MANAGERIAL ECONOMICS- ASSIGNMENT 2

To enhance the economy due to covid-19,Indian govt released relief package called
ATMANIRBHAR BHARAT ABHIYAN.
Hon’ble Prime Minister Shri Narendra Modi announced the Atmanirbhar Bharat Abhiyan (or Self-
reliant India Mission) with an economic stimulus package — worth Rs 20 lakh crores aimed
towards achieving the mission and to support an economy battered by a weeks-long lockdown to
contain the coronavirus pandemic. The announced economic package is 10% of India's Gross
Domestic Product (GDP) in 2019-20. He also outlined five pillars of Atmanirbhar Bharat –
Economy, Infrastructure, System, Vibrant Demography and Demand.

Impact on different stakeholder’s:

People/citizens/consumers:
The covid situation has ended up with loss of jobs for many people, the govt allocate Rs.40,000
crore additionally to the Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGS).
 It will help generate nearly 300 crore person days in total addressing need for more work
including returning migrant workers in Monsoon season as well.
 Creation of larger number of durable and livelihood assets including water conservation assets
that will boost the rural economy through higher production.

To create job opportunities for citizens including tribals/ Adivasis, plans amounting to Rs.6000
crores under Compensatory Afforestation Management & Planning Authority (CAMPA) will be
approved shortly.
The Consumer price index inflation has reduced to 5.6 per cent.

Health sector:

The investments on the health sector increased.

 To prepare india in handling future pandemics, Infectious Diseases Hospital Blocks will be
setup in all districts
 Integrated Public Health Labs in all districts & block level Labs & Public Health Unit would be
strengthened
 National Institutional Platform for One health by ICMR will encourage research.
 National Digital Health Blueprint implementation would be taken up, under the National Digital
Health Mission.
Education sector:
PM eVIDYA – A programme for multi-mode access to digital/online education to be launched
immediately. It shall consist of the following initiatives:

 DIKSHA – for school education in all states/ UTs involving e-content and QR coded
energized textbooks for all grades (one nation, one digital platform)
 One  TV channel  per  class  from 1 to 12 (one class,  one channel)
 Extensive  use of Radio,  Community  radio  and  Podcasts
 Special e-content for visually and hearing impaired.
 Top 100 universities will be permitted to automatically start online courses by 30 th May,
2020.
Manodarpan – An initiative for psycho-social support for students, teachers and families for mental
health and emotional well-being to be launched immediately.

Business/firms:
India currently ranks at 63rd position in the ease of doing business index, created by world bank.
The central government attributes this jump in rankings due to the improvement in starting a
business and insolvency resolution
 Direct listing of securities by Indian public companies in permissible foreign jurisdictions.
 Private companies which list NCDs on stock exchanges not to be regarded as listed
companies.
 Including the provisions of Part IXA (Producer Companies) of Companies Act, 1956 in
Companies Act, 2013.
 Power to create additional/ specialized benches for NCLAT
 Lower penalties for all defaults for Small Companies, One-person Companies, Producer
Companies & Start Ups.

Public Sector:
Indian government will announce a new policy where all sectors are opened to the private sector
while public sector enterprises (PSEs) will play an important role in defined areas. The policy shall
have the following features:

 List of strategic sectors requiring presence of PSEs in public interest will be notified
 In strategic sectors, at least one enterprise will remain in the public sector but private sector
will also be allowed
 In other sectors, PSEs will be privatized (timing to be based on feasibility etc.)
To minimize wasteful administrative costs, number of enterprises in strategic sectors will ordinarily
be only one to four; others will be privatized/ merged/ brought under holding companies.

State Government:
The central government has decided to increase the borrowing limits of States from 3% to 5% for
2020-21 only. This would provide the States with extra resources of Rs. 4.28 lakh crore.

Agriculture:
NABARD will extend additional re-finance support of Rs 30,000 crore for meeting crop loan
requirement of Rural Cooperative Banks and RRBs.

