Escolar Documentos
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Assignment
GDP Contraction
Government's expenditure plan to revive the
country's ailing economy & Fiscal Stimulus of GOI
References 20
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NAME Pragya Trivedi
ROLL NO E-42
Among economic sectors, value added by industry saw a contraction of 40 per cent, which was
expected. The services sector, which includes construction, trade, banking and financials, and
real estate and restaurants, faced a near 27 per cent decline in GVA over the previous year.
Favourable crop sowing in the country perked up farm production estimates, and lifted the June
quarter GDP.
Chart 1: India’s GDP story since economic liberalisation. Source: McKinsey and Express Research Group.
Page | 3
As Chart 2 shows almost all the
major indicators of growth in the
economy show deep contraction.
Even total telephone subscribers saw
a contraction in this quarter. 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
• Second engine is the demand generated by private sector businesses. Let’s call it I, and
this accounted for 32% of all GDP in India.
• 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.
• Fourth engine is the net demand on 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.
GDP = C + I + G + NX
Page | 4
OBSERVATIONS
• Private consumption is the biggest engine driving the Indian economy, it has fallen by
27%. In money terms, the fall is of Rs 5,31,803 crore over the same quarter last year.
• The NX or the net export demand 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.
• That brings us to the last engine of growth, the government. As the data shows,
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.
• When the demand from C and I fell by Rs 10,64,803 crore, the government’s spending
increased by just Rs 68,387 crore. In other words, government’s spending increased but
it was so meagre that it could cover just 6% of the total fall in demand being experienced
by people and businesses.
• The net result is that while, on paper, government expenditure’s share in the GDP has
gone up from 11% to 18% yet the reality is that the overall GDP has declined by
24%. It is the lower level of absolute GDP that is making the government look like a
bigger engine of growth than what it is.
• 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.
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NAME Anmol Choubey
ROLL NO E-07
Liquidity remained tight as the cost of borrowing in real terms jumped upwards. This is
despite central banks’ efforts to reduce interest rates. Banks and financial institutions were
under immense pressure as the fear of NPAs, insolvency and bankruptcies increased multi-
fold. The government did focus on meeting hyper demand for essential goods while non-
essential businesses focused on recovering their receivables/outstanding money due from
debtors. New strategic alliances or business partnerships did not emerge during the whole
covid-19 period.
Page | 6
Below we have debt to equity ratios of various sectors which would give us an
understanding as to what impact the pandemic has created and would create on
these sectors as whole:
Sectors which were considered having huge potential for possible upticks and which
were also seen in couple of months after March (2020):
• Digital & Internet Economy: Online based products & services companies found new takers.
• Ed-tech and Online Education along with firms involved with online-skill development.
• Online groceries.
• There was a sudden spike in the demand for Content, with digital content being in
demand more than ever.
• IT Industry growth projections were already being made and India being the house of
major IT giants saw huge growth even during the pandemic. Here is a graph showing
global market shares of Indian IT Giants.
• FMCG: & Retail benefitted immensely. With continued fear, food-based retail chains, and
companies catering to low-ticket consumption demand emerged as winners.
• Speciality Chemicals: Firms dealing in Chemicals saw a jump due to increased demand for
disinfectants, drugs and medicines.
• Pharma: Pharmaceutical firms were already set to see growth in the near term.
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The Impact on MARKETS:
• The recovery of the underlying economy has been gradual and slow, and it will take
1-2 years for normalcy to come back across sectors. While the overall economy took
major hit because of the government lockdown, some sectors saw immense growth in
the post-COVID era – FMCG, B2C specialised lenders, gold-dependent companies,
food retail and pharmaceutical companies to name a few.
• Stock markets have always had a mind of their own, formed by the collective
emotions + intelligence of millions. They are often skewed and aren’t the best
indicators of the underlying economy. Stock markets had a strong recovery, not due
to the fundamentals strength, but due to global liquidity which is available for almost
free (as interest rates tended to near zero as on march 2020). Availability of debt
capital is generally scarce in India, whilst equity capital is available in plenty over a
period of time.
• The New IPOs getting overwhelming response form investors truly reflect the
availability of equity capital in Indian markets which are definitely being capitalized
by many companies offering a series of IPOs like never before.
