rajasthan and Madhya Pradesh, have shown significant improvement.
  • In terms of economic growth, several of these states have experienced high growth rates in recent years, with Madhya Pradesh and Bihar recording growth rates of over 10% in 2019-20.
  • Uttar Pradesh and Rajasthan have also recorded growth rates of over 7% in recent years.
  • There has also been progress in improving social indicators such as literacy rates and healthcare infrastructure.
  • For example, Bihar has seen a significant increase in literacy rates, with the state’s literacy rate increasing from 47% in 2001 to 63% in 2011.

Alternatives to ‘BIMARU’ terms

  • PM has urged to refrain the use of such terms as they only serves to reinforce negative stereotypes and inhibit progress towards more equitable development across the country.
  • He coined the term such as ‘Aspirational Districts/Blocks’ as alternative to such negative word.

Way forward

This involves several key strategies to address the economic and social challenges that these states face. Some of these strategies include:

  • Enhancing economic growth: The BIMARU states need to focus on enhancing economic growth through policies that encourage investment, job creation, and entrepreneurship. This can include measures such as improving the ease of doing business, providing infrastructure, and investing in sectors with high growth potential.
  • Improving social indicators: They need to focus on improving social indicators such as literacy rates, healthcare, and sanitation. This can involve investing in education and healthcare infrastructure, and implementing programs that target poverty reduction and social inclusion.
  • Enhancing agricultural productivity: Given that agriculture is a major contributor to the economy of BIMARU states, efforts should be made to enhance agricultural productivity and efficiency. This can include investments in irrigation and modern agricultural techniques, and support for small and marginal farmers.
  • Encouraging inclusive development: In order to reduce disparities and ensure inclusive development, policies and programs should be targeted towards the most vulnerable and marginalized sections of society. This can include measures to promote gender equality, social inclusion, and address issues such as caste-based discrimination.
  • Leveraging technology: The BIMARU states can leverage technology to enhance economic and social development. This can involve the use of digital technologies to improve access to education and healthcare and promote entrepreneurship and innovation.

Conclusion

  • Overall, while the BIMARU states have made progress in recent years, there is still a long way to go in terms of achieving more equitable development across the country.

 

Crack Prelims 2023! Talk to our Rankers

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Role of regulators in the Stock Market

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Stock Market, Role of regulators and investors, SEBI

regulator

Context

  • On 25 January, US-based Hindenburg Research put out a tweet, talking about a negative report on the Adani Group that it had published. The report made many allegations against the group which triggered a fall in the price of their listed stocks.

Crack Prelims 2023! Talk to our Rankers

Just think of this situation

  • A research report is released by a global firm that is also a short seller (that is, one who sells shares that it does not own, but buys them back at a lower price once the price falls).
  • The report outlines areas of concern in a company that is listed in another jurisdiction. The issues raised could relate to the firm’s accounting or market practices.
  • The report is released, quite curiously, before the company is going in for an equity issuance.

What happens after the news?

  • Panic sale: As equity markets run on sentiments, such news leads to a panic sale and the share price of the company comes down sharply.
  • Widespread uncertainty: The market sees investor wealth eroding sharply, leading to widespread uncertainty, as this is how contagions progress.
  • Outrage: Denials are issued by the concerned company while the short seller stands firm on its views. However, shareholders have seen an erosion in their wealth and there is outrage everywhere.

In such a situation, what can the regulator do?

  • Policies and system in place to put verified facts in public domain: It is for regulators in other jurisdictions to have policies/systems in place for verified facts to be put in the public domain.
  • In the current context: The Securities and Exchange Commission of the US would matter and if the broker complied with its rules, then there is nothing to stop their views from being aired in a globalised world. This is why it is said that if any company opts for listing in overseas markets, there is more reason to ensure that its accounts are in place and there are no deviations from best practices.

What can regulators do to protect investors?

  • It is necessary to understand that when share prices tumble: Only when someone sells the shares that have declined in value will a loss be actually incurred. This is the first point that ordinary investors need to keep in mind. While the media will talk of the loss of value and wealth, it is notional for those shareholders who don’t sell. And stock prices will return to their equilibrium once the storm passes.
  • There is a need to have a wide market intelligence network: A special division that continuously analyses the messaging about Indian companies across the world. Given that such reports do not come up without signals being sent along the way, monitoring of views on companies listed overseas would be essential.
  • While citing financial accounting irregularities need to be looked into: the accounting and auditing firms need to take on more responsibility to ensure that the Generally Accepted Accounting Practices (GAAP) are followed for overseas-listed firms. They will have to be made partners in any such crisis in terms of taking ownership and clarifying the same.
  • Detecting price manipulation: Price manipulation, for instance, is one practice that has always been a concern for regulators. And it takes a lot of experience to detect it. Thus exchanges need to ensure that their market watch and surveillance practices are robust. This is where trading patterns can show if there has been market manipulation.
  • Restoring assurance and sanity in the market: It is necessary that investors have some assurance from the regulator, which may be needed to restore sanity in the markets. However, this should be an immediate and time-bound investigation which looks at the allegations or the shortcomings of the report.
  • Investing derivative segments too: As a corollary, the regulator needs to investigate the derivative segment too and probably talk to other regulators to analyse how the short positions have been created and whether they were in order. This will mean being in touch with other regulators, especially the SEC which regulates the jurisdiction for most overseas listings.
  • Audit firms can be employed to flag off the concerns: The regulator should insist that all overseas listed companies have regular investor calls with stakeholders where meetings are recorded and transmitted back home for special teams to examine so that there is a sense of how potential investors feel about the companies.

Conclusion

  • In the cases of overseas reports, investors must have some assurance from the regulator, which can restore sanity in the markets. But investors also need to be proactive when investing. Those who are more active investors would perhaps need to be aware of developments in the companies that they have invested in.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Possibility of global recession?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Current status of global economy and Global recession implications

recession

Context

  • There have recently been growing concerns about the global economy slipping into recession. These concerns were primarily triggered by the contraction of the US economy, observed in the first half of 2022. Negative growth in two consecutive quarters is commonly but not officially used as an indication of recession.

Crack Prelims 2023! Talk to our Rankers

Background: Status of the US economy

  • First and second quarter of 2022: As reported by the Bureau of Economic Analysis (BEA), the US real Gross Domestic Product (GDP adjusted for inflation) decreased at an annual rate of 1.6 per cent and 0.6 per cent in the first and second quarters of 2022, respectively.
  • Third quarter: In the third quarter, however, the US economy grew by 3.2 per cent, signalling a significant recovery.
  • Fourth quarter: The latest BEA advance estimates show that the US real GDP increased at an annual rate of 2.9 per cent in the fourth quarter.
  • Expansion of US economy a positive sign: Despite the slight decrease from the third quarter, the continued expansion of the US economy at the end of 2022 marks a positive sign, soothing concerns about a recession in 2023.

recession

Economic recovery of the US economy

  • Positive growth in fourth quarter: The positive growth in the fourth quarter can primarily be attributed to consumer spending, which increased by an annualised rate of 2.1 per cent, and private inventory investment that showed an upturn in 2022. Although a significant decline from the 5.9 per cent increase in 2021, the difference accounts for the enthused post-Covid economic recovery in 2021.
  • The US labour market continues to remain robust: The unemployment rate was recorded at a low of 3.5 per cent in December 2022, matching the pre-pandemic levels. Also, the total non-farm payroll employment increased by 2,23,000 in December, exceeding the Dow Jones estimate of 2,00,000.
  • Inflation has eased: While the labour market remains tight, US inflation has eased in the last few months. Consumer prices fell 0.1 per cent in December the largest month-over-month decrease since April 2020, due to reductions in motor vehicle and gasoline prices.
  • Layoffs not yet translated into rise in jobless claims: Although not a perfect association, the decline in jobless claims in January shows that the mass layoffs in recent weeks, particularly in the tech sector, have not yet translated into a rise in claims, suggesting the possibility of finding new jobs.
  • The reopening of China’s borders can have positive implications for the global economy: As China resumes its economic activities to pre-Covid levels by boosting growth, domestic consumption is expected to increase significantly. With the ease of trans-border movement and eventual increase in exports of consumer and industrial goods, global trade is expected to strengthen as well.

recession

What is Recession?

  • A recession is a significant decline in economic activity that lasts for months or even years.
  • Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
  • Recessions are considered an unavoidable part of the business cycle or the regular cadence of expansion and contraction that occurs in a nation’s economy.

Possibility of a global recession

  • Elevated inflation continues to be a cause for global concern: Despite the fall in consumer prices, the headline CPI for the US showed an annual increase of 6.5 per cent in December 2022. In spite of the slow-paced increase in headline CPI, persistent elevation in core inflation excluding food and energy continues to be a major issue across economies.
  • Interest Rate Hikes on the Horizon: Consequently, the central banks are expected to continue with interest rate hikes in the coming months. On an annualised level, the CPI inflation in Australia also jumped to 7.8 per cent in the 2022 fourth quarter, increasing the likelihood of respective interest rate hikes as well.
  • China’s Impact on Commodity Prices: Moreover, an increase in China’s demand for goods post-reopening could drive up commodity prices, thereby creating an inflationary impact. For instance, China’s increased demand for natural gas would mean more competition with the European market, leading to higher commodity prices that can put further inflationary pressures on Europeans already dealing with high energy bills.
  • Higher borrowing costs: Rising interest rates would incur even higher borrowing costs that could dampen consumer spending. While sectors sensitive to high borrowing costs such as housing and construction have slowed down significantly.

recession

Conclusion

  • Among the positive signs are the continued expansion of the US economy and the reopening of China’s borders. Rising inflation remains a cause for global concern. However, prevalence of mixed signals suggests that the onset and depth of a global recession in 2023 are not certain.

Mains question

Q. Highlight the current situation of global economies. Discuss if there’s a global recession in 2023?

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Layoff and the conditions for retrenchment

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Layoffs, reasons and impact, Industries, Employment and economy

Layoff

Context

  • Last year, around 1,60,000 workers in the tech industry were laid off globally. In contrast, in just this month alone some 60,000 tech workers have been laid off till now. On the back of a gloomy global economic outlook and prospects of a possible recession, tech firms across the world from US-based giants like Alphabet, Amazon and Meta to early-stage startups have engaged in large-scale retrenchments.

What is means by Lay-Off?

  • A layoff is the temporary or permanent termination of employment by an employer for reasons unrelated to the employee’s performance.
  • Employees may be laid off when companies aim to cut costs, due to a decline in demand for their products or services, seasonal closure, or during an economic downturn.
  • When laid off, employees lose all wages and company benefits but qualify for unemployment insurance or compensation (typically in USA).

Inflation after strong recovery of the global economy: Two factors

  • Outpaced demand: Buoyed by extraordinary pandemic relief support to households, aggregate demand in advanced economies outpaced supply.
  • Supply chain disruption as a result of Russia- Ukraine war: the armed conflict between Russia and Ukraine caused supply-chain disruptions, leading to global inflationary pressures for food and fuel. In response, the US Federal Reserve has rapidly hiked rates.

Layoff

Layoff drive in India

  • Lay-offs in India: As multinational firms seek to cut their payroll figures worldwide, this lay-off drive has made its way to India as well.
  • Impact on Indian workers: Indian workers, including expatriates and local employees, in both the traditional IT sector and the tech-based startup sector have been affected.
  • Slowdown in funding in 2022: Despite a strong start, funding in India began to slow down in 2022, with third-quarter funding falling to a two-year low.
  • Rising interest rates and cost of capital: Rising interest rates have meant that the cost of capital has increased and venture capitalists have to be more selective about how they deploy funds in this funding winter.
  • Restructuring and cost-cutting for Indian tech startups: Indian tech startups are under pressure to cut costs and restructure their businesses in search for profitability. As a result, startups, including unicorns have engaged in broad-based retrenchments.

Retrenchment conditions according to Industrial Disputes Act

  • One month notice with reasons is must: Employers must give a one-month notice with reasons for retrenchment to workers who have been in continuous service for at least a year.
  • Must provide compensation: Employers must give retrenchment compensation.
  • Notice shall be served: A notice in the prescribed manner must be served on the appropriate government.
  • Principle of last come first go shall be followed: Employers must follow the principle of last come, first go while retrenching employees.

Layoff

Concerns for contract workers

  • Employers often skirt legal requirements by asking for voluntary resignations to remain outside the scope of retrenchment provisions.
  • In any case, these mandates only apply to non-managerial employees; managerial employees are governed by their employment contracts.
  • There are no similar protections available to gig or contract workers.

Conclusion

  • Even as India seeks to lead a digital and technologically-driven world, it is important to note that the tech sector is not immune to harsh macroeconomic realities. It is crucial for the government and private sector to work together to mitigate the impact of layoffs on workers and to ensure that the industry continues to grow and create opportunities for all.

Mains question

Q. Layoffs have been frequently reported in the news recently. In this context, briefly explain the term layoffs and discuss the factors contributing to them? Highlight the impact of layoffs in India.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

State of the Economy Report and the Macroeconomic Stability

Note4Students

From UPSC perspective, the following things are important :

Prelims level: State of the Economy report

Mains level: Indian economy- Monetary policy and macroeconomic stability

Economy

Context

  • The Reserve Bank of India (RBI) just-released State of the Economy report. The report suggests that while controlling inflation was a big concern in 2022, the bank may now be more focused on avoiding a recession in 2023. There is still debate about whether the recession will be short and mild or long and severe.

Crack Prelims 2023! Talk to our Rankers

What is State of the Economy report?

  • A State of the Economy report is a paper that the Reserve Bank of India (RBI) releases which gives a summary of how the country’s economy is doing.
  • The report talks about things like prices going up, how much the economy is growing, how many people have jobs, and the bank’s plan for managing money.
  • The RBI uses the report to make decisions about interest rates and other economic rules, and it also helps people like economists, investors, and regular citizens understand the economy and make smart choices.

Economy

What the RBI’s State of the Economy report says?

  • Retail inflation eased: Retail inflation eased to 5.72 per cent in December. In November, the inflation print was 5.88 per cent. The government has mandated the central bank to keep inflation at 4 per cent with a +/- 2 per cent band.
  • Consumer price inflation within RBI’s upper tolerance limit: The report said the country’s macroeconomic stability is getting bolstered with inflation being brought into the tolerance band. consumer price inflation in the last two months falling within the RBI’s six per cent upper tolerance limit
  • Hopeful for the fiscal consolidation: It is even hopeful of fiscal consolidation underway at central and sub-national levels and the external current account deficit on course to narrow through the rest of 2022 and 2023. RBI said in a report that they want to keep prices steady at a certain level and bring it down to 4% by 2024.
  • Narrowing CAD: Lead indicators suggest that the current account deficit is on course to narrow through the rest of 2022 and 2023.
  • Stock market continue to outperform peers: The country’s stock markets stood out in 2022 and continue to outperform peers on the strength of macroeconomic fundamentals and retail participation.

Who prepares the report and what the authors says?

  • Views expressed are not of the institution: The report was prepared by RBI’s deputy governor Michael Patra and other RBI officials. The views expressed in the report are of the authors and not of the institution, the report said.
  • India at a bright spot: Authors said the prospect of India as a bright spot amidst 2023’s encircling gloom is burnished by most recent history and current developments. By cross-country standards, the country’s economy exhibited resilience through 2022 in the face of the triad of shocks war; monetary policy tightening; and recurring waves of the pandemic.
  • India will be ahead of UK: According to the authors, at current prices and exchange rates, India will still be the 5th largest economy in the world in 2023, worth $3.7 trillion and will be ahead of the UK.

Economy

Back to basics: What is Monetary policy?

  • Monetary policy is the macroeconomic policy laid down by the central bank.
  • It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
  • A contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation.
  • During times of slowdown or a recession, an expansionary policy grows economic activity, by lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.

What are the concerns and prognosis over the report?

  • Predictions are too optimistic: The report’s release is significant, as it comes before the Union Budget for 2023-24. However, the report’s predictions may be too optimistic.
  • Risks tilted towards growth than inflation: The balance of risks is currently tilted towards growth rather than inflation, both globally and domestically.
  • Slowing down the pace of monetary tightening: It is appropriate for the RBI to slow down or pause the pace of monetary tightening. Monetary policy takes time to have an effect, so the impact of these increases may take a few quarters to realise actually.
  • Wait and Watch Approach: The RBI can afford to adopt a wait-and-watch approach and allow the impact of past actions to be fully felt. This does not mean neglecting inflation, as bringing it down to 4% is still important.

Economy

Conclusion

  • The world is, no doubt, viewing India favourably as an investment destination, both for its large domestic market and the need to de-risk from China in the current geopolitical environment. The government’s focus on improving the country’s physical as well as digital infrastructure is boosting the investors’ confidence. Demonstrating macroeconomic stability and policy credibility can be the icing on the cake to bring the world to India.

Mains question

Q. Highlight RBI’s State of the Economy report and discuss what makes India a favorable investment destination?

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Economic growth and the government disintermediation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's fiscal challenge and options

Context

  • Between spending and saving, governments are generally better at the former. High growth comes with the advantage that government revenue expands and gets spent, as is happening this fiscal. But this is also habit-forming. If growth tapers down as is expected in FY 2024 cutting back government spending will be politically rocky just before a general election. Better then, to get selective on spending early on.

Crack Prelims 2023! Talk to our Rankers

Current economic indicators

  • Finance Minister Nirmala Sitharaman took over the hot seat in May 2019. True to character, she resolved to pick up this rolling can by tabling in the FY 2021 budget, an amount of INR 2.64 trillion (1.2 percent of GDP) to pay these overdues.
  • India, yet again, in an era of high inflation and high oil import prices. It has taken courage and sagacity to reduce the FD from 9.2 percent (FY 2021—the COVID-19 year) to a targeted 6.4 percent this fiscal.

Challenges to establish a declining trend back towards an FD of 3.5 percent of GDP

  • The oil slick of global uncertainty and inflation: Oil price uncertainties, created by the Ukraine standoff, which was partially cushioned via nimble Indian diplomacy resisting the boycott of cheaper Russian oil, has kept imported oil at US$77.7 per barrel in January 2023. But the ongoing opening up of China could firm up oil prices.  
  • India’s high-debt burden compromises fiscal resilience: Interest payments in FY 2023 (budgeted) at INR 9.4 trillion, are the largest expense outlay bucket, accounting for 43 percent of budgeted Union net revenue receipts, up from 41.7 percent in FY 2021. Defence and domestic security services at 15 percent come next, followed by subsidies (food, fertilizers, and fuel) at 14 percent and inflation-indexed government pensions at 9 percent.
  • Infrastructure lags: Infrastructure remains a drag on growth although intercity highways have improved. Multimodal transport solutions remain underdeveloped as do train stations and bus terminals in most towns and rural areas. The competitiveness of major Indian ports in 2018 was ranked 42nd well below China, Malaysia and Thailand- pulled down by low outcomes in infrastructure and turn-around time. The gas grid remains nascent with just 10.1 million connections versus 309 million users for LPG canisters a more volatile substitute for cooking fuel, than piped natural gas.

What is the worrying situation?

  • Inflation: The Reserve Bank of India (RBI) expects retail inflation, assessed at 5.78 percent (December 2022) to trend downwards in FY 2024. But signals of embedded inflation via core inflation (other than volatile food and fuel) above 6 percent are worrying.
  • Disrupted energy supply: A disruption in energy supplies could upset sanguine inflation expectations.
  • Taming inflation would increase fiscal crunch: Taming the resulting inflation by reducing taxes on the retail supply of petroleum products would increase the fiscal crunch.
  • Interests funded by additional borrowings is risky strategy: High-growth economies can afford to fund by borrowings as can start-ups, which borrow against their future growth prospects. For a large, lower middle-income economy like India, with historically moderate long-term growth rates (4 to 6 percent), it compromises reserve fiscal capacity to respond, through counter-cyclical measures, to economic downturns induced by economic shocks a risk-laden strategy.

What India should do?

  • Resume much delayed disinvestment: Resume the much-delayed privatisation and disinvestment of public sector enterprises and government-owned financial sector entities.
  • Make Indian railway and autonomous entity: Second, make Indian Railway an autonomously regulated, commercially run entity, providing a surplus to the government rather than looking for budgetary support.
  • Encourage public finance outlays: Maximise the economic impact by encouraging public finance outlays to be driven by competitive metrics of allocative efficiency across investment options and program/project implementation models.

Conclusion

  • For a new phase of growth, government disintermediation is appropriate. It allows for increased competition and innovation in the private sector, leading to greater efficiency and economic growth. India has momentum. What it needs is for the reins to be lightly held.

Mains question

Q. What obstacles does the Indian economy face as it enters a new era of growth, and what should India do?

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A Bumpy Ride for India’s Economy in 2023: A perspective

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Prospectus on Indian economy

Economy

Context

  • India’s general elections, scheduled for 2024, will also bring in their wake high-pitched rhetoric and spin-doctoring to further muddy the waters. In short, buckle up because the next 12 months promise a flurry of conflicting signals and a rather bumpy ride. A perspective on Indian economy in 2023.

Crack Prelims 2023! Talk to our Rankers

Turbulent global situation

  • Pandemic plus Ukraine war: One conflicting signal is already staring us in the face, the seemingly doomed future of globalization. Post-Brexit, the covid pandemic and Russia-Ukraine conflict, there are multiple signs indicating retrenchment of globalization.
  • Collapse of Supply chains: The collapse of global supply chains due to economic lockdowns has refocused attention towards near-shoring or on-shoring.
  • Trade barriers: In an associated move, nations have erected protective trade barriers; both the US and EU are using climate plans to renege on free-trade promises. The end result, reduced global trade.

What are the prospects from international institute?

  • BlackRock Investment Institute’s 2023 Global Outlook: Various financial institutions across the globe are trying to wrap their heads around the phenomenon. According to BlackRock Investment Institute’s 2023 Global Outlook, “We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs.
  • Citi’s wealth outlook for 2023: Citi’s wealth outlook for 2023 intoned ominously, as a less globalized, more polarized world presents challenges for investors.

Economy

Effect of globalization and policy change by developed economies

  • Rising federal rates: As US employment numbers and demand data continue to stay elevated (despite, paradoxically, slowing growth), the Federal Reserve is likely to be unrelenting in its endeavor to bring the inflation rate back to 2%.
  • Rise in domestic interest rates: The Fed’s actions will undoubtedly strengthen the dollar further, forcing many central banks across the global economy to raise interest rates in tandem. Interestingly, central banks in emerging economies today face threats to their independence from an external agency and not from the political dispensation at home.
  • Increase in food and fuel cost: Beyond interest rates, inflation also travels easily across national boundaries, especially through food and fuel trade. The fractured supply chains and war in Europe have ensured that inflation’s harmful impact might sustain through 2023.
  • Omicron variant and travel restrictions: The other undesirable effect of globalization could be the persisting effect of the Omicron variant that has travelled seamlessly from one corner of the world to another. The Indian government has been forced to resume random screening of passengers arriving from different parts of the world to test for the numerous Omicron variants that have witnessed a resurgence in recent times.

Economy

Impact on Indian Economy

  • Over-priced equity markets: Indian equity markets have been soaring since early 2020, once the initial shock of the covid pandemic was negotiated. Cross-country comparisons across emerging markets by various valuation indices show the Indian market to be considerably over-priced currently, both relative to its own past performance as well as compared with the rest of the world.
  • High retail investors: Interestingly, the market held its own despite foreign portfolio investors (FPI) pulling out money over the past few months. Domestic investment institutions and retail investors are believed to have kept the market valuation up. But below this cheery visage lies a grim reality.
  • Worrisome credit records: Sectoral credit deployment data from the Reserve Bank of India (RBI) shows credit growth in commercial banks in recent months has been driven by only two segments: non-bank financial companies (NBFCs) and consumer loans.
  • High retail borrowings: A large chunk of the NBFC borrowing was also for on-lending to retail borrowers, given tepid industrial credit demand. RBI data for commercial banks shows consumer loans in four categories advances against fixed deposits, advances against shares or bonds, loans against gold jwellery and other personal loans grew by almost 71% between April 2020 and November 2022.
  • Loans for equity investments: It is quite likely that a large proportion of these loans have found their way into stock markets; the Nifty-50 index gained close to 118% between April 2020 and November 2022, at a time when FPI investments during the same period witnessed a net inflow of only ₹1,464 crore.

Conclusion

  • The year 2023 appears to be very bumpy for economy in general and credit growth and recovery in particular. SEBI and RBI need to protect the retail investors from Ponzi scheme and fake promises of guaranteed returns.

Mains Question

Q. How policy changes in developed economies affects the India’s decision making? Assess the effect of turbulent global situation on credit growth in India.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Indian economic growth forecast

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Indian economic growth estimate and the areas of concern

growth

Context

  • The Indian economy is expected to grow at 7 per cent in 2022-23 as per the first advance estimates of national income released by the National Statistical Office (NSO) on Friday. This is marginally higher than the RBI’s most recent assessment in the December monetary policy committee meeting, the central bank had lowered its expectation of growth to 6.8 per cent.

Crack Prelims 2023! Talk to our Rankers

growth

Estimate: Indian economic growth

  • As per the latest estimates growth is likely to slow down in later half: Considering that the economy grew by 9.7 per cent in the first half of the financial year (April-September), the latest estimate implies that growth is likely to slow down to 4.5 per cent in the second half of the year (October-March) as the base effect wanes.
  • Full year growth estimates India will be fastest growing economy: Notwithstanding that, the full-year growth estimate suggests that India will be one of the fastest-growing economies in the world.

Positive signs in the Indian Economy

  • Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity.
  • Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
  • On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.

growth

Areas of concern

  • Private consumption is likely to contract in the second half of the year: While the pace of contraction is expected to be marginal, the slowdown in spending could be due to either the exhaustion of pent-up demand or the lagged impact of a tighter monetary policy.
  • Exports growth likely to grow: As per the estimates, exports are likely to grow at almost 12 per cent in the second half of the year. This is at odds with recent data which showed that export growth has actually slowed down considerably as advanced economies have come under pressure.
  • Agriculture growth likely to slow down: Agricultural growth is expected to slow down in the second half. As per some analysts this is not in sync with the healthy sowing rates and reservoir levels.
  • Manufacturing will go upward: The manufacturing sector, which was almost flat in the first half of the year, is expected to witness an uptick in the second half. It is difficult to reconcile this with the view that both domestic demand and exports are likely to remain subdued, which would in turn impact industrial production.
  • Government spending will remain almost flat: Public administration, defence and other services, which largely connotes government spending, is expected to remain more or less flat in the second half. This is odd considering that government consumption expenditure is pegged to grow at 7.2 per cent during the period.

growth

As the data is not yet concrete, estimates made are likely to change

  • As the first advance estimates suffer from data limitations, they are based only on seven to eight months of data these are likely to change once more data is available.
  • However, they do provide some sense of underlying momentum in economic activities, and are useful in the context of the upcoming Union budget.
  • The last budget had assumed a nominal GDP growth of 11.1 per cent. However, as per the latest estimates, nominal GDP is expected to grow at a significantly higher pace of 15.4 per cent.

Conclusion

  • Along with trends in tax collections as per which the government’s revenues will surpass budgeted targets by a significant margin, these growth estimates only increase the likelihood of the Centre meeting its budgeted fiscal deficit target for the year.

Mains question

Q. As per the first advance estimates of national income released by the National Statistical Office, Indian economy is expected to grow at 7 per cent in 2022-23. In light of this discuss some of the latest projections and the areas of concern for Indian economic growth.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Blue economy and marine pollution

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Blue economy

Mains level: Blue economy , maritime pollution and associated challenges

Blue economy

Context

  • Blue economy relates to presentation, exploitation and regeneration of the marine environment. It is used to describe sustainability-based approach to coastal resources. The worry is that the oceans are under severe threat by human activities, especially when the economic gains come at the cost of maintaining environmental sanity.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Blue economy

From the beginning: The Blue economy

  • Origin of the concept: Gunter Pauli’s book, “The Blue Economy: 10 years, 100 innovations, 100 million jobs” (2010) brought the Blue Economy concept into prominence.
  • A project to find best nature inspired and sustainable technologies: Blue Economy began as a project to find 100 of the best nature-inspired technologies that could affect the economies of the world. While sustainably providing basic human needs potable water, food, jobs, and habitable shelter.
  • Inclusive approach and objective: This is envisaged as the integration of Ocean Economy development with the principles of social inclusion, environmental sustainability and innovative, dynamic business models
  • Environment friendly maritime infrastructure: It is creation of environment-friendly infrastructure in ocean, because larger cargo consignments can move directly from the mothership to the hinterland through inland waterways, obviating the need for trucks or railways

Blue economy

Significance of Maritime transport

  • One of the largest employers within ocean-related activities: Maritime transport plays a big role in the globalised market in the form of containerships, tankers, and ports, coastal tourism is the largest employer within ocean-related activities.
  • Eighty percent trade happens on the seas: Eighty per cent of world trade happens using the seas, 40 per cent of the world’s population live near coastal areas, and more than three billion people access the oceans for their livelihood.
  • Annual value makes up equivalent to seventh largest GDP: A healthy marine environment is essential for a sustainable future for people and the planet. Its value is estimated to be over $25 trillion, with the annual value of produced goods and services estimated to be $2.5 trillion per year, equivalent to the world’s seventh largest economy in gross domestic product (GDP) terms.
  • Ensures food security: The oceans, seas and coastal areas contribute to food security and economic viability of the human population. The ocean is the next big economic frontier, with the rapidly growing numerous ocean-based industries.

What are the concerns?

  • Human induced Oceanic pollution: Marine activities have brought in pollution, ocean warming, eutrophication, acidification and fishery collapse as consequences on the marine ecosystems.
  • Oceans are rarely financial institutions: The ocean is uncharted territory, and rarely understood by financial institutions. Hence preparedness of these institutions in making available affordable long-term financing at scale is nearly zero.
  • Developing nations pay heavy price: In this journey of achieving blue economy goals, it is developing nations that pay a heavy economic price.
  • Lack of capacity is a critical hindrance: Many of the developing nations have high levels of external debt. Lack of capacity and technology for transition between agri economy and marine economy is also a critical hindrance.
  • Not having a elaborative guiding principles is a major concern: There is concern that without the elaboration of specific principles or guidance, national blue economies, or sustainable ocean economies, economic growth will be pursued with little attention paid to environmental sustainability and social equity.

Blue economy

What should be the approach towards achieving Blue economy?

  • Inclusive discussion and participation is must: The blue economy is based on multiple fields within ocean science and, therefore, needs inter-sectoral experts and stakeholders. It is imperative to involve the civil society, fishing communities, indigenous people and communities for an inclusive discussion.
  • SDG-14 journey cannot undermine the other SDGs: The UN stresses that equity must not be forgotten when supporting a blue economy. Land and resources often belong to communities, and the interests of communities dependent on the ocean are often marginalised, since sectors such as coastal tourism are encouraged to boost the economy.
  • Integrated marine spatial planning with national and global expertise is necessary: Developing the blue economy should be based on national and global expertise. It is important that any blue economy transformation should include using integrated marine spatial planning. This would provide collaborative participation of all stakeholders of the oceans, and would make room for debate, discussion and conflict resolution between the stakeholders.

Where does India stand at this hour?

  • Suitable natural geography: Vast coastline of almost 7,500 kilometres, with no immediate coastal neighbours except for some stretches around the southern tip. In some sense, India has the advantage of its natural geography
  • Opportunity on G20 presidency: It is an opportunity for India to use its G20 Presidency to ensure environmental sustainability, while providing for social equity.
  • Rising role and significance: India’s engagement in the blue economy has been rising, with its active involvement in international and regional dialogues, and maritime/marine cooperation.

Conclusion

  • Achieving the Blue economy goal would need tremendous human effort, and would call for global cooperation through various legal and institutional frameworks. This also includes the need to develop newer sectors such as renewable ocean energy, blue carbon sequestration, marine biotechnology and ex-tractive activities, with due attention paid to the environmental impacts.

Mains question

Q. What do you understand by mean Blue economy? Highlight the importance of maritime transport and discuss what need to be done to achieve blue economy in a true sense?

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Stock Trade and the Economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Indian Economy, stock trade indicators and economic growth

Stock

Context

  • Even as the RBI steadily downgraded India’s growth forecasts for the year from 7.2 per cent in April to 6.8 per cent in December, and the benchmark Nifty50 index ended the year up a mere 4.1 per cent, a handful of stocks delivered outsized returns to investors.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Expansion of business and reward

  • Adani gained because of expansion: The top trade was undoubtedly that of Adani Enterprises with the stock more than doubling over the year. But that should not come as a surprise. After all, the group has embarked on a breathless pace of expansion (both organic and inorganic) that is perhaps unparalleled in recent times.
  • Unexpected rise in prices: Share prices of associated companies such as Adani Green have also seen a remarkable surge, catapulting the group into the top leagues of Indian conglomerates.
  • Risky price-to-rent ratio: One should be forgiven for thinking that residential real estate in Delhi, with a price-to-rent ratio that ranges between 40-50, is expensive. Adani Enterprises is currently trading at a price-to-equity ratio of 394 as per NSE. The Nifty50, in comparison, is trading just above 21.

Performance of Public sector banks

  • SBI AND PNB gained: The year also belonged to Indian banks, more specifically to public sector banks, who at last seemed to have turned the corner. SBI is up more than 30 per cent, while Punjab National Bank is up almost 50 per cent. Others like Bank of Baroda and UCO Bank have more than doubled.
  • Outperforming private banks: While private sector bank stocks have also seen a sharp rise Axis is up almost 35 per cent, while ICICI is up 17 per cent, public sector banks have outperformed their private counterparts by a significant margin. The Nifty PSU bank index is up 70 per cent for the year, while in comparison, the private bank index is up only 21 per cent. This was perhaps to be expected.
  • Cleaning up balance sheet: Public sector banks have been on a multi-year drive to clean up their balance sheets, and shore up capital. And while there are still some concerns over possible slippages from accounts that were restructured during the pandemic, gross non-performing assets or bad loans were down to 6.5 per cent at the end of September 2022.
  • Rising lending rates: Moreover, lending is growing at a brisk pace. And banks’ spreads also have improved with the interest rate cycle on the upswing. In typical fashion, lending rates have risen faster than deposit rates. But, as credit growth picks up and competition for deposits among banks begins to intensify, deposit rates are likely to edge upwards, putting pressure on the spread.

Status of Consumption and auto sector

  • Consumption is up: while concerns over the unevenness of the economic recovery persist, consumption stocks have fared well. ITC is up more than 50 per cent, as are Britannia (almost 20 per cent) and HUL (9 per cent).
  • Real wages have not increased: But with firms underlining the continuing pressure on volumes with elevated inflation, real wage growth has been subdued in rural areas it is likely that in some product segments, the formalisation theme is still playing out.
  • Size of market is not expanding: The bigger formal firms gaining market share even as the overall size of the market isn’t expanding as hoped.
  • Auto sector have done well: Among the auto stocks, M&M and Maruti are up 50 per cent and 12 per cent respectively, though Tata motors is down 22 per cent, while among the two-wheelers, both Bajaj and Hero are up.

Better performance of Infrastructure

  • Moderate uptick in infrastructure: Infrastructure stocks are a mixed bag. Larsen & Toubro, often thought of as a proxy for the domestic capex cycle, is up almost 9 per cent, recently hitting a new high.
  • Impact of PLI scheme: Perhaps, this reflects a pick up in the public sector capex or the private sector push under the government’s production-linked investment scheme.
  • Mix picture of steel and cement: Among cement stocks, Ultratech is down, though ACC is up, while among steel stocks, SAIL is down, Tata steel is almost flat, but JSW Steel is up.

IT sector was worst performing

  • IT NIFTY significantly down: The sector which has taken a beating has been IT. The Nifty IT index is down 26 per cent.
  • Heavy correction in market: All major IT firms from TCS to Infosys to Wipro have witnessed heavy correction.
  • Impact of slowdown in advanced economy: Valuations of the sector will be heavily influenced by market views over the slowdown in advanced economies which are major revenue centres for these firms.

Conclusion

  • Though stock market doesn’t reflect the entirely true picture of economy but it certainly a good indicator of where the retail investor and common man invest his money. India’s stock market is going to be top 3 in the world. SEBI must protect the retail investor from this highly volatile terrain.

Mains Question

Q. Analyze the performance of the auto and IT sector in India through lenses of stock market? Why the balance sheet of public sector banks is improving?

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

New Year and the Indian economic growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Indian economic growth prospect and challenges

economic

Context

  • The new year begins on a slightly more optimistic note for India. Global crude and food prices are down, the rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022, even as official foreign exchange reserves have recovered. However, there are challenges to the economic growth of India which needs an immediate attention and action.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

The current scenario and the optimism around Indian economy

  • Global crude and food prices: Global crude and food prices are roughly 38 per cent and 15 per cent down respectively from their highs in March, following Russia’s invasion of Ukraine.
  • Stabilised rupee: The rupee has stabilised at 82-83 to the dollar after dropping from 74.5 levels at the start of 2022
  • FOREX recovered: even as official foreign exchange reserves, which had plunged to $524.5 billion on October 21 from a year-ago peak of $642 billion, have since recovered to $562.8 billion.
  • Environmental conditions are good for Rabi crops: With the prospects for the upcoming rabi crop looking good, as there is favourable soil moisture conditions, timely onset of winter and improved fertiliser availability on the back of declining international prices one can expect consumer inflation to ease further.

economic

What is inflation?

  • Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall (a situation called deflation).

economic

What are the challenges?

  • Challenge is more on growth than on Inflation: The challenge for India this year is likely to be more on the growth than on the inflation front.
  • It seems, Chinese’s authoritarian policies making India a favourable investment destination: On paper, the world’s disillusionment with China (more specifically, the authoritarian policies of Xi Jinping, both at home and beyond) and its diminishing economic prospects, worsened by a looming demographic crisis, should be making India every investor’s favourite destination.
  • On paper government efforts are honest to attract investment: The present government’s focus on improving the country’s physical as well as digital infrastructure plus schemes such as production-linked incentive to attract investments in specific sectors, from solar photovoltaic modules and drones to specialty steels ought to have given added impetus to this process.
  • But on the ground, neither domestic nor foreign companies are really investing: The biggest drag on investment during the last decade was over-leveraged corporates and bad loans-saddled banks.
  • Deepening global slowdown is a major challenge to the economic growth: That twin balance sheet problem has more or less resolved itself. Today’s problem has mainly to do with strained government and household balance sheets. That, coupled with a deepening global slowdown constricting export demand, could have a bearing on India’s economic growth.

What is Current Account Deficit (CAD)?

  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

economic

What should the government do?

  • Refrain from fiscal stimulus and maintain macroeconomic stability: It should certainly refrain from any fiscal stimulus to kick-start investment or drive growth. Far from stimulus, what the country needs is macroeconomic stability and policy certainty.
  • Managing current account deficit: The current fiscal deficit and public debt levels are far too high to allow any new populist schemes in the name of putting money in people’s hands or sharp tax cuts to supposedly revive investor sentiment. Large government deficits will invariably spill over into current account deficits. The latter number, at 4.4 per cent of GDP in July-September, was the highest for any quarter since October-December 2012 and the prelude to the last so-called taper tantrum-induced balance of payments crisis.
  • Must prioritize fiscal consolidation: The coming budget must prioritize fiscal consolidation. This will enable the RBI to also pause interest rate hikes and further monetary tightening, which is probably not the best thing for an economy already facing multiple growth headwinds.

Conclusion

  • India’s challenge has shifted from inflation management to facilitating growth in 2023. Policy stability and credibility should be the mantra that will ultimately work for India.

Mains question

Q. It is said that the new year 2023 is starting on a slightly more optimistic note for the Indian economy. In this background, discuss the challenges facing India’s economy and what the government should do?

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s Path to Prosperity through Formal Employment

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Emmployment issues

prosperity

Context

  • Mass prosperity for massive populations is hard. India’s large remittances from a small population overseas and IT sectors employability reinforce that our mass prosperity strategy should be human capital and formal jobs.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

prosperity

Why human capital formation is effective tool for mass prosperity?

  • Disproportionate contribution of IT employees: A strong case for human capital-driven productivity is our software employment — 0.8 per cent of workers generate 8 per cent of GDP.
  • Remittance by NRIs: This case is reinforced by remittances from our overseas population of less than 2 per cent of our resident population crossing $100 billion last year.
  • Shift towards formal employment: A World Bank report suggests that the qualitative shift during the previous five years from low-skilled, informal employment in Gulf countries (dropped from 54 per cent to 28 per cent) to high-skilled formal jobs in high-income countries (increased from 26 per cent to 36 per cent) is significant.
  • Remittances are higher than FDI: Our rich forex remittance harvest roughly 25 per cent higher than FDI and 25 per cent less than software exports is fruit from the tree of human capital and formal jobs.

prosperity

Limitations of Fiscal and monetary policy

  • Credit availability is bigger issue: Monetary policy is, at best, a placebo, painkiller, or steroid especially since credit availability is a bigger problem in India than credit cost.
  • Source of finance is important than expenditure: Global experience suggests where governments spend money (pensions, interest, salaries, education, healthcare, roads, etc) and how this spending is financed (taxes or debt) matters more than how much is spent (about Rs 80 lakh crore in India this year).
  • Fiscal policy tends to overshoot: Covid made enormous fiscal and monetary policy demands, but the bigger the binge, the bigger the hangover. Western central banks are struggling to shrink their balance sheets because they used what Harvard’s Paul Tucker calls “unelected power” to chase goals outside their mandate, administer medicine with poorly understood side effects, and speed down highways with no known return paths.
  • India avoided the fiscal and monetary trap: Rich-country borrowing rates have risen by 300 per cent plus and inflation hurts the poor the most. India avoided these fiscal and monetary policy excesses. This prudence now combines with previous structural reforms (GST, IBC, MPC, UPI, DBT, NEP, etc) and a reform “tone from the top” to create a fertile habitat for productive citizens and firms.

prosperity

What should be the strategy in next fiscal year for employment generation?

  • Targeting the job creation: The Finance Bill must target productivity and continuity by legislating human capital and formal job reforms previously proposed.
  • NEP should be implemented in 5 years: It should reduce the implementation glide path for the powerful National Education Policy 2020 from 15 years to five years.
  • Abolishing the licensing: It should abolish separate licensing requirements for online degrees and freely allow all our 1,000-plus accredited universities to launch online learning.
  • Accelerating apprentices: It should accelerate growing our 0.5 million apprentices to 10 million by allowing all universities to launch degree apprentice courses under tripartite contracts with employers under the Apprentices Act.

What are the other steps that can be taken through next budget?

  • Notify labour code: It should notify the four labour codes for all central-list industries while appointing a tripartite committee to converge them into one labour code by the next budget.
  • Universal enterprise number: It should continue EODB reforms by designating every enterprise’s PAN number as its Universal Enterprise Number.
  • Remove the factory act: It should explore manufacturing employment by abolishing the Factories Act this painful Act accounts for 8,000 of the 26,000 plus criminal provisions in employer compliance and require all employers to comply under each state’s Shops and Establishment Act (like Infosys, TCS, and IBM India do).
  • Ensuring better compliances by employer: It should create a non-profit corporation (like NPCI in payments) that will operate an API-driven National Employer Compliance Grid and enable central ministries and state governments to rationalise, digitise and decriminalise their employer compliances.
  • Making EPFO contribution optional: Making employees’ provident fund contributions optional but raising employer PF contributions from the current 12 per cent to 13 per cent. It should notify a previous budget announcement to create employee choice in their contributions to health insurance (ESIC or insurance companies) and pensions (EPFO or NPS).
  • Subsidy to high wage employer: Most importantly, it should link all employer subsidies and tax incentives to high-wage employment creation (a difficult-to-fudge and easy-to-measure effectiveness metric for this public spending is employer provident fund payment).

Conclusion

  • Experience and evidence now firmly suggest the odds of mass prosperity in the planet’s most populous nation rise from possible to probable by anchoring our strategy in human capital and formal jobs rather than fiscal or monetary policy.

Mains Question

What are the limitations of Fiscal and monetary policy in mass welfare of people? What are the possible strategies for creation of mass prosperity in India?

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Credit Ratings Agency and their Significance

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Credit Rating Agency

Mains level: Not Much

credit

Fitch Ratings on December 20, 2022, retained its rating for India at ‘BBB’-with a stable outlook.

What does BBB mean?

  • A ‘BBB’ rating indicates that expectations of default risk are currently low.
  • The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.

What is a Rating Agency?

  • Rating agencies assess the creditworthiness or potential of an equity, debt or country.
  • Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
  • They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
  • In simpler terms, these reports help investors gauge if they would get a return on their investment.

What do they do?

credit

  • The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
  • Their reports are sold and published in financial and daily newspapers.

What grading pattern do they follow?

  • The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
  • Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
  • Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
  • Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
  • Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.

Criticism of rating agencies

  • Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
  • However, credit rating agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
  • The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
  • They were charged for methodological errors and conflict of interest on multiple counts.

Do countries pay attention to ratings agencies?

  • Lowered rating of a country can potentially cause panic selling or offloading of investment by a foreign investor.
  • In 2013, the European Union opted for regulating the agencies.
  • Over reliance on credit ratings may reduce incentives for investor to develop their own capacity for credit risk assessment.
  • Ratings Agencies in the EU are now permitted to issue ratings for a country only thrice a year, and after close of trade in the entire Union.

 

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s Current Account Deficit (CAD) Strategy amidst the Global Uncertainty

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Concept of CAD

Mains level: India's problem of CAD, effects and solutions

Deficit

Context

  • There seems to be considerable optimism about India’s near-term growth prospects now that the major global energy and commodity shocks have subsided. Even if these shocks have subsided, India still faces one big problem of its large current account deficit (CAD). How will this be managed? It turns out that the answer to both questions lies in one word exports.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Deficit

What is Current Account Deficit (CAD)?

  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.
  • CAD = Trade Deficit + Net Income from Abroad + Net transfers

What has been the recent trend?

  • Swelling CAD: Over the past year, the post-pandemic normalisation has caused the current account deficit to swell to exceptional proportions.
  • Decline in demand abroad: At home, normalisation has spurred a renewed demand for imported inputs. But abroad, it has had the opposite effect, leading to a decline in demand.
  • India’s import soared while exports fell: Foreign households are no longer demanding so many goods now that the lockdowns that kept them in their houses and the fiscal stimuli that gave them the money to spend have both ended. So, India’s imports have soared just at a time when its merchandise exports have started to fall.
  • Statistics for instance: The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
  • Service sector is saviour: However, based on robust performance by computer and business services, net service receipts rose both sequentially and, on a year, -on-year basis.

Future projections

  • Looking ahead, the situation seems set to worsen: Foreign demand will slow further as advanced countries slip into what now seem like inevitable recessions.
  • In the backdrop of recession India’s CAD could widen further: In that case, India’s CAD could widen even further, possibly to four per cent of GDP in 2022-23, double the level that the Reserve Bank of India (RBI) traditionally regards as “safe”.

Deficit

Analysis: How should India respond?

  1. Attracting foreign capital inflow: Attract foreign capital inflows worth at least four per cent of GDP.
  • Is this realistic in time of global uncertainty: The world is currently facing unprecedented levels of uncertainty. Two years of the pandemic, now a land war in Europe, inflation and energy crisis in Europe, interest rate hikes in the history of the US Federal Reserve, slowdown in china, etc. In such an uncertain environment, foreign investors prefer to invest in safe assets such as US government bonds rather than emerging markets like India. As a result, India has witnessed large outflows of foreign capital in 2022-23
  1. Deploying RBI’s Forex to pay for imports: If India cannot attract the required amount of capital inflows, the RBI’s foreign exchange reserves could be deployed to pay for imports.
  • Is this strategy sustainable: The country’s reserves are meant to tide the country over short-term problems, such as commodity price spikes. India’s merchandise exports have been structurally weak, stagnating for the past decade, until the pandemic induced a short-lived boom.

Deficit

How depreciating rupee could be helpful?

  • Price needs to be adjusted by depreciating rupee: This means that something fundamental needs to change. Ultimately, India’s CAD reflects a mismatch between the demand and supply of foreign exchange. To restore balance, first and foremost, the price needs to adjust, that is, the rupee needs to depreciate.
  • Exporting becomes more profitable: When this happens, exporting becomes more profitable, inducing more and more firms to explore foreign markets. Meanwhile, foreign demand improves, because the rupee depreciation makes India’s products more price-competitive. As a result, exports increase and the CAD falls.
  • Exchange rate depreciation is helpful in sustained growth: The recovery of the Indian economy from the pandemic was largely fuelled by exports. But with exports now declining, this crucial source of growth has now become uncertain for India. Strengthening the export sector is, therefore, critical for sustaining growth.

Way forward

  1. Allow the rupee to depreciate,
  2. Encourage foreign firms to produce in India by letting them access their supply chains,
  3. Encourage domestic firms to step up to the competition, and
  4. Create a level playing field for all players.

Conclusion

  • The large CAD, however, is not a short-term problem: It is a long-term problem requiring a long-term solution. By adopting the discussed strategy, India could potentially solve its two most important macroeconomic problems that are reducing the large CAD and securing rapid, sustained growth.

Mains question

Q. What is Current account deficit (CAD)? In a time of global uncertainty How India can reduce its large CAD and secure sustained growth. Analyze

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[pib] Social Progress Index (SPI) for states and districts

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Social Progress Index (SPI)

Mains level: Read the attached story

Economic Advisory Council to Prime Minister (EAC-PM) will release the Social Progress Index (SPI) for states and districts of India on December 20, 2022.

Social Progress Index (SPI) Report

  • SPI is a comprehensive tool intended to be a holistic measure of the Social Progress made by the country at the national and sub-national levels.
  • The report has been prepared by Institute for Competitiveness, headed by Dr Amit Kapoor and the Social Progress Imperative, headed by Michael Green.
  • It was mandated by Economic Advisory Council to the Prime Minister of India.

Objectives of the report

  • With state and district-wise rankings and scorecards, the report aims to provide a systematic account of the social progress made at all levels in the country.
  • The report also sheds light on the achievements of the districts that have performed well on the index and the role of the states in achieving social progress.
  • A special section of the report provides an analysis of the Aspirational Districts of India, leading to a broader understanding of the social progress at the grassroots level.
  • The report will act as a critical enabler and tool for policymakers in the coming years for achieving sustained socio-economic growth.

Components of SPI

SPI assesses the performance of states and districts on three dimensions of social progress:

  1. Basic Human Needs: It assesses the performance of states and districts in terms of Nutrition and Basic Medical Care, Water and Sanitation, Personal Safety and Shelter.
  2. Foundations of Wellbeing: It evaluates the progress made by the country across the components of Access to Basic Knowledge, Access to Information and Communication, Health and Wellness, and Environmental Quality.
  3. Opportunity: It focuses on aspects of Personal Rights, Personal Freedom and Choice, Inclusiveness, and Access to Advanced Education.

(This newscard will be updated once the report is published.)

Need for SPI

  • GDP is not a holistic measure of a nation’s development: It would be incorrect to state that the economic progress is completely divorced from progress made in areas mentioned above.
  • Social outcomes of developmental economics: The primary goal of the SPI is to provide a rigorous tool to benchmark progress and stimulate progress within countries.
  • No single holistic parameter available: Several indicators, like GHI and HDI, go beyond GDP, but none captures social progress as finely as SPI.
  • Doing away with biased reports: India does not display a respectable position in the index, as even the small neighbours like Nepal have a better rank. India is also the lowest rank holder in BRICS.

 

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Capital Expenditure and Fiscal Consolidation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Basics of Budget

Mains level: Capital expenditure and fiscal consolidation

Fiscal

Context

  • The 2023-24 Union budget will be announced on February 1, followed by the states’ respective budgets. These budgets will set the policy tone for the rest of the year and, as such, are followed closely.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Situation of Capex and fiscal consolidation after pandemic

  • Rise in fiscal deficit: The overall fiscal deficit of the government has soared and we believe the next few years will be all about getting it back on track.
  • Rising interest payments: This is important because interest payments on past debt make up a whopping 50 per cent of net tax revenues for the central government, leaving very little room for other spending.
  • less room for social spending: Given the needs of the economy on various fronts like health, education and capex, it is important to lower the interest burden over time. That can only be achieved by fiscal consolidation.

Analysing the tax revenue and expenditure of central and state Government

  • Central government tax revenues have risen faster than state revenues: Both benefitted as small and informal firms struggled with the lockdowns and lost market share to large firms, which tend to pay more taxes.
  • Disparity in revenue collection: A large chunk of the tax revenues in the early part of the pandemic period came from the “special” duty and surcharge on oil, which went primarily to the central government. To be fair, the central government subsequently cut the duty on oil (in both 2021-22 and 2022-23) and the tax share that went to the states rose somewhat.
  • Capex of centre is more: The Centre has committed to more current expenditure than the states. While it increased across the board during the pandemic, current expenditure rose more for the central government.
  • Higher spending on social schemes: This was led by higher social welfare spending (for instance, on the free food distribution scheme) and, more recently, higher subsidies (for example, fertilisers) in the face of rising commodity prices.
  • States have a moderate capex: The common perception is that states have gone all out on unsustainable current expenditure. But the data shows that it’s just a few states which have spent heavily (for example, Telangana, Assam, West Bengal and Punjab).

Fiscal

Analyzing the capex and fiscal deficit of central and state government

  • The central government capex has risen but state capex has contracted: Making a commendable choice, the central government used both its tax bounty as well as its ability to borrow more at a time when banking sector liquidity was loose to raise capex spending, which rose by 1.2 per cent of GDP between 2019-20 and 2021-22.
  • Cut in state capex: On the other hand, the states cut back on capex, which has fallen as a percentage of GDP over the last few years, and continues to be on a weak footing in the current year. In fact, putting the central government’s capex alongside the state and public sector capex shows that the overall public sector thrust is not any stronger than it was back in 2018-19.
  • Centre has breached the fiscal deficit target: The central government’s fiscal deficit has overshot targets while the state deficit is relatively contained. At a budgeted 6.4 per cent of GDP in 2022-23, the central government’s fiscal deficit has risen above the pre-pandemic level of 3.4 per cent in 2018-19, and is well above the 3 per cent medium-term target.
  • Sharp fall in states fiscal deficit target: Even though the state fiscal deficit rose in the first year of the pandemic (from 2.5 per cent of GDP in 2018-19 to 3.8 per cent in 2020-21), it has fallen sharply since (to 2.7 per cent in 2021-22).
  • Low borrowing by states: In fact, state government borrowing is rather low in the current year so far. If this continues, the fiscal deficit could be even lower in 2022-23 (around 2.5 per cent of GDP), which is well under the 3 per cent medium-term target, and bang in line with pre-pandemic levels.

Fiscal

What are the challenges?

  • Less consolidation by states: The states have less fiscal consolidation to do than the central government.
  • High quality spending: Both have a common challenge to commit to more capex, which is considered high quality spending as it “crowds in” private investment if done responsibly. And we believe investment is the only sustainable way to increase the capacity of the economy to grow and create jobs.
  • Balancing the capex and fiscal consolidation: For the central government, the challenge is to hold on to its capex push at a time of fiscal consolidation. For the states, the challenge is to start doing more.

Fiscal

What should be the way forward?

  • Lowering the fiscal deficit: The central government’s aim is to lower the fiscal deficit by about 2 per cent of GDP over the next three years. About half of this consolidation can come from lowering current expenditure to pre-pandemic levels.
  • Raising the tax revenue through formalization: Continued formalisation of the economy that raises tax revenues (though “organic” formalisation will likely be more sustainable than “forced” formalisation).
  • Disinvestment of PSUs: A bigger push for disinvestment by selling stakes in public-owned companies, and further tax reforms (in terms of direct taxes and the GST).
  • Capex cut is the last option: If these don’t work, the default option will be to cut capex, which is a concern as it has implications for medium-term growth.

Conclusion

  • Fiscal consolidation and capital expenditure should go hand in hand. More government spending means more infrastructure building and more chances of growth and employment. However, this spending should be done with sound fiscal base.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Urban-rural manufacturing shift: A mixed bag

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Urban rural manufacturing shift, advantages and challenges

manufacturing

Context

  • There is growing evidence to suggest that the most conspicuous trend in the manufacturing sector in India has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas. This ‘urban-rural manufacturing shift’ has often been interpreted as a mixed bag, as it has its share of advantages that could transform the rural economy, as well as a set of constraints, which could hamper higher growth.

Recent data by Annual Survey of Industries for 2019-20

  • In terms of capital: The rural segment is a significant contributor to the manufacturing sector’s output. While 42% of factories are in rural areas, 62% of fixed capital is in the rural side.
  • In terms of value addition: In terms of output and value addition, rural factories contributed to exactly half of the total sector.
  • In terms of employment: In terms of employment, it accounted for 44%, but had only a 41% share in the total wages of the sector.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Why is this shift of manufacturing away from urban locations to rural?

  • A report on manufacturing shift brought out by World Bank: The movement of manufacturing away from urban locations was brought out by the Work Bank in a report a decade ago, “Is India’s Manufacturing Sector Moving Away from Cities? Policy Research Working Paper, World Bank).
  • Higher urban-rural cost caused this shift: This study investigated the urbanisation of the Indian manufacturing sector by “combining enterprise data from formal and informal sectors and found that manufacturing plants in the formal sector are moving away from urban areas and into rural locations, while the informal sector is moving from rural to urban locations”. Their results suggested that higher urban-rural cost ratios caused this shift.
  • Steady investment in rural areas: This is the result of a steady stream of investments in rural locations over the last two decades.
  • Input costs are relatively less in rural area: Rural areas have generally been more attractive to manufacturing firms because wages, property, and land costs are all lower than in most metropolitan areas.
  • Factory floorspace supply constraints: When locations get more urbanised and congested, the greater these space constraints are.
  • Increased capital intensity of production: The driving force behind such a shift is the continuing displacement of labour by machinery as a result of the continuous capital investments in new production technologies. In cities, factories just cannot be expanded as opposed to rural areas.

How this trend is a welcome sign?

  • Fulfilling the need of balanced development: Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign.
  • Created an opportunity for small scale industries to survive after liberalization: In the aftermath of trade liberalisation, import competition intensified for many Indian manufacturers, forcing them to look for cheaper methods and locations of production. One way to cut costs was to move some operations from cities to smaller towns, where labour costs are cheaper.
  • Source of livelihood diversification in rural area: The shift in manufacturing activities from urban to rural areas has helped maintain the importance of manufacturing as a source of livelihood diversification in rural India.
  • Make up for loss of employment: This trend helped to make up for the loss of employment in some traditional rural industries. The growth of rural manufacturing, by generating new jobs, thus provides an economic base for the transition out of agriculture

What are the challenges ahead and a solution to it?

  • While the input cost is less but the cost of capital is high, offsetting the benefits: Though firms reap the benefits of lower costs via lower rents, the cost of capital seems to be higher for firms operating on the rural side. This is evident from the shares in rent and interest paid. The rural segment accounted for only 35% of the total rent paid, while it had 60% of the total interest payments. The benefits reaped from one source seem to be offset by the increased costs on the other front.
  • Skill shortages in rural area: There exists an issue of “skills shortage” in rural areas as manufacturing now needs higher skilled workers to compete in the highly technological global ‘new economy’. Manufacturers who need higher skilled labour find that rural areas cannot supply it in adequate quantities. Manufacturers who depend only on low-wage workers simply cannot sustain their competitive edge for longer periods as this cost advantage vanishes over time.
  • Solution to this issue lies in skill development: This suggests the need for clear solutions to the problems of rural manufacturing and the most important is the provision of more education and skilling for rural workers. A more educated and skilled rural workforce will establish rural areas’ comparative advantage of low wages, higher reliability and productivity and hasten the process of the movement out of agriculture to higher-earning livelihoods

Conclusion

  • Given the size of the Indian economy and the need for balanced regional development, the dispersal of manufacturing activities is a welcome sign. However, the compulsions of global competition often extend beyond the considerations of low-wage production and depend on the virtues of ‘conducive ecosystems’ for firms to grow.

Mains Question

Q. There is growing evidence to suggest that the trend in the manufacturing sector in India has been a shift of manufacturing activity and employment from bigger cities to smaller towns and rural areas. Discuss the reasons for this trend and note down the challenges ahead.

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Discussing the Indian Economy’s pressing problems

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's economic growth and the problems

Economy

Context

  • Several agencies, including the IMF and the World Bank have projected lower growth rates for the Indian economy in FY23, than the 7.2 per cent estimated by the RBI in April. The Central bank has now lowered its forecast to 6.8 per cent. Given the current situation, with the Q2 FY 2023.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Economy

Current economic growth estimation

  • Economy is likely to grow at 6.5-7.0 per cent: Given the current situation, with the Q2 FY 2023 GDP growth clocking in at 6.3 per cent, the economy is likely to grow at 6.5-7.0 per cent in this fiscal year.
  • Considering economic uncertainties it is difficult to arrive at precise estimate: It is difficult to arrive at a precise estimate for growth this year with unprecedented economic uncertainty worldwide, including high global inflation, synchronized monetary tightening, and the impact of the Ukraine war.

Positive signs in the Indian Economy

  • Positive medium-term growth prospects: Company and bank balance sheets are healthier, credit growth is rising, and capacity utilisation has increased, all of which augur well for investment activity.
  • Positive impact on tourism: The waning of Covid-19 should hopefully have a positive impact on travel, transport and tourism. Construction activity should pick up further with the reduction in housing inventory and almost stable prices over the last decade.
  • On inflation India is doing better: On the inflation front, India is doing better than many advanced economies and emerging markets.

Economy

What is Indian economy’s pressing problems specifically in terms of Labour-intensive growth?

  • Employment a biggest concern: Employment, an issue that has persisted over the last two decades. In brief, we have not generated enough good jobs to match the scale at which the economy has grown, especially in the organised sector. As a result, we have very high under-employment and poor-quality employment, which have hampered a much-needed move away from agriculture.
  • Lack of precise data on people living in poverty: We do not have a precise estimate of the current levels of poverty, as there has been no household consumption survey since 2011-12, and the 2017-18 survey was abandoned due to technical issues. But there is reasonable consensus that poverty could be around 10 per cent of the country’s population, A low number compared to the past, but as many as 140 million people could still be living in poverty.
  • Lack of non-agricultural jobs: The rising demand for the MGNREGA, and the importance of food distribution schemes and other welfare programmes for the poor are indicators of the lack of non-agriculture jobs being generated.
  • Lowest rate of women participation in labour force: An alarming aspect of the employment problem in India is the low participation rate of women in the labour force, which is among the lowest in the world. This loops back to the importance of labour-intensive manufacturing. For example, much of Bangladesh’s success, and that of Southeast Asian countries, in exports and manufacturing stems from the large number of women working in their factories.
  • Women literacy is rising but increasing number of educated women are not working: A positive trend in India has been the growing trend in girls attending schools and college in the last 20 years, but this also means that an increasing number of educated women are not working.
  • Despite of 1991 reforms still remains an untapped opportunity: With the LPG reforms, the expectation was that, as the economy opened up to global competition, India’s low wage levels would attract private investment into labour-intensive manufacturing, thus generating jobs. This was the path followed by the East Asian economies that experienced high growth and rapid development. But for India this remains an untapped opportunity.
  • Manufacturing is shifting to countries other than India: Even with rising wage levels in China, manufacturing is shifting to countries other than India. The PLI (production-linked incentives) scheme has been rolled out to encourage manufacturing. It may need some tweaking to be biased towards labour-intensive manufacturing as China vacates space in this area. This may seem at odds with the more popular view that it is small and medium enterprises which promote employment.
  • Country’s real exchange rate is not healthy: An overvalued rupee has discouraged the export of labour-intensive manufacturing goods, which are very price-sensitive in global markets. It has also had a dampening effect on domestic production as our currency has depreciated at a lower rate than other emerging economies like China and Indonesia.
  • Depreciated rupee impacting domestic producers by inflow of cheaper imports: Domestic producers of goods that compete with imports into our markets have been impacted by the inflow of cheaper imports. This has disincentivised them from expanding production and generating employment.
  • Micro, small and medium enterprises (MSMEs) are severally hit: Problems that have come to the fore post-pandemic include the health of micro, small and medium enterprises (MSMEs). Accurate information on this is somewhat scarce but anecdotal evidence suggests that they have been more severely hit than the formal sector.

Economy

Way ahead

  • The rupee has been overvalued for long and needs to be allowed to depreciate, though in a calibrated way, ensuring external and financial stability.
  • Job growth is crucial if we are to reduce the still high levels of poverty in the country
  • Incentivizing the domestic producers so that they can compete with the cheaper inflow of imports and expands their manufacturing thereby generating employment in the economy
  • The continued recovery of the formal sector, as indicated by various metrics, in terms of the improved health of corporates and banks should effectively pull up the MSMEs through supply chains linkages, among others.
  • We still have a negative real interest rate (that is, the difference between the RBI’s policy rate and inflation). Hence, the policy rate needs to rise further, providing a push to financial savings, which are needed to generate higher investment for growth.
  • Inflation need to be contained through supply-side measures as well, such as an improvement in the supply of food products.

Conclusion

  • High under-employment and poor-quality employment have hampered a much-needed move away from agriculture. A focus on labour-intensive formal manufacturing is the need of the hour.

Mains Question

Q. India is showing positive signs of economic recovery however the economy still has a hangover from the past and some are exacerbated by Covid. Discuss.

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Healthy tax collection and the challenge of effective utilization

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Healthy tax collection, advantages and challenges

collection

Context

  • Notwithstanding the likely slowdown in economic momentum in the second half of the year, the Union government’s tax collections are on track to surpass its budgeted target by a significant amount this year.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

collection

The current status Union government’s tax collection

  • Gross tax collections have already touched the target: Data released by the Controller General of Accounts last week shows that gross tax collections have already touched 58 per cent of the full year’s target, growing by 18 per cent in the first seven months (April-October) of the current financial year.
  • Healthy growth in corporate tax collection: Under the broad rubric of taxes, direct tax collections have grown by a robust 26 per cent in the first seven months of the financial year, with healthy growth being seen across both corporate and income tax collections.
  • Higher than the nominal GDP growth: While the pace of direct collections has eased during July-October when compared to the first quarter, it continues to be higher than nominal GDP growth in the second quarter.
  • Healthy indirect tax collection: On the indirect tax side, GST collections continued to witness healthy growth, recording an increase of 11 per cent in November.

collection

Memory shot in short: Types of Direct Taxes

  • Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid. The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.
  • Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
  • Estate Tax: It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
  • Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax.
  • Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments

What the Healthy tax collection imply?

  • Higher devolution to states: Higher tax collections at the level of the central government imply that devolution to states will be higher than the budgeted amount of Rs 8.16 lakh crore. The months of August and November have in fact witnessed double instalments as the Centre has stepped up devolution.
  • States can increase fiscal expenditure: Along with the interest free loan scheme extended by the Centre, higher devolution implies that states have considerable fiscal room to increase capital expenditure. However, this has not been the case so far. Capex by states has been rather muted.
  • Provides comfort to governments fiscal arithmetic: As per recent statements by revenue secretary Tarun Bajaj, the government is now hopeful of exceeding the budgeted target by nearly Rs 4 lakh crore. With its spending also likely to surpass earlier expectations by a considerable margin, higher tax collections will provide some comfort to the government’s fiscal arithmetic.

collection

Challenges on the expenditure side

  • Increased subsidy bills: On the expenditure side, the Union government is facing a massive increase in its subsidy bill.
  • Spending is more than actual budget: Actual spending on the food and fertilizer subsidy and also on LPG will be significantly higher than what has been budgeted for. This is likely to make the fiscal situation challenging.
  • Effective utilization is necessary: Considering that the central government has maintained the momentum on its capital spending, growing by around 60 per cent in the first seven months of the year, the overall general government fiscal impulse will depend on how effectively states are able to utilise the extra space available to them.

Conclusion

  • Calls for increasing spending to support the economy during this uncertain period will only gain traction as the budget approaches. The government must however resist the temptation. It should stick to the glide path of fiscal consolidation.

Mains Question

Q. In a time of possible economic slowdown, India’s tax collection is on a healthy path. Discuss what good tax collection means for economy?

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Current status of India’s economic growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's economic growth amidst the global slowdown

growth

Context

  • India’s economic growth slowed to 6.5 percent during the July-September quarter because of a fading low-base effect. For the full year, the economy is expected to grow at 7 percent, with risks tilted to the downside. This implies that the second half of the year (October–March) will see growth slow down to 4.6 percent, again largely due to the base effect and slowing global growth.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Background: The COVID Pandemic, geopolitical tensions and the Prospects

  • This was the second consecutive quarter with no functional disruption of economic activity caused by the COVID-19 pandemic.
  • Since October, Google, too, has stopped reporting mobility indicators, which had become one of the most tracked data points for analysts and policymakers since the pandemic struck.
  • This suggests that COVID-19 is unlikely to come in the way of growth for most parts of the world, with China, which is following a zero-COVID policy, being the key exception.

