Managerial Economics

Assignment

GDP Contraction
Government's expenditure plan to revive the
country's ailing economy & Fiscal Stimulus of GOI

Submitted to- Ms Mala Sane

Submitted By- Abhishek Kumar E-01

Ankit Kandari E-06

Anmol Choubey E-07
Nikhil Yadav E-39
Pragya Trivedi E-42
 Index
Topic- Page No.

Analysis of GDP Contraction of India 2-5

Industries & Sectors Analysis 6-8

Government Reviving Economy 9-12

Expenditure Plan- Aatma Nirbhar Bharat
Abhiyaan

Aatma Nirbhar Bharat Abhiyaan- 13-15

Hurdles to cross and stakeholders to

engage & Reopening of the economy

Output contraction: Government 16-19

expenditure for survival & growth

References 20

Page | 1
 NAME Pragya Trivedi
ROLL NO E-42

ANALYSIS OF GDP CONTRACTION OF INDIA

India's April-June quarter GDP contracted by a massive 23.9 per cent year-on-year (YoY),
the first GDP contraction in more than 40 years. As per the National Statistical Office (NSO),
Gross Value Added (GVA) came in at -22.8 per cent. India's economy had expanded by 3.1
per cent in the March quarter and FY20 GDP growth was around 4.2 per cent.

It was the worst performance since

quarterly measurement began in 1996 and
probably the first contraction since 1980.
The numbers quantified what was evident
all around: the Indian economy is in
doldrums. India has never experienced
an economic contraction in at least four
India has never experienced an economic
decades. Since 1996, when the country
contraction in at least four decades. Since
started publishing quarterly GDP data,
1996, when the country started
this is the first instance of negative
publishing quarterly GDP data, this is the
growth.dia has never experienced an
first instance of negative growth.
economic contraction in at least four
decades. Since 1996, when the country
Indi
While the pandemic has slowed down every other countrystarted in the publishing
world, the scale of economic
quarterly GDP data,
contraction in India was bigger than almost any comparable Indiacountry.
has never
this is the fi experienced an economic
contraction in at least four decades. Since
The lockdown only accelerated a decline that had set in well before
India the pandemic
has never struck.
experienced an economic
1996, when the country started
“There is no denying that Covid has played a role, but before that toointhere
contraction wasfour
a clear
publishing quarterly GDP data, this Since
at least decades. is the
deceleration in the economy evident in the government’s 1996,own data,”
when “Since
the 2016-’17
country there
started publishing
first instance of negative growth.
have been clear and visible signs of contraction – this reflected
quarterlyin both
GDPquarterly
data, thisand annual
is the first
15data of the government.” While the pandemic has
instance of negative growth. slowed down
every other country in the world, the
While the pandemic has slowed down
scale other
of economic
countrycontraction in the
India
FY21 SHOWS THE WORST QUARTERLY ECONOMIC every PERFORMANCE
in the world,
was bigger than almost any comparable
SINCE THE MEASUREMENT BEGAN
scale of economic contraction in India was
country.
Real GDP had not contracted even when the global bigger financial
acountry.
has never
than
crisis almost anydomestic
hit India's
experienced
comparable
an economic
economy. On the demand side, while consumer spendingcontraction
and investment declined
in at least four massively,
decades. Since
government spending grew by 16 per cent. In addition,1996, though exports fell 17 per cent, Net
when the country started
Exports (exports minus imports) turned positive at 2.1 per cent of GDP, due to relatively
publishing quarterly GDP data, this is the
lower imports. In Q1 FY20, Net Exports were negative 3.4 per cent of GDP (due to higher
imports). Economic recovery, which would help incomes grow first instance of negative
and generate growth.
more jobs, appears
to be longer than expected, experts said. While the pandemic has slowed down
every other country in the world, the
scale of economic contraction in India
was bigger than almost any comparable
Page | 2 country.

India has never experienced an economic

 Private consumer spending,
the bedrock that contributes
more than half the Indian
economy, got chipped by 27
per cent in Q1. But
investment, represented by
gross fixed capital
formation (GFCF),
contracted by 47 per cent,
their worst fall to date.
GFCF, a key indicator of
long-term growth in
developing economies, has
now contracted for four successive quarters. The Central and state governments tried to stem the
collapse by spending more, and, as a result, government expenditure grew 16 per cent.

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.

GDP PHENOMENON EXPLAINED THROUGH CHARTS

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

WHAT CAUSES GDP CONTRACTION? WHY HASN’T THE GOVERNMENT

BEEN ABLE TO CURB IT?
GDP is generated from one of the four engines of growth, these are:
• First engine is consumption demand from private individuals like you. Let’s call it C,
and in the Indian economy, this accounted for 56.4% of all GDP before this quarter.

• 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.

Page | 5
 NAME Anmol Choubey
ROLL NO E-07

INDUSTRIES AND SECTORS ANALYSIS:

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.