Page | 8
NAME Ankit Kandari
ROLL NO E-06
Announcement: Aatma Nirbhar Bharat Abhiyaan
On May 12, the Prime Minister, Mr. Narendra Modi, announced a special
economic package of Rs 20 lakh crore (equivalent to 10% of India’s GDP) with
the aim of making the country independent against the tough competition in
the global supply chain and to help in empowering the poor, labourers,
migrants who have been adversely affected by COVID. Following this
announcement, the Finance Minister, Ms. Nirmala Sitharaman, through five
press conferences, announced the detailed measures under the economic
package.
Page | 9
Here is the detailed breakup of India's Atma Nirbhar
economic package:
The RBI on April 14 had announced monetary policy actions worth Rs 8.01
lakh crore, thereby injecting additional liquidity into the system. Key
announcements included CRR reduction to 3 per cent from 4 per cent,
ensuring additional liquidity worth 1.37 lakh crore. The apex bank announced
targeted long-term repos operation (TLTRO) twice to increase liquidity in the
markets. Marginal standing facility (MSF) was decreased to 2 per cent from 3
per cent, allowing banks to avail an additional Rs 1.37 lakh crore worth
liquidity under the LAF window. The central bank also announced special
refinance facility worth 50,000 crore to NABARD, SIDBI and NHB.
As Franklin Templeton closed six schemes due to redemption pressure, the
RBI stepped in and offered Rs 50,000 crore special liquidity facility (SLF-MF)
to the MF industry to maintain liquidity.
The RBI through purchase of government security in open market injected
liquidity worth Rs 90,000 crore and provided additional liquidity worth Rs 1.25
lakh crore through long-term repo operations (LTRO).
PRE-TRANCHE MEASURE:
Page | 10
Kisan payment; assistance to construction workers; and measures to prevent
job disruption by paying 24 per cent of monthly wages of employees earning
less than Rs 15,000 directly into their PF accounts for three months.
2. TAX CONCESSIONS
Through the Central Board of Indirect Taxes and Customs (CBIC), money
stuck in pending tax refund claims was also released, increasing cash in hand
for many.
The Centre also initiated refund and drawback disposal drive, under which
Rs 7,800 crore worth revenue lost due to tax concessions since March 22 was
given, thereby increasing liquidity and buying power.
The Centre also announced emergency health response preparedness
package worth 15,000 crore, which will be implemented in three phases
between January 2020 and March 2024 to strengthen emergency COVID-19
response.
TRANCHE II
In the second tranche, measures
worth Rs 3.10 lakh crore were
announced for poor migrants and
farmers. Under the package, the FM
announced Kisan Credit Card (KCC)
worth Rs 2 lakh crore; emergency
working capital for farmers worth Rs
30,000 crore; Mudra Shishu loans -
interest subvention worth Rs 1,500
Page | 11
crore; special credit facility worth Rs 5,000 crore for street vendors; free food
for migrant workers worth Rs 3,500 crore; and housing credit subsidy worth
Rs 70,000 crore for middle-income people.
TRANCHE III
The third tranche worth Rs 1.5 lakh crore comprised Agri infrastructure fund
worth Rs 1 lakh crore; formalisation of micro food enterprises (Rs 10,000
crore); Rs 20,000 crore under the Pradhan Mantri Matsya Sampada Yojna
(PMMSY); animal husbandry infrastructure development fund worth Rs
15,000 crore; Rs 4,000 crore for herbal cultivation; Rs 500 for beekeeping
initiatives; and Rs 500 crore under operation green to fruits and vegetable
owners.
TRANCHE IV
The fourth fiscal package consisted of measures for opening up key sectors
along with viability gap funding of Rs 8,100 crore. The Centre opened FDI
limit from 49% to 74% under automatic route in defence manufacturing;
introduced commercial mining in the coal sector; reduced restriction on the
use of Indian air space to increase the efficiency of passenger aircraft; allowed
private businesses in the field of satellites and other space-based services;
and permitted ISRO to partner with private companies. The government also
gave nod to setting up of nuclear reactors via PPP mode for the production of
medical isotopes; paved way for privatisation of discoms in UTs; and approved
social infrastructure worth Rs 8,100 crore.