Performance of Indian economy amidst the current global slowdown

  • Spill over effect in India: In an interconnected world, Geopolitical tensions, high and broad-based inflation in many parts of the world and sharp increases in policy rates in developed countries amid a looming recession will continue to confront the global economy. These effects will spill over to India as well, despite its structural strengths.
  • Slow growth of contact- intensive service sector: Growing at 14.7 per cent, contact-intensive services such as trade, hotels and transport continued to be key drivers of the growth momentum in the second quarter. This segment had borne the brunt of the pandemic because of recurrent lockdowns, and is showing a strong rebound because of pent-up demand, a trend that is likely to continue this year.
  • Strong private consumption: Private consumption was quite strong in the second quarter, growing by 9.7 per cent, and now 11.2 per cent above the pre-pandemic level.
  • Rising domestic demand, good for the economy: The resilience of domestic demand will shape the contours of GDP growth in coming quarters as the global growth momentum is anticipated to lose steam. Advanced economies, whose growth is expected to slow sharply next year, account for almost 45 per cent of India’s merchandise exports.
  • Strong and firm Agriculture sector: Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter.
  • Healthy tax revenue: So far, healthy tax revenue collections have allowed the government to finance its bloated subsidy bill and investments without much pressure on the fiscal deficit. Led by government capex, investments grew 10.4 per cent in the second quarter.
  • Good corporate balance sheets: strong corporate balance sheets not only cushion them against global headwinds but also provide an opportunity to kick-start the investment cycle once uncertainty subsides.

growth

The current status of India’s manufacturing growth

  • Slowed growth: Manufacturing GDP growth slowed rather sharply due to the base effect and margin pressure on manufacturing companies. This is somewhat contradictory to the relatively strong signals from the Purchasing Managers’ Index (PMI) which, at 55.9, was in the expansion zone during the July-September quarter, while also being slower than the IIP growth of 1.4 per cent in the same quarter.
  • Support from the government: Currently, manufacturing is finding some support from government spending on infrastructure, particularly in sectors such as steel and cement. The production-linked incentive scheme has incentivised private investment and fast-forwarded manufacturing investments in electronics and pharmaceuticals.
  • Overall demand is low except few high value segments: The festive season-related production and the continued strong demand in the automobile sector (especially in high-value segments), was not enough to prevent an overall slide in manufacturing.

The current status of Agriculture sector

  • Strong and firm Agriculture sector: Despite climate-related disturbances, agriculture surprisingly held its ground in the second quarter. Although rains were 6 per cent above normal this year, they were quite lopsided and led to a drop in rice acreage in some of the rice-growing regions on account of rainfall deficiency and some damage to crops from excess unseasonal rains in October.
  • Inconsistency in rainfall may affect kharif: In fact, October rains were 47 per cent above the long-period average. Rain shortfall in some regions, excess in others, and unseasonal excess rains point towards some hit to kharif production.
  • Rabi crops look in good swing: That said, the prospects for the winter crop (rabi crop), which is largely irrigated, look good owing to favourable soil moisture conditions and healthy reservoir levels. While rabi sowing was initially delayed on account of unseasonal October rains, it is now progressing well, with sown area until November 18 about 7 per cent higher than during the same period last year.
  • Overall agriculture growth prospects: This trend, if sustained, should offset the hit to kharif production to some extent. Overall, we expect agriculture to grow at 3 per cent this year, lower than the decadal average of 3.8 per cent.
  • Food inflation: Abnormal weather has also triggered food inflation, particularly in cereals, which will cool off only when the prospects for rabi crop become clear. While fall in inflation in October was largely due to a high base effect, core inflation continues to be sticky and food inflation risks persists.

growth

Conclusion

  • India’s growth cycle has become well-synchronized with those of advanced economies. So, a sharp slowdown in these countries will spill over to India and the maximum impact of domestic interest rate hikes on growth will play out next fiscal given that monetary policy impacts growth with a lag. The key policy challenge for India will be to manage a soft landing amid the possibility of a hard landing in advanced countries.

Mains question

Q. COVID pandemic disrupted the global economy, moreover the geopolitical tensions are adding to the existing slow growth. In this context, discuss the current status of Indian economy.

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Assessing The Impact of Falling Rupee

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Falling of Indian rupee, challenges and advantages

Context

  • The Indian rupee has been quite the controversial newsmaker this year. Having fallen more than 11 percent against the US dollar so far in 2022, the rupee breached the much-feared 80-mark in July and went on to set record lows, touching 83 to a dollar late in October.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Impact on trade

  • Widening trade deficit: The first phenomenon is one of the biggest worries caused by a falling rupee, a rise in import costs, threatening higher inflation and a widening trade deficit.
  • Advantage for export: However, there also exists a ray of hope, a depreciated currency implies cheaper, more competitive exports and therefore, a possible export-led boost to the domestic economy. The net effect of these opposing forces would determine the impact of a depreciating currency on an economy.
  • Robust Purchasing Manager’s Index (PMI): The import bill has risen not only on the back of a raging dollar and hardening crude prices but has also been spurred by strengthening domestic demand and manufacturing, as evidenced by a robust Purchasing Manager’s Index (PMI) of 55.3 in October.
  • Subdued merchandized export: Although service exports have done fairly well in FY 2022-23, merchandise exports have remained subdued and could soon worsen due to economic downturns in Europe and the US.

Rupee

Impact on foreign investment

  • Weak rupee low foreign portfolio investors (FPI): The rupee has a complicated relationship with the moody foreign portfolio investors (FPIs). A weaker rupee can discourage FPIs. In turn, FPI outflows can further push the rupee to depreciate.
  • Falling NRI deposits: With the rupee losing value against the dollar, and interest rates around the world rising, NRI deposit flows also fell in the five-month period from April to August 2022, down to US$1.4 billion from US$2.4 billion a year ago.
  • FDI is Rising: Net FDI flows have remained positive and are set to grow, with April-June 2022 seeing an inflow of US$13.6 billion, higher than the same period last year. Even Indian stock markets have remained resilient, particularly on the back of large net-purchases by domestic institutional and retail investors, offsetting the equity sell-off by foreign investors.
  • Negative foreign investment: Net foreign investment (FII) flows did turn negative for a few months in 2022, and while rebounding FPI and resilient FDI do point to a more optimistic opinion of India among foreign investors, foreign investment is absolutely crucial at this juncture in India’s growth story and must be watched closely.

Rupee

Efforts taken by RBI

  • Use of forex reserve: In an effort to defend the rupee, the RBI has intervened and sold off some of its foreign exchange reserves. The reserves stood at US$524.52 billion as of 21 October 2022, witnessing a fall of over US$115 billion since the beginning of the year.
  • according to RBI external situation is better: RBI has stated that most external indicators such as external debt to GDP ratio, net international investment position to GDP ratio and the ratio of short-term debt to reserves reflect India’s relatively comfortable position in meeting its external financing requirements–even in contrast to other emerging economies.
  • Careful intervention: Over-tightening of monetary policy and excessive intervention in the currency market can pose significant risks to the country’s growth prospects and the RBI must be careful to intervene just enough to quell volatility, without expending an inordinate amount of reserves.

Rupee

Opportunity in crisis

  • Leveraging the growth rate: India has the chance to leverage its relatively healthy growth rates and rising infrastructure and capital expenditure to attract foreign investment, spurring growth and strengthening the capital account.
  • High investor confidence: Investor confidence has been steady, with the country seeing a record high of annual FDI inflows of US$84.8 billion in FY2021-22 in spite of the pandemic and volatile geopolitical scenario.
  • Stability in growth: This confidence needs to be leveraged and by positioning India on the international stage as a thriving and stable haven for investments, both the country’s growth and forex needs can be met.
  • Sufficient policy support is needed: Although the falling rupee has caused worry for a few economic indicators, with sufficient policy support, the domestic economy could emerge as an outlier in a global downturn.

Conclusion

  • With the United States (US) on a war path to curtail inflation and the supply side stifled by the conflict in Ukraine, even historically strong currencies like the euro and the British pound have plummeted against the raging dollar, more than the rupee. Government and RBI must stay on course of steady growth of economy.

Mains Question

Q. Discuss the impact of falling rupee on Trade and foreign investment in India? How India has unique opportunity for growth amidst the crisis around the world?

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Assessing The Impact of Falling Rupee

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Falling of Indian rupee, challenges and advantages

Context

  • The Indian rupee has been quite the controversial newsmaker this year. Having fallen more than 11 percent against the US dollar so far in 2022, the rupee breached the much-feared 80-mark in July and went on to set record lows, touching 83 to a dollar late in October.

Click and get your FREE Copy of CURRENT AFFAIRS Micro Notes

Impact on trade

  • Widening trade deficit: The first phenomenon is one of the biggest worries caused by a falling rupee–a rise in import costs, threatening higher inflation and a widening trade deficit.
  • Advantage for export: However, there also exists a ray of hope–a depreciated currency implies cheaper, more competitive exports and therefore, a possible export-led boost to the domestic economy. The net effect of these opposing forces would determine the impact of a depreciating currency on an economy.
  • Robust PMI: The import bill has risen not only on the back of a raging dollar and hardening crude prices but has also been spurred by strengthening domestic demand and manufacturing–as evidenced by a robust Purchasing Manager’s Index (PMI) of 55.3 in October.
  • Subdued merchandized export: Although service exports have done fairly well in FY 2022-23, merchandise exports have remained subdued and could soon worsen due to economic downturns in Europe and the US.

Impact on foreign investment

  • Weak rupee low FPI: The rupee has a complicated relationship with the moody foreign portfolio investors (FPIs). A weaker rupee can discourage FPIs. In turn, FPI outflows can further push the rupee to depreciate.
  • FPI existing from market: With the exception of July and August–each month in 2022, FPIs turned net-sellers of Indian assets in the debt and equity markets, with the calendar year seeing a total of $23.2 billion in FPI outflows by the end of October.
  • Falling NRI deposits: With the rupee losing value against the dollar, and interest rates around the world rising, NRI deposit flows also fell in the five-month period from April to August 2022, down to US$1.4 billion from US$2.4 billion a year ago.
  • FDI is Rising: Net FDI flows have remained positive and are set to grow, with April-June 2022 seeing an inflow of US$13.6 billion, higher than the same period last year. Even Indian stock markets have remained resilient, particularly on the back of large net-purchases by domestic institutional and retail investors, offsetting the equity sell-off by foreign investors.
  • Negative FII: Net foreign investment (FII) flows did turn negative for a few months in 2022, and while rebounding FPI and resilient FDI do point to a more optimistic opinion of India among foreign investors, foreign investment is absolutely crucial at this juncture in India’s growth story and must be watched closely.

Efforts by RBI

  • Use of forex reserve: In an effort to defend the rupee, the RBI has intervened and sold off some of its foreign exchange reserves. The reserves stood at US$524.52 billion as of 21 October 2022, witnessing a fall of over US$115 billion since the beginning of the year.
  • External situation is better: RBI has stated that most external indicators such as external debt to GDP ratio, net international investment position to GDP ratio and the ratio of short-term debt to reserves reflect India’s relatively comfortable position in meeting its external financing requirements–even in contrast to other emerging economies.
  • Perils around growth prospects: Over-tightening of monetary policy and excessive intervention in the currency market can pose significant risks to the country’s growth prospects and the RBI must be careful to intervene just enough to quell volatility, without expending an inordinate amount of reserves.

Opportunity in crisis

  • Leveraging the growth rate: Particularly, India has the chance to leverage its relatively healthy growth rates and rising infrastructure and capital expenditure to attract foreign investment, spurring growth and strengthening the capital account.
  • High investor confidence: Investor confidence has been steady, with the country seeing a record high of annual FDI inflows of US$84.8 billion in FY2021-22 in spite of the pandemic and volatile geopolitical scenario.
  • Stability in growth: This confidence needs to be leveraged and by positioning India on the international stage as a thriving and stable haven for investments, both the country’s growth and forex needs can be met.
  • Sufficient policy support is needed: Therefore, although the falling rupee has caused worry for a few economic indicators, with sufficient policy support, the domestic economy could emerge as an outlier in a global downturn.

Conclusion

  • With the United States (US) on a war path to curtail inflation and the supply side stifled by the conflict in Ukraine, even historically strong currencies like the euro and the British pound have plummeted against the raging dollar, more than the rupee. Government and RBI must stay on course of steady growth of economy.

Mains Question

Q. Discuss the impact of falling rupee on Trade and foreign investment in India? How India has unique opportunity for growth amidst the crisis around the world?

 

 

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Old Pension Scheme and related issues

Note4Students

From UPSC perspective, the following things are important :

Prelims level: National Pension Scheme

Mains level: Pension reforms in India

Some political parties are promising to switch to the Old Pension Scheme in the opposition-ruled states.

Old Pension Scheme

  • Pension to government employees at the Centre as well as states was fixed at 50 per cent of the last drawn basic pay.
  • The attraction of the Old Pension Scheme or ‘OPS’ — called so since it existed before a new pension system came into effect for those joining government service from January 1, 2004.
  • It was hence described as a ‘Defined Benefit Scheme’.
  • To illustrate, if a government employee’s basic monthly salary at the time of retirement was Rs 10,000, she would be assured of a pension of Rs 5,000.
  • Also, like the salaries of government employees, the monthly pay-outs of pensioners also increased with hikes in dearness allowance or DA.

What were the concerns with the OPS?

  • Liability remained unfunded: There was no corpus specifically for pension, which would grow continuously and could be dipped into for payments.
  • Usual budgetary allocation: The Union budgetary allocations (Rs 3,86,001 crore in 2020-21) provided for pensions every year; there was no clear plan on how to pay year after year in the future.
  • Burden on working class: The ‘pay-as-you-go’ scheme created inter-generational equity issues — meaning the present generation had to bear the continuously rising burden of pensioners.
  • Far extended pay-outs: Better health facilities would increase life expectancy, and increased longevity would mean extended payouts.

What was planned to address this situation?

Ans. Oasis Project

  • In 1998, the Union Ministry of Social Justice and Empowerment commissioned a report for an Old Age Social and Income Security (OASIS) project.
  • Its primary objective was targeted at unorganised sector workers who had no old age income security.
  • The OASIS report recommended individuals could invest in three types of funds to be floated by six fund managers:
  1. Safe (allowing up to 10 per cent investment in equity),
  2. Balanced (up to 30 per cent in equity), and
  3. Growth (up to 50 per cent in equity)
  • The balance would be invested in corporate bonds or government securities.
  • Individuals would have unique retirement accounts, and would be required to invest at least Rs 500 a year.

Alternative to OPS: New Pension Scheme

  • The New Pension System was proposed by the Project OASIS report; it became the basis for pension reforms.
  • It was originally conceived for unorganised sector workers, was adopted by the government for its own employees.
  • The NPS for Central government employees was notified on December 22, 2003.
  • Unlike some other countries, the NPS was for prospective employees — it was made mandatory for all new recruits joining government service from January 1, 2004.
  • The defined contribution comprised 10 per cent of the basic salary and DA by the employee and a matching contribution by the government — this was Tier 1, with contributions being mandatory.
  • In January 2019, the government increased its contribution to 14 per cent of the basic salary and dearness allowance.
  • Schemes under the NPS are offered by nine pension fund managers — sponsored by SBI, LIC, UTI, HDFC, ICICI, Kotak Mahindra, Aditya Birla, Tata, and Max.

Risk profiles under NPS

  • NPS is now regulated under the Pension Fund Regulatory & Development Authority (PFRDA) Act, 2013.
  • The risk profiles of various schemes offered by these players vary from ‘low’ to ‘very high’.
  • The 10-year return for the NPS Scheme-Central Government floated by SBI, LIC, and UTI stood at 9.22 per cent; the 5-year return at 7.99 per cent, and the 1-year return at 2.34 per cent.
  • Returns on high-risk schemes could be as high as 15 per cent.

Issues with OPS

  • Burden on exchequer: In 30 years, the cumulative pension bill of states has jumped to Rs 3,86,001 crore in 2020-21 from Rs 3,131 crore in 1990-91.
  • Huge share of tax receipts: Overall, pension payments by states eat away a quarter of their own tax revenues. If wages and salaries of state government employees are added to this bill, states are left with hardly anything from their own tax receipts.
  • Issue of inter-generational equity: Today’s taxpayers are paying for the ever-increasing pensions of retirees, with Pay Commission awards almost taking the pension of old retirees to current levels. It means the pension of someone who retired in 1995 may well be the same as that for someone who retires in 2025.

Why states are reverting back to OPS?

OPS brings state governments some short-term gains:

  • Deferment to contribution: They save money since they will not have to put the 10 per cent matching contribution towards employee pension funds.
  • Low curtailment in salaries: For employees too, it will result in higher take-home salaries, since they too will not set aside 10 per cent of their basic pay and dearness allowance towards pension funds.
  • Old age security: Some government employees are concerned that their pension may not be the same as 50 per cent of their last salary drawn (as in the OPS).

Why need pensions at all?

  • Pension helps you accumulate a part of your income, over a long period, so that this money can be used post-retirement.
  • They provide a steady source of income when one needs the most.
  • It helps inculcate fiscal discipline.

Conclusion

  • NPS vs. OPS will play out in the Himachal Assembly elections with freebie trending parties considering following the same trend as Rajasthan, Chhattisgarh and Jharkhand.
  • The fiscal risks involved in the transition of NPS-borne employees to OPS regime are substantive and to a great extent unsustainable keeping in view the existing share of pensionary liability in government expenditure.
  • It is estimated that the cost incurred by the government on pension is more than double the cost of NPS contribution in the long run.

 

(Click) FREE1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Private: GDP and The Rising Interest Rates

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP and basic economic concepts

Mains level: Inflation and effect of rising Interate rates.

GDPContext

  • While cutting down India’s GDP growth to 6.5 per cent for 2022-23, the World Bank noted that this was largely due to a deteriorating global scenario. But, even at 6.5 per cent, India will still be a global growth out-performer this year.

What is Gross Domestic Product (GDP)?

  • GDP is the value of all final goods and services produced by the normal residents as well as non-residents in the domestic territory of the country but does not includes Net Factor Income from Abroad.
  • The important point to remember is whatever is produced in India, whether by an Indian or foreign national is part of Indian GDP.
  • GDP = Consumption + Gross Private Investment + Government Expenditure + Net Exports
  • Net Exports= Exports – Imports.

GDP

What is India’s Current GDP?

  • Indian Economy stands at $3.53 trillion in FY22
  • India’s gross domestic product (GDP) grew 8.7% in FY22.
  • India has overtaken Britain to become the world’s fifth largest economyand as per IMF projections, only USA, China, Japan, and Germany are now ahead of India in terms of the volume of the national economy.
  • As per its estimates, India would be a $3.54 trillion economy at the end of 2022 compared to the UK’s $3.38 trillion. India’s economy has been growing at a much faster rate in both real and nominal rates than that of the UK over a long period of time.

DO YOU KNOW

India, still a developing nation but it is the third-largest economy globally when it comes to Purchasing power parity (PPP). This country has approximately 6.7 percent of the world’s GDP, compared to America’s 16 percent.

An examination of GDP growth data for India

  • India’s growth trajectory: India’s growth cycles are in sync with those of the advanced economies. What this implies is that India cannot avoid the short-term pain of deceleration in the developed countries. Increasing global interconnectivity only accentuates this effect.
  • Divergent Rate of GDP Growth: The long-term trend rate of GDP growth of advanced economies and India is divergent. For India, it has moved up over time, while for advanced economies it is the other way.
  • Domestic factors: Domestic inflation dynamics and financial conditions will also influence growth outcomes. On the other hand, the long-term trend rate of growth will be influenced by many factors including efficiency-enhancing reforms.

GDPNear-term

prospects for India’s GDP growth in the backdrop of ongoing geopolitical events

  • A complex interplay of geopolitical events and its impact:
  • High inflation and sharp rate hike has turned the global environment gloomier more so for calendar 2023 than 2022. As economies moved past the pandemic in early 2022, geopolitical risks emerged and have only escalated since then.
  • S&P Global has recently marked down global growth to 3.1 per cent and 2.4 per cent for 2022 and 2023 respectively.
  • Impact of Global slowdown:
  • Typically, Global slowdowns soften crude and commodity prices, which ease the burden on India’s imports. However, the ongoing geopolitical stress is likely to limit the decline in their prices. OPEC’s recent move to cut oil output is an example of how geopolitics is shaping oil prices.
  • Impact of a slowing global economy on exports will overshadow the mild positive impulse from the rupee depreciating.
  • Volatility of crude oil and commodity prices leading to inflation:
  • From the beginning of this fiscal, geopolitical developments have had an outsized impact on India’s inflation, particularly the wholesale price inflation, which continues to be in double digits and spills over to consumer prices.
  • The Russia-Ukraine conflict has created volatility for several agricultural commodities. Exporter nations have then imposed trade restrictions. While commodity prices have come off from their highs, volatility and uncertainty about their price trajectory continue.
  • Systematic rise in interest rates and its impact on rupee:
  • The four-decade high inflation is forcing systemically important central banks such as the Fed and European Central Bank (ECB) to raise interest rates faster and by bigger magnitudes than anticipated earlier.
  • Such hikes in the US have raised the spectrum of currency depreciation and imported inflation for India. Although the rupee’s depreciation had been quite orderly so far thanks to the Reserve Bank of India’s deft interventions, the downward pressure has intensified again with the rupee breaching 82/$ last week.
  • A weaker rupee will only make imports expensive. Domestic pressures on food inflation from freak weather events and a lopsided monsoon are keeping consumer inflation high.
  • Impact on India’s Exports:
  • In the backdrop of slowing economy, India’s exports, which have already started contracting. A 1 per cent decline in global GDP is associated with a 2.3 per cent reduction in exports. But every 1 per cent depreciation in the real effective exchange rate leads to a 1 per cent increase in exports.
  • The World Trade Organization has already lowered global trade volume growth forecasts.
  • Impact on Consumption linked sectors:
  • Sectors such as textiles (readymade garments and home furnishings) and leather are already facing lower export orders. Engineering and electronics goods are also getting hit.
  • Since the domestic growth momentum remains strong, imports are sticky and continue to grow.
  • Widening trade deficit leading to Current account deficit(CAD):
  • During April-September this year, while exports have grown by 15.5 per cent, imports grew by 37.8 per cent.
  • A rising CAD requires more capital flows to finance it. The availability of this in the current risk-off scenario would be a challenge. Thus the rupee is likely to remain volatile with a depreciation bias in the near term.

GDP

Way ahead

  • Rising interest rates and slowing external demand will be the growth dampeners in the foreseeable future.
  • We see downside risks to our GDP growth forecast of 7.3 per cent and 6.5 per cent for the current and next year respectively.
  • During upturns, the growth is overestimated, while in downturns, it’s the other way around. Therefore, forecasts at this juncture will have a short shelf life and a wider confidence interval.

Mains Question

Q.Slowdown in global growth has an immediate impact on India’s exports, further widening the trade deficit and affecting domestic growth. In this context, discuss the role of central bank in keeping inflation low.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Effect of Rising Interest Rates on GDP

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Basic concepts of GDP,

Mains level: Paper 3- Inflation challenge,Interest rates

Context

  • While cutting down India’s GDP growth to 6.5 per cent for 2022-23, the World Bank noted that this was largely due to a deteriorating global scenario. But, even at 6.5 per cent, India will still be a global growth out-performer this year.

What is Gross Domestic Product (GDP)?

  • GDP is the value of all final goods and services produced by the normal residents as well as non-residents in the domestic territory of the country but does not includes Net Factor Income from Abroad.
  • The important point to remember is whatever is produced in India, whether by an Indian or foreign national is part of Indian GDP.
  • GDP = Consumption + Gross Private Investment + Government Expenditure + Net Exports
  • Net Exports= Exports – Imports.

What is India’s Current GDP?

  • India’s gross domestic product (GDP) grew 8.7% in FY22.
  • India has overtaken Britain to become the world’s fifth largest economyand as per IMF projections, only USA, China, Japan, and Germany are now ahead of India in terms of the volume of the national economy.
  • As per its estimates, India would be a $3.54 trillion economy at the end of 2022 compared to the UK’s $3.38 trillion. India’s economy has been growing at a much faster rate in both real and nominal rates than that of the UK over a long period of time.

An examination of GDP growth data for India

  • India’s growth trajectory: India’s growth cycles are in sync with those of the advanced economies. What this implies is that India cannot avoid the short-term pain of deceleration in the developed countries. Increasing global interconnectivity only accentuates this effect.
  • Divergent Rate of GDP Growth: The long-term trend rate of GDP growth of advanced economies and India is divergent. For India, it has moved up over time, while for advanced economies it is the other way.
  • Domestic factors: Domestic inflation dynamics and financial conditions will also influence growth outcomes. On the other hand, the long-term trend rate of growth will be influenced by many factors including efficiency-enhancing reforms.

Near-term prospects for India’s GDP growth in the backdrop of ongoing geopolitical events

  • A complex interplay of geopolitical events and its impact:
  • High inflation and sharp rate hike has turned the global environment gloomier more so for calendar 2023 than 2022. As economies moved past the pandemic in early 2022, geopolitical risks emerged and have only escalated since then.
  • S&P Global has recently marked down global growth to 3.1 per cent and 2.4 per cent for 2022 and 2023 respectively.
  • Impact of Global slowdown:
  • Typically, Global slowdowns soften crude and commodity prices, which ease the burden on India’s imports. However, the ongoing geopolitical stress is likely to limit the decline in their prices. OPEC’s recent move to cut oil output is an example of how geopolitics is shaping oil prices.
  • Impact of a slowing global economy on exports will overshadow the mild positive impulse from the rupee depreciating.
  • Volatility of crude oil and commodity prices leading to inflation:
  • From the beginning of this fiscal, geopolitical developments have had an outsized impact on India’s inflation, particularly the wholesale price inflation, which continues to be in double digits and spills over to consumer prices.
  • The Russia-Ukraine conflict has created volatility for several agricultural commodities. Exporter nations have then imposed trade restrictions. While commodity prices have come off from their highs, volatility and uncertainty about their price trajectory continue.
  • Systematic rise in interest rates and its impact on rupee:
  • The four-decade high inflation is forcing systemically important central banks such as the Fed and European Central Bank (ECB) to raise interest rates faster and by bigger magnitudes than anticipated earlier.
  • Such hikes in the US have raised the spectrum of currency depreciation and imported inflation for India. Although the rupee’s depreciation had been quite orderly so far thanks to the Reserve Bank of India’s deft interventions, the downward pressure has intensified again with the rupee breaching 82/$ last week.
  • A weaker rupee will only make imports expensive. Domestic pressures on food inflation from freak weather events and a lopsided monsoon are keeping consumer inflation high.
  • Impact on India’s Exports:
  • In the backdrop of slowing economy, India’s exports, which have already started contracting. A 1 per cent decline in global GDP is associated with a 2.3 per cent reduction in exports. But every 1 per cent depreciation in the real effective exchange rate leads to a 1 per cent increase in exports.
  • The World Trade Organization has already lowered global trade volume growth forecasts.
  • Impact on Consumption linked sectors:
  • Sectors such as textiles (readymade garments and home furnishings) and leather are already facing lower export orders. Engineering and electronics goods are also getting hit.
  • Since the domestic growth momentum remains strong, imports are sticky and continue to grow.
  • Widening trade deficit leading to Current account deficit(CAD):
  • During April-September this year, while exports have grown by 15.5 per cent, imports grew by 37.8 per cent.
  • A rising CAD requires more capital flows to finance it. The availability of this in the current risk-off scenario would be a challenge. Thus the rupee is likely to remain volatile with a depreciation bias in the near term.

Way ahead

  • Rising interest rates and slowing external demand will be the growth dampeners in the foreseeable future.
  • We see downside risks to our GDP growth forecast of 7.3 per cent and 6.5 per cent for the current and next year respectively.
  • During upturns, the growth is overestimated, while in downturns, it’s the other way around. Therefore, forecasts at this juncture will have a short shelf life and a wider confidence interval.

Mains Question

Q.Slowdown in global growth has an immediate impact on India’s exports, further widening the trade deficit and affecting domestic growth. In this context, discuss the role of central bank in keeping inflation low in this context.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Fixing Falling Indian Rupee

Note4Students

From UPSC perspective, the following things are important :

Prelims level: weakening of Rupee,appreciation and depreciation

Mains level: Indian Economics

Falling Indian RupeeContext

  • Last week, the rupee weakened against the dollar past the 81-mark to a record low. In recent months, the Reserve Bank of India (RBI) has been intervening in the FOREX market to smoothen the decline. Indian foreign exchange reserves have fallen by about $94billion in 12 months to about $545 billion until mid-September. Falling Indian Rupee poses huge challenge in the economy.

What are the major challenges before Indian Economy?

  • Falling rupee: A fall in the rupee against the dollar in the FOREX market means that the Indian currency is weakening. This means that while importing from the United States or any country, India will have to pay more because the payment is done in dollars, i.e., less import cost more.
  • Inflation: Since May this year, RBI has largely managed to control inflation. RBI managed inflation to keep it below 7.5 % but, looking at Ukraine situation, oil prices may shoot up again and there by inflation will rise.
  • Growing CAD: India’s current account deficit (CAD) in April-June was at $23.9 billion, or 2.8 per cent of gross domestic product (GDP), much higher than the $13.4 billion, or 1.5 per cent of GDP, in January-March 2022. India has faced upward pressure on its import bill in 2022 because Russia’s invasion of Ukraine in late February led to a sharp rise in prices of commodities across the globe.

Falling of RupeeWhat is RBI’s role in managing falling Rupee ?

  • Use of foreign exchange reserve: The use of FOREX reserves is appropriate at this juncture. You build your reserves during good times and spend them during bad times. Right now, reserves are being spent in trying to curb currency volatility. RBI can’t defend the rupee at a particular level, because that would be swimming against the tide, which is not possible in this environment. But RBI can make it less volatile.
  • Easy dollar supply: RBI has already undertaken measures such as easing provisions for remittances, allowing short-term foreign portfolio investments in government securities, etc. We can even think of a scheme similar to the one introduced in 2014to attract NRI investments.
  • Interest rate: Interest rates are being raised not only to control inflation, but also to address external imbalances. But let’s also look at past episodes of sharp depreciation of the currency which we have seen during the global financial crisis, during the taper tantrum. They tell us that the currency weakens very sharply during these episodes of global shocks, but it also corrects. If you plot it over a 15-20-year period, you will see that the overshooting of the currency typically gets corrected after the event is over. So, the aim now should only be to ensure that volatility is not too high, not to steer the currency in any direction.
  • Managing the CAD: According to experts, RBI can finance the CAD with capital inflows, and prevent hot money outflow with the aid of interest rates, that could be an effective long-term solution. The focus should be on how we can stem capital that is flighty. Even during the tenure of Raghuram Rajan the CAD went up to 4%. But the moment hot money became flighty, panic set in. Till then, we were comfortably financing the CAD with capital flows.

Falling Indian RupeeWhat are the Notes of caution?

  • On FOREX: There is also a limit to how much you can lean on the reserves. They can burn out pretty quickly if you are aggressive in your interventions.
  • On rupee fall and CAD: RBI also needs to let the rupee depreciate in an orderly manner. Some, but not too much, depreciation will partly help the export sector, as global demand is the key influencer of exports, and currencies of our competitors are also weakening. So, the vulnerability that stems from high current account deficit (CAD) can get addressed to some extent.
  • On interest rate: We have to focus on the real interest rate and economic growth, for public debt management. If the Real interest rate is going to be greater than Growth, then we are in an unsustainable situation. The only way to address these concerns such as fiscal consolidation, twin deficit crisis, given that the real rate of interest is negative, given the hawkish mode of the Fed, is to raise rates.

Falling Indian RupeeConclusion

  • With rising external trade, India’s economy is integrating with world. Impact of global uncertainty on economy is natural outcome. Ukraine episode, slowing Europe and unclear USA is going give Indian policy maker a tough time in coming months.

Mains Question

Q.Recent global events and future uncertainties pose challenges to microeconomic stability. Discuss what measures India can take to keep inflation low.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Private: Recession unlikely to hit India: S&P

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Recessions, Depression

Mains level: Read the attached story

recession

Global rating agency S&P has said that even though the US and the Euro zone are headed towards recession, India is unlikely to face the impact given the not-so-coupled nature of its economy with the global economy.

How is India immune to global recession?

  • Indian economy is a lot decoupled from the global economy than we normally think of, given its large domestic demand.
  • India has enough forex reserves on one hand and domestic companies have managed to maintain healthy balance sheets.
  • In fact, India was never coupled fully with the global economy and so is relatively independent of global markets.
  • Elsewhere, a lot depends on how global fund flows behave if there is a recession in the U.S. and Europe.

What is a Recession?

recession

  • A recession is a significant decline in economic activity that lasts for months or even years.
  • Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
  • Recessions are considered an unavoidable part of the business cycle—or the regular cadence of expansion and contraction that occurs in a nation’s economy.

What causes Recessions?

These phenomena are some of the main drivers of a recession:

  • A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
  • Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy.
  • Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy.
  • Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity.
  • Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy.
  • Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological breakthroughs. In the 19th century, there were waves of labour-saving technological improvements.

What’s the difference between Recession and Depression?

  • Recessions and depressions have similar causes, but the overall impact of a depression is much, much worse.
  • There are greater job losses, higher unemployment and steeper declines in GDP.
  • Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover.
  • Economists do not have a set definition or fixed measurements to show what counts as a depression. Suffice to say, all the impacts of a depression are deeper and last longer.
  • In the past century, the US has faced just one depression: The Great Depression.

The Great Depression

  • The Great Depression started in 1929 and lasted through 1933, although the economy didn’t really recover until World War II, nearly a decade later.
  • During the Great Depression, unemployment rose to 25% and the GDP fell by 30%.
  • It was the most unprecedented economic collapse in modern US history.
  • By way of comparison, the Great Recession was the worst recession since the Great Depression.
  • During the Great Recession, unemployment peaked around 10% and the recession officially lasted from December 2007 to June 2009, about a year and a half.
  • Some economists fear that the coronavirus recession could morph into a depression, depending how long it lasts.

How long do recessions last?

  • Gulf War Recession (July 1990 to March 1991): At the start of the 1990s, the U.S. went through a short, eight-month recession, partly caused by spiking oil prices during the First Gulf War.
  • The Great Recession (2008-2009): As mentioned, the Great Recession was caused in part by a bubble in the real estate market.
  • Covid-19 Recession: The most recent recession began in February 2020 and lasted only two months, making it the shortest US recession in history.

Can we predict a recession?

Given that economic forecasting is uncertain, predicting future recessions is far from easy. However, the following warning signs can give you more time to figure out how to prepare for a recession before it happens:

  • An inverted yield curve: The yield curve is a graph that plots the market value—or the yield—of a range. When long-term yields are lower than short-term yields, it shows that investors are worried about a recession. This phenomenon is known as a yield curve inversion, and it has predicted past recessions.
  • Declines in consumer confidence: Consumer spending is the main driver of the US economy. If surveys show a sustained drop in consumer confidence, it could be a sign of impending trouble for the economy.
  • Drop in the Leading Economic Index (LEI): Published monthly by the Conference Board, the LEI strives to predict future economic trends. It looks at factors like applications for unemployment insurance, new orders for manufacturing and stock market performance.
  • Sudden stock market declines: A large, sudden decline in stock markets could be a sign of a recession coming on, since investors sell off parts and sometimes all of their holdings in anticipation of an economic slowdown.
  • Rising unemployment: It goes without saying that if people are losing their jobs, it’s a bad sign for the economy.

How does a recession affect individuals?

  • We may lose your job during a recession, as unemployment levels rise. It becomes much harder to find a job replacement since more people are out of work.
  • People who keep their jobs may see cuts to pay and benefits, and struggle to negotiate future pay raises.
  • Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upsetting your plans for retirement.
  • Business owners make fewer sales during a recession, and may even be forced into bankruptcy.
  • With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans, and other types of financing.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Europe heading for Recession

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Recessions, Depression

Mains level: Not Much

The Eurozone is almost certainly entering a recession, with surveys showing a deepening cost-of-living crisis and a gloomy outlook that is keeping consumers wary of spending.

What is Recession?

  • A recession is a significant decline in economic activity that lasts for months or even years.
  • Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
  • Recessions are considered an unavoidable part of the business cycle—or the regular cadence of expansion and contraction that occurs in a nation’s economy.

What causes Recessions?

These phenomena are some of the main drivers of a recession:

  • A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
  • Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy.
  • Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy.
  • Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity.
  • Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy.
  • Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological breakthroughs. In the 19th century, there were waves of labour-saving technological improvements.

What’s the difference between Recession and Depression?

  • Recessions and depressions have similar causes, but the overall impact of a depression is much, much worse.
  • There are greater job losses, higher unemployment and steeper declines in GDP.
  • Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover.
  • Economists do not have a set definition or fixed measurements to show what counts as a depression. Suffice to say, all the impacts of a depression are deeper and last longer.
  • In the past century, the US has faced just one depression: The Great Depression.

The Great Depression

  • The Great Depression started in 1929 and lasted through 1933, although the economy didn’t really recover until World War II, nearly a decade later.
  • During the Great Depression, unemployment rose to 25% and the GDP fell by 30%.
  • It was the most unprecedented economic collapse in modern US history.
  • By way of comparison, the Great Recession was the worst recession since the Great Depression.
  • During the Great Recession, unemployment peaked around 10% and the recession officially lasted from December 2007 to June 2009, about a year and a half.
  • Some economists fear that the coronavirus recession could morph into a depression, depending how long it lasts.

How long do recessions last?

  • Gulf War Recession (July 1990 to March 1991): At the start of the 1990s, the U.S. went through a short, eight-month recession, partly caused by spiking oil prices during the First Gulf War.
  • The Great Recession (2008-2009): As mentioned, the Great Recession was caused in part by a bubble in the real estate market.
  • Covid-19 Recession: The most recent recession began in February 2020 and lasted only two months, making it the shortest US recession in history.

Can we predict a recession?

Given that economic forecasting is uncertain, predicting future recessions is far from easy. However, the following warning signs can give you more time to figure out how to prepare for a recession before it happens:

  • An inverted yield curve: The yield curve is a graph that plots the market value—or the yield—of a range. When long-term yields are lower than short-term yields, it shows that investors are worried about a recession. This phenomenon is known as a yield curve inversion, and it has predicted past recessions.
  • Declines in consumer confidence: Consumer spending is the main driver of the US economy. If surveys show a sustained drop in consumer confidence, it could be a sign of impending trouble for the economy.
  • Drop in the Leading Economic Index (LEI): Published monthly by the Conference Board, the LEI strives to predict future economic trends. It looks at factors like applications for unemployment insurance, new orders for manufacturing and stock market performance.
  • Sudden stock market declines: A large, sudden decline in stock markets could be a sign of a recession coming on, since investors sell off parts and sometimes all of their holdings in anticipation of an economic slowdown.
  • Rising unemployment: It goes without saying that if people are losing their jobs, it’s a bad sign for the economy.

How does a recession affect individuals?

  • We may lose your job during a recession, as unemployment levels rise. It becomes much harder to find a job replacement since more people are out of work.
  • People who keep their jobs may see cuts to pay and benefits, and struggle to negotiate future pay raises.
  • Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upsetting your plans for retirement.
  • Business owners make fewer sales during a recession, and may even be forced into bankruptcy.
  • With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans, and other types of financing.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

IIP gives us true health of our economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: particulars of IIP

Mains level: economic indicator

IIPContext

  • India’s statistics ministry generates only one high-frequency gauge of economic activity. And that lone barometer, the index of industrial production (IIP), is completely broken.

What is IIP?

  • The Index of Industrial Production (IIP) is an index that indicates the performance of various industrial sectors of the Indian economy. It is a composite indicator of the general level of industrial activity in the economy.

IIPHow is IIP calculated?

  • IIP is calculated as the weighted average of production relatives of all the industrial activities. In the mathematical calculation Laspeyre’s fixed base formula is used.

What are the Core Industries in India?

  • The main or the key industries constitute the core sectors of an economy.
  • In India, there are eight sectors that are considered the core sectors.
  • They are electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilizers.

Which has highest weightage in IIP?

  • The eight core sector industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

IIPWhy is IIP important?

  • IIP is the only measure on the physical volume of production. It is used by government agencies including the Ministry of Finance, the Reserve Bank of India, etc. for policy-making purposes. IIP remains extremely relevant for the calculation of the quarterly and advance GDP estimates.

Who releases IIP data?

How useful are monthly IIP figures to draw a conclusion about India’s growth?

  • IIP figures are monthly data and as such it keeps going up and down.
  • In fact, the release calls them “quick estimates” because they tend to get revised after a month or two.

IIP Index Components

  • Mining, manufacturing, and electricity are the three broad sectors in which IIP constituents fall.
  • The relative weights of these three sectors are 77.6% (manufacturing), 14.4% (mining) and 8% (electricity).
  • Electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilizers are the eight core industries that comprise about 40 per cent of the weight of items included in the IIP.

Basket of products

  • Primary Goods (consisting of mining, electricity, fuels and fertilisers)
  • Capital Goods (e.g. machinery items)
  • Intermediate Goods (e.g. yarns, chemicals, semi-finished steel items, etc)
  • Infrastructure Goods (e.g. paints, cement, cables, bricks and tiles, rail materials, etc)
  • Consumer Durables (e.g. garments, telephones, passenger vehicles, etc)
  • Consumer Non-durables (e.g. food items, medicines, toiletries, etc)

IIP base year change

  • The base year was changed to 2011-12 from 2004-05 in the year 2017.

Way ahead

  • IIP remains extremely relevant for the calculation of the quarterly and advance GDP (Gross Domestic Product) estimates.

Mains question

Q. What do you understand by IIP? How it helps us to understand economic health?

 

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI, government must act in coordination during an economically challenging period

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Standing Deposit Facility rate

Mains level: Paper 3- Dealing with economically challenging period

Context

In the recent MPC meeting, the policy rate hike was widely expected, more anticipated were the MPC and the RBI Governor’s forward guidance on the trajectory of policy — on both monetary policy and liquidity instruments. So, how do we see monetary policy evolve over the rest of the year and beyond?

Tightening of monetary policy

  • Repo rate at 5.4 per cent: In its latest meeting, the members of the monetary policy committee voted unanimously to increase the policy repo rate by 50 basis points to 5.4 per cent.
  • The repo rate was 5.15 per cent in February 2020.
  • So, in effect, the RBI’s policy has not only been normalised, but has actually tightened compared to the pre-pandemic level.
  •  Even the lower bound of the rate corridor, the Standing Deposit Facility (SDF) rate, at 5.25 per cent is now above the pre-pandemic repo rate.

Forward guidance on stance

  • The MPS indicated the retaining the policy stance rather than shifting to “neutral”.
  • This retention of stance might be interpreted as being a bit more hawkish than “neutral”, which implies that rates might be both increased or cut, depending on economic conditions.
  • Now that policy is largely normalised, the pace of tightening is likely to moderate.
  • The urgency of aggressive rate hikes and tightening of liquidity has somewhat moderated, although risks remain.
  • RBI’s research suggests that the “real natural rate” — the rate at which policy is neither loose nor tight – is 0.8-1 per cent.
  • This operative interest rate is usually the three-month T-bill rate, which in “normal” times averages 10-15 basis points above the repo rate.
  • Considering that monetary policy is calibrated over a one-year horizon and using the RBI’s inflation forecast of 5 per cent for the first quarter of 2023-24, the “natural” repo rate will be around 5.85 per cent.

Inflation and growth conditions

  • The RBI’s growth projection for 2022-23 has been retained at 7.2 per cent, with growth frontloaded in the first half.
  • CPI inflation is still forecast to average 6.7 per cent.
  • Inflationary pressures are likely to wane in the second half of 2022-23, particularly if the recent drop in industrial metals prices persists over the next few months.
  • A more or less normal monsoon might help in keeping food prices stable. However, risks remain.
  • Robust growth prospects: Demand for consumption goods seems to be resilient, enabling some further pass-through of input costs.
  • Combine this with tight labour markets and rising wage costs in some tech-oriented sectors.
  • High frequency indicators of economic activity have recovered after some weakness in June.
  • In addition to resilient demand, there is evidence of a closing of the “output gap”.
  • Global growth: Global growth and trade are forecast to significantly slow down in 2022 and 2023, largely due to aggressive tightening by G-10 central banks and a slowdown in China.
  • The IMF predicts global trade volume (both merchandise and services) to slow to 4.1 per cent and 3.2 per cent in 2022 and 2023, down from 10.1 per cent in 2021.
  • With world growth and trade flows moderating, along with a drop in commodities prices, India’s export growth is likely to be lower than last year.

External financial condition

  • The current account deficit remains a concern.
  • India’s external balance sheet remains quite robust, as is evident from various balance of payments and debt metrics, and reportedly low unhedged foreign currency borrowings.
  • Continued tightening by global central banks, particularly the US Federal Reserve over the rest of 2022, will keep India’s external financial conditions tight and likely limit portfolio capital flows.
  • However, there are some signs emanating from these central banks that the hitherto front-loaded tightening might moderate going forward.
  • This will take some pressure off the rupee, though, exchange rate volatility management will remain a part of the overall monetary policy management framework.

Challenge of surplus liquidity

  • During the earlier phase of policy normalisation and the recent tightening, liquidity management has played an important role in influencing short-term money market interest rates.
  • The current latent surplus liquidity — the existing funds with banks and the Union government’s unspent revenues parked with RBI — is over Rs 5 lakh crore.
  • While the extent of liquidity surplus during the Covid months has come down, these levels are still much higher than RBI estimates of non-inflationary levels of surplus, which is around Rs 1.8-2.4 lakh crore.
  • This will gradually fall with cash withdrawals and some potential RBI dollar sales in the coming months.

Conclusion

The central bank, in coordination with the government, has ensured an orderly evolution of economic conditions during a very complex and challenging environment. The exit process now will also need the same adroit use of policy instruments.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics: Standing Deposit Facility rate

  • The Reserve Bank of India (RBI) in April 2022 introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75 per cent.
  • The main purpose of SDF is to reduce the excess liquidity  in the system, and control inflation.
  • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral.
  • By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
  • The SDF is also a financial stability tool in addition to its role in liquidity management.
  • The SDF replaced the fixed rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
  • The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
  • It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Fiscal prudence

Note4Students

From UPSC perspective, the following things are important :

Prelims level: FRBM act

Mains level: Fiscal health of states

Fiscal prudenceContext

  • The Central government’s alarm has been on the mounting debt burden and the deteriorating fiscal situation in some States due to diversion in fiscal prudence.
  • As both the Union government and States are expected to work closely in a co-operative federal structure, frictions arising out of these exchanges might have repercussions on both resource sharing and expenditure prioritisation.

What is India’s fiscal federalism?

  • Fiscal federalism refers to the financial relations between the country’s federal government system and other units of government.
  • It refers to how federal, state, and local governments share funding and administrative responsibilities within our federal system.

Three issues in India’s fiscal federalism                   

  • First: are a set of issues related to Goods and Services Tax (GST) such as the rate structure, inclusion and exclusion of commodities, revenue sharing from GST and associated compensation.
  • Second: State-level expenditure patterns especially related to the welfare schemes of States.
  • Third: the conception and the implementation of central schemes.

Fiscal prudenceMeaning of fiscal prudence

  • Fiscal prudence is defined as the ability of a government to sustain smooth monetary operation and long-standing fiscal condition.

Where should state government spend the borrowed money?

  • Fundamental infrastructure: Ideally, governments should use borrowed money to invest in physical and social infrastructure that will generate higher growth, and thereby higher revenues in the future so that the debt pays for itself.
  • Targeted expenditure only: On the other hand, if governments spend the loan money on populist giveaways that generate no additional revenue, the growing debt burden will eventually implode.

Fiscal prudenceWhy there is a need for Fiscal Council?

  • Institutionalizing fiscal practices: With a complex polity and manifold development challenges, India need institutional mechanisms for fiscal prudence.
  • Transparency: An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.
  • Fiscal prudence: International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.

What does fiscal consolidation mean?

  • Fiscal consolidation is defined as concrete policies aimed at reducing government deficits and debt accumulation.

Why fiscal consolidation is needed?

  • Fiscal expansion financed through debt and the resultant debt accumulation have important impacts on the economy both in the short run as well as in the long run.

How to achieve fiscal consolidation?

  • Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies
  • Improved tax revenue realization For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made.
  • Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues.

Suggestions

  • Amend FRBM Act for complete disclosure: First, the FRBM Acts of the Centre as well as States need to be amended to enforce a more complete disclosure of the liabilities on their exchequers.
  • Centre should impose conditionalities: Under the Constitution, States are required to take the Centre’s permission when they borrow. The Centre should not hesitate to impose conditionalities on wayward States when it accords such permission.
  • Use of financial emergency provision: There is a provision in the Constitution of India which allows the President to declare a financial emergency in any State if s/he is satisfied that financial stability is threatened.
  • Course correction by the Centre: The Centre itself has not been a beacon of virtue when it comes to fiscal responsibility and transparency. It should complete that task in order to command the moral authority to enforce good fiscal behaviour on the part of States.

Conclusion

  • Fiscal correction at the State level is important. While there exists a need for raising additional resources at the sub-national levels, expenditure prioritisation has to be carried out diligently. The Centre, too, on its part needs to demonstrate commitment to fiscal discipline by sticking to announced fiscal glide path to ensure the sustainability of a frictionless cooperative federal structure.

Mains question

Q. Why Fiscal correction at the State level is important? Why fiscal consolidation is needed? Write in context frictionless cooperative fiscal federal structure.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Macrovariable projections in uncertain times

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Stagflation

Mains level: Paper 3- Challenges in projection of economic macrovariables

Context

The Fed has raised its benchmark interest rate again by a whopping 0.75%. The Reserve Bank of India has also been forced to raise interest rates further but also take other steps.

Two challenges for policymakers

  • Decisions in the Monetary Policy Committee (MPC) meeting are based on what the members of the MPC see as the likely course of the economy in the months ahead.
  • But, the trajectory of the world economy, and its likely impact on the Indian economy, is imponderable.
  • So, Indian policymakers would face two crucial problems.
  • 1] Uncertainty due to war and Covid-19: First, the main uncertainty is due to Russia’s war on Ukraine and the resultant economic sanctions on Russia, as well as the zero-COVID-19 policy in China that repeatedly implements lockdowns leading to global supply bottlenecks.
  • 2] Uncertainty in data: Policy has to base itself on data.
  • If it is deficient, it introduces additional uncertainty, making projections for the future difficult and causing policies to fail.
  • This will compound the problem that results from the global uncertainty.

Role of uncertainties related to Covid and Ukraine war

  • Since early 2020, the SARS-COV-2 virus has caused global uncertainty.
  •  In a globalised interdependent world, production was hit resulting in price rise (inflation) and loss of real incomes.
  • This has resulted in decline in demand and, in a vicious cycle, a further slowing down of the economy.
  • As prices have risen globally and economies slowed down, many countries have faced stagflation.
  • Decline in uncertainty: The uncertainty due to the novel coronavirus has declined in spite of waves of attack persisting because the impact of new virus mutants of the virus is milder and there is also immunity due to vaccination.
  • However, China is an exception with its zero-COVID policy.
  •  It has been implementing strict lockdowns in the last six months, even when only a few cases of the disease have been detected.

The uncertainties due to Ukraine conflict

  • The war in Ukraine and western sanctions on Russia have caused huge uncertainty since February 2022 (when Russia invaded Ukraine) and displaced the disease-related uncertainty, i.e., COVID-19.
  • The reason is that the war is a proxy war between two powerful capitalist blocs.
  • There is needless continuing suffering of the people of Ukraine, with a bombardment of cities, and this could escalate.
  • The war and the sanctions have already affected the world economy and the Europeans in particular.
  • The U.S. economy has entered technical recession with two quarters of GDP decline.
  • As supplies of critical items supplied by Russia and Ukraine have been hit, prices have soared.
  • Europe, the United States and India have experienced or are experiencing high inflation.
  • The biggest disruption is in energy supplies from Russia, impacting production.
  • The availability of food, fertilizers, metals, etc., have been hit as Ukraine and Russia are important sources.
  • To weaken Russia, sanctions may be imposed on countries that carry out trade with it.
  • Many Indian entities may face the heat since India has increased its imports from Russia, which undermines sanctions.
  • China may also face sanctions since it has increased trade with Russia and is backing it.

Data related uncertainties

  • Indian policymakers also face data-related issues.
  • It is not only available with a big lag on most macroeconomic variables but for many variables, data are either not available or has huge errors.
  • Errors in data: Policymakers rely on high frequency data to proxy for actual data.
  • For example, very little data are available for quarterly GDP data which is used to calculate the growth rate of the economy.
  • First, except for agriculture, unorganised sector data is not available.
  • Second, for the organised sector, very limited data are available.
  • Third, projections from the previous year or proxies are used — both these introduce errors when there are repeated shocks to the economy, such as the pandemic and now the war.
  • Issues with price data: Price data too are problematic.
  • The services sector is under-represented.
  • Prices of many services have risen and expenditures on them have increased dramatically, thus changing their weight in the consumption basket.
  • Common CPI: Further, the consumer price index is common for the upper classes and the poor.
  •  Earlier, there was a different index for various categories of people, which reflected the differential impact of inflation on people.
  • This gave a truer picture of the economy and peoples’ distress.

Conclusion

Indian policymakers face the unenviable task of predicting the course of the economy for the next few months and even the year (or years) ahead because of the shocks and faulty and inadequate data. The problem is compounded by international factors.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India as a ‘developed’ country: where we are, and the challenges ahead

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP, GNI

Mains level: India's roadmap for development

In his Independence Day address, PM asked Indians to embrace the “Panch Pran” — five vows — by 2047 when the country celebrates 100 years of independence.

What are the Panch Prans?

  • Calling it the ‘panch pran‘ — the five resolutions to help India become a developed nation in the next 25 years — PM said:
  1. Every Indian should focus on developing the country;
  2. 100 per cent freedom from slavery (100% Azadi from Ghulami);
  3. Taking pride in Indian heritage;
  4. Ensuring importance is given to unity and integrity and
  5. Every citizen should be responsible

What is a “developed” country?

  • Different global bodies and agencies classify countries differently.
  • The ‘World Economic Situation and Prospects’ of the United Nations classifies countries into three broad categories: developed economies, economies in transition, and developing economies.
  • The idea is “to reflect basic economic country conditions”, and the categories “are not strictly aligned with the regional classifications”.
  • So, it isn’t as though all European countries are “developed”, and all Asian ones are “developing”.
  • To categorise countries by economic conditions, the United Nations uses the World Bank’s categorisation, based on Gross National Income (GNI) per capita (in current US dollars).

Issues with such categorization

  • But the UN’s nomenclature of “developed” and “developing” is being used less and less, and is often contested.
  • Former US President Donald Trump had criticised the categorisation of China as a “developing” country, which allowed it to enjoy some benefits in the World Trade Organization.
  • If China is a “developing” country, then the US should also be “made” one, Donald Trump once said.

But why is the United Nations classification contested?

  • It can be argued that the UN classification is not very accurate and, as such, has limited analytical value.
  • Only the top three mentioned in chart 3 alongside — the US, the UK and Norway — fall in the developed country category.
  • Today, there are 31 developed countries according to the UN in all.
  • All the rest — except 17 “economies in transition” — are designated as “developing” countries, even though in terms of proportion, China’s per capita income is closer to Norway’s than Somalia’s.
  • China’s per capita income is 26 times that of Somalia’s while Norway’s is just about seven times that of China’s.
  • Then there are countries — such as Ukraine, with a per capita GNI of $4,120 (a third of China’s) — that are designated as “economies in transition”.

Where does India stand?

  • As chart 2 shows, India is currently far behind both the so-called developed countries, as well as some developing countries.
  • Often, the discourse is on the absolute level of GDP (gross domestic product).
  • On that metric, India is one of the biggest economies of the world — even though the US and China remain far ahead.
  • However, to be classified as a “developed” country, the average income of a country’s people matters more.
  • And on per capita income, India is behind even Bangladesh.
  • China’s per capita income is 5.5 times that of India, and the UK’s is almost 33 times.

India’s progress

  • India has made a secular improvement on HDI metrics.
  • For instance, the life expectancy at birth (one of the sub-metrics of HDI) in India has gone from around 40 years in 1947 to around 70 years now.
  • India has also taken giant strides in education enrolment at all three levels — primary, secondary, and tertiary.

What is the distance left to cover?

  • When compared to the developed countries or China, India has a fair distance to cover.
  • Even though India is the world’s third-largest economy in purchasing power parity (PPP) terms, most Indians are still relatively poor compared to people in other middle income or rich countries.
  • Ten per cent of Indians, at most, have consumption levels above the commonly used threshold of $10 (PPP) per day expenditures for the global middle class.
  • Other metrics, such as the food share of consumption, suggest that even rich households in India would have to see a substantial expansion of their total consumption to reach levels of poor households in rich countries.

How much can India achieve by 2047?

  • One way to make this assessment is to look at how long other countries took to get there.
  • For instance, in per capita income terms, Norway was at India’s current level 56 years ago — in the year 1966.
  • Comparing India to China is more useful. China reached that mark in 2007.
  • Theoretically then, if India were to grow as fast as China did between 2007 and 2022, then, broadly speaking, it will take India another 15 years to be where China is now.
  • But then, China’s current per capita income was achieved by the developed countries several decades earlier — the UK in 1987, the US and Norway in 1979.

Where does India lag?

  • India’s current HDI score (0.64) is much lower than what any of the developed countries had even in 1980.
  • China reached the 0.64 level in 2004, and took another 13 year to reach the 0.75 level — that, incidentally, is the level at which the UK was in 1980.

What can India achieve by 2047?

  • The World Bank’s 2018 report had made a mention of what India could achieve by 2047.
  • By 2047 — the centenary of its independence — at least half its citizens could join the ranks of the global middle class.
  • By most definitions, this will mean that households have access to better education and health care, clean water, improved sanitation, reliable electricity, a safe environment, affordable housing, and enough discretionary income to spend on leisure pursuits.

Way forward

  • Fulfilling these aspirations requires income well above the extreme poverty line, as well as vastly improved public service delivery.
  • To see this in perspective, note that at the last count, as of 2013, India had 218 million people living in extreme poverty — which made India home to the poorest people in the world.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Govt incurs revenue loss of ₹1.84 lakh crore

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Public Estimates Committee

Mains level: Revenue loss to govt

The opposition has questioned the government over the corporate tax cut that led to a revenue loss of ₹1.84 lakh crore to the public exchequer as per a report of the Parliamentary Committee on Estimates.

Why in news?

  • The Public Estimates Committee found such a huge revenue loss for the government.
  • The middle class was charged at a peak tax rate of 30% against 22% for the corporates. Quiet antithetical!
  • The centre on the other hand has repeatedly claimed that the corporate tax cut would help increase tax collection.

What is Corporate Tax?

  • Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act.
  • While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India i.e. is being accrued or received in India.
  • For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under:
  1. Domestic Company is one which is registered under the Companies Act of India and also includes the company registered in the foreign countries having control and management wholly situated in India. A domestic company includes private as well as public companies.
  2. Foreign Company is one which is not registered under the company’s act of India and has control & management located outside India.

Why has the government slashed Corporate Tax?

  • The corporate tax cut is part of a series of steps taken by the government to tackle the slowdown in economic growth since the start of pandemic.
  • The most immediate reason behind the tax cut may be the displeasure that various corporate houses have shown against the government’s policies.
  • Many investors, for instance, were spooked by the additional taxes on them that were announced by the government during the budget in July and began pulling money out of the country.
  • The government hoped that the new, lower tax rates will attract more investments into the country and help revive the domestic manufacturing sector which has seen lackluster growth.

Why Corporate Tax?

  • The corporate tax rate is a major determinant of how investors allocate capital across various economies.
  • So there is constant pressure on governments across the world to offer the lowest tax rates in order to attract investors.
  • Tax cuts, by putting more money in the hands of the private sector, can offer people more incentive to produce and contribute to the economy.

Impact of the rate cut

  • The present cut in taxes can make India more competitive on the global stage by making Indian corporate tax rates comparable to that of rates in East Asia.
  • At the same time, if it manages to sufficiently revive the economy, the present tax cut can help boost tax collections and compensate for the loss of revenue.
  1. Relief to big companies
  • Big companies got a relief of close to 10 percentage points in the effective tax rate including cess and surcharge.
  1. Enhanced competitiveness
  • India was earlier at disadvantage because of a couple of factors and on top of it was the high corporate tax rate.
  • After this cut, base corporate tax rate in India has become competitive and should help boost investment.

III. Enhanced EoDB

  • Singapore with 17 per cent tax rate, and Vietnam, Thailand, Cambodia and Taiwan with 20 per cent base tax rates are the only countries offering lower rates than India
  • India is now much better than China in terms of rate, transparency, and tax administration so companies can now look at India for setting up new units.

Criticisms of the move

  • Some see the present tax cut simply as a concession to corporate houses rather than as a structural reform that could boost the wider economy.
  • They believe that the current economic slowdown is due to the problem of insufficient demand which cannot be addressed just through tax cuts and instead advocate greater government spending to boost the economy.
  • Others, however, argue that lacklustre demand faced by sectors like automobiles is merely a symptom of supply-side shocks such as the GST that have affected various businesses and caused job losses.
  • If so, tax cuts and other supply-side reforms can indeed help the economy recover from its slump.

Back2Basics: Public Estimates Committee

  • The Committee on Estimates constituted for the first time in 1950, is a Parliamentary Committee consisting of 30 members, elected every year by the Lok Sabha from amongst its Members.
  • The Chairperson of the Committee is appointed by the Speaker from amongst its members.
  • A Minister cannot be elected as a member of the Committee and if a member after selection to the Committee is appointed a Minister, the member ceases to be a Member of the Committee from the date of such appointment.

Term of Office

  • The term of office of the Committee is one year.

Functions

  • The functions of the Estimates Committee are:
  1. to report what economies, improvements in organisation, efficiency or administrative reform, consistent with the policy underlying the estimates may be effected;
  2. to suggest alternative policies in order to bring about efficiency and economy in administration;
  3. to examine whether the money is well laid out within the limits of the policy implied in the estimates; and
  4. to suggest the form in which the estimates shall be presented to Parliament.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Inclusive growth, social justice and income inequality

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Inclusive growth, Social justice

Context

  • Key findings of the World Inequality Report 2022 related to India: National Income: In India, the top 10% and top 1% hold respectively 57% and 22% of total national income.

What is inclusive growth?

  • Organization for Economic Co-operation and Development (OECD) defines Inclusive growth as the economic growth that is distributed fairly across society and creates opportunities for all. It refers to ‘broad-based’, ‘shared’, and ‘pro-poor growth’.

What is social justice?

  • Social justice is the view that everyone deserves equal economic, political and social rights and opportunities. Social workers aim to open the doors of access and opportunity for everyone, particularly those in greatest need.

Meaning of Inclusiveness

  • Inclusiveness is a concept that encompasses equity, equality of opportunity, and protection in market and employment transitions and is, therefore, an essential ingredient of any successful growth strategy.

Need of inclusive growth

  • Complete development: India is the 7th largest by area and 2nd by population and 12th largest economy at market exchange rate. Yet, India is away from the development.
  • Income inequality: Low agriculture growth, low quality employment growth, low human development, rural-urban divides, gender and social inequalities, and regional disparities etc. are the problems for the nation.
  • Human development: Reducing poverty and inequality and increasing economic growth are the main aim of the country through inclusive growth.

Need of social justice

  • Equality: We should shift from equality of outcomes to equality of opportunities.
  • Peace and Order: If the majority disregards smaller sections in the community, it drives them to rebellion.
  • Dignity: To ensure life to be meaningful and liveable with human dignity.
  • Mitigate Sufferings: It is a dynamic device to mitigate the sufferings of the poor, weak Dalits, tribal and deprived sections of the society.
  • Human Resources: It will help in the conservation of human resource by provision of health and education facilities.
  • Freedom to form political, economic or religious institutions: It will help to eradicate the challenges of caste system, untouchability and other discrimination in the society.

Challenges before inclusive growth and social justice

  • Wage Gap: When it comes to wages in the workplace, there is a noticeable differentiation between men and women. According to the American Association of University Women (AAUW), in 2018, the gender pay gap from men and women for the same job was 82 percent. Stated simply, women make 82 percent of what men make doing the same work. This can be further broken down into a pay gap for minority men and women.
  • LGBTQ Oppression: When it comes to oppression and human rights, individuals of the Lesbian, Gay, Bisexual, Transsexual and Queer (LGBTQ) community face several forms of social injustice and oppression. For example, same sex marriages are outlawed in some states and countries. Additionally, transsexual students often face discrimination and bullying within school settings.
  • Education System: Globally, steps are being made to close the education gap between male and female students. However, there are still several areas around the world where girls may never set foot into a classroom at all. UNESCO notes that more than nine million girls never go to school, compared to only six million boys in areas of Africa.
  • Child Welfare: Social workers and human rights activists are working tirelessly to combat issues relating to children and their welfare. Despite their efforts, there are still several problems children face that are harmful to their health and mental wellbeing.
  • Forced Child Labour: Laws are in place around the world to ensure a safe work environment for children. These laws were drafted from historically harsh and dangerous working conditions for children. While many would like to believe that child labour is a thing of the past, it persists in some areas around the globe.
  • Child Abuse and Neglect: Thousands of children globally are being neglected. They’re also being physically, sexually and emotionally abused. The World Health Organization (WHO) reports that as many as a quarter of adults have been abused as children. This abuse has both social and economic impacts that include mental health problems.

Government measures to address this challenge

  • SETU(Self Employment and Talent Utilization)
  • Skill India
  • Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)
  • Pradhan Mantri Jan Dhan Yojana
  • MUDRA (Micro Units Development and Refinance Agency)Bank

Way forward

  • Equality of opportunity is the core of inclusive growth, and the inclusive growth emphasises to create employment and other development opportunities through rapid and sustained economic growth, and to promote social justice and the equality of sharing of growth results by reducing and eliminating inequality of opportunity.

Mains question

Explain the term inclusive growth in brief. How we can achieve social justice through inclusive growth?

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Reaping our demographic dividend

Note4Students

From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: India's demographic dividend

Context

  • India’s biggest strength is its ‘demographic dividend’ and people need to fully leverage it to fast-track the country’s progress in various sectors

Why in news

  • The 2022 edition of the World Population Prospects (WPP) of the United Nations has projected that India may surpass China as the world’s most populous country next year.
  • The report estimates that India will have a population of 1.66 billion in 2050, ahead of China’s 1.317 billion around that time.

What is demographic dividend?

  • Demographic dividend, as defined by the United Nations Population Fund, is “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population is larger than the non-working-age share of the population”.

Current status for India

  • India entered the demographic dividend opportunity window in 2005-06 and will remain there till 2055-56.
  • This is the period when the working age ratio is equal to or more than 150% and the dependency ratio is equal to or lower than 66.7%, generally taken as the cut-off for the demographic dividend window.

How India can leverage this dividend

(1) Investment in right direction

  • Investments in human and physical infrastructure will need to be scaled up dramatically to promote entrepreneurship and create jobs.
  • Investment in education is crucial for ensuring that working-age people are prepared for the demands of the economy.
  • Increase spending on health
  • Increase investments in Research and Development

(2) Absorption of labour into productive employment

  • Promote entrepreneurship and job creation
  • Service sector like tourism, logistics should be promoted
  • Skill development of the working-age population so that they can turn out to be productive for the country’s economy

Challenges in reaping this

  • Drastic quality improvement: India’s challenge is to create conditions for faster growth of productive jobs outside of agriculture, especially in the organized manufacturing and in services.
  • Severe shortages: India currently faces a severe shortage of well trained, skilled workers. Large sections of the educated workforce have little or no job skills, making them largely Unemployable.
  • Dismal health sector: A closer look implies various factors such as poor health which although obvious, play a major role in the poor performance of working population.
  • Socio economic dimensions: The status of institutions in India regarding caste discrimination, gender inequalities, widening income gap between the rich and the poor, religious differences, inefficient and slow legal system- all contribute to the poor standard of living of the masses.

Government steps

  • National Skill Development Corporation (NSDC): incorporated on 31st July, 2008, is a first-of-its-kind Public Private Partnership (PPP) in India set up to facilitate the development and upgrading of the skills of the growing Indian workforce through skill training programs.
  • National Skill Development Agency: Currently, skill development efforts are spread across approximately20 separate ministries, 35 State Governments and Union Territories and the private sector.
  • National Skill Certification and Money Reward Scheme: encouragement is given for skill development for youth by providing monetary rewards for successful completion of approved training programs.

Way forward

  • Strategies exist to exploit the demographic window of opportunity that India has today, but they need to be adopted and implemented.
  • The dreams of huge income flow and resultant economic growth due to demographic dividend could be realized only when we inculcate the required skills in the work force to make it as competent as its counterparts in the developed world.

Important data for mains

  • India’s working-age population has numerically outstripped its non-working age population.
  • India’s total fertility rate (TFR) has declined from 2.2 in 2015-16 to 2.0 in 2019-21, indicating the significant progress of population control measures, revealed the report of the fifth round of the National Family Health Survey (NFHS-5).
  • The TFR is the average number of children born to a woman in her lifetime.

Mains question

Q. Do you think the right has come that India should adopt moving away policy from population control towards reaping its demographic dividends? Critically examine.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

States holding up results of Economic Census: Centre

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Economic Censis

Mains level: Not Much

The Centre has blamed the States for a prolonged delay in releasing the findings of the Seventh Economic Census, a critical compendium of formal and informal non-farm enterprises operating across the country, in a submission to the Parliament.

What is National Economic Census?

  • In 1976, GoI launched a planning scheme called Economic Census and Surveys.
  • It is the census of the Indian economy through counting all entrepreneurial units in the country which involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.
  • It provides detailed information on operational and other characteristics such as number of establishments, number of persons employed, source of finance, type of ownership etc.
  • This information used for micro level/ decentralized planning and to assess contribution of various sectors of the economy in the GDP.

