1)What are the reasons for slowdown in the Indian Economy (Pre pandemic).

Is slowdown and recession(post pandemic) the same .Today there seems to be recovery.
How do the components of aggregate demand fare in 2021 -(trading economics.com).You
can attempt a comparison with any developed country along the same lines (as discussed in
class)?

Aggregate demand is the sum of four components: consumption, investment, government

spending, and net exports.

Consumption will change for a number of reasons, including movements in income, taxes,
expectations about future income, and changes in wealth levels.

An economy’s aggregate demand is the sum of all individual demand curves from different sectors
of the economy. It is typically the sum of four components:

1. Government Spending (G):

Government spending (G) is the total amount of expenditure by the government on infrastructure,
investments, defense and military equipment, public sector facilities, healthcare services, and
government employees. It excludes the spending on transfer payments, such as pension plans,
subsidies, and aid transfers to other countries that are in need.

2. Consumption Spending (C):

Consumption spending (C) is the largest component of an economy’s aggregate demand, and it
refers to the total spending of individuals and households on goods and services in the economy.
Consumption spending depends on several factors, such as disposable income, per capita income,
debt, consumer expectations of future economic conditions, and interest rates.

An important point to note is that consumption spending does not include spending on residential
structures, which is accounted for in the investment spending component.

3. Investment Spending (I):

Investment spending (I) is the total expenditure on new capital goods and services such as
machinery, equipment, changes in inventories, investments in nonresidential structures, and
residential structures. Investment spending depends on factors such as interest rates (since they
determine the cost of borrowing), future expectations regarding the economy, and government
incentives (such as tax benefits or subsidies for investing in renewable energy).

4. Net Exports (X–M):

Exports are products that are produced by domestic producers and sold abroad, while imports are
products that are manufactured abroad and imported for domestic purchase.

It is important to remember that aggregate demand is the total demand for domestically produced
goods and services; therefore, exports are added to the aggregate demand, whereas imports are
subtracted. The measure of exports minus imports is called Net Exports, an important determinant
of aggregate demand.
INDIA

GDP:
Pre-Pandemic Slowdown in Economy

A significant drop in industrial output, massive reduction in power demand were among the many
signs of a slowing economy

Even before the COVID-19 outbreak, which led to a shutdown of the economy and made way
for the worst contraction of India's GDP in decades in the April-June quarter, the economy
was already witnessing a slowdown.

Decelerating GDP growth, significant decrease in industrial output, fall in tax revenues and a
massive reduction in power demand were all recorded well before the impact of the lockdown
was recorded.

GDP growth

GDP growth has been on a constant downward slope since Q4 FY17, and slowed to a 11-
year-low of 3.1% in Q4 FY20. The nationwide lockdown due to COVID-19 began in the last
week of that quarter.

Industries affected

Industrial activity had also taken a hit well before the pandemic set in, with the output of the
eight core sectors (bar) and the index of industrial production (line) contracting between
August and October 2019.
Tax collections:

The chart shows growth in gross tax revenue, which decelerated to -19.8% y-o-y last
December.

The next chart shows growth in GST collections (blue bar), which had also been slowing since
early 2019, though it recovered towards the end of the year. The y-o-y growth of
compensation cess (red line), levied on luxury and sin goods and used for compensating States
for GST shortfall, also witnessed deceleration.

Electricity demand

Another indicator of a slowing economy is power demand. This had dropped by 13.2% in
October 2019, the steepest fall in 154 months. The chart shows the y-o-y % change in
electricity demand.
Post Pandemic Recovery