 It is over and above Rs 90,000 crore that will be provided by NABARD to this sector in the
normal course.
 The scheme is front-loaded with on-tap facility to 33 state cooperative banks, 351 district
cooperative banks
It is expected that this initiative will benefit around 3 crore farmers, mostly in small and
marginal category, helping them for their post-harvest Rabi and current Kharif requirements.

A Rs. 1 lakh crore fund has been announced for agri-infrastructure fund for farm-gate
infrastructure.

 The financing facility will be provided for funding Infrastructure Projects at farm-gate &
aggregation points (Primary Agricultural Cooperative Societies, Farmers Producer
Organizations, Agriculture entrepreneurs, Start-ups, etc.)
 The fund is expected to improve the number of adequate cold chain & Post Harvest
Management infrastructure in the vicinity of farm-gate causing gaps in value chains

Source: www.Bankexamindia.com & Monetary policy 2020 & 2021.

Understanding how Government policies impact AD and income levels in economy:

Following the first COVID-19 wave and initial nation-wide lockdown, on April 15, 2020 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.
The government’s crisis response has mitigated damage, with a fiscal stimulus of 20 trillion
rupees, almost 10 percent of GDP. Also, the Reserve Bank of India enacted decisive
expansionary monetary policy. Yet, banks accessed only 520 billion rupees out of the
emergency guaranteed credit window of 3 trillion rupees. S&P has estimated the
nonperforming loans would increase by 14 percent. Corporations have deleveraged retiring old
debts and hoarding cash, as have households. Recovery through investment and consumption
has stalled. These trends are exacerbated due to the pandemic. The manufacturing
Purchasing Managers Index (PMI) recovered 50 percent since May but at 47.2 it remains in
negative territory. Services contribute over half of GDP but its PMI, even after bouncing back,
remains low at 33.7 in June. Consumption of electricity, petrol, and diesel have regained from
the lockdown lows but are still 10-18 percent below June 2019 levels. Agriculture has been the
bright spot, with 50 percent higher monsoon crop sowing and fertilizer consumption up 100
percent. Unemployment levels had spiked to 23.5 percent but with a mid-June recovery to 8.5
percent—and then crept up again marginally. Budget: 2.65 lakh crore INR Announcement: Nov
14th, 2020 Main orientations: Infrastructure, Healthcare, Public Private Collaboration
Atmanirbhar Bharat Rozgar Yojana
● New employees under the Employees’ Provident Fund Organization (EPFO)-registered
organizations will enjoy benefits, including subsidy support by way of EPF contributions. The
scheme is expected to cover 65% of employees and 95% of establishments in the formal
sector.
● Rs10,000 crore under the Prime Minister Garib Kalyan Yojana will boost rural employment in
the informal sector and encourage the growth of the rural economy

