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

Everything you need to know about the Indian growth story and the complexities involved in predicting it right. Let’s connect the dots.

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

Dealing with the macroeconomic uncertainties


From UPSC perspective, the following things are important :

Prelims level : Tax buoyancy

Mains level : Paper 3- Macroeconomic uncertainty and way ahead


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.


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)


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

What is a K-shaped Economic Recovery?


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)

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

A chance to support growth, fiscal consolidation


From UPSC perspective, the following things are important :

Prelims level : Marginal propensity to consume

Mains level : Paper 3- Growth prospects for Indian economy


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.


  • 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.


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)

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

What is World Economic Forum’s Davos Agenda ’22?


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)

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

Dravidian Model of Development


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)

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

Issues with India’s GDP data


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Issues with India's GDP data


There are three major reasons why the GDP data, and hence any narrative of economic recovery based on it, are questionable.


  • 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.”


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)

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

What are the First Advance Estimates of GDP?


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.
Please leave a feedback on thisx


UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

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

A reality check on great CAPEX expectations


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Capex boom in India


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.


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)

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

The challenge of achieving 9.5% growth rate


From UPSC perspective, the following things are important :

Prelims level : Gross tax revenue

Mains level : Paper 3- Challenges in achieving 9.5 growth rate


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.


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)

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

Mixed signals on growth-inflation dynamics


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Recovery momentum


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.


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)

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

World Economic Outlook (WEO) Report by IMF


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)

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

What the Q1 GDP numbers say


From UPSC perspective, the following things are important :

Prelims level : Private Final Consumption Expenditure

Mains level : Paper 3- Measures to sustain the growth momentum


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.”


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)

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

Why we must focus on Human Development not GDP growth?


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)


National Income Accounting

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


From UPSC perspective, the following things are important :

Prelims level : GVA and GDP

Mains level : Paper 3- How to sustain economic recovery


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.


  • 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.


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)

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

Learning from China


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Lessons from China's economic progress


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.


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.

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

Growth needs steps beyond reforms


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.


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.


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

Poverty in India is on rise again


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.


Poverty Lines in India: Estimations and Committees

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

A cycle of low growth, higher inflation


From UPSC perspective, the following things are important :

Prelims level : Minsky moment

Mains level : Paper 3- Policy intervention needed for recovery of economy


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.


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.

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

Unlocking recovery


From UPSC perspective, the following things are important :

Prelims level : Inflation

Mains level : Paper 3- Economic recovery


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.


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.

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

What is Gross Environment Product?


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.

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

Growth matters but income levels matter more


From UPSC perspective, the following things are important :

Prelims level : Purchasing Managers' Index

Mains level : Paper 3- Need for focus on supply side


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.


  • 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.


India needs a sharp revival of demand for which higher per capita incomes are necessary.

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

It’s time for RBI to turn its attention to inflation


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?”


Given the impact rising inflation has for the braoader sections of the economy, it is time for RBI to turn its attention to inflation.

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

World Competitiveness Ranking 2021


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.

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

Direct Tax collections surge in 2021-22


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.

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

What Centre must do to meet the economic challenges


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.


With higher expenditure, financed through borrowings, the impact of liquidity expansion on inflation needs to be monitored.

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

Consumer Confidence Survey (CCS) by the RBI


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.

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

7 Years of UPA Government vs 7 Years of NDA Government


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.


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.


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.

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

Growth of farm sector during COVID-19 Pandemic


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.


  • 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.

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

Explained: India’s GDP fall, in perspective


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.

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

The conundrum of financial distress and higher household savings amid covid


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?”


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.

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

What is the 2008 Lehman Crisis?


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.

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

Recovery? Different numbers tell different stories


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?”


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.

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

A year of cautious optimism on economic front


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.


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.

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

Credit rating


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?”


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.

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

‘The Inequality Virus’ Report


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.


  • 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.

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

What is The Great Reset?


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.

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

Why Financial boom at a time of economic stagnation?