Censuses till date

  • Total Six Economic Censuses (EC) has been conducted till date.
  • In 1977 CSO conducted First economic census in collaboration with the Directorate of Economics & Statistics (DES) in the States/UTs.
  • The Second EC was carried out in 1980 followed by the Third EC in 1990. The fourth edition took place in 1998 while the fifth EC was held in 2005.
  • The Sixth edition of the Economic Census was conducted in 2013.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Kuznets Hypothesis and India’s unique Jobs Crisis

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Kuznets Curve

Mains level: Read the attached story

In India, there are fewer people employed in agriculture today, but the transformation has been weak. Those moving out of farms are working more in construction sites and the informal economy than in factories.

What is the news?

  • India has too many people in agriculture and the inability to move surplus labour from farms constitutes a major policy failure of successive governments.
  • In 1993-94, agriculture accounted for close to 62% of the country’s employed labour force.
  • Overall, between 1993-94 and 2018-19, agriculture’s share in India’s workforce came down from 61.9% to 41.4%.
  • In other words, roughly a third in 25 years. That isn’t insignificant.
  • The declining trend continued, albeit at a slower pace, in the subsequent seven as well.

What is our point of analysis?

  • Even the movement of workforce from agriculture that India has witnessed over the past three decades or more does not qualify as what economists call “structural transformation”.
  • Such transformation would involve the transfer of labour from farming to others sectors – particularly manufacturing and modern services – where productivity, value-addition and average incomes are higher.
  • The surplus labour pulled out from the farms is being largely absorbed in construction and services.
  • The bulk of the jobs are in petty sectors such as retailing, small eateries, domestic help, sanitation, security staffing, transport and similar other informal economic activities.
  • This is also evident from the low, if not declining, share of employment in organised enterprises, defined as those engaging 10 or more workers.

What is the crux of the story?

  • Simply put, the structural transformation process in India has been weak and deficient.
  • Yes, there is movement of labour taking place away from farms – even if stalled, possibly temporarily.
  • But that surplus labour isn’t moving to higher value-added non-farm activities, specifically manufacturing and modern services.
  • This is familiar to the ‘Kuznets Process’ named after the American economist and 1971 Nobel Memorial Prize winner, Simon Kuznets.

What is Kuznets’ Hypothesis?

  • In the 1950s and 1960s, Simon Kuznets hypothesized that as an economy develops, market forces first increase and then decrease the overall economic inequality of the society.
  • This is illustrated by the inverted U-shape of the Kuznets curve.
  • For instance, the hypothesis holds that in the early development of an economy, new investment opportunities increase for those who already have the capital to invest.
  • These new investment opportunities mean that those who already hold the wealth have the opportunity to increase that wealth.
  • Conversely, the influx of inexpensive rural labor to the cities keeps wages down for the working class thus widening the income gap and escalating economic inequality.

Basis of this hypothesis

  • The Kuznets curve implies that as a society industrializes, the center of the economy shifts from rural areas to the cities as rural laborers, such as farmers, begin to migrate seeking better-paying jobs.
  • This migration, however, results in a large rural-urban income gap and rural populations decrease as urban populations increase.
  • But according to Kuznets’ hypothesis, that same economic inequality is expected to decrease when a certain level of average income is reached.
  • This process is triggered by the processes associated with industrialization, such as democratization and the development of a welfare state, take hold.
  • It is at this point in economic development that society is meant to benefit from trickle-down effect and an increase in per-capita income that effectively decreases economic inequality.

What does the inverted Kuznets Curve mean?

  • The inverted U-shape of the Kuznets curve illustrates the basic elements of the Kuznets’ hypothesis with income per capita graphed on the horizontal x-axis and economic inequality on the vertical y-axis.
  • The graph shows income inequality following the curve, first increasing before decreasing after hitting a peak as per-capita income increases over the course of economic development.

Criticism of the theory

  • Critics say that the Kuznets curve does not reflect an average progression of economic development for an individual country.
  • Rather it is a representation of historical differences in economic development and inequality between countries in the dataset.
  • It suits to the countries that have had histories of high levels of economic inequality as compared to their counterparts in terms of similar economic development.
  • The critics hold that when controlling for this variable, the inverted U-shape of the Kuznets curve begins to diminish.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is Household Consumption Expenditure Survey (HCES)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: HCES

Mains level: Not Much

The Centre has kicked off the process for conducting the quinquennial Household Consumption Expenditure Survey (HCES) this month.

What is the Household Consumer Expenditure Survey (CES)?

  • The HCES is traditionally a quinquennial (recurring every five years) survey conducted by the government’s National Sample Survey Office (NSSO).
  • It is designed to collect information on the consumer spending patterns of households across the country, both urban and rural.
  • Typically, the Survey is conducted between July and June and this year’s exercise is expected to be completed by June 2023.

Why HCES?

  • The HCES is used to arrive at estimates of poverty levels as well as review key economic indicators like Gross Domestic Product (GDP).
  • The results of the survey are also utilised for updating the consumption basket and for base revision of the Consumer Price Index.
  • It helps generate estimates of household Monthly Per Capita Consumer Expenditure (MPCE) as well as the distribution of households and persons over the MPCE classes.
  • It is used to arrive at estimates of poverty levels in different parts of the country and to review economic indicators such as the GDP, since 2011-12.

Why need this survey?

  • India has not had any official estimates on per capita household spending.
  • It provides separate data sets for rural and urban parts, and also splice spending patterns for each State and Union Territory, as well as different socio-economic groups.

What about the previous survey?

  • The survey was last held in 2017-2018.
  • The government announced that it had data quality issues.
  • Hence the results were not released.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Need for overhaul of India’s economic performance measurement framework

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP

Mains level: Paper 3- Need for overhaul of India's economic performance measurement framework

Context

It is then apparent that GDP growth matters to the average Indian only if it can generate good quality jobs and incomes for them.

Background

  • Nobel laureate Simon Kuznets, who conceived of GDP as a measure of economic performance, never intended it to be the single-minded economic pursuit for a nation that it has now become, and warned repeatedly that it is not a measure of societal well-being.
  • Irrefutably, GDP is an elegant and simple metric that is a good indicator of economic progress which can be compared across nations.
  • But a compulsive chase for GDP growth at all costs can be counter-productive, since it is not a holistic but a misleading measure.
  • The excessive obsession over GDP growth by policymakers and politicians can be unhealthy and dangerous in a democracy.
  • If growth in GDP does not translate into equivalent economic prosperity for the average person, then in a one person-one vote democracy, exuberance over high GDP growth can backfire and trigger a backlash among the general public.
  • Global phenomenon: Sri Lanka’s mass uprising and people’s revolution can partly be explained through this prism of the structural break between headline GDP growth and economic prosperity for the people.
  • The U.S. today produces fewer new jobs for every percentage point of GDP growth than it did in the 1990s.
  • China produces one-third the number of new jobs today than it did in the 1990s for every percentage of its GDP growth.

Employment intensity of economic growth

  • Data of ‘employment in public and organised private sectors’ published by the Reserve Bank of India (RBI) shows that in the decade between 1980 and 1990, every one percentage point of GDP growth (nominal) generated roughly two lakh new jobs in the formal sector.
  • In the subsequent decade from 1990 to 2000, every one percentage point of GDP growth yielded roughly one lakh new formal sector jobs, half of the previous decade.
  • In the next decade between 2000 and 2010, one percentage point of GDP growth generated only 52,000 new jobs.
  • The RBI stopped publishing this data from 2011-12.
  • In essence, one percentage of GDP growth today yields less than one-fourth the number of good quality jobs that it did in the 1980s.
  • It is amply clear that the correlation between formal sector jobs and GDP growth has weakened considerably.

Implications of decline in GDP growth’s contribution to job creation

  • Irrelevant as a political measure: GDP growth may be an important economic measure, but it is becoming increasingly irrelevant as a political measure, since it impacts only a select few and not the vast majority.
  • Indicates changed nature of economic development: This divorce of GDP growth and jobs is both a reflection of the changed nature of contemporary economic development with emphasis on capital-driven efficiency at the cost of labour and GDP being an inadequate measure.
  • Political backlash: The perils of the obsession over GDP growth will be felt by politicians who have to answer voters on lack of jobs and incomes despite robust headline growth.
  • Voter disenchantment over the economy not working for them is already rife in many democracies across the world that have catalysed agitations and social disharmony.
  • Electoral outcomes in favour of extreme positions in mature democracies such as the U.S., the U.K., France and Germany in the last decade may partly be a reflection of voters’ sense of deception over economic gains.

Way forward

  • It is time for India’s political leaders to not be drawn into argument over GDP growth every quarter and instead clamour for an overhaul of India’s economic performance measurement framework to reflect what truly matters to the common person.

Conclusion

GDP growth has turned into a misleading and dangerous indicator that portrays false economic promises, betrays people’s aspirations and hides deeper social problems.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

IMF flags Recession risk

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Recessions

Mains level: Global economic slowdown

Surging inflation and sharp slowdowns in the United States and China prompted the IMF to cut its outlook for the global economy this year and next, while warning that the situation could get much worse.

By one common definition, the major global economies are on the cusp of a recession.

What is Recession?

  • A recession is a significant decline in economic activity that lasts for months or even years.
  • Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
  • Recessions are considered an unavoidable part of the business cycle—or the regular cadence of expansion and contraction that occurs in a nation’s economy.

What causes Recessions?

These phenomena are some of the main drivers of a recession:

  • A sudden economic shock: An economic shock is a surprise problem that creates serious financial damage. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
  • Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy.
  • Asset bubbles: When investing decisions are driven by emotion, bad economic outcomes aren’t far behind. Investors can become too optimistic during a strong economy.
  • Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity.
  • Too much deflation: While runaway inflation can create a recession, deflation can be even worse. Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy.
  • Technological change: New inventions increase productivity and help the economy over the long term, but there can be short-term periods of adjustment to technological breakthroughs. In the 19th century, there were waves of labour-saving technological improvements.

What’s the difference between Recession and Depression?

  • Recessions and depressions have similar causes, but the overall impact of a depression is much, much worse.
  • There are greater job losses, higher unemployment and steeper declines in GDP.
  • Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover.
  • Economists do not have a set definition or fixed measurements to show what counts as a depression. Suffice to say, all the impacts of a depression are deeper and last longer.
  • In the past century, the US has faced just one depression: The Great Depression.

The Great Depression

  • The Great Depression started in 1929 and lasted through 1933, although the economy didn’t really recover until World War II, nearly a decade later.
  • During the Great Depression, unemployment rose to 25% and the GDP fell by 30%.
  • It was the most unprecedented economic collapse in modern US history.
  • By way of comparison, the Great Recession was the worst recession since the Great Depression.
  • During the Great Recession, unemployment peaked around 10% and the recession officially lasted from December 2007 to June 2009, about a year and a half.
  • Some economists fear that the coronavirus recession could morph into a depression, depending how long it lasts.

How long do recessions last?

  • Gulf War Recession (July 1990 to March 1991): At the start of the 1990s, the U.S. went through a short, eight-month recession, partly caused by spiking oil prices during the First Gulf War.
  • The Great Recession (2008-2009): As mentioned, the Great Recession was caused in part by a bubble in the real estate market.
  • Covid-19 Recession: The most recent recession began in February 2020 and lasted only two months, making it the shortest US recession in history.

Can we predict a recession?

Given that economic forecasting is uncertain, predicting future recessions is far from easy. However, the following warning signs can give you more time to figure out how to prepare for a recession before it happens:

  • An inverted yield curve: The yield curve is a graph that plots the market value—or the yield—of a range. When long-term yields are lower than short-term yields, it shows that investors are worried about a recession. This phenomenon is known as a yield curve inversion, and it has predicted past recessions.
  • Declines in consumer confidence: Consumer spending is the main driver of the US economy. If surveys show a sustained drop in consumer confidence, it could be a sign of impending trouble for the economy.
  • Drop in the Leading Economic Index (LEI): Published monthly by the Conference Board, the LEI strives to predict future economic trends. It looks at factors like applications for unemployment insurance, new orders for manufacturing and stock market performance.
  • Sudden stock market declines: A large, sudden decline in stock markets could be a sign of a recession coming on, since investors sell off parts and sometimes all of their holdings in anticipation of an economic slowdown.
  • Rising unemployment: It goes without saying that if people are losing their jobs, it’s a bad sign for the economy.

How does a recession affect individuals?

  • We may lose your job during a recession, as unemployment levels rise. It becomes much harder to find a job replacement since more people are out of work.
  • People who keep their jobs may see cuts to pay and benefits, and struggle to negotiate future pay raises.
  • Investments in stocks, bonds, real estate and other assets can lose money in a recession, reducing your savings and upsetting your plans for retirement.
  • Business owners make fewer sales during a recession, and may even be forced into bankruptcy.
  • With more people unable to pay their bills during a recession, lenders tighten standards for mortgages, car loans, and other types of financing.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Weighing in on India’s investment-led revival

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GFCF

Mains level: Paper 3- Long term growth through public capital expenditure

Context

The Finance Minister, Nirmala Sitharaman, said recently that India’s long-term growth prospects are embedded in public capital expenditure programmes. She added that an increase in public investment would crowd in (or pull in) private investment, thus reviving the economy.

Significance of public investment-led economic growth

  • Public investment-led economic growth forms a credible strand of explanation for India’s post-Independence economic growth. 
  • Revival after Asian financial crisis: When it was faced with a slow-down after the Asian financial crisis of 1997, the  government initiated public road building projects.
  • In the form of the Golden Quadrilateral and the Pradhan Mantri Gram Sadak Yojana, these initiatives sowed the seeds of economic revival, culminating in an investment and export-led boom in the 2000s; GDP grew at 8%-9% annually.
  • In comparison, the investment record during the 2010s has been dismal.
  • However, a recent uptick is evident in the real gross fixed capital formation (GFCF) rate — the fixed investment to GDP ratio (net of inflation).
  • The ratio recovered to 32.5% in 2019-20 from a low of 30.7% in 2015-16.

Analysing the Investment distribution

  • As in the June edition of the Ministry of Finance’s Monthly Economic Review, the fixed investment to GDP ratio was 32% in 2021-22.
  • However, there is need for caution in reading the most recent data, as they are subject to revision.
  • Moreover, the budgetary definition of investment refers to financial investments (which include purchase of existing financial assets, or loans offered to States) and not just capital formation representing an expansion of the productive potential.
  • The National Accounts Statistics provides disaggregation of gross capital formation (GCF) by sectors, type of assets and modes of financing; over 90% of GCF consists of fixed investments.
  • No change in investment distribution: The investment distribution has hardly changed over the last decade, with the public sector’s share remaining 20%.
  • Fall in share of agriculture and industry: Between 2014-15 and 2019-20, the shares of agriculture and industry in fixed capital formation/GDP fell from 7.7% and 33.7% to 6.4% and 32.5%, respectively.
  • Services’ share rose to 52.3% in 2019-20 compared to 49% in 2014-15.
  • The rise in the services sector is almost entirely on transport and communications.
  • The share of transport has doubled from 6.1% to 12.9% during the same period.
  • Within transportation, it is mostly roads.
  • Decline in the share of investment: Its share in the investment ratio (column 2.1) fell from 19.2% in 2011-12 to 16.5% in 2019-20.
  • This indicates that ‘Make in India’ failed to take off, import dependence went up, and India became deindustrialised.
  • Import dependence on China is alarming for critical materials such as fertilizers, bulk drugs (active pharmaceutical ingredients or APIs) and capital goods.
  • Instead of boosting investment and domestic technological capabilities, the ‘Make in India’ campaign frittered away time and resources to raise India’s rank in the World Bank’s Ease of Doing Business Index.
  • Decline in foreign capital in GFC: The contribution of foreign capital to financing GCF fell to 2.5% in 2019-20 from 3.8% in 2014-15 (or 11.1% in 2011-12).
  • With declining investment share, industrial output growth rate fell from 13.1% in 2015-16 to a negative 2.4% in 2019-20, as per the National Accounts Statistics.

Way forward

  • Need for balance: As roads and communications are classic public goods, investment in them is welcome.
  • However, for healthy domestic output growth, there is a need for balance between “directly productive investments” (in farms and factories) and infrastructure investments.
  • And this balance was missed.
  • The recent upturn in the aggregate fixed capital formation to GDP ratio is positive, though the rate is still lower than its mark in the early 2010s.

Conclusion

The claim that the investment revival is public sector driven is not borne out by facts. The budgetary figures refer to financial investment, not estimates of capital formation, indicating expansion of the economy’s productive capacity.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics: Gross fixes capital formation

  • Gross fixed capital formation (GFCF), also called “investment”, is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, minus disposals.
  • The relevant assets relate to assets that are intended for use in the production of other goods and services for a period of more than a year.
  • The term “produced assets” means that only those assets that come into existence as a result of a production process are included.
  • It therefore does not include, for example, the purchase of land and natural resources.
  • This indicator is available in different measures: GFCF at current prices and current PPPs in US dollars, and annual growth rates of GFCF at constant prices, as well as quarterly data for percentage change over previous period and percentage change over same period last year.
  • The indicator at current prices and current PPPs is less suited for comparisons over time, as developments are not only caused by real growth, but also by changes in prices and PPPs.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Despite pressures, the Indian rupee’s remarkable resilience

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dollar Index

Mains level: Paper 3- Depreciation of Indian rupee

Context

The Indian rupee has depreciated by around 7% against the U.S. dollar, since the start of the year, in response to various domestic and global factors.

What are the factors responsible for decline?

  • A widening current account deficit, persistent risk-off sentiment as a result of geopolitical tensions, ‘a strengthening dollar index, and continuous sell-off by foreign portfolio investors have all put pressure on the rupee’.
  • Reversal of monetary policy in the US: The runaway inflation levels since last year, which have seen consumer price index (CPI) inflation in the United States reaching a multi-decade high of 9.1% in June 2022, have prompted the reversal in the monetary policy stance of the US Federal Reserve.
  • With inflation rising unabated, the Fed is widely expected to continue raising interest rates.
  • Higher risk-free return in the US: As a result of higher risk-free returns being available in the U.S., there have been persistent outflows of foreign portfolio capital since October 2021, which, on a cumulative basis, stands at $30 billion this year.

Comparison with the depreciation in the past

  • Even as the rupee has fallen sharply against the dollar, the depreciation has been relatively lower compared with past crises.
  • During the global financial crisis of 2008, the rupee had weakened by over 20% between December 2007-June 2009 and during the Taper Tantrum of 2013 for seven months from the start of the crisis in May 2013, the rupee had depreciated by over 11%.
  • Reduced external vulnerability: The relative lower depreciation this time is attributed to the lowering of India’s external vulnerability measured in terms of a relatively high import cover and low short-term external debt.
  • During the Taper Tantrum, India’s import cover stood at over seven months as compared to around 12 months in the current period.

Decline in foreign exchange reserves

  • The Reserve Bank of India (RBI) has stepped in to arrest a large depreciation in the currency, with interventions in the spot and forward foreign exchange markets.
  • Consequently, India’s foreign exchange reserves have moderated by almost $55 billion from a high of $635 billion seen this year.
  • Elevated global crude oil prices have impinged on India’s oil import bill, in turn widening the trade deficit, thus increasing the demand for U.S. dollars, and affecting forex reserves further.

Effects of weak rupee

  • Export to become competitive: Among the benefits is the premise that the rupee’s weakening should aid exporters in becoming more competitive.
  • However, the concomitant depreciation of currencies of some of India’s competitors such as South Korea, Malaysia and Bangladesh against the dollar, alongwith a high import intensity of some of its key export segments (petroleum, gems and jewellery and electronics), is likely to have blunted the ameliorative impact on India’s exports.
  • Increase in the price of imported commodities: a weaker rupee is driving up prices of key import commodities such as coal, oil, edible oil, gold, thus impacting the imported component of inflation.
  • Impact on the borrowers: The unhedged component of corporate debt denominated in dollars is also likely to bear the brunt of a weaker rupee.
  • Impact on investment: Most importantly, a continuously sliding exchange rate discourages foreign investors from making fresh investments, which keep losing value in dollar terms.
  • For this reason, it is ideal to provide confidence to investors by arresting a continuous slide in the exchange rate.

Measure by the RBI to arrest the weakening of rupee

  • Apart from intervening in the forex market to arrest the fall in the rupee’s value, the RBI announced a slew of measures recently to liberalise foreign inflows into the country and make them more attractive.
  • Measures such include:
  • Promoting trade settlements between India and other countries in rupee terms.
  • Offering higher interest rates on fresh Foreign Currency Non-Resident (Bank) and Non-Resident External deposits.
  • A widening of investible universe of government and corporate debt, a relaxation of the interest rate.
  • Amount ceiling for External Commercial Borrowing loans, among others, have contributed to arresting the rupee’s slide against the greenback.

Way forward

  • Inclusion of companies in glabal indices: The Government could encourage some of the large market cap companies (private and public sectors) to be included in the major global indices such as MSCI and FTSE.
  • This will help increase the weight of Indian equities in these indices, compensating for foreign portfolio outflows to some extent as investors are unlikely to be underweight on India.
  • India’s entry into bond indices: The Government could also expedite India’s entry into bond indices such as J.P. Morgan’s Emerging-Market Bond Index and Barclays Global Bond Index.
  • This will not only lead to forex inflows but also have a benign impact on interest rates.
  • Such measures will keep the forex war chest of the RBI at a comfortable level, providing the central bank the requisite ammunition in case there is further weakness.
  • The maintenance of the U.S.-India interest rate differential along with timely forex market interventions by the central bank to manage volatility will prove to be salutary in preserving the rupee value against the greenback.

Conclusion

Even as the rupee is expected to remain under pressure in the near term because of global uncertainty, high commodity prices and rising U.S. interest rates, mitigating measures have to be taken to partly arrest the slide.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics: What is taper tantrum?

  • Taper tantrum refers to the 2013 collective reactionary panic that triggered a spike in U.S. Treasury yields, after investors learned that the Federal Reserve was slowly putting the breaks on its quantitative easing (QE) program.
  • The Fed announced that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it was feeding into the economy.
  • The ensuing rise in bond yields in reaction to the announcement was referred to as a taper tantrum in financial media.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The cost of misrepresenting inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Food inflation in India

Context

Globally, inflation is now the prime concern of governments, even as there is a speculation that a recession may not be far behind.

Is inflation in India driven by the global factors?

  • The Governor of the Reserve Bank of India (RBI) has been reported as saying that there was a “need to recognise global factors in inflation”.
  • However, the current inflation in India is, even largely, due to global factors is wrong, and harmful.
  • While the price of edible oils and the world price of crude may have risen following the Ukraine war, the impact of this development on overall inflation in India, measured by the rise in the consumer price index, would depend upon their share in the consumption basket of households, which is relatively low.
  • For the commodity groups ‘fuel and light’ and ‘fats and oils’, chosen as proxies for the price of imported fuel and edible oils, respectively, inflation has actually been lower in the first five months of 2022 than in the last five months of 2021.
  • On the other hand, for the commodity group ‘food and beverages’, it was exactly the reverse, i.e., inflation has been much higher in the more recent period.
  • Contribution of domestic factors: The estimated direct contribution of this group to the current inflation dwarfs that of all other groups, establishing conclusively that the inflation is driven by domestic factors.

Inadequacy of monetary policy to address the food-price driven inflation

  • Issues with the monetary policy: Starting in May, the repo rate has been raised.
  • Raising the interest rate in an attempt to control inflation, implicitly assumes that it reflects economy-wide excess demand.
  • Such a diagnosis of the current inflation is belied by the fact that the price of food is rising faster than that of other goods i.e., its relative price has risen.
  • So, the excess demand is in the market for foodstuff, and it is this that needs to be eliminated.
  • The inadequacy of monetary policy to address food-price-driven inflation has been flagged by economists internationally.
  • at the World Economic Forum’s annual meet held at Davos, Switzerland in June, Nobel Laureate Joseph Stiglitz observed that raising interest rates is not going to solve the problem of inflation. It is not going to create more food.
  • Jerome Powell is reported stating that even though the Fed’s resolve to fight inflation is unconditional, “a big part of inflation won’t be affected by our tools”.
  • This is an acknowledgement that there is only so much a central bank can do when battling inflation driven by the rise in energy and food prices.

Way forward

  • Need for supply side interventions:  To hold on to the view that inflation in India is due to excess aggregate demand curable by raising interest rates ensures that attention is not paid to the necessary supply-side interventions.

Conclusion

India is suffering from undercurrent of a food price inflation, which, by exacerbating poverty, stands in the way of a more rapid expansion of the economy.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why there is no reason to panic over the rupee

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dollar Index

Mains level: Paper 3- Depreciation of rupee

Context

Rupee hits the all-time low of 80 against US dollar recently. The enormity of the challenges can be gauged by these numbers: Since the beginning of war, foreign exchange reserves have declined by $51-billion, total portfolio outflows have been $23 billion, and the current account deficit is now certain to breach $100 billion.

Is depreciation of rupee sign of weak domestic fundamentals?

  • In case of strong domestic fundamentals: In an ideal world, if domestic economic fundamentals are strong, the depreciation of the rupee should be accompanied by an appreciation of the Dollar Index (DXY) along similar lines.
  • In case of weak fundamentals: Between January 2008 and February 2012 and October 2012 and May 2014, on a cumulative basis, the rupee had lost a whopping 48.7 per cent against the USD, even as the DXY had appreciated by a modest 5.2 per cent.
  • This indicates that much of the decline in rupee value then was purely because of weak domestic macro fundamentals.
  • Current scenario:  The rupee has depreciated by a modest 5.6 per cent since the Russian invasion of Ukraine, though the DXY has appreciated by 11.3 per cent.
  •  Thus, the recent decline in the rupee has been more because of the strengthening of the dollar and not because of weak fundamentals at home.

Reasons for the dominance of dollar

  • In principle, Bretton Woods ensured that the dollar would be a “trust” currency.
  • The US sits at the centre of an international financial system where its assets have been in high demand.
  • For instance, frantically growing Asian economies whose penchant for US government securities have also made them susceptible to sudden changes in expectations and economic sentiments sweeping the globe.
  • The recent disturbances in the global supply chain and volatile commodity prices have only made the job more difficult.

What explains the recent strengthening of dollar

  • High interest rates in the US: The recent gains in the dollar have come along expectations of aggressive monetary policy by the US Fed compared to other major jurisdictions, particularly, the Eurozone and Japan.
  • Markets expect the Fed to continue on its path of interest rate normalisation with multiple rate hikes.
  • Low interest rates in the Eurozone: The European Central Bank (ECB) appears behind the curve, its communication with markets is as uncertain as the political and climatic hot winds criss-crossing the Eurozone.
  • Low interest rates in Japan: The Bank of Japan has taken a completely divergent path, continuing its accommodative monetary policy despite the hammering of the yen.
  • This has augured well for the dollar, obscuring the question of how the Fed failed to anticipate the surge in inflation.

Measures by the RBI and the government

  • As currencies reel under the weight of an unrelenting dollar, questions on the rupee’s performance and future are a natural corollary, more so in the wake of hitting the psychological mark of Rs 80/dollar.
  • In 2013, when the rupee was in a free fall, stability was finally restored but it came at a cost — a debt buildup of $34.5 FCNR(B).
  • This time, the RBI and government have taken a long-term view of bolstering dollar inflows, which is perfectly justified.
  • The RBI, in close tandem with the government, has been supportive of the rupee, and is also now embarking on an unprecedented journey to internationalise the currency. 

Conclusion

A direct casualty of the Ukraine war is that the Indian rupee has now depreciated by 5.6 per cent against the dollar. In terms of relative performance, however, the rupee has done quite well compared to most of its counterparts.


Back2Basics: US Dollar Index

  • The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies.
  • The USDX was established by the U.S. Federal Reserve in 1973 after the dissolution of the Bretton Woods Agreement.
  • It is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE).
  • The six currencies included in the USDX are often referred to as America’s most significant trading partners, but the index has only been updated once: in 1999 when the euro replaced the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc.
  • Consequently, the index does not accurately reflect present-day U.S. trade.

Bretton Woods Agreement and Systems

  • The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire.
  • Thus, the name “Bretton Woods Agreement.
  • Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value.
  • The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

FCNR(B)

  • An FCNR ( Foreign Currency Non-resident) account is a type of term deposit that NRIs can hold in India in a foreign currency.
  • FCNR (A) was introduced in 1975 to encourage NRI deposits.
  • The Reserve Bank of India (RBI) guaranteed the exchange rate prevalent at the time of a deposit to eliminate risk to depositors.
  • In 1993, the apex bank introduced FCNR (B), without exchange rate guarantee, to replace FCNR (A).

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What Rs 80 to a dollar means

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Taper Tantrum, Rupee depreciation impacts

Mains level: Read the attached story

The Indian rupee breached the psychologically significant exchange rate level of 80 to a US dollar in early trade.

Free fall of Indian Rupee

  • Since the war in Ukraine began, and crude oil prices started going up, the rupee has steadily lost value against the dollar.
  • There are growing concerns about how a weaker rupee affects the broader economy.
  • Certainly it presents challenges to policymakers, especially since India is already grappling with high inflation and weak growth.

What is the rupee exchange rate?

  • The rupee’s exchange rate vis-à-vis the dollar is essentially the number of rupees one needs to buy $1.
  • This is an important metric to buy not just US goods but also other goods and services (say crude oil) trade in which happens in US dollars.

Benefits of Rupees fall

  • Broadly speaking, when the rupee depreciates, importing goods and service becomes costlier.
  • But if one is trying to export goods and services to other countries, especially to the US, India’s products become more competitive.
  • Depreciation makes these products cheaper for foreign buyers.

How bad is it for the rupee?

  • If the rupee depreciates at a rate faster than the long-term average, it goes above the dotted line, and vice versa.
  • In the last couple of years, the rupee has been more resilient than the long-term trend.
  • The current fall has brought about a correction.

Rupee’s exchange rate against the dollar

  • Another thing to note is that, at least as of now, the rupee is still more resilient (against the dollar) than it was in some of the previous crises such as the Global Financial Crisis of 2008 and the Taper Tantrum of 2013.
  • Moreover, the US dollar is just one of the currencies Indians need to trade.
  • If one looks at a whole basket of currencies, then data suggests the rupee has become stronger (or appreciated against that basket).
  • In other words, while the US dollar has become stronger against all other major currencies including the rupee, the rupee, in turn, has become stronger than many other currencies such as the euro.

Is it a cause of worry?

  • It is important to remember that it is more of a story of the dollar strengthening than the rupee weakening.
  • This suggests that as things stand, India is still not facing an external crisis.
  • Take for instance the issue of external debt.
  • Long-term data shows that India is in a relatively comfortable position.

Can we be comfortable with this free-fall?

  • While India is fine as of now, trends suggest things are getting worse.
  • For instance, forex reserves have fallen by over $50 billion between September 2021 and now.
  • In these 10 months, the rupee’s exchange rate with the dollar has fallen 8.7%, from 73.6 to 80. For context, historically the rupee depreciates by about 3% to 3.5% in a year.
  • What’s worse, many experts expect the rupee to weaken further in the coming 3-4 months and fall to as low as 82 to a dollar.

Why are the rupee-dollar exchange rate and forex reserves falling?

  • To understand movements on these variables, one must understand India’s Balance of Payment (BoP)
  • The BoP is essentially a ledger of all monetary transactions between Indians and foreigners. Here it is shown in US dollar terms.
  • If a transaction leads to dollars coming into India, it is shown with a positive sign; if a transaction means dollars leaving India, it is shown with a minus sign.

How did BoP come to the picture?

  • The BoP has two broad subheads (also called “accounts”) — current and capital — to slot different types of transactions.
  • The current account is further divided into the trade account (for export and import of goods) and the invisibles account (for export and import of services).
  • So if an Indian buys an American car, dollars will flow out of BoP, and it will be accounted for in the trade account within the current account.
  • If an American invests in Indian stock markets, dollars will come into the BoP table and it will be accounted for under FPI within the capital account.
  • The important thing about the BoP is that it always “balances”.

India’s vulnerability on the external debt front

  • In 2021-22, India had a trade deficit of $189.5 billion.
  • That is, the country imported more goods (such as crude oil) than it exported, and the net effect was negative.
  • At the end of the year, the BoP was at a surplus of $47.5 billion — that is, the net effect of all transactions on current and capital accounts was that $47.5 billion came into India.

What may happen ahead?

Now, two things can happen from here:

(1) Huge BoP surplus would lead to the rupee appreciating

  • This will bring about a change in people’s buying and investing preferences.
  • For instance, India’s exports will become costlier and import cheaper. Over time, the trade deficit will alter (will reduce or turn into a surplus) to “balance” the BoP.

(2) RBI swoops in and removes all the surplus dollars

  • RBI purchases dollars to increase its forex reserves.
  • In 2021-22, for instance, India’s forex reserves went up by $47.5 billion.
  • The RBI keeps monitoring the BoP every week and keeps intervening in such a manner which ensures that the rupee’s exchange rate does not fluctuate too much.

What will be the effect on the economy?

  • Since a large proportion of India’s imports are dollar-denominated, these imports will get costlier.
  • A good example is the crude oil import bill.
  • Costlier imports, in turn, will widen the trade deficit as well as the current account deficit, which, in turn, will put pressure on the exchange rate.
  • On the exports front, however, it is less straightforward.
  • For one, in bilateral trade, the rupee has become stronger than many currencies.

Should policymakers prevent the fall?

  • It is neither wise nor possible for the RBI to prevent the rupee from falling indefinitely.
  • Defending the rupee will simply result in India exhausting its forex reserves over time because global investors have much bigger financial clout.
  • Most analysts believe that the better strategy is to let the rupee depreciate and act as a natural shock absorber to the adverse terms of trade.

What should policymakers do?

  • The RBI (which is in charge of monetary policy) should focus on containing inflation, as it is legally mandated to do.
  • The government (which is in charge of the fiscal policy) should contain its borrowings.
  • Higher borrowings (fiscal deficit) by the government eat up domestic savings and force the rest of the economic agents to borrow from abroad.
  • Policymakers (both in the government and the RBI) have to choose what their priority is: containing inflation or being hung up on exchange rate and forex levels.
  • If they choose to contain inflation (that is, by raising interest rates) then it will require sacrificing economic growth. So be prepared for that.

Conclusion

  • We can conclude that the rupee’s exchange rate and forex reserves levels are two sides of the same coin.

Back2Basics: Taper Tantrum

  • After the 2007-2009 global financial crisis and recession, the US Federal Reserve started a bond-buying program (known as quantitative easing) to infuse liquidity.
  • With these funds, the investors started investing in global bonds and stocks. 
  • In 2013, the US Federal Reserve decided to reduce (taper) its quantum of a bond-buying program which led to a sudden sell-off in global bonds and stocks. 
  • As a result, many emerging market economies, that received large capital inflows, suffered currency depreciation and outflows of capital.
  • This was called globally a ‘taper tantrum‘.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Key terminologies in news: Yield Inversion, Soft-Landing and Reverse Currency Wars

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Read the attached story

Mains level: NA

This article provides a quick summary of what has been happening in the global economy. These are few key terms that one is likely to hear repeatedly in the coming days and weeks:

  1. Yield Inversion
  2. Soft-landing and
  3. Reverse Currency War

Here’s a quick look at what they mean and why they are significant at present.

(1) Bond Yield Inversion

What is Bond Yeild?

  • Bonds are essentially an instrument through which governments (and also corporations) raise money from people.
  • Typically government bond yields are a good way to understand the risk-free interest rate in that economy.
  • This 2019 piece provides an introduction to government bonds and explains how yields are calculated.

What is Yield Curve?

  • The yield curve is the graphical representation of yields from bonds (with an equal credit rating) over different time horizons.
  • In other words, if one was to take the US government bonds of different tenures and plot them according to the yields they provide, one would get the yield curve.

The chart below provides a sense of the different types of yield curves one could have.

How to see this?

  • Under normal circumstances, any economy would have an upward sloping yield curve.
  • That is to say, as one lends for a longer duration — or as one buys bonds of longer tenure — one gets higher yields. This makes sense.
  • If one is parting with money for a longer duration, the return should be higher.
  • Moreover, a longer tenure also implies that there is a greater risk of failure.
  • An inversion of the yield curve essentially suggests that investors expect future growth to be weak.

Inversion of bond yield

  • However, there are times when this bond yield curve becomes inverted.
  • For instance, bonds with a tenure of 2 years end up paying out higher yields (returns/ interest rate) than bonds with a 10 year tenure.
  • Such an inversion of the yield curve essentially suggests that investors expect future growth to be weak.

Here’s how to make sense of this?

  • When investors feel buoyant about the economy they pull the money out from long-term bonds and put it in short-term riskier assets such as stock markets.
  • In the bond market, the prices of long-term bonds fall, and their yield (effective interest rate) rises.
  • This happens because bond prices and bond yields are inversely related.
  • However, when investors suspect that the economy is heading for trouble, they pull out money from short-term risky assets (such as stock markets) and put them in long-term bonds.
  • This causes the prices of the long-term bonds to rise and their yields to fall.

Why use inversion curve?

  • Over the years, inversion of the bond yield curve has become a strong predictor of recessions. Of course, for it to be taken seriously, such an inversion has to last for several months.
  • Over the past few weeks, such inversion is happening repeatedly in the US, suggesting to many that a recession is in the offing.
  • In the current instance, the US Fed (their central bank) has been raising short-term interest rates, which further bumps up the short-end of the yield curve while dampening economic activity.

(2)  Soft-Landing

  • The process of monetary tightening that the US is currently unveiling involves not just reducing the money supply but also increasing the cost of money (that is, the interest rate).
  • US is doing this to contain soaring inflation.
  • Ideally, the US Fed or any central bank doing this would like to bring about monetary tightening in such a manner that slows down the economy but doesn’t lead to a recession.
  • When a central bank is successful in slowing down the economy without bringing about a recession, it is called a soft-landing — that is, no one gets hurt.
  • But when the actions of the central bank bring about a recession, it is called hard-landing.

(3) Reverse Currency War

  • A flip side of the US Fed’s action of aggressively raising interest rates is that more and more investors are rushing to invest money in the US.
  • This, in turn, has made the dollar become stronger than all the other currencies. That’s because the dollar is more in demand than yen, euro, yuan etc.
  • On the face of it, this should make all other countries happier because a relative weakness of their local currency against the dollar makes their exports more competitive.
  • For instance, a Chinese or an Indian exporter gets a massive boost.
  • In fact, in the past the US has often accused other countries of manipulating their currency (and keeping its weaker against the dollar) just to enjoy a trade surplus against the US.
  • This used to be called the currency war.

What explains this reverse currency war unfolding at the moment?

  • The important thing to understand is that a stronger dollar has had a key benefit — importing cheaper crude oil.
  • A currency which is losing value to the dollar, on the other hand, finds that it is getting costlier to import crude oil and other commodities that are often traded in dollars.
  • But raising the interest rate is not without its own risks.
  • Just like in the US, higher interest rates will decrease the chances of a soft-landing for any other economy.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

As GST compensation ends, state governments need to be provided certainty of revenues

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GST compensation to States

Mains level: Paper 3- GST compensation discontinuation

Context

The five-year transition period after the adoption of the Goods and Services Tax (GST) on July 1, 2017, came to an end on June 30, 2022. With this, the era of GST compensation that the state governments were entitled to has ended.

High estimated loan issuance

  • Many state governments have asked for the compensation period to be extended by a few years.
  • To tangibly assess the near-term outlook for state finances, we have to rely on the states’ own estimates for their market borrowing requirements for the second quarter of 2022-23.
  • The indicative calendar of market borrowings by 23 state governments and two Union territories for the second quarter has pegged their total state development loan issuance — the primary source of financing state government deficits — at Rs 2.1 trillion.
  •  This projected issuance is 29 per cent higher than the same period last year, and at an eight-quarter high.
  • This high level of issuance projected by states reflects concerns that some of them might rightfully have regarding the uncertainty of their cash flows in the post-GST compensation era.
  • High dependence on GST compensation: Of these 23 states, Tamil Nadu, Andhra Pradesh, Haryana, Punjab and Gujarat have indicated large increases in borrowings.
  • Most of these states have an above-average dependence on GST compensation.

Implications of discontinuation of GST compensation

  • Alter the revenue compensation: The discontinuation of the GST compensation flows would alter the revenue composition of some states adversely, particularly those with a relatively larger share of such receipts in their overall revenue streams.
  • Increase in debt level: To offset a portion of the associated revenue loss, such states are likely to enhance their borrowings and/or to undertake some expenditure adjustments in the quarters ahead.

Adjustment of borrowing limit of the States by the Centre

  • At the time of communicating to states their annual borrowing limits for the ongoing year, we understand that the Centre had informed state governments that their off-budget borrowings for the past two years (2020-21 and 2021-22) would be adjusted from their borrowing ceiling this year.
  • Data on off-budget borrowing: It appears that the calculation of the adjusted borrowing limit required the submission of detailed data by the state governments related to their off-budget borrowings for the last two fiscal years, followed by a thorough assessment of the same by the Centre.

Need for early step up in tax-devolution

  • On the whole, though, states appear to have entered the year with a comfortable cash flow position.
  • This follows from the back-ended release of the tax devolution to states for 2021-22 — nearly half of the full-year amount was released in the fourth quarter.
  • Additionally, the total amount was also well above the revised estimate, providing an unexpected gain to states.
  • This may have allowed them to temporarily withstand the changes related to their borrowing permission.
  • Subsequently, the release of the GST compensation grant of Rs 869 billion for several months in May is likely to have further eased their cash flows.
  • If the government does decide to step-up tax devolution to the states in the near term, instead of back-ending it as was done in the last year, it may reduce the size of state borrowings in the second quarter.
  • But more significantly, such revenue certainty, despite the end of the GST compensation era, may embolden states to ringfence their capital spending, providing a positive impulse to the economy.

Conclusion

The discontinuation of the GST compensation flows would alter the revenue composition of some states adversely, tax devolution to the states in the near term could cushion the blow of the discontinuation.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics: Compensation under GST regime

  • The adoption of the GST was made possible by the States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed under the GST.
  • While the States would receive the SGST (State GST) component of the GST, and a share of the IGST (Integrated GST), it was agreed that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years that is set to end in 2022.
  • This corpus in turn is funded through a compensation cess that is levied on so-called ‘demerit’ goods.
  • This GST Compensation Cess or GST Cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The inflation tightrope

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dutch disease

Mains level: Paper 3- Inflation challenge

Context

The Indian economy has been hit by inflationary shocks of late.

Inflation story so far

  • RBI mandate: The inflation target of the Reserve Bank of India is 4 per cent, with a band of 2 per cent on either side.
  • Inflation was at or above the upper threshold of 6 per cent since the beginning of this year.
  • Only after inflation hit 7 per cent did the RBI raise the repo rate.
  • Increase in interest rate: The RBI has raised the cost of borrowing (by 90 basis points so far), with a promise of more to come.
  • Fuel taxes reduced: The central government has cut fuel taxes with alacrity, and has banned the export of certain items.

Role of monetary authorities

  • Monetary authorities raise interest rates if inflation is above the preferred target, and vice versa.
  • What should be the interest rate? Interest rates should rise more than inflation so the “real” interest rates rise, causing a compression in demand (and a fall in economic activity), which in turn will reduce inflation.
  • The RBI embraced this idea. In 2016, an independent monetary policy committee was constituted.

Effects of global inflation

  • Some part of inflation is coming from abroad is an added complication.
  • Outflow of fund: There has also been a steady outflow of foreign funds from the stock market.
  • Depreciation of rupee: This could cause the rupee to depreciate, in turn, raising the prices of imported goods thereby adding to the inflationary woes.

Two ways in which the Indian economy is different

1] Role of agriculture in Indian economy

  • India’s non-food and non-oil components of the consumer price index CPI are about 47 per cent.
  •  In comparison, for the ECB, it is less than one-third of the CPI.
  • Of course, the RBI has no control over international prices of food and oil, so it must squeeze less than 50 per cent of the domestic economy to lower inflation.
  • The real interest rise works through demand compression.
  • But the problem is on the supply side.
  • Also, as compared to the RBI, the ECB would suffer a lower rise in inflation, and has a larger menu on which to apply demand compression.

2] Exchange rate and its effect on output

  • Until the 1970s, the accepted wisdom was that an economy had to achieve both internal balance and external balance.
  • Internal balance consisted of full employment and low inflation using monetary and fiscal policies.
  • Over time, the internal balance has come to mean, from a policy perspective, low inflation, since “the market” will ensure full employment.
  • External balance required a balanced current account over some horizon (“don’t get too much into foreign debt”), by using, for example, the exchange rate.
  • For the OECD countries, the external balance was not a constraint any longer, since they had made their currencies fully convertible, and international capital flows were unrestricted.
  • But this is not the case with India.
  • If it were so, no one would be interested in discussing the country’s foreign exchange reserves, because these could be generated instantaneously by exchanging the domestic currency for foreign exchange.

India’s foreign reserves and its impact on competitiveness of Indian products

  • Until 2020, India had seen massive portfolio capital inflows when OECD interest rates were low, and its current account deficits were financed by foreign reserves.
  • But portfolio inflows can, and do, reverse themselves.
  • FII inflows also contribute to India’s lack of competitiveness.
  • The RBI bought foreign exchange (with rupees).
  • But fearing this would stoke inflation, it sold government bonds, and removed the excess liquidity.
  • This “sterilised intervention” saw the RBI’s foreign exchange assets going up, matched by a reduced holding of government bonds.
  • Thus, India’s foreign exchange reserves were not its “own”— there were liabilities against it.
  • India’s Dutch Disease: The RBI could have let the rupee appreciate or have accumulated foreign reserves.
  • It chose an intermediate solution — a mix of an appreciation and accumulation of reserves.
  • The appreciation caused by inflows reduced international competitiveness for Indian products.
  • In effect, we had our own episode of the “Dutch Disease”.

Way forward

  • As the RBI raises interest rates, outflows will possibly slow down with the rupee appreciating.
  • That is not good for external balance.
  •  It is easy to see that inflation targeting could be at odds with external balance.

Conclusion

If inflation does prove stubborn, and fighting inflation is all that the authorities in India worry about, we could see an external crisis.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics: What is Dutch Disease?

  • Dutch disease is an economic term for the negative consequences that can arise from a spike in the value of a nation’s currency.
  • It is primarily associated with the new discovery or exploitation of a valuable natural resource and the unexpected repercussions that such a discovery can have on the overall economy of a nation.
  • Symptoms include a rising currency value leading to a drop in exports and a loss of jobs to other countries.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What does our Current Account Deficit (CAD) show?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Current account deficit

Mains level: Read the attached story

The data for the country’s current account balance for the fourth quarter of FY 2021-22 shows a decrease in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22.

What is Current Account Deficit (CAD)?

  • A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.
  • This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.
  • A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

Components of Current Account

Current Account Deficit (CAD) =

Trade Deficit + Net Income + Net Transfers

(1) Trade Deficit

  • Trade Deficit = Imports – Exports
  • A Country is said to have a trade deficit when it imports more goods and services than it exports.
  • Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.
  • A trade deficit represents an outflow of domestic currency to foreign markets.

(2) Net Income

  • Net Income = Income Earned by MNCs from their investments in India.
  • When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.
  • This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.
  • Net income is measured by the following things:
  1. Payments made to foreigners in the form of dividends of domestic stocks.
  2. Interest payments on bonds.
  3. Wages paid to foreigners working in the country.

(3) Net Transfers

  • In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.
  • It Includes Remittances, Gifts, Donation etc

How does Current Account Transaction takes place?

  • While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.
  • Current account transactions are transactions that require foreign currency.
  • Following transactions with from which component these transactions belong to :
  1. Component 1 : Payments connection with Foreign trade – Import & Export
  2. Component 2 : Interest on loans to other countries and Net income from investments in other countries
  3. Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

What has been the recent trend?

  • In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion).
  • The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.
  • However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis.
  • Remittances by Indians abroad also rose.

What are the reasons for the current account deficit?

  • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
  • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
  • However, with global demand picking up, merchandise exports have also been rising.

How will a large CAD affect the economy?

  • A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency.
  • Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).
  • However, worsening CAD will put pressure on inflow under the capital account.
  • Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

Should a widening CAD worry policymakers?

  • Data shows the trade deficit widened to $24.29 billion in May 2022 from $6.53 billion a year ago.
  • Merchandise exports in May 2022 rose by 20.55% over May 2021, while merchandise imports rose by 62.83%.
  • However, if increasing imports is accompanied by an expansion in industrial production, it is a sign of economic development.
  • Immediately after the covid-19 lockdown, after a long time, the country experienced a current account surplus.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India better placed to avoid Risks of Stagflation: RBI

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Stagflation

Mains level: Read the attached story

India’s economy is better placed than many other countries to avoid the risk of potential stagflation worldwide, said the Reserve Bank of India Deputy Governor.

Why in news?

  • Stagflation remains a risk to the US economy, and there are similarities between the situation in the 1970s and today, a/c to World Bank.
  • Surging prices for oil and food are pushing up the cost of living, and business executives are voicing concerns about the outlook for the economy.

What is Stagflation?

  • Stagflation is a stagnant growth and persistently high inflation. It, thus, describes a rather rare and curious condition of an economy.
  • Iain Macleod, a Conservative Party MP in the United Kingdom, is known to have coined the phrase during his speech on the UK economy in November 1965.

What happens in Stagflation?

  • Typically, rising inflation happens when an economy is booming — people are earning lots of money, demanding lots of goods and services and as a result, prices keep going up.
  • When the demand is down and the economy is in the doldrums, by the reverse logic, prices tend to stagnate (or even fall).
  • But stagflation is a condition where an economy experiences the worst of both worlds — the growth rate is largely stagnant (along with rising unemployment) and inflation is not only high but persistently so.

Possible reasons behind

  • Volatility due to war: Global economic conditions continued to deteriorate as commodity prices and financial market volatility have led to heightened uncertainty.
  • Monetary tightening: In advanced economies, the war against inflation would entail significant monetary tightening, complicating the growth-inflation outlook.
  • Global slowdown: Emerging market economies grapple with the global trade slowdown, capital outflows and imported inflation.

Why is it so unpopular?

  • The combination of slow growth and inflation is unusual, because inflation typically rises and falls with the pace of growth.
  • The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending.

Back2Basics: Inflation and its impact

  • Depression: It is Economic depression is a sustained, long-term downturn in economic
  • Deflation: It is the general fall in the price level over a period of time.
  • Disinflation: It is the fall in the rate of inflation or a slower rate of inflation. Example: a fall in the inflation rate from 8% to 6%.
  • Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation.
  • Skewflation: It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
  • Stagflation: The situation of rising prices along with falling growth and employment, is called stagflation. Inflation is accompanied by an economic recession.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India specific factors that have bearing on inflation trajectory

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Inflation triggering factors

Context

Inflation is turning into a global concern fueled by multiple global factors. However, in India there are a few other triggers that will have a bearing on the inflationary trajectory.

Global inflation concerns

  • All that could have possibly triggered higher inflation globally has already occurred — multiple waves of the pandemic, supply disruptions, an overdose of policy stimuli, war, sanctions, energy shocks, geopolitical adversity and weather disruptions.

1] Impact of MSP on inflation

  • The MSP that is fixed by the government for kharif and rabi crops has been one of the key policy instruments.
  • Policymakers in India have often acted with alacrity to protect the interests of farmers over the years.
  • In the last 20 years, the weighted average MSP for kharif crops saw double-digit growth four times — in 2007, 2008, 2012 and 2018.
  • Food inflation shot up to 12 per cent in 2007-08 as against 8 per cent in 2006-07 and 4 per cent in 2005-06.
  • The inflationary surge continued in 2009 as a monsoon failure hit agricultural output hard.
  • Global agricultural commodity prices started to rise in 2010 again and the FAO food price index reached an all-time high in July 2012.
  • One of the key reasons for the increase in food prices was the oil price surge and a rise in demand for biofuel production.
  • The global upside in food prices coincided with a 22 per cent increase in MSP for Kharif crops in India.
  • Following the rise in MSP, food inflation in 2012 increased by 14.6 per cent as against 3.6 per cent the preceding year.
  • In  2018, for the first time, the MSPs for all 23 kharif and rabi crops were fixed at a margin of at least 50 per cent higher than the cost of cultivation.
  • The cost of cultivation (A2 + FL) includes the paid-out cost and cost of imputed family labour.
  • Accordingly, the MSP of kharif crops in 2018 saw an annual increase of about 14 per cent.
  • However, despite the significant rise in MSP, food inflation in 2018-19 was muted at 0.3 per cent.
  • This was because farm input costs were under control and the terms of trade for farmers remained positive.

2] Impact of GST on inflation

  • Raising the revenue-neutral rate: In the upcoming meeting, there is talk of changes in GST slabs and rates with an eye on raising the revenue-neutral rate from around 11.5 per cent, which is far lower than the 15.5 per cent estimated at the time of the launch of GST.
  • Avoid the shock: However, a GST rate shock to the system is best avoided given the global inflationary backdrop and the fragility of consumer balance sheets.

3] Influence of weather

  • While the dependence of agricultural output on the quantum of rainfall has reduced, variance in the spatial and temporal distribution of rainfall is emerging as a key risk.
  • A look at 2021 — a normal monsoon year with rainfall at 99 per cent of its long period average — is instructive.
  • The late excess rains delayed the crop cycle and led to crop damage in several parts of the country.
  • Likewise, the spatial distribution of rainfall remained uneven in 2021.
  • Thus, even with normal rainfall in 2021, there were several disruptions to the crop cycle and farm cash flows.

Conclusion

The government has taken various steps lately to rein in inflation. However, the RBI will have little freedom in case the GST council decides to accord revenue protection to states via higher GST rates or if the monsoon is not in line with expectations. One hopes these events pan out right, like the MSP hike, when most other things have gone wrong.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India is not the fastest growing big economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP and inflation

Mains level: Paper 3- India's growth rate

Context

The Provisional Estimates of Annual National Income in 2021-22 just released show that GDP grew 8.7% in real terms and 19.5% in nominal terms (including inflation). It makes India the fastest growing major economy in the world.

What data implies

  • Just 1.51% larger: Provisional Estimates of Annual National Income in 2021-22 also indicate that, the real economy is 1.51% larger than it was in 2019-20, just before the novel coronavirus pandemic hit the world.
  • In nominal terms it is higher by 17.9%.
  • Inflation: These numbers imply that the rate of inflation was 10.8% in 2021-22 and 16.4% between the two years, 2019-20 and 2021-22.
  • Almost no growth: This picture implies almost no growth and high inflation since the pre-pandemic year.
  • So, the tag of the fastest growing economy means little.
  • Quarterly growth rate: The quarter to quarter growth currently may give some indication of the present rate of growth.
  • In 2020-21, the quarterly rate of growth increased through the year.
  • In 2021-22, the rate of growth has been slowing down.
  • Of course in 2020-21, the COVID-19 lockdown had a severe impact in Q1 (-23.8%); after that the rate of growth picked up.
  • In 2021-22, the rate of growth in Q1 had to sharply rise (20.3%).
  • Ignoring the outliers in Q1, growth rates in 2021-22 have sequentially petered out in subsequent quarters: 8.4%, 5.4% and 4.1%.
  • Going forward, while the lockdown in China is over, the war-related impact is likely to persist since there is no end in sight.
  • Thus, price rise and impact on production are likely to persist.

Issues with the data

  • The issue is about correctness of data.
  • The annual estimates given now are provisional since complete data are not available for 2021-22.
  • There is a greater problem with quarterly estimates since very limited data are available for estimating it.
  • No data for Q1 of 2020-21: The first issue is that during 2020-21, due to the pandemic, full data could not be collected for Q1.
  • No data for agriculture: Further, for agriculture, quarterly data assumes that the targets are achieved.
  • Agriculture is a part of the unorganised sector.
  • Very little data are available for it but for agriculture — neither for the quarter nor for the year.
  • It is simply assumed that the limited data available for the organised sector can be used to act as a proxy.
  • The non-agriculture unorganised sector is represented by the organised sector.
  • Changes in non-agriculture unorganised: The method using the organised sector to proxy the unorganised non-agriculture sector may have been acceptable before demonetisation (2016) but is not correct since then.
  • The reason is that the unorganised non-agriculture sector suffered far more than the organised sector and more so during the waves of the pandemic.
  • Shift in demand to the organised sector: Large parts of the unorganised non-agriculture sector have experienced a shift in demand to the organised sector since they produce similar things.
  • This introduces large errors in GDP estimates since official agencies do not estimate this shift.
  • All that is known is that the Micro, Small and Medium Enterprises (MSME) sector has faced closures and failures.
  • If GDP data are incorrect, data on its components — private consumption and investment — must also be incorrect.
  • Further, the ratios themselves would have been impacted by the shock of the lockdown and the decline of the unorganised sectors.
  • Private consumption data is suspect since according to the data given by the Reserve Bank of India which largely captures the organised sector, consumer confidence throughout 2021-22 was way below its pre-pandemic level of 104 achieved in January 2020.
  • In brief, neither the total nor the ratios are correct.

Possible corrections

  • In the best possible scenario,  assume that the organised sector (55% of GDP) and agriculture (14% of GDP) are growing at the official rate of growth of 8.2% and 3%, respectively.
  • Then, they would contribute 4.93% to GDP growth.
  • The non-agriculture unorganised component is declining for two reasons: first, the closure of units and the second the shift in demand to the organised sector.
  • Even if 5% of the units have closed down this year and 5% of the demand has shifted to the organised sector, the unorganised sector would have declined by about 10%; the contribution of this component to GDP growth would be -3.1%.

Conclusion

Clearly, recovery is incomplete and India is not the fastest growing big economy of the world.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Monetary tightening and its impact on growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Core inflation

Mains level: Paper 3- Inflation challenge

Context

A rate hike in the monetary policy committee’s June meeting was a foregone conclusion after the spike in inflation and an off-cycle surprise interest rate hike on May 4.

Reasons fast forwarding of interest rate hike

  • 1] Broad based inflation: A confluence of factors has pushed inflation higher and made it persistent and broad-based. 
  • 2] Policy rates are still negative: Even with this hike, the repo rate, the signalling tool for bank interest rates, is still below pre-pandemic levels.
  • The real policy rate (repo rate less expected inflation) remains negative and has some distance to cover before it reaches positive territory — where the RBI would like to see it.
  • 3] Lag in effect: Monetary policy impacts growth, and thereafter, inflation with a lag.
  • To control inflation, the RBI needed to act faster by front loading rate hikes.
  • 4] Elevated inflation expectations: The risk of inflation expectations getting unmoored had risen.
  • Household and business inflation expectations remain elevated, as indicated by the RBI’s inflation expectations survey of households.
  • 5] Interest rate hike in the US: The aggressive stance of the US Federal Reserve and ensuing tightening financial conditions.
  • India is better placed today than in 2013 to face the Fed’s actions with a stronger forex shield.

How US Fed’s actions affect India?

  • India is not insulated.
  • Capital outflow: The headwinds now are stronger than in 2013 and we have seen net capital outflows since October 2021.
  • S&P Global expects the US federal funds rate to be hiked to 3-3.25 per cent in 2023, higher than the pre-pandemic level, and highest since early 2008.
  • Despite a strong forex hoard, the RBI has had to deploy monetary policy to mute the impact of the Fed’s actions.

Inflation and its impact

  • Upward pressure on food inflation: The pressure on food inflation has increased owing to the impact of the freak heatwave on wheat, tomatoes and mangoes, which is driving prices higher.
  • This is on top of rising input costs for agricultural production, the global surge in food prices and the expected sharper than usual rise in minimum support price.
  • Fuel inflation will remain high, duty cuts notwithstanding, as global crude prices remain volatile at elevated levels.
  • Core inflation, the barometer of demand, is a complex story.
  • Goods (despite only partial pass-through of input costs) are witnessing higher inflation than services.
  • That’s because services faced tighter restrictions during the Covid-19 waves, restricting their consumption and the pricing power of providers as well.
  • Service categories that are mostly regulated, such as public transport, railways, water and education, have over 50 per cent weight in core services.
  • However, prices of discretionary services such as airlines, cinema, lodging and other entertainment are rising.
  • Transportation-related services have seen the sharpest rise in the past six months due to fuel price increases.
  • Impact on the poor: For those at the bottom of the pyramid, high inflation hits harder because energy and food are a big chunk of their consumption basket.

Growth prospects

  • S&P Global has recently cut the growth outlook for major economies for 2022 — that of the US to 2.4 per cent from 3.2 per cent, for Eurozone to 2.7 per cent from 3.3 per cent earlier, and for China to 4.2 per cent from 4.9 per cent.
  • This will hurt exports which are very sensitive to global demand.

Monetary policy actions

  • Not all aspects of supply-driven inflation can be addressed via monetary policy.
  • So the authorities are complementing monetary policy actions by using the limited fiscal space to cut duties and extend subsidies to the vulnerable.

Conclusion

Monetary tightening impacts growth with a lag of at least 3-4 quarters and the fact that real interest rates are negative and borrowing rates still below pre-pandemic levels, implies monetary policy is unlikely to be growth-restrictive for this year.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Challenges in global growth recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Impact of capital outflwow

Mains level: Paper 3- Growth recovery challenges

Context

The global economy was well on its path to recovery until the invasion of Ukraine by Russia.

Uncertainties in global growth prospects

  • Divergent economic recoveries: Economic prospects have worsened since the Ukraine crisis, worsening the divergence between the economic recoveries of advanced economies and those of the developing ones.
  • The prevailing uncertainties in global growth prospects come in the aftermath of frequent disruptions to worldwide supply chains in the last two years.
  • Against this background, two key macroeconomic variables have a persistent effect on growth rebound.
  • 1] Price pressure: There is tenacious price pressure, leading to policy trade-offs especially in developing economies.
  • 2] Capital outflow: There have been capital outflows and a tightening of financial conditions, affecting investment and growth in the medium and long term.

1] Price pressure

  • Global concern: In some of the advanced economies, inflation has reached its highest level in the last 40 years.
  • The major contributors to high inflation are energy and food prices.
  • A spike in oil and gas prices due to a tight fossil fuel supply and geopolitical uncertainty have led to substantial increases in energy costs worldwide.
  • In developing economies, rising food prices have had cascading effects, culminating in higher overall inflation.
  • This gets intensified if poor weather hits harvests and rising oil prices drive up the cost of producing and transporting fertilizers.
  • In developing economies, higher prices for food impacts different sections of the population differently, depending on the types of food consumed and the share of food expenditure in a household’s consumption basket.
  • Persistent short supply and increases in food and fuel prices could significantly increase the risk of social unrest as the poorer sections are pushed to the edge of heightened deprivation.

2] Capital outflow

  • Emerging markets suffered their first portfolio outflows in a year in March 2022.
  • The Institute of International Finance (IIF) says “foreign net portfolio outflows for emerging markets came to $9.8 billion in March.
  • Investors have become more selective, as higher risk sensitivity mounts due to tighter monetary conditions and rising inflation.
  • Reasons for capital outflow: Interest rates tightening in the United States is associated with capital flow reversals from emerging markets.
  • Impact on developing economies: For developing economies, the result of sudden large capital outflows is currency depreciation and tighter external sector conditions, leading to growth fluctuations.

Way forward

  • Monitor the pass-through of international prices: Though the factors contributing to high inflation (global supply shocks) are beyond the control of central banks, they need to carefully monitor the pass-through of rising international prices to domestic inflation to calibrate their responses.
  • Calibrate the pace of policy tightening: The pace of policy tightening needs to be attuned to prevailing economic situations and activity levels.
  • Communicate the importance of inflation targeting: Central banks could also signal a readiness to shift the monetary stance to maintain the credibility of their inflation-targeting frameworks by clearly communicating the importance of inflation stabilisation in their objectives and backing it with policy actions.
  • Foreign exchange interventions: As sudden capital flow reversals can threaten financial stability, foreign exchange interventions could address market imbalances.
  • Fiscal consolidation: There exists an imperative to prune expenditure and get back to the road of fiscal consolidation.
  • However, a push for consolidation should not prevent governments from prioritising spending to protect and help vulnerable populations affected by price increases and the pandemic.
  • Income support policies: In the post-pandemic global economy, there will be a likely cross-sectoral labour reallocation.
  •  These transitions require labour market and income support policies that are designed to provide safety nets for workers without hindering employment growth.

Conclusion

The message from the current phase of global growth is clear. Policymakers in the developing economies have to prepare for tighter financial conditions and spillovers from geopolitical volatility.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Brace for higher interest rates

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Inflation challenge

Context

Inflation has now remained above the RBI’s upper tolerance limit of 6 per cent for four months in a row.

Broad based inflation

  • The second-order impact of higher fuel prices is also visible as inflation in transport and communication surged to nearly 11 per cent, from 8 per cent in the previous month.
  • The latest data also indicates that inflation is becoming broad-based. 
  • With demand rebounding, the pass-through of higher input costs is also gaining momentum.
  • Considering that demand for goods recovered faster than services, goods producers passed on input costs to consumers.
  • But as services recover, there will be greater pass-through of prices to consumers in the coming months.
  • While there may be a slight moderation, inflation is expected to remain above the RBI’s threshold of 6 per cent in the coming months.
  • The Ukraine conflict continues to impact markets for foodgrains and vegetable oils.
  • Rising fertiliser prices are likely to push up farmers’ production costs, leading to high food prices.
  • While the government has extended price support through higher subsidies, if this will be enough to cool prices needs to be seen.

Inflation targeting by the RBI

  • With sticky crude oil prices and continuing supply-side disruptions amplified by the Covid-induced lockdowns in China, the RBI has rightly reverted its focus on inflation targeting.
  • This is needed as central banks around the world are pursuing tight monetary policies to counter inflation.
  • The US Fed followed its 25 basis points hike by another 50 basis points rise in May.
  • These will be followed by hikes of similar magnitude in the coming months.
  • In its April policy, the RBI announced the withdrawal of excess liquidity but did not raise the policy rate.
  • Rate hikes by RBI: The RBI is now likely to respond with aggressive rate hikes to prevent the price spiral from getting entrenched.
  • The continued strength of the dollar index and sharp rupee depreciation in the last few days could impose further pressure on prices through higher imported inflation.
  • Withdrawal of liquidity support: In addition to calibrated rate hikes, the RBI needs to fast-track the withdrawal of the ultra-accommodative liquidity support provided during the pandemic.

Implications

  • Discretionary spending: Rising inflation will cut back discretionary spending and adversely impact consumption that had only just started picking up.
  • Recession concerns: There are concerns about a recession in advanced economies as rising prices have started manifesting in a decline in purchasing power and a fall in consumer sentiments.
  • The demand destruction could trigger a moderation in prices.
  • Base metals prices have eased from the peak seen in the last few months.

Conclusion

Monetary policy support needs to be accompanied by fiscal support measures. The policy response will have to be tailored to the evolving geopolitical situation and the paths of commodity and food prices while balancing the imperatives of fiscal consolidation.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Monetary policy alone won’t bring down inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Impact of rate hike on inflation

Mains level: Paper 3- Effectiveness of monetary policy in dealing with the inflation

Context

The Reserve Bank of India (RBI) last week raised both policy rates and cut back liquidity in a surprise inter-meeting decision. The forcefulness and urgency of the policy shift have been seen as a signal of the RBI’s renewed commitment to fighting inflation via aggressive monetary tightening in the coming months.

How do higher inflation rates slow inflation?

  • It is true that a large swathe of the global economy is in the throes of runaway inflation and that in many of these economies tightening monetary and fiscal policies is the right response.
  • Initial conditions: But initial conditions matter as do the specific drivers of inflation.
  •  There are typically three ways in which higher inflation rate slows inflation.

1] Lowering inflationary expectations

  • Suppose one believes that because a central bank has not tightened enough, future inflation will be higher.
  • In that case, the obvious response is to bring forward future consumption and investment to the present, thereby adding to demand and fueling current inflation further.
  • So, in principle, the central bank by credibly committing to bringing down inflation through aggressive current actions can bring down expectations of future inflation. 
  • It won’t work in India: This is a very potent conduit of monetary transmission in developed markets, where there is a wide variety of inflation-hedging instruments, as well as in some emerging markets — Brazil, for instance —where inflation-indexation is widespread.
  • However, there is little empirical evidence that this channel works in India, even weakly.

2] Exchange rate channel

  • Higher interest rates attract foreign capital that appreciates the currency, lowering import prices and, in turn, inflation.
  • Again, this is a powerful mechanism in Latin America and Central Europe, where bond flows — that are sensitive to interest rate differential —dominate capital movements and the import content of the consumer basket is large.
  • Will it work in India? This is not the case in India and, in any event, for this to work it would require extreme rate hikes in the country, given the anticipated aggressive tightening by the US Fed.

3] Curbing credit growth

  • Raising both the cost of borrowing as well as its availability (for example, by increasing the cash reserve ratio) reduces credit growth, lowering demand, GDP growth and, eventually, inflation.
  • It works well in India: This is the credit transmission by which higher interest rates dampen inflation and it works well in India.
  • How much of today’s price increase is credit-driven? Even a cursory glance at bank balance sheets would suggest that credit growth is just treading water.
  • Having recovered from being negative in mid-2021, real credit growth is running just around 2 per cent.