India's economy rebounded at a record rate in the three months to the end of June even as a
devastating second wave of Covid-19 hit the country.
• Looser pandemic curbs allowed for more economic activity compared to the country's first
nationwide lockdown in 2020.Gross domestic product (GDP) grew by 20.1% for the April
to June quarter compared to a year earlier.
• During the same period last year, India's economy shrank by 24%.
• The Indian government's chief economic adviser KV Subramanian pointed to private
investments and consumer spending for helping to boost the so-called 'V-shaped' recovery.
• A V-shaped recovery is considered to be a sharp downturn which quickly bottoms out,
followed by a sharp rebound.
• Manufacturing and construction also drove growth, according to India's statistics ministry.
• The Indian economy shrank by 7.3% in its last financial year. It has been among the world's
major economies to be hit hardest by the pandemic.
• The jump in GDP during the April to June quarter missed a forecast by the country's central
bank of 21.4% growth for the period.
 • Some analysts said this would make the Reserve Bank of India (RBI) more likely to keep
stimulus measures in place until at least the end of this year.
• While many advanced economies around the world have provided huge amounts of
stimulus to fuel spending, India's Prime Minister Narendra Modi has prioritized investment
in infrastructure, privatization of state-owned businesses and tax reforms to drive growth.
• Experts are optimistic that India will continue to post strong growth, although some key
sectors are still not seeing a rebound.
• Consumer spending - a major driver of growth - is also still lower than pre-pandemic levels.
• The risk of another wave of coronavirus infections and a sluggish vaccination programme
could hamper momentum too, experts say.
• Although India is Asia's third-largest economy, it remains smaller than it was before the
pandemic.
USA

Pre- and Post-Pandemic Economy:

• The American economy advanced an annual 6.7% on quarter in the second

quarter of 2021, slightly higher than early estimates of 6.6%.
• Upward revisions to personal consumption expenditures (12% vs 11.9% in the
second estimate), exports (7.6% vs 6.6%), and private inventory investment were
partly offset by an upward revision to imports (7.1% vs 6.7%).

• The rapid spread of the coronavirus delta variant, supply-chain disruptions,

shortage of workers and a cooling housing market are seen weighing on the
growth for the rest of the year.

• The Fed recently cut its growth projections for 2021 to 5.9% but revised higher
for 2022 (3.8%) and 2023 (2.5%).

• Fueled by vaccinations and government aid, the U.S. economy grew at a solid 6.5% annual
rate last quarter in another sign that the nation has achieved a sustained recovery from the
pandemic recession. The total size of the economy has now surpassed its pre-pandemic
level.
• Thursday’s report from the Commerce Department estimated that the nation’s gross
domestic product — its total output of goods and services — accelerated in the April-June
quarter from an already robust 6.3% annual growth rate in the first quarter of the year.
• The latest figure fell well below the 8%-plus annual growth rate that many economists had
predicted for the second quarter. But the miss was due mainly to clogged supply chains
related to the rapid reopening of the economy.
• Those bottlenecks exerted a larger-than-expected drag on companies’ efforts to restock
their shelves. The resulting slowdown in inventory rebuilding, in fact, subtracted 1.1
percentage points from last quarter’s annual growth.
• By contrast, consumer spending — the main fuel of the U.S. economy — surged for a
second straight quarter, advancing at an 11.8% annual rate.
• Spending on goods grew at an 11.6% rate, and spending on services, from restaurant meals
to airline tickets, expanded at a 12% pace as vaccinations encouraged more Americans to
shop, travel and eat out.
• Companies, too, spent with confidence last quarter. Business investment surged at an 8%
annual rate in the April-June quarter, adding 1.1 percentage point to GDP.
• With consumers and businesses expected to keep spending, many analysts expect the
economy to grow at a robust pace of around 6.5% for all of 2021, despite the supply
 shortages and the possibility of a resurgent coronavirus in the form of the highly contagious
delta variant.
• Growth that strong would far exceed the 2% to 3% average annual rates of recent decades.
And it would represent a striking bounce-back from the economy’s 3.4% contraction last
year in the midst of the pandemic, the worst decline since the 1940s.
• The measure of consumer inflation in the second-quarter GDP report showed an annual
rise of 3.4% for core inflation, which excludes food and energy. It was the fastest such
jump since 1991.

2).Mention some general indicators of slowdown in the economy as mentioned in the case?

Indicators mentioned in the case for economy slowdown are:

• The slump in private consumption

• The decline in domestic automobile sales
• Stagnant bank retail loans
• Drop in Acquisition of new homes
• Drop in growth of FMCG(fast moving consumer goods)
• Low Investment
• Sharp slowdown in savings
• Low bank lending to industry
• Domestic commercial vehicle sales
• Government expenditure
• Net exports
• Decline in FDI(Foreign direct investment)
• The rollout of Goods and service tax(GST)
• Stressed banking sector
• NBFC crisis
• Problems in agriculture sector
 • 3)What components of Aggregate Demand are mentioned in the case? Explain very
briefly.