Adversely affected Sectors Analysis:

• Apparel & Textile: Got hit adversely due to

disruption in labour supply, raw material
unavailability, working capital constraints and
restricted demand due to limited movement of
people and purchasing ability.
• Auto sector: (which includes automobiles and auto
parts) continued to face challenges on account of
lack of demand, global recession and falling
income levels.
• Aviation & Tourism: is one sector which had the
highest probability of going under without direct
government intervention. In the next several
months, it’s highly unlikely people would travel
for leisure apart from very essential travel.
• Shipping and Non-Food Retail: – Non-food retail
chains and global shipping businesses found these
months very challenging and the way ahead also
looks quite grim.
• Building & Construction: businesses are generally
highly leveraged and hence faced the dual challenges of high-interest payments and lack of
sales.
• The fall in the output of eight core sectors further slowed in April-
May but the year-on-year decline was still 9.6 per cent as industry
battled demand slump, an acute liquidity crisis, and labour
shortages in the aftermath of the nationwide lockdown. In April,
the core sector output plunged almost 40 per cent. The
infrastructure segment as mentioned above continued to see the
worst production shocks. The already volatile sectors of steel and
cement being badly affected by the Covid-19 pandemic as social
distancing norms meant that construction remained largely sus-
pended across the country. Steel also remained the worst-
performing sector of the month of April, contracting 16.4 per cent.
The graph shows different core sectors with their YOY% Decline.

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 DEBT TO EQUITY RATIO

Real Estate 0.86
Information Technology 0.11
Consumer Staples (FMCG Food) 0.49
Financials (Investment Banking and Brokerage) 0.083

Source: Business Standard Research

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.

IT SERVICES SHARE IN GLOBAL MARKET

6
3.9
4
2.4
1.6 2.1
2 0.8 0.6 0.9
1.2 0.9 1.3 0.5 0.7 0.8 0.7 0.7
0.3 0.6 0.1 0.4 0.4
0
TCS INFOSYS HCL WIPRO TechM

2009 2014 2019 2020

• 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.

Page | 7
The Impact on MARKETS:

There is no doubt that

COVID-19 had a large
impact on the Indian
economy. With respect to
India, the discussion can
be bifurcated into 2 parts
– India’s economy, and its
stock markets. Nifty going
down like a dead cat
during the lockdown,
reached as low as 7511 as
on 23-03-20.

• 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:

Table: Break-up of stimulus package from Aatma Nirbhar Bharat

Abhiyaan
Item Amount (in Rs crore)
Stimulus from earlier measures 1,92,800
Stimulus provided by announcements in Part 1 5,94,550
Stimulus provided by announcements in Part 2 3,10,000
Stimulus provided by announcements in Part 3 1,50,000
Stimulus provided by announcements in Part 4 and Part 5 48,100
Sub Total 1,295,400
RBI Measures (Actual) 8,01,603
Grand Total 20,97,053

RBI MONETARY POLICY ACTIONS

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:

1. GARIB KALYAN PACKAGE

The Centre announced the Garib Kalyan Package worth Rs 1.7 lakh crore on
March 26, a day after the first phase of lockdown was announced in India.
The package comprised measures taken for poor, elderly, women and
migrants. The government offered free rice/wheat and pulses; free cooking
gas for three months; hike in MNREGS wages to Rs 202 a day from Rs 182;
direct money transfer to elderly, poor widows and disabled; and direct money
transfer to women Jan Dhan account holders. The Centre also announced PM

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.

Further Measures announced in

five tranches
TRANCHE I
The FM announced first tranche of
the fiscal package worth Rs 5.94 lakh
crore on May 13. The package
comprised credit guarantee worth Rs
3 lakh crore for MSMEs; subordinate
debt assistance worth Rs 20,000
crore; equity infusion for MSMEs
worth Rs 50,000 crore; PMGKP EPF
support worth Rs 2,800 crore;
reduced EPF contribution worth Rs
6750 crore; liquidity window for
NBFC/HFC/MFIs worth Rs 30,000
crore; partial credit guarantee
scheme worth Rs 45,000 crore; relief
to discoms worth Rs 90,000 crore;
and TDS/TCS relief worth Rs 50,000
crore.

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:

NIFTY chart before and after relief package:

The confidence of the market increased after the announcement of the Rs 20

lakh crore stimulus package announced by Indian Prime Minister Narendra
Modi included previously announced measures to save the lockdown-battered
economy. It focused on tax breaks for small businesses as well as incentives
for domestic manufacturing. The combined package works out to roughly 10%
of the GDP, making it among the most substantial in the world after the
financial packages announced by the United States, which is 13% of its GDP,
and by Japan, which is over 21% of its GDP.

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.