Comparison with inflation-monetary policy dynamics of 2010-11

  • Back then, real GDP growth was clocking over 10 per cent per quarter, nominal credit growth 20-25 per cent, and real credit growth over 10 per cent.
  • Inflation was unambiguously driven by an overheated economy and fueled by runaway credit.
  • In the event, the RBI assessed the drivers of inflation to be originating from the supply side — higher food and commodity prices — and moved at a glacial pace, such that even after 12 rate hikes inflation remained in double digits for much of that period.
  • Faced with a potential US Fed tightening in 2013, India found itself in a near-crisis situation.
  • Today things are different. Much of the inflation is driven by global food and commodity prices.
  • Despite the languishing private demand, core inflation remains high.
  •  But this has been the case for much of the last two years, strongly suggesting that the domestic supply chain disruptions in manufacturing and services, especially at the informal level, haven’t been repaired fully.
  • The reason why firms locate in the informal sector in the first place is because of lower transaction costs, so when parts of the supply chain shift to the higher-cost formal sector, it shows up as inflation during the transition before increased scale of production and efficiency bring down the cost over time.
  • None of these factors is affected much by higher lending rates. 
  • So the burden of taming inflation by tightening monetary policy will fall largely on lower credit.
  • There is clearly a case to remove the extraordinary monetary support provided during the pandemic.

Conclusion

The RBI had misread the drivers of inflation badly in 2010-11. Hopefully, it won’t repeat that mistake this time.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Tackling the inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Core inflation

Mains level: Paper 3- Inflation challenge

Context

Expectations that commodity and oil prices would cool down in 2022 as the pandemic ebbed were belied by the Russia-Ukraine conflict, which exacerbated existing pressures. Fresh lockdowns in China are also extending the pandemic-induced supply-chain bottlenecks.

Challenges for central banks

  • Systemically important central banks that viewed the consistent uptick in inflation as transitory — caused by post-pandemic supply shocks — are now finding it hard to bottle the genie.
  • Inflation in the time of weak growth: What central banks like even less is having to deal with rising inflation in times of weak growth.
  • Because the primary tool they have to fight it — the interest rate hikecan be recessionary.

Inflation in India

  • CPI inflation averaged 6.3 per cent in the January-March 2022, above the RBI’s target range of 2-6 per cent.
  • The RBI forecasts inflation for April-June at 6.3 per cent.
  • One more quarter over the 6 per cent mark, and the central bank would owe the government an explanation.
  • Factors driving inflation: Fiscal 2021-In fiscal 2021, inflationary pressures came largely from food and, to some extent, core which excludes fuel and food.
  • Fiscal 2022- In fiscal 2022, crude prices hardened to emerge as the new driver. Core inflation firmed up further.
  • But the drop in food inflation offset this, so overall inflation was lower at 5.5 per cent compared with 6.2 per cent the previous year.

Understanding inflation in fiscal 2023

  • What makes this fiscal worrying is, all three-fule, food and core are firmly pointing in the same direction — up.
  • Fuel inflation, in double digits for a year now, shows no signs of easing.
  • Energy prices have risen sharply across the board — from crude oil to coal and natural gas.
  • The cut in excise duties on petrol and diesel in November 2021 is insufficient to bring down fuel inflation, in the event crude prices stay above $90 per barrel this fiscal.
  • Food inflation: Food is the most volatile component and biggest mover of CPI inflation, given that it occupies 39 per cent weight in the average consumption basket.  
  • On the positive side, India looks set to enjoy a fourth successive year of normal monsoon and still has good buffer stocks of rice and wheat.
  • What is certain, though, is the rising cost of food production.
  • Prices of fertilisers, pesticides, diesel and animal feed are all surging.
  • Already pricey edible oils are set to get even costlier, with Indonesia’s recent ban on refined palm oil exports adding pressure.
  • No wonder then, food inflation is expected to rise.
  • Core inflation: Core inflation, a barometer of demand pressures, will continue to climb despite an environment of weak demand due to the persistence of supply shocks.
  • For producers, the bump-up in international prices across energy and metal commodities since the war has brought more pain.
  • But a weak and uneven demand recovery means producers had limited ability to pass on cost pressures to consumers.
  • Such pass-through has been partial, at best.
  • For most goods, CPI inflation has been much lower than the corresponding WPI last fiscal.
  • The pattern of recovery is also uneven across different segments, with contact-intensive services lagging formal manufacturing.
  • But contact-based services will catch up sooner or later, as restrictions become a thing of the past.
  • The last time we saw such broad-basing of inflationary pressures was after the Global Financial Crisis.
  • The difference this time around is consumer demand, which remains weak and will limit the extent of pass-through.

Conclusion

Forecasting inflation in such uncertain times is fraught with risk. The RBI has predicted ~5.7 per cent consumer inflation this fiscal, while professional forecasters see it at 5.6 per cent. The odds currently favour a higher inflation print, and a rate hike in June.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Direct Tax collections surge in FY22

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Indirect Taxes

Mains level: Recovery of the economy after the Pandemic

India’s net direct tax collections amounted to ₹14,09,640.83 crore for FY22, which is the highest collection ever.

What are Direct Taxes?

  • A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.
  • The tax is paid directly by the organization or an individual to the entity that has imposed the payment.
  • The tax must be paid directly to the government and cannot be paid to anyone else.

 Why in news?

  • The surge in direct tax collection signals that the Indian economy has bounced back after two years of the pandemic.

Rise in direct tax collection

  • As against ₹14.09 lakh crore this year, our collection in 2020-21 was only ₹9.45 lakh crore.
  • In a single year, the economy has moved upward by nearly ₹4.5 lakh crore, registering a growth of 49%.
  • The collection is the best-ever as far as income tax and corporation tax are concerned.

What about direct tax-to-GDP ratio?

  • The direct tax-to-GDP ratio is around 12%.
  • The Central Board of Direct Taxes (CBDT) was working to raise the ratio to 15-20% in 5-10 years.

Why is it significant?

  • A tax-to-GDP ratio is a gauge of a nation’s tax revenue relative to the size of its economy as measured by gross domestic product (GDP).
  • The ratio provides a useful look at a country’s tax revenue because it reveals potential taxation relative to the economy.
  • It also enables a view of the overall direction of a nation’s tax policy, as well as international comparisons between the tax revenues of different countries.

Back2Basics: Types of Direct Taxes

The various types of direct tax that are imposed in India are mentioned below:

(1) Income Tax

  • Depending on an individual’s age and earnings, income tax must be paid.
  • Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
  • The taxpayer must file Income Tax Returns (ITR) on a yearly basis.
  • Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.

(2) Wealth Tax

  • The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
  • In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
  • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
  • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

(3) Estate Tax

  • It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.

(4) Corporate Tax

  • Domestic companies, apart from shareholders, will have to pay corporate tax.
  • Foreign corporations who make an income in India will also have to pay corporate tax.
  • Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India is taxable.
  • The below-mentioned taxes are also included under Corporate Tax:
  1. Securities Transaction Tax (STT): The tax must be paid for any income that is earned via security transactions that are taxable.
  2. Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
  3. Fringe Benefits Tax: For companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
  4. Minimum Alternate Tax (MAT): For zero tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

(5) Capital Gains Tax:

  • It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets.
  • Based on its holding period, tax can be classified into long-term and short-term.
  • Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
  • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

Advantages of Direct Taxes

The main advantages of Direct Taxes in India are mentioned below:

  • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
  • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increases. Therefore, direct taxes are considered to be very productive.
  • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
  • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
  • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organizations that can afford them. This extra money is used to help the poor and lower societies in India.

What are the disadvantages of direct taxes?

  • Easily evadable: Not all are willing to pay their taxes to the government. Some are willing to submit a false return of income to evade tax. These individuals can easily conceal their incomes, with no accountability to the law of the land.
  • Arbitrary: Taxes, if progressive, are fixed arbitrarily by the Finance Minister. If proportional, it creates a heavy burden on the poor.
  • Disincentive: If there are high taxes, it does not allow an individual to save or invest, leading to the economic suffering of the country. It does not allow businesses/industry to grow, inflicting damage to them.

 

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Anchoring inflationary expectations

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Inflation expectations

Mains level: Paper 3- Understanding inflation anchoring

Context

The RBI released the Inflation Expectations Survey of Households (IESH) for March 2022 on April 8. The survey results present interesting behavioural insights for public policy, particularly from a gender perspective.

Significance of inflation expectations

  • The impact of inflation — the overall increase in the prices in an economy — is felt by everyone.
  • High inflation adversely affects the poor.
  • Individuals, therefore, form expectations about how prices will behave in the future to take precautions.
  • If they anticipate high inflation, they negotiate wages or rents to compensate against a potential fall in their purchasing power.
  • Self-fulfilling: Increased wages increase the cost of production, making expectations self-fulfilling and, therefore, playing a pivotal role in determining inflation.
  • Anchoring inflation expectations: Central banks raise interest rates to ‘anchor’ high inflationary expectations when temporary price shocks, on account of drought or disruption in global supply chains, entail the risk of getting transmitted into actual inflation.

What shapes inflation expectations of individuals?

  • A recent study carried out by Acunto et al., 2020, validates that what agents frequently purchase, instead of those purchased infrequently, shape their perception of the general level of inflation.
  • Factors shaping individual’s perception: A significant factor shaping perceptions on inflation are the prices that individuals observe in their daily lives, originally posited by Robert Lucas in his seminal Islands model.
  • Therefore, generalising aggregate inflation expectations for making general views of prices in the economy could be misleading.
  • This insight has implications for gender-based differences in anticipating inflation in the future.
  • Existing literature shows that women have higher inflationary expectations compared to men.
  •  However, a new study reveals that it is not the innate characteristics as much as the traditional gender roles that explain this divergence.

Natural experiments

  • To test its validity, trends of Inflation Expectations Survey of Households (IESH) before and after the lockdown period present itself as a crude ‘natural experiment’.
  • The authors hypothesise that if traditional gender roles are the primary reasons behind the gender inflation expectation gap, then the lockdown-imposed work-from-home (WFH) arrangements or loss of employment should contribute in closing this gap.
  • The logic: during the lockdown, people in urban areas lost jobs or remained at home, taking a relatively equal share in the frequent day-to-day purchases.
  • Two categories of occupations are studied here: homemakers (assumed to be dominated by women) and financial sector employees (assumed to be dominated by men).
  • Looking at the trends of the RBI surveys for the period between March 2018 and March 2020, homemakers report higher inflation expectations than financial sector employees.
  • However, this gap has narrowed over the last two years and has almost converged in March 2022.
  • A possible explanation of closing of the gap could be the gradual ‘experience effect’ of male-dominated financial sector employees.
  • Experience effect, contrary to Rational Expectations Theory that assumes individuals base their decisions on the information available to them, is based on the premise that actual personal experiences shape behaviour more than being informed about the outcome of the event.

Conclusion

Focus could be shifted more on the microfoundations — understanding macroeconomic outcomes by studying factors that shape individual behaviour and decision making — for making better policy decisions concerning macroeconomic phenomena.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

All-India Household Consumer Expenditure Survey

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Consumer Expenditure Survey (CES)

Mains level: Need for CES for GDP estimation

The All-India Household Consumer Expenditure Survey, usually conducted by the National Statistical Office (NSO) every five years, is set to resume this year after a prolonged break.

What is the Consumer Expenditure Survey (CES)?

  • The CES is traditionally a quinquennial (recurring every five years) survey conducted by the government’s National Sample Survey Office (NSSO).
  • It is designed to collect information on the consumer spending patterns of households across the country, both urban and rural.
  • Typically, the Survey is conducted between July and June and this year’s exercise is expected to be completed by June 2023.

Utility of the survey

  • The data gathered in this exercise reveals the average expenditure on goods (food and non-food) and services.
  • It helps generate estimates of household Monthly Per Capita Consumer Expenditure (MPCE) as well as the distribution of households and persons over the MPCE classes.
  • It is used to arrive at estimates of poverty levels in different parts of the country and to review economic indicators such as the GDP, since 2011-12.

Why need this survey?

  • India has not had any official estimates on per capita household spending.
  • It provides separate data sets for rural and urban parts, and also splice spending patterns for each State and Union Territory, as well as different socio-economic groups.

What about the previous survey?

  • The survey was last held in 2017-2018.
  • The government announced that it had data quality issues.
  • Hence the results were not released.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India ranks 136th in the World Happiness Report 2022

Note4Students

From UPSC perspective, the following things are important :

Prelims level: World Happiness Report

Mains level: Not Much

India ranks 136th in the World Happiness Report 2022, while Finland becomes the happiest country for the fifth consecutive year.

One can definitely question the credibility of such reports whenever India is being grouped with some African countries that too below Pakistan.

World Happiness Report

  • The WHR is an annual publication of the UN Sustainable Development Solutions Network.
  • It measures three main well-being indicators: life evaluations, positive emotions, and negative emotions (described in the report as positive and negative affect).
  • Since 2011, the World Happiness Report (WHR) is released every year around the time of International Day of Happiness on March 20.
  • It was adopted by the UN General Assembly based on a resolution tabled by Bhutan.

How is the WHI derived?

  • The ranking is done on a three-year average based on surveys of ‘Life Evaluation’ conducted by Gallup World Poll which surveys around 1000 people from each country to evaluate their current life on a scale of 0-10.
  • On this scale, 10 marks the best possible and 0 as the worst possible life.
  • Further, six key variables GDP per capita, social support, healthy life expectancy, freedom, generosity, and corruption contribute to explaining life evaluations.

Top performers this year

  • The top five countries in the list are from Europe.
  • While the United States held the 16th spot in the happiest countries list.
  • Following Finland, Denmark bagged the second rank, while Iceland and Switzerland stood at third and fourth rank.
  • The Netherlands was at the fifth rank in the list.
  • Meanwhile, Luxembourg, Norway, Israel, and New Zealand were the remaining countries in the top 10.

Dismal performers

  • Afghanistan held the last position of 146th in the list, with Lebanon (145th), Zimbabwe (144th), Rwanda (143rd), and Botswana (142nd) following.
  • Bangladesh has improved its ranking by seven notches on the WHI from 101 last year to 94 in 2022 out of 146 countries included in the report.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Retail Inflation climbs to 6.07%

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Wholesale and Retail (Consumer) Inflation

Mains level: Not Much

India’s retail inflation inched up to an eight-month high of 6.07% in February from 6.01% in January, with rural India experiencing a sharper price rise at 6.38%.

What is Retail Inflation?

  • When we generally talk about retail inflation, it often refers to the rate of inflation based on the consumer price index (CPI).
  • The CPI tracks the change in retail prices of goods and services which households purchase for their daily consumption.
  • The CPI monitors retail prices at a certain level for a particular commodity; price movement of goods and services at rural, urban and all-India levels.
  • The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.

What is Consumer Price Index (CPI)?

  • It is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
  • In India, there are four consumer price index numbers, which are calculated, and these are as follows:
    1. CPI for Industrial Workers (IW)
    2. CPI for Agricultural Labourers (AL)
    3. CPI for Rural Labourers (RL) and
    4. CPI for Urban Non-Manual Employees (UNME).
  • While the Ministry of Statistics and Program Implementation collects CPI (UNME) data and compiles it, the remaining three are collected by the Labour Bureau in the Ministry of Labour.
  • The base year for CPI is 2012.
  • To calculate CPI, multiply 100 to the fraction of the cost price of the current period and the base period.

Significance of CPI

  • Generally, CPI is used as a macroeconomic indicator of inflation, as a tool by the central bank and government for inflation targeting and for inspecting price stability, and as deflator in the national accounts.
  • CPI also helps understand the real value of salaries, wages, and pensions, the purchasing power of the nation’s currency, and regulating rates.
  • CPI, one of the most important statistics to ascertain economic health, is generally based on the weighted average of the prices of commodities.
  • It basically gives an idea of the cost of the standard of living.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Taking stock of the Indian economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's export

Mains level: Paper 3- Taking stock of Indian economy

Context

This article takes the stock of the Indian economy using the EFGHIJ framework.

Export

  • The $400-billion target of goods exports in FY22 appears achievable:
  • This is a structural break from ~$300-330 billion per year over the last decade.
  • Note that in calendar year 2021, India exported almost $400 billion worth of goods.
  • This export growth comes at a time when global shipping and freight markets have been in a tizzy over the last few months as Covid-related supply chain disruptions across commodities and final products reverberated across the globe.

Fiscal growth

  • India has significant fiscal headroom in FY23 with a 6.4% fiscal deficit pencilled in.
  • The revenue buoyancy, assumed at less than 1, is conservative as is the overall assumption on nominal growth at 11%.
  • In as volatile a world as this, the conservatism in forecasting should come to India’s advantage.
  • India saw healthy direct and indirect tax receipts in FY22: the GST collections have consistently remained above the `1 trillion-a-month mark for many months now.
  • Two aspects need a close watch:
  • (a) as the prices of various commodities rise, there can be calls for softening the blow on the final consumer via tax cuts or direct support, and
  • (b) the disinvestment programme of the government which could face a market where investor appetite is uncertain.

Growth challenges and opportunities for India

  • India’s GDP growth in FY23 is projected to be 7.6-8.5%, making it one of the fastest-growing economies.
  • With the newly changed circumstances, it is possible that this tight range and the absolute number may require revision.
  • It is, however, too early to say in which direction and by what amounts.
  • Opportunities for India: Global dislocations of supply chain or the creation of new supply sources could create divergent challenges and opportunities for India.
  • The post Covid rebound in high frequency indicators (air and rail passengers, toll collections, UPI payments, etc.) suggests that the internal consumption economy is currently back on track.
  • It is important to note that India continues to be the fastest-growing nation of its size in the world.

Health

  • India has now completed almost 1.8 billion doses.
  • The Omicron wave, thankfully both due to the inherent nature of the virus and the large vaccination drive, did not cause significant economic upheaval.
  •  It may be time to think of Covid as endemic and plan accordingly.

Inflation

  • The inflation in 2021 was based on a sudden bout of fiscal-support-driven spending meeting with tight supply chain bottlenecks.
  • It was expected that as spending normalises and supply chains open, prices will stabilise.
  • However, the sharp uptick in the prices of crude, coal, commodities, and chips has created a more sustained scare for inflation.
  • Many measures may be taken across the world to curb the impact for the common man: from opening of oil reserves, to cutting of taxes, to direct support, etc—all of which could impact the fiscal.

Capital

  • Denoted by K by economists, expect to see a lot of ebb-and-flow here as investors react to evolving, volatile trends.
  • Higher public investment in the last two years has supported economic recovery: India has planned for a record `10 lakh crore plus public capex.
  • Net FDI has been strong at $25.3 billion up to December in FY2022.
  • While FPIs have withdrawn $9.5 billion in FY22, DIIs and retail investors have supported the markets.

Conclusion

With two waves of COVID-19 largely behind us, many macroeconomic factors have changed dramatically, especially in the last fortnight.


Source:

https://www.financialexpress.com/opinion/efghijk-taking-stock-of-the-indian-economy/2457255/

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Stagflation’ in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Stagflation

Mains level: Economic impact of Russian invasion

Reports suggest that crude oil prices soared and touched almost $140 per barrel mark amid Russian invasion of Ukraine. This has posed a risk of causing Stagflation in India.

What is Stagflation?

  • Stagflation is a stagnant growth and persistently high inflation. It, thus, describes a rather rare and curious condition of an economy.
  • Iain Macleod, a Conservative Party MP in the United Kingdom, is known to have coined the phrase during his speech on the UK economy in November 1965.
  • Typically, rising inflation happens when an economy is booming — people are earning lots of money, demanding lots of goods and services and as a result, prices keep going up.
  • When the demand is down and the economy is in the doldrums, by the reverse logic, prices tend to stagnate (or even fall).
  • But stagflation is a condition where an economy experiences the worst of both worlds — the growth rate is largely stagnant (along with rising unemployment) and inflation is not only high but persistently so.

How does one get into Stagflation?

  • The best-known case of stagflation is what happened in the early and mid-1970s.
  • The OPEC (Organisation of Petroleum Exporting Countries), which works like a cartel, decided to cut crude oil supply.
  • This sent oil prices soaring across the world; they were up by almost 70%.
  • This sudden oil price shock not only raised inflation everywhere, especially in the western economies but also constrained their ability to produce, thus hampering their economic growth.
  • High inflation and stalled growth (and the resulting unemployment) created stagflation.

Is India facing stagflation?

  • In the recent past, this question has gained prominence since late 2019, when retail inflation spiked due to unseasonal rains causing a spike in food inflation.
  • In December 2019, it was also becoming difficult for the government to deny that India’s growth rate was witnessing a secular deceleration.
  • As revised estimates, released in January end, now show, India’s GDP growth rate decelerated from over 8% in 2016-17 to just 3.7% in 2019-20.
  • However, the answer to this question in December 2019 was a clear no.
  • For one, in absolute terms, India’s GDP was still growing, albeit at a progressively slower rate.

Why this is a cause of concern?

  • Russia is the world’s second-largest oil producer and, as such, if its oil is kept out of the market because of sanctions, it will not only lead to prices spiking, but also mean they will stay that way for long.
  • While India is not directly involved in the conflict, it will be badly affected if oil prices move higher and stay that way.
  • India imports more than 84% of its total oil demand. At one level, that puts into perspective all the talk of being Atmanirbhar (or self-reliant).
  • Without these imports, India’s economy would come to a sudden halt — both metaphorically as well as actually.

Expected impact on Indian Economy

  • Higher inflation would rob Indians of their purchasing power, thus bringing down their overall demand.
  • In other words, people are not demanding enough for the economy to grow fast.
  • Private consumer demand is the biggest driver of growth in India.
  • Such aggregate demand — the monetary sum of all the soaps, phones, cars, refrigerators, holidays etc. that we all spend on in our personal capacity — accounts for more than 55% of India’s total GDP.
  • Higher prices will reduce this demand, which is already struggling to come back up to the pre-Covid level.
  • Fewer goods and services being demanded will then disincentivise businesses from investing in new capacities, which, in turn, will exacerbate the unemployment crisis and lead to even lower incomes.

Back2Basics: Inflation and its impact

  • Depression: It is Economic depression is a sustained, long-term downturn in economic
  • Deflation: It is the general fall in the price level over a period of time.
  • Disinflation: It is the fall in the rate of inflation or a slower rate of inflation. Example: a fall in the inflation rate from 8% to 6%.
  • Reflation: It is the act of stimulating the economy by increasing the money supply or by reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle. It is the opposite of disinflation.
  • Skewflation: It is the skewed rise in the price of some items while remaining item prices remain the same. E.g. Seasonal rise in the price of onions.
  • Stagflation: The situation of rising prices along with falling growth and employment, is called stagflation. Inflation accompanied by an economic recession.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Hike in crude oil prices and its impact on India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Marginal propensities to consume

Mains level: Paper 3- Impact of high crude price

Context

The Russia-Ukraine conflict will impact India’s economy through several channels. The first order impact, emanates from the negative terms of trade shock from higher commodity prices, particularly oil.

  • Crude prices have surged well past a $110/barrel and there is a growing expectation that, as the conflict gets more entrenched, crude could remain elevated for much longer and average close to $100/barrel in 2022, vis-a-vis $70/barrel in 2021.

Why crude oil price is increasing?

Limited Supply:

  • Major oil-producing countries had cut oil production last year amid a sharp fall in demand due to the Covid-19 pandemic.
  • Saudi Arabia pledged extra supply cuts in February and March 2020 following reductions by other members of the Organization of the Petroleum Exporting Countries (OPEC) and its allies.
  • In early January 2021, the OPEC and Russia (as OPEC+) agreed to cut back on oil production to increase prices.

Rising Demand:

  • The production and rollout of vaccines for Covid-19 and the rising consumption post the Covid lockdowns last year have both led to a revival in international crude oil prices.

Geopolitical reasons

  • Geopolitical tension has risen between Russia, which is the second largest oil producer in the world, and neighbouring Ukraine.
  • In January, there were drone attacks on oil facilities in UAE, another major oil producer.
  • An outage on a major oil pipeline linking Saudi Arabia and Turkey further added to the pressures.

How it will impact India?

  • Current Account Deficit: The increase in oil prices will increase the country’s import bill, and further disturb its current account deficit (excess of imports of goods and services over exports).
    • According to estimates, a one-dollar increase in crude oil price increases the oil bill by around USD 1.6 billion per year.
  • Inflation: The increase in crude prices could also also further increase inflationary pressures that have been building up over the past few months.
    • This will decrease the space for the monetary policy committee to ease policy rates further.
    • The government had hiked central taxes on petrol and diesel by Rs. 13 per litre and Rs. 11 per litre in 2020 to boost revenues amid lower economic activity.
  • Fiscal Health: If oil prices continue to increase, the government shall be forced to cut taxes on petroleum and diesel which may cause loss of revenue and deteriorate its fiscal balance.
    • The growth slowdown in the last two years has already resulted in a precarious fiscal situation because of tax revenue shortfalls.
    • The revenue lost will erode the government’s ability to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.

Why high growth impact on fiscal space leads to a greater hit to demand and growth?

  • The growth impact will manifest through constraints on fiscal space, household purchasing power being impinged and firm margins coming under pressure.
  • Why does marginal propensity to consume matter? The quantum of the growth impact will depend on how the shock is distributed across the fiscal, households and firms because of the different marginal propensities to consume.
  • For example, the excise duty cuts last November have already absorbed about one-third of the shock from oil (0.4 per cent of GDP).
  • The cost of this, however, is commensurate pressures on fiscal expenditures and growth, agnostically assuming a fiscal multiplier of 1.
  • In contrast, the marginal propensity to consume/invest out of income/earnings is typically lower than 1 for households/firms.
  • So, the greater the fraction of the shock absorbed on the fiscal, the greater the hit to demand and growth. 

Way forward

1] Let the rupee reach the new equilibrium

  • The widening of the CAD and associated BoP pressures will create some depreciation pressures on the rupee.
  • More fundamentally, a persistent negative terms of trade shock will argue for a weaker equilibrium real effective exchange rate.
  • Policymakers should let the rupee reach this new equilibrium – albeit in a gradual and non-disruptive manner – and not prevent this adjustment because it will facilitate the necessary “expenditure switching” to reduce imports, boost exports and help narrow an elevated CAD.

2] Pragmatic fiscal policies

  • Cutting excise duties would buffer the impact on households and protect consumption, but potentially result in a larger hit to demand by shrinking fiscal space to spend.
  • If the government doesn’t cut duties, it has resources that can potentially be used to more directly target affected households at the bottom of the pyramid.
  • But this will mean higher retail prices that can harden inflationary expectations, increasing the challenges for monetary policy.
  • Finally, policymakers could always cut duties, not cut spending and let the deficit widen commensurately — effectively pushing out some of the terms of trade costs to the future — but negative surprises on the fiscal during periods of heightened macro uncertainty can generate significantly risk premia in markets.
  • All told, the fiscal will confront several trade-offs, and should try avoiding corner solutions.
  • What should be clear is that as soon as markets begin to stabilise, authorities must plough ahead with planned asset sales/disinvestment to create more fiscal headroom, without trying to perfectly time the market.

3) Reduce the dependence

  • India has proposed Oil Buyer’s club. This would be a grouping of India, China, Japan and South Korea. The objective is to reduce the dependence on OPEC, have better bargains, increase the imports of crude oil imports from USA etc
  • It was put forward by Mani Shankar Ayyar in 2005
  • Create a stabilization fund or reserve account – Thailand, UK etc

Conclusion

A persistent adverse supply shock is complicated and challenging to respond to, and the new equilibrium will inevitably need some combination of a weaker rupee, higher rates, and judicious fiscal management.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics: What is a fiscal multiplier?

  • The fiscal multiplier measures the effect that increases in fiscal spending will have on a nation’s economic output, or gross domestic product (GDP).
  • Fiscal multipliers are important because they can help guide a government’s policies during an economic crisis and help set the stage for economic recovery.

What is Marginal Propensity to Consume?

  • In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
  • Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income.
  • MPC varies by income level. MPC is typically lower at higher incomes.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Time to rationalise fuel taxes

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CPI and WPI

Mains level: Paper 3- Inflation and policy response

Context

The disconnect between retail and wholesale inflation suggests that the two measures are driven by distinct and unrelated shocks.

The disconnect between retain inflation and wholesale inflation

  •  In the months between April 2020 and November 2020, retail inflation remained above 6%, while average wholesale inflation was -0.20%.
  • During the financial crisis (2008-2009) wholesale inflation came down significantly as commodity prices crashed after a boom, but retail inflation kept rising.
  • Correlation: This disconnect is reflected in the contemporaneous correlation between these two measures of inflation, which we find to be very low (0.04), and not significant.

Understanding the reasons for the disconnect

  •  We cannot rule out feedback from wholesale inflation to retail inflation.
  • To better explore this, it helps to understand the driving forces behind retail and wholesale inflation. 
  • Driving factors for CPI: Retail inflation is closely linked to food and beverage prices, partly because of their higher weightage in the consumer price index (CPI).
  • The dominance of supply shocks: High retail inflation in 2020 was primarily due to the rising prices of food and beverages.
  • The surge was likely led by the usual supply shocks—rainfall, agricultural productivity, or Covid-19-induced supply shocks.
  • This suggests two important features of Indian retail inflation: it is predominantly led by supply shocks (food inflation shock) and it is transitory in nature.
  • Driving factor for WPI: High wholesale inflation in recent months was mainly due to rising prices in fuel and power and manufacturing, which together comprise around 77% of the wholesale price index (WPI).
  • Rising fuel and energy prices in India were a result of the recent increase in global oil prices.

Takeaways

  • High wholesale inflation should not warrant any immediate policy responses as the two inflation measures seem to reflect different things.
  • Overall, the high correlation between world energy inflation and India’s wholesale inflation (0.88) indicates that India’s wholesale inflation is predominantly driven by world commodity prices.
  • On the other hand, the low correlation between India’s retail inflation and world energy inflation (-0.13, and not significant), suggests that India’s retail inflation is primarily driven by domestic food prices.
  • Higher wholesale inflation implies a higher profit margin for producers, which acts as an incentive for investment
  •  There are, in fact, some early signs of a revival in investment in recent quarters, and policy must be careful not to derail this.

Policy options

  • Given the pass-through of wholesale inflation into retail inflation, if the ongoing commodity boom persists, then the fuel and power component of the WPI is likely to raise retail inflation directly.
  • At that point, there would be some urgency to increase the interest rate, which may be premature and could dampen the revival of growth prospects.
  • To avoid the interest rate response, the best option going forward would be to rationalise fuel taxes, to reduce the pass-through of global commodity prices into wholesale prices and ultimately into retail inflation.

Conclusion

The correct fiscal-monetary coordination requires fiscal policy not to be inflationary, so that the RBI can support growth by keeping interest rates low.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)


Source:

https://www.financialexpress.com/opinion/time-to-rationalise-fuel-taxes-oil-is-a-major-input-in-production-hence-a-tax-on-it-is-highly-inflationary/2430635/

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is a Ratings Agency and why do they matter?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Credit Ratings

Mains level: Assessment of economies by Credit Rating Agencies

Finance Secretary has accused rating agencies of “double standards” when assessing emerging markets and developing economies.

What is the news?

  • Fitch, a rating agency, has termed India as the most indebted emerging market.
  • It claimed that the latest budget did not provide clarity on fiscal consolidation plans.

What is a Rating Agency?

  • Rating agencies assess the creditworthiness or potential of an equity, debt or country.
  • Their reports are read by investors to make an informed decision on whether or not to invest in a particular country or companies in that geography.
  • They assess if a country, equity or debt is financially stable and whether it at a low/high default risk.
  • In simpler terms, these reports help investors gauge if they would get a return on their investment.

What do they do?

  • The agencies periodically re-evaluate previously assigned ratings after new developments geopolitical events or a significant economic announcement by the concerned entity.
  • Their reports are sold and published in financial and daily newspapers.

What grading pattern do they follow?

  • The three prominent ratings agencies, viz., Standard & Poor’s, Moody’s and Fitch subscribe to largely similar grading patterns.
  • Standard & Poor’s accord their highest grade, that is, AAA, to countries, equity or debt with the exceedingly high capacity to meet their financial commitments.
  • Its grading slab includes letters A, B and C with an addition a single or double letter denoting a higher grade.
  • Moody’s separates ratings into short and long-term definitions. Its longer-term grading ranges from Aaa to C, with Aaa being the highest.
  • Fitch, too, rates from AAA to D, with D being the lowest. It follows the same succession scheme as Moody’s and Fitch.

Criticism of rating agencies

  • Popular ratings agencies publicly reveal their methodology, which is based on macroeconomic data publicly made available by a country, to lend credibility to their inferences.
  • However, credit rating agencies were subjected to severe criticism for allegedly spurring the financial crisis in the United States, which began in 2017.
  • The agencies underestimated the credit risk associated with structured credit products and failed to adjust their ratings quickly enough to deteriorating market conditions.
  • They were charged for methodological errors and conflict of interest on multiple counts.

Do countries pay attention to ratings agencies?

  • Lowered rating of a country can potentially cause panic selling or offloading of investment by a foreign investor.
  • In 2013, the European Union opted for regulating the agencies.
  • Over reliance on credit ratings may reduce incentives for investor to develop their own capacity for credit risk assessment.
  • Ratings Agencies in the EU are now permitted to issue ratings for a country only thrice a year, and after close of trade in the entire Union.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Dealing with the macroeconomic uncertainties

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tax buoyancy

Mains level: Paper 3- Macroeconomic uncertainty and way ahead

Context

Macroeconomic uncertainties are mounting.

Impact of US Fed’s decision

  • Against the backdrop of possible interest rate hikes by the U.S. Federal Reserve and the taper tantrum, there is pressure on the Reserve Bank of India (RBI) to increase its interest rates to prevent capital outflows.
  • The monetary policy corridor is still “accommodative” to support the growth recovery.
  • Globally, central banks have started increasing the interest rates.

Macroeconomic uncertainties

1] Inflationary pressure

  •  In India, the wholesale price index (WPI) inflation rose to a record high of 14.32% in November 2021 as per the data released by the Ministry of Commerce and Industry.
  • The consumer price index (CPI) inflation now is 5.03%, though that is still within the comfort zone of the inflation targeting framework envisaged in India’s new monetary framework.
  • The official nominal inflation anchor in India is 4%, with a band of variations of +/- 2. 

2] Absorbing excess liquidity

  • The RBI Financial Stability Report, published on December 29, 2021, revealed a possible worsening of the gross non-performing asset (GNPA) ratio of scheduled commercial banks — from 6.9% in September 2021 to 9.5% by September 2022.
  • Absorbing the excess liquidity that was injected to stimulate growth as part of the pandemic response is crucial to reversing trends in non performing assets (NPAs).
  • Absorption of excess liquidity was attempted by increasing the cut-off yield rate of variable rate reverse repo (VRRR) to 3.99%, and curtailing the government securities acquisition programme.

3] Interest rate structure and implications for government borrowing

  •  The call money market rates are below the repo rate.
  • The bond yields are increasing ahead of the Union Budget 2022-23.
  • The rise in bond yields will result in higher borrowing costs for the Government.

Way forward for fiscal policy

  • Maintain accommodative policy stance: Given these macroeconomic uncertainties, maintaining an accommodative fiscal policy stance in the upcoming Union Budget for FY23 is crucial for a sustainable recovery.
  • Don’t focus on fiscal consolidation: Any attempt at fiscal consolidation at this juncture employing capital expenditure compression rather than a tax buoyancy path can adversely affect economic growth. 
  •  Public investment — infrastructure investment in particular — is a major growth driver through “crowding-in” of private corporate investment.
  • Strengthening investments in the health-care sector is crucial at this juncture as a prolonged lockdown can accentuate the current humanitarian crisis and deepen economic disruptions.
  • When credit-linked economic stimulus has an uneven impact on growth recovery, the significance of fiscal dominance cannot be undermined.
  • Address unemployment: Rising unemployment needs to be addressed through an urgent policy response that strengthens job guarantee programmes.

Conclusion

The upcoming Union Budget for 2022-23 should maintain an accommodative fiscal stance in order to support the sustainability of the economic growth process and also for financing human development.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)


 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is a K-shaped Economic Recovery?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various shapes of economic recovery

Mains level: Impact of COVID on employment and economic growth

Former RBI Governor Raghuram Rajan has said that the government needed to do more to prevent a K-shaped recovery of the economy hit by the coronavirus pandemic.

K-Shaped Recovery

  • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
  • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
  • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
  • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

Try these PYQ:

 

Q.Economic growth in country X will necessarily have to occur if-

 

(a) There is technical progress in the world economy

(b) There is population growth in X

(c) There is capital formation in X

(d) The volume of trade grows in the world economy

Implications of a K-Shaped Recovery

  • Households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts; this will be a recurring drag on demand, if the labour market does not heal faster.
  • To the extent that Covid has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor tend to spend-instead of saving.
  • If Covid-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

Also read:

Shapes of Economic Recovery

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A chance to support growth, fiscal consolidation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Marginal propensity to consume

Mains level: Paper 3- Growth prospects for Indian economy

Context

The adverse effect of the third wave of COVID-19, which is mainly affecting the last quarter of 2021-22, may call for a further downward adjustment in the growth rate to about 9%.

Growth in FY 2021-22

  •  As per the NSO’s advance estimates, at the end of 2021-22, the magnitude of GDP in real terms is estimated at INR₹147.5-lakh crore that is only a shade higher than INR₹145.7-lakh crore in 2019-20.
  • Thus, due to the three waves of COVID-19 that India has experienced, two years of real growth in economic activities have been wiped out. 
  • As per the advance estimates, the gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in 2021-22.
  • Capacity utilisation in India continues to have considerable slack.
  • Private final consumption expenditure (PFCE) also shows a low growth of 6.9% in 2021-22.
  • Any pick-up in demand would continue to be constrained by low-income growth in sectors characterised by a high marginal propensity to consume (MPC) such as the trade, transport, et al. sector and the Micro, Small and Medium Enterprise (MSME) sector more broadly.
  • It may thus be prudent to expect a real GDP growth in the range of 6%-7%.
  • Growth in 2022-23 would also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products.
  • Growth in 2022-23 would depend on the basic determinants such as the saving and investment rates in the economy.

Suggestions

  • Extend GST compensation period: The GST compensation provision would also come to an end in June 2022.
  • This would cause a major revenue shock at least for some States such as Tamil Nadu, Kerala and Andhra Pradesh.
  • While this matter may be considered by the GST Council, the compensation arrangement should be extended by two years in some modified form.
  • With respect to non-tax receipts, the scope of the National Monetization Pipeline (NMP) may be extended to cover monetisation of government-owned land assets.
  • Disinvestment initiatives may have to be accelerated.
  • Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand.
  • Urban counterpart to MGNREGA: Since consumption demand remains weak, some fiscal support in the form of an urban counterpart to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may be considered.

Focusing on fiscal consolidation

  • It would be appropriate now to consider a graduated return to fiscal consolidation while using fiscal policy to lay the base for faster growth in the years to come.
  • The Fifteenth Finance Commission had suggested a fiscal consolidation path where the Centre’s fiscal deficit was benchmarked at 5.5% of GDP for 2022-23.
  • In their pessimistic scenario, it was kept at 6% of GDP. 
  • It may be prudent to limit the reduction in fiscal deficit-GDP ratio to about 1% point of GDP in 2022-23.
  • This would imply a fiscal deficit in the range of 5.5%-6% of GDP.
  • From here on, a stepwise reduction of 0.5% points per year would enable a level of about 4% of GDP by 2025-26.
  • By this time, as suggested by the Fifteenth Finance Commission, a high-powered inter-governmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and state governments.

Conclusion

Expenditure prioritisation in 2022-23 should focus on reviving both consumption and investment demand while aiming for the gradual return to the fiscal consolidation.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is World Economic Forum’s Davos Agenda ’22?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: WEF and its various reports

Mains level: Read the attached story

PM Modi has made a special address ahead of the theme-setting World Economic Forum (WEF) Agenda on the ‘State of the World’ at Davos.

About World Economic Forum (WEF)

  • WEF is an international non-governmental and lobbying organisation based in Cologny, canton of Geneva, Switzerland.
  • It was founded on 24 January 1971 by German engineer and economist Klaus Schwab.
  • The foundation, which is mostly funded by its 1,000 member companies – typically global enterprises with more than five billion US dollars in turnover – as well as public subsidies.
  • It aims at improving the state of the world by engaging business, political, academic, and other leaders of society to shape global, regional, and industry agendas.

Major reports released:

  • Engaging Tomorrow Consumer Report
  • Inclusive growth & Development Report
  • Environmental Performance Index
  • Global Competitive Index
  • Global Energy Architecture Performance Index Report
  • Global Gender Gap Report
  • Global Information Technology Report
  • Human Capital Report
  • Inclusive growth & Development Report
  • Global Risk Report
  • Travel and Tourism Competitiveness Report by WEF

Important agenda: Davos meeting

  • The WEF is mostly known for its annual meeting at the end of January in Davos, a mountain resort in the eastern Alps region of Switzerland.
  • The meeting brings together some 3,000 paying members and selected participants – among which are investors, business leaders, political leaders, economists, celebrities and journalists.

Why is WEF important?

  • Common platform: The WEF summit brings together the who’s-who of the political and corporate world, including heads of state, policymakers, top executives, industrialists, media personalities, and technocrats.
  • Influence global decision-making: Deliberations at the WEF influence public sector and corporate decision-making.
  • Discusses global challenges: It especially emphasizes on the issues of global importance such as poverty, social challenges, climate change, and global economic recovery.
  • Brings in all stakeholders: The heady mix of economic, corporate, and political leadership provides an ideal opportunity for finding solutions to global challenges that may emerge from time to time.

What are the main initiatives?

  • Agenda 2022 will see the launch of other WEF initiatives meant for:
  1. Accelerating the mission to net-zero emissions
  2. Economic opportunity of nature-positive solutions
  3. Cyber resilience

Criticisms of WEF

  • WEF has been criticized for being more of a networking hub than a nebula of intellect or a forum to find effective solutions to global issues.
  • It is also criticized for the lack of representation from varied sections of the civil society and for falling short of delivering effective solutions.

Way forward

  • WEF sees large-scale participation of top industry, business leaders, civil society, and international organizations every year.
  • This collaboration is necessary for addressing global concerns such as climate change and pandemic management.
  • It is one of such few platform, that provides an opportunity for collaboration through comprehensive dialogue.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Dravidian Model of Development

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Dravidian Model, Justice Party

Mains level: Socio-economic model of economic development

The Chief Minister of Tamil Nadu is pushing for a ‘Dravidian Model’ where economic development is inclusive.

What is the Dravidian Model?

  • The goal is equal economic development that will be in tune with social justice.
  • It has taken root since the days of the Justice Party government [in pre-Independent India].
  • TN polity has divided the task into short-term and long-term, and travels with the objective of improving the economy by implementing them within the time frame.

Note: The Government of India Act 1919 implemented the Montagu-Chelmsford reforms, instituting a Diarchy in Madras Presidency. The diarchial period extended from 1920 to 1937, encompassing five elections. Justice party was in power for 13 of 17 years.

Unique features of this developmental approach

(1) Financial planning

  • TN has constituted an Economic Advisory Council comprising internationally renowned economists since there is a need to evolve an economic development to suit the current situation.
  • It has emerged out higher as comparatively high levels of human development with economic dynamism.

(2) Health and education

  • It sought and ensured opportunity-equalizing policies in the expanding modern sectors through affirmative action policies and investments in education and health.
  • Tamil Nadu has been a pioneer in broad-basing entry into school education through a slew of incentives, the noon meal scheme being the most well-known.

(3) Social Harmony

  • It also succeeded in building a bloc of lower caste groups under a Dravidian-Tamil identity that subsumed and sought to transcend individual caste identities.
  • It has distinct political mobilization against caste-based inequalities in the state.
  • Mobilization built an ethos that questioned the privileges of caste elites and the naturalness of merit in a caste society.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Issues with India’s GDP data

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Issues with India's GDP data

Context

There are three major reasons why the GDP data, and hence any narrative of economic recovery based on it, are questionable.

Background

  • The NSO released the current GDP series in 2015, using 2011-12 as its base year.
  • Some have argued that the problem in the new series is the real growth rate. This is debatable.
  • Scholars have pointed to measurement problems, both in the nominal and real GDP growth rates.

Three issues with the GDP data, and  narrative of economic recovery based on it

[1] Double deflation problem

  • The new series entailed a shift from a volume-based measurement system to one based on nominal values, thereby making the deflator problem more critical.
  • Simply put, the NSO calculates real GDP by gathering nominal GDP data in rupees and then deflating this data using various price indices.
  • The nominal data needs to be deflated twice: Once for outputs and once for inputs.
  • But the NSO — almost uniquely amongst G20 countries — deflates the nominal data only once.
  • It does not deflate the value of inputs.
  • To see why this is a problem, consider what happens when the price of imported oil goes down.
  • In that case, input costs will fall and the profits recorded by Indian firms will rise.
  • This increase in profits is merely the result of a fall in input prices, so it needs to be deflated away.
  • But the NSO doesn’t deflate away the increase in profits.
  • Since the cost of inputs is measured by the WPI (wholesale price index), a crude measure of the overestimation caused by the absence of “double deflation” is given by the gap between the WPI and the CPI (consumer price index).
  • In the 2014-2017 period, oil prices plunged, causing the WPI to fall sharply relative to the CPI.
  • This meant that real growth was probably overstated.
  • In the last few months, the exact opposite has been happening. WPI inflation is soaring.
  • The rapid increase in the WPI relative to the CPI is imparting an upward bias to the deflator.

[2] Sectoral weight not updated

  • When it calculates GDP, it takes a sample of activity in each sector, then aggregates the figures by using sectoral weights.
  • To make sure that the weights are reasonably accurate, the NSO normally updates them once a decade.
  • It has now been more than 10 years since the weights were changed, and there are no signs of a base year revision.
  • As a result, the sectoral weights are still based on the structure of the economy in 2010-11, when in particular the information technology sector was much smaller.

[3] Measurement of unorganised sector

  • Measurement of the unorganised sector has always been difficult in India.
  • Once in a while, the NSO undertakes a survey to measure the size of the sector.
  • In the meantime, it simply assumes that the sector has been growing at the same rate as the organised sector.
  • However, starting in 2016 the unorganised sector has been disproportionately impacted by a series of shocks.
  • In 2018, the NBFC sector reported serious problems, which in turn impacted unorganised sector firms since they were heavily dependent on NBFCs for funds.
  • From 2020 onwards, the pandemic has impacted the unorganised sector more than the organised sector enterprises.
  • Despite these shocks, the NSO does not seem to have made any adjustments to its methodology for estimating the growth of the unorganised sector.

Consider the question “Elaborate the issues with India’s GDP data. Suggest the way forward.”

Conclusion

There are serious problems with India’s GDP data. Any analysis of recovery or growth forecast based on this data must be taken with a handful of salt.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What are the First Advance Estimates of GDP?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP computation and various terminologies

Mains level: National Income Accounting

The Ministry of Statistics and Programme Implementation (MoSPI) has released the First Advance Estimates (FAE) for the current financial year (2021-22 or FY22).

Tap to read more about:

National Income Determination, GDP, GNP, NDP, NNP, Personal Income

What is GDP?

  • GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).
  • It is slightly different from the other commonly used statistic for national income — the GNP.
  • The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.

GDP estimates for FY22

  • According to MoSPI, India’s GDP will grow by 9.2 per cent in 2020-21.
  • Last financial year, FY21, the GDP had contracted by 7.3%.

What are the First Advance Estimates of GDP?

  • The FAE, which were first introduced in 2016-17, are typically published at the end of the first week of January.
  • They are the “first” official estimates of how GDP is expected to grow in that financial year.
  • But they are also the “advance” estimates because they are published long before the financial year (April to March) is over.
  • It is important to note that even though the FAE are published soon after the end of the third quarter (October, November, December), they do not include the formal Q3 GDP data.
  • Q3 data is published at the end of February as part of the Second Advance Estimates (SAE).

Significance of FAE

  • Budgetary calculations: Since the SAE will be published next month, the main significance of FAE lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s budget allocations.
  • Basis for nominal GDP: From the Budget-making perspective, it is important to note what has happened to nominal GDP — both absolute level and its growth rate. That’s because nominal GDP is the actual observed variable.

Note: Real GDP, which is the GDP after taking away the effect of inflation, is a derived metric. All Budget calculations start with the nominal GDP.

Real GDP = Nominal GDP — Inflation Rate

The difference between the real and nominal GDP shows the levels of inflation in the year.

How are the FAE arrived at before the end of the concerned financial year?

Ans. Benchmark-Indicator method

  • The FAE are derived by extrapolating (uses ratio and proportion) the available data.
  • The approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
  • In this, the estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.”

What are the main takeaways?

#1 GDP Growth

  • At 9.2%, the real GDP growth rate for FY22 is slightly lower than most expectations, including RBI’s, which pegged it at 9.5%.
  • These estimates are based on data before the rise of the Omicron variant.

#2 Role of high inflation

  • For FY22, while real GDP (with 2011-12 base prices) will grow by 9.2%, nominal GDP (calculated using current market prices) will grow by a whopping 17.6%.
  • The difference between the two growth rates — about 8.5 percentage points — is essentially a marker of inflation (or the rate at which average prices have increased in this financial year).

#3 Private consumption continues to struggle

  • The FAE analyses the three main contributors to GDP — private consumption demand, investments in the economy, and government expenditures.
  • It shows that while the latter two are expected to claw back to the pre-Covid level, the first engine will continue to stay in a slump.

#4 Average Indian is much worse off

  • For the bulk of the Indian population, thus, aggregate data recovering to pre-Covid levels are largely academic.
  • An average Indian has lost almost 2 years in terms of income levels and 3 years in terms of spending levels.

Try this PYQ:

Q. In the context of Indian economy, consider the following statements:

  1. The growth rate of GDP has steadily increased in the last five years.
  2. The growth rate in per capita income has steadily increased in the last five years.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

 

Note: There can be no absolute answers to such questions unless the year is mentioned. Still try to substantiate your answer with the FY21 context.

 

Do post it here.
4
Please leave a feedback on thisx

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A reality check on great CAPEX expectations

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Capex boom in India

Context

Economists are predicting a potential virtuous capital investments (capex) cycle to kick in globally as we emerge from the pandemic.

Why do analysts think that capital investment cycle is about to start?

  • Less leveraged: Corporates are less leveraged today compared to 2008.
  • Indian corporates repaid debts of more than Rs 1.5 trillion.
  • Fiscal and monetary support: Companies are also more confident of durable fiscal and monetary support.
  • Increased savings: Households have large excess savings built during Covid — $1.7 trillion in the US and roughly $300 billion in India as per a UBS report.
  • Cash: Lastly, corporates are sitting on a large cash pile – S&P 500 firms’ cash has soared from $1 trillion pre-pandemic to $1.5 trillion now.

Why capex wave is difficult in India?

  • Fall in capital formation: India’s fixed capital formation rate has steadily fallen from 36 per cent of GDP in 2008 to 26 per cent in 2020.
  • For a set of 718 listed companies for which data is consistently available from 2005, the capex growth rate has decreased from 7 per cent in 2008 to around 2 per cent in 2020.
  • Low return on invested capital: The return on invested capital in FY21 is still low at 2-3 per cent compared with 16-18 per cent returns in 2005-08.
  • Structural issues: Land acquisition is still tough, changes to labour laws have been slow, and reform uncertainty has resurfaced with the rollback of the agriculture reform laws.
  • Discouraging current data: As per CMIE data, the quarter ending in June 2021 saw Rs 2.72 lakh crore worth of new projects announced. This fell to Rs 2.22 lakh crore for the September 2021 quarter.
  • This is much below the average of Rs 4 lakh crore a quarter of new project announcements during 2018 and 2019.
  • Further, new projects are concentrated in fewer industries (power, and technology) with the top three accounting for 44 per cent of the total of new projects announced.
  • Low capacity utilisation: At the same time, capacity utilisation for corporate India is at an all-time low.
  • From a peak of 83 per cent in 2010, when capex was running hot, utilisation levels declined to 70 per cent just before the pandemic, and further to 60 per cent in June 2021 as per the RBI’s latest OBICUS data.
  • Capex is funded either from fresh debt or equity issues or from accumulated cash. Large firms are repaying debt.

Conclusion

It is too early in the cycle to predict anything with confidence, but we need more evidence to predict a capex cycle.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The challenge of achieving 9.5% growth rate

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gross tax revenue

Mains level: Paper 3- Challenges in achieving 9.5 growth rate

Context

The National Statistical Office (NSO) released the second quarter gross value added (GVA) and gross domestic product (GDP) numbers on November 30, 2021, indicating the pace of economic recovery in India after the two COVID-19 waves.

Strong growth momentum required to exceed pre-COVID-19 levels

  • The real GVA for the first half of 2021-22 at ₹63.4 lakh crore has remained below the level in the first half of 2019-20 at ₹65.8 lakh crore by (-)3.7%.
  • This difference is even larger for GDP which at the end of first half of 2021-22 stood at ₹68.1 lakh crore, which is (-) 4.4% below the corresponding level of GDP at ₹71.3 lakh crore in 2019-20.
  • As the base effect weakens in the third and fourth quarters of 2021-22, a strong growth momentum would be needed to ensure that at the end of this fiscal year, in terms of magnitude, GVA and GDP in real terms exceed their corresponding pre-COVID-19 levels of 2019-20.
  • Domestic demand including private final consumption expenditure (PFCE) in the first half of 2021-22 remains below its corresponding level in 2019-20 by nearly ₹5.5 lakh crore.
  • This indicates that investment as well as consumption demand have to pick up strongly in the remaining two quarters to ensure that the economy emerges on the positive side at the end of 2021-22 as compared to its pre-COVID-19 level.

Annual growth prospects

  • Required rate in second half of 2021-22: To realise the projected annual growth at 9.5% for 2021-22 given both by the Reserve Bank of India (RBI) and the International Monetary Fund (IMF), we require a growth of 6.2% in the second half of 2021-22.
  • This will have to be achieved even as the base effect weakens in the third and fourth quarters since GDP growth rate in these quarters of 2020-21 was at 0.5% and 1.6%, respectively.
  •  Thus, achieving the projected growth rate of 9.5% is going to be a big challenge.

What should be the policy to achieve higher growth rate

  • Fiscal support: The policy instrument for achieving a higher growth may have to be a strong fiscal support in the form of government capital expenditure.
  • The Centre’s gross tax revenues have shown an unprecedented growth rate of 64.2% and a buoyancy of 2.7 in the first half of 2021-22.
  • The Centre’s incentivisation of state capital expenditure through additional borrowing limits would also help in this regard. According to available information, 11 States in the first quarter and seven States in the second quarter qualified for the release of the additional tranche under this window.
  • Even as Central and State capital expenditures gather momentum, high frequency indicators reflect an ongoing pick-up in private sector economic activities.

Robust growth in Centre’s gross tax revenue

  • The growth in the Centre’s GTR in the first half of 2019-20 was at 1.5% and there was a contraction of (-)3.4% for the year as a whole.
  • In the face of such weak revenues, the Central government could not mount a meaningful fiscal stimulus in 2019-20 even as real GDP growth fell to 4.0%.
  • In contrast, the government is in a significantly stronger position in 2021-22 since the growth in GTR in the first half is 64.2% and the full-year growth is expected to be quite robust.

Conclusion

Thus, the key to attaining a 9.5% real GDP annual growth in 2021-22 lies in the government’s ongoing emphasis on infrastructure spending as reflected in the government’s capital expenditure.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Mixed signals on growth-inflation dynamics

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Recovery momentum

Context

We are now at that point in the cycle where all central banks — the RBI, the US Fed, the European Central Bank, Bank of England and others — have begun to signal, a process of normalisation from the unprecedented loose monetary policy stimulus post the onset of the pandemic in early 2020.

Recovery momentum

  • Surveys and data prints are now signalling that the recovery momentum in the first half of 2021 is decelerating in many countries, although the direction and momentum may vary.
  • The RBI Governor notes that “the external environment, which had been supportive of aggregate demand over the past few months, may lose momentum for a variety of reasons”.
  • China — its policy and economy — is the most salient risk for a sustained global recovery.
  • The Chinese authorities’ seeming determination to push ahead with structural reforms, de-carbonising initiatives, and curbs on real estate appear designed to sacrifice some short-term growth for medium-term efficiencies, and reduce financial risks and inequality.
  • Inflation in almost all major economies continues to remain high.
  • The US Personal Consumption Expenditure (PCE) survey measure of core inflation is running over 4 per cent.
  • The story is similar in Europe.

Assessing India’s growth recovery

  • India’s growth–inflation dynamics are also becoming favourable, but are still subject to multiple risks.
  • In assessing India’s growth recovery, a risk of the global economy going into “stagflation”, going by US signals seems to be that if at all, it is likely to be mild.
  • The recovery of economic activity continues, although the high-frequency indicators we track suggest that the momentum observed in July and August has moderated.
  • Electricity consumption growth is also down from August levels, but part of this can be explained by both cooler, rainy weather, as well as coal shortage related cutbacks in many electricity-intensive manufacturing.
  • The residential real estate is reportedly doing exceptionally well, with low-interest rates on home loans, cuts in stamp duty and registration charges, and indeed behavioural shifts towards own home ownerships with hybrid and work from home shifts.
  • Even the commercial real estate sector is reviving.
  • The Union government also has large unspent cash balances, which can be judiciously deployed to boost both capex and consumption.
  • The overall inflation trajectory suggests a gradual glide path towards the 4 per cent target by March 2023 or a bit beyond.
  • There are risks of overshooting this forecast trajectory, despite a benign outlook on food prices.
  • This emanates from global metals, minerals, crude oil prices, and from supply bottlenecks persisting till well into 2022.

Conclusion

In summary, the growth–inflation signals remain mixed. Multiple episodes of global spillovers in the past couple of decades have taught us that imminent normalisation will have implications for all emerging markets.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

World Economic Outlook (WEO) Report by IMF

Note4Students

From UPSC perspective, the following things are important :

Prelims level: World Economic Outlook (WEO), IMF

Mains level: Impact of COVID on employment and economic growth

The International Monetary Fund (IMF) has unveiled its 2nd World Economic Outlook (WEO) Report.

About WEO Report

  • The WEO is a report by the IMF that analyzes key parts of the IMF’s surveillance of economic developments and policies in its member countries.
  • It also projects developments in the global financial markets and economic systems.
  • The report comes out twice every year — April and October.
  • It is based on a wide set of assumptions about a host of parameters — such as the international price of crude oil — and set the benchmark for all economies to compare one another with.

Key takeaways from the October 2021 WEO

  • The central message was that the global economic recovery momentum had weakened due to the pandemic-induced supply disruptions.
  • It is the increasing inequality among nations that IMF was most concerned about.
  • The dangerous divergence in economic prospects across countries remains a major concern.

Reasons for the slowdown

There are two key reasons:

  1. Large disparities in vaccine access
  2. Differences in policy support

What about Employment?

Ans. There is a lag.

  • Employment around the world remains below its pre-pandemic levels.
  • This reflects a mix of negative output gaps, worker fears of on-the-job infection in contact-intensive occupations, childcare constraints, labour demand changes due to automation etc.
  • The main concern is the gap between recovery in output and employment which is likely to be larger in emerging markets and developing economies than in advanced economies.
  • Further, young and low-skilled workers are likely to be worse off than prime-age and high-skilled workers, respectively.

Implications for India

Ans. Reduce India’s growth momentum

  • IMF has suggested that India’s economic recovery is gaining ground.
  • Some sectors such as the IT-services sectors have been practically unaffected by Covid, while the e-commerce industry is doing brilliantly.
  • However, the recovery in unemployment is lagging the recovery in output (or GDP).
  • This matters immensely for India as it reflects jobless growth.
  • India was already facing a deep employment crisis before the Covid crisis, and it became much worse after it.
  • Lack of adequate employment levels would again drag down overall demand and affect the growth momentum.

Threats to growth momentum

  • Usual unemployment: Even before the pandemic, India already had a massive unemployment crisis.
  • Sector-wise recovery: India is witnessing a K-shaped recovery. That means different sectors are recovering at significantly different rates.
  • Unorganized sector: A weak recovery for the informal/unorganized sectors implies a drag on the economy’s ability to create new jobs or revive old ones.
  • Contact-based services: Such services which can create many more jobs, are not seeing a similar bounce-back.

How informal is India’s economy?

  • A NSO report titled ‘Measuring Informal Economy in India’ gives a detailed account of informal Indian economy.
  • It shows the share of different sectors of the economy in the overall Gross Value Added and the share of the unorganised sector therein.
  • The share of informal/unorganised sector GVA is more than 50% at the all-India level, and is even higher in certain sectors.
  • It creates a lot of low-skilled jobs such as construction and trade, repair, accommodation, and food services.

This is why India is more vulnerable.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What the Q1 GDP numbers say

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Private Final Consumption Expenditure

Mains level: Paper 3- Measures to sustain the growth momentum

Context

India’s GDP data for Q1 of 2021-22 was released on August 31, 2021. The data revealed the real GDP growth at 20.1% in Q1.

Making sense of the growth

  • Base effect: Real GDP growth at 20.1% in Q1 of 2021-22 is largely because of the contraction of 24.4% in the corresponding quarter of the first COVID-19 year, that is, 2020-21.
  • The Q1 2021-22 output and GDP growth data reflect a strong base effect since the corresponding levels of Q1 of 2020-21 were significantly adversely impacted by the first wave of COVID-19.
  • Fall in magnitude: The magnitude of real GDP fell short of the corresponding level in 2019-20 by a margin of ₹3.3 lakh crore.
  • Required rate: A growth rate of 32.3% was required in Q1 of 2021-22 for achieving the same level of real GDP as in Q1 of 2019-20.
  • To achieve the annual growth of 9.5% as forecast by both the Reserve Bank of India and the International Monetary Fund for 2021-21, an average growth of 6.8% in the remaining part of the year would be required.
  •  The task would become relatively more demanding in Q3 and Q4 considering that the real GDP growth was positive at 0.5% and 1.6%, respectively, in the corresponding quarters of 2020-21.

Analysing the demand side

1) Private consumption growth lagging overall GDP growth

  • Largest segment: The largest segment of GDP viewed from the demand side is private final consumption expenditure (PFCE).
  • Its average share over the last three years (2018-19 to 2020-21) was 56.5%.
  • If PFCE were to reach back the 2019-20 level, it should have grown by 35.5% in this quarter.
  • The recovery in private consumption demand is lagging behind the overall GDP growth.
  • Way forward: Private consumption depends largely on income growth and its distribution.
  • Therefore, it would be useful to focus on further supporting income and employment levels for the MSMEs and informal sectors of the economy which have a higher propensity to consume.

2) Export and investment: positive outcome in Q1

  • Noticeable positive outcomes in Q1 of 2021-22 came from exports and to some extent, from investment as reflected by gross fixed capital formation (GFCF).
  • Exports grew by 39.1% over a contraction of 21.8% in Q1 of 2020-21.
  • This differential is reflected in a positive growth of 8.7%.
  • Investment: In the case of GFCF, the base effect was quite large.
  • Despite a growth of 55.3% in Q1 of 2021-22, its magnitude was still 17.1% lower than the corresponding level in Q1 of 2019-20.

3) Contraction in government final consumption

  • The only demand segment which contracted even with reference to Q1 of 2020-21 was government final consumption expenditure (GFCE).
  • This contraction was by a margin of (-) 4.8%.

Analysing the output side

1) Key service sectors

  • The key service sector — namely trade, transport, storage grew by 34.3% in Q1 of 2021-22 as compared to a contraction of 48.1% in Q1 of 2020-21.
  • However, relative to its level in Q1 of 2019-20, the output of this large service sector was significantly lower by 30.2% in Q1 of 2021-22.
  • Though public administration, defence and other services showed a growth of 5.8% in Q1 of 2021-22 over Q1 of 2020-21, they actually reflected a contraction of 5.0% as compared to Q1 of 2019-20.

2) Agriculture

  • The key positive news came from the agricultural sector which showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.
  • Given agriculture’s positive growth in all the quarters of 2020-21, further contribution from this sector to the overall growth may not be expected.
  • Its average weight to the overall output is also low at about 15%.
  •  It is the high weight manufacturing sector and the two substantive service sectors — trade, transport et. al and financial, real estate et al. — which will have to support growth in the remaining part of the year.

Way forward

  • Government should raise the demand: The Centre’s fiscal deficit in the first four months of 2021-22 amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.
  • Clearly, significant policy space is opening up for the government to raise its demand and its contribution to output in the remaining part of the current fiscal year.
  • Dealing with likely third wave: Attempts should be made either to bypass or at least curb the adverse impact of COVID-19’s likely third wave.
  • Vaccination and investment in health infra:  Both the coverage of vaccination and the pace of investment in health infrastructure should be accelerated.
  • As revenues improve, expenditures can be increased.
  • There is no need to reduce the fiscal deficit below the budgeted level of 6.8% of GDP.

Consider the question “To make up for the loss of output in the last two years India needs to embark on the path of high growth trajectory. Suggest the measure to achieve this objective.”

Conclusion

We need a faster rate of growth to make up for the loss of output in the previous two years from the trend rate. We must lay the foundation for faster growth in this year itself.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why we must focus on Human Development not GDP growth?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP computation and various terminologies

Mains level: Growth vs Development debate

The much-anticipated estimates of gross domestic product (GDP) for the first quarter of the fiscal year 2021-22 were released on 31 August. This has seen an unprecedented decline in GDP at 24.4%.

Why debate this?

  • An increasing GDP is often seen as a measure of welfare and economic success.
  • However, it fails to account for the multi-dimensional nature of development or the inherent short-comings of capitalism, which tends to concentrate income and, thus, power.
  • The real issue thriving the Indian Economy is the relevance of GDP estimates as the sole or most important indicator of a recovery.
  • Our economy was slowing down even before the pandemic and was then devastated by it.

GDP as an indicator

  • Economic growth assesses the expansion of a country’s economy.
  • Today, it is most popularly measured by policymakers and academics alike by increasing gross domestic product or GDP.
  • This indicator estimates the value-added in a country which is the total value of all goods and services produced in a country minus the value of the goods and services needed to produce them.
  • It is common to divide this indicator by a country’s population to better gauge how productive and developed an economy is – the GDP per capita.

A brief history of Growth and GDP

  • The concept of economic growth gained popularity during the industrial revolution, when market economies flourished.
  • In the 1930s, Nobel laureate, Simon Kuznets wrote extensively about national statistics and propagated the use of GDP as the measure of the national income of the US.
  • Against the backdrop of a bloody world wars, governments were on the look for analytical tools to raise taxes to finance the newly minted war machine.
  • It was at the 1944 Bretton Woods conference that GDP became the standard tool for measuring a country’s economy.
  • Right from the classicals to the neo-classicals, the idea of development was intertwined with economic growth, i.e. accumulation of wealth and production of goods and services.

Prominence of GDP today

  • GDP as a measure of economic growth is popular because it is easier to quantify the production of goods and services than a multi-dimensional index can measure other welfare achievements.
  • Precisely because of this, GDP is not, on its own, an adequate gauge of a country’s development.
  • Development is a multi-dimensional concept, which includes not only an economic dimension, but also involves social, environmental, and emotional dimensions.

Limitations of GDP

  • One of the limitations of GDP is that it only addresses average income, failing to reflect how most people actually live or who benefits from economic growth.
  • There is also a possibility that the wealth of a society becomes more concentrated and why this is counterproductive to development.
  • If left unchecked, growing inequalities can not only slow down growth, but also generate instability and disorder in society.

Therefore, a growing GDP cannot be assumed to necessarily lead to sustainable development.

Relevance since COVID times

(a) Failure to capture informal economy

  • A decline in economic activity, as captured by GDP data, is only one part of the distress caused by the slowdown and covid.
  • GDP estimates hardly capture the extent of depressed economic activity in the informal sector.
  • This makes it irrelevant to the cause of understanding the changing fortunes of workers and others who are dependent on these activities.
  • India’s informal sector is not only a significant part of the overall economy but is crucial for generating broad demand, given the significantly large proportion of our population that depends on it.

(b) Rise in distress employment

  • Most worrisome is a reversal of the trend of non-farm diversification due to reverse migration.
  • After more than five decades, we have seen an actual increase in the proportion of workers employed in agriculture.

(c) Farmers losses

  • Farmers have fared badly. Already suffering from low output prices, the majority of farmers have seen incomes decline as input costs rose (such as on diesel and fertilizers).
  • Even though our farm sector appears relatively unaffected by covid, the ground reality of farmer incomes is at complete variance with the aggregate statistics from the national accounts.
  • The failure to capture livelihood and income losses in the informal sector is only one aspect of our GDP data inadequacy.

GDP can never account this

  • This failure to reflect the economic conditions of our population’s majority is partly a result of the way data on GDP is calculated, but also due to infirmities of the database itself.
  • But its limitations at the conceptual level are far more serious.

Alternate measures

  • One expanded indicator, which attempts to measure the multi-dimensional aspect of development, is the Human Development Index (HDI) by UNDP.
  • It incorporates the traditional approach to measuring economic growth, as well as education and health, which are crucial variables in determining how developed a society is.
  • In 2018, the World Bank launched the Human Capital Index (HCI).
  • This index ranks countries’ performances on a set of four health and education indicators according to an estimate of the economic productivity lost due to poor social outcomes.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)


Back2Basics:

National Income Accounting

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The April-June quarter GDP numbers indicated at 20.1 per cent growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GVA and GDP

Mains level: Paper 3- How to sustain economic recovery

Context

The April-June quarter GDP numbers indicated at 20.1 per cent growth.

Making sense of the numbers

  • The higher GDP growth was driven by high indirect tax collections, largely GST.
  • The more representative measure of economic activity, gross value added (GVA), grew by 18.8 per cent.
  • GDP is derived by adding indirect tax collections, net of subsidy payouts, to GVA.
  • These numbers are over a base quarter that had contracted sharply due to the lockdowns during the first Covid wave last year.
  • The revival of manufacturing GVA was the most robust, with mining and electricity growth somewhat moderate.
  • The overall and sector-specific activity levels need to be evaluated vis-à-vis the corresponding thresholds of (the pre-pandemic) first quarter of 2019-20.
  • Agriculture grew at 4.5 per cent, with cereals, pulses and oilseeds output at all-time highs.
  • As could be expected, the services sector remained vulnerable, with activity even softer than expected.
  • Steel and cement output growth — proxies for construction activity — were also quite robust in the quarter.
  • Demand and expenditure: Private consumption was up 19.3 per cent while investment was at 55.3 per cent.
  • Government consumption was lower by 4.8 per cent.
  • Export: Net exports are typically in deficit, but the gap was much lower in the first quarter.