TRANCHE V
The final package announced today comprised measures worth Rs 40,000
crore, in which additional funding worth Rs 40,000 crore was provided under
the MGNREGS; increased public health expenditure to make India future
pandemic ready; and launched PM eVIDYA for online access to education.
The Centre also allowed decriminalisation of Companies Act involving minor
technical and procedural defaults; raised minimum threshold for initiating
insolvency proceedings to Rs 1 crore from Rs 1 lakh earlier; announced a new
coherent policy allowing private players' entry into strategic sectors; and
increased borrowing limits of states from 3% to 5% for 2020-21.
Page | 12
NAME Nikhil Yadav
ROLL NO E-39
Sensex chart before and after relief package:
The Rs 20 lakh crore package includes Rs 1.7 lakh crore package of free food
grains to poor and cash to poor women and elderly, announced in March, as
well as the Reserve Bank's liquidity measures and interest rate cuts. While
the March stimulus was 0.8 per cent of GDP, RBI's cut in interest rates and
liquidity boosting measures totalled to 3.2 per cent of the GDP (about Rs 6.5
lakh crore).
Page | 13
Atmanirbhar Bharat Abhiyan – some hurdles to cross and stakeholders
to engage
The USD266 billion (INR20 trillion) COVID-19 stimulus package titled
‘Atmanirbhar Bharat Abhiyan’ aims to build a self-reliant India by prioritising
MSMEs, liquidity and welfare, agriculture, power distribution, mining, health,
rural employment and housing sector reforms. The focus on import
substitution, reviving demand and export-oriented industrialisation are key
underlying themes. Mining-sector reforms and the launch of commercial coal
block auction is another transformational agenda and can potentially fast
track growth in the central and eastern states.
Over the short to medium term, putting in place a strong framework for
bankable projects, investment monitoring from commitment to actual
completion and achieving steady-state operations for infrastructure projects
will be critical. Investor and private sector confidence can be revived if the
certainty and reliability of fund-flow commitments are brought back.
Page | 14
Reopening of the economy
The gradual opening of the lockdown has had positive changes in the market
and slowly people are starting to adjust with the current pandemic scenario
and start their work taking the necessary precautions. The government has
so far allowed the functioning of public and private offices in a graded manner,
resumed limited passenger train services and domestic air travel, and also
allowed the conditional reopening of shops and marketplaces except those in
malls. Restrictions on public transport too have been considerably eased.
Even though it is going to take a lot of time to recover from the economic
slowdown the gradual opening of the lockdown is a step towards a positive
direction.
Page | 15
NAME Abhishek Kumar
ROLL NO E-01
Page | 16
There has been a flurry of GDP growth forecast downgrade for the current fiscal by the
major investment
banks and research
house, explains the
extent of trouble the
economy finds itself
in and which needs,
some serious efforts
on the part of the
policymakers to
arrest the decline.
Up until now whatever measure government along with the central bank have taken has only
helped the economy survive this tumultuous phase of lockdown where large parts of the
economic activity were shut. Government in tandem with the central bank needs to continue
with its aggressive fiscal policy as the road to recovery will be a long one.
There certainly has been some progress on the unemployment, goods consumption, business
formation etc and therefore, now would be the wrong time for policymakers to take their foot
off the gas as doing so will lead to weaker recovery and would thwart a rebound in activity.
Page | 17
Recent High Frequency Data
So, all the recent i.e. August &
September lead economic
indicators, points towards the
gaining, economic momentum
across sectors and regions barring a
few worst affected ones which are
still reeling under the crippling pain
brought upon by the pandemic.
However, the gaining momentum
can be a deceiving one given as the
large portion of the economy was
closed for business and restriction
on movement of people and
conduct of business had given a
body blow to the economy,
therefore, major part of this
momentum is surely ‘pent up
demand’.
As we enter the crucial month of festivities in India i.e. from October to December, which
constitutes over 40 % of the total yearly sales, may just flatter to deceive given that there
will be an element of seasonality in the data coming. Also, usually months preceding the
festivity’s witnesses spurt in economic activity given that large inventory pile up is done in
order to cater to the high surge in demand during the festival time.