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.


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.


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

India’s New Deal moment


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.


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.

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

What is a K-shaped Economic Recovery?


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.


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.


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

First Advance Estimates of GDP for 2021


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.

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

Dangers lurking beneath economic recovery


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.”


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.

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

Laying the foundation for faster growth


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.”


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.

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

Need for avoiding misplaced optimism over economic recovery


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.


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

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

Perils of profits based economic recovery


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.


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.

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

Sustaining India’s Growth Momentum


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.


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.

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

Analysing India’s economic growth


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.


India’s growth when analysed from both the perspective offers valuable lessons for India and these lessons must guide India’s future economic trajectory.

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

How to improve the income and Productivity of Indian labour?


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.”


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.

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

What is a Technical Recession?


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.

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

Controlling the distorting power of the global capital


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.


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.


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

Base Year of CPI- Industrial Workers revised to 2016


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.

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

Comparison between India- Bangladesh per capita GDP


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.

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

What is Debt-to-GDP Ratio?


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.

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

RBI shifts focus on bond market to transmit policy signals


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.


  • 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.

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

Is Indian economy going through stagflation


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.


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.




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

Coordinated strategy between government and RBI


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.


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.



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.

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

Aiming for wider consumer base and directing public spending accordingly


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.


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.

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

Private: India’s GDP Contraction


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.



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

Despite the messaging, it is still advantage China


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.


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.

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

Implications of World Bank halting ‘Doing Business’ report for India


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.


  • 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?”


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.

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

Economic crisis without culprit


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.


  • 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?” 


Governments should borrow and spend. They need worry only about GDP growth, real and nominal.


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

The new consumer


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.


  • 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.”


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.

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

How to pay for the stimulus package


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.”


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.

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

Gold and forex reserves cannot finance stimulus


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.


  • 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.”


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

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

Do we need Fiscal Council


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.

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

How to counter China


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.


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.

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

How much forex reserve is too much


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.”


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.

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

Why spending on infrastructure matters


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”


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.

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

International Comparison Programme (ICP) by World Bank


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.

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

Tale of two economies


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

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

What explains the new mark crosses by our Forex reserves


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.”


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 :

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

Shapes of Economic Recovery


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.

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

Explained: Gross Value Added (GVA) Method


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.

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

Global Economic Prospects (GEP) 2020 report by World Bank


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.

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

Moody’s downgrade India’s Ratings


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.

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

Problem of interest rate differential in India


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.


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.

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

Understanding the monetisation of deficit


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.”


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.



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

Government must fix an upper limit for fiscal deficit


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.

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

A time for extraordinary action


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.


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.

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

Restarting the economy after lockdown


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.)


  • 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.


  • 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.

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

Comparing current crisis with Great Depression, 1929


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.


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.

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

The sudden return of quantity planning in the wake of covid-19


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


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.


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.

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

What is Keqiang Index’?


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.

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

No green shoots of a revival in sight as yet


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Significance of quarterly GDP estimates and revision.


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.

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

Don’t blame it on NSO


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Revision and estimates of GDP data.


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.


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.

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

Way out lies within


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.


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.



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

The growth challenge


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.


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.


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.


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

The $5 trillion arithmetic


From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- The ambitious target of $5 trillion economy.


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.


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.

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

Key Highlights of Economic Survey 2019-20


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.


  • 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.


  •  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.


  • 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.

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

Strategy for boosting Wealth Creation


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.

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

Economic Survey & its significance


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.

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


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.


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.


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.



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

[op-ed snap] Examining the slowdown


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.


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.


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.


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

Explained: Fiscal Marksmanship


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.

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

[op-ed snap] Where demand has gone


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.


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.


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.



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

[op-ed snap] Redesigning India’s ailing data system


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.


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.


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.



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

[op-ed snap] The perils of RBI’s fixation on inflation


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.


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.


While focusing on the inflation, the Central bank also needs to keep the other mandates especially the regulation of the finance sector in check.