How to sustain recovery: way forward

  • Looking beyond the first quarter, the set of high-frequency economic signals suggest a strong recovery in July and August.
  •  But, how can this recovery over the rest of the year and beyond be sustained, and even accelerated?
  • Sustaining 3 growth drivers: The three distinct potential growth drivers — consumption, investment and exports — will need to be effectively sustained by policy initiatives over the next couple of years.
  • Government spending: Centre’s revenues and expenditures during April-July this year suggest that it has significant room to increase spending.
  • National Monetisation Plan will open up further fiscal space to increase spending, in particular, on capex.
  • Credit support to stressed segment: mid-and small-sized enterprises will take some time to restore their pre-pandemic operational levels.
  • An increase in the flow of credit, from banks, NBFCs and markets, particularly to these stressed segments, is a priority, as a supplement to state spending.
  • Opportunity for exports: Global inventories are low and depending on the progression of the pandemic relaxations across geographies, are likely to provide opportunities for Indian exports to fill some of these gaps.
  • Reforms: Multiple reform initiatives, tax and other incentives are in the process of implementation.
  • These need to be accelerated in coordination with states to enable an environment of steady, high growth in the medium term.

Challenges

  • Global central banks’ are signalling the imminent normalisation of ultra-loose monetary policy.
  • The resulting increase in financial sector volatility will have spillover effects on emerging markets, including India.
  • To keep the process smooth, it is crucial to raise India’s potential growth so that the economic recovery does not rapidly close the output gap, thereby preventing a surge in inflationary pressures.

Conclusion

There is a limited window of opportunity for India to leverage the current ongoing realignment of global supply chains and progressively onboard both manufacturing and services entities.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Learning from China

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Lessons from China's economic progress

Context

As we look back on our own journey after independence and feel proud of our achievements, wisdom lies in also looking around to evaluate how other nations have performed, especially those which started with a similar base or even worse conditions than us.

How India’s neighbouring countries have performed?

  • Independent India has done better than Pakistan if measured on a per capita income basis:
  • Comparison with Pakistan: India’s per capita income stood at $1,960 (in current PPP terms, it was $6,460) in 2020, as per the IMF estimates, while Pakistan’s per capita income was just $1,260 (in PPP terms $5,150).
  • Comparison with Bangladesh: Bangladesh, whose journey as an independent nation began in 1971, had a per capita income of $2,000 (though $5,310 in PPP terms), marginally higher than India, and certainly much higher than Pakistan in 2020.
  • Comparison with China: The real comparison of India should be with China, given the size of the population of the two countries and the fact that both countries started their journey in the late 1940s.
  • By 2020, China’s overall GDP was $14.7 trillion ($24.1 trillion in current PPP terms), competing with the USA at $20.9 trillion.
  • India, however, lags way behind with its overall GDP at $2.7 trillion ($8.9 trillion in PPP terms).
  • The quality of life, however, depends on per capita income in PPP terms, with the USA at $63,420, China at $17,190 and India at $6,460.

What made the difference between India and China?

  • India adopted a socialist strategy while China took to communism to provide people food, good health, education, and prosperity.
  • China, having performed dismally on the economic front from 1949 to 1977, started changing track to more market-oriented policies, beginning with agriculture.
  • Agriculture reforms: Economic reforms that included the Household Responsibility System and liberation of agri-markets led to an annual average agri-GDP growth of 7.1 percent during 1978-1984.
  • Reform in the non-Agri sector: Success in agriculture reforms gave political legitimacy to carry out reforms in the non-agriculture sector.
  • Manufacturing revolution: The success of reforms in agriculture created a huge demand for manufactured products, triggering a manufacturing revolution in China’s town and village enterprises.
  • Population control measures: China adopted the one-child norm from 1979-2015.
  • As a result, its per capita income grew much faster.
  • India’s attempts to control its population succeeded only partially and very slowly.
  • India’s sluggish performance when compared to China raises doubts about its flawed democratic structure that makes economic reforms and implementation of policy changes more challenging, unlike China.

Way forward for India

  • Liberating agri-markets is part of the reform package that China followed. That’s the first lesson.
  • Increase purchasing power of rural areas: Even for manufacturing to grow on a sustainable basis, we have to increase the purchasing power of people in rural areas.
  • This has to be done by raising their productivity and not by distributing freebies.
  • Investment in various areas: Increasing productivity requires investments in education, skills, health and physical infrastructure, besides much higher R&D in agriculture, both by the government as well as by the private sector.
  • Create institutional setup: This requires a different institutional setup than the one we currently have.

Conclusion

India’s sluggish performance when compared to China raises doubts about its flawed democratic structure that makes economic reforms and implementation of policy changes more challenging, unlike China. But India has lessons to learn from China.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Growth needs steps beyond reforms

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Growth rate after 1991

Mains level: Paper 3- Impact of economic reforms on growth

Why 1991 stands out as a watershed year in the economic history of India

  • This was the year in which the economy was faced with a severe balance of payments crisis.
  • In response, we launched a wide-ranging economic program to reform, restructure and modernize the economy.
  • The break with the past came in three important ways:
  • Dismantling of license and permit requirements: The vast network of licenses, controls, and permits that dominated the economic system was dismantled.
  • Redefining the role of the state: Changes were made by redesigning the role of the state and allowing the private sector a larger space to operate within,
  • Integration with world economy: The inward-looking foreign trade policy was abandoned and the Indian economy was integrated with the world economy and trade.

Judging the performance of the economy after liberalisation

  • It is appropriate to look at three broad parameters to judge the performance of the economy after liberalisation — growth rate, current account deficit, and poverty reduction.

1) Growth rate after 1991

  • Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%.
  • Between 2001-02 and 2010-11, it grew by 7.69% and the growth rate between 2011-12 and 2019-20, was 6.51%.
  • Best growth rate: The best performance was between 2005-06 and 2010-11 when showing clearly what the potential growth rate of India was.
  • This is despite the fact that this period included the global crisis year of 2008-09.

2) Foreign reserves

  • BoP: The balance of payments situation had remained comfortable.
  • Most of the years showed a small deficit.
  • The exceptions were 2011-12 and 2012-13 when the current account deficit exceeded 4%. This was taken care of quickly.
  • Forex reserves: Foreign exchange reserves showed a substantial increase and touched $621 billion as of last week.
  • The opening up of the external sector, which included liberal trade policy, market-determined exchange rate, and a liberal flow of external resources, has greatly strengthened the external sector.

3) Poverty ratio

  • Going the Tendulkar expert group methodology, the overall poverty ratio came down from 45.3% in 1993-94 to 37.2% in 2004-05 and further down to 21.9% in 2011-12.
  • The post-reform period up to 2011-12 did see a significant reduction in poverty ratio because of faster growth supplemented by appropriate poverty reduction programmes such as the Rural Employment Guarantee Scheme and the Extended Food Security Scheme.
  • With the decline in growth rate since then and with negative growth in 2020-21, this trend must have reversed, i.e. the poverty rate may have increased.

Way forward

  • Growth requires more than reforms. Reforms are, in the words of economists, only a necessary condition. It is not sufficient.
  • Need to increase investment: It is the decline in investment rate of nearly five percentage points since 2010-11 that has led to the progressive decline of the growth rate.
  • Reforms supplemented by a careful nurturing of the investment climate are needed to spur growth again.
  • Reform agenda must continue: First of all, there is a need to move in the same direction in which we have been moving in the past three decades.
  • Policymakers should identify the sectors which need reforms in terms of creating a competitive environment and improving performance efficiency.
  • From this angle, we need to take a relook at the financial system, power sector, and governance. Centre and States must be joint partners in this effort.
  • Second, in terms of government performance, there should be an increased focus on social sectors such as health and education.

Conclusion

Growth and equity must go together. They must not be posed as opposing considerations. They are truly interdependent. It is only in an environment of high growth, equity can be pushed aggressively.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Poverty in India is on rise again

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Poverty estimates

Mains level: Pauperization in India

In the absence of Consumption Expenditure Survey (CES) data, the Periodic Labour Force Survey shows a rise in the absolute number of the poor in India.

About Consumption Expenditure Survey (CES)

  • A CES is conducted by the National Sample Survey Office (NSO) every five years.
  • But the CES of 2017-18 (already conducted a year late) was not made public by the Government of India.
  • Now, we hear that a new CES is likely to be conducted in 2021-22, the data from which will probably not be available before end-2022.
  • India has not released its CES data since 2011-12.

Key highlights

  • Unemployment had reached a 45-year high in 2017-18, as revealed by NSO’s Periodic Labour Force Survey (PLFS).
  • While the PLFS’s questions on consumption expenditure are not as detailed as those of the CES, they are sufficient for us to estimate changes in consumption on a consistent basis across time.
  • It enables any careful researcher to estimate the incidence of poverty (i.e. the share in the total population of those below the poverty line), as well as the total number of persons below poverty.

There is unemployment induced poverty

  • There is a clear trajectory of the incidence of poverty falling from 1973 to 2012.
  • In fact, since India began collecting data on poverty, the incidence of poverty has always fallen, consistently.
  • It was 54.9% in 1973-4; 44.5% in 1983-84; 36% in 1993-94 and 27.5% in 2004-05.
  • This was in accordance with the Lakdawala poverty line (which was lower than the Tendulkar poverty line), named after a distinguished economist, then a member of the Planning Commission.

Methodology of Poverty Line

  • In 2011, it was decided in the Planning Commission, that the national poverty line will be raised in accordance with the recommendations of an expert group chaired by the late Suresh Tendulkar.
  • That is the poverty line we use in estimating poverty in the table.
  • As it happens, this poverty line was comparable at the time to the international poverty line (estimated by the World Bank), of $1.09 (now raised to $1.90 to account for inflation) person per day.
  • The PLFS also estimates the incidence of poverty. It also collects the household monthly per capita consumption expenditure data based on the Mixed Recall Period methodology.

Stunning rise in Poverty

  • It is stunning fact that for the first time in India’s history of estimating poverty, there is a rise in the incidence of poverty since 2011-12.
  • The important point is that this is consistent with the NSO’s CES data for 2017-18 that was leaked data.
  • The leaked data showed that rural consumption between 2012 and 2018 had fallen by 8%, while urban consumption had risen by barely 2%.
  • Since the majority of India’s population (certainly over 65%) is rural, poverty in India is also predominantly rural.
  • Remarkably, by 2019-20, poverty had increased significantly in both the rural and urban areas, but much more so in rural areas (from 25% to 30%).

Why is it intriguing?

  • It is important here to recall two facts: between 1973 and 1993, the absolute number of poor had remained constant (at about 320 million poor), despite a significant increase in India’s total population.
  • Between 1993 and 2004, the absolute number of poor fell by a marginal number (18 million) from 320 million to 302 million, during a period when the GDP growth rate had picked up after the economic reforms.
  • It is for the first time in India’s history since the CES began that we have seen an increase in the absolute numbers of the poor, between 2012-13 and 2019-20.
  • The second fact is that for the first time ever, between 2004-05 and 2011-12, the number of the poor fell, and that too by a staggering 133 million, or by over 19 million per year.

Fuss over GDP growth

  • This was accounted for by what has come to be called India’s ‘dream run’ of growth: over 2004 and 2014, the GDP growth rate had averaged 8% per annum — a 10-year run that was not sustained thereafter.
  • By contrast, not only has the incidence of poverty increased since then, but the absolute increase in poverty is totally unprecedented.

Reasons behind this Pauperization

The reasons for increased poverty since 2013 are not far to seek:

  • GST: While the economy maintained some growth momentum till 2015, the monumental blunder of demonetization was followed by a poorly planned and hurriedly introduced GST.
  • Fall in investments: None of the engines of growth was firing after that. Private investment fell from 31% inherited by the new government, to 28% of GDP by 2019-20.
  • Fall in exports: Exports, which had never fallen in absolute dollar terms for a quarter-century since 1991, actually fell below the 2013-14 level ($315 billion) for five years.
  • Unemployment: Joblessness increased to a 45-year high by 2017-18 (by the usual status), and youth (15-29 years of age) saw unemployment triple from 6% to 18% between 2012 and 2018.
  • Fall in wages: Real wages did not increase for casual or regular workers over the same period, hardly surprising when job seekers were increasing but jobs were not at anywhere close to that rate.
  • Pandemic: Poverty is expected to rise further during the COVID-19 pandemic after the economy has contracted.

Hence, consumer expenditure fell, and poverty increased.


Back2Basics:

Poverty Lines in India: Estimations and Committees

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A cycle of low growth, higher inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Minsky moment

Mains level: Paper 3- Policy intervention needed for recovery of economy

Context

In recent times, several economists have been arguing that the Government does not need to do anything with the economy. They argue that like after the Great Depression, the economy rebounded worldwide, and so will it with us. The argument is fallacious on four accounts:

Four factors that make recovery different from the recovery after the Great Depression

1) Demand destruction

  • In the case of the Great Depression, demand was created by the Second World War effort, especially in the United States.
  • Demand destruction: In the current scenario, the COVID-19 pandemic has resulted in demand destruction.
  • This is because many jobs have been lost, and even where jobs were retained, there have been pay cuts.
  • Both of these trends were confirmed in the Centre for Monitoring Indian Economy and other surveys.

Bright spot on export front

  • The only bright spot in this dismal scenario is that the western world has spent a lot of money stimulating the economy.
  • However, the Indian exporter face the challenge of rising freight costs and structural issues such as a strong rupee relative to major competitors.
  • Only the Indian IT sector is placed well to capitalise on rising demand in the world markets.

2) Inflation and factors driving it

  • India is suffering from stagnant growth to low growth in the last two quarters.
  • As in the low initial base set by last year, almost any growth this year is seen as a significant growth percentage.
  • Commodity prices and monetary policy: Inflation in India is being imported through a combination of high commodity prices and high asset price inflation caused by ultra-loose monetary policy followed across the globe.
  • Liquidity infusion: RBI is infusing massive liquidity into the system by following an expansionary monetary policy through the G-SAP, or Government Securities Acquisition Programme.
  • Foreign portfolio investors have directed a portion of the liquidity towards our markets.
  • India has a relatively low market capitalisation, therefore, India cannot absorb the enormous capital inflow without asset prices inflating.
  • Supply chain issues: Additionally, supply chain bottlenecks have contributed to the inflation we see in India today.
  • Rising fuel prices: India’s usurious taxation policy on fuel has made things worse.
  • Rising fuel prices percolate into the economy by increasing costs for transport.

Impact of inflation

  • The middle and lower-middle-class get destitute due to regressive indirect taxes and high inflation, with their wealth eroding due to said inflation.
  • Especially in the case of the lower middle class, inflation is lethal as they do not have access to any hard assets, including the most fundamental hard asset, gold.
  • The increase in fuel prices will also lead to a rise in wages demanded as the monthly expense of the general public increases.
  • This leads to the dangerous cycle of inflation and depleting growth.

3) Interest Rate

  • The only solution for any central banker once he realises that inflation is entrenched is tightening liquidity and further pushing the cost of money.
  • If this does not dampen inflation, repo rates will need to go up later this year or early next year.
  • Tightening the money supply is a painful act that will threaten to decimate what is left of our economy.
  • Rising interest rates lead to a decrease in aggregate demand in a country, which affects the GDP.
  • There is less spending by consumers and investments by corporates.

4) Rising NPA and its impact on credit growth

  • Rising interest rates, lack of liquidity, and offering credit to leveraged companies instead of direct subsidies to support small and medium-sized enterprises (SMEs) and micro, small and medium enterprises (MSMEs) to counter the COVID-19 pandemic and its effects will result in NPAs of public sector banks climbing faster.
  • Our small and medium scale sector is facing a Minsky moment. 
  • The Minsky moment marks the decline of asset prices, causing mass panic and the inability of debtors to pay their interest and principal.
  • India has reached its Minsky moment.
  • This means that the public sector unit and several other banks will need capital in copious amounts to make up for bad debt.
  • The Union government’s Budget is in no position to infuse large amounts of capital.
  • As a result of the above causes, credit growth is at a multi-year low of 5.6%.

Way forward

  • Indian economy is in a vicious cycle of low growth and higher inflation unless policy action ensures higher demand and growth.

Conclusion

In the absence of policy interventions, India will continue on the path of a K-shaped recovery where large corporates with low debt will prosper at the cost of small and medium sectors. This means lower employment as most of the jobs are created by the latter.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Unlocking recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Inflation

Mains level: Paper 3- Economic recovery

Context

Many developed countries are poised for strong growth. This will compel their respective central banks to begin normalizing the extremely loose monetary policies. This will require a reorientation of India’s stimulus strategy.

Global growth momentum

  • On the global front, the growth momentum has been strong, particularly in the US and China, although recent data suggest this has peaked or is even stalling.
  • Post the perceived hawkishness of the last US Federal Reserve policy meeting, the traded interest rate of the benchmark US 10-year treasury bond fell to below 1.3 percent.
  • The falling rate reflects disquiet about the durability of the recovery once the fiscal stimulus starts waning.
  • China recently announced a 0.5 percent cut in the required reserves ratio for banks.
  • Europe’s recovery had begun to inch up, but members of the European Central Bank have begun to push back on market expectations of early tapering.
  • However, some smaller global central banks have started normalizing their respective Quantitative Easing programs.

Growth momentum in India

  • The encouraging aspect of the recovery is the resilience of many mid-and large-turnover companies in the face of the debilitating public health crisis
  • In India, there are signs that the recovery momentum began to strengthen from mid-June, and of demand accelerating, despite capacity utilization in many industries below thresholds needed for the next round of private investments.
  • In line with the market consensus, we think that 2021-22 growth is likely to be in the 9-10 percent range.
  • Tax collections, another indicator of activity, even if a bit skewed, support this view.
  • A revival of retail consumer demand is critical for sustaining the recovery. Reports from industry associations suggest a somewhat mixed picture.
  • Demand emanating from rural geographies is important for sustaining recovery.
  • Demand for work under MGNREGA suggests continuing stress.
  • Monsoons will be a big contributor.
  • The sowing of Kharif crops stalled in late June but is predicted to pick up again in mid-July.
  • Renewed government intervention is required.

Factors deciding the trajectory of recovery

  • Inflation: Rising inflation could force a monetary policy normalization faster than presently anticipated.
  • Global recovery: Effects global central banks’ policy tightening will only add to the difficulty of balancing a policy-induced increase in interest rates, moderating financial markets volatility, and maintaining growth incentives.
  • Access to credit: Access to credit remains a crucial input in the recovery matrix, particularly for small and micro-enterprises.
  • The Union government’s Emergency Credit Line Guarantee Scheme (ECLGS) has reportedly been very effective in stabilizing the solvency (and cash flows) of micro and small businesses.

Way forward

  • Expansion of subvention scheme: The expansion of subvention (ECLGS) is probably the most effective template to incentivize credit flows, leveraging on the government’s balance sheet to take on the first loss risks.
  • At the same time, capex proposals of the Centre and states should gradually draw in private sector capex.
  • Policy intervention to create a level field: Corporate health has improved, with lower debt on balance sheets.
  • Adoption of technology is widespread; this will boost productivity and competitiveness.
  • But these factors reinforce trends in consolidation and market power.
  • It will require policy interventions to create a more level playing field for smaller companies, which is crucial for job creation.

Conclusion

Policy support will thus need to adapt from the “revive” to the “thrive” phase, to place India on a sustained 7 percent-plus growth path.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is Gross Environment Product?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gross Environment Product (GEP)

Mains level: GEP vs GDP

The Uttarakhand government recently announced it will initiate valuation of its natural resources in the form of ‘Gross Environment Product’ (GEP), said to be along the lines of Gross Domestic Product (GDP).

Why such a move?

  • The idea of the valuation of the components of the environment is not new.
  • But it got impetus following rapid degradation of ecosystems, which led to adverse impacts on more than 60 percent of services we get from the ecosystems.

What is Gross Environment Product (GEP)?

  • GEP is the measure of ecosystem services of any area.
  • It reflects the aggregated annual value of goods and services provided by ecosystems (forests, water bodies, oceans, etc.) to people in a given region, such as at district levels, state, and country.
  • It entails the establishment of a natural capital accounting framework by integrating ecological benefits into common measures of economic growth such as GDP.
  • It summarizes the value of ecosystem services in a single monetary metric.

Evolution of GEP

  • The term “ecosystem services” was coined in 1981 to attract academics towards this aspect.
  • Ecosystem services represent the benefits humans get: Forests, lakes, and grasslands; timber and dyed; carbon sequestration and nutrient cycling; soil formation and productivity; and tourism.
  • The definition is still in the process of evolution. The concept received attention and now is part of global knowledge.

Advantages offered

  • GEP can be applied as a scientific basis for Eco-Compensation and public financial transfers.
  • For example, Finance Commission’s revenue-sharing formula between the Union and the states including forest cover as a determining factor in a state’s share.
  • GEP can be applied to measure the status of ecosystem services, which is an important indicator of sustainable development.
  • It is also a critical indicator for measuring the progress of Eco-civilization.
  • Its implementation can help assess the impact of anthropological pressure on our ecosystem and natural resources- air, water, soil, forests.

The Himalayan context

  • The Himalayas contribute substantially to the sustainability of the Gangetic Plains where 500 million people live.
  • The Union government incorporated the value of ecosystem services of its states in national accounting.
  • According to the recommendation of the 12th and 13th Finance Commissions, grants were transferred to forest-rich states in amounts corresponding to their forest covers.
  • However, considering only the forest cover in transferring funds to states is inadequate.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Growth matters but income levels matter more

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Purchasing Managers' Index

Mains level: Paper 3- Need for focus on supply side

Context

But the quest for sustained higher growth has been elusive for India for the last five years. The pandemic seems to make it more elusive.

The magnitude of contraction in the economy

  • There is nothing encouraging in the provisional estimates of annual national income (2020-21), released by the National Statistical Office.
  • The agriculture sector continued its impressive growth performance, reiterating that it still remains as the vital sector of the economy, especially at times of crisis.
  • The manufacturing sector continued its subdued growth performance, failing to emerge as the growth driver.
  •  The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%) and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
  • Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q4 of 2020-21 is showing a growth of 1.6%.
  • The magnitude of contraction in the economy and the policy responses towards it raises an important issue of growth prospects for the next year.

Contextualising the current growth rates in terms of following three macroeconomic data would provide us a better perspective on growth recovery.

1) Rising unemployment

  • The unemployment data released by the Centre for Monitoring Indian Economy (CMIE) says, that in May 2021, India’s labour participation rate at 40 per cent was the same as it was in April 2021.
  • But, the unemployment rate shot up to 11.9 per cent from 8 per cent in April.
  • A stable labour participation rate combined with a higher unemployment rate implies a loss of jobs and a fall in the employment rate.
  • The employment rate fell to 35.3 per cent in May 2021 from 36.8 per cent in April 2021.
  • According to CMIE, over 15 million jobs were lost in May 2021.
  • May 2021 was therefore a particularly stressful month on the jobs front.

Takeaway

  • Employment and aggregate demand in an economy are related via the channel of disposable incomes of workers.
  • Aggregate demand and output growth have a positive correlation.
  • Hence, the prospects of growth revival in the next year look bleak at the moment and from employment perspective.

2) Low business confidence

  • It is the second important data point that needs to examined.
  • Business confidence index (BCI), from the survey by the industry body FICCI, plummeted to 51.5 from 74.2 in the previous round.
  • The survey also highlights the weak demand conditions in the economy.
  • Compounding this is the uncertainty arising out of the imposition of localised curbs due to the second wave of infections and a muddled vaccine policy in the country.

3) Low PMI

  • Manufacturing Purchasing Managers’ Index (PMI) has slipped to a 10-month low indicating that the manufacturing sector is showing signs of strain with growth projections being revised lower.
  • Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.

Why focusing on supply-side will not work

  • Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures.
  • This policy stance is unlikely to prop up growth for three reasons.
  • First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side.
  • Second, large parts of all the stimulus packages announced till now would work only in the medium term.
  • Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side as this could result in poor growth performance if private investments do not pick up.
  • Further, the credit easing approach would take a longer time to multiply incomes as lending involves a lender’s discretion and borrower’s obligation.

Way forward

  • Growth recovery depends on demand recovery.
  • The combined increase in exports of April and May 2021 is over 12% indicating that global demand rebound is much faster than the domestic demand. 
  • What needs to be addressed immediately is the crisis of low domestic demand.
  • A tight-fisted fiscal policy approach comes at a time when conventional fiscal stimulus packages might not be enough as supply side issues arising out of episodic lockdowns need to be addressed simultaneously.
  • Focusing on short-term magnified growth rates resting on low bases might be erroneous, as income levels matter more than growth rates at this juncture.

Conclusion

India needs a sharp revival of demand for which higher per capita incomes are necessary.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

It’s time for RBI to turn its attention to inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP Deflator

Mains level: Paper 3- Impact of inflation on various stakeholders

Recently, CPI inflation crossed the RBI’s upper limit of 6%. The article explains the implications of this for various stakeholders.

How inflation benefits government as a borrower

  • Rising inflation hurts lenders and benefits borrowers.
  • To that extent, the government, one of the biggest borrowers, stands to benefit as high inflation will lower the national debt load in relation to the size of the economy.
  • The Union budget 2021-22 assumed a 14.4 per cent growth in nominal GDP, however, actual growth is set to exceed this.
  • The GDP deflator, which measures the difference between nominal and real GDP, is a weighted average of WPI and CPI, with a higher weightage to WPI.
  • And given that nominal GDP is used as a base for computing the fiscal ratios, all of these will get deflated.
  • The value of past debt and debt servicing costs thus gets pared in real terms as inflation rises.
  • Viewed from a debt dynamics perspective, as the gap between growth and interest rates rises, the debt/GDP ratio falls.

Impact on other stakeholder

  • That inflation reduces purchasing power and hits private consumption is well known.
  • Overall food CPI inflation (5 per cent) was lower than non-food inflation (7.1 per cent) in May.
  • Lower food inflation, coupled with higher non-food inflation means reduced purchasing power for farmers.
  • Inflation trends, specifically input prices (reflected better by WPI), matter for corporate performance as well.
  • While producers seem to be bearing a part of the burden of rising input costs for now, these could get passed on in greater measure to consumers once demand recovers.
  • Rising inflation reduces returns on fixed income instruments, including bank deposits, which account for over 50 per cent of households’ financial savings.
  • This has already induced a shift to riskier asset classes such as equities, which has ramifications for overall financial stability.

Way forward

  • The RBI will have to closely monitor inflation trends and calibrate its policy response.
  • It has not intervened on high inflation since the onset of the pandemic and, rightly so, in order to support growth.
  • But the current spell of inflation is over a high base and a continuation of recent trends will persuade it to turn the focus back on inflation.
  •  Given the need for monetary policy to stay accommodative, it might be time to consider other supply-side interventions such as cuts in excise rates on petroleum products to soften the inflation blow.

Consider the question “As a one of the largest borrowers, how rising inflation benefits the government? How high inflation affects the other sections of the economy?”

Conclusion

Given the impact rising inflation has for the braoader sections of the economy, it is time for RBI to turn its attention to inflation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

World Competitiveness Ranking 2021

Note4Students

From UPSC perspective, the following things are important :

Prelims level: World Competitiveness Ranking

Mains level: Not Much

India’s position has remained unchanged at 43 for the third year in a row in the World Competitiveness Ranking by Switzerland-based Institute for Management Development (IMD).

World Competitiveness Ranking

  • The IMD World Competitiveness Ranking ranks 64 economies and assesses the extent to which a country promotes the prosperity of its people by measuring economic well-being through hard data and survey responses from executives.
  • The ranking examines four factors — economic performance, government efficiency, business efficiency, and infrastructure.
  • The top-performing economies are characterized by varying degrees of investment in innovation, diversified economic activities, and supportive public policy.

India’s performance

  • Among the BRICS nations, India is ranked second after China (16), followed by Russia (45th), Brazil (57th) and South Africa (62th).
  • Among the four indices used, India’s ranking in government efficiency increased to 46 from 50 a year ago, while its ranking in other parameters such as economic performance (37), business efficiency (32) and infrastructure (49) remained the same.
  • India has maintained its position for the past three years but this year, it had significant improvements in government efficiency.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Direct Tax collections surge in 2021-22

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Direct Taxes

Mains level: Read the attached story

India’s direct tax collections in the first two and a half months of 2021-22 stand at nearly ₹1.86 lakh crore, double the collections over the same period of last year that was affected by the national lockdown.

Surge in direct tax collections

  • The jump in the direct tax collections reflects healthy exports and a continuation of various industrial and construction activities.
  • This supports our expectation that GDP will record a double-digit expansion.

What are Direct Taxes?

  • A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.
  • The tax is paid directly by the organization or an individual to the entity that has imposed the payment.
  • The tax must be paid directly to the government and cannot be paid to anyone else.

Answer this PYQ in the comment box:

Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the:

(a) Contingency Fund of India

(b) Public Account

(c) Consolidated Fund of India

(d) Deposits and Advances Fund

Types of Direct Taxes

The various types of direct tax that are imposed in India are mentioned below:

(1) Income Tax

  • Depending on an individual’s age and earnings, income tax must be paid.
  • Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
  • The taxpayer must file Income Tax Returns (ITR) on a yearly basis.
  • Individuals may receive a refund or might have to pay a tax depending on their ITR. Penalties are levied in case individuals do not file ITR.

(2) Wealth Tax

  • The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property.
  • In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
  • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
  • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

(3) Estate Tax

  • It is also called Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.

(4) Corporate Tax

  • Domestic companies, apart from shareholders, will have to pay corporate tax.
  • Foreign corporations who make an income in India will also have to pay corporate tax.
  • Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India is taxable.
  • The below-mentioned taxes are also included under Corporate Tax:
  1. Securities Transaction Tax (STT): The tax must be paid for any income that is earned via security transactions that are taxable.
  2. Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
  3. Fringe Benefits Tax: For companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
  4. Minimum Alternate Tax (MAT): For zero tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.

(5) Capital Gains Tax:

  • It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets.
  • Based on its holding period, tax can be classified into long-term and short-term.
  • Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
  • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

Advantages of Direct Taxes

The main advantages of Direct Taxes in India are mentioned below:

  • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
  • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increases. Therefore, direct taxes are considered to be very productive.
  • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
  • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
  • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organizations that can afford them. This extra money is used to help the poor and lower societies in India.

What are the disadvantages of direct taxes?

  • Easily evadable: Not all are willing to pay their taxes to the government. Some are willing to submit a false return of income to evade tax. These individuals can easily conceal their incomes, with no accountability to the law of the land.
  • Arbitrary: Taxes, if progressive, are fixed arbitrarily by the Finance Minister. If proportional, it creates a heavy burden on the poor.
  • Disincentive: If there are high taxes, it does not allow an individual to save or invest, leading to the economic suffering of the country. It does not allow businesses/industry to grow, inflicting damage to them.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What Centre must do to meet the economic challenges

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tax buoyancy

Mains level: Paper 3- Dealing with the challenge of Covid second wave

The article takes an overview of the fiscal and monetary challenges posed by the second covid wave and suggest ensuring the availability of liquidity.

GDP projections need to be re-examined

  •  According to NSO’s provisional estimates for 2020-21, the annual contraction in real GDP turned out to be 7.3 per cent.
  • The erstwhile GDP growth projections for 2021-22 are being re-examined to take into account the adverse impact of the second wave of the pandemic.
  • The RBI has revised down its 2021-22 real GDP growth forecast to 9.5 per cent.
  • Some other recent estimates (ICRA) indicate the feasibility of a 9 per cent growth.
  •  It is also important to consider nominal GDP growth for 2021-22 since that would be a critical determinant of fiscal prospects. 
  • In the light of supply-side and cost-push pressures, the RBI has projected CPI inflation at 5.1 per cent.
  • The nominal GDP growth may be projected at 13.4 per cent, that is, 1 percentage point lower than Centre’s budget assumption of 14.4 per cent.

Fiscal aggregates

  • The Controller General of Accounts’ data indicate a gross tax revenues (GTR) of Rs 20.2 lakh crore and net tax revenue of Rs 14.2 lakh crore for 2020-21. 
  • The likely growth in GTR for 2021-22 may be derived by applying a buoyancy of 0.9.
  • This gives a tax revenue growth of 12 per cent, translating that to projected gross and net tax revenues for 2021-22 would mean Rs 22.7 lakh crore and Rs 15.8 lakh crore respectively. 
  • This implies some additional net tax revenues to the Centre amounting to Rs 0.35 lakh crore as compared to the budgeted magnitudes.
  • The main expected shortfall may still be in non-tax revenues and non-debt capital receipts.
  • According to the CGA numbers, their 2020-21 levels are respectively Rs 2.1 lakh crore and Rs 0.57 lakh crore.
  • Applying a growth rate of 15 per cent on these, a shortfall in 2021-22 to the tune of Rs 1.3 lakh crore may arise in non-tax revenues and non-debt capital receipts.

So, how much would be the Fiscal Deficit?

  • The growth rates of non-tax revenues and and non-debt capital receipts average to a little lower than 15 per cent during the five years preceding 2020-21.
  • In any case, the large budgeted growth of 304 per cent in non-debt capital receipts for 2021-22 seems quite unlikely because of the challenges posed by the second wave.
  • Taking into account RBI’s recently announced dividend of Rs 0.99 lakh crore to the Centre, the main shortfall may be in non-debt capital receipts.
  • Together, the overall shortfall in total non-debt receipts may be limited to about Rs 0.9 lakh crore, or 0.4 per cent of estimated nominal GDP.
  • This indicates that a slippage, if any, in the budgeted fiscal deficit of 6.7 per cent of GDP, as revised in view of the recently released GDP data, could be a limited one.

Way forward: Prioritise three heads

  • First, an increase in the provision for income support measures for the vulnerable rural and urban population.
  • Second, in light of the recent decision, the budgeted expenditure on vaccination of Rs 0.35 lakh crore ought to be augmented, at the very least, doubled.
  • Third, additional capital expenditure for select sectors, particularly healthcare, should also be provided for.
  • Together these additional expenditures would amount to Rs 1.7 lakh crore, about 0.8 per cent of the estimated nominal GDP.
  • Thus, we need to plan for a fiscal deficit of about 7.9 per cent of GDP.

Borrowing programme would need RBIs support

  • The Centre has announced borrowings of Rs 1.6 lakh crore to meet the shortfall in the GST compensation cess.
  • Given the higher fiscal deficit, it would need to add to its borrowing programme another Rs 2.6 lakh crore, taking the total borrowing, including GST compensation, to about Rs 16.3 lakh crore, from Rs 12.05 lakh crore now.
  • Borrowing by states would be in addition to this.
  • The net result will be an unprecedented borrowing programme by the Centre which may require RBI’s support.
  • RBI is injecting liquidity into the system through various channels.
  • Banks have sufficient liquidity to subscribe to new debt.
  • This is indirect monetisation of debt.
  • This is not new, but the scale is much higher.
  • Direct monetisation is best avoided.
  • The success of the borrowing programme of the Centre depends on the support provided by the RBI.
  • The support need not be direct.
  • It can be indirect as is currently happening. RBI is injecting liquidity into the system in a big way.
  • Despite this, the money multiplier is low.
  • This may be attributed to two reasons: Low credit expansion and larger leakage in the form of currency.
  • The potential for money supply growth is large.
  • The discussion in the monetary policy statement on inflation is focused entirely on supply availability and bottlenecks in the distribution of commodities.
  • The output gap is certainly relevant.
  • But equally relevant in an analysis of inflation is liquidity in the system, and its impact on output and prices with lags.
  • The injection of liquidity has its limits.

Conclusion

With higher expenditure, financed through borrowings, the impact of liquidity expansion on inflation needs to be monitored.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Consumer Confidence Survey (CCS) by the RBI

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Consumer Confidence Survey (CCS)

Mains level: Read the attached story

The highlights of the Consumer Confidence Survey (CCS) were recently released by the RBI pointing to some all-time lows.

Consumer Confidence Survey (CCS)

  • The RBI conducts this survey every couple of months by asking households in 13 major cities — such as Ahmedabad, Bhopal, Guwahati, Patna, Thiruvananthapuram — about their current perceptions and future expectations on a variety of economic variables.
  • These variables include the general economic situation, employment scenario, overall price situation, own income and spending levels.
  • Based on these specific responses, the RBI constructs two indices: the Current Situation Index (CSI) and the Future Expectations Index (FEI).
  • The main variables of the survey are- Economic situation, Employment, Price Level, Income and Spending.
  • The CSI maps how people view their current situation (on income, employment etc.) vis a vis a year ago. The FEI maps how people expect the situation to be (on the same variables) a year from now.
  • By looking at the two variables as well as their past performance, one can learn a lot about how Indians have seen themselves fairing over the years.

Why does it matter?

  • The CCS is a survey that indicates how optimistic or pessimistic consumers are regarding their expected financial situation.
  • If the consumers are optimistic, spending will be more, whereas if they are not so confident, then their poor consumption pattern may lead to recession.

What was the main finding?

  • As Chart 1 shows, the CSI has fallen to an all-time low of 48.5 in May.
  • An index value of 100 is crucial here, as it distinguishes between positive and negative sentiment.
  • At 48.5, the current consumer sentiment is more than 50 points adrift from being neutral — the farthest it has ever been. It is important to note that even a year ago, the CSI had hit an all-time low.
  • The FEI moved to the pessimistic territory for the second time since the onset of the pandemic.

What are the factors responsible for pulling down the CSI and FEI respectively?

  • The RBI states that CSI is being pulled down because of falling consumer sentiments on the “general economic situation” and “employment” scenario.
  • So, on the “general economic situation”, RBI finds that there has been a largely secular decline in both current consumer sentiment and future expectations since PM Modi’s re-election in 2019.
  • What is equally worse is that more people expect the employment situation to worsen a year from now — that is why the one year ahead expectation line is below the zero marks.

Big takeaways

  • These data layout the tricky challenge facing the Indian economy.
  • If the government’s strategy for fast economic growth — expecting the private sector to lead India out of this trough by investing in new capacities — is to succeed, then consumer spending (especially on non-essentials) has to go up sharply.
  • But for that to happen, household incomes have to go up; and for that to happen, the employment prospects have to brighten; and for that to happen, again, companies have to invest in new capacities.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

7 Years of UPA Government vs 7 Years of NDA Government

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Performance of the current government in the past seven years

The article compares the performance of the present government under Prime Minister Modi with the first seven years of the Manmohan Singh government on various fronts.

Context

The current government completed seven years at the Centre recently. It is time to reflect and look back at its performance on basic economic parameters over the last seven years. It may also be interesting to compare and see how it fared vis-à-vis the first seven years of UPA government (2004-05 to 2010-11) under Manmohan Singh.

Analysing the progress by studying key economic indicator

1)  GDP growth

  • One of the key economic parameters is GDP growth.
  • It is not the most perfect one, as it does not capture specifically the impact on the poor, or on inequality.
  • But higher GDP growth is considered central to economic performance as it enlarges the size of the economic pie.
  • The average annual rate of growth of GDP under the Modi government so far has been just 4.8 per cent compared to 8.4 per cent during the first seven years of the Manmohan Singh government.
  • If this continues as business as usual, the dream of a $5 trillion economy by 2024-25 is not likely to be achieved.

2) Inflation

  • The Modi government scores much better on the inflation front with CPI (rural and urban combined) rising at 4.8 per cent per annum.
  • It is well within the tolerance limits of RBI’s targeted inflation band and also much lower than 7.8 per cent during the first seven years of the Manmohan Singh government.

3) Forex reserves

  • Also, at macro level, foreign exchange reserves provide resilience to the economy against any external shocks.
  • On this score too, the Modi government fares quite well with forex reserves rising from $313 billion on May 23, 2014 to $593 billion on May 21, 2021.

4) Food and agriculture

  • It engages the largest share of the workforce in the economy and matters most to poorer segments.
  • On the agri-front, both governments recorded an annual average growth of 3.5 per cent during their respective first seven years.
  • However, on the food and fertiliser subsidy front, the Modi government broke all records in FY21, by spending Rs 6.52 lakh crore and accumulating grain stocks exceeding 100 million tonnes in May end, 2021.
  • One area in which the Modi government performed very poorly is agri-exports.
  • In 2013-14 agri-exports had crossed $43 billion while during all the seven years of the Modi government agri-exports remained below this mark of $43 billion.
  • Sluggish agri-exports with rising output put downward pressure on food prices.
  • It helped contain CPI inflation, but subdued farmers’ incomes.

5) Infrastructure development

  • The Modi government has done better in power generation by increasing it from 720 billion units per annum to 1,280 billion units per annum.
  • Similarly, road construction too has been at least 30 per cent faster under the Modi government.

6) Social sector

  • Based on an international definition of extreme poverty (2011 PPP of $ 1.9 per capita per day), the World Bank estimated India’s extreme poverty in 2015 to be about 13.4 per cent, down from 21.6 per cent in FY 2011-12.
  • Even the incidence of multidimensional poverty hovered around 28 per cent in 2015-16.
  • Three key indicators can be used to assess performance on this front:
  • One, average annual person days generated under MGNREGA in the first five years since this programme started under the UPA in 2006-07 to 2010-11, which was 200 crore, and under Modi government it improved to 230 crore.
  • Two, average annual number of houses completed under the Indira Awaas Yojana and PM Awaas Yojana-Gramin, which improved from 21 lakhs to 30 lakhs per annum.
  • Three, open defecation free (ODF) which was only 38.7 per cent on October 2, 2014 and shot up to 100 per cent by October 2, 2019, as per government records.

Conclusion

The current government has turned out to be more welfare-oriented than reformist in revving up GDP growth. How long this welfare approach is sustainable without enlarging the size of GDP pie is an open question.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Growth of farm sector during COVID-19 Pandemic

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: India's farm sector and its contribution to the GDP

2020-21 saw the Indian economy register its worst-ever contraction since Independence and also the first since 1979-80. There has been recording economic contraction, however, the farm sector actually grew by 3.6%.

Growth in Farm Sector

There are two main reasons why agriculture didn’t suffer the fate of the rest of the economy last year.

(1) Better monsoon and yields

  • 2019 and 2020, by contrast, were above-normal monsoon years, with the country receiving an area-weighted rainfall.
  • It led to the filling of reservoirs and recharging of groundwater tables and aquifers, unlike after the deficient monsoons of 2014 and 2015 and the near-deficient one of 2018.
  • Not surprisingly, 2019-20 and 2020-21 produced back-to-back bumper harvests.

(2) Ease during lockdowns

  • The second reason had to do with agriculture being exempted from the nationwide lockdown that followed the first wave of Covid-19.
  • Lockdown restrictions only spared PDS ration shops and other stores selling food, groceries, fruits & vegetables, milk, meat and fish, animal fodder, seeds and pesticides.
  • But within days, an addendum was issued, extending the lifting of curbs to fertilizer outlets, all field operations by farmers and farmworkers, intra- and inter-state movement of agricultural machinery, sale of produce in wholesale mandis and procurement.

Inherent resilience of India’s farm sector

  • Simply put, farmers made sure they did not waste a good monsoon, finding ways to even mobilize harvesting and planting labor during peak lockdown.
  • The inherent resilience and adaptability of rural economic actors — meant that the farm sector was relatively insulated from lockdown-imposed supply-side

What were the issues faced?

  • The problems agriculture encountered due to the lockdown had more to do with the demand
  • The closure of hotels, restaurants, roadside eateries, sweetmeat shops, hostels, and canteens — and no wedding receptions and other public functions — resulted in a collapse of out-of-home consumption.
  • This was demand destruction not from rising prices — “movement along the demand curve”.
  • Instead, it was from forced consumption reduction, translating into lower demand for farm produce even at the same price — “a leftward shift in the demand curve”.

Various successes

(1) Success of MSP procurement

  • MSP procurement was effective largely in crops and regions where the institutions undertaking such operations — be it the Food Corporation of India, NAFED, Cotton Corporation of India or even cooperative dairies.
  • These all were active and could stem price declines during the period of demand destruction.
  • Such intervention wasn’t possible in non-mainstream produce (vegetables, fruits, poultry, fish, flowers, spices, etc) and regions (maize in Bihar), where the corresponding institutional mechanisms were non-existent.
  • The demand situation improved, though, with the gradual lifting of lockdown restrictions and also the recovery in global agri-commodity prices.

(2) MGNREGA

  • While agriculture grew amid an unprecedented economic contraction, 2020-21 was also notable for the record person-days of employment generated under MGNREGA.
  • This flagship employment scheme was yet another source of liquidity infusion and, again, a pre-existing program that the government could deploy to support rural incomes during a crisis.
  • Rural consumption, in turn, provided some cushion to the economy and preventing a bad situation from turning much worse.

Prospects for this Year

The one obvious difference between now and last year is Covid-19 cases. Covid’s impact on agriculture per se would depend on the spread, intensity, and duration of the infection.

  • Rural areas were mostly unaffected by the pandemic’s first wave.
  • Farm-related activities could, then, go on relatively unhindered, which government policy, whether to do with lockdown or public procurement, also facilitated.
  • That situation has changed with the second wave and rising share of rural districts in total cases, even without factoring in the higher probability of underreporting in these places.

What next?

  • While fear of the virus may induce precautionary behavior and economic growth, it is unlikely to affect normal agricultural operations.
  • And if last years’ experience is any guide, the adaptability of farmers and myriad rural economic agents should not be underestimated.

(1) The first factor to be considered is the monsoon. The good news this time is that there is no El Niño.

  • There are increasing chances of a La Niña — El Niño’s counterpart that is associated with above-normal rains and lower temperatures in India — for the autumn and winter months.
  • El Nino is the abnormal warming of the tropical central and eastern Pacific Ocean surface waters, resulting in increased evaporation and cloud-formation activity around South America and away from Asia.

(2) Uncertainty is prices

  • Global prices — be it of wheat, maize, soybean, palm oil, sugar, skimmed milk powder or cotton — have scaled multi-year highs in the recent period, helping India’s agri-commodity exports.
  • But export demand alone cannot sustain prices, especially in a scenario where job and income losses, accelerated post the pandemic that has severely dented domestic purchasing power.
  • Diesel prices alone have gone up by over a third in the last year; so have that of most non-urea fertilizers.

Way forward

  • The real challenge for Indian agriculture and farmers will be on the demand side.
  • That is specifically going to come from declining real incomes and particularly affecting demand for milk, pulses, egg, meat, fruits, vegetables and other protein/micronutrient-rich foods.
  • While rising rural wages and overall incomes is what propelled the demand for these foods in the past — in turn, contributing to dietary and cropping diversification — the ongoing slide presents a frightening proposition.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: India’s GDP fall, in perspective

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various economic indicators mentioned

Mains level: India's economic growth

India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21.

Tap to read more about:

National Income Determination, GDP, GNP, NDP, NNP, Personal Income

GDP contraction

There are two ways to view this contraction:

  1. One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.
  2. The other way would be to look at this contraction in the context of what has been happening to the Indian economy since the regime change.

Impact of the new regime

Let’s look at the most important ones.

(1) Gross Domestic Product

  • Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.
  • The GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.
  • The economy was already struggling with massive bad loans which were further deteriorated by demonetization and the GST regime.

(2) GDP per capita

  • Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy.
  • At a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started.
  • As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.

(3) Unemployment rate

  • This is the metric on which India has possibly performed the worst.
  • First came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetization and GST.
  • Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of total employment declining in independent India’s history.
  • As against the norm of an unemployment rate of 2%-3%, India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19.
  • The pandemic, of course, made matters considerably worse.
  • What makes India’s unemployment even more worrisome is the fact that this is happening even when the labor force participation rate — which maps the proportion of people who even look for a job — has been falling.

(4) Inflation rate

  • After staying close to the $110-a-barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $85 in 2015 and further to below (or around) $50 in 2017 and 2018.
  • On the one hand, the sudden and sharp fall in oil prices allowed the government to completely tame the high retail inflation in the country, while on the other, it allowed the government to collect additional taxes on fuel.
  • But since the last quarter of 2019, India has been facing persistently high retail inflation.
  • Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge.

(5) Fiscal deficit

  • The fiscal deficit is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.
  • Typically, there are two downsides of excessive borrowing:
  1. One, government borrowings reduce the investible funds available for the private businesses to borrow (this is called “crowding out the private sector”); this also drives up the price (that is, the interest rate) for such loans.
  2. Two, additional borrowings increase the overall debt that the government has to repay. Higher debt levels imply a higher proportion of government taxes going to pay back past loans. For the same reason, higher levels of debt also imply a higher level of taxes.

On paper, India’s fiscal deficit levels were just a tad more than the norms set, but, in reality, even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated.

(6) Rupee vs dollar

  • The exchange rate of the domestic currency with the US dollar is a robust metric to capture the relative strength of the economy.
  • A US dollar was worth Rs 59 when the government took charge in 2014.
  • Seven years later, it is closer to Rs 73. The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.

What’s the outlook on growth?

  • The biggest engine for growth in India is the expenditure by common people in their private capacity.
  • This “demand” for goods accounts for 55% of all GDP.
  • The private consumption expenditure has fallen to levels last seen in 2016-17.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The conundrum of financial distress and higher household savings amid covid

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Explaining the increased savings during the covid lockdown

The article explains the paradoxical increase in savings of Indian households during the pandemic.

Increase in savings during lockdown

  • Counterintuitively, the financial savings of people went up in April-June 2020.
  • Data compiled by the RBI reveal that in April-June 2020, household financial savings was 8.16 trillion.
  • For a perspective on how big this is, in April-June 2019, household financial savings was 2.02 trillion.
  • In July-September 2019, it was 4.85 trillion and in the two following quarters, it was 4.2 trillion and 5.14 trillion, respectively.
  • As a percentage of GDP, it was 21% of GDP in April-June 2020 (the lockdown quarter) against 4% of GDP in April-June 2019.

So, what happened to savings in the next quarter?

  • In the immediate quarter after April-June 2020, would you expect savings to move up, as things were opening up gradually?
  • Again, counter-intuitive.
  • In July-September 2020, household savings was 4.92 lakh crore, or 10.4% of GDP.

What explains such saving behaviour?

  • This has got to do with the human response to an emergency situation.
  • When things are looking bleak, one does not know how worse it can get.
  • Discretionary spending was cut down.
  • One section of the population was losing jobs and opting for moratorium on loans.
  • Now we know, in hindsight, that it was not the entire population—people with access to means were rather saving than spending.
  • Household financial savings is the net of flow of financial assets minus flow of financial liabilities.
  •  In April-June 2020, flow of financial assets at 7.38 trillion was much higher than 3.83 trillion of April-June 2019.
  • The big difference was the flow of financial liabilities.
  • In April-June 2020, it was a negative 0.78 trillion over a positive 1.81 trillion in April-June 2019.
  • That is, people paid off their liabilities in April-June 2020, whereas usually they add to it.
  • Things normalized in July-September 2020.
  • The flow of financial assets rose to 7.47 trillion, but the flow of financial liabilities was 2.55 trillion i.e., people added to financial liabilities.
  • The household debt to GDP ratio rose to 37.1% in July-September 2020 from 35.4% in April-June 2020.

What do we learn from all this?

  • In a pandemic-induced financial distress phase, a majority of the people preferred to save.
  • One basic tenet of financial planning is that you have an emergency fund equivalent to, say, six months of expenses.
  • People usually follow the principle of Income – Expenses = Savings/Investments.
  • Ideally, it should be Income – Savings/Investments = Expenses.

Consider the question “What explains the increased saving of Indian households during the quarter of lockdown? What lessons we can draw from this for reliance on the demand-led recovery from the pandemic?”

Conclusion

The data from the RBI attest to the well-established fact that people tend to save in emergencies. This also suggests that the demand-led recovery path during emergencies faces the risk of failure.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is the 2008 Lehman Crisis?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Lehman Crisis

Mains level: Not Much

The fire sale of about $20 billion of Archegos assets, comprising Chinese and US stocks, has sent jitters in the global financial markets, raising worries that the event could be a possible “Lehman moment”.

What is the Lehman Crisis?

  • The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis.
  • After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate to finance for its reorganization.
  • These discussions failed, and Lehman filed a petition that remains the largest bankruptcy filing in US history, involving more than US$600 billion in assets.

Note: The subprime mortgage crisis occurred when the real estate market collapsed and homeowners defaulted on their loans.

What defines the moment?

  • It signalled a limit to the government’s ability to manage the crisis and prompted a general financial panic.
  • Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure.
  • The government and the Federal Reserve system responded with several emergency measures to contain the panic.

Other terminologies:

Margin Call

  • Typically, a margin call occurs when the value of an investor’s margin account falls below the broker’s required amount during a market correction or sell-off.
  • As the margin account contains securities bought with borrowed money, a margin call occurs when lenders demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value.
  • A margin call is usually an indicator that the securities held in the margin account have decreased in value.
  • When a margin call occurs, the investor must choose to either deposit more money in the account or sell some of the assets held in their account.
  • If the investor fails to pay up the margin amount, the lender will resort to the sale of assets lying in the investor’s account.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Recovery? Different numbers tell different stories

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Indian economy's growth rate

India’s growth numbers reveal a different story when seen through the quarter-on-quarter growth lense. The article deals with this issue.

Weakness of India’s GDP statistics

  • The CSO press release for 4Q20 stated that India grew 0.4 per cent on a year-ago basis.
  • That is, relative to the level of GDP four quarters before.
  • Many heaved a sigh of relief at growth turning positive after two-quarters of negative year-ago: -24.4 per cent in 2Q20 and -7.3 per cent in 3Q20 and declared that growth would accelerate from hereon.
  • Nothing could be further from the truth.
  • To know whether the economy will accelerate or decelerate, one needs to know its current speed.
  • To do that, one needs to compute the quarter-on-quarter growth as almost all large economies do.
  • This is a central weakness of India’s GDP statistics, exemplified by last week’s 4Q20 print.

Challenges in measuring quarter-on-quarter growth

  • These computations are not easy, because each quarter has its own characteristics or, as economists call it, “seasonality”
  • Seasonality naturally increases or decreases activity in that period.
  • Think of quarters with festivals or with harvests versus those without them.
  • The modern economy is more complicated as its seasonal patterns change when its structure does.
  • To compare two quarters, these changes to seasonality need to be excluded from the data.
  • Statisticians have been working on this issue for more than a century and, over the last two decades.
  • As a result, many official statistical bodies (such as the US Census Bureau) have made deseasonalising methods freely available.

Understanding the issue through example

  • If the level of 1Q20 GDP is set at 100, then the quarterly growth rates imply that it fell to 75, rising to 91.1 in the following quarter and then to 96.3 last quarter.
  • Now assume that the level of GDP remains constant for the next five quarters, that is, there is no growth in the economy until the end of fiscal year 2021-22.
  • This would mechanically put the full-year growth in 2021-22 at 7.2 per cent simply because of the low average level of GDP in the previous year.
  • If the speed of the economy were to remain at its current pace of 5.7 per cent, then the annual growth in 2021-22 would be an astonishing 28.7 per cent.
  • Any annual growth projection for next year that is less than this necessarily implies a slowdown from the current pace.

So, what is Indian economy’s current growth rate

  • J.P. Morgan uses one of the above mentioned deseasonalising technique.
  • The derived quarterly path is the following: In 1Q20, India’s economy grew 3.7 per cent over the previous quarter, in 2Q20 the economy contracted 25 per cent and then recovered 21.5 per cent in 3Q20 and ended the last quarter at 5.7 per cent.
  • Put differently, growth slowed to 5.7 per cent last quarter — the latest reading of the economy’s “current” speed.

Putting in context the projected nominal growth

  • The budget documents suggest that the government’s projected nominal growth for 2021-22 is 14.5 per cent.
  • This implies a real growth rate of around 11 per cent assuming inflation averages 3.5 per cent.
  • The implied average quarterly pace, consistent with an 11 per cent annual growth, is just 1 per cent.
  • The year-on-year quarterly numbers will keep rising giving the false assurance of a strengthening recovery when in reality the level of income would rise only at a grinding pace.

Reasons behind the deceleration

  • India’s growth drivers had already slowed dramatically prior to the pandemic, the pandemic likely exacerbated them.
  • With listed companies posting strong profit growth in 3Q and 4Q, much of the decline in overall income has fallen on households and MSMEs.
  • This is likely to have not only worsened income inequality, but also severely impaired their balance sheets, making it that much more difficult to access credit in the coming quarters.
  • While industry has recovered to 98 per cent of its pre-pandemic level, the service sector remains substantially below.
  • Thus, much of the continued high unemployment (as reported by private surveys) is in services.
  • This is likely to have disproportionately increased women’s unemployment, thereby widening the gender gap.
  • Last quarter, central government spending rose 12 per cent, but overall public expenditure contracted 1 per cent, implying a sharp contraction at the state level.

Consider the question “Why quarter-on-quarter growth rates reveal a true picture of India’s growth rate as compared to year-on-year rates? What are the challenges in dealing with the quarter-on-quarter data?”

Conclusion

Neither fiscal policy nor monetary policy are designed to reverse these widening economic imbalances. This makes it hard to see India’s growth engines firing on all cylinders, despite the rollout of vaccines and the anticipated surge in US growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A year of cautious optimism on economic front

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Gross fixed capital formation

Mains level: Paper 3- Year of economic consolidation

The article argues that we are less likely to witness high growth next year rather it is going to be the year of consolidation.

Year of consolidation

  • The Economic Survey, the Union budget, and the RBI credit policy attest that the economy is on the recovery path.
  • The fourth quarter will register a positive growth rate, and as a consequence, the contraction for the full year will be between 7.5-8 per cent.
  • The contraction sets the pace for growth in 2021-22 which is now going to be critical as it is the foundation for the fructification of the budget revenue targets.
  • But consider this: GDP in 2019-20 was Rs 146 lakh crore, which has come down to Rs 134 lakh crore in 2020-21.
  • Hence, a 10 per cent growth will take the Indian economy to Rs 147 lakh crore — when compared to Rs 145 lakh crore, this reflects modest growth.
  • Therefore, expectations should be tempered when we talk of growth next year.
  • There will be a revival in economic activity on all ends which will probably bear fruit in 2022-23 — FY 2021-22 will be a year of consolidation.

Policy architecture

  • The government has brought in a cogent policy framework right from the time of the Atmanirbhar announcements, culminating in the budget.
  • There is a focus on infrastructure as well as providing incentives to investment through the Production Linked Incentive (PLI) scheme.
  • Real estate, power and construction saw several policy reforms last year.
  • There is a strong capex push by the government and there will more action taken here.

RBI policies

  • The RBI has promised to continue accommodative policies, which sends a signal of managing liquidity considering the large borrowing programme of the government of Rs 12.8 lakh crore.
  • RBI will carry out more open market operations, and long-term repo operations during the year to ensure that interest rates remain stable.
  • However, there will be concern around state government borrowings too, which will exert pressure on the availability of funds.
  • Hence, there will be more central bank intervention in the market to ensure that funds are available.

Inflation concerns

  • Inflation is a concern as global commodity prices have already started going up and this has led to core inflation rising.
  • Given that the monsoon has been good in the last four years, there is a possibility of an adverse season this time which can affect food prices. 
  • In India, too, we have seen that the price of petrol and diesel is rising sharply.
  • Add to this rising manufactured goods inflation witnessed of late, and there is a possibility of inflation rising above the MPC’s tolerance levels.

Lack of consumption growth

  • For growth to take place, consumption growth has to be real and rapid.
  • Consumption growth has been affected by the absence of commensurate job creation.
  • Consumption growth is unlikely too soon as consumption is dependent on job creation.
  • Jobs get created when growth is high and hence there is circular reasoning here.
  • Income has been affected in 2020 due to the pandemic which has led to job losses as well as salary cuts.
  • This has affected the sustainability of the pent-up demand seen in October and November.

Falling investment

  • Investment has lagged with gross fixed capital formation falling to a low of 24.2 per cent in 2019-20 from 34.3 per cent in 2011-12.
  • Reversing this decline will be challenging because the demand for such projects has slowed down and banks have been wary of lending for infrastructure.
  • There is also surplus capacity in industry with the capacity utilisation rate being 63.3 per cent in the second quarter of 2020-21.
  • Therefore, private investment will rise only gradually and the onus is on governments to manage their targets.
  • Private investment will follow, but at a slower pace and realistically speaking, will fire more in 2022-23 rather than 2021-22.

Consider the question “Growth has to be driven by two engines- consumption and investment. India has been facing challenges on both fronts. In light of this, suggest the measures India needs to adopt to move forward on both fronts.

Conclusion

The year 2021-22 will be one of cautious optimism. Growth will trend upwards, but it has to be interpreted with caution, keeping a check on the consumption while pushing the investment while arresting the inflation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Credit rating

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Credit Rating Agencies

Mains level: Paper 3- Issue of rating given to India by global credit rating agencies

The Economic Survey-2020-21 highlights the issue of the adverse rating given to emerging economies by global credit rating agencies. This article suggests using our flawless repayment record as the basis of argument.

Prejudice against emerging economies

  • The Economic Survey for 2020-21, charged international credit rating agencies with prejudice against emerging economies such as India and China.
  • The Survey has used economic size as an argument.
  • The economy that is the world’s fifth-largest has predominantly been rated AAA, S&P’s top rating.
  • By contrast, India, which displaced the UK in 2019 as the world’s fifth-largest, has been rated BBB-, the lowest investment grade.
  • The Survey points out that since 1994, only twice has the credit rating (as assigned by S&P and Moody’s) of the fifth-largest economy in US dollar terms been poor.
  • This was when China and India rose to that rank, in 2005 and 2019 respectively.

Issues with Credit Rating

  •  Rating agencies rarely get credit quality right and they have been found to be well behind the curve in almost every default crisis.
  • The behavior of these agencies has been pro-cyclical, which is often seen to aggravate crises and fuel bubbles.
  • They are too lenient when the times are good, and too harsh when economic conditions worsen, making booms and busts that much more dramatic.

What should be the basis of India’s argument

  • Unless the country has the privilege of printing the world’s reserve currency, as the US has, there is nothing special that ensures a large economy will always repay what it owes.
  • India’s argument should revolve around the country’s flawless repayment record.
  • The last time we were on the verge of a sovereign default, in 1991, we reformed our economy.
  • Today, the country has foreign exchange reserves in excess of $584 billion, while its total external debt, including that of the private sector, is a shade over $556 billion.

Consider the question “The Economic Survey of 2020-21 point to the adverse rating of India economy by the global rating agencies. What is the significance of such ratings for the economy. What should be the basis of the argument against India’s adverse rating by the agencies?”

Conclusion

Despite the above-mentioned factors, we still find that Indian borrowers must pay higher rates of interest overseas than they would have to with a better rating. Global rating agencies need to overhaul their methodology to better reflect reality.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

‘The Inequality Virus’ Report

Note4Students

From UPSC perspective, the following things are important :

Prelims level: 'The Inequality Virus' Report

Mains level: Economic implications of COVID

The ‘Inequality Virus Report’ was recently released on the opening day of the World Economic Forum in Davos.

About the report

  • The Inequality Virus Report was released by Oxfam.
  • It inquired into different forms of inequities, including educational, gender and health during the pandemic.

Highlights of the report

‘Rise’ in wealth

  • Indian billionaires increased their wealth by 35% during the lockdown to ₹ 3 trillion, ranking India after the U.S., China, Germany, Russia and France.
  • The wealth of just the top 11 billionaires during the pandemic could easily sustain the MGNREGS or the Health Ministry for the next 10 years, stated the report.
  • A person (no citation needed!) who emerged as the richest man in India and Asia, earned ₹90 crores an hour during the pandemic when around 24% of the people in the country were earning under ₹ 3,000 a month during the lockdown.
  • The increase in his wealth alone could keep 40 crores, informal workers, out of poverty for at least five months, said the report.

Observations made

Health: Only 6% of the poorest 20% have access to non-shared sources of improved sanitation, compared to 93.4 % of the top 20 %.

Education: Till October, 32 crores students were hit by the closure of schools, of whom 84 % resided in rural areas and 70 %attended government schools. Dalits, Adivasis and Muslims were likely to see a higher rate of dropout. Girls were also most vulnerable as they were at risk of early and forced marriage, violence and early pregnancies, it noted.

Gender: Unemployment of women rose by 15% from a pre-lockdown level of 18 %, which could result in a loss of India’s GDP of about 8 % or ₹15 trillion. Women who were employed before the lockdown were also 23.5 percentage points less likely to be re-employed compared to men in the post lockdown phase.

Recommendations

  • It recommended reintroducing the wealth tax and affecting a one-time COVID-19 cess of 4% on taxable income of over ₹10 lakh to help the economy recover from the lockdown.
  • According to its estimate, a wealth tax on the nation’s 954 richest families could raise the equivalent of 1% of the GDP.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is The Great Reset?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: WEF

Mains level: The Great Reset

This news card is an excerpt from the original article published in The Indian Express and is articulated by C. Raja Mohan.

The Great Reset

  • The Great Reset is a proposal by the World Economic Forum (WEF) to rebuild the economy sustainably following the COVID-19 pandemic.
  • It was unveiled in May 2020 by the United Kingdom’s Prince Charles and WEF director Klaus Schwab.

The basis for the said reset

  • It is based on the assessment that the world economy is in deep trouble.
  • Schwab has argued that the situation has been made a lot worse by many factors, including the pandemic’s devastating effects on global society, the un- folding technological revolution, and the consequences of climate change.
  • He demands that the world must act jointly and swiftly to revamp all aspects of our societies and economies, from education to social contracts and working conditions.
  • Every country must participate, and every industry, from oil and gas to tech, must be transformed.

Agenda behind

The agenda of The Great Reset touches on many key issues facing the world a/c to C Raja Mohan. Three of them stand out as:

First is the question of reforming capitalism

  • The WEF has been at the forefront of calling for “stakeholder capitalism” that looks beyond the traditional corporate focus on maximizing profit for shareholders.

Second, it is certainly right to focus on the deepening climate crisis

  • Climate skeptics have been ousted from Washington and President Biden has rejoined the 2015 Paris accord on mitigating climate change.

The third is the growing difficulty of global cooperation

  • The era of great power harmony that accompanied the liberalization of the global economy at the turn of the 1990s has yielded place to intense contestation. The contestation is not just political but increasingly economic and technological.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why Financial boom at a time of economic stagnation?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Understanding the paradox in between booming financial sector and declining economy

Divergence in the financial sector and the overall economy

  • India’s major secondary stock market, the Sensex has been found tracking an upward path, from 40,817 on January 8, 2020, to 48,569 a year later, on January 8, 2021.
  • The trend indicates that GDP in India has been subdued while the financial sector has continued moving up.
  • This paradox has been found to be replicated in other developing as well as advanced economies.
  • These include the major emerging economies such as Brazil and Argentina along with advanced economies such as the United States and the United Kingdom.
  •  It remains an open question whether this paradox can sustain itself.
  • If this cannot sustain, it poses risk for those having large exposures in the financial market and also for the economy as a whole.

Let’s understand the financial flows beyond the real economy

  • Finance as above, having no counterpart in the productive sector, was identified, first by Karl Marx, as fictitious capital.
  • Earnings from fictitious capital include interests, dividends, and capital gains as well as profits on derivatives.
  • All the above come in the category of unearned or rentier capital.
  • Financial assets, sold with capital gains at higher prices, are met with a rising rather than with the usual declines in demand.
  • Evidently, possibilities of accumulating assets turn even brighter with the high-value assets (used as collaterals), fetching credit for further business.
  • As for the stock prices, which reflect the stream of dividends over time discounted by interest rates, lower rates can help pitch stock prices higher.
  • Cuts in interest rates are often preferred as tools under mainstream prescriptions limiting expansionary policies, which evidently helps stock prices.
  • A journey as above for the financial circuit continues, is subject to market confidence.

Role of state

  • To look at how finance has attained its present status we need to look at the evolving alliances between finance and the ruling state.
  • The path started with the financial deregulation in the late-1990s when banks were allowed to profit by dealing with securities and with the emergence of hedging devices such as futures and options in the market.
  • It also reflects the rise of non-bank financial institutions as well as shadow banks operating beyond regulations even at cost for the regular banks which had large exposures to the non-banks.
  • The state’s close proximity to big finance is also evident in the revamping of downhill finance, even with bailouts in the name of restoring financial stability.
  • It speaks even more of the pro-finance stance of the government in the neglect of upswings in the financial sector despite the continuing downslides in the real economy.

Consider the question “What explains the apparent paradox in the India economy with evident divergence in its booming financial sector and subdued economy. What are the risks involved in such situations? Suggest the measures to deal with such situations.

Conclusion

Catastrophes, that comes with the sudden collapse of confidence in the financial sector, highlight the need for alternative policies on the part of the state as well as a bit of caution on part of individual investors — in a bid to usher in a sustainable and equitable path of growth for the economy as a whole.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India’s New Deal moment

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Marginal propensity to consume

Mains level: Paper 3- Economic recovery and India's New Deal Moment

The article explains the opportunity presented by the budget to steer the economy out of the uncertain territory.