Immigration
● Foreign nationals are permitted to enter India by water routes or by flights including those
under the Vande Bharat Mission or ‘Air Bubble’ (Bilateral Air Travel Arrangements) Scheme or
by any non-scheduled commercial flights as allowed by the Ministry of Civil Aviation
Corporate affairs:
● Applicability of CARO, 2020 has been shifted to FY21 instead of FY20. (CARO is the
Companies Auditors' Report Order).
● Companies Act requirement of creating deposit reserve of 20% of deposits maturing in FY21
and investing 15% of debentures maturing in FY21 before 30 April 2020 may be done before
30 Sep 2020.
RBI measures:
Relief measures announced by Reserve Bank of India on 27 March 2020 & 17 April 2020:
● Reduction of policy repo rate by 75 basis points (from current 5.15% to 4.40%).
● RBI will conduct auctions of TLTRO (Targeted Long Term Repo Operations) of up to three-
year tenor of appropriate sizes for a total amount up to INR 2 lakh crore (~USD 26 billion) at a
floating rate, linked to policy repo rate (50% corporates, 25% for development institutions for
onward lending to agri, housing and medium / small enterprises and 25% for NBFCs and MFI).
● CRR of all banks to be reduced by 100 basis points to 3% beginning March 28, for 1 year.
This will release liquidity of INR 1,37,000 crore across the banking system.
● Liquidity coverage ratio for banks reduced from 100% to 80% likely to release liquidity. ●
These liquidity measures will inject liquidity of INR 4.74 lakh crore (~USD 63 billion) to the
system.
Relief for MSMEs
● INR3 Lakh crore (USD 39 bn) collateral free loan with 100% credit guarantee.
● INR20k crore (USD 2.6 bn) subordinate debt for stressed MSMEs.
● INR50k crore (USD 6.5 bn) equity infusion for MSMEs with growth potential and viability
through Fund of Funds.
● No global tenders for government contracts up to INR200 crore (USD 26 mn).
● E-market linkage to be promoted as replacement of trade fairs and exhibitions
● MSME dues to be cleared within 45 days.
Relief for NBFCs
● INR30k crore (USD 3.9 bn) liquidity infusion for NBFCs/HFCs/MFIs
● INR45k crore (USD 5.9 bn) partial credit guarantee scheme for NBFCs
Real estate sector and EPC/Contractors:
● Extension of up to 6 months to be provided by all Central Agencies (like Railways, Ministry of
Road, Transport & Highways, Central Public Works Dept, etc.).
● Government agencies to partially release guarantees, to the extent contracts are partially
completed.
● Registration and completion timelines extended by up to six months for all registered real
estate projects.
Insolvency and Bankruptcy Code (IBC):
● Threshold of default under section 4 of the IBC has been increased from Rs 100,000 to Rs
10 million with the intention to prevent triggering of insolvency proceedings against MSMEs.
● Fresh admission of Insolvency cases for default arising after 25 March 2020 under IBC, 2016
suspended for six months (extendable by another six months) to stop companies at large from
being forced into insolvency proceedings in such force majeure causes of default.
● Loans for COVID-19 excluded from definition of default.
Impact on Economy:
Overall, the RBI, in cooperation with the Government of India, has succeeded in achieving its
broad objective of keeping financial intermediaries, financial markets and the financial system
as a whole sound, liquid, and functioning smoothly. It has maintained financial stability despite
initial conditions of the Indian financial intermediaries being stressed because of legacy
problems. But very significant challenges remain as this crisis unfolds further in both India and
the rest of the world. It has also protected households as well as small and large businesses
from experiencing acute financial stress for the time being, but stresses will emerge once
regulatory forbearance is lifted. Transmission of the highly accommodative monetary policy,
and the corresponding liquidity management, has been largely successful. Interest rates have
fallen across the board and g-sec yields are at almost record lows, with most real interest rates
now being in negative territory. However, the RBI’s liquidity injection has been so large that
there was an almost consistent systemic liquidity surplus of about ₹6 trillion (about 3% of GDP)
that needed to be absorbed by the RBI daily. However, despite all the measures implemented
to promote the flow of credit to all segments of the market, credit growth has continued to be
sluggish except for a significant increase to the small and medium scale enterprise (SMSE)
sector. Hence there is a mismatch between the performance of the real sector and financial
markets. This could potentially lead to enhanced stresses experienced by both lenders and
borrowers, leading to potential financial instability. Thus, financial stability challenges remain
for the Indian financial system and its regulator in the months to come.
Source: https://scroll.in/article/999275/the-pandemic-in-data-how-covid-19-has-devasted-
indias-economy

Before we try to understand how money changes hands in the economy, let's discuss the
Velocity of Money.

Definition:

The rapidness with which money changes hands in an economy during a fiscal year is denoted
as the velocity of money.

Generally, it is termed as the nominal GDP divided by money supply. It can be understood as
the rate of turnover in the money supply, which in simpler terms, is the number of times a
dollar is used to purchase final goods and services included in the GDP.
The Velocity of Money Formula:

For this application, economists typically use GDP and either M1 or M2 for the money supply.