The component of aggregate demand mentioned in the case are:

National Income(Y):
• This national income identity provides the level of aggregate demand existing in the
economy. When aggregate supply meets this aggregate demand (of goods and services)
the economy is generally said to be in an equilibrium.
• If the aggregate demand does not match the level of aggregate supply, then output
adjusts, in the next time period, to match the level of aggregate demand. In other words,
if current level of aggregate demand is inadequate to buy all goods and services
produced in the economy then producers will cut back their output (aggregate supply)
to match the existing level of aggregate demand.

Consumption(C):
 • Consumption (C in the national income identity), termed as private final consumption
expenditure (PFCE), is the first of the most important components of aggregate demand.
• Figure shows a declining trendline for quarterly growth of this component. In Q1 of
2020-21, consumption growth rate has slumped by 26.7 percent, compared to the same
quarter in the previous year.
• Excluding growth rate of Q1 of 2020-21 (lower panel of Figure), the line diagram reveals
that long-term trend in consumption growth has stagnated in the last few years, and had
fallen to 2.7 percent in the last quarter of 2019-20.
Investment(I):

• Investment (I in the national income identity), termed as gross fixed capital formation
(GFCF), is the other important component of aggregate demand.
 • The pandemic has sent investment growth crashing by 47.1 percent in the first quarter of
2020-21. Excluding this figure, the average trend value has stagnated around 5.0 percent
in the last seven years (Figure).
• The quarterly growth rate of investment started falling since first quarter of 2018-19 and
has been -6.5 percent in the fourth quarter of 2019-20. This means that investment growth
has been in a downslide for the last two years, even before the pandemic.
• Government final consumption expenditure (G in the national income identity) is the
next component in aggregate demand. Trendline of quarterly growth rate of G is
increasing for the last eight years, continuing to do so in the first quarter of 2020-21 at
16.4 percent (Figure).This is one component that has enabled the overall quarterly GDP
growth rates to be in the positive zone in the last two years or so. But the share of
government expenditure in total GDP, despite continuous rise in growth, has been 18.1
percent in first quarter of 2020-21.
• (Figure ) It has reached its limits, and this component alone can no longer prop up the
overall GDP.
Net Exports:
• Net exports (X-M in national income identity), the difference between exports and
imports, is the next important demand component of GDP. Given the last two years’ trade
tension and turmoil in international trade, the exports growth was expected to decrease.
Exports growth slumped by 19.8 percent in the first quarter of 2020-21, but even before
the growth rates were negative in previous three quarters.
• Similarly, imports were going down before the pandemic and the trend continues after
(Figure). There may be a general perception that decreasing imports are good for an
economy. It is not so for the Indian economy.
• Apart from crude oil imports, India imports sizeable amount of capital goods – mainly
heavy machineries and equipment that are not produced in India. Indian manufacturing
and other industries are crucially dependent on these capital goods.
• There has been no empirical evidence of large-scale import-substitution strategy in these
capital goods in recent times. Unless import dependence is decisively diminished for
these goods, the trendline going down does not serve Indian industry well.
• Therefore, given the current composition and structure of Indian production net exports
getting into positive value does not bode well for the economy. It implies lack of demand
and diminishing activities in manufacturing and allied services.
• Any developing country needs a threshold warranted import growth to maintain
sustainable output expansion, particularly in manufacturing. India is no exception.
• A certain number of imports in capital goods is necessary to reboot. In that sense, imports
going down and trade surplus going up right now cannot be treated as a good indication.
Conclusion:

Among the components of aggregate demand generators, consumption and investment are
two largest contributors. In first quarter of 2019-20, these two contributed 88.4 percent in
total GDP, in Q1 of 2020-21 their contribution is 76.6 percent. If the share of these demand
components in new series of GDP are observed, then it becomes clear that consumption
mainly drives the economy, followed by investment.