3 characteristics of India’s economic recovery

  • First, India has broken the link between virus proliferation and mobility earlier and more successfully than many countries.
  • Second, the employment rate gradually improved till September but has weakened since then, even as the economy has progressively opened up.
  • CMIE’s labour market survey still reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
  • A third phenomenon is large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
  • To the extent there is a migration of activity from the informal/SME firms to larger firms, tax collections and Sensex/Nifty earnings should get a boost, even holding the economic pie constant.
  • Greater scale and formalisation undoubtedly augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.

Increased prospects of K-shaped recovery

  • Above 3 factors increases prospects of a K-shaped recovery from COVID, a phenomenon playing out globally.
  • Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates increased.
  • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.

3 Implications of K-shaped recovery

  • 1) What we are currently witnessing is pent-up demand from the upper-income households.
  • However, households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
  • 2) To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding in the steady state.
  • This is explianed by the fact that marginal propensity to consume at the bottom is higher than that at the top, just as the marginal propensity to import at the top is higher than at the bottom.
  • 3) If COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

Factors that need to be considered to decide the policy response

  • Policy need to look beyond the next few quarters and anticipate the state of the macro economy post this expression of pent-up demand.
  • The key factor is wheather private sector starts re-investing and re-hiring.
  • With manufacturing utilisation rates below 70 per cent pre-COVID, an investment revival, in turn, will depend crucially on the
  • Exports should benefit from strengthening global growth as the world gets progressively vaccinated and more US fiscal stimulus.

Upcoming budget: India’s New Deal moment

  • It’s against this backdrop that the upcoming budget presents India with its New Deal moment.
  • Given the prevailing demand uncertainties, the budget represents an opportune moment for the Centre, in conjunction with the states, to embark on a large physical and social infrastructure push.
  • This will simultaneously boost near-term aggregate demand, crowd in private investment, create jobs to soak up the unemployed, and improve the economy’s external competitiveness.
  • Job creation, health and education, in turn, will be a start to help mitigate COVID-induced inequalities.

How to finance the investment?

  • Gradual near-term consolidation coupled with a credible medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
  • How then can public investment increase meaningfully if the headline deficit (projected above 11 per cent of GDP) must come down?
  • Public investment could be increased only if the public investment push is financed by aggressive asset sales-strategic sales, disinvestment, land and infrastructure monetisation.
  • In this manner, expenditure to GDP can actually rise next year — generating an expansionary fiscal impulse to the economy — while automatic stabilisers are used to reduce the headline fiscal deficit.

Conclusion

India’s faster-than-expected rebound is very encouraging. But given labour market pressures and prospects of a K-shaped recovery around the world, the economy will need to be carefully nurtured and stoked. The budget presents a crucial opportunity to make a big down payment towards this end.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is a K-shaped Economic Recovery?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various graphs of economic recovery

Mains level: Economic recovery amid coronavirus pandemic

The prospects of a K-shaped economic recovery from COVID are increasing both in India and across the world.

What is K-Shaped Recovery?

  • A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
  • This is in contrast to an even, uniform recovery across sectors, industries, or groups of people.
  • A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession.
  • This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter “K.”

Try these PYQs:

 

Q.Economic growth in country X will necessarily have to occur if

(a) There is technical progress in the world economy

(b) There is population growth in X

(c) There is capital formation in X

(d) The volume of trade grows in the world economy

 

Q. Economic growth is usually coupled with

(a) Deflation

(b) Inflation

(c) Stagflation

(d) Hyperinflation

3 characteristics of India’s economic recovery

  • First, India has broken the link between virus proliferation and mobility earlier and more successfully than many countries.
  • Second, the employment rate gradually improved till September but has weakened since then, even as the economy has progressively opened up.
  • CMIE’s labour market survey still reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
  • A third phenomenon is large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
  • To the extent there is a migration of activity from the informal/SME firms to larger firms, tax collections and Sensex/Nifty earnings should get a boost, even holding the economic pie constant.
  • Greater scale and formalisation undoubtedly augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.

Increased prospects of K-shaped recovery

  • Above 3 factors increases prospects of a K-shaped recovery from COVID, a phenomenon playing out globally.
  • Households at the top of the pyramid are likely to have seen their incomes largely protected, and savings rates increased.
  • Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.

3 Implications of K-shaped recovery

  • 1) What we are currently witnessing is pent-up demand from the upper-income households.
  • However, households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
  • 2) To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding in the steady state.
  • This is explained by the fact that marginal propensity to consume at the bottom is higher than that at the top, just as the marginal propensity to import at the top is higher than at the bottom.
  • 3) If COVID-19 reduces competition or increases the inequality of incomes and opportunities, it could impinge on trend growth in developing economies by hurting productivity and tightening political economy constraints.

Factors that need to be considered to decide the policy response

  • Policy need to look beyond the next few quarters and anticipate the state of the macro economy post this expression of pent-up demand.
  • The key factor is whether private sector starts re-investing and re-hiring.
  • With manufacturing utilisation rates below 70 per cent pre-COVID, an investment revival, in turn, will depend crucially on the demand dynamics
  • Exports should benefit from strengthening global growth as the world gets progressively vaccinated and more US fiscal stimulus.

Upcoming budget: India’s New Deal moment

  • It’s against this backdrop that the upcoming budget presents India with its New Deal moment.
  • Given the prevailing demand uncertainties, the budget represents an opportune moment for the Centre, in conjunction with the states, to embark on a large physical and social infrastructure push.
  • This will simultaneously boost near-term aggregate demand, crowd in private investment, create jobs to soak up the unemployed, and improve the economy’s external competitiveness.
  • Job creation, health and education, in turn, will be a start to help mitigate COVID-induced inequalities.

How to finance the investment?

  • Gradual near-term consolidation coupled with a credible medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
  • How then can public investment increase meaningfully if the headline deficit (projected above 11 per cent of GDP) must come down?
  • Public investment could be increased only if the public investment push is financed by aggressive asset sales-strategic sales, disinvestment, land and infrastructure monetisation.
  • In this manner, expenditure to GDP can actually rise next year — generating an expansionary fiscal impulse to the economy — while automatic stabilisers are used to reduce the headline fiscal deficit.

Conclusion

India’s faster-than-expected rebound is very encouraging. But given labour market pressures and prospects of a K-shaped recovery around the world, the economy will need to be carefully nurtured and stoked. The budget presents a crucial opportunity to make a big down payment towards this end.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

First Advance Estimates of GDP for 2021

Note4Students

From UPSC perspective, the following things are important :

Prelims level: First Advance Estimates

Mains level: India's GDP related issues

The Ministry of Statistics and Programme Implementation released the First Advance Estimates (FAE) for the current financial year.

What do estimates show?

  • According to MoSPI, India’s gross domestic product (GDP) — the total value of all final goods and services produced within the country in one financial year — will contract by 7.7 per cent in 2020-21.
  • The first advance estimates of GDP, obtained by extrapolation of seven months’ data, are released early to help officers in the Finance Ministry and other departments in framing the broad contours of Union Budget 2021-22.

What are the First Advance Estimates of GDP?

  • For any financial year, the MoSPI provides regular estimates of GDP. The first such instance is through the FAE.
  • The FAE for any particular financial year is typically presented on January 7th.
  • Their significance lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s budget allocations.
  • The FAE will be quickly updated as more information becomes available.
  • On February 26th, MoSPI will come out with the Second Advance Estimates of GDP for the current year.

How is the FAE arrived at before the end of the concerned financial year?

  • The FAE are derived by extrapolating the available data. (Hope you remember Newtons’ interpolation and extrapolation from XII std.)
  • According to the MoSPI, the approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
  • The sector-wise estimates are obtained by extrapolating indicators such as-
  1. Index of Industrial Production (IIP) of the first 7 months of the financial year
  2. Financial performance of listed companies in the private corporate sector available up to quarter ending September 2020
  3. The 1st Advance Estimates of crop production,
  4. The accounts of central & state governments,
  5. Information on indicators like deposits & credits, passenger and freight earnings of Railways, passengers and cargo handled by civil aviation, cargo handled at major seaports, sales of commercial vehicles, etc., available for first 8 months of the financial year.

How is the data extrapolated?

  • In the past, extrapolation for indicators such as the IIP was done by dividing the cumulative value for the first 7 months of the current financial year by average of the ratio of the cumulative value of the first 7 months to the annual value of past years.
  • So if the annual value of a variable was twice that of the value in the first 7 months in the previous years then for the current year as well the annual value is assumed to be double that of the first 7 months.
  • However, this year, because of the pandemic there were wide fluctuations in the monthly data. Moreover, there was a significant drop, especially in the first quarter, on many counts.
  • That is why the usual projection techniques would not have yielded robust results.
  • As such, MoSPI has tweaked the ratios for most variables.

What are the key takeaways from the First Advance Estimates for 2020-21?

There are 7 key takeaways.

#1 GDP Growth Rate:

  • In the context of recent history, the 7.7 per cent contraction in GDP is a sharp one considering that India has registered an average annual GDP growth rate of 6.8 per cent since the start of economic liberalisation in 1992-93.

#2 Absolute level of real GDP:

  • At Rs 134.4 lakh crore, India’s real GDP — that is, GDP without the influence of inflation — in 2020-21 will be lower than the 2018-19 level.
  • In other words, from the start of the next financial year, India would first have to raise its GDP back to the level it was at in 2019-20 (Rs 143.7 lakh crore).

#3 Per Capita GDP:

  • While the GDP provides an all-India aggregate, per capita GDP is a better variable if one wants to understand how an average India has been impacted.
  • India’s per capita GDP will fall to Rs 99, 155 in 2020-21.
  • In fact, while the overall real GDP will fall by 7.7 per cent, per capita real GDP will fall by 8.7 per cent.

#4 Absolute level of real Gross Value Added (or GVA):

  • The GVA provides a picture of the economy from the supply side.
  • It maps the value-added by different sectors of the economy such as agriculture, industry and services. In other words, GVA provides a proxy for the income earned by people involved in the various sectors.
  • This fiscal, at Rs 123.4 lakh crore, India’s real GVA level, too, will fall below the 2018-19 level.

#5 Absolute level of Private Final Consumption Expenditure (PFCE):

  • India’s overall GDP can be divided into four main sections. The biggest demand for goods and services comes from private individuals trying to satisfy their consumption needs.
  • Typically this would include all the things — be it toothpaste or a car — that you and your family members buy in their private individual capacity.
  • This demand is called PFCE and it constitutes over 56 per cent of the total GDP.

#6 Per capita PFCE:

  • Just like per capita GDP, the per capita PFCE is also a relevant metric as it shows how much does an average Indian spend in his/her private capacity.
  • Typically, with rising incomes standards, such consumption levels also rise.
  • However, at Rs 55,609, per capita, PFCE will fall below the 2017-18 level.

#7 Absolute level of Gross Fixed Capital Formation (GFCF):

  • The second biggest component of GDP is called GFCF and it measures all the expenditures on goods and services that businesses and firms make as they invest in their productive capacity.
  • So if a firm buys computers and software to increase the overall productivity then it will be counted under GFCF.
  • This type of demand accounts for close to 28 per cent of India’s GDP. Taken together, private demand and business demand account for almost 85 per cent of all GDP.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Dangers lurking beneath economic recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Relation between inequality and inflation

Mains level: Paper 3- Rising inequality in the economic recovery

As Indian economy recovers from the economic disruption caused by the pandemic, there are dangers of rising inequality and cosequently the rising inflation. The article deals with these issues.

3 features of Indian recovery

  • 1) The number of new cases has fallen while the fatality rate continues to drop.
  • 2) India has rolled out one of the smallest fiscal support packages globally, with central government spending flat so far this year.
  • 3) Inflation is now a big problem, with consumer prices above the 6 per cent tolerance level for the past eight months.

Consequences of low fiscal spending

  • It may seem that India is back on the path to recovery.
  • But  the low level of fiscal spending could leave behind other problems, such as rising inequality.
  • Although, in India there was a focus on vulnerable section, there were some misses, such as the urban poor being left out, and the overall outlay was small.
  • For instance, demand for the rural employment guarantee programme continues to outstrip supply.
  • There is the rise in inequality between large and small firms, which is likely to be felt by individual employees.
  • Large firms were helped by cost-cutting, low interest rates, access to buoyant capital markets and increased spending in the formal economy probably helped.
  • The smaller listed firms did not do as well.
  • Small firms are more labour intensive than large firms.
  • If small firms do poorly, it impacts a large number of people.
  • All this could impact demand over time.
  • Rising inequality could stoke inflation (in services particular).
  • Consumption patterns show that the rich in India tend to consume more services than the poor.
  • And rising inequality could, therefore, stoke inflation.

Possibility of services inflation

  • 1) As a vaccine comes into play, there could be a release of pent-up demand for high-touch services.
  • 2) As large firms and their employees do relatively well, they are likely to demand more services, stoking prices.
  • 3) Many service providers did not do a regular annual price reset in 2020, so they may raise prices to cover the two years once demand picks up.
  • If inflation does become persistent and leads to tighter monetary policy, that could weigh on growth over time.

Way forward

  • To control inflation in 2021, the RBI may have to take steps such as:-
  • 1) Gradually drain the excess liquidity in the banking sector,
  • 2) Provide a floor for short-term rates, which have fallen below the reverse repo rate.
  • 3) Narrow the policy rate corridor by raising the reverse repo rate.
  • A quicker exit from loose monetary policy could become another area where India differs from the world.

Consider the question “What are the consequences of economic recovery in the wake of pandemic? Suggest the ways to deal with these consquences.”

Conclusion

Putting all of this together, it seems India will come full circle in 2021. For a while it was worried more about weak growth than high inflation. But as growth recovers, inflationary concerns could reappear.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Laying the foundation for faster growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Investment rate

Mains level: Paper 3- Steps India needs to take to compensate for the economic loss due to pandemic.

To ease the damage inflicted by the pandemic on the economy, India needs to act on multiple fronts. The article suggests the trajectory India should follow to compensate for the economic loss due to pandemic.

Economy picking up

  • As the restrictions were slowly withdrawn, the economy has also started picking up.
  • There are many indicators such as collection of Goods and Services Tax (GST), the improved output of coal, steel, and cement, and positive growth in manufacturing in October 2020 which point to better performance of the private sector.
  • In Q1, the economy declined by 23.9%; it declined by 7.5% in Q2, when the relaxations were eased.
  • Reductions in the first half of GDP in 2020-21 as compared to the first half of 2019-20 is 7.66% of the 2019-20 GDP.
  • If the Indian economy at least maintains the second half GDP in 2020-21 at the level of the previous year, the full-year contraction can be limited to about 7.7%.

Steps need to be taken

  • If the Indian economy grows at 8% in 2021-22 will we be compensating for the decline in 2020-21.
  • Thus, it is imperative that the Indian economy grows at a minimum of 8% in 2021-22.
  • This should be possible if by that time restrictions imposed because of COVID-19 are withdrawn and the nation goes back to a normal state.
  • Some sectors can act as lead sectors or engines of growth with increased government capital expenditures in them.
  • The private sector seems to be revising its future prospects.
  • Many new issues in the capital market have met with good response.
  • The attitude to trade must also change.
  • Closing borders may appear to be a good short-term policy to promote growth.
  • A strong surge in our exports will greatly facilitate growth, i.e. 2021-22.
  • However, much of Indian’s growth must rest on domestic factors.
  • Growth must not only be consumption-driven but also investment-driven.
  • It is the investment-driven growth in a developing economy that can sustain growth over a long period.

The important role of monetary policy

  • The stance of monetary policy in 2020-21 has been extremely accommodating.
  • Three major elements in the policy are:
  • 1) A reduction in interest rate.
  • 2) Providing liquidity through various measures.
  • 3) Regulatory changes such as moratorium.
  • There has been a substantial injection of liquidity into the system.
  • With a large injection of liquidity, one should expect inflation to remain high.
  • In the final analysis, inflation is determined by the overall liquidity or money supply in the system in conjunction with the availability of goods and services.
  • While there may be sufficient justification for an accommodative monetary policy in a difficult year such as 2020, there will be a need to exercise more caution as we move into the next year.

Role of government expenditure

  • Government expenditures play a key role in a situation such as the one we are facing.
  • The stimulus policies involving higher government expenditures were expected to arrest the contractionary momentum.
  • The government expenditures should be speeded up from now on so that the contraction in the current fiscal year as a whole can be reduced.
  • In 2021-22, government revenues should pick up with the rise in GDP.
  • The process of bringing down the fiscal deficit must also start.
  • What is required is a sharp increase in government capital expenditures which can act as a stimulus for growth.
  • A detailed investment plan of the government and public sector enterprises must be drawn up and presented as part of the coming Budget.

Increasing investment

  • Over the past decade, the investment rate has been falling.
  • In 2018-19, the rate fell to 32.2% of GDP from 38.9% in 2011-12.
  • Some of the recent measures including corporate tax rate changes may help in augmenting investment.
  • A strong effort must be made to improve the investment climate. The National Infrastructure Pipeline is a good initiative.
  • But the government must come forward to invest more on its own.

Reforms with consensus

  • Reforms are important in the context of rapid development.
  • However, timing, sequencing, and consensus-building are equally important while introducing them.
  • Labor reforms, for example, are best introduced when the economy is on the upswing.

Consider the question ” Growth must not only be consumption-driven but also investment-driven. It is the latter which in a developing economy can sustain growth over a long period. In light of this, suggest the policy imperatives that India should follow to make good of the decline in 2020-202.”

Conclusion

To achieve the level of $5 trillion, we need to grow continuously at 9% for six years from now. That is the challenge before the economy. Jobs and employment will come from growth. They are not independent of growth. For that policymakers should eschew other considerations and focus only on growth.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Need for avoiding misplaced optimism over economic recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP

Mains level: Paper 3- Recovery of Indian economy and the issue of fiscal conservatism

Overoptimism stemming from the signs of recovery shown by the figures for the second quarter could result in reduced spending and the rollback of the stimulus. However, other features indicate that fiscal conservatism at this moment is not a good idea.

Hype over recovery

  •  India’s economy contracted by 7.5% in the second quarter of financial year 2020-21.
  • There are two ways to look at that figure:-
  • 1) That figure is far lower than the 23.9% contraction registered in the first quarter of this financial year.
  • 2) A 7.5% second quarter contraction is high both in itself and when compared with most similarly placed countries.
  • The government, however, has chosen to focus on the unsurprising evidence that GDP rose sharply, by 23%, between the first quarter and the second when restrictions were substantially lifted.
  • Based on that evidence, the Finance Ministry’s Monthly Economic Report, for November, speaks of a V-shaped recovery reflective of “the resilience and robustness of the Indian economy”.
  • The danger is that such optimism would provide the justification to avoid adoption of the measures crucially needed to pull the economy out of recession.

India economy is still demand constrained: 3 signs

  • 1) The decline in private final consumption expenditure at constant prices, which accounts for 56% of GDP, has come down from minus 27% in the first quarter to minus 11% in the second, it still remains high.
  • Though there are signs of a short-run recovery in private consumption demand with the lifting of lockdowns, net incomes and consumer confidence are not at levels that can even restore last year’s levels.
  • 2) As is to be expected, with production restraints relaxed, depleted stocks are being replenished with a fall of 21% in the first quarter turning into an increase in stocking of 6.3% in the second quarter.
  • 3) The decline in fixed capital formation has fallen from a high minus 47% in the first quarter to minus 7% in the second, investment is still falling year-on-year.
  • These are all signs of an economy that is severely demand constrained, requiring a significant step up in government expenditure.

Impact on spending by the Centre and the States

  • Figures from the Office of the Controller General of Accounts for the first seven months of 2020-21 (April to October) indicate that the total expenditure of the central government stood at only 55% of what was provided for in the Budget for 2020-21.
  • In fact, in a non-COVID-19 year, 2019-20, the ratio of actual spending by the central government over April-October relative to that budgeted figure was a higher 59%.
  •  Meanwhile, with Goods and Services Tax (GST) revenues having fallen from their lower-than-expected levels during the COVID-19 months, the States have been cash-strapped.
  • Yet, the government has decided not to compensate them for the shortfall, as promised under the GST regime.
  • States have been left to fend for themselves by going to market and borrowing at high interest rates, which they would find difficult to cover.
  • Needless to say, as a consequence, State spending has also been curtailed.

Why government should avoid fiscal conservatism

  • The loss of jobs and livelihoods that happened during lockdown is sure to affect demand now.
  • This leads to increased indebtedness and the bankruptcies well after restrictions are relaxed.
  • So, the tasks of providing safety nets, reviving employment and spurring demand become crucial.
  • Since the market cannot deliver on those fronts, state action facilitated by substantially enhanced expenditure is crucial.
  • And since government revenues shrink during a recession, that expenditure has to be funded by borrowing.
  • This is no time for fiscal conservatism, as governments across the world have come to accept.
  • Trend suggests that allocations for welfare expenditures — ranging from subsidised food to minimal guaranteed employment — needed to support those whose livelihoods have been devastated by the pandemic, would be reduced over time.
  • As collateral damage, this frugality in a time of crisis is likely to prolong the recession.

Conclusion

The optimism that a V-shaped recovery is imminent, and that optimism, in turn, would justify the view that fiscal conservatism pays. It does not, as time would tell.


Back2Basics: What is V-shaped recovery?

  • A V-shaped recovery is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
  • Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best case scenario given the recession.
  • The recoveries that followed the recessions of 1920-21 and 1953 in the U.S. are examples of V-shaped recoveries.
V-shaped recovery of the U.S. economy

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Perils of profits based economic recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Analysis of economic recovery post-Covid

The economies across the world are showing recovery driven by profits. However, one cannot neglect the implication of such recovery for the long term growth given the pressure such recovery has been exerting on the labour markets. The article deals with this issue.

3 Ways to look at GDP

  • The first is what they tell us about the past.
  • Here, the news has generally been better-than-expected.
  • The US and India saw a much stronger recovery last quarter than previously envisioned.
  • The second is sectoral, production side-agriculture, manufacturing, services- and the functional, expenditure side consumption, investment, net exports.
  • But there’s a third way — the income side.
  • Value addition must ultimately accrue to the different factors of production.
  • On the income side, therefore, GDP is simply the sum of profits, wages and indirect taxes.

Profit-driven growth and impact on employment

  • The economic recovery in many parts of the world is driven disproportionately by capital than labour.
  • In India, the net profits of listed companies grew 25 per cent (in real terms) last quarter. This despite revenues shrinking.
  • Revenue shrank because firms aggressively cut costs, including employee compensation.
  • This implies that if listed company profits are growing 25 per cent, and yet GDP contracted 7.5 per cent, it reveals (by construction) significant pressure on profits of unlisted SMEs, wages and employment.
  • Labour market pressures are evident in India too.
  • Household demand for MGNREGA remains very elevated, suggesting significant labour market slack.
  • The employment rate in some labour market surveys still reveal about 14 million fewer employed compared to February, and nominal wage growth across a universe of 4,000 listed firms has slowed from about 10 per cent to 3 per cent over the last six quarters.

Why this matters

  • It may be rational for any one firm to boost profits by cutting employee compensation.
  • But if every firm pursued that strategy, that simply reduces future aggregate demand and profitability for all firms.
  • This is quintessential fallacy of composition that Keynes enumerated.
  • Weak demand, in turn, disincentivises re-hiring, reinforcing the risks of settling into a sub-optimal equilibrium.

Need to remain vigilant about labour market

  • Remaining vigilant about labour markets is particularly important for India.
  • Private consumption was increasingly financed by households running down savings and taking on debt pre-COVID-19.
  • Consequently, if job-market pressures induce households into perceiving this shock as a quasi-permanent hit on incomes, households will be incentivised to save, not spend in the future.

Way forward for fiscal consolidation

  • While economic momentum is expected to slow as pent-up demand wears off, the level of output will progressively reach pre-COVID levels as the economy normalises.
  • The question is what will drive growth after that?
  • India’s fiscal response has been restrained thus far, with the Centre’s total spending similar to last year and state capex under pressure.
  • It’s therefore important for the Centre to step up spending in the remaining months.
  • More importantly, public investment, and a large infrastructure push, must be the leitmotif of the next budget.
  • This will be crucial to boost demand, create jobs, crowd-in private investment and improve the economy’s external competitiveness.
  • If higher infrastructure spending is financed by higher asset sales, the headline fiscal deficit (which matters for bond markets and interest rates) can be slowly reduced, even as the underlying fiscal impulse (which matters for growth and jobs) remains positive.
  • This is the only way to undertake fiscal consolidation without incurring a fiscal drag.
  • Monetary policy has led the charge in 2020. But with inflation continuing to remain sticky and elevated, the RBI has fewer degrees of freedom going forward.

Conclusion

The stronger-than-expected GDP print is very encouraging. But this is the start of a long journey back. Much, therefore, remains to be done. The excitement around the vaccine shouldn’t obscure this fundamental premise.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Sustaining India’s Growth Momentum

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- India's economic recovery post pandemic

The article highlights the factors that explain that India’s economic recovery is broad-based and sustainable in nature.

Revising India’s GDP forecast

  • With major banks, investor advisory groups, and credit rating agencies revising their GDP forecasts for the next financial year while lowering estimates of economic contraction for this fiscal, surely the bounce back is well on track.
  • Some of the earlier assessments were too pessimistic and assumed a gradual pace of economic normalisation.
  • Thus, a reassessment was given but nevertheless welcome.

Many continue to challenge conventional belief regarding India’s economic recovery being broad-based and sustainable in nature. It is important that we look at underlying data and relate it with steps undertaken by the government with the sole objective of reviving India’s economy.

1) Employment figures

  •  Economic activity will see a faster revival than employment figures as labour markets tend to lag.
  • This is because most firms face costs associated with hiring and firing and they prefer to adjust the working hours before adjusting employment numbers.
  • Trends labour market does indicate prospects of a cyclical recovery which will lead to jobs being added at a faster pace than what was originally estimated.
  • Critically, the new scheme subsiding part of the EPFO contribution for the unskilled workers will benefit enormously which will then have spill-over effects.

2) Normalisation driven by rural economy

  • The bulk of the normalisation of economic activity was driven by the rural economy which eventually benefited the rest of the economy.
  • Rural growth has gained momentum and definitely augurs well for the Indian economy as it gets one of the engines firing.
  • The strong push by the government towards financing construction of assets has a significant impact.

3) Avoiding excessive and inefficient use of public funds

  • The design of the aid by the government is similar in terms of its size to programmes announced by other emerging markets.
  • However, the choice of instruments is along the lines those deployed by developed countries.
  • The government has refrained from excessive and inefficient use of public funds by restricting expenditures to temporary fiscal commitments.
  • This is important as our 2008 response had a lot of permanent fiscal expenditures which led to a systematic deterioration of our macroeconomic fundamentals.
  • The government has taken undertaken a sizable fiscal expansion combining automatic stabilizers, cash transfers, bank guarantees, expansion of expenditure under various programs such as MGNREGA, Food Security Act and Urban Affordable Housing Measures.
  • The fiscal component under each of these policies can be easily reversed making it possible for India to revert to its fiscal consolidation path a lot sooner.

4) Structural reforms as a part of its economic response package

  • These reforms are geared at unshackling the productivity potential in areas such as APMCs,  labour markets, other reforms that allow for greater private role within the economy in critical areas such as coal, space technology etc.
  • These moves and their productivity gains will help India improve its potential growth rate.
  • This means that India should be better equipped at sustaining a high-growth rate of above 7 per cent due to the productivity gains that will be an outcome of the proposed reforms.
  • This will further help a faster reduction in fiscal deficit as a percentage of GDP and our public debt to GDP figures.

Conclusion

Strong macroeconomic fundamentals are necessary for sustained economic growth and the government has focused on a response package which prioritises sustainability of growth rather than having a fast yet unsustainable economic recovery from the crisis.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Analysing India’s economic growth

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Key trends in India's economic history

Mains level: Paper 3- Analysing India's economic progress

The article analyses India’s economic trajectory after independence and divides it into five phases. India’s progress is also compared with Pakistan’s as both countries have had much in common.

What drives economic growth

  • Examining the experiences of different countries to analysing the growth may seem a promising approach.
  • However, generalising from specific experiences can be misleading since ground conditions vary hugely across countries.
  • There are two ways to avoid the pitfalls of generalising from specific cases.
  • 1) The first is to examine the same country over time to look for changes in outcomes at specific points in time.
  • 2) A second approach is to compare countries with shared history, culture and geography.
  • If there are stark differences in outcomes between them, then there may be some policy lessons to be drawn.

The Indian subcontinent provides lessons from both approaches. The 73 years of post-Independence India has generated a lot of evidence across different political-economic regimes. This period has also provided us with the contrasting experiences of India and Pakistan, two countries that share history, geography and socio-cultural mores.

5 phases of India’s economic progress in 73 years: first approach

  • 1) The first phase was the period 1950-65. This was the Nehruvian period of state-led industrialisation.
  • Starting in 1950 annual per person GDP growth averaged 2 per cent during this period.
  • This translated to aggregate annual GDP growth of around 4 per cent since the population was growing at close to 2 per cent.
  • 2) The second phase of post-Independence India was during 1965-84.
  • This period was an unmitigated economic disaster with negative per capita growth.
  • The phase was marked with increasing state control of the economy, nationalisation of industry, closing of the economy to trade and a systematic weakening of institutions.
  • 3) The third phase is 1984-91 when the government ushered in the first round of economic reforms by liberalising capital goods imports as well as starting industrial de-licensing.
  • These reforms were rewarded by a growth take-off. India’s annual per capita GDP growth averaged 3.1 per cent while aggregate GDP grew at 5.2 per cent during 1984-91.
  • 4) The period 1991-2004 is typically classified as the liberalisation phase.
  • The reform effort was reflected in the 4.9 per cent annual per capita GDP growth during 1991-2004.
  • 5) India embarked on a distinctive phase of faster growth post-2004 on the back of large investments in infrastructure.
  • Per person GDP growth in the period 2004-2015 averaged 7.7 per cent.
  • The corresponding aggregate GDP growth averaged 9 per cent.
  • This came at a cost, as a number of these infrastructure projects later caused problems in the banking sector on account of burgeoning NPAs, a problem that continues till today.

Comparison with Pakistan

  • In 1950, Pakistan’s per person GDP was almost 50 per cent greater than India that year.
  • Due to political uncertainty, Pakistan stagnated throughout the 1950s while a politically stable India grew.
  • As a result, by 1960, India had almost caught up with Pakistan in per capita GDP terms.
  • Unfortunately, from 1964, India went into two decades of economic stagnation while Pakistan opened up to foreign capital.
  • By 1984, Pakistan’s per capita income was more than double that of India’s.
  • Pakistan’s slowdown began in the 1980s.
  • This period coincided with the reforms in India.
  • Nevertheless, it wasn’t till as recently as 2010 that India’s per capita GDP finally overtook Pakistan.

4 takeaways

  •  First, openness to trade and private enterprise usually has positive effects on growth.
  • Second, rapacious and exploitative democratic systems do not necessarily promote growth. Pakistan in the 1950s, 1990 and post-2010 is a good example.
  • Third, the socio-economic environment surrounding religious fundamentalism may be inimical to growth.
  • Fourth, degradation of institutions that regulate, arbitrate and enforce laws can be costly.

Conclusion

India’s growth when analysed from both the perspective offers valuable lessons for India and these lessons must guide India’s future economic trajectory.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How to improve the income and Productivity of Indian labour?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Increasing the income and productivity of labour force

 

Slowdown in demand

  • The bigger medium-term problem facing Indian economy is the slowdown of aggregate demand — private final consumption expenditure (PFCE), investment and exports.
  • The largest component of GDP, PFCE, has declined as a share of GDP 68 per cent in 1990 to 56 per cent of GDP in 2019 .
  • The consumption of the top socio-economic deciles (top 10%) has stagnated.
  • Also the consumption demand of the rest of the demography ( 90%) — mostly in agriculture, small-scale manufacturing and self-employed — is not increasing due to low income growth.

How to increase income and productivity

  • Atmanirbhar Bharat depends on improving the income and productivity of a majority of the labour force.
  • First, incentivise the farming community to shift from grain-based farming to cash crops, horticulture and livestock products.
  • Second, shift the labour force from agriculture to manufacturing.
  • India can only become self-reliant if it uses its 900 million people in the working-age population with an average age of 27 and appropriates its demographic dividend as China did.
  • That is possible if labour-intensive manufacturing takes place in a big way, creating employment opportunities for labour force with low or little skills, generating income and demand.
  • India is in a unique position at a time when all other manufacturing giants are ageing sequentially — Japan, EU, the US, and even South Korea and China.
  • Most of these countries have moved out of low-end labour-intensive manufacturing, and that space is being taken by countries like Bangladesh, Vietnam, Mexico, etc.
  • India offers the best opportunity in terms of a huge domestic market and factor endowments.

Way forward

  • We need Indian firms to be part of the global value chain by attracting multinational enterprises and foreign investors in labour-intensive manufacturing, which will facilitate R&D, branding, exports, etc.
  • There is a need to aggressively reduce both tariffs and non-tariff barriers on imports of inputs and intermediate products.
  • Removing these barriers create a competitive manufacturing sector for Make in India, and “Assembly in India”.
  • Apart from trade reforms, further factor market reforms are required, such as rationalising punitive land acquisition clauses and rationalising labour laws, both at the Centre and state level.
  • We also have to go for large-scale vocational training from the secondary-school level, like China and other east and south-east Asian countries.

Consider the question “Key to faster economic progress of India lies in income growth and productivity of its labour force. Suggest the ways to achieve these.”

Conclusion

The COVID-triggered economic crisis should lead us to create a development model that leads to opportunities for the people at the bottom of the pyramid. A competitive and open economy can ensure Atmanirbhar Bharat.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is a Technical Recession?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Terminologies such as Slowdown, Recession, Depression

Mains level: Hurdles to India's economic growth

Latest RBI bulletin projects contraction for a second consecutive quarter, which means the economy, is in a ‘technical recession’.

Nowcasts by RBI

  • In its latest monthly bulletin, the Reserve Bank of India has dedicated a chapter on the “State of the economy”.
  • The idea is to provide a monthly snapshot of some of the key indicators of India’s economic health.
  • As part of the exercise, the RBI has started “nowcasting” or “the prediction of the present or the very near future of the state of the economy”.
  • And the very first “nowcast” predicts that India’s economy will contract by 8.6% in the second quarter (July, August, September) of the current financial year.
  • It implies India that has entered a “technical recession” in the first half of 2020-21— for the first time in its history.

What is a Recessionary Phase?

  • At its simplest, in any economy, a recessionary phase is the counterpart of an expansionary phase.
  • In simpler terms, when the overall output of goods and services — typically measured by the GDP — increases from one quarter (or month) to another, the economy is said to be in an expansionary phase.
  • And when the GDP contracts from one quarter to another, the economy is said to be in a recessionary phase.
  • Together, these two phases create what is called a “business cycle” in any economy. A full business cycle could last anywhere between one year and a decade.

Now try this PYQ:

Q.Consider the following actions by the Government:

  1. Cutting the tax rates
  2. Increasing government spending
  3. Abolishing the subsidies

In the context of economic recession, which of the above actions can be considered a part of the “Fiscal stimulus” package?

(a) 1 and 2 only

(b) 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

How is the Recession different?

  • When a recessionary phase sustains for long enough, it is called a recession. That is, when the GDP contracts for a long enough period, the economy is said to be in a recession.
  • There is, however, no universally accepted definition of a recession — as in, for how long should the GDP contract before an economy is said to be in a recession.
  • But most economists agree with the US definition that during a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.

Then, what is a Technical Recession?

  • While the basic idea behind the term “recession” — significant contraction in economic activity — is clear, from the perspective of empirical data analysis, there are too many unanswered queries.
  • For instance, would quarterly GDP be enough to determine economic activity? Or should one look at unemployment or personal consumption as well?
  • It is entirely possible that GDP starts growing after a while but unemployment levels do not fall adequately.
  • To get around these empirical technicalities, commentators often consider a recession to be in progress when real GDP has declined for at least two consecutive quarters.
  • That is how real quarterly GDP has come to be accepted as a measure of economic activity and a “benchmark” for ascertaining a “technical recession”.

How long do recessions last?

  • Typically, recessions last for a few quarters. If they continue for years, they are referred to as “depressions”.
  • But depression is quite rare; the last one was during the 1930s in the US.
  • In the current scenario, the key determinant for any economy to come out of recession is to control the spread of Covid-19.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Controlling the distorting power of the global capital

Note4Students

From UPSC perspective, the following things are important :

Prelims level: TRIPS

Mains level: Paper 3- Issues with free trade

Issues with free trade are making themselves more evident in the aftermath of the Covid pandemic. The article analyses the growing influence of the capital and how it is benefiting the few.

Issues with free trade

  • Debates about free trade revolves around value of economic growth vs. the values of justice.
  • The Economist (October 5) says “Investor-state dispute-settlement (ISDS) clauses of international trade and investment agreements give foreign investors the right to resort to a secretive tribunal to seek compensation when they are in disagreement with a host government.
  • They threaten governments who want to pass laws that seem self-evidently in their country’s and even the world’s interests.
  • The interests of remote financial investors are considered superior to the rights of local people represented by their own democratically elected governments.
  • TRIPS (the Agreement on Trade-Related Aspects of International Property Rights) is another egregious example.
  • Lobbies of multinational pharma companies want to protect their investors with intellectual monopolies under TRIPS, denying affordable medicines to the world’s poorer people.
  • New business models are throwing more workers into short-term contractual arrangements to make it easier for investors to do business.

How it is relevant in India

  • The Environmental Impact Assessment (EIA) notification 2020 make it easier for investors to take over lands for projects by debilitating the assessment process which requires that communities be heard.
  • The new labour codes passed by Parliament to simplify regulations have also weakened the rights of workers to be represented by unions.
  •  In India, terms of trade have been stacked against small farmers to keep prices low for consumers.
  • Terms are also against small enterprises in financial markets, and also when they supply to large buyers in global supply chains.
  • The terms of trade are unfair for all workers who are on the supply side of labour markets vis-à-vis those who pay them.
  • Small people do not have clout in any market. Those with more money set the terms of trade.

Governance crisis

  • Capitalism runs on the principle of property rights: Those who own more must have a greater say in the governance of the enterprise.
  • Money is speaking too much in fixing the rules of the game: It influences elections; it controls the media; it powers lobbies for reforms at international and national levels.

Conclusion

The way the rules of the economy and trade are made must change to create a more just and resilient world. Voices of the poorest people and their associations must be heard more loudly than the opinions of the rich and their lobbies.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Base Year of CPI- Industrial Workers revised to 2016

Note4Students

From UPSC perspective, the following things are important :

Prelims level: CPI, WPI, Base Year

Mains level: Inflation management

The Labour and Employment Ministry has revised the base year of the Consumer Price Index (CPI) for Industrial Workers (CPI-IW) from 2001 to 2016.

Why such a move?

  • This revision reflects the changing consumption pattern, giving more weightage to spending on health, education, recreation and other miscellaneous expenses while reducing the weight of food and beverages.

What is the Consumer Price Index (CPI)?

  • The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
  • It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.
  • The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
  • Essentially it attempts to quantify the aggregate price level in an economy and thus measure the purchasing power of a country’s unit of currency.

Types of CPI in India

  • CPI in India comprises multiple series classified based on different economic groups.
  • There are four series, viz the CPI UNME (Urban Non-Manual Employee), CPI AL (Agricultural Labourer), CPI RL (Rural Labourer) and CPI IW (Industrial Worker).
  • While the CPI UNME series is published by the Central Statistical Organisation, the others are published by the Department of Labour.
  • From February 2011 the CPI (UNME) released by CSO is replaced as CPI (urban), CPI (rural) and CPI (combined).

How it is different from WPI?

  • CPI is different from WPI, or Wholesale Price Index, which measures inflation at the wholesale level.
  • While WPI keeps track of the wholesale price of goods, the CPI measures the average price that households pay for a basket of different goods and services.
  • WPI measures and tracks the changes in the price of goods before they reach consumers; goods that are sold in bulk and traded between entities or businesses (rather than consumers).
  • Even as the WPI is used as a key measure of inflation in some economies, the RBI no longer uses it for policy purposes, including setting repo rates.
  • The central bank currently uses CPI or retail inflation as a key measure of inflation to set the monetary and credit policy.

Major components of WPI

  • Primary articles are a major component of WPI, further subdivided into Food Articles and Non-Food Articles.
  • Food Articles include items such as Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc.
  • Non-Food Articles include Oil Seeds, Minerals and Crude Petroleum
  • The next major basket in WPI is Fuel & Power, which tracks price movements in Petrol, Diesel and LPG
  • The biggest basket is Manufactured Goods. It spans across a variety of manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.
  • Manufactured Goods basket also includes manufactured food products such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.

Note: WPI has a sub-index called WPI Food Index, which is a combination of the Food Articles from the Primary Articles basket, and the food products from the Manufactured Products basket.

Now try this PYQ from 2014 CSP:

Q.With reference to India, consider the following statements:

  1. The Wholesale Price Index (WPI) in India is available on a monthly basis only
  2. As compared to the Consumer Price Index for Industrial Workers (CPI (IW)), the WPI gives less weight to food articles.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2


Back2Basics: Base Year

  • A base year is the first of a series of years in an economic or financial index. It is typically set to an arbitrary level of 100.
  • Any year can serve as a base year, but analysts typically choose recent years. They are periodically revised to keep data current in a particular index.
  • A base year is used for comparison in the measure of business activity or economic index.
  • For example, to find the rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time set.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Comparison between India- Bangladesh per capita GDP

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP, GNP, GVA etc.

Mains level: India's GDP related issues

In IMF’s latest Economic Outlook, Bangladesh has overtaken India in GDP per capita. This has caught everyone’s attention.

Do you know?

  • In the 2019 edition of Transparency International’s rankings, Bangladesh ranks a low 146 out of 198 countries (India is at 80th rank; a lower rank is worse off).
  • In the latest gender parity rankings, out of 154 countries mapped for it, Bangladesh is in the top 50 while India languishes at 112.

Bangladesh surpasses India

  • Typically, countries are compared on the basis of GDP growth rate, or on absolute GDP.
  • For the most part since Independence, on both these counts, India’s economy has been better than Bangladesh’s.
  • This can be seen from Charts 1 and 2 that map GDP growth rates and absolute GDP — India’s economy has mostly been over 10 times the size of Bangladesh, and grown faster every year.
  • However, per capita income also involves another variable — the overall population — and is arrived at by dividing the total GDP by the total population.

What made India lag behind?

There are three reasons why India’s per capita income has fallen below Bangladesh this year:

  • The first thing to note is that Bangladesh’s economy has been clocking rapid GDP growth rates since 2004.
  • Secondly, over the same 15-year period, India’s population grew faster (around 21%) than Bangladesh’s population (just under 18%).
  • Lastly, the most immediate factor was the relative impact of Covid-19 on the two economies in 2020. While India’s GDP is set to reduce by 10%, Bangladesh’s is expected to grow by almost 4%.

How has Bangladesh managed to grow so fast and so robustly?

  • Freshly start: In the initial years of its independence with Pakistan, Bangladesh struggled to grow fast. However, moving away from Pakistan also gave the country a chance to start afresh on its economic and political identity.
  • Diverse labour participation: As such, its labour laws were not as stringent and its economy increasingly involved women in its labour force. This can be seen in higher female participation in the labour force.
  • Textile boom: A key driver of growth was the garment industry where women workers gave Bangladesh the edge to corner the global export markets from which China retreated.
  • Less dependence on Agriculture: It also helps that the structure of Bangladesh’s economy is such that its GDP is led by the industrial sector, followed by the services sector. Both of these sectors create a lot of jobs and are more remunerative than agriculture.
  • Better social capital: Bangladesh improved a lot on several social and political metrics such as health, sanitation, financial inclusion, and women’s political representation.

Retaining the lead

  • The IMF’s projections show that India is likely to grow faster next year and in all likelihood again surge ahead.
  • But, given Bangladesh’s lower population growth and faster economic growth, India and Bangladesh are likely to be neck and neck for the foreseeable future in terms of per capita income.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is Debt-to-GDP Ratio?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Debt-GDP ratio

Mains level: Not Much

India’s public debt ratio, which remarkably remained stable at about 70% of the GDP since 1991, is projected to jump by 17 percentage points to almost 90% a/c to IMF.

Try this PYQ:

Q.Consider the following statements:

  1. Most of India’s external debt is owed by governmental entities.
  2. All of India’s external debt is denominated in US dollars.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Why such a spike?

  • The increase in public spending, in response to COVID-19, and the fall in tax revenue and economic activity, will make public debt jump by 17 percentage points to almost 90% of GDP.

What is Debt-to-GDP Ratio?

  • The Debt-to-GDP ratio is the ratio between a country’s government debt and its gross domestic product (GDP).
  • It measures the financial leverage of an economy.
  • A country able to continue paying interest on its debt-without refinancing, and without hampering economic growth, is generally considered to be stable.
  • A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called “public debts”), which are any balances owed to outside lenders.
  • In such scenarios, creditors are apt to seek higher interest rates when lending. Extravagantly high debt-to-GDP ratios may deter creditors from lending money altogether.
  • A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.
  • Geopolitical and economic considerations – including interest rates, war, recessions, and other variables – influence the borrowing practices of a nation and the choice to incur further debt.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

RBI shifts focus on bond market to transmit policy signals

Note4Students

From UPSC perspective, the following things are important :

Prelims level: LTRO

Mains level: Paper 3- Stance of MPC amid rising inflation

The article analyses the implications of the recently concluded MPC meeting and predicts the trends for the future.

Highlights of the MPC meeting

  • In the October meeting of the monetary policy committee (MPC), repo rate were kept unchanged at 4%, with a continuation of an accommodative stance.
  • It chose to ignore elevated levels of CPI inflation as transitory and maintaining focus on supporting growth.
  • It appears that the MPC would maintain a status quo on rates through this fiscal year.
  • The scope for further easing is anyways limited to 0.50%, as any more easing may affect household financial savings and endanger financial stability.

Ensuring the rate transmission

  • With unchanged repo rates, the focus of the liquidity measures announced by the RBI is to further improve transmission of previous rate cuts across a spectrum of market rates and other instruments.
  • The RBI Governor assured market participants that the large supply of government bonds in the second half along with a likely pick-up in credit demand, would be accommodated through open market purchases of government bonds.

Reducing the cost of borrowing

  • The RBI may have to buy bonds worth 1,000 to 1,500 billion in these operations over 2HFY21 keeping pressure on yields [which affects interest rates].
  • In a related move, to reduce the cost of borrowings for state governments, the RBI for the first time will buy state government bonds, as a special case for this year.

Other measures

  • The extension of enhanced Held to Maturity (HTM) limit of banks on their government bonds portfolio to March 2022.
  • A new on-tap targeted LTRO window was announced, for banks to borrow up to 1,000 billion from the RBI at a floating rate linked to the repo rate, and invest in corporate paper issued by specific sectors and to provide loans to them.
  • In effect, the aim of the central bank is to ensure that lower policy rates determined by the macro-economic fundamentals, are reflected in lower cost of borrowings for the Centre, states and corporates.

Containing inflation

  • Inflation outlook for this fiscal and projections for next year indicate that CPI inflation would ease, from an average of 6.8% in Q2 to 4.5% in Q4 and 4.1% by Q4FY22.
  • Headline inflation is expected to fall, as supply conditions normalize with progressive unlocking and another year of bumper farm output helps pull down food inflation.
  • Higher fuel taxes and import duties are expected to provide an upward push though.
  • Effective supply management will therefore be crucial in controlling food inflation and ensuring that it does not turn persistent and feeds into non-food inflation.

Conclusion

  • The role of monetary policy in the is limited and the RBI focus will remain on improving transmission of policy signals through banking, bond and credit market channels.

Back2Basics: LTRO

  • Long-Term Repo Operation (LTRO) was introduced by the Reserve Bank in February, 2020.
  • Through this policy, the central bank would provide liquidity support to commercial banks for a period of 1 to 3 years at the current repo rate, and would accept government securities as collateral in return.
  • This is in contrast to the other measures it was providing such as Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) which provide cash to banks for a period of 1 to 28 days only.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Is Indian economy going through stagflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: WPI and CPI, MPC inflation targeting framework etc

Mains level: Paper 3- Role of MPC and inflation targeting issue

The article analyses the challenge faced by the Monetary Policy Committee in wake of a pandemic where falling growth is accompanied by the rising inflation.

Dilemma with inflation targetting in pandemic

  • After the RBI’s adoption of a flexible inflation targeting framework from August 2020, it became even more focused on anchoring inflation and inflation expectations than ever before.
  • But the COVID pandemic has created a dilemma for the RBI.
  • Higher-than-anticipated inflation compelled the monetary policy committee (MPC) to hold policy rates despite the contraction in April-June GDP by 23.9 per cent.

 CPI vs. WPI: Which should be focused for inflation targeting?

  • Inflation-targeting framework based on one narrow nominal consumer price index (CPI)  has highlighted the challenges of conducting monetary policy in a severe growth shock scenario.
  • Inflation targeting is particularly challenging if it coincides with a sharp increase in headline CPI inflation as in the current period.
  • The current framework has led to an excessive and obsessive emphasis on point CPI estimates, at the cost of ignoring other indicators.
  • WPI core inflation, which essentially represents the manufacturing sector, is below 1 per cent but this does not find much mention.
  • This is strange because ultimately, the GDP deflator is calculated using both CPI and WPI inflation, with the latter having a greater weight.
  • This should be taken into consideration, while reviewing the existing monetary policy framework.
  • Given the composition of the current CPI basket, RBI’s monetary policy actions can at best impact only 41.35 per cent of the overall items.
  • Food and beverages, fuel items, gold and silver tobacco/intoxicants are items over which the RBI does not have any control.[58.65 per cent of the overall items]

This is a different time

  • In normal times, a sustained increase in food and fuel prices can lead to a generalised increase in prices.
  • But this argument is not valid in the current context where a large number of people have lost their jobs or have seen fall in incomes.
  • In the current context, higher food and fuel prices would lead to reduction in expenditure on discretionary items.
  • So there will be only a relative shift in prices, without any fear of a generalised spiral, as households will not be in any position to demand higher wages to compensate for the increase in prices of food and fuel items.
  • Given the amount of slack in the economy, a scenario of sustained generalised increase in prices seems unlikely over the next 6-9 months.

How to measure the success of inflation targeting

  • The CPI inflation targeting framework has helped to reduce inflation expectations during FY17-FY21 on average (9.3 per cent) compared to the previous period of FY12- FY16 (12.8 per cent).
  • However, the gap between inflation expectations and actual CPI inflation has remained unchanged at 5.1 per cent during these two periods.
  • The success of the inflation-targeting framework should not only be judged by the actual CPI inflation trend, but also in terms of gap between the two.

How RBI performed without inflation targeting framework in the past

  • Even without any formal inflation-targeting framework, India had successfully managed to keep inflation low during FY02-FY06.
  • The RBI’s stance then was based on a multiple-indicator approach to conduct monetary policy.
  • First factor that made it possible was the increase in minimum support prices of food-grains was kept below 3 per cent on average.
  • Second factor was the composition of growth which was better during this period with investment growth surpassing consumption growth by several percentage points.
  • It is for this reason that CPI inflation remained contained at 4 per cent on average during this period even with 7 per cent real GDP growth.

Risk of structural increase in inflation

  • In the current cycle, investment growth is likely to be impacted more severely than consumption growth.
  • Given the acute weakness in the demand side of the economy, persistent problems in the real estate sector, continued deleveraging of the NBFC sector and significant job losses structural increase in inflation is limited.

What should be the policy response

  • The scope for rate cuts remains dim in the near-term.
  • But the RBI to remain active with a host of unconventional measures, which will likely include more proactive bond purchases to ensure that market interest rates do not rise significantly due to fiscal and market borrowing-related concerns.

Conclusion

Given the prevailing unholy mix of growth and inflation, it is tempting to categorise India’s economic situation as one of “stagflation”. But, in our view, it is too early to conclude decisively on this matter, given the fluid nature of things.


Back2Basics: Inflation expectations

  • Inflation expectations are what people expect future inflation to be, and they matter because these expectations actually affect people’s behavior.
  • If people expect inflation to be lower and they act on those beliefs, they could, in fact, cause inflation to be lower.
  • If businesses expect lower inflation, they may raise prices at a slower rate; they don’t want the prices of their items to look too out of line with those of their competitors.
  • If workers expect lower inflation, they may ask for smaller wage increases.
  • The combination of businesses and workers acting in this manner will result in the economy experiencing lower inflation.

 

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Coordinated strategy between government and RBI

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Monitory policy and fiscal policy

Mains level: Paper 3- Monetary and fiscal response.

The article analyses the relation between the response of fiscal authority and monetary authority to get the maximum payoff in the normal circumstance. But the pandemic would require different approach.

Coordination between monetary and fiscal authority in India

  • Coordination between monetary and fiscal authorities has been a thorny issue globally in recent years.
  • If there is perfect coordination between the monetary and fiscal policy then there should be statistically significant negative correlation between the two. 
  • In the Indian context, for the 30-year period till FY2020, relation between the change in the consolidated fiscal deficit and the change in the growth rate of broad money reveals no coordination, substantiating the dominance of fiscal over monetary policy.
  •  Non-coordination between the two in India is also constrained by several policy targets and fewer instruments.

Optimal combination of monetary and fiscal strategy

  • Both the government and the RBI have two options between them — either a contraction or an expansion.
  • Thus, we effectively have four policy options, and each of the options will have a particular benefit.
  • Our endeavour is to find out which policy option can result in a Nash Equilibrium.
  • A Nash equilibrium occurs when neither the government nor the RBI can increase its benefit by unilaterally changing its action.
  • The payoff scenarios are hypothesised as benefits accruing to the government and the RBI separately when they are deciding on either of the policy options: Contraction or expansion.
  •  The government favour an expansionary policy and gets maximum payoffs from a fiscal expansion, either with monetary expansion or contraction.
  • The monetary authority ideally wants to contract the economy to fight inflation and gets maximum payoffs from a monetary contraction.

So, what is optimal combination of fiscal and monetary strategy

  •  If the RBI opts for monetary expansion, the government also opts for expansion as the payoff is higher.
  • But this will compel the RBI to then opt for contraction, since that gives it a higher payoff.
  • Knowing this, the government’s best strategy will be then an expansion — so the outcome will always be a fiscal expansion with a simultaneous monetary contraction.
  •  This is the only Nash equilibrium for this game.

Responding to the pandemic

  • The current pandemic is resulting in behavioural changes of individuals in terms of risk-taking.
  • In the Indian context too, there are behavioural changes in terms of risk-taking.
  • Many of the current companies were also born during the financial crisis, like Uber (2009), Microsoft (1975), Disney (1923), General Motors (1908) and General Electric (1890).
  • Echoing such “procedural rationality” in the current unprecedented circumstances, we thus believe fiscal expansion and monetary expansion is the desirable outcome.

Conclusion

The RBI has been largely successful in communicating to the market about its intentions and we now expect the government to manage expectations with coordinated communication and leave matters of financing the fiscal deficit, through measures like monetisation, to the RBI.

B2BASICS

NASH EQUILBRIUM

Simply put, it is a situation where no player can increase his payoff by deviating alone (from the situation). That is,it is a situation where both players are involved in mutual best replies.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Aiming for wider consumer base and directing public spending accordingly

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Widening consumer base to revive growth

The article suggests the widening of consumer base rather than increasing consumption. To augment that, the government should also direct the spending towards such sectors which would help in broadening of the base.

Prescription for long term growth: Broadening the consumer base

  • India entered the pandemic with declining growth and limited scope for a conventional and large fiscal stimulus.
  • The NSS 68th round consumption survey indicates that in urban India, the top 20 per cent of the population accounted for nearly 55 per cent of discretionary consumption and 45 per cent of all consumption.
  •  The narrow consumption base coupled with uncertainty over the demographic dividend could belie India’s long-term investment attractiveness.
  • With or without the pandemic, the prescriptions for long-term growth remain the same — broaden the consumer base.
  • This broadening of the consumer base should happen through empowering the low and middle-income consumers.

Why can’t the government just spend to revive growth

  • 1) Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
  • 2) With revenues declined, funding of additional expenditure is through higher borrowings.
  • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.
  • India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. 

Way forward

  • India needs to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
  • To achieve this we will need well-paid employment for the bottom and middle segments.
  • The “safe” group of India’s workforce is extremely small.
  • The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category.
  • Within this segment, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract.
  • These sharp skews in consumption and labour become a substantial risk for a consumption-led growth in the aftermath of a crisis.
  • The PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce.
  • 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
  • The rebuild and recover phase should aim for a wider consumer base with infrastructure and manufacturing as the two pillars.
  • To make manufacturing easier, the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
  • Policies should not become too inward-looking such that export promotion becomes difficult.

Directing public spending and policies appropriately

  • Most public spending should be directed towards roads, railways, infrastructure, healthcare and educational facilities.
  • To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities.
  • Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
  • The government should also signal its vision along with a financing strategy through sharper expenditure management, enhanced market borrowings, setting up of a Development Financing Institution, and an asset monetisation programme.

Conclusion

To achieve economic growth of 7-8 per cent the government needs to start addressing large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Private: India’s GDP Contraction

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Mains level : Economic recovery amid coronavirus pandemic

  • India’s GDP for the period April to June 2020 has contracted by 23.9 percent.
  • In other words, the total value of goods and services produced in India in April, May and June this year is 24% less than the total value of goods and services produced in India in the same three months last year.
  • What is worse is that, because of the widespread lockdowns, the data quality is sub-optimal and most observers expect this number to worsen when it is revised in due course.

India’s GDP numbers

Almost all the major indicators of growth in the economy — be it production of cement or consumption of steel — show deep contraction. Even total telephone subscribers saw a contraction in this quarter.

Chart 1: India’s GDP story since economic liberalization. Source: McKinsey and Express Research Group.

Chart 2: Percentage change in key indicators. Source: Ministry of Statistics and Programme Implementation

What contributes to India’s GDP?

GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).

In any economy, the total demand for goods and services — that is the GDP — is generated from one of the four engines of growth.

  1. The biggest engine is consumption demand from private individuals like us. Let’s call it C, and in the Indian economy, this accounted for 56.4% of all GDP before this quarter.
  2. The second-biggest engine is the demand generated by private sector businesses. Let’s call it I, and this accounted for 32% of all GDP in India.
  3. The third engine is the demand for goods and services generated by the government. Let’s call it G, and it accounted for 11% of India’s GDP.
  4. The last engine is the net demand for GDP after we subtract imports from India’s exports. Let’s call it NX. In India’s case, it is the smallest engine and, since India typically imports more than it exports, its effect is negative on the GDP.

So total GDP = C + I + G + NX

Now, look at Chart 4. It shows what has happened to each of the engines in Q1.

Chart 4: Engines of growth falter. Source: MoSPI and Express Research Group

Reasons for GDP contraction

The biggest engines, which accounted for over 88% of the Indian total GDP saw a massive contraction. They are as follows:

  1. Private consumption — the biggest engine driving the Indian economy — has fallen by 27%.
  2. Investments by businesses: The second biggest engine — investments by businesses — has fallen even harder — it is half of what it was last year same quarter.
  • Net export demand: The NX has turned positive in this Q1 because India’s imports have crashed more than its exports. While on paper, this provides a boost to overall GDP, it also points to an economy where economic activity has plummeted.
  • Govt. Expenditure: Data shows that the government’s expenditure went up by 16% but this was nowhere near enough to compensate for the loss of demand (power) in other sectors (engines) of the economy.

Issues with govt. expenditure

  • Even before the COVID crisis, government finances were overextended.
  • It was not only borrowing but borrowing more than what it should have. As a result, today it doesn’t have as much money.
  • It will have to think of some innovative solutions to generate resources. Chart 4 by McKinsey Global Institute provides ways in which an additional 3.5 per cent of the GDP can be raised by the government.

Why can’t the government just spend to revive growth?

  • First, in all likelihood, temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
  • Second, the fiscal situation was weak even before the pandemic. With revenues having cratered, funding of additional expenditure is through higher borrowings.
  • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.

Implications of GDP decline

  • With GDP contracting by more than what most observers expected, it is now believed that the full-year GDP could also worsen.
  • A fairly conservative estimate would be a contraction of 7% for the full financial year.
  • Chart 1 puts this in perspective. Since economic liberalisation in the early 1990s, Indian economy has clocked an average of 7% GDP growth each year. This year, it is likely to turn turtle and contract by 7%.
  • The worst affected were construction (–50%), trade, hotels and other services (–47%), manufacturing (–39%), and mining (–23%).
  • It is important to note that these are the sectors that create the maximum new jobs in the country.
  • In a scenario where each of these sectors is contracting so sharply — that is, their output and incomes are falling — it would lead to more and more people either losing jobs (decline in employment) or failing to get one (rise in unemployment).

Impact on Economy

The impact of an economic contraction on an average individual isn’t always in a direct way, like job losses or salary cuts. There are indirect ways as well. Let’s take a look at this pointwise.

  • Many companies are encouraging their employees to work from home. This has an impact on those working in the surrounding informal sector leading to a loss of economic activity.
  • If people cut down on consumption, it basically means they are spending less than before. This works in various ways. First, businesses, on the whole, see a fall in revenues and a fall in profits. Hence the employees are bound to be impacted.
  • Many businesses, in order to stay afloat, have fired employees. Some have cut salaries. Some others have rescinded on the job offers they made.
  • Even businesses that are on a strong wicket have given only bare-minimum increments to their employees this year.
  • Many big businesses have publicly announced that they are putting all their expansion plans on the backburner currently. If businesses don’t expand, then a fresh set of jobs don’t get created and hence expenditure.

Getting recovered: Way forward

1.Thinking beyond stimulus

To achieve a stipulated economic growth, the government needs to start addressing some of the traditional sore points such as the large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

  • It is easy to prescribe abandoning fiscal prudence or ‘printing money’ to fund spending. But the risk is high compared to the reward.
  • This sets the base for any kind of “stimulus” — it should be well-targeted and have a large multiplier effect.
  • Instead, they argue, that India needs to broaden its consumer base beyond the top 10- 20 per cent of the population to improve long-term growth prospects.
  • This cannot happen with regular doses of consumption stimulus but through creating steady and well-paid employment for the bottom and middle segments.

2.Tax reforms

One area that clearly needs reform is the GST system, which instead of freeing up the Indian economy has acted in a negative way.

3.Improving  Public health infrastructure

Another area that clearly needs reform is India’s public health infrastructure.

  • While these reforms may not lead to immediate benefits they will work well for the economy in the longer-term, something which we shouldn’t miss out on with the current focus on Covid-19.
  • Beyond that, there isn’t much that the government can do. Also, it is worth remembering here that the Indian economy was already in trouble before the pandemic struck.

Raghuram Rajan’s Suggestions

1. Government-provided relief

  • The economist pointed out that the government’s reluctance to do more today seems partly because it wants to conserve resources for a possible future stimulus. “This strategy is self-defeating
  • Rajan said economic stimulus would work as a tonic and  called MNREGA a tried and tested means of providing rural relief which needed to be be replenished as needed.
  • Given the length of the pandemic, more direct cash transfers to the poorest households, especially in urban areas that do not have access to MNREGA, is warranted.

2. Expand resources

  • India could borrow more without scaring the bond markets if it committed to return to fiscal viability over the medium term – for example, by setting future debt reduction targets through legislation and committing to honest and transparent fiscal numbers with a watchdog independent fiscal council.
  • It should prepare public sector firm shares for on-tap sale, to take advantage of every period of market buoyancy.
  • Many government and public sector entities have surplus land in prime urban areas, and those too should be readied for sale.
  • government would have to set aside resources to recapitalise public sector banks as the extent of losses are recognised.

 3. Clear payables quickly, provide rebates to corporations, small firms

  •  Government and public sector firms must clear their payables quickly so that liquidity moves to corporations.
  • Rebates on the corporate income and GST tax depending on firm size would help small viable firms, he said.

4. Plan to deal with financial distress

Government need to plan for financial distress when various entities would be unable to pay as payment moratoria come to an end.

His suggestions to combat this included:

  • a variety of structures to help debtors and claimants reach agreements to restructure obligations,
  • arbitration forums set up to renegotiate claims of various sizes and beefed up civil courts,
  • debt recovery tribunals and the NCLTs to provide rapid back-up judgments.

5. Reforms as stimulus

  • Reforms, even if they are not undertaken immediately, could boost current investor sentiment.
  • The world will recover earlier than India, so exports can be a way for India to grow,
  • His suggestions for this included reversal of recent tariffs increases so inputs could be imported at a low cost and implementation of “long-debated reforms to land acquisition, labor,  power” and in agriculture.

 


References:

https://indianexpress.com/article/explained/gdp-contraction-23-9-the-economics-behind-the-math-6578046/

https://www.deccanherald.com/business/economy-business/gdp-contraction-no-easy-solutions-but-a-chance-for-deep-economic-reforms-883234.html

https://www.newslaundry.com/2020/09/04/explained-how-will-indias-gdp-contraction-impact-you

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Despite the messaging, it is still advantage China

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Providing alternative investment destination to China and policy changes in India

The article examines whether India has been proving a favourable alternative to China or not.

Is India becoming alternate supply source and investment destination?

  • Despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit China.
  • Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now.
  • Those that do leave may not choose India as a relocation destination.
  • Many U.S. companies with experience working with China are not convinced that India has China’s established industrial base and expertise.
  • They also see other Asian countries as more competitive.

India’s strengths

  • Democracy: India’s identity as a democratic “un-China” is one of its strongest selling points.
  • Strong IPR: There is no threat of stealing of intellectual property rights.
  • No coercive tactics: Foreign companies in India are not subject to coercive tactics as in China.
  • Institutions: India’s open and vibrant press, an independent judiciary, and other advantages of democratic governance also provide a contrast to China.
  • Domestic market:India’s well-off domestic market also attracts foreign investors.

Why China is a favoured destination

  • China offers many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product.
  • China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities.

Way forward

1) Focus on the States

  • India can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors.
  • Foreign capital could also greatly increase infrastructure funds beyond government spending alone.
  • India might also usefully build up new industrial centres with an eye to geography. [for instance-linking the southeast of the country to supply chains in Southeast Asia]

2) Focus on the policy framework

  • India should take two great steps-
  • 1) Reduce the number of investments needing approval by the Centre.
  • 2)To increase intra-Ministry coordination on foreign direct investment policies.
  • The same coordination could be extended to the appointment of a high-level official or body in the Prime Minister’s Office.
  • This will ensure that all proposed economic policy changes are consistent with the goal of attracting foreign investment.

Conclusion

A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Implications of World Bank halting ‘Doing Business’ report for India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various indicators in Ease of Doing Business index

Mains level: Paper 3- Ease of doing business Index and issues with it

India’s ranking in the World Bank’s ‘Ease of Doing Business’ index has improved spectacularly. However, the World Bank recently halted its publication and announced decision to review and assess data changes for last five years.

Background

  • Citing irregularities of data for a few countries, the World Bank halted its annual publication ‘Doing Business’ report.
  • It will conduct a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.

Why India should be concerned

  • Through improved ranking India sought to attract investments to achieve the targets set for ‘Make in India’.
  • India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014.
  • Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”.
  • The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking.
  • Study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
  • During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017.
  • The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies.

Does ease of doing business have predictive power?

  • While India’s rank drastically improved, it has meant nothing on the ground.
  • The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18.
  • Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics.
  • India’s import dependence on China has shot up.
  • In case of Russia, ease of doing business rank jumped from 120 in 2012 to 20, but without becoming a magnet for investment inflows.
  • China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

Other flaws in the Index

  • The Indicators used for the index are de jure (as per the statute), not de facto (in reality).
  • The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
  • The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index.
  • The World Bank conducts a global enterprise survey collecting information from companies.
  • There is no correlation between the rankings obtained from ease of doing business and the enterprise surveys.

Lack of theoretical basis: Major flaw

  • There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment.
  • Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations.
  • Such simplistic basis is used under a seemingly scientific garb of the quantitative index to the disadvantage of workers.
  • To meet the ease of doing business targets, safety standards of factories are compromised.
  • For instance, in 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950.
  •  However, no factory has complied with self-certification or submitted the third party certification.

Consider the question “Examine the issues with the World Bank’s ‘Ease of Doing Business Index’?  What are its implications for India?”

Conclusion

It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Economic crisis without culprit

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Nominal GDP

Mains level: Paper 3- Economic slowdown caused by pandemic

Contradictions in the present crisis

  • India registered negative economic growth in 1972-73, 1965-66 and 1957-58.
  • All these were drought years.
  • 1957-58 also registered a significant balance of payments (BOP) deterioration and 1979-80 witnessing the second global oil shock following the Iranian Revolution.
  • Farmers harvested a bumper rabi crop last year and public cereal stocks at 94.42 million tonnes as on July 1 were also 2.3 times the required level.
  • There’s no shortage today of food, forex or even savings.
  • Foreign exchange reserves were at an all-time high of $538.19 billion.
  • So, the real GDP decline of 5-10 per cent for 2020-21 would be the country’s first-ever not triggered by an agricultural or a BOP crisis.

“Western style” demand slowdown in India

  • What India has been going through is a full-fledged recession bereft of consumption and investment demand.
  • Households have cut spending.
  • The same goes with businesses. Many have shut or are operating at a fraction of their capacity and pre-lockdown staff strength.
  • This demand-side uncertainty and the resulting economic contraction is something new to India.
  • Banks are also facing a problem of plenty.
  • While their deposits are up 11.1 per cent, the corresponding credit growth has been just 5.5 per cent.
  • At some point when all this reduced spending and investments leads to a further contraction of incomes, it is bound to reduce savings as well.

Why the government is not spending?