Velocity of Money = GDP ÷ Money Supply

Understanding money changes hands in Indian Economy:

When an amount of money is released by the RBI (Reserve Bank of India) into the economy, it
transpires through circulation via transactions. The government may also use it to pay the
salaries of their employs, buy goods and services, provide subsidies, and so on. In this
process, a part of the money is kept by the recipients and the remaining usually returns to
bank accounts. Quite often, one places a certain fraction of their salary in a bank account
which incurs them some interest while keeping the remaining amount at their disposal. The
businessperson who sells their goods or services to the government and gets money in their
bank accounts uses only a part of that to carry on their business, while the rest stays in the
bank.

One can see that most of the money released into the economy goes through a continual
process of flow within the commercial banking system where businesses and households
maintain their accounts. Banks have to pay their depositors some amount of interest for
placing their money with them. Which implies that they too now need to earn some income to
pay this interest. This income is made through lending money to various people who require it
for several purposes. For instance, I may be setting up a plant to produce some items and may
need long-term capital. I may require it to set up an office to provide services. I may need
capital to pay wages to my workers and also purchase raw materials. So, a part of the profit
earned by my business is paid to the banks as interest for the loan I have taken. What this
means is that a bank does not have the money that its depositors deposited with it. If a
situation where all the depositors of a bank came to withdraw their respective deposits arises,
the bank is highly unlikely to be able to pay them. This situation is called a “run” on a bank, and
such a bank is most likely to fail. In such cases, the RBI plays the role of a banker to the banks
by providing money to them.

A certain amount of the deposits made to a bank is required to be deposited to the RBI. This is
called the cash reserve ratio (CRR). In simpler words, if a bank gets Rs100 in deposits and the
CRR is 10%, then it has to deposit Rs10 with the RBI. Which implies that the bank now has
Rs90 to lend. This Rs90 is then given to a borrower, who pays it to someone else who puts it
in their bank. That bank then has to deposit Rs9 with the RBI and can now lend Rs81. This
amount may be lent and may make its way to a third bank, which then has to deposit Rs8.1
with the RBI.

This chain can continue, now looping in another bank which has to pay the RBI Rs7.29. The
banks get Rs100+90+81+72.9…and the RBI gets Rs10+9+8.1+7.29+…What the banks are
getting is also going out to the public and is being used as money. As the chain of deposits
and withdrawals is completed over a duration, the Rs100 deposit leads to the system getting
Rs1,000 and the RBI Rs100. It can be seen that the banking system, along with the RBI, has
created 10 times the money that the RBI released to begin with. This phenomenon is called
the money multiplier.

The RBI, the lender of last resort

This system is highly advantageous if a bank is in trouble and does not have the funds to
return to its depositors as they can borrow that amount from the RBI. So, the RBI plays the role
of a guarantor of the banking system. For performing this role, the RBI is also a regulator of the
banks and ensures that no bank oversteps the line within prudential norms.

Having said that, when would a bank be in trouble? Trouble is caused when a bank has lent
out money to insolvent borrowers, default in paying back the interest on the loans they have
taken and are unable to return the capital they have borrowed. This becomes a bad debt for
the bank. If this debt is large in relation to the total lending of the bank, then it is safe to
assume that the bank is in trouble. Since, it does not have the money to pay interest to its
depositors or return their deposits. In India, this problem has manifested itself recently as the
problem of NPAs (non-performing assets) in banks. The RBI has been trying to deal with this
situation.

To sum it up:

1. Currency with public = currency in circulation – cash on hand with banks

2. M0 (reserve money) = currency with public + cash on hand with banks + “other” deposits
with RBI + bankers’ deposits with RBI

3. M1 (high-powered money) = currency with public + deposit money of public; where, deposit
money of public = demand deposits with banks + “other” deposits with Reserve Bank

4. M2 = M1 + post office savings deposits

5. M3 = M1 + time deposits with banks

6. M4 = M3 + total post office deposits.

…………………………………..END OF REPORT…………………………………………..