However, the real picture would only be clear once we enter the fag month of the festive
season that is the end of Q2FY21. Therefore, in order to continue with the business activity in
the economy and not let it fade away it would be definitely in the best interest if the GOI
(Government of India) comes up with a fiscal package/spending to shore up the economy
with added focus on the badly impacted sectors and the populations worst off due to
COVID19.
Opinion
Time would be ripe for the government to announce next set of fiscal measures to uplift the
economy from the shock experienced by households and small urban service firms which
have been hit hard and witnessed massive contraction in output whereas, poor and
vulnerable households experienced significant social hardship- specifically urban
migrants and workers in the informal economy without any safety net.
With the Union government’s initially providing guarantees and liquidity support to ailing
industries, its fiscal support so far has been considered one of the lowest among large
economies and its advisor have always mentioned that they would like to ‘keep the powder
dry’ for the appropriate moment in the future when the economy reopens so that the impact it
has on the economy would be multi-fold.
Page | 18
Any fiscal measure undertaken by the
government should involve a bigger
direct fiscal outlay compared to the
previous two packages - the PM Garib
Kalyan package and the Aatmanirbhar
Bharat package given that the latter
didn’t involve a large fiscal impact on the
exchequer.
With the phase of opening up of the
economy taking place this month,
government will have a clear picture
available, and accordingly undertake
targeted spending encompassing the
sectors and population previously being
ignored.
Government should massively spend on
infrastructure initiative with special
emphasis on 20-25 big projects which can
be completed this year, and continuing focus on rural job and farm schemes and free food
and cash transfers which could give a further flip to other sectors and have a multiplier
effect. Fiscal stimulus measure aimed at creating jobs and pushing demand, would be a
good move for the India’s ailing economy.
Though the present government has been a “fiscally conservative" one compared to the past
ones and believes in sticking to fiscal trajectory, however, there has been recognition on the
government part that this may be a special year where it may have to make some special
arrangements for spending to provide a safety net and reflate aggregate demand.
According to a World Bank, recently published report “The COVID-19 shock will lead to a
long-lasting inflexion in India’s fiscal trajectory. Assuming that the combined deficit of the
states is contained within 4.5-5 % of GDP, the general government fiscal deficit is projected
to rise to above 12 % in FY21 before improving gradually. In this backdrop, government
needs to be pretty smart with its spending and timing of it so as to gain maximum out of it
and get the economy out of this slump.
Lastly, if India only reforms when out under immense pressure, then now should be the
moment for the big changes being bought in by the GOI in various sectors, notably the three
farm bills which are transformative in nature and have the power to unclog one of the most
important sectors of the economy and attract investments and help farmers increase their
income levels. Reforms in other sectors are also a welcome move by the government.
Page | 19
References
1. https://government.economictimes.indiatimes.com/news/economy/opinion-impact-of-
covid-19-on-the-indian-economy/75021731
2. https://www.sundayguardianlive.com/news/consequences-covid-19-indian-economy-
harsh
3. https://www.firstpost.com/business/indias-23-9-percent-gdp-contraction-should-
alarm-us-all-writes-ex-rbi-governor-raghuram-rajan-8790791.html
4. https://economictimes.indiatimes.com/news/economy/indicators/gdp-growth-at-23-9-
in-q1-worst-economic-contraction-on-record/articleshow/77851891.cms
5. https://www.financialexpress.com/economy/breakup-of-the-rs-20-lakh-crore-
economic-stimulus-package-by-fm-sitharaman/1961843/
6. https://www.hindustantimes.com/india-news/after-lockdown-plan-to-unlock-india-in-
phases/story-vsK1wGQ7moLTMjlKkUelHP.html
7. https://cfo.economictimes.indiatimes.com/news/india-lockdown-5-0-covid-19-unlock-
action-plan/76167820
8. https://timesofindia.indiatimes.com/business/india-business/govt-unlikely-to-opt-for-
traditional-stimulus-to-focus-on-specific-sectors/articleshow/78484078.cms
9. https://www.moneycontrol.com/news/india/some-sectors-worst-hit-by-pandemic-
require-special-love-and-care-sanjeev-sanyal-5929141.html
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