  • Solution in such a situation is the spending by the government.
  • There are three probable reasons why government isn’t doing that.

1.Optimism

  • Hope that once the worst of the pandemic is behind us, people will start spending and businesses, too, will spring back to life.
  • However, this assumes the economy wasn’t doing all that badly previously and that the lockdown hasn’t caused too much of permanent damage.
  • The truth is that growth had already slid to 3.9 per cent in 2019-20.

2.State of Government finances

  • In 2007-08 global financial crisis, the Centre’s fiscal deficit was only 2.5 per cent of GDP, whereas it stood at 4.6 per cent in 2019-20.
  •  The space for a fiscal stimulus, in other words, is very limited compared to that time.

3.Sustainability of debt

  •  Between 2007-08 and 2019-20, the Centre’s outstanding debt-GDP ratio has come down from 56.9 to 49.25 per cent.
  • So has general government debt, which includes the liabilities of states, from 74.6 to 69.8 per cent.
  • Economists such as Olivier Blanchard have shown that public debts are sustainable provided governments can borrow at rates below nominal GDP growth (i.e. GDP unadjusted for inflation).
  • The nominal GDP averaged 11.1 per cent during  2014-15 to 2018-19.
  • As against this, the weighted average interest rate on Central government securities ruled between 6.97 per cent in 2016-17 and 8.51 per cent in 2014-15.
  • Only with nominal GDP growth falling to 7.2 per cent in 2019-20, and most likely zero this fiscal, has the Blanchard debt sustainability formula come under threat.

Way forward

  • Government can take lessons from the Vajpayee period when the weighted average cost of Central borrowings more than halved from 12.01 per cent in 1997-98 to 5.71 per cent in 2003-04.
  • In the last four months, yields on 10-year Indian government bonds have softened from 6.5 to 5.9 per cent and even more for states — from 7.9 to 6.4 per cent.
  •  Interest rates will fall further as banks have nobody to lend to.

Consider the question “Examine how covid induced economic recession is different from the past recessions? What are the options with the government to deal with the situation?” 

Conclusion

Governments should borrow and spend. They need worry only about GDP growth, real and nominal.

Sources: https://indianexpress.com/article/opinion/columns/a-crisis-without-villains-6557602/

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The new consumer

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Demand problem and ways to deal with it

The focus of this article is on the behavioural changes in the consumer post Covid. It also suggest the ways to deal with these changes.

Context

  • The consumer during and post-COVID is showing remarkable flexibility, bringing about a paradigm shift in her consumption pattern.

Issue of generating demand

  • Some state governments are busy demanding the opening up of the economy.
  • However, the issue is that the economy does not merely need opening up, but it requires urgent generation of basic demand.
  • That is why consumer behaviour needs to be closely watched.
  • Since the lockdown, the priorities of consumers have seen a drastic shift.

Factors to consider to increase demand

  • 1) The decrease in the purchasing power to buy products needs to be addressed.
  • The government must look at ways like a reduction in taxes which will help the common man.
  • 2) The current scenario has also made all of us go back to the basic needs.
  • Luxury products hold little value. But renting will increase.
  • 3) The emphasis will be on saving for a rainy day, whether in the case of banks or households
  • 4) Aviation, tourism and hospitality sectors have been hit and continue to remain so even after the restrictions are lifted.
  • 5)  e-commerce has shown exponential growth and will continue to do so.
  • 6) With “Vocal for Local” gaining momentum, there’s a huge increase in local apps, local kirana stores, local artisans and brands.
  • 7) Schools and colleges have taken a hit as e-learning and online courses are being preferred.
  • 8) The entertainment industry has been drastically hit. The media and entertainment industry needs to pay heed to this and curate content accordingly.
  • 9) With a lot of people laying emphasis on their health and immunity, there’s been a substantial rise in the consumption of organic, ayurvedic, and immunity-boosting products.
  • Apart from the obvious products, financial and medical insurance will play an important role.
  • 10) Real estate will suffer as no long-term, high investment purchases will be favoured, but renting will increase.

Role of the government

  • 1) People need to be provided with their daily needs — basic essentials such as food, water, housing, and electricity.
  • The government is already taking care of that, but money also needs to be given.
  • 2) Jobs need to be provided through development of infrastructure projects.
  • 3) Farmers need to have insurance for their crops and the infrastructure to sell at the right price.
  • 4) Migrant workers with their livelihoods being disrupted are looking for support,and many are focusing on agriculture as a means of income.

Way forward

  • The government should focus on generating demand for products, and create jobs by improving infrastructure.
  • The government must incentivise spending by offering tax benefits on the amount spent.
  • Government must forget about fiscal prudence this year.
  • Consumers in rural areas are buying more than before.Companies should focus on tapping the rural demand

Consider the question “Demand has been the driver of India’s growth. But the pandemic has dampened it with devastating effect. Agaist this backdrop suggest the measures to be taken by the government to revive the demand.”

Conclusion

With focus on these emerging trends and changing behaviour of the consumers, the government must take steps to bring the economy fast on the tracks.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How to pay for the stimulus package

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Debt financing versus money financing

The article addresses the issue of apprehensions over money financing. It also compares the option of borrowing from international institutions.

Issues with public spending

  • Greater public spending will increase the fiscal deficit and this expansion has to be financed.
  • Theoretically, it can be financed by higher taxes.
  • But when the economy is in a recession, this option cannot be explored even though the balanced-budget multiplier is one.
  • When the multiplier is one, output expands by exactly the same amount as the increase in government spending.

So, what are the options?

There are two options

1) Issuing debt to the public (Debt financing)

2) Borrowing from the RBI (Money financing)

Borrowing from World Bank and IMF?

This borrowing has 4 issues with it-

  • 1) This borrowing will have to be paid back in hard currency.
  • This would involve India having to earn hard currency by stepping up exports.
  • If a stimulus of approximately 10% of the GDP is envisaged, with exports at 25% of the GDP, it would imply stepping up exports by close to 50%.
  • This would be a herculean task under present circumstances.
  • 2) There is the issue of conditionalities.
  •  It is not obvious what conditionalities will come along with the loan.
  • 3) The loan is bound to take some time to be negotiated, taxing the energies of a government that ought to be engaged in the day to day battle with COVID-19.
  • 4) The external debt is truly national which, arguably, government bonds held by the country’s private sector are not.

Issues with money financing

  • The standard economic argument against money financing is that it is inflationary.
  • However, whether a fiscal expansion is inflationary or not is related more to the state of the economy than the medium of its financing.
  • When resources are unemployed, output may be expected to expand without inflation.

Consider the question “Examine the issues with the money financing of the fiscal deficit.”

Conclusion

There is no reasoned case for denying ourselves the option of money financing to take us back to pre-COVID-19 levels of output and employment.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Gold and forex reserves cannot finance stimulus

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Debt monetisation, RBI balance sheet etc

Mains level: Paper 3-Ways to raise funds to finance the stimulus package

The article analyses the issues with suggestions like printing of currency and using forex reserves to finance the stimulus. They also lead to an increase in government debts.

Context

  • Prime Minister announced a stimulus package of 20 trillion to fight the economic fallout of the covid pandemic.
  • Since then, several unorthodox ideas have been floated to raise funds for it without straining government finances.
  • Among the suggestions are the printing of currency, and using foreign exchange reserves or household gold.

Let’s look at entries in the RBI’s balance sheets

  • On the liabilities side of it is the currency in circulation, commercial bank reserves  and government reserves.
  • On the asset side of it is forex reserves, government securities and gold.
  • The balancing item represents the central bank’s equity and accumulated surplus.

Let’s look at 3 options suggested above and issues with them-

1) Printing currency

  • Doing this would increase the liabilities of the RBI under “currency in circulation”.
  • But it first needs to acquire assets to offset this increase in liability.
  • These assets could be government securities, forex reserves or gold.
  • Thus, one way for the government to finance its expenditure would be to issue government bonds and ask RBI to print currency with which to subscribe to such bonds.
  • This is known as deficit monetization.
  •  It is important to note that for the central bank to print money, the government would have to issue bonds to it.
  • It will increase government debt.

2) Monetisation of gold held by household

  • This would first involve the government buying gold from households in exchange for its bonds.
  • Then, the accumulated gold would be bought by RBI from the government with newly printed currency.
  •  In this case, instead of creating new money to acquire government bonds, RBI would be doing the same to acquire gold.
  • This too involves the Centre taking on additional debt.
  •  Moreover, gold monetization schemes in the past have yielded only mild success.

3) Using RBI’s forex reserves

  • Against every dollar of forex reserves shown by RBI on the asset side, an equivalent rupee amount has already been created on the liability side.
  • This is because whenever RBI acquires foreign currency, it pays for it using the Indian rupee.
  • Thus, no additional currency can be printed against such already-acquired reserves.
  • The only way our forex reserves can be used for generating additional resources is by pledging them to a third party.
  • The pledging of RBI’s assets to raise funds is done only under extreme circumstances, for instance, during the 1991 balance of payments crisis.
  • We are certainly not in a situation that warrants a repeat of an exercise where RBI’s assets, be it gold or forex reserves, have to be mortgaged.

So, what is the way out?

  • There are only three ways to finance government expenditure: taxes, debt and asset sales.
  • Taxes and asset sales can pitch in a bit towards the stimulus bill.

Consider the question “Examine the ways in which government can raise the funds to finance the stimulus package and also discuss the issues with each move.”

Conclusion

There is no escaping the fact that we are staring at a higher build-up of government debt in the future. When we stop harbouring the notion that we can pay the stimulus bill without any deterioration in government finances, we will be able to see the bitter truth: There is no such thing as a free lunch.

Read more about the issue here:

India’s rising Forex Reserves

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Do we need Fiscal Council

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Fiscal Council and why it won't be the solution

Why there is a need for Fiscal Council?

  • With a complex polity and manifold development challenges, India need institutional mechanisms for prudent fiscal practices.
  • An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.
  • International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.
  • In a globalised world of enormous capital flows, market volatility across the world and especially in emerging markets, in response to monetary policy changes in major economies, and geopolitical tensions that ebb and flow, causing currencies and commodity prices to swing, countries like India need macroeconomic management as an active function round the year.
  • Also, it is supposed to report to the parliament regarding the practicability of government forecasts in the budget. This will make executive more responsible in budget preparation.
  • For the last eight years the projections of the government has fallen short by a consistent 10 percent, leading to fund cuts in the middle of the year. Thus, an independent Fiscal council would evaluate budget proposals and forecasts using objective criteria.
  • This would also boost confidence in global credit rating agencies about government’s fiscal commitment.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How to counter China

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Policy changes and reforms needed for growth of India

There is no doubt that an economically prosperous India will be well placed to deal with China effectively. So, to achieve this prosperity India urgently needs to embark upon the path of reforms. 

How much China has moved ahead

  • In 1987, both countries’ nominal GDPs were almost equal.
  • China’s economic opening-up has left India behind, contributing to a military imbalance.
  • China’s economy was nearly five times larger than India’s in 2019.
  • Not coincidentally, from rough parity in 1989, China’s military spending last year more than tripled India’s.
  • Heightened vigilance along the LAC demands summoning scarce resources.
  • If India cannot close the economic gap and build military muscle, Beijing may feel emboldened to probe the subcontinent’s land and maritime periphery.

Reforms: Key to progress

  • In 1991, India enacted changes allowing markets to set commodity prices.
  • But it did not similarly liberalise land, labour and capital.
  • Now, the government has delivered mixed messages about a revitalised reform agenda.
  • Some States have temporarily lifted labour restrictions.
  • Some others intend to make land acquisition easier.

But a call for self-sufficiency could do harm

  • India emphasis on self-reliance could inhibit growth and constrain investment in a more vigorous foreign and defence policy.
  • Greater self-sufficiency is desired.
  • Home-grown manufacturing of critical medicinal ingredients or digital safeguards on citizens’ personal data would reduce vulnerabilities.
  • Imposing restriction to help the local defence industry would hamper acquisitions helping balance China.

Competition from other countries

  • China is facing intense scrutiny for its role in the pandemic, geopolitical competition, trade wars, and economic coercion.
  • Businesses are revisiting whether or not to diversify suddenly exposed international value chains.
  • India’s competitors [like Bangladesh, Vietnam] are trying to attract the businesses shifting out form China.
  • These countries are highlighting their regulatory predictability, stable tax policies, and fewer trade obstacles.
  • While India remains outside the Regional Comprehensive Economic Partnership, competitors are wooing companies seeking lower trade barriers.
  • Asian countries are pushing ahead: Vietnam just inked a trade deal with the European Union that threatens to eat into India’s exports.

Way forward

  • India needs increased exports and investments to provide more well-paying jobs, technology.
  • Before committing to long-term, multi-billion investments, companies often want to test India’s market through international sales.
  • Liberalisation remains the tried-and-true path to competitiveness.
  • If India can unite its people and rapidly strengthen capabilities, it will likely discover that it can deal with China effectively.

Consider the question “Do you agree with the view that slowdown in the reforms in land, labour and capital after the reforms of 1991 restricted Indias economic progress? Give reasons in support of your argument.

Conclusion

The choices that India makes to recapture consistent, high growth will determine its future. Bold reforms offer the best option to manage Beijing and achieve greater independence on the world stage.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

How much forex reserve is too much

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's foreign exchange reserves

Mains level: Paper 3-India's foreign exchange reserves.

India’s foreign exchange reserves touched an unprecedented level. Being reserves, the reserves also represent the lost opportunity. This article examines the reasons for and utility of maintaining huge reserves.

Reasons for surge in the forex reserves

  • The recent forex reserves surge was a result of two things:
  • 1) Foreign institutional investors reinvested in the Indian market in May-June after they exited their positions in panic in March.
  • 2) A global fall in fuel prices has reduced India’s oil import bill, allowing it to save up forex reserves.

But why does India keeps huge forex reserves- 3 possibilities

  • Sufficiency of forex reserves is sometimes measured on how many months’ worth of imports a country can afford.
  • While six months is considered sufficient.
  • The RBI in December 2019 said it had enough to sustain for 10 months, the forex reserves were then $0.4 trillion.
  • Today, the cover is 12 months!
  • This is despite having a sufficient credit line from the IMF, should there be a credit shock.
  • So, there are 3 possibilities for why government maintains such huge reserves.
  • 1) Excess forex reserves are likely the government’s contingency fund, in case the economy suddenly topples.
  • The pandemic has increased the government’s insecurity.
  • 2) Another possibility is that the government is accumulating these reserves as “Plan-B” savings should its strategic disinvestment plans fail.
  • 3) Forex reserves are also likely a way for India now to maintain its global rating.
  • The fundamental use of India’s foreign exchange should be to ensure the Rupee (INR) stability.

Stability of Rupee

  •  Despite steadily rising reserves, INR fluctuated between 77 and 75 against the US dollar in the last two months.
  • INR has become one of Asia’s worst currencies.
  • The RBI may allow it to devalue further to support its balance sheet,
  • Devaluation would enable it to transfer a big chunk of its realised profits as dividend to the starving government.

Lost opportunity

  • It is understandable for oil-rich countries to maintain high forex reserves.
  • A single oil trade hiccup can derail their economy.
  • Economists have theorised that holding high forex reserves is unnecessary.
  • In fact, not using them to finance mega infrastructure projects are lost opportunities.
  • And yet the Indian government has held these reserves in liquid, possibly for its feared D-day.

Perils of using forex reserves as emergency funds

  •  Over-reliance on these floating funds to stimulate the economy might be poorly informed.
  • The potential of these funds to switch direction [i.e. they could exit as fast] should not be underestimated.
  • In March alone, foreign institutional investments in India fell by Rs 65,000 crore.
  • India’s foreign exchange reserves registered this impact.
  • Reversing the dip, investments went up in May and now in June with some big corporate deals.
  • If the government intends to use forex reserves as an emergency fund, it should ensure that they do not shrink just when they are most needed.

Consider the question “India’s foreign exchange reserves touched new height recently. This also giver rise to the argument of lost opportunity. In light of this discuss the utility of maintaining foreign exchange reserves and issue of optimum level of foreign exchange reserves.”

Conclusion

Maintaining high foreign exchange reserves definitely entails cost. The cost-benefit analysis and the lost opportunity must be the basis for deciding the level of the reserves.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Why spending on infrastructure matters

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Aggregate demand, components of India's growth

Mains level: Paper 3- Importance of spending of infrastructure

Spending on infrastructure can help kickstart the economy. This article highlights the importance of spending on infrastructure and suggests ways to find resources.

Gloomy prospects for Indian economy

  • The IMF estimates the global economy to contract by -4.9 per cent this year.
  • It could still contract should the virus not recede in the latter half of 2020.
  • As for the Indian economy, growth has been decelerating for the past eight quarters.
  • Indications by the RBI suggest that growth is contracting for the first time in four decades.
  •  We must address the elephant in the room — the need to further aid a demand recovery as the economy begins to reopen.

Components of Indias growth

  • Growth in the Indian economy has been dominated by the following components respectively-
  • 1) Consumption.
  • 2) It is followed by investments.
  • 3) Government expenditure.
  • 4) Net exports.
  • However, consumption and investment demand have been subdued for the past few quarters, dragging down overall growth.
  • Keynesian theory suggests that for aggregate demand to increase, at least one of the components of GDP needs to expand.

Declining consumption demand

  • These two components were perhaps casualties of a sharp deceleration in credit supply.
  •  The IL&FS debacle in September 2018 only made matters worse.
  • The NBFC sector, suffered from funding crunches leading to a further squeeze in credit supply.
  • Freeze in credit supply impacted consumption demand.
  • This deceleration is likely to exacerbate going forward.

Declining rate of investment

  • Broad-based utilisation levels, as represented by the RBI, dropped to 68.6 per cent in Q3FY20.
  • This is well below the 75 per cent benchmark for new capacity addition, implying suboptimal levels of fresh investments.
  • A higher rate of investments is essential for sustainable economic growth.
  • The deteriorating economic scenario and increasing levels of debt with rating downgrades for industries are likely to aggravate existing problems.

Importance of expenditure on spending on infrastructure

  • Government expenditure is the only exogenously determined element in a Keynesian framework.
  • The positive push required to aid a demand recovery has to come through the government.
  • However, with sparse resources that India has, we must deploy funds that yield a higher return.
  • One key area that can provide the necessary support is infrastructure investment.
  • A study by S&P Global estimates 1 per cent of GDP spend on infrastructure can boost real growth by 2 per cent while creating 1.3 million direct jobs.
  • Historically, countries have used infrastructure to provide counter-cyclical support to the economy.
  • Notably, infrastructure has strong links to growth and with both supply and demand-side features that help generate employment and long-term assets.
  • India already has an upper hand here.
  • Front-loading key projects with greater visibility from the recently announced National Infrastructure Pipeline (NIP) could aid in a quicker recovery.

Special infrastructure bond

  •  India already has several institutions for infrastructure development purposes from the likes of IIFCL, IRFC to more recently NIIF.
  • Taking a cue from China, floating special infrastructure bonds through this organisation to accelerate the funding of the NIP could aid a speedier recovery.
  • Further, taking a page from the New Deal and its Reconstruction Finance Corporation, this institution’s ability for greater leverage can be used to make amends to our credit channels.
  • This ability could also be used for the development of state government and urban local body bond markets.
  • This could help businesses and bankers overcome risk aversion and bring back trust in the system while financing new paths for growth.

Consider the question “Highlight the role of consumption and investment as the two largest contributors to India’s growth and explain how spending on the infrastructure could help revive the economy hit hard by the pandemic”

Conclusion

The exogenous component in the form of spending by the government could step-in in a greater way, perhaps because, it is the only one that can.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

International Comparison Programme (ICP) by World Bank

Note4Students

From UPSC perspective, the following things are important :

Prelims level: ICP, PPP

Mains level: India's GDP related issues

The World Bank has released its ICP report for the reference year 2017. India has retained its position as the third-largest economy in the world in terms of purchasing power parity (PPP), behind the US and China.

Try this MCQ:

Q. The International Comparison Programme (ICP) Report recently seen in news is released by:  IMF/World Bank/OECD/None.

The International Comparison Programme (ICP)

  • ICP is one of the largest statistical initiatives in the world.
  • It is managed by the World Bank under the auspices of the United Nations Statistical Commission.
  • Globally 176 economies participated in the 2017 cycle of ICP. The next ICP comparison will be conducted for the reference year 2021.

The main objectives of the ICP are:

(i) To produce purchasing power parities (PPPs) and comparable price level indexes (PLIs) for participating economies;

(ii) To convert volume and per capita measures of gross domestic product (GDP) and its expenditure components into a common currency using PPPs.

Highlights of the report

  • India accounts for 6.7% or $8,051 billion, out of the world’s total of $119,547 billion of global GDP in terms of PPP compared to 16.4 % in case of China and 16.3 % for the US.
  • India is also the third-largest economy in terms of its PPP-based share in global Actual Individual Consumption and Global Gross Capital Formation.
  • In the Asia-Pacific Region, in 2017, India retained its regional position, as the second-largest economy, accounting for 20.83 % in terms of PPPs.
  • China was first at 50.76% and Indonesia at 7.49% was third.
  • India is also the second-largest economy in terms of its PPP-based share in regional Actual Individual Consumption and regional Gross Capital Formation.

Trends in INR

  • The PPPs of Indian Rupee per US$ at the GDP level is now 20.65 in 2017 from 15.55 in 2011.
  • The Exchange Rate of US Dollar to Indian Rupee is now 65.12 from 46.67 during the same period.

Significance of PPP

  • Purchasing Power Parities are vital for converting measures of economic activities to be comparable across economies.
  • It is calculated based on the price of a common basket of goods and services in each participating economy and is a measure of what an economy’s local currency can buy in another economy.
  • Market exchange rate-based conversions reflect both price and volume differences in expenditures and are thus inappropriate for volume comparisons.
  • PPP-based conversions of expenditures eliminate the effect of price level differences between economies and reflect only differences in the volume of economies.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Tale of two economies

Note4Students

From UPSC perspective, the following things are important :

Prelims level: India's export

Mains level: Paper 3- India's foreign trade and comparison with China

China began heavy investment in infrastructure. This was a key policy decision as it provided employment to millions of people improving their economic status and purchasing power, which was the essential ingredient for industrial progress.ajya Sabha TV programs like ‘The Big Picture’, ‘In Depth’ and ‘India’s World’ are informative programs that are important for UPSC preparation. In this article, you can read about the discussions held in

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What explains the new mark crosses by our Forex reserves

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Forex reserves and exchange rates

Mains level: Paper 3- India's Forex reserves touched ceiling of half-trillion

At first, it seems almost contradictory. And so it is. Our foreign exchange reserves touched new high of $500 billion for the first time, but the time in which this has happened makes it paradoxical. At the time when economies around the world are touching new lows, this rise in the Forex seems all but usual. In this article, you’ll learn about the 4 factors that made it happen.

1. Decreased oil imports

  • Usually, we import a lot of oil.
  • But the payment here is dollar-denominated since very few countries are going to accept our currency (Rupee) as is.
  • So, you have to expend dollars i.e. the foreign exchange reserves to keep the flow of crude oil intact.
  • However, with the nationwide lockdown in place, our import bill has reduced drastically.
  • We simply don’t need as much oil anymore.
  • And considering oil prices have also taken a beating simultaneously, our Forex Reserves have been piling up.
  • Less oil import. More Forex reserves.

2. Dollars coming with foreign investors

  • Contrary to popular opinion, foreign investors have been pouring money into India of late.
  • You could attribute a bulk of these inflows to Reliance Jio.
  • They’ve been enticing investors all over the world and they’ve been doing it at a pace that belies all rational expectations.
  • They’ve raised close to $15 Bn over the course of a few months and it doesn’t look like they’re stopping anytime soon.
  • So technically, dollar inflows have spiked and therefore, Forex reserves get a boost once again.

3. RBI preparing itself for a bad time

  • Another popular explanation is that the RBI is preparing a war chest to stave off future uncertainties.
  • At a time when the world economy is reeling from an unprecedented crisis, it’s perhaps prudent to build up reserves for a rainy day.
  • So the RBI buys gold and dollar-denominated assets using our national currency and builds up the foreign exchange reserves.
  • Inadvertently, this increases the money supply within the economy.
  • There will be more “Rupees” floating around.
  • As more Indian currency keeps entering the ecosystem, the value of the rupee depreciates.
  • And yes, the value of rupee has tumbled recently, but we are not in dire straits yet.
  • But if India’s economy takes a turn for the worse, it becomes incumbent on the RBI to ensure price stability.
  • Imagine the value of the rupee starts fluctuating wildly because of economic uncertainties.
  • The RBI has to intervene.
  • It has to exchange the foreign reserves for the Indian currency.
  • If they keep mopping up the excess Rupees floating in the system, they could ensure the value of the rupee remains stable.
  • So long as the value of the rupee remains stable, prices of commodities will follow the same cue, all things remaining equal that is.
  • Now, there’s still no clear consensus on what kind of reserves we might need if things do go south.
  • Although there have been recommendations made in the past about hoarding too much, it’s still the RBI’s call at the end of the day.

4. The RBI is doing it for the government

  • The RBI can turn a profit if it wants to.
  • And once it does turn a profit, it can transfer a part of the surplus to the government — as dividends.
  • Now if the RBI wanted to offer the government a higher dividend, it has to simply turn a higher profit.
  • One way to accomplish this is to simply let the value of the rupee depreciate. Do not intervene.
  • Do not forego the reserves. Let the rupee tumble.
  • And so long as you don’t intervene, all the dollar-denominated assets you own will be worth more in rupee terms.
  • Consider the hypothetical example-suppose the exchange rate was 1$= Rs. 71 in March 2020, then the rupee loses value and you see the same line item once again in June 2020 will be 1$=Rs. 76.
  • The extra ₹ 5 is treated as a profit. And this profit could be ploughed back to the government.

Consider the question “With the economy in the tailspin amid pandemic, the news of India’s Forex reserves touching the $500 billion mark for the first time provided the semblance of solace. Examine the factors that could explain this increase.”

Conclusion

Though there will always be the debate over the optimum value of the Forex reserves, the new level it reached in such an uncertain time for the economy is, nonetheless, a cause for celebration.

 


Reference Source : https://finshots.in/archive/india-foreign-exchange-reserves/

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Shapes of Economic Recovery

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Various graphs and their analysis

Mains level: Economic recovery amid coronavirus pandemic

Predicting recovery graphs, economists have added cool shapes for our information.

The types of graphs mentioned here are the possible indicators of macro-economic recovery. They are the potential hotspots for a prelim question. UPSC can puzzle you with the type of graphs and associated macroeconomic situation.

Try to mirror! How would our economy grow?!

Types of graphs

The shape of economic recovery is determined by both the speed and direction of GDP prints. This depends on multiple factors including fiscal and monetary measures, consumer incomes and sentiment.

  • The best scenario is a V-shaped recovery in which the economy quickly recoups lost ground and gets back to the normal growth trend-line.
  • A pipe graph is a V graph with a longer tail — the recovery isn’t one that happens quickly over one quarter but over two-three quarters.
  • The pipe is different from the Swoosh because in the latter the economy bears the pain for longer.
  • A Zshaped recovery is when a post-lockdown spending surge is so fierce that growth is lifted above the trendline and then after a party settles down to trend. The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash.
  • A U-shaped recovery — resembling a bathtub — is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
  • A W-shaped recovery is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart. The double-dip depicted by a W-shaped recovery is what some economists are predicting if the second wave of COVID comes along and the initial rebound flatters to deceive.
  • The L-shaped recovery is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.
  • Then, there is the J-shaped recovery, a somewhat unrealistic scenario, in which growth rises sharply from the lows much higher than the trend-line and stays there.
  • There is also the Swoosh shaped recovery, similar to the Nike logo — in between the V-shape and the U-shape. Here, after falling, growth starts recovering quickly but then, slowed down by obstacles, moves gradually back to the trend-line.
  • Finally, say hello to the Inverted square root shaped In this, there could a rebound from the bottom, the growth slows and settles a step-down.

Why is it important for India?

  • The Indian economy was slowing down even before COVID hit, and the trouble has now been amplified manifold because of the lockdowns.
  • Experts predict a fall of up to 5 per cent in the GDP in FY-21.
  • This is clearly a crisis situation, and our getting out of the hole will depend a great deal on the shape of the economic recovery that will hopefully follow.
  • A Z- or at least V-shaped recovery would be the most preferable. If not, we should at least have a U-shaped recovery or a Swoosh to get back on our feet in a couple of years.
  • A W-shape will bring in much pain before the eventual gain, while an L-shape or the Inverted-square root will make a wreck of the growth train.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Gross Value Added (GVA) Method

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP, GNP, GVA etc.

Mains level: Not Much

The National Statistical Office (NSO) recently released its provisional estimates of national income for the financial year 2019-20. The release also detailed the estimates of the Gross Value Added (GVA).

Try this question from CSP 2011:

Q. In the context of Indian economy, consider the following statements

1. The growth rate of GDP has steadily increased in the last five years.

2. The growth rate in per capita income has steadily increased in the last five years.

Which of the statements given above is/are correct?

(a.) 1 only

(b.) 2 only

(c.) Both 1 and 2

(d.) Neither 1 nor 2

The GVA method

  • In 2015, in the wake of a comprehensive review of its approach to GDP measurement, India opted to make major changes to its compilation of national accounts.
  • It aims to bring the whole process into conformity with the UN System of National Accounts (SNA) of 2008.

What is GVA?

  • As per the SNA, GVA is defined as the value of output minus the value of intermediate consumption.
  • GVA is a measure of the contribution to GDP made by an individual producer, industry or sector.
  • At its simplest, it gives the rupee value of goods and services produced in the economy after deducting the cost of inputs and raw materials used.
  • It can be described as the main entry on the income side of the nation’s accounting balance sheet, and from economics, perspective represents the supply side.

How it has changed income calculation?

  • While India had been measuring GVA earlier, it had done so using ‘factor cost’.
  • GDP at ‘factor cost’ was the main parameter for measuring the country’s overall economic output until the new methodology was adopted.
  • GVA at basic prices became the primary measure of output across the economy’s various sectors and when added to net taxes on products amounts to the GDP.
  • In the new series, the base year was shifted to 2011-12 from the earlier 2004-05.

GVA estimates by NSO

  • As part of the data on GVA, the NSO provides both quarterly and annual estimates of output — measured by the gross value added — by economic activity.
  • The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy.
  • These are: 1) Agriculture, Forestry and Fishing; 2) Mining and Quarrying; 3) Manufacturing; 4) Electricity, Gas, Water Supply and other Utility Services; 5) Construction; 6) Trade, Hotels, Transport, Communication and Services related to Broadcasting; 7) Financial, Real Estate and Professional Services; 8) Public Administration, Defence and other Services.

How relevant is the GVA data given that headline growth always refers to GDP?

  • The GVA data is crucial to understand how the various sectors of the real economy are performing.
  • The output or domestic product is essentially a measure of GVA combined with net taxes.
  • However, GDP can be and is also computed as the sum total of the various expenditures incurred in the economy.
  • It includes private consumption spending, government consumption spending and gross fixed capital formation or investment spending; these reflect essentially on the demand conditions in the economy.

Significance of GVA

  • From a policymaker’s perspective, it is vital to have the GVA data to be able to make policy interventions, where needed.
  • Also, from global data standards and uniformity perspective, GVA is an integral and necessary parameter in measuring a nation’s economic performance.

Issues with GVA

  • As with all economic statistics, the accuracy of GVA as a measure of overall national output is heavily dependent on the sourcing of data and the fidelity of the various data sources.
  • To that extent, GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure.
  • Economists argue that India’s switch of its base year to 2011-12 had led to a significant overestimation of growth.
  • They argued that the value-based approach instead of the earlier volume-based tack in GVA estimation had affected the measurement of the formal manufacturing sector and thus distorted the outcome.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Global Economic Prospects (GEP) 2020 report by World Bank

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GER

Mains level: Not Much

The World Bank has released its Global Economic Prospects (GEP) 2020 report.

Try this PYQ from CSP 2019

Q.) The Global Competitiveness Report is published by the-

(a) International Monetary Fund

(b) United Nations Conference on Trade and Development

(c) World Economic Forum

(d) World Bank

Global Economic Prospects (GEP)

  • GEP is a World Bank Group flagship report that examines global economic developments and prospects, with a special focus on emerging market and developing economies.
  • It is issued twice a year, in January and June.
  • The January edition includes in-depth analyses of topical policy challenges while the June edition contains shorter analytical pieces.

Summary of the report

In a nutshell, the outlook for the global economy for 2020 has darkened, amid slowing activity and heightened downside risks.

1) On poverty

  • The scope and speed with which the COVID-19 pandemic and economic shutdowns have devastated the poor around the world are unprecedented in modern times.
  • Current estimates show that 60 million people could be pushed into extreme poverty in 2020.

2) Policy choices

  • Policy choices made today — include greater debt transparency to invite new investment, foster advances in digital connectivity, and a major expansion of cash safety nets for the poor.
  • The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery.

3) Emerging Market and Developing Economies (EMDEs)

  • EMDEs face health crises, restrictions and external shocks like falling trade, tourism and commodity prices, as well as capital outflows.
  • These countries are expected to have a 3-8% output loss in the short term, based on studies of previous pandemics, as per the analysis.
  • Growth is likely to slow more in commodity-exporting EMDEs than in commodity-importing ones.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Moody’s downgrade India’s Ratings

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not Much

Mains level: Signs of economic slowdown in the country

The Moody’s Investors Service downgraded the Government of India’s foreign-currency and local-currency long-term issuer ratings to “Baa3” from “Baa2”. It stated that the outlook remained “negative”.

Practice question for mains:

Q. Why India’s GDP growth rate is being labelled an overestimate yet again by the global credit rating agencies? Discuss this in context to the latest downgrade of Indian Economy as highlighted by the Moody’s.

Why this matters?

  • The Moody’s is historically the most optimistic rating agency about India.
  • This downgrade challenges India’s policymaking institutions.
  • They will be challenged in enacting and implementing policies which effectively mitigate the risks of a sustained period of relatively low growth.

What is the reason for this downgrade?

There are four main reasons why Moody’s has taken the decision:

  • Weak implementation of economic reforms since 2017
  • Relatively low economic growth over a sustained period
  • A significant deterioration in the fiscal position of governments (central and state)
  • And the rising stress in India’s financial sector

What does “negative” outlook mean?

  • The negative outlook reflects dominant, mutually-reinforcing, downside risks from deeper stresses in the economy and financial system.
  • These could lead to more severe and prolonged erosion in fiscal strength than Moody’s current projections.
  • The ratings have highlighted persistent structural challenges to fast economic growth such as “weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks”.
  • In other words, a “negative” implies India could be rated down further.

Is the downgrade because of Covid-19 impact?

No. The pandemic has amplified vulnerabilities in India’s credit profile that were present and building prior to the shock, and which motivated the assignment of a negative outlook last year.

Then why did the downgrade happen?

  • More than two years ago, in November 2017, Moody’s had upgraded India’s rating to “Baa2” with a “stable” outlook.
  • At that time, it expected that effective implementation of key reforms would strengthen the sovereign’s credit profile through gradual but persistent measures.
  • But those hopes were belied. Since that upgrade in 2017, implementation of reforms has been relatively weak and has not resulted in material credit improvements, indicating limited policy effectiveness.
  • Each year, the central government has failed to meet its fiscal deficit (essentially the total borrowings from the market) target.
  • This has led to a steady accretion of total government debt.

What will be the implications of this downgrade?

  • Ratings are based on the overall health of the economy and the state of government finances.
  • When India’s sovereign rating is downgraded, it becomes costlier for the Indian government as well as all Indian companies to raise funds because now the world sees such debt as a riskier proposition.
  • A rating downgrade means that bonds issued by the Indian governments are now “riskier” than before.
  • The weaker economic growth and worsening fiscal health undermine a government’s ability to pay back.
  • Lower risk is better because it allows governments and companies of that country to raise debts at a lower rate of interest.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Problem of interest rate differential in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Policy rates

Mains level: Paper 3- Why interest differential could be a problem?

Do you remember Operation Twist by the RBI? what was being twisted there? It was the yield curve that was sought to be twisted. It had been aimed at reducing the gap between long term interest rates and short term policy rates. This article explains the impact such gap could have on the economy.

Why long term loans come with a higher interest rate?

  • Long term loans equate to long repayment periods.
  • More uncertainty during these long periods can translate to higher risks.
  • And to compensate for the high risks involved, banks quote higher interest rates when corporates borrow from them to build and operate stuff.
  • However, when banks borrow from the RBI they are borrowing over short intervals.
  • And so they get charged lower interest rates.

So, why banks are keeping interest rates high despite borrowing at low rates from the RBI?

  • Ever so often, the RBI cuts rates in the hopes of making loans more accessible to banks.
  • They are hoping banks will also extend this benevolence to their customers by cutting long term interest rates.
  • But right now, banks are scared.
  • They don’t think the corporates can pay back.
  • So they are keeping long term rates at elevated levels despite borrowing at consistently low rates from the RBI.

What happens when gap between long-term and short term interest rates widen?

  •  Capital wasn’t cheap to begin with for corporate borrowers, and it’s getting more expensive.
  • This comes just as migrant rural workers have been driven out of urban production centers because of shuttered factories.
  • Even if this labor is safely put back on, say, road construction, concessionaires [think private road contractors] might still go bankrupt before completing any projects.
  • That’s because their annuity payments from the government are linked to falling short-term policy rates, whereas their long-term borrowing costs are both high and sticky

To understand the issue of annuity payment and its relation with interest rates, let’s dig deeper into 3 types of models-

1. Build-Operate-Transfer (BOT) Model

  • So, NHAI is the National Highways Authority of India and is largely responsible for building and maintaining roads.
  • Its preferred method to get the job done is to deploy what is called the BOT model.
  • The Build-Operate-Transfer (BOT) model, as the name suggests is a way for NHAI to offload its responsibilities of road building to private contractors.
  • Under BOT model, private contractors build the road, operate it, make money off of collecting toll, and after about 10–15 years, they hand over the road back to NHAI.
  • There aren’t enough private contractors willing to bid for such projects because — hey, maintaining and operating a road is a pain.
  • Why pain?  You have to wait 15 years to recoup all the money you had to pour in to build the damn thing. That’s the pain.

2. Engineering, procurement and Construction (EPC) model

  • Under the EPC (Engineering, Procurement & Construction) model, NHAI pays private contractors first, so that they can help NHAI build the road.
  • The contractor does not operate or collect tolls here.
  • Instead, it can walk away scot-free with money in its coffers once it’s done building the road.
  • But it’s hard for the government to shore up all the resources required upfront.

3. Hybrid Annuity Model (HAM)- The middle path

  •  It’s a nice little mix of both EPC and BOT.
  • Under it, NHAI pays some money upfront in fixed installments usually, 40% of the project cost.
  • And the private contractor does his bit by putting up the rest and finishing the project.
  • However, once the construction is complete, the contractor does not make money off of collecting toll.
  • Instead, he transfers the assets over to NHAI.
  • So its incumbent on the government to pay the rest of the money once the project takes off.
  • And the payments are dependent on the asset created, the performance of the developer, and a few other things.
  • However, since the payouts usually last 15–20 years we need to find a way to determine what kind of money the government pays the contractor every 6 months.
  • And here’s the best way to think about this — So when the government pays the 40% upfront, it’s promising to pay the 60% sometime in the future.
  • It’s money they owe the contractor.

And, here is the crux of the matter

  • So when the repayments, are made, they’ll have to pay the principal and the interest.
  • The interest involves a fixed component (3%) and a variable component.
  • What is varible component? The variable component is effectively the short term policy rates.
  • So if the RBI keeps cutting these short term rates, private contractors get less money per instalment even if their roads are all nice and shiny.
  • And this can’t bode well for them because they probably put up the 60% back in the day by borrowing from another bank.
  • A bank that’s charging them long term interest rates that refuse to come down.

Conclusion

The widening gap between the short term policy rates and long term interest could easily spell the disaster for the entrepreneurs and in turn for the economy as a whole. The government should consider a special package for such entities given the unprecedented situations we found ourselves in.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Understanding the monetisation of deficit

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Relation between bond yield

The RBI could finance the government debt by buying bonds from the secondary market. Or it could directly finance the debt. And both could stoke inflation. But, do they carry the same inflation risk. The answer is an unambiguous ‘No’. So, how monetisation of debt is different from Open Market Operation by the RBI? Read the article to know…

What is Monetised deficit?

  • The Monetised Deficit is the extent to which the RBI helps the central government in its borrowing programme.
  • In other words, monetised deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily.

What monetisation of deficit mean (and doesn’t mean)

  • Monetisation of the deficit does not mean the government is getting free money from the RBI.
  • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch.
  • But it does get a heavily subsidised lunch.
  • That subsidy is forced out of the banks.
  • And, as in the case of all invisible subsidies, they don’t even know.

So, is the RBI monetising the debt?

  • It is not as if the RBI is not monetising the deficit now; it is doing so.
  • It is doing so indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
  • Note that both monetisation and OMOs involve printing of money by the RBI.
  • But there are important differences between the two options that make shifting over to monetisation a non-trivial decision.

Historical context of the monetisation of debt: An agreement

  • In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
  • That practice ended in 1997 with a landmark agreement between the government and the RBI.
  • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
  • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing.
  • So, the RBI uses OMO as liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

So, what were the outcomes of the agreement?

  • The outcomes of that agreement were historic.
  • Since the government started borrowing in the open market, interest rates went up.
  • HIgh interest rates incentivised saving and thereby spurred investment and growth.
  • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
  • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
  • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

What is the reasoning for jeopardising the hard-won gains of agreement?

  • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause.
  • Escape clause permits monetisation of the deficit under special circumstances.
  • What is the case for invoking this escape clause?
  • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
  • Bond yields would spike so high that financial stability will be threatened.
  • The RBI must therefore step in and finance the government directly to prevent this from happening.

No, the situation is not so grim-Look at the bond yields

  • There is no reason to believe that we are anywhere close to the above-mentioned situation.
  • Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
  • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
  • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
  • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

Why worry about monetisation if OMO also leads to inflation?

The following four issues make clear the difference in OMO and monetisation

1. Issue of RBI’s control over monetary policy

  • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation.
  • If so, why should we be so wary of monetisation?
  • Because although they are both potentially inflationary, the inflation risk they carry is different.
  • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
  • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
  • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation.
  • That can be a more serious problem than it seems.

2. Credibility of RBI on curbing inflation

  • India is inflation prone.
  • Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
  • In hindsight, it is clear that the RBI failed to tighten policy in good time.
  • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target.
  • Forsaking that credibility can be costly.

3. Yield on bond could shoot up anyway

  • If, in spite of above problems, the government decides to cross the line, markets will fear that the constraints on fiscal policy are being abandoned.
  • Perception in the market will be that the government is planning to solve its fiscal problems by inflating away its debt.
  • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

4. Monetisation is not inevitable yet

  • What is the problem that monetisation is trying to solve?
  • There are cases when monetisation — despite its costs — is inevitable.
  • If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
  • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
  • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.
  • We are not there yet.

Consider the question asked in 2019, “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 argument.”

Conclusion

Though OMO and monetisation both leads to inflation, the issues with monetisation have far-reaching consequences. Also, the situation we are in doesn’t yet warrant monetisation which should be seen as a last resort.

Back2Basics:  Open Market operation

  • OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
  • When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
  • Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Government must fix an upper limit for fiscal deficit

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Need for the stimulus and relief package to in the wake of Covid-19 and issues involved in its size.

D. Subbarao in this article discusses how the government is facing the hard choice of choosing between saving lives and saving the economy. On the government’s response on economic front he argues that the government, unlike the rich countries should keep an upper limit on its spending because of the dangers involved in unrestricted spending.

Why the dilemma is sharpest for India?

  • This dilemma is arguably the sharpest for India.
  • Because of our high population density and poor medical infrastructure, any laxity in prevention can result in a huge health disaster.
  • On the other hand, an extended lockdown will force millions into the margins of subsistence, push small and large firms alike into bankruptcy, seriously impair financial stability and land us in a humanitarian and economic disaster.

Why is the relief package criticised as too little?

  • After the lockdown, the government announced a relief package amounting to 0.8 per cent of GDP, that’s been criticised as being too little.
  • From a study of a sample of countries, the latest issue of The Economist reports that India’s lockdown has been the most stringent while its fiscal relief package is the smallest in proportion to GDP.

What could be the reasons for a cautious approach in the relief package?

  • A possible explanation for the government’s timid fiscal response may be the fear of spooking the market.
  • For years, every economist and analyst has been warning the government of the dire consequences of fiscal irresponsibility.
  • And that warning message must have been so hardwired into the government’s collective mind that it was unable to get over the mental overhang.

We should be aware of the reasons from the macroeconomic point of view that force the government to limit its fiscal deficit. In this case, India government is exercising the caution owing to the same constraints.

Uncertainties in the crisis

  • Uncertainty is a defining feature of every crisis.
  • During the global financial crisis, a big uncertainty around the world was about how much risk there was in the system, where it lay and who was bearing it.
  • The uncertainty of the corona crisis is much deeper.
  • There are far too many known unknowns not to speak of unknown unknowns.
  • Uncertainties in corona crisis: We just don’t know enough about the effectiveness of the lockdowns, the age and gender profile of susceptibility to the virus.
  • We also don’t know about the process of recovery, the tipping point if any for mass immunity, whether the virus will attack in waves.
  • And most importantly, when we might have a vaccine and a cure.
  • Governments are, for the large part, having to fly blind.

Issues over relief and stimulus package

  • There are many issues to be decided and planned on the way forward.
  • A big issue will be an expenditure plan for relief during the crisis and stimulus after some normalcy is restored.
  • Borrow more spend more: Even the most ardent fiscal hawks are now agreed that the government needs to abandon its fiscal reticence, and borrow more and spend more.
  • Even the most extreme monetary purists are agreed that the RBI should fund the government borrowing by printing money.
  • Even the staunchest advocates of financial stability are agreed that more regulatory forbearance is necessary.
  • And virtually everyone is agreed on where additional spending should be directed.

Debate on how much additionally the government should borrow

  • There is disagreement on how much additionally the government should borrow.
  • There are two opposing views in this regard, which are discussed below.
  • 1. Fiscal risk without preset fiscal deficit: One view is that the government should err on the side of taking a fiscal risk without any preset fiscal deficit number.
  • It should simply determine what needs to be done and borrow to that extent, acting as if there were no fiscal constraint at all.
  • In other words, act as per the diktat of the now famous three words — “whatever it takes”.
  • 2. Set a limit: An opposing view is “whatever it takes” is not an option for India.
  • Many analysts have estimated that just the loss of revenue due to the economic shutdown will take the combined fiscal deficit of the Centre and states beyond 10 per cent of GDP.
  • The borrow and spend programme will be in addition to the above loss.
  • Unlike rich countries, we can’t afford to ignore the risks of fiscal excess of that magnitude, no matter the compelling circumstances.
  • What are the risks involved? There will be a heavy price to pay down the road by way of inflation and exchange rate volatility.

From the UPSC point of view you must pay attention to the both the arguments made here, question can be asked in UPSC based on the suggestions and their pros and cons. Both the arguments cited above have their merits and demerits.

Way forward

  • It’s important to keep in mind that we have resources and capability in the near future should there be another wave of the virus later in the year.
  • It will be advisable for the government to fix an upper bound for fiscal deficit and operate within that. For now, the borrow and spend programme should be restricted to 2 per cent of GDP.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

A time for extraordinary action

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Stimulus package on the lines of package declared by developed countries is necessary for Indian economy to deal with the pandemic.

Context

The lockdown and other movement restrictions, backed by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board. What is its impact on the Indian economy? This question calls for an urgent answer.

The methodology used to estimate the impact

  • We provide an initial, quantitative response, using a methodology that is based on the technique of input-output (IO) models, first elaborated by the economist Wassily Leontief.
  • How the model works: Such models provide detailed sector-wise information of output and consumption in different sectors of the economy and their inter-linkages, along with the sum total of wages, profits, savings, and expenditures in each sector and by each section of final consumers (households, government, etc.).
  • Crucially, it pays attention to intermediate consumption, namely consumption by some sectors of the output of other sectors (as well as consumption within their own sector).
  • Advantage of the model: The key advantage of such a model is that it allows the calculation of the impact of any change in any sector in both direct and indirect terms, which has made this model somewhat ubiquitous in the computation of the economic impact of disasters.
  • This also renders it well-suited to estimating the economic consequences of COVID-19.
  • Regrettably, the last officially published IO table for India was for the year 2007-2008.
  • In our estimates, we use the IO tables for India published by the World Input-Output Database for the year 2014 that updates the IO tables for individual countries using time series of national income statistics.
  • To calculate the impact of the lockdown, there are four different scenarios of the number of workdays lost in different sectors.
  • How daily output loss is calculated? Assuming that the estimated annual output is distributed uniformly across the year, it is possible to calculate the daily output and therefore the daily output loss.
  • The direct and indirect impacts of the lockdown are then estimated using IO multipliers which are assumed to be constant.
  • We then calculate the percentage decline in the national gross domestic product (GDP) of 2019-2020 that this impact amounts to.

What is the impact on various sectors?

  • Loss at 7% to 33% of GDP: Model (see table) shows that the loss of GDP ranges from ₹17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67.
  • In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹29 lakh crore (13% of GDP) and ₹51 lakh crore (23% of GDP), respectively.
  • OECD estimate: These estimates also accord well with other estimates, such as those of the OECD that suggest a 20% loss to GDP for India.
  • Impact of varying lockdown period: Even assuming that sectors will have varying lockdown periods, all sectors face serious losses due to their
  • If we take the scenario where a prolonged lockdown happens, averaging about 47 days across sectors, we find that the mining sector faces the largest drop of 42% in value-added despite that sector itself being shut down for, say, 35 days.
  • The electricity sector sees a 29% fall in value-added, even though it faces no shut down per se.
  • Losses are expected across all sectors in terms of both wage compensation and the availability of working capital.

Incorporation of feedback effect in estimates

  • The linear character of our estimates, intrinsic to IO analysis, does not allow incorporation of feedback effects and assumes that output commences where it left off without further constraints.
  • An attempt has been made to correct for this by using a varying number of days of output loss across sectors, but this is quite possibly inadequate to capture the continuing economic impact.
  • We are faced today with a unique situation where both supply and demand have collapsed in several sectors.
  • Impact on agriculture: In some sectors such as agriculture, the impact may manifest in the delayed fashion, if the anti-COVID-19 measures, or the pandemic itself, affects agricultural operations in the next the kharif season, even if, as reports suggest, much of this year’s rabi has been successfully harvested.
  • The shortfall in export not accounted for: Given the database, we are using and the initial character of our analyses we have also not explicitly accounted for possible shortfalls in exports due to lack of demand elsewhere in the world, as well as the unavailability of intermediate imported goods that are crucial for the Indian economy.
  • Nor are we able to adequately separate the impact on the informal sector, that is partially aggregated with the formal sector in the database that we are using and partially unaccounted for due to lack of data.

Need for the huge stimulus package

  • The most striking feature of even this simple calculation is the all-round pervasive impact on the economy of the anti-COVID-19 measures that we are currently undertaking and that are likely to continue in modified form for a short period.
  • Measures such as debt relief, postponement of revenue and tax collections, immediate relief in cash and kind to the poor, and revamping and scaling up public distribution are all undoubtedly necessary but far from sufficient.
  • Our numbers suggest that the resort to huge stimulus packages that developed countries have already started putting in place is by no means mistaken.

Way forward

  • Package for all the sectors of the economy: We need to compensate and pump cash into the hands of not only wage workers in the formal and informal sectors, and also into the livelihood activities of the informal sector.
  • But businesses too need to be primed with handouts in the case of small and medium enterprises, and with a variety of concessions even in the case of larger businesses.
  • It is critical to preserve the productive capacities of the Indian economy across the board. The annual budget of the current year, already passed, clearly cannot cope with such a massive effort and needs to be revisited by suitable parliamentary measures.
  • Caring too much about fiscal deficit will not be helpful: Redistributing expenditure, seeking to keep the fiscal deficit “under control” as it were, through measures such as cutting back on government salaries, are unlikely to be helpful.
  • Apart from sending the wrong signal to private sector employers, who have so far been exhorted to maintain salaries and wages during the lockdown, it is quite likely to lead to further reduction in demand since the government is the biggest employer in the country.
  • Ensure the key role of the state: Finally, one must note that the current crisis is not a transformatory moment for the Indian economy, even if the scale of the impact and recovery process will undoubtedly push the economy in new directions.
  • But “greening” the economy or more radical transformative measures are not particularly relevant in its current state.
  • What is needed is ensuring the key role of the state to lift up an economy that is in danger of being brought to its knees, and to restore some semblance of its normal rhythm, by an unprecedented scale of state investment.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Restarting the economy after lockdown

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not Much

Mains level: Read the attached story

  (This newscard is the excerpt from an article published in the TOI, authored by former RBI governor Raghuram Rajan. It discusses a series of reformative measures to boost our economy once the lockdown restrictions are eased.)

Context

  • Economically speaking, India is faced today with perhaps its greatest emergency since Independence.
  • The global financial crisis in 2008-09 was a massive demand shock but our financial system was largely sound, and our government finances were healthy.
  • None of this is true today as we fight the coronavirus pandemic.
  • With the right resolve and priorities, and drawing on India’s many sources of strength, it can beat this virus back and even set the stage for a much more hopeful tomorrow.

To begin with: 21 day Lockdown

  • The immediate priority, of course, is to suppress the spread of the pandemic through widespread testing, rigorous quarantines, and social distancing.
  • The 21-day lockdown is a first step, which buys India time to improve its preparedness.
  • The government is drawing on our courageous medical personnel and looking to all possible resources – public, private, defence, retired – for the fight, but it has to ramp up the pace manifold.
  • It will have to test significantly more to reduce the fog of uncertainty on where the hotspots are, and it will have to keep some personnel and resources mobile so that they can be rushed to areas where shortages are acute.

Restarting with caution

  • The 21 day lockdown is about a week ahead to get lifted. It is hard to lockdown the country entirely for much longer periods, so we should also be thinking of how we can restart certain activities.
  • Restarting requires better data on infection levels, as well as measures to protect those returning to work.
  • Healthy youth, lodged with appropriate distancing in hostels at the workplace, maybe ideal workers for restarting.

Pacing up manufacturing

  • Since manufacturers need to activate their entire supply chain to produce, they should be encouraged to plan on how the entire chain will reopen.
  • The administrative structure to approve these plans and facilitate movement for those approved should be effective and quick – it needs to be thought through now.

Most crucial: Ensuring workforce sustenance

  • In the meantime, policymakers need to ensure that the poor and non-salaried lower middle class who are prevented from working for longer periods can survive.
  • Direct transfers to households may reach most but not all, as a number of commentators have pointed out.
  • Furthermore, the quantum of transfers seems inadequate to see a household over a month.
  • The state and Centre have to come together to figure out quickly some combination of public and private participation and DBTs that will allow needy households to see through the next few months.
  • We have already seen one consequence of not doing so – the movement of migrant labour. Another will be people defying the lockdown to get back to work if they cannot survive otherwise.

Gearing up for fiscal shocks

  • Our limited fiscal resources are certainly a worry. However, spending on the needy at this time is a high priority use of resources, the right thing to do as a humane nation.
  • This does not mean that we can ignore our budgetary constraints, especially given that our revenues will also be severely affected this year.
  • Unlike the US or Europe, which can spend 10% more of GDP without fear of a ratings downgrade, we already entered this crisis with a huge fiscal deficit, and will have to spend yet more.
  • A ratings downgrade coupled with a loss of investor confidence could lead to a plummeting exchange rate and a dramatic increase in long term rates in this environment, and substantial losses for our financial institutions.

Channelizing expenditures

  • So we have to prioritise, cutting back or delaying less important expenditures, while refocusing on immediate needs.
  • At the same time, to reassure investors, the government could express its commitment to return to fiscal rectitude.
  • The govt. must back up its intent by accepting the setting up of an independent fiscal council and setting a medium term debt target, as suggested by the NK Singh committee.

Boosting up Industries

1) MSMEs

  • Many MSMEs already weakened over the last few years, may not have the resources to survive.
  • We need to think of innovative ways in which bigger viable ones, especially those that have considerable human and physical capital embedded in them, can be helped.
  • SIDBI can make the terms of its credit guarantee of bank loans to SMEs even more favourable, but banks are unlikely to want to take on much more credit risk at this point.
  • The government could accept responsibility for the first loss in incremental bank loans made to an SME, up to the quantum of income taxes paid by the SME in the past year.

2) Large industries

  • Large firms can also be a way to channel funds to their smaller suppliers. They usually can raise money in bond markets and pass it on.
  • Banks, insurance companies, and bond mutual funds should be encouraged to buy new investment-grade bond issuances, and their way eased by the RBI.
  • The government should also require each of its agencies and PSUs, including at the state level, to pay their bills immediately, so that private firms get valuable liquidity.

Looping in everyone’s participation

  • The government should call on people with proven expertise and capabilities, of whom there are so many in India, to help it manage its response.
  • It may even want to reach across the political aisle to draw in members of the opposition who have had experience in previous times of great stress like the global financial crisis.
  • If, however, the government insists on driving everything from the PMO, with the same overworked people, it will do too little, too late.

Conclusion

  • Globally, it is said that India reforms only in crisis.
  • Hopefully, this otherwise unmitigated tragedy will help us see how weakened we have become as a society, and will focus our politics on the critical economic and healthcare reforms we sorely need.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Comparing current crisis with Great Depression, 1929

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Great Economic Depression, Slowdown vs. Depression

Mains level: Impact of the depression on colonial India

 

With the novel coronavirus pandemic severely affecting the global economy, some experts have begun comparing the current crisis with the Great Depression — the devastating economic decline of the 1930s that went on to shape countless world events.

Looming depression ahead

  • Experts have warned that unemployment levels in some countries could reach those from the 1930s era, when the unemployment rate was as high as around 25 per cent in the United States.
  • Currently, unemployment levels in the US are already estimated to be at 13 per cent, highest since the Great Depression.

What was the Great Depression?

  • The Great Depression was a major economic crisis that began in the United States in 1929, and went to have a worldwide impact until 1939.
  • It began on October 24, 1929, a day that is referred to as “Black Thursday”, when a monumental crash occurred at the New York Stock Exchange as stock prices fell by 25 per cent.
  • Though the crash was triggered by minor events, the extent of the decline was due to more deep-rooted factors such as a fall in aggregate demand, misplaced monetary policies, and an unintended rise in inventory levels.
  • In the United States, prices and real output fell dramatically. Industrial production fell by 47 per cent, the wholesale price index by 33 per cent, and real GDP by 30 per cent.

What caused Great Depression?

The causes of the Great Depression are extremely complex and disputed to this day. The three main factors are:

  1. Financial instability and credit cycles: A period of stability encouraged more borrowing and lending than prudent, sowing the seeds for future instability.
  2. Monetary contraction, the gold standard, and bank runs: Monetary policy, driven in large part by the gold standard, tightened credit at the wrong time fueling bank-runs and economic slowdown.
  3. Debt deflation: Excess private debt created a dangerous condition where no one wanted to spend, causing deflation and economic weakening.

Worldwide impact

  • The havoc caused in the US spread to other countries mainly due to the gold standard, which linked most of the world’s currencies by fixed exchange rates.
  • In almost every country of the world, there were massive job losses, deflation, and a drastic contraction in output.
  • Unemployment in the US increased from 3.2 per cent to 24.9 per cent between 1929 and 1933. In the UK, it rose from 7.2 per cent to 15.4 per cent between 1929 and 1932.

Latent outcomes

  • The Depression caused extreme human suffering, and many political upheavals took place around the world.
  • In Europe, economic stagnation that the Depression caused is believed to be the principal reason behind the rise of fascism, and consequently the Second World War.
  • It had a profound impact on institutions and policymaking globally and led to the gold standard being abandoned.

How did Great Depression impact India?

  • The Depression had an important impact on India’s freedom struggle.
  • Due to the global crisis, there was a drastic fall in agricultural prices, the mainstay of India’s economy, and a severe credit contraction occurred as colonial policymakers refused to devalue the rupee.
  • The effects of the Depression became visible around the harvest season in 1930, soon after Mahatma Gandhi had launched the Civil Disobedience movement in April the same year.

1) Rural India mainstreamed into freedom struggle

  • The fallout made substantial sections of the peasantry rise in protest and this protest was articulated by members of the National Congress.
  • There were “No Rent” campaigns in many parts of the country, and radical Kisan Sabhas were started in Bihar and eastern UP.
  • Agrarian unrest provided a groundswell of support to the Congress, whose reach was yet to extend into rural India.

2) INC gained momentum

  • The endorsement by farming classes is believed to be among the reasons that enabled the party to achieve its landslide victory in the 1936-37 provincial elections held under the Government of India Act, 1935.
  • This is marked as a significant event in the history of INC as it flourished the party’s political might for years to come.

Back2Basics

Slowdown vs recession vs depression

  •  Slowdown simply means that the pace of the GDP growth has decreased.  During slowdown, the GDP growth is still positive but the rate of growth has decreased.
  •  Recession refers to a phase of the downturn in the economic cycle when there is a fall in the country’s GDP for two quarters.   It is a period of decline in total output, income, employment and trade, usually lasting six months to a year.
  • Depression is a prolonged period of economic recession marked by a significant decline in income and employment.   It is a negative GDP growth of 10% of more, for more than 3 years.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The sudden return of quantity planning in the wake of covid-19

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3-Applying ways suggested by Keynes in times pandemic. of war to deal with the covid-19

Context

We could take a leaf out of a booklet by Keynes in our effort to tackle some of the challenges posed by the covid-19 pandemic.

The Crisis-Keynesian Mode response mode to pandemic

  • What is the war economy? One of the defining features of a war economy is that economic thinking is focused on quantities rather than prices.
  • Much of the ongoing global response to the covid-19 pandemic is still in crisis-Keynesian mode.
  • What is a crisis-Keynesian response: The nation-state has become the income supporter, financier and consumer of last resort.
  • However, there are also clear signs of war economics as well.
  • Signs of war economics: The decision by US President Donald Trump to use America’s Defense Production Act to force General Motors to make ventilators is one resonant example.
  • Just consider some of the key questions that are being asked right now.
  • How many ventilators are available? Are there ample food stocks? Can more hospital beds be made available? How many masks be produced in the next few weeks? Can the production of testing kits be ramped up? It’s all about quantities, quantities, quantities.

Historical background and impact of a shift in economic strategies

  • Impact persists in subsequent decades: Such big shifts in economic strategies are usually not reversed overnight. Decisions taken in response to a particular emergency tend to remain with us in subsequent decades.
  • World War II example: What happened in India during World War II is instructive. Many of the controls that were introduced during that global conflagration formed the basis of the later interventionist state that sought to control who produces how much. Here are a few examples.

1. Quantitative import controls

  • One of the first moves by the colonial state was to impose quantitative import controls in May 1940.
  • There were two reasons why this was done—to conserve foreign exchange as well as ensure that shipping capacity was used to bring in only what was essential to the war economy.

2. Food rationing

  • Food rationing was also introduced during the war years.
  • Over 700 towns were covered by some rationing scheme or the other by the end of the War.
  • The government also brought in measures to buy surplus grain from farmers at administered prices.
  • Various forms of rent control were also instituted. Most of these controls continued after India gained independence.

3. Balance of payment crisis in 1957

  • India was hit by a balance of payments crisis in 1957.
  • The massive investment thrust in the Second Five Year Plan had severely strained the country’s foreign exchange reserves.
  • The Indian government, once again as a temporary measure, imposed stringent controls on imports.
  • Many of these were quantitative in nature. They survived well into the 1980s.
  • In fact, the entire trade policy approach since the 1957 crisis was to minimize imports in a bid to preserve foreign exchange.

Will the government opt for automatic monetisation of the deficit?

  • Money creation by the RBI to fund deficit: There is now a growing consensus that the Indian government will have to fund part of its growing fiscal burden through money creation by the Reserve Bank of India.
  • What about inflationary consequences? The inflationary consequences will be muted—for now—because the velocity of narrow money is most likely set to fall on account of weak demand conditions under a lockdown.
  • Precedence: The automatic monetization of Indian government deficits was part of the policy playbook after the 1950s till it was thankfully discontinued in 1997.
  • The main instrument for that was ad hoc treasury bills.
  • These were introduced in 1954 as a temporary measure to replenish the cash balances the government maintains with the central bank.
  • What was ad hoc treasury bills? Ad hoc treasury bills were not introduced through any formal law but as an arrangement between mid-level bureaucrats in New Delhi and Mumbai (i.e. RBI).
  • What began as a temporary measure to smoothen government cash holdings had become a near-permanent feature of Indian macroeconomic policy by the 1970s.

The uncertain future

  • Longer the war more profound will be the changes: The longer the global battle against the pandemic lasts, the more profound will be the changes across the economic landscape.
  • In an insightful article in Bloomberg, Andy Mukherjee uses the lessons of history to look into the uncertain future.
  • Among the possibilities he mentions are the contrasting ones of an economy run by robots and algorithms but with little labour, or an economy in which labour has clawed back the power it lost in the second age of globalization.

Managing the resources in the time of war

  • Managing the resources: In 1940, John Maynard Keynes wrote a little booklet How To Pay For The War, Keynes essentially argued that the main challenge was not how to finance the war effort, but how to manage real resources to produce the arms that the UK needed to defend herself.
  • Suppression of consumption: He then argued that war production would necessarily involve suppression of consumption, either through higher taxes or some scheme of deferment.

Conclusion

The war against the covid-19 pandemic is very different from the military war that Keynes was thinking about. Yet, his booklet offers useful lessons on how to think about some of our current challenges—and also about what we can expect once the situation returns to normal.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

What is Keqiang Index’?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Keqiang Index

Mains level: NA

China’s GDP numbers which are preferably represented by Keqiang Index has been recently seen in news amid coronavirus outbreak.

Keqiang Index

  • Li Keqiang index or Keqiang index is an economic measurement index created by The Economist to measure China’s economy using three indicators, as reportedly preferred by Li Keqiang.
  • It uses three other indicators:
  1. the railway cargo volume,
  2. electricity consumption and
  3. loans disbursed by banks
  • Li Keqiang currently the Premier of the People’s Republic of China, suggest the index as better economic indicator than official numbers of GDP.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

No green shoots of a revival in sight as yet

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Significance of quarterly GDP estimates and revision.

Context

As the third-quarter GDP was marginally higher than the second-quarter figure of 4.5% many concluded that the economic slowdown witnessed during the last six quarters has “bottomed out”. Has it?

What closer examination of data reveal?

  • Estimates revised upwards: A closer reading reveals that the latest data release has revised the estimates of the first two quarters of the current year (2019-2020) upwards to 5.6% and 5.1%, from the earlier figures of 5% and 4.5%, respectively.
  • What the revision mean? The upward revisions have, perhaps unwittingly, changed the interpretation of the current year’s Q3 estimate: the slowdown has continued, not bottomed out; hence, there is no economic revival in sight as of now.

Competing views of the performance

  • The question therefore is why did the current year’s Q1 and Q2 GDP estimates get revised upwards?
    • The answer is this was simply because the corresponding figures for the previous year (2018-2019) got revised downwards.
  • The question over the revision process: Many viewed the revision of last year’s estimates as evidence of lack of credibility of the NSO’s revision process.
  • Questions over the veracity of data: Such doubts are well taken, given the long-standing debate and unresolved disputes on the veracity of GDP figures put out since 2015, when the statistical office released the new series of National Accounts with 2011-2012 as base year.

Why the GDP estimates undergo revisions?

  • Lags in data: As there are lags and unanticipated delays in obtaining the primary data, the GDP estimates undergo several revisions everywhere (except in China).
    • GDP is a statistical construct, prepared using many bits of quantitative information on an economy’s production, consumption and incomes.
  • How frequently is data revised? GDP estimates are revised five times in India over nearly three years.
    • The initial two rounds, the advanced estimates, are prepared mainly using high-frequency proxy indicators followed by three rounds based on data obtained from various sectors.

Quarterly GDP estimates and issues with it

  • Since 1999, quarterly GDP estimates are being prepared, as per the International Monetary Fund (IMF)’s data dissemination standards.
  • Subpar quality: Their quality is subpar as the primary data needed quarterly are mostly lacking.
    • Why quality is subpar? Nearly one-half of India’s GDP originates in the unorganised sector (including agriculture), whose output is not easily amenable to direct estimation every quarter, given the informal nature of production and employment.
    • Hence, the estimates are obtained as ratios, proportions and projections of the annual GDP estimates.
  • Quarterly estimates are extrapolations: In general terms, quarterly estimates of GDP are extrapolations of annual series of GDP. The estimates of GVA by industry are compiled by extrapolating value of output or value-added with relevant indicators.

Way forward

  • Little ground to question the present revisions: There were considerable variations at the sectoral estimates after the revision, which probably contained more noise than information. For now, there is little ground to question the revised estimates based on the publicly available information.
  • Slowdown not bottomed out: If we accept the latest data, it is clear, though in an alarming way, that there has been an undeniable decline in the GDP growth rate over seven consecutive quarters, from 7.1% in Q1 of 2018-2019 to 4.7% in Q3 of 2019-2020.
    • Considering that physical indicators of production, such as the official index of infrastructure output, or monthly automotive sales, continue to show an unambiguous deceleration, the economic slowdown has apparently not bottomed-out.
    • More seriously, the quarterly GDP deceleration comes over and above the annual GDP growth slowdown for four years now: from 8.3% in 2016-17 to 5% in 2019-20 (as per the second advance estimate).
  • Limited primary information: India’s quarterly GDP estimates have limited primary information in them. Their revisions are largely extrapolations and projections of the annual figures. Hence, one should be cautious in reading too much into the specific numbers.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Don’t blame it on NSO

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Revision and estimates of GDP data.