The measures announced by the government were largely a continuation of

economic philosophy seen since May 2014. The lack of measures to boost
consumption is a key concern which has been left unaddressed by the
Government. However, an important step has been taken by the government
to revive the rural demand by increasing the allocation of funds of MNREGA
(Mahatma Gandhi Rural Employment Guarantee Act) to Rs. 1 Lakh crore.
This will help increase the demand in rural areas as more and more migrant
laborers are returning to villages. Beyond the rural jobs guarantee scheme,
little immediate support has been extended to revive demand in the economy.

The announcements made by FM Nirmala Sitharaman will have an impact in

the medium and long term, however, it is our belief that the announcements
made by FM will not help soften the short-term pain caused due to COVID-
19. We believe that the Atmanirbhar Bharat Package may fall short of
mitigating the short-term challenges for various sectors, but it is better
designed to improve India’s medium and long-term growth potential.

A look at railway freight traffic, which is often times a good indicator of

economic activity, in July, it is 95 per cent of the level that it was last year.
In fact, in the first 26 days of August, it is 6 per cent higher than the same
period last year. Power consumption is only 1.9 per cent lower than last year.
E-way bills in August, which capture inter-state trade, are at 99.8 per cent,
almost the same as last year, despite the presence of some local lockdowns.
So overall, there is a V-shaped recovery which gives hope to expect a better
performance in the subsequent quarters.

Page | 14
Reopening of the economy

On April 15, with a view to supporting economic activities, the government

announced several relaxation measures in geographical areas designated as
non-hotspot, with effect from April 20, 2020. On April 29, the government
permitted inter-state movement of stranded people, including migrant
workers, managed by the nodal authorities who are designated by the states.
Some graded relaxations in economic activities have been allowed in
geographic areas designated as orange and green zones on May 4 and
domestic air travel restarted on May 25. On May 12, the PM announced a
relief package of around 10
percent of GDP, including
previously announced
monetary and fiscal
measures. On July 29, the
central government issued
‘Unlock 3.0’ guidelines further
paving the way for a phased
re-opening of activities across
the country and limiting the
lockdown only to containment
zones till August 31. On
August 29, the government
issued new guidelines
(‘Unlock 4.0’) to further re-
open the economy in
September, removing
restrictions on metro rail in a
graded manner from 7
September, and allowing for social, academic, sports, entertainment, and
other congregations of up to 100 people. Education institutions will remain
closed till end-September, with lockdowns continuing to be implemented in
containment zones.

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

Output contraction: Government expenditure for survival & growth

India saw perhaps the biggest fall in GDP (Gross Domestic Product) in its independent
history, as April-June GDP contracted 23.9% year-on-year in Q1FY21. The COVID19
induced economic crisis has led to a renewed call for discretionary fiscal spending to be
under taken by the government of the country, which is already hamstrung with its finances
and thereby providing limited scope for any big bang spending push which the economy
needs at this point of time when the country starts to reopen and more and more economic
activity is undertaken.

Need for big fiscal push

According to Keynesian economic theory, which primarily focuses on government
expenditure to stimulate demand in the economy and pull it out of contractionary scenario.
Given the current economic backdrop where the country finds itself, amidst a very weak
macroeconomic environment due to pandemic inflicted humanitarian & economic crisis it
is the government which needs to do the heavy lifting on order to bring life to the sagging the
economy from doldrums.
Keynesian, proposed that the government spend more money and cut taxes to turn a budget
deficit, which would increase consumer demand in the economy. This would, in turn, lead to
an increase in overall economic activity and a reduction in unemployment thereby help in
kickstarting the virtuous cycle of economic activity.
As the famous economist believed and which to a great extent is relevant in the current
context where there is so much uncertainty prevailing given the rising infection levels in the
country and risk appetite taking a big beating both at the consumer level and business level
makes it a prolonged phase of lull in the economy, therefore it becomes imperative on the
part of the government to open the spending caps in the more targeted manner which could
give flip to the economy.
According the famous English economist, once an economic downturn sets in, for whatever
reason, the fear and gloom that it engenders among businesses and investors will tend to
become self-fulfilling and can lead to a sustained period of depressed economic activity and
unemployment. In response to this, Keynes advocated a countercyclical fiscal policy in
which, during periods of economic woe, the government should undertake deficit spending to
make up for the decline in investment and boost consumer spending in order to stabilize
aggregate demand.

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.

Government Spending Multiplier

According to Keynes's theory of fiscal stimulus, an injection of government spending
eventually leads to added business activity and even more spending. This theory proposes
that spending boosts aggregate output and generates more income. If workers are willing to
spend their extra income, the resulting growth in the GDP could be even greater than the
initial stimulus amount.
The magnitude of the Keynesian multiplier is directly related to the marginal propensity
to consume. Its concept is simple. Spending from one consumer becomes income for a
business that then spends on equipment, worker wages, energy, materials, purchased services,
taxes and investor returns. That worker's income can then be spent and the cycle continues.
In theory, it’s a highly debatable topic however, given the options which are available to the
Indian government seems to be limited.

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.

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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.

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 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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