ANSWER 1

a. Gross Fixed Capital Formation is a part of calculation of GDP through the Expenditure
Method. It calculates the net increase in fixed capital. Examples include government’s
expenditure on plant, machinery, equipment, construction of new railway tracks, new public
roads etc. Any sale of fixed assets and depreciation is subtracted from the total fixed assets
to compute the Gross Fixed Capital Formation.

Components:

1. Gross Business Fixed Investment- Expenditure made on procuring production

related assets. Example: machines, plants, equipment etc.
2. Gross Residential Construction Investment- Expenditure done by households on
purchase or construction of new houses
3. Gross public Investment- Investment made in assets through publicly owned
industries and corporations.

b. Investment Levels are influenced by-

1. Interest Rates: Interest Rates and investments have an inverse relationship

between them. When the rates are low, households and firms are willing to
increase their borrowings and invest the moneyinto purchasing new assets,
whereas, when the interest rockets, they are not necessarily in favour of
borrowing money and investing.
2. Economic Growth: Change in economic growth leads to change in the
confidence of the players in the economy directly. When the growth rate is high,
higher rate of returns are expected by the investors, which lead to an increase in
investment in the economy.
3. Technological Advancement: There is an increase in investment when a new
technology is being developed or used in an economy since the efficiency
increases tremendously even with a small advancement.
4. Availability of Finance from the banks: If it is easy to procure funds from banks
or other financial institutions, investments increase and if it becomes difficult,
the small players tend to hold back their money.
ANSWER 2
a. Items of Revenue Expenditure by the Government of India (Source: Budget table in the ques)

- Pension: It refers to the monthly payment made to the retired employees of the
government. The expenditure of pension increased in FY20-21 as compared to previous
year, while the government has decided to lower down its expenditure in Pensions in FY
21-22 as it is a major expense for the govt after defence and interest payments.
- Defense: The expenditure made on the security of the nation like our Army, Navy,
defense equipment, etc. It is a vital expenditure for a country in order to protect itself in
the need of hour.
- Subsidies: The expenditure incurred by the govt to various necessity goods in order to
control its inflationary prices so that they become affordable to the general public.
- Agriculture and allied activities: Since majority of India’s population is dependent on
agriculture and related activities as a source of income, it becomes necessary for our
govt to help the employed people of the sector by constantly monitoring and controlling
the prices of inputs and outputs so that they don’t face losses even when times are
tough. A recent example of this was the Farmer’s bill that was strongly opposed by the
farmers.
- Interest: This is another major expenditure being made by the government as it the cost
of national debt in the economy. Since ours is a developing nation, the govt has to
borrow loans in order to support the economy and thereby keep paying the interest on
the same. Until our country becomes developed and is able to run the economy on its
own, this expenditure will continue.
- Education & Health: It is necessary for the govt to incur expenditure on these 2 areas in
order to make its population, majority of which comes under the workforce bracket,
educated and healthy in order for them to be productive for themselves and the
country.

b. Expenditure: The government proposes to spend Rs 34,83,236 crore in 2021-22. As per the
revised estimates, the government spent Rs 34,50,305 crore in 2020-21, 13% higher than the
budget estimate.
Receipts: The receipts (other than borrowings) are expected to be Rs 19,76,424 crore in
2021-22, which is 23% higher than the revised estimates of 2020-21. In 2020-21, revised
estimates for receipts were 29% lower than budget estimates. Given the impact due to
COVID-19, it is useful to see the growth from 2019-20, an annual increase of 6%.
GDP growth: Nominal GDP is expected to grow at of 14.4% (i.e., real growth plus inflation)
in 2021-22.
Deficits: Revenue deficit is targeted at 5.1% of GDP in 2021-22, which is lower than the
revised estimate of 7.5% in 2020-21 (3.3% in 2019-20). Fiscal deficit is targeted at 6.8% of
GDP in 2021-22, down from the revised estimate of 9.5% in 2020-21 (4.6% in 2019-20). The
government aims to steadily reduce fiscal deficit to 4.5% of GDP by 2025-26.
ANSWER 3
a. Reasons for increased co-movement of inflation:

- Globalisation has seen a progressive increase in the recent years. In both AEs and EMEs,
the exchange force has grown. Similarly, the concept of creation has evolved
significantly. Esteem chains have become fragmented and transmitted across borders.
The value added that has crossed at least two public borders, referred to as global value
chain linked exchange, has risen rapidly leading to the beginning of the rise in expansion.
Because of the extensive cross-line connections, disruptions in the global industrial
network have resulted in a shortage of supplies in specific places. Even if there are no
disruptions, the rise in value in any country today will surely have ramifications in other
countries.
- Since the last supported high expansion time frame, during the 70s, there has been a
huge change in money related approaches which has critically become a general rule
across nations. Since mid 90s, starting from New Zealand, increasing number of nations
have started focusing on taking keen interest in expansion. India is a new member
amongst the group, as it took on expansion in 2015. For AEs this goes way beyond as the
target expansion rate has likewise merged to 2%. This approach isn’t restricted to
ordinary financial strategy of setting loan fees, regularly resource buy programs have
likewise occurred pair. In March 2020 when, following the beginning of the Covid
pandemic, a surge began from the EMEs and the Cboe Volatility Index (VIX) shot up. A
concentrated effort in announcing asset purchasing programs, in both AEs just as EMEs,
stemmed the surge from EMEs while the VIX dropped down to a lower level.

b. Focussing entirely on domestic factors in determining monetary policy are not enough to
control inflation as convergence in monetary policy causes a sync in inflation across
countries. India adopted inflation targeting in 2015. There is a narrow line: beyond a certain
point, inflation can become very non-linear and spiral out of control. The safest approach is
to combat inflation as soon as possible. The MPC's decision to hold repo rates steady was
largely predicted, but whether they will maintain their accommodative posture is debatable.
According to MPC, domestic factors are majorly responsible for an increase in inflation
except edible and crude oil prices and global logistics bottlenecks. MPC does not take into
consideration the global inflationary surge and the resultant dynamics of monetary policy in
other countries for increasing inflation in India. It is believed that while MPC rightly identifies
financial tightening globally as a risk factor to the recovery of the economy, it does not seem
to acknowledge the globalization of inflation, nor any indication that it is prepared for
nonsynchronous monetary policy making across the globe and dealing with the spill over of
monetary policy actions in the advanced economies. Now is the right time for the MPC to
undertake some actions to fight inflation in India by acknowledging and identifying the
global risks and act accordingly.