Context

The latest GDP data witnessed significant revisions that have gone largely unnoticed.

The GDP data revision and its criticism

  • Revisions an act of due diligence: In the last few years there has been a lot of noise regarding the data revisions.
    • The need for closer examination: While part of revision requires closer examination, we must be fair to our statistical system as such revisions are, in large part, due diligence and happen globally.
  • Schedule of NSO estimates
    • First estimate: The NSO releases the first estimates of any fiscal year in January.
    • Revises the January’s first estimates in February.
    • And then again in May.
    • Simultaneous revision in February: Simultaneously, it revises the previous year estimates in February, alongside the February data release.
  • Suspicion of statistically protecting the 5% growth: The primary criticism, with the current year’s fiscal data, is that the revisions in February for 2019-20 and the 4th revision in 2018-19 are almost identical, implying that the sanctity of 5 per cent growth was statistically protected.

Examining the criticism purely on the data

  • Precedence of 1st and 2nd quarter revision: There is precedence to the first and second quarter revisions for the current financial year that happen in February.
    • For example, while in the current fiscal, the cumulative downward revision was close to Rs 30,000 crore.
    • In FY19, there was even a greater upward revision of roughly Rs 86,000 crore in February.
  • Is there precedence of such large first-time revisions? Yes, there has been since 2014-15. In 2018-19, the first-time data was revised by a sharp Rs 1.43 lakh crore, while in 2017-18, it was revised by an even larger Rs 1.69 lakh crore.
  • Revision in the same direction: The simultaneous revisions are mostly in the same direction, though different in magnitude, and hence it is unfair to say that the 2018-19 data was revised downwards to protect the 2019-20 numbers.

What was the problem?

  • Uncertainty: The problem has been that the global and domestic uncertainties in 2017-18 and 2018-19 have been so swift that it has been virtually impossible to predict the outcome initially.
    • While in 2017-18, the final estimates were progressively higher.
    • In 2018-19, while the interim estimates were higher, they were drastically scaled-down later as the impact of the NBFC crisis began to unfold.
  • The US example: The US Fed had also missed the possibility of the US economy bouncing back in 2018 on the back of tax cuts when in 2015 it had projected the economy to expand by only 2 per cent, only to change it to 3 per cent in 2018 (almost at par with scale of revisions in India).

Why such unconditional biases arise?

  • Asymmetric loss function: It is common for such unconditional bias to arise due to the fact that the statistical reporting agency produces releases according to an asymmetric loss function.
    • For example, there may be a preference for an optimistic/pessimistic release in the first stage, followed by a more pessimistic/optimistic one in the later stage.
  • Cost factor: Intuitively, one might argue that the cost of a downward readjustment of the preliminary data is higher than the cost of an upward adjustment.
  • This asymmetric loss function is not so relevant at the reporting stage but at the forecasting stage.
  • Interpreting the data revision: A statistical reporting agency like the NSO simply does not have all the data at hand and has to forecast the values of the yet to be collecting data.
    • It is at that moment that the asymmetric loss function comes into play.
    • So, we must be careful about interpreting data revisions by the NSO by attributing ulterior motives as we more often tend to do.

India lagging in the use of data analysis

  • Unlike countries across the world, India is still significantly lagging in its use of data analysis.
    • Methodologies based on thin surveys: Some of the current methodologies of data collection is based mostly on thin surveys.
    • Not supported by the data in public domain: It is also not supported by data available in the public domain that are more comprehensive, less biased and real-time in nature, based on digital footprints.
    • The end result is that we end up publishing survey results that are misleading.

Way forward

  • Development of big data and AI bases ecosystem: We must develop an ecosystem that is high quality, timely and accessible.
    • Big data and artificial intelligence are key elements in such a process.
    • Big data helps acquire real-time information at a granular level and makes data more accessible, scalable and fine-tuned.
  • Use of payment data: The use of payments data can also help track economic activity, as is being done in Italy.
    • Different aggregates of the payment system in Italy, jointly with other indicators, are usually adopted in GDP forecasting and can provide additional information content.

Conclusion

To be fair to both the RBI and the NSO, the volatility of oil prices and structural changes in the economy make the forecasting of inflation and GDP a difficult job indeed. However, we should supplement our existing measurement practices with “big data” to make our statistical system more comprehensive and robust.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Way out lies within

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3-Focus on demand side of the Indian economy instead of focusing all attention on supply-constraints.

Context

Domestic demand must play a greater role in India’s growth story.

Recovery in the Indian economy

  • Sub-5 per cent growth rate: India’s fourth-quarter GDP growth (the calendar year 2019) printed another sub-5 per cent growth rate.
  • Favourable base effect: It would have been lower had it not been for the large downward revisions to previous years’ GDP that statistically boosted the last quarter’s growth rate because of favourable base effects.
  • The decline in GDP stabilised: Policymakers and the market heaved a sigh of relief that the relentless decline over the last three years at least seems to have stabilised around 4-5 per cent.
  • Why some countries prefer sequential growth rate: Because year-over growth rates are so strongly affected by what happened a year ago, most economies (including China) instead publish and conduct policy discussions based on sequential quarterly growth.
    • Better sense of momentum: Sequential growth rates provide a much better sense of the momentum and turning points in activity, which are critical to deciding whether, how much, and when the economy needs policy support.
  • The magnitude of recovery: The growth momentum rose, albeit modestly, from 3.8 per cent in the third quarter of 2019 to 4.1 per cent.
    • Non-farm and non-governmental GDP recovery: More importantly, non-farm and non-government GDP (the closest approximation to non-farm private-sector GDP) bounced much more sharply from 1.6 per cent (and no this is not a misprint) to 4.4 per cent in the fourth quarter.

What is the dominant narrative of the slide in growth?

  • The deceleration in sequential terms: With the revised data, we now know that annual growth over the last four years has slowed from 8.3 per cent to 7 per cent to 6.1 per cent to 4-5 per cent.
    • The decline in non-farm private GDP: In sequential terms, the deceleration was far more dramatic, especially in non-farm private GDP, which after hitting a run rate of 13 per cent in the first quarter of 2016 fell to 1.6 per cent by the third quarter of 2019.
    • The dominant narrative of the cause of slide: The dominant narrative is that India’s woes are just an unfortunate and unintended consequence of demonetisation, the shift to a national GST, and the credit squeeze caused by the bad debt in banks and non-banks.
    • The dominant narrative on recovery: With a bit more fiscal support, some monetary easing, and extended regulatory forbearance to help banks work out their bad debts, these headwinds will fade and India will likely be back to its winning ways.

Why real cause of the slowdown lays somewhere else?

Following factors suggest that answer lies somewhere else.

  • Disruptive but not the drivers of the slowdown: While it is undeniable that facts stated in the dominant narrative had been disruptive, they couldn’t be the drivers of the decline.
    • Slide in growth started even before demonetisation: India’s growth had been sliding since the second quarter of 2016; nearly 6 months before demonetisation and a year before the GST was introduced.
    • By the third quarter of 2016, non-farm private sector growth had already slid to 3.5 per cent.
    • Bad debt problem predates slowdown: Although bad debt hit the headlines in 2016, the overleverage had already begun to tighten bank lending since 2014.
  • Fall in corporate investment- inexplicable cause: More inexplicable is the argument that falling corporate investment is the main culprit for the slowdown.
    • It is true that corporate investment is no longer running at the heady 17 per cent of GDP of the pre-global financial crisis (GFC) days but at a much more sombre 11-12 per cent.
    • However, this outsized adjustment had already taken place by 2010 and since then, corporate investment has flatlined at current levels.

The answer lies in globalisation

It is obvious once one eschews India’s exceptionalism and accepts that it is just another emerging market economy that grew on the coattails of globalisation with the minimal reforms. Globalisation has largely determined India’s fate.

  • Growth in corporate investment and exports: Contrary to a widely held misperception, India is and has been for a long time far more open to the global economy than believed.
    • Rise in corporate investment from 5 to 17%: The limited liberalisation of 1991-92, coupled with the corporate restructuring in the late 1990s, spurred corporate investment to rise from 5-6 per cent of GDP in the early 2000s to 17 per cent of GDP by 2008.
    • Increase in exports: Almost all of this expansion in investment was geared to produce for exports, which grew at an astonishing pace of 18 per cent per year-over-year in this period as global trade expanded at breakneck speed with the entry of China into the WTO in 2001.
    • 12% of GDP to 26% of GDP: Exports as a share of GDP more than doubled from 12 per cent in the early 2000s to over 26 per cent by 2008.
    • Slow growth in private consumption: In contrast, private domestic consumption, which is considered to be India’s great strength, grew only at 6 per cent annually, less than the growth rate of the economy, such that its share in GDP fell from 63 per cent to 56 per cent.
    • The engine of the Indian economy- Export: Since 2012, global trade has floundered and with that so has India’s economy.
    • Indeed, the entire rise and fall of investment, including the quarter-to-quarter twists and turns in it, can be almost fully explained by changes in exports.
    • The Indian economy has long been flying on one engine – exports — and that is now spluttering.

What are the prospects of taking the economy back to its high growth path

  • Unlikely: So will the nascent recovery strengthen and take the economy back to its high growth path? Unlikely on current policies.
  • COVID-19 factor: In the near term, as in now widely feared, the COVID-19 outbreak could turn into a pandemic, sharply reducing global demand and trade.
    • With that, even expectations of a modest 2019-20 recovery to 5.25 per cent growth are under threat.
  • Backlash against globalisation: Over the longer term, it is unlikely that global trade will return to its pre-Global financial crisis growth rates not only because supply chains have stopped expanding in the absence of any material technology breakthrough, but there is also a growing political backlash against globalisation in the developed market that has led to increased trade barriers.

Way forward

  • Search for new sources of growth: India too, like other emerging market economies, needs to face up to the reality that it can no longer depend on global trade to be the only growth driver. Instead, it needs to search and find new sources of growth and that starts with recognising and accepting reality.
  • Let domestic demand play a greater role in the economy: Policymakers need to stop thinking about India as a perennially supply-constrained economy focusing almost all policies and reforms to easing these constraints. Instead, it is time to let domestic demand play a greater role in India’s growth story.
  • Policy changes: The above factors mean that India Inc. needs to shift from producing what foreigners want to produce what residents can afford, it also means that policymakers have to reverse policies that have so far forced households to keep increasing savings (for retirement income, children’s education, healthcare, and housing) through a web of financial repression, regulatory distortions, and public spending choices.
    • It means redesigning India’s infrastructure to look more inward and less outward.
    • Reduce out of pocket expenses: Increasing public provisioning of healthcare and education, reforming insurance regulations to reduce out-of-pocket expenses and eliminating financial repression to raise returns on retirement savings.
    • Merely tinkering with macroeconomic policies will not be enough.

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The growth challenge

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Prospects of recovery of Indian economy and indications from demand and supply side.

Context

The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

Growth prospects of India

  • The NSO forecast at 5%: The latest data from the National Statistical Office (NSO) retained India’s economic growth forecast at 5 per cent for the current financial year.
    • Growth has dropped from 6.1 per cent in the previous year.
  • Fall in nominal GDP: More strikingly, nominal GDP growth has decelerated from an average of 11 per cent during 2016-17 to 2018-19 to 7.5 per cent this year.
    • Lower inflation added to the volume slowdown.
    • The value of India’s GDP for FY20 is estimated at around $2.9 trillion.

Input and output side growth prospects

  • GDP is estimated from both output and demand lenses, using specific economic indicators as proxies for activity in specific sectors.
  • Output side: From the output side, sector-wise estimates were as following-
    • Agriculture sector growth was revised up to 3.7 per cent (up from the 2.8 per cent previously).
    • Agricultural production is expected to improve based on the third advance estimates of the rabi season crops, as well as higher horticulture and allied sector output (livestock, forestry and fishing), which now is significantly larger than conventional food crops.
    • Industrial activity was lowered to 1.5 per cent (from 2.3 per cent earlier).
    • The key concern regarding the continuing slowdown is the increasing weakness in the industrial sector (particularly of manufacturing, whose growth has progressively fallen from 13.1 per cent in FY16 to 5.7 per cent in FY19, and plummeting to 0.9 per cent in FY20).
    • Services output remained largely unchanged at 6.5 per cent.
  • Demand-side: From a demand perspective, the obverse side to the manufacturing slowdown is the even sharper drop in fixed asset investment growth — down sharply from an average 8.5 per cent during FY17 and FY19 to -0.6 per cent in FY20.
    • The causes for this contraction needs to be understood in detail, and we will return to this.

Private consumption- a significant driver of growth

  • Private consumption at 60% of GDP: The other significant driver of growth in India has been private consumption. For perspective, the share of private consumption had averaged 59-60 per cent during FY16-FY20.
  • Government consumption 10% of GDP: Reflecting the higher spending over the last couple of years, the share of government consumption in GDP has risen from an average of 10.5 per cent of GDP over FY12-17 to almost 12 per cent in FY20, resulting in the share of total consumption above 70 per cent.

Drop in the share of nominal investment

  • Drop from 39 % to 30 % of GDP: The really remarkable trend, though, as noted above, is the share of nominal investment in GDP progressively dropping from 39 per cent in FY12 to 30 per cent in FY20.
  • Is it a good sign? Part of this is actually good, reflecting higher Capex efficiency.
    • Slowing household consumption: One narrative underlying the contraction in fresh Capex in FY20 was slowing household consumption growth, which, in nominal terms, fell from an average 11.6 per cent during FY16-19 to an estimated 9.1 per cent in FY20.
    • Disproportionate contribution to lower growth: Though the deceleration prima facie does not seem significant enough to result in a broader economic slowdown of the current magnitude, the high share of household consumption has contributed disproportionately to lower growth.
    • Fall in capacity utilisation: A direct fallout of this is that seasonally adjusted capacity utilisation (based on RBI surveys) had shrunk from 73.4 per cent in the first quarter of FY20 to 70.3 per cent in the second quarter, and this is unlikely to have improved materially in the second half of the year.
    • This is one of the reasons for the low levels of fresh investment.

Reduced flow of credit to the commercial sector

  • Impediment to growth revival: The other cause of the low Capex, more from the supply side, is a much-reduced flow of credit to the commercial sector, and this remains the proximate impediment for growth revival, with signs of risk aversion in lending still strong despite the recent measures by RBI to incentivise credit to productive sectors.
    • Funds from selected sources, over April-January FY20, was only about Rs 9 lakh crore as against Rs 15 lakh crore in the corresponding 10 months of FY19.
  • Bank credit lowest in three months: Growth in bank credit (which is still the largest source of financing) till mid-February 2020 was down to 6.3 per cent — the lowest in three years.
    • Even this is almost wholly driven by retail credit; incremental credit to industry and services over this period was negative.

Investor confidence and coronavirus factor

  • A bright feature of the economic environment: One bright feature in this economic environment is strong foreign investor confidence in India, reflected in both FPI equity and FDI flows.
    • Many borrowers have used offshore sources to refinance or pay down domestic bank loans and debt.
    • A global risk-off environment might restrict even this channel in the near future.
  • Robust corporate bond issuances: Domestic corporate bond issuances have also remained robust, although the dominant set of borrowers still remain public sector agencies and financial institutions.
  • Coronavirus factor likely to moderate the gains: Monthly economic indicators suggest that the growth deceleration has likely bottomed out in the third quarter.
    • The bet has been on reducing inventories and the consequent production ramp-up to replenish stocks. However, the evidence on this is mixed.
    • The coronavirus effects, both concurrent and lagged, will also moderate some of the emerging positive effects of counter-cyclical policy measures of the past six months.
    • If the outbreak does not abate over the next month or so, the complex supply chains of intermediates sourced from China will run dry and add to the already weak system demand.
  • Growth prospects in the next few weeks: Surveys indicate that both business and consumer confidence, which while improving, remain muted. A growth revival, hence, is likely to be only very modest over the next few quarters.

Conclusion

A $5 trillion economy by 2025 is still a worthwhile target and aspirational; coordinated strategies, policies, execution and institutional mechanisms will be needed to move up to a sustained 8 per cent plus growth consistent with achieving the target. The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

The $5 trillion arithmetic

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- The ambitious target of $5 trillion economy.

Context

The Indian government has set itself a big target, namely, that the Indian economy will have an aggregate income or gross domestic product (GDP) of $5 trillion by 2024-25.

Lack of clarity

  • There is little effort to take it beyond a slogan.
  • When it comes to targets and aims pertaining to the economy, it is important to have-
    • The officials and advisers go beyond the headline.
    • To lay out the details and the road-map for the target.
  • Matter for investors: For international observers and particularly investors, not to see these details creates doubts about professionalism.

What growth rate is required to reach that target?

  • How long will it take to achieve the target at the present growth rate?
    • In 2018-19, India’s GDP was $2.75 trillion.
    • India’s latest official growth rate happens to be 5 per cent.
    • Target will be reached in 2032-33: Continue in the same fashion to compute the size of the GDP and it becomes clear that the target of $5 trillion will be reached not in 2024-25, but in 2032-33.
  • What is the required rate? Set the target as $5 trillion dollars for 2024-25 the required rate turns out to be 10.48 per cent or, approximately, 10.5 per cent.

Why 10.5 rate is an ambitious target?

  • The only example of any nation growing for six consecutive years at an average annual rate of over 10.5 per cent was China from 2003 to 2009.
  • Can India achieve this rate?
    • From 1947 till now, India’s economy grew at over 10 per cent only twice — in 1988-89 and 2007-8.
    • Of these, the first may be dismissed because the previous year the economy had grown very slowly, by 3.5 per cent.
  • What we can learn from the past growth rate?
    • The only example to learn from: The only example from which we can learn is the remarkable growth in 2007-8, made all the more remarkable by the fact that India had been growing well for several years, starting from 2003.
    • And from 2005, India was actually growing over 9 per cent.
    • What factors played the role in high growth?
    • This was a period of professional fiscal policy and steady effort at building infrastructure.
    • India’s economy was making big news in the international media and investment poured in.
    • India’s investment-to-GDP rate climbed to an all-time record of 39 per cent.
  • Current investment-to-GDP ratio: Our investment-to-GDP ratio has crashed to 30 per cent and this takes time to re-build.
    • If we can get back to a growth rate of 7 per cent we will be lucky.

Can inflation make the target achievable?

  • Combination of real growth and inflation can make it possible: Virtually all serious commentators agree that in purely real terms, the $5-trillion target is unreachable.
    • But maybe we can make it by a combination of real growth and inflation.
    • How the combination will work? One way India can get to the target is if alongside say 7 per cent growth, India has inflation of say 3.5 per cent.
    • Then India’s nominal GDP growth rate will be 10.5 per cent.
  • Why the inflation argument is flawed?
    • The five trillion target is in dollar terms.
    • Inflation will lead to depreciation: Typically, if India has higher inflation than the US, the rupee would depreciate vis-à-vis the dollar to account for that.
    • For the sake of pure arithmetic, assume US inflation is zero, India’s inflation is 10 per cent, and India’s real growth rate is 0.
    • In that case, in rupee terms, India’s economy will grow by 10 per cent. But how much will India’s economy grow in dollar terms?
    • The answer is zero.
    • Why is it so? This is because the rupee will typically depreciate by 10 per cent to match the inflation differential, and so the larger GDP of India in rupee terms, when converted to dollars will show no growth.
  • The other possibility of achieving the target?
    • What if the dollar loses value? But this should immediately make it clear that there is another way of getting to the target.
    • This can happen if the US dollar loses value.
    • We can then get to the target of $5 trillion because that will mean less in real terms.

Conclusion

There are two routes to achieve the target of $5 trillion: A huge policy initiative to boost real growth or the luck of dollar depreciation. The luck of dollar would mean nothing for us in the real term so the best course of action for the government is to seek the first option and try to achieve it.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Key Highlights of Economic Survey 2019-20

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Read the attached story

Mains level: Not Much

 

The Union Minister for Finance & Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2019-20 in the Parliament today. The Key Highlights of the Survey are as follows:

Wealth Creation: The Invisible Hand Supported by the Hand of Trust

[Covered in a separate newscard]

Survey posits that India’s aspiration to become a $5 trillion economy depends critically on:

  1. Strengthening the invisible hand of the market.
  2. Supporting it with the hand of trust.

Pro-business versus Pro-markets Strategy

  • Survey says that India’s aspiration of becoming a $5 trillion economy depends critically on:
  1. Promoting ‘pro-business’ policy that unleashes the power of competitive markets to generate wealth.
  2. Weaning away from ‘pro-crony’ policy that may favour specific private interests, especially powerful incumbents.
  • Pro-crony policies such as discretionary allocation of natural resources till 2011 led to rent-seeking by beneficiaries while competitive allocation of the same post 2014 ended such rent extraction.

Strengthening the invisible hand by promoting pro-business policies to:

  1. Provide equal opportunities for new entrants.
  2. Enable fair competition and ease doing business.
  3. Eliminate policies unnecessarily undermining markets through government intervention.
  4. Enable trade for job creation.
  5. Efficiently scale up the banking sector.
  • Introducing the idea of trust as a public good, which gets enhanced with greater use.
  • Survey suggests that policies must empower transparency and effective enforcement using data and technology.

Entrepreneurship at the Grassroots

  • Entrepreneurship as a strategy to fuel productivity growth and wealth creation.
  • India ranks third in number of new firms created, as per the World Bank.
  • New firm creation in India increased dramatically since 2014:
  1. 2 % cumulative annual growth rate of new firms in the formal sector during 2014-18, compared to 3.8 % during 2006-2014.
  2. About 1.24 lakh new firms created in 2018, an increase of about 80 % from about 70,000 in 2014.
  • Survey examines the content and drivers of entrepreneurial activity at the bottom of the administrative pyramid – over 500 districts in India.
  • New firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture.
  • Survey notes that grassroots entrepreneurship is not just driven by necessity.
  • A 10 percent increase in registration of new firms in a district yields a 1.8 % increase in Gross Domestic District Product (GDDP).

Impact of education on entrepreneurship

  • Literacy and education in a district foster local entrepreneurship significantly:
  1. Impact is most pronounced when literacy is above 70 per cent.
  2. New firm formation is the lowest in eastern India with lowest literacy rate (59.6 % as per 2011 Census).
  • Physical infrastructure quality in the district influences new firm creation significantly.
  • Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.
  • Survey suggests enhancing ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.

Divestment in public sector undertakings

  • The Survey has aggressively pitched for divestment in PSUs by proposing a separate corporate entity wherein the government’s stake can be transferred and divested over a period of time.
  • The survey analysed the data of 11 PSUs that had been divested from 1999-2000 and 2003-04 and compared the data with their peers in the same industry.
  • Further, the survey has said privatized entities have performed better than their peers in terms of net worth, profit, return on equity and sales, among others.
  • The government can transfer its stake in listed CPSEs to a separate corporate entity.
  • This entity would be managed by an independent board and would be mandated to divest the government stake in these CPSEs over a period of time.
  • This will lend professionalism and autonomy to the disinvestment programme which, in turn, would improve the economic performance of the CPSEs.

Golden jubilee of bank nationalization: Taking stock

  • The survey observes 2019 as the golden jubilee year of bank nationalization
  • Accomplishments of lakhs of Public Sector Banks (PSBs) employees cherished and an objective assessment of PSBs suggested by the Survey.
  • Since 1969, India’s Banking sector has not developed proportionately to the growth in the size of the economy.
  • India has only one bank in the global top 100 – same as countries that are a fraction of its size: Finland (about 1/11th), Denmark (1/8th), etc.
  • A large economy needs an efficient banking sector to support its growth.

The onus of supporting the economy falls on the PSBs accounting for 70 % of the market share in Indian banking:

  1. PSBs are inefficient compared to their peer groups on every performance parameter.
  2. In 2019, investment for every rupee in PSBs, on average, led to the loss of 23 paise, while in NPBs it led to the gain of 9.6 paise.
  3. Credit growth in PSBs has been much lower than NPBs for the last several years.

Solutions to make PSBs more efficient:

  • Employee Stock Ownership Plan (ESOP) for PSBs’ employees
  • Representation on boards proportionate to the blocks held by employees to incentivize employees and align their interests with that of all shareholders of banks.
  • Creation of a GSTN type entity that will aggregate data from all PSBs and use technologies like big data, artificial intelligence and machine learning in credit decisions for ensuring better screening and monitoring of borrowers, especially the large ones.

Doubts regarding GDP Growth

  • GDP growth is a critical variable for decision-making by investors and policymakers. Therefore, the recent debate about accuracy of India’s GDP estimation following the revised estimation methodology in 2011 is extremely significant.
  • As countries differ in several observed and unobserved ways, cross-country comparisons have to be undertaken by separating the effect of other confounding factors and isolating effect of methodology revision alone on GDP growth estimates.
  • Models that incorrectly over-estimate GDP growth by 2.7 % for India post-2011 also misestimate GDP growth over the same period for 51 out of 95 countries in the sample.

Fiscal Developments

  • Revenue Receipts registered a higher growth during the first eight months of 2019-20, compared to the same period last year, led by considerable growth in Non-Tax revenue.
  • Gross GST monthly collections have crossed the mark of Rs. 1 lakh crore for a total of five times during 2019-20 (up to December 2019).
  • Structural reforms undertaken in taxation during the current financial year:
  • Change in corporate tax rate.
  • Measures to ease the implementation of GST.
  • Fiscal deficit of states within the targets set out by the FRBM Act.
  • Survey notes that the General Government (Centre plus States) has been on the path of fiscal consolidation.

External Sector

Balance of Payments (BoP):

  • India’s BoP position improved from US$ 412.9 bn of forex reserves in end March, 2019 to US$ 433.7 bn in end September, 2019.
  • Current account deficit (CAD) narrowed from 2.1% in 2018-19 to 1.5% of GDP in H1 of 2019-20.
  • Foreign reserves stood at US$ 461.2 bn as on 10th January, 2020.

Global trade:

  • India’s merchandise trade balance improved from 2009-14 to 2014-19, although most of the improvement in the latter period was due to more than 50% decline in crude prices in 2016-17.
  • India’s top five trading partners continue to be USA, China, UAE, Saudi Arabia and Hong Kong.

Exports:

  • Top export items: Petroleum products, precious stones, drug formulations & biologicals, gold and other precious metals.
  • Largest export destinations in 2019-20 (April-November): United States of America (USA), followed by United Arab Emirates (UAE), China and Hong Kong.
  • The merchandise exports to GDP ratio declined, entailing a negative impact on BoP position.
  • Slowdown of world output had an impact on reducing the export to GDP ratio, particularly from 2018-19 to H1 of 2019-20.
  • Growth in Non-POL exports dropped significantly from 2009-14 to 2014-19.

Imports:

  •  Top import items: Crude petroleum, gold, petroleum products, coal, coke & briquittes.
  •  India’s imports continue to be largest from China, followed by USA, UAE and Saudi Arabia.
  •  Merchandise imports to GDP ratio declined for India, entailing a net positive impact on BoP.
  • Large Crude oil imports in the import basket correlates India’s total imports with crude prices. As crude price raises so does the share of crude in total imports, increasing imports to GDP ratio.

Logistics industry of India:

  • Currently estimated to be around US$ 160 billion.
  • Expected to touch US$ 215 billion by 2020.
  • According to World Bank’s Logistics Performance Index, India ranks 44th in 2018 globally, up from 54th rank in 2014.

Direct investments and remittances:

  • Net FDI inflows continued to be buoyant in 2019-20 attracting US$ 24.4 bn in the first eight months, higher than the corresponding period of 2018-19.
  • Net FPI in the first eight months of 2019-20 stood at US$ 12.6 bn.
  • Net remittances from Indians employed overseas continued to increase, receiving US$ 38.4 billion in H1 of 2019-20 which is more than 50% of the previous year level.

External debt:

  • Remains low at 20.1% of GDP as at end September, 2019.
  • After significant decline since 2014-15, India’s external liabilities (debt and equity) to GDP increased at the end of June, 2019 primarily by increase in FDI, portfolio flows and external commercial borrowings (ECBs).

Monetary Management and Financial Intermediation

Monetary policy:

  • Remained accommodative in 2019-20.
  • Repo rate was cut by 110 basis points in four consecutive MPC meetings in the financial year due to slower growth and lower inflation.
  • However, it was kept unchanged in the fifth meeting held in December 2019.
  • In 2019-20, liquidity conditions were tight for initial two months; but subsequently it remained comfortable.

Prices and Inflation

Inflation Trends:

  • Inflation witnessing moderation since 2014
  • Consumer Price Index (CPI) inflation increased from 3.7 per cent in 2018-19 (April to December, 2018) to 4.1 per cent in 2019-20 (April to December, 2019).
  • WPI inflation fell from 4.7 per cent in 2018-19 (April to December, 2018) to 1.5 per cent during 2019-20 (April to December, 2019).

Drivers of CPI – Combined (C) inflation:

  • During 2018-19, the major driver was the miscellaneous group
  • During 2019-20 (April-December), food and beverages was the main contributor.
  • Among food and beverages, inflation in vegetables and pulses was particularly high due to low base effect and production side disruptions like untimely rain.

Cob-web Phenomenon (Cyclical fluctuations in inflation) for Pulses:

  • Farmers base their sowing decisions on prices witnessed in the previous marketing period.
  • Measures to safeguard farmers like procurement under Price Stabilization Fund (PSF), Minimum Support Price (MSP) need to be made more effective.

Volatility of Prices:

  • Volatility of prices for most of the essential food commodities with the exception of some of the pulses has actually come down in the period 2014-19 as compared to the period 2009-14.
  • Lower volatility might indicate the presence of better marketing channels, storage facilities and effective MSP system.

Essential Commodities Act is outdated

  • The Centre’s imposition of stock limits in a bid to control the soaring prices of onions over the last few months actually increased price volatility, according to the ES.
  • The finding came in a hard-hitting attack in the report against the Essential Commodities Act (ECA) and other “anachronistic legislations” and interventionist government policies, including drug price control, grain procurement and farm loan waivers.
  • The Centre invoked the Act’s provisions to impose stock limits on onions after heavy rains wiped out a quarter of the kharif crop and led to a sustained spike in prices.
  • However the Survey showed that there was actually an increase in price volatility and a widening wedge between wholesale and retail prices.
  • The lower stock limits must have led the traders and wholesalers to offload most of the kharif crop in October itself which led to a sharp increase in the price volatility.

Agriculture

  • Agricultural productivity is also constrained by lower level of mechanization in agriculture which is about 40 % in India, much lower than China (59.5 %) and Brazil (75 %).
  • With regard to the agri sector, the Survey argued that the beneficiaries of farm loan waivers consume less, save less, invest less and are less productive.
  • It added that the government procurement of foodgrains led to a burgeoning food subsidy burden and inefficiencies in the markets, arguing for a shift to cash transfers instead.

Food Management

  • The share of agriculture and allied sectors in the total Gross Value Added (GVA) of the country has been continuously declining on account of relatively higher growth performance of non-agricultural sectors.
  • GVA at Basic Prices for 2019-20 from ‘Agriculture, Forestry and Fishing’ sector is estimated to grow by 2.8 %.

Services Sector

Increasing significance of services sector in the Indian economy:

  1. About 55 % of the total size of the economy and GVA growth.
  2.  Two-thirds of total FDI inflows into India.
  3. About 38 per cent of total exports.
  4. More than 50 % of GVA in 15 out of the 33 states and UTs.

Social Infrastructure, Employment and Human Development

  • The expenditure on social services (health, education and others) by the Centre and States as a proportion of GDP increased from 6.2 % in 2014-15 to 7.7 % in 2019-20 (BE).
  • India’s ranking in Human Development Index improved to 129 in 2018 from 130 in 2017:
  • With 1.34 % average annual HDI growth, India is among the fastest improving countries
  • Gross Enrolment Ratio at secondary, higher secondary and higher education level needs to be improved.
  • Gender disparity in India’s labour market widened due to decline in female labour force participation especially in rural areas:
  • Around 60 % of productive age (15-59) group engaged in full time domestic duties.

Sustainable Development and Climate Change

  • India moving forward on the path of SDG implementation through well-designed initiatives
  • SDG India Index:
  1. Himachal Pradesh, Kerala, Tamil Nadu, Chandigarh are front runners.
  2. Assam, Bihar and Uttar Pradesh come under the category of Aspirants.
  • India hosted COP-14 to UNCCD which adopted the Delhi Declaration: Investing in Land and Unlocking Opportunities.
  • COP-25 of UNFCCC at Mandrid:
  1. India reiterated its commitment to implement Paris Agreement.
  2. COP-25 decisions include efforts for climate change mitigation, adaptation and means of implementation from developed country parties to developing country parties.
  • Forest and tree cover:
  1. Increasing and has reached 80.73 million hectare.
  2. 56 % of the geographical area of the country.
  • The numbers of stubble-burning incidents in 2019 were the least in four years, the Economic Survey says.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Strategy for boosting Wealth Creation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not Much

Mains level: Prospects of ethical wealth creation and its redistribution

  • The big idea from the Economic Survey 2019-20 is the need to push towards increasing the number of wealth creators in the Indian economy.
  • The Survey states that to achieve the goal of becoming a $5-trillion economy, the invisible hand of markets will need the support of “the hand of trust”.

Wealth Creation

  • Essentially, this means that regulation and rules in the economy should be such that they make it easy to do business but not turn into crony capitalism.
  • The Survey states: “The invisible hand needs to be strengthened by promoting pro-business policies to:
  1. Provide equal opportunities for new entrants, enable fair competition and ease doing business,
  2. Eliminate policies that unnecessarily undermine markets through government intervention,
  3. Enable trade for job creation, and
  4. Efficiently scale up the banking sector to be proportionate to the size of the Indian economy.”

How can this be done?

  • The Survey introduces the idea of “trust as a public good that gets enhanced with greater use”.
  • In other words, it states that policies must empower transparency and effective enforcement using data and technology to enhance this public good.
  • A key element here is the need to increase the opportunities for new entrants.
  • “Equal opportunity for new entrants is important because… a 10 per cent increase in new firms in a district yields a 1.8 per cent increase in Gross Domestic District Product (GDDP)”.
  • According to the Survey, the right policy mix can boost job creation.

Levers for furthering Wealth Creation

The Survey identifies several levers for furthering Wealth Creation, which are:

  • entrepreneurship at the grassroots as reflected in new firm creation in India’s districts;
  • promote ‘pro-business’ policies that unleash the power of competitive markets to generate wealth as against ‘pro-crony’ policies that may favour incumbent private interests;
  • eliminate policies that undermine markets through government intervention, even where it is not necessary;
  • integrate ‘Assemble in India’ into ‘Make in India’ to focus on labour intensive exports and thereby create jobs at a large scale;
  • efficiently scale up the banking sector to be proportionate to the size of the Indian economy and track the health of the shadow banking sector;
  • use privatization to foster efficiency. The Survey provides careful evidence that India’s GDP growth estimates can be trusted.

Is this push for wealth creators new?

  • This is an extension of what PM said during his Independence Day speech in August last year, where he stressed on the need for the country to view “wealth creators” differently.
  • Those who create wealth for the country, those who contribute in the country’s wealth creation — they all are serving the nation as well.
  • We should not look at wealth creators with apprehension and doubt their intentions; we should not look down upon them.
  • The PM had also said there was a need in the country to give such wealth creators due respect and credit.
  • He had said that this change is required because “If no wealth is created, no wealth can be distributed”.

Focus on Ethical Wealth Creation

  • The Survey emphasised on the importance of ‘Ethical Wealth Creation’, as the key to making India $5 trillion economy by 2025.
  • Krishnamurthy V. Subramanian, the Chief Economic Adviser of Ministry of Finance has done a commendable job in producing a thought-provoking masterpiece on ‘ethical wealth creation.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Economic Survey & its significance

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Economic Survey

Mains level: Economic Survey and its significance

With the Indian economy in the doldrums, this year’s Economic Survey will be keenly watched. The Economic Survey for 2019-2020 will be tabled in Parliament today.

What is the Economic Survey?

  • The Economic Survey is a report the government presents on the state of the economy in the past one year, the key challenges it anticipates, and their possible solutions.
  • One day before the Union budget, the Chief Economic Adviser (CEA) of the country releases the Economic Survey.
  • The document is prepared by the Economic Division of the Department of Economic Affairs (DEA) under the guidance of the CEA.
  • Once prepared, the Survey is approved by the Finance Minister.
  • The first Economic Survey was presented in 1950-51. Until 1964, the document would be presented along with the Budget.
  • For the past few years, the Economic Survey has been presented in two volumes.
  • For example, in 2018-19, while Volume 1 focussed on research and analysis of the challenges facing the Indian economy, Volume 2 gave a more detailed review of the financial year, covering all the major sectors of the economy.

Why is the Economic Survey significant?

  • The Economic Survey is a crucial document as it provides a detailed, official version of the government’s take on the country’s economic condition.
  • It can also be used to highlight some key concerns or areas of focus — for example, in 2018, the survey presented by the then CEA Arvind Subramanian was pink in colour, to stress on gender equality.

Is it binding on the government?

  • The government is not constitutionally bound to present the Economic Survey or to follow the recommendations that are made in it.
  • If the government so chooses, it can reject all suggestions laid out in the document.
  • But while the Centre is not obliged to present the Survey at all, it is tabled because of the significance it holds.

What are the expectations from Economic Survey 2020?

  • At a time when India’s growth has plummeted to a six-year low, the Economic Survey ahead of the Union Budget is expected to offer key insights into the path ahead for the government to revive growth.
  • The conundrum of remaining fixated on deficit targets or making a concerted push towards more expenditure to kickstart growth is one of the key challenges the government is facing.
  • The Survey is expected to shed light on the crucial gaps that the Budget will aim to fill in terms of unemployment, private investment, and a slump in consumption.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

 [op-ed snap] Don’t be deterred by the ‘crowding out’ effect of the fisc

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- The crowding out effect, effects of the Government borrowing on various variables.

Context

Market borrowings of the government do not always squeeze credit for the private sector in India.

What is ‘crowding out’ effect?

  • Increased government spending and borrowing: It refers to how increased government spending, for which it borrows more money, tends to reduce private spending.
    • Why does private spending reduce? This happens because when the government takes up the lion’s share of funds available in the banking system, less of it is left for private borrowers.
    • Relationship with interest rate: Higher borrowing by the government and subsequent crowding out also impacts interest rates in the economy.

How the Government borrowing works and the role of RBI

  • Local borrowing local spending: Typically, the government funds its fiscal deficit by borrowing from the domestic bond market.
    • Its expenditure is also local in nature.
  • Overdraft from RBI: The Reserve Bank of India (RBI) is the official banker to the government-which spends money by first taking an overdraft from the central bank.
    • This overdraft gets repaid through bond market borrowings.
  • Why overdraft? The understanding is that any such government spending should ideally not affect the availability of funds to other borrowers in the market.
  • Excessive borrowing and effects on the interest rate: Excessive government borrowing from the bond market, many cautions, could lead to a rise in interest rates for the government itself and consequently for everyone else in the economy.

Analysis of the effects of borrowing on other variables

  • Analysis of the data reveals the following trends.
  • No impact on other variables: Local borrowing and spending by the Indian government does not impact any other macroeconomic variables like-
    • The availability and cost of funds for other participants in the economy.
    • Inflation.
    • Deposit growth, at the current deficit level—that is, with the state and central combined figure above 6% of GDP.
  • What impacts the interest rate the most?
    • The two most important variables that impacted interest rates were inflation and the repo rate. Which tend to move together.
    • What does it indicate? This clearly indicates that RBI is extremely proactive in the way it manages interest rates.
  • Effects of funds on inflation: Such borrowings that are funded by the central bank could lead to inflation, the same is true for large external inflows to domestic money markets.
    • The foreign borrowings finally get reflected in the country’s foreign exchange reserves, which have a very strong relationship with inflation.
    • Effects on interest rates: Technically, any large inflow of a foreign currency sterilized by RBI does have the potential to move the inflation needle up, thus placing upward pressure on interest rates.
  • Relationship between borrowing and growth: It is clear that government borrowing and spending actually drives GDP growth.
    • Government borrowing should not impact bank lending to companies, as the sums borrowed return to the market almost immediately.
  • How RBI controls bond yield?
    • RBI ensures that bond yields don’t shoot up because of the excessive borrowing, by taking bonds onto its books to be released back into the market in good times.

The uniqueness of the Indian money market

  • Why is it unique? India market is a unique money market, different from the rest of the world, for the following reasons-
    • We have investors who are explicitly required to invest in government debt.
    • Banks, non-banking financial companies, insurers, provident funds, and pension funds are all forced to invest in government debt as a condition for their licence to operate in India.
    • We also find that RBI works towards aiding the government borrowing programme rather effectively, ensuring that interest rates do not change too adversely.

Conclusion

The government should not be excessively worried about the government living beyond its means at this juncture. Government spending being the main driver for the country’s GDP growth, it could be a good way to put the economy on a higher growth trajectory. Perhaps it is time to revisit the entire FRBM framework.

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Examining the slowdown

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Reasons for the slowdown in the Indian economy, declining household saving, consumption driven growth.

Context

Setting aside the gloomy projections based on short-term economic trends, the long-term and comparative evidence reveal interesting trends about the health of the Indian economy.

Performance of the Indian economy after 1991

  • Higher growth plateau reached after 1991: After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3. 85%.
    • The high growth rate during 2003-2011: India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12).
    • Ups and downs after 2012: The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19.
    • Structural dimension? This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
  • Comparison with China and the world
    • Average at 7.07% after 2011-12: Despite these fluctuations from 2011-12, on average, India clocked a growth rate of  7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates.
    • Whereas like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.

Why couldn’t India’s growth momentum be sustained after 2010-11?

  • Analysis of five variables: To answer the above question, an in-depth analysis of trends in five key macroeconomic variables was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19.
    • Consumption.
    • Investment.
    • Savings.
    • Exports.
    • Net foreign direct investment (NFDI) inflows.
  • What emerged from the analysis: The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period.
    • How much the investment declined? The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19.
    • Household vs. corporate sector decline: The investment decline was caused mainly by the household sector and to some extent by the public sector, but not the corporate sector.
    • The decline in investment compensated by NFDI: The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows.
    • On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.

Why tax-cut not help the economy

  • The justified policy of reviving the housing sector: The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector.
  • Why corporate tax cut won’t help much? The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment.
    • Given that the corporate investment rate has not eroded severely during 2011-2019, the tax cut would help economic revival.
    • Lost opportunity to spur rural consumption: A part of the largesse offered to Corporate India could have been used to spur rural consumption.

What the decline in saving rate mean?

  • Importance of savings: The savings rate declined almost consistently from 27% of GDP to 30.51% between 2011 and 2018.
    • This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall.
    • Why the fall in household financial savings needs to be increased? The fall in household financial savings is alarming and needs to be arrested.
    • Savings are required to meet the requirements of those who want to borrow for their investment needs.
    • Saving-investment relation: Lower household savings imply lesser funds available in the domestic market for investment spending.
  • Economic growth powered by consumption: The decline in household savings has pushed up private final consumption expenditure consistently
    • Private final consumption rose from 56.21% of GDP in 2011-12 to 59.39% in 2018-19.
    • Consumption driven economic growth in 2011-19: The increase in private consumption suggests that economic growth during 2011-2019 was powered by consumption, not investment.
    • Investment driven growth during 2003-2011: In contrast, during 2003-2011, growth was powered by investments.
  • So, declining saving rate means a slowdown in the economy may not be due to structural issues.
    • Re-examination of popular view: Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined.
    • There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.

Export-GDP ratio decline and what it means

  • Export-GDP decline from 24.54% to 19.74%: India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019.
  • A trend similar to the rest of the world: The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio.
    • However, the drop in India’s exports was significantly larger than the world, a cause for concern.
    • The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006.
  • Indian economy doing better than China: Sharp decline in China’s export-GDP and NFDI-GDP, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.

Conclusion

The popular view that the slowdown in the Indian economy is due to the structural problems needs a re-examination in the view of the decline in investment in tandem with the world.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: Fiscal Marksmanship

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Fiscal Marksmanship

Mains level: Signs of economic slowdown in the country

Over the past few years, many have questioned the government’s fiscal marksmanship.

What is fiscal marksmanship?

  • Fiscal marksmanship essentially refers to the accuracy of the government’s forecast of fiscal parameters such as revenues, expenditures and deficits etc.
  • In other words, if the difference between what the government projected as the likely tax revenues in the Budget and the actual figures a year later is large then it reflects poor fiscal marksmanship.
  • In the Indian context, this term gained popularity after Raghuram Rajan, then India’s Chief Economic Advisor stressed on fiscal marksmanship in the Economic Survey for the year 2012-13.
  • He had defined fiscal marksmanship as “the difference between actual outcomes and budgetary estimates as a proportion of GDP”.

Why does fiscal marksmanship matter?

  • The salience of Budget numbers lies in their credibility.
  • The central purpose of publicly disclosing the Budget or the annual financial statement in a democracy and seeking approval from the legislature is to make the policymaking and governance transparent and participatory.
  • Everyone knows that Budget numbers are forecasts and estimates, and as such, unlikely to tally exactly with the actual numbers a year later.
  • But there is an underlying belief among people that when the government states, say, that its revenues will grow by 12% or that its fiscal deficit will remain within the FRBM Act’s mandate as it is based on genuine calculations.
  • However, if these fiscal forecasts turn out to be way off the mark repeatedly, it will undermine the credibility of the Budget numbers and indeed the Budget presentation itself.

Why is India’s fiscal marksmanship being questioned?

Typically, the fiscal marksmanship tends to get dented every time the economy faces a bump during the financial year.

  • For instance, as a result of the extent of the Global Financial Crisis in 2008, budget forecasts in the ensuing years did take a hit.
  • The latest trigger has been the wide discrepancy between what the last couple of budgets — first the interim budget for 2019-20 (presented in February 2019) and then the full budget for 2019-20 (presented in July 2019).
  • It expected the nominal GDP growth to be in 2019-20 and what the First Advance Estimates (FAE), released by the Ministry of Statistics and Programme Implementation in January 2020.
  • For instance, the July 2019 Budget expected nominal GDP to grow by 12% in 2019-20 but the FAE expect the nominal GDP to grow by just 7.5% (which by the way is a 42-year low).
  • Since all budget calculations are based on the nominal GDP, it is expected that this wide variance in nominal GDP will reflect across the board in the coming Budget.

Impact on revenue

  • The government’s revenues are unlikely to grow anywhere close to the last Budget’s expectation.
  • Indeed, the revenue shortfall is expected to be anywhere between Rs 2 lakh crore to Rs 5 lakh crore.
  • As a result, either the fiscal deficit will overshoot from the budgeted number or the expenditure numbers will be much lower than promised.

Why has fiscal marksmanship worsened?

  • As mentioned earlier, when an economy’s growth slows down (or picks up) sharply within a year, it is possible that the fiscal forecasts for that year go down (or up) substantially.
  • However, such changes do not happen too often.
  • In the recent past, however, there is one structural change that appears to be contributing to poor fiscal forecasts by the government.
  • This structural change was the government’s decision in January 2017 to advance the presentation of the Union Budget by a whole month.
  • Accordingly, the Union Budget for 2017-18 was presented on February 1 instead of the last working day of February (28th or 29th), as was the norm till then.
  • It meant that the First Advance Estimates, which used to come by January end (after taking into account the economic activity of the first three quarters of the financial year), had to be brought out by the start of January.
  • This, in turn, essentially meant that the estimate of the key nominal GDP data for the current year — on the base of which next year’s nominal GDP and other estimates were to be made — had to be made using the first two quarters of the current fiscal year.

Why didn’t the government course-correct and project slower economic growth in July 2019 when it presented the full Budget for 2019-20?

  • It is unclear why this was not done. But could be two or three possible reasons.
  • One, the FM may have favoured continuity over the Interim Budget estimates instead of providing a starkly different set of estimates.
  • Two, and a related reason, could be that the government did not have enough time to make the adjustment because it may have required redoing the whole Budget afresh.
  • Or third, because perhaps the government did not recognise the severity of the economic slowdown that has been underway.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Where demand has gone

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Role of informal sector in Indian economy, How expansionary fiscal policy can help more than represented in the official data.

Context

That India is in the midst of a serious economic slowdown is no longer in question. The debates are now mostly about what to do about it.

Where is the GDP growth coming from?

Fall in consumption expenditure in absolute terms: The leaked National Sample Survey (NSS) consumer expenditure data -shows that real monthly per capita expenditure has in fact fallen in absolute terms between 2011-12 and 2017-18.

  • 8 % decline in a rural area: In rural areas, consumption expenditure decreased by 8.8 per cent.
  • 2% decline in an urban area: While in urban areas it increased by 2 per cent, leading to an all India decline of 3.7 per cent.
  • Where is the growth coming from: If average consumer expenditure is down, then where is the GDP growth coming from?
    • Consumer expenditure contribution: After all, according to National Accounts Statistics (NAS) consumer expenditure is around 60 per cent of the GDP.
    • And given the other contributors to GDP-investment and government spending- are not growing spectacularly, consumer expenditure should be growing rather than decreasing.
    • So, to get an overall 5 per cent growth rate, consumer expenditure should be growing at higher than 5 per cent.
  • NSS vs. NAS- a genuine puzzle: How can consumption expenditure be going down in absolute terms according to the NSS estimates and be growing at more than 5 per cent according to the NAS?
    • Variation in data a norm: That these two types of estimates of consumption expenditure do not match is well-known, and that is the case in other countries as well.
    • The discrepancy at alarming proportions: In the 1970s, consumer expenditure according to NSS estimates was around 90 per cent of consumer expenditure according to NAS, but in 2017-18 it was only 32.3 per cent.
    • Data from two different countries: It is as if we are looking at data from two different countries.
    • One where the consumption expenditure growth is positive and propping up the GDP growth rate and the other where it is actually falling.

A few inferences that pertain to the state of the economy and the policy options.

  • Reasons for the discrepancy between NSS data and NAS data.
  • First- Presence of large informal sector:
    • 50% contribution to GDP: Informal sector accounts for nearly half of the GDP and employs 85 per cent of the labour force.
    • Guesswork on performance: In national income accounts, growth in the informal sector is estimated by extrapolating from the performance of the formal sector. Which is largely guesswork.
  • Second- Making effects of the expansionary policy less pronounced:
    • Expansionary fiscal policy more effective than appear to be: Because of the presence of the informal sector, expansionary fiscal policy will be more effective than what would appear from official statistics, as a big part of its impact will be felt in the informal sector.
    • Why is it so? The reason is that a big segment of the population is located in the informal sector; they are poorer and tend to spend a much higher fraction of their income on consumption.
    • This group has been seriously affected by the economic slowdown.
  • Third-Results of expansionary policy would be apparent after a delay
    • Apparent effects of policy much worse than what it would be: The effect of an expansionary policy on the budget deficit will look much worse than what it would be since the estimates of its effect on income expansion and tax collection will be largely based on the formal sector.
    • Informal sector boosting the formal sector: Some of the income generated in the informal sector will boost demand in the formal sector through consumer demand for mass-consumption items (for instance, biscuits, as opposed to automobiles).
    • Good medium-term pictures: Therefore, in the medium term, once the engine of the economy starts moving, the income expansion and deficit numbers will look better.
  • Final-Tax cuts will achieve little
    • Only 3-5% population affected: The tax cut will affect barely 3-5 per cent of the adult population.
    • Contribution of taxes in GDP: Income tax revenues amount to around 5 per cent of the GDP and corporate income taxes around 3.3 per cent.
    • Rich tends to save more: Most of the tax is paid by the richest among these groups (the top 5 per cent taxpayers contribute 60 per cent of individual income tax revenue), and the rich tend to spend a smaller fraction of their income (and save more).
    • Little impact on GDP: Irrespective of the number of people affected, and even if they spend the entire increase in their income as a result of the tax cut, the overall economic impact will be small relative to the GDP.
    • The futility of tax cut: Therefore, a tax cut for the rich would be less effective in raising spending compared to an equivalent amount being given to poorer groups who spend a much higher fraction of their incomes.

Conclusion

The government should not underestimate the role of the informal sector in the economy. To get the engine of the economy revving, an expansionary fiscal policy that harnesses the energy of the informal sector to boost aggregate demand is the order of the day.

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] Redesigning India’s ailing data system

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- National accounting and problems in associated with the data collection and methods.

Context

As official statistics is a public good, giving information about the state of the economy and success of governance, it needs to be independent to be impartial.

GDP calculation and its significance

  • What is GDP:
    • Assigning a value to products and services: In effect, it adds apples and oranges, tractors and sickles, trade, transport, storage and communication, real estate, banking and government services through the mechanism of value.
    • GDP covers all productive activity for producing goods and services, without duplication.
    • The System of National Accounting (SNA): It is designed to measure production, consumption, and accumulation of income and wealth for assessing the performance of the economy.
  • What is the significance of GDP data?
    • Influence the market: GDP data influence markets, signalling investment sentiments, the flow of funds and balance of payments.
    • The input-output relations impact productivity and allocation of resources.
    • Demand and supply influences prices, exchange rates, wage rates, employment and standard of living, affecting all walks of life.
  • Issues over the present series of GDP:
    • Nominal GDP: The data on GDP are initially estimated at a current price known as nominal GDP.
    • Real GDP: Nominal GDP minus the inflation effect is real GDP.
    • Price Index: There is a way of adjusting inflation effect through an appropriate price index.
    • Pricing series issue with the service sector: The present series encountered serious problems for the price adjustment, specifically for the services sector contributing about 60% of GDP.
    • Absence of price index: There is an absence of appropriate price indices for most service sectors.
    • What the absence of series means: The deflators used in the new series could not effectively separate out price effect from the current value to arrive at a real volume estimate at a constant price.
    • Methodical issue: Replacing Annual Survey of Industries (ASI) with the Ministry of Corporate Affairs MCA21 posed serious data and methodological issues.

Need for the change in the approach of data collection

  • The approach for the collection of data remains largely the same for long.
    • Price and production indices are constructed using a fixed base Laspeyres Index.
    • The yield rate for paddy is estimated by crop cutting experiments.
    • The organisation of field surveys for collection of data on employment-unemployment, consumer expenditure, industrial output, assets and liabilities continue.
  • Why data collection for yields need to change?
    • Productivity and remunerative price of output are major concerns for agriculture.
    • Data collection from diverse factors: It is necessary to collect data on factors such as soil conditions, moisture, temperature, water and fertilizer use determining yield, the impact of intermediary and forward trade on farm gate price and so on.
    • Israel collects these data for analysis to support productivity.
    • Need to leverage the e-governance: The initiative under e-governance enabled the capturing of huge data, which need to be collated for their meaningful use for the production of official statistics.

Data Logistics

  • Need of data from the other areas: Along with GDP, we need data to assess-
    • Inclusive growth.
    • Fourth-generation Industrial Revolution riding on the Internet of things.
    • Robotics-influencing employment and productivity.
    • Environmental protection.
    • Sustainable development and social welfare.
  • How to deal with the data inconsistency
    • We need systems which have the capability to sift through a huge volume of data seamlessly to look for reliability, validity, consistency and coherence.
    • Such a system is possible through a versatile data warehouse as a component of bigdata technology.
    • Rangarajan Committee recommendation: Setting up of such system has been wanting as thoughtful and well-meaning key recommendations of the Rangarajan Commission and subsequent recommendations from 2006 onwards by successive National Statistical Commissions.

Way forward

  • The need for a new system: The present national accounting and analytical framework miss out on many important dimensions of the economy.
    • We need a new framework for analysis for such a complex system and evolutionary process.
    • The system needs to take into account automation, robotisation and other labour-replacing technologies affecting profitability, structural change and general welfare.
  • Need to find alternative avenues for the unemployed and jobs lost: In order to inject efficiency and stability, there is a need to have detailed data on how: markets clear, prices are formed, risks build-up, institutions function and, in turn, influence the lifestyle of various sections of the people.
  • Knowing market microstructure: It is also needed to know in greater detail about market microstructure and optimality therein, the role of technology and advanced research, changing demand on human skills, and enterprise and organising ability.
  • Monopoly must be contained:  The loss caused to the economy through monopoly power, inefficient input-output mix, dumping, obsolete technology and product mix must be contained.
  • Ensure distribution of wealth: The consensus macroeconomic framework of analysis assumes symmetric income distribution and does not get into the depth of structural issues.
    • In the changed situation of availability of microdata, there is a need to build a system to integrate the micro with the macro, maintaining distributional characteristics.

Conclusion

Data is the new oil in the modern networked economy in pursuit of socio-economic development. The economics now is deeply rooted in data, measuring and impacting competitiveness, risks, opportunities and social welfare in an integrated manner, going much beyond macroeconomics. There is a need for commitment to producing these statistics transparently.

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] The perils of RBI’s fixation on inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Inflation targeting by RBI, and other mandates of RBI.

Context

The RBI’s responsibility to regulate the financial sector may have taken a back seat after the adoption of inflation targeting as the main objective. Has a fixation with inflation rate made the RBI take its eyes off the loan books of the banks?

Evolution of the role of the Central Banks

  • Maintaining financial stability: The establishment of some of the world’s oldest central banks was inspired by the goal of maintaining financial stability.
    • Harm to the depositors: It was recognised that when private commercial banks fail, whether due to malfeasance or misjudgement, they harm their trusting depositors.
    • Harm to the entire system: But when banks fail they not only harm the depositors they can also take down with them the rest of the financial system.
  • Banks lending to one another: The entire financial system also gets harmed when banks have lent to one another, which is not uncommon.
    • The collapse of credit: In the crisis that ensues, there is a collapse of credit which, in turn, leads to a downturn in economic activity.
  • Lender of last resort: To avoid this, the central bank was conceived of as the lender of last resort.
    • Prevention of run on the banks: Lender of last resort is the one that could pre-empt a run on banks and give them time to put their books back in order.
    • Regulation of banks: However, this was to be accompanied by the adoption of a tough regulatory stance.
    • Whereby the central bank would stay hawk-eyed towards the activities of banks, particularly risky lending.
  • Rise of neo-liberalism and change in a role: With the rise of neoliberalism, the central tenet of which is that markets should be given free play, the regulatory role of central banks took a back seat.
    • Inflation control as primary role: The Central banks came to be primarily mandated with inflation control.

Inflation targeting and regulation of the financial market by RBI

  • Multiple indicator approach: In India, the RBI had earlier pursued a ‘multiple indicators approach’.
    • What was the multiple indicator approach: The approach involves concern for outcomes other than inflation, including even the balance of payments.
    • Discouraging the approach: Developments in economic theory discouraged ‘multiple indicators approach’.
    • It was argued that having economic activity as an objective of monetary policy leads to higher inflation.
  • Favouring low inflation over lower unemployment: Discouraging the ‘multiple indicator approach’ encouraged low inflation over low unemployment.
  • Inflation targeting as the sole objective of monetary policy: The Indian government also instituted inflation targeting as the sole objective of monetary policy.
    • The fixed target for the RBI: The RBI was permitted to exceed or fall short of a targeted inflation rate of 4% by a margin of 2 percentage points.
  • But have the RBI’s original mandate as a central bank been met?
    • IL&FS crisis: In 2018, within three years of the adoption of inflation targeting goal, a crisis engulfed IL&FS, a non-banking financial company in the infrastructure space.
    • Not a small player: It operated over 100 subsidiaries and was sitting on a debt of ₹94,000 crores.
    • Effects of default: Given this, IL&FS default had a chilling effect on the investors, banks and mutual funds associated with it both directly or indirectly.
    • PMC bank crisis: In 2019, a run on the Punjab and Maharashtra Co-operative Bank had to be averted by imposing withdrawal limits.
    • Outright fraud in PMC case: While in the case of IL&FS, some part of the problem may have been caused by a slowing economy, outright fraud underlay the crisis at PMC Bank.
    • Raghavendra Sahakara Bank case: In early 2020, curbs have had to be placed on withdrawals from the Bengaluru-based Sri Guru Raghavendra Sahakara Bank.
  • Pertinent question
    • Regulatory sector at the backseat? It is not too early to ask if the RBI’s responsibility to regulate the financial sector may have taken a back seat after the adoption of inflation targeting as the main objective.
    • Has a fixation with inflation rate made the RBI take its eyes off the loan books of the banks?

The recent rise in inflation and shortfall of currency notes

  • Inflation at 7%: At over 7%, the inflation rate in December is the highest in five years.
    • Not cause of concern: This may not be the reason to panic, for the price rise could be seasonal and may well abate.
    • Question on inflation targeting: But it does raise a question on the efficacy of inflation targeting as a means of inflation control.
    • Reason for moderate inflation so far: If the inflation rate was within the intended range so far, that may have been due to both declining food prices and, for a phase, oil prices.
  • The shortfall of notes: The central bank has a monopoly on the issue of notes.
    • There is an absolute shortage of small denomination notes in the bazaars of India.
    • Small-denomination notes are mostly unavailable.

Conclusion

While focusing on the inflation, the Central bank also needs to keep the other mandates especially the regulation of the finance sector in check.

 

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

[op-ed snap] A rough patch

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Not much.

Mains level: Paper 3- Rising inflation-slowing growth rates and its consequences for Indian economy.

Context

High inflation has reduced the fiscal space available for a rate cut.

RBI target of 6% breached.

  • CPI at 7.35 %: Retail inflation, as measured by the consumer price index (CPI), has surged to 7.35 per cent in December 2019.
  • Latest inflation data seems to corroborate fears articulated by the Monetary Policy Committee (MPC) in its December meeting.
  • In the meeting, MPC refrained from cutting the benchmark repo rate.

Consequences for the economy

  • Reduced scope for fiscal slippage: High inflation reduced the space for further easing of policy rates.
    • Even after clarity over the extent of the Centre’s fiscal slippage emerged.
  • Rise in yield for 10-year securities: The 10-year G-sec yields have reacted sharply to these developments, rising to 6.67 on Tuesday.
    • Offsetting operation twist: Rise in yield resulted in offsetting the impact of the RBI’s recent open market operations.
  • Inflation targeting under stress: The combination of weak economic activity and higher than expected supply-side inflationary pressures has put the inflation-targeting regime under test.

Reasons for the inflation rise and chances of easing

  • Food prices rise: Much of the rise in the headline inflation number can be traced to higher food prices.
    • Food inflation has risen to a near six-year high of 14.12 per cent in December 2019, up from 10.01 per cent in the previous month.
    • Vegetable prices have surged to 60.5 per cent in December, contributing nearly 3.7 percentage points to the headline numbers.
  • Chances of ease in coming months: While vegetable crop cycles tend to be short, and supply-side pressures may ease in the coming months.
    • The stickiness in prices of protein items is likely to provide a floor for food inflation.

Bleak outlook for inflation easing

  • No short-term return to normal level: Food inflation is unlikely to revert to previous levels in the short term.
  • Household inflation expectations, a key metric in the MPC’s assessment, are more responsive to food inflation, this will further exert upward pressure on MPC.
  • A factor of hostilities in the Middle East: The uncertainty over oil prices on account of hostilities in the Middle East, adds to the bleak outlook for inflation.

Conclusion

With limited fiscal space for a meaningful stimulus, the government intends to support the economy during this rough patch, and return growth to a higher trajectory.

 

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: The fundamentals of the Indian Economy

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Fundamentals as mentioned in the newscard

Mains level: Fundamentals of Indian Economy

PM Modi highlighted the strong absorbent capacity of the Indian economy while referring to certain fundamentals. He emphasized the strength of these basic fundamentals in absorbing the shocks of ongoing economic slowdown.

What are the ‘fundamentals of an economy’?

  • The PM has reiterated a phrase of reassurance — underscoring the strong fundamentals of the Indian economy — that has been often used by policymakers in the past when the economy is seen to be faltering.
  • When one talks about the fundamentals of an economy, one wants to look at economy-wide variables such as the overall GDP growth, the overall unemployment rate, the level of fiscal deficit, the valuation of a country’s currency against the US dollar, the savings and investment rates in an economy, the rate of inflation, the current account balance, the trade balance etc.
  • There is intuitive wisdom in looking at these “fundamentals” of an economy when it goes through a tough phase.
  • Such an analysis, when done honestly, can give a sense of how deep the strain in an economy run.
  • It can answer the question whether the current crisis just an exaggerated response to a sectoral problem or is there something more “fundamentally” wrong with the economy that needs urgent attention and “structural” reform.
  • To be sure about the broader health of the economy, one looks at the broader variables. That way, one reduces the chances of getting the diagnosis wrong.

Their relevance

  • The first advance estimates of national income for the current financial year, released earlier in the week, found that nominal GDP was expected to grow at just 7.5% in 2019-20.
  • This is the lowest since 1978. Real GDP is calculated after deducting the rate of inflation from the nominal GDP growth rate.
  • So, if for argument sake, the inflation for this financial year is 4%, then the real GDP growth would be just 3.5%.
  • Just for perspective, the Union Budget presented in July 2019 expected a real GDP growth of 8% to 8.5% and a nominal GDP growth of 12% to 12.5%, with a 4% inflation level.

So, what is the current state of the fundamentals?

The data on most variables that one may call as fundamentals of the Indian economy are struggling.

  • Growth rate — both nominal and real — has decelerated sharply; now trending at multi-decade lows. Gross Value Added, which maps economic growth by looking at the incomes-generated is even lower; and its weakness in across most of the sectors that traditionally generated high levels of employment.
  • Inflation is up but the consolation is that the spike is largely due to transient factors.
  • However, a US-Iran type of conflagration could result is a sharp hike in oil prices and, as such, domestic inflation may rise in the medium term.
  • Unemployment is also at the highest in several decades.According to some calculations, between 2012 and 2018, India witnessed a decline in the absolute number of employed people — the first instance in India’s history.
  • Fiscal deficit, which is proxy for the health of government finances, is on paper within reasonable bounds but over the years, the credibility of this number has come into question. Many, including the CAG, has opined that the actual fiscal deficit is much higher than what is officially accepted.
  • Bucking the trend, the current account deficit, is in a much better state but trade weakness continues as do the weakness of the rupee against the dollar; although on the rupee-dollar issue, a case can be made that the rupee is still overvalued and thus hurting India’s exports.
  • Similarly, while the benchmark stock indices have run up, and grabbed all attention, the broader stock indices like the BSE500 have struggled.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

Explained: First Advance Estimates (FAE)

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP, GNP, GVA etc.

Mains level: First Advance Estimates

The First Advance Estimates (FAE) were recently released by the Ministry of Statistics and Programme Implementation (MoSPI).

The First Advance Estimates and their significance

  • The First Advance Estimates (FAE) extrapolate a variety of data, such as the Index of Industrial Production (IIP), the financial performance of listed companies, first advance estimates of crop production etc., for the first 7 to 8 months to arrive at the annual figure.
  • The significance of the FAE is that this is the final bit of official data before the government presents its next Budget.
  • The sector-wise Estimates are obtained by extrapolation of indicators like-
  1. IIP of first 7 months of the financial year,
  2. financial performance of Listed Companies in the Private Corporate sector available upto quarter ending September, 2019
  3. 1st Advance Estimates of Crop production,
  4. accounts of Central & State Governments, information on indicators like Deposits & Credits, Passenger and Freight earnings of Railways, Passengers and Cargo handled by Civil Aviation, Cargo etc., available for first 8 months of the financial year”.

Estimates for 2018-19

  • It estimated India’s GDP will grow by just 5 per cent in the current financial year (2019-20). Last financial year, 2018-19, the Indian economy grew at 6.8 per cent.
  • The gross value added (GVA), which maps the economic activity from the income side as against the GDP which maps it from the expenditure side, is expected to grow by 4.9 per cent in 2019-20 as against 6.6 per cent in 2018-19.

Drivers of the GDP

There are four main drivers of the GDP:

  • One, the private consumption expenditure – that is the expenditure that you and I make in our personal capacity. This category has grown by just 5.7 per cent in 2019-20 while it grew by 8 per cent last financial year.
  • The second driver is the expenditure made by the Government. This grew by 10.5 per cent, which is higher than the rate of growth (9.2 per cent) in the last financial year.
  • But the most disappointing number is the deceleration in business investments in the economy.
  • This driver, which is the key to sustainable long-term growth, grew by less than 1 per cent; last financial year it grew by 10 per cent.
  • This shows that while the private consumption demand is tepid, businesses have completely turned off the tap on new investments despite the government making a once-in-generation cut in corporate taxes.

Performance in terms of GVA

  • The GVA data provides a detailed picture. Given that the overall GVA has decelerated sharply, almost all sectors have witnessed slower growth in economic activity.
  • Only “Public Administration, Defence and Other Services,“ which essentially measures how the government did, grew by 9.1 per cent.
  • All other sectors saw a GVA growth that was slower than the average growth in the last financial year.
  • The worst performing sectors are ‘Agriculture, Forestry and Fishing’, ‘Mining and Quarrying’, ‘Manufacturing’ and ‘Construction’, which are expected to see a GVA growth of 2.8 per cent, 1.5 per cent, 2.0 per cent and 3.2 per cent respectively.

Back2Basics

Real vs. Nominal GDP

  • GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products.
  • The market value taken at current prices is the nominal GDP.
  • The value taken at constant prices — that is prices for all products taken at an unchanged base year (2011) — is the real GDP.
  • In simple terms, real GDP is nominal GDP stripped of inflation.
  • Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year.
  • Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Subscribe
Notify of
14 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments

JOIN THE COMMUNITY

Join us across Social Media platforms.

💥Mentorship New Batch Launch
💥Mentorship New Batch Launch