Written Economic Policy Report 3.

Q1 Inflation-data, causes an impacts on savers and borrowers

1.1. Pre-covid Period
GDP growth rate Inflation rate (Annual Unemployment rate
(Annual %) %) (% of total labour
force)
2008 3.1 12 5.4
2009 7.9 8.9 5.5
2010 8.5 9.5 5.5
2011 5.2 6.7 5.4
2012 5.5 4.9 5.4
2013 6.4 10 5.4
2014 7.4 6.7 5.4
2015 8 4.9 5.4
2016 8.3 4.9 5.4
2017 6.8 3.3 5.4
2018 6.5 3.9 5.3
2019 3.7 3.7 5.3
2020 -6.6 6.6 8
2021 8.9 5.1 6
Table 1: India's GDP growth, inflation, and unemployment rates from 2008 to 2021.

Source: WorldBank, 2022.

India has been impacted by the global crisis in three different ways: through the financial
markets, trade flows, as well as exchange rates. The reverse in capital inflows, which led to one
credit constraint in domestic markets and a sharp decrease in export demand, were major factors
in the fiscal year 2008–2009 GDP decline of more than 2 percentage points (Prasad & Reddy,
2009). Singapore, which has a well-established financial sector and an economy that depends
heavily on exports, went through the worst recession in 2008. However, India's amazing
recovery and escape from the crisis were reflected in a skyrocketing GDP growth rate in 2010 of
8.5%, before plummeting precipitously in 2011 (World bank, 2022). Food prices have climbed,
demand has surged in emerging nations, and global oil prices have increased since the weather
interrupted the foreign food supply during the economic recovery (Seshaiah et al, 2018). The rate
of inflation has increased rapidly, reaching a peak in 2008 of 12%. From 2011 to 2021 (Mohan
& Ray, 2019), the economy underwent reorganisation, restructuring, and transition, which
caused the structural unemployment rate to almost hold steady for a long time. Due to declining
commodity prices, gas and electricity prices, and a decline in service inflation, the rate of
inflation practically fell but soar in 2021.

Figure 1: GDP growth (annual %) – India 2008-2021.

Source: The World Bank 2022.

Figure 2: Inflation, consumer prices (annual %) – India 2009-2021.

Source: The World Bank 2022.

Figure 3: Unemployment, total (% of total labor force) (modeled ILO estimate) – India 2009-
2021.

Source: The World Bank 2022.

1.2. Post-Covid 19 conditions:
The impact of covid19 has left India with a decline in GDP growth in the period 2017-2020
(from 6.8% to -6.6%) and had the highest unemployment rate at 8% in 2020. However, post-
covid with the recovery of the economy, in 2021 GDP has skyrocketed to 8.9% (Worldbank,
2022). The state of the world economy has been worse since May 2022. Growth in significant
advanced economies like the US and the Eurozone is anticipated to be hampered by stronger-
than-expected inflationary pressures and the more aggressive tightening of monetary policy in
response and fundamental issues like the conflict between Russia and Ukraine and China's zero-
COVID policy are still present (Greitens, 2022).

Q2abc Policy discussion

Since 1981, India's central bank, the Reserve Bank of India (RBI), has used the exchange rate as
the focal point of its monetary policy, as evidenced by the country's achievement of its primary
objective of promoting price stability and the sustained growth of its. This instrument operates
by altering the slope, width, and centre of the trading band, followed by an adjustment for
appreciation or depreciation, allowing RBI to increase domestic growth and support the export
economy.
In order to boost lending to SMEs, RBI provide money to financial institutions at a low interest
rate (Ahmad, 2020). It also lowers the cost of capital for loans, helping SMEs manage their cash
flow better. This not only enables financial institutions to offer loans that cut SME borrowing
costs for SME borrowers.

Figure 4: Money Market diagram

Figure 5: Aggregate Demand and Aggregate Supply diagram.

As RBI has injected additional money into the market, RBI runs Easy Money. Consequently, MS
rises in the money market and moves to the right (MS1 tobMS2). Interest rates decline from R1
to R2 in the new equilibrium (E2). Since Income (I) and Consumption (C) are two of the four
factors influencing the AD curve and lower interest rates would stimulate both investment and
consumption, I and C would increase, pushing the AD curve to the right (AD1 to AD2). As a
result, new equilibrium B is established as a short-run equilibrium (since that is the point at
which AD2 and SRAS1 are in balance), and at that point, RGDP increases in the short run (from
Y1 to Y2) and the price level does as well (from P1 to P2). As a result, inflation rises as RBI
injects more money into the market, which RBI does in order to create inflation. As RGDP rises
from Y1 to Y2, the overemployment rate decreases, the unemployment rate rises, labour costs
rise, production costs rise, and firms become less motivated to create as a result, shifting SRAS
to the left (SRAS1 to SRAS2). At C, SRAS2 and AD2 establish a new equilibrium that is long-
term equilibrium (as C is on LRAS). Therefore, at C, RGDP eventually recovers (Y2 to Y1:
which is fully employed), and inflation increases as the price level rises (P2 to P3). Theoretically,
when RBI raises MS and lowers interest rates, RGDP would rise in the near run, the
unemployment rate would drop, and inflation would rise. In actuality, however, GDP has not yet
increased and has even declined to the lowest rate since adopting an expansionary monetary
policy, as described in the post-covid circumstances section. The unemployment rate has also
increased to the greatest level, from 5.3% through 2019 to 8% through 2020. In May 2020,
inflation increased by 2.9% as well (3.7 to 6.6%).
For a variety of reasons, the actual figure contradicts the theories. So, a lack of time is still
another factor contributing to the failure to achieve the goal of accelerating economic growth.
Second, in 2020, RBI implemented an Easy Money Policy to increase GDP growth, support s
faltering economy battered by the Covid-19 pandemic (Nguồn). Most businesses were closed at
the time, unimportant services were suspended, and travel was restricted. As a result, external
demand was weak, firms did not increase their investments, and people did not increase their
consumption during that time.
Q2d Policy comparison
Discuss the tools and effectiveness of policies in the two given periods
Additionally, during COVID-19, the State Bank of Vietnam (SBV) enacted an expansionary
monetary policy by dropping the overnight lending rate in the interbank market by 1% and
lowering interest rates on loans and deposits with Vietnamese dongs as the unit of currency by
0.25 to 0.5 percent (Thanh, 2021). Vietnsamese News 2020. Additionally, SBV has decreased
interest rates for the third time to boost business financing.
In an effort to promote financing to businesses, encourage them to spend more, and raise
consumption, both SBV and RBI have lowered interest rates. RBI has provided numerous large-
sized support packages for individuals, SMEs, and FinTech by injecting more money into the
market and also cutting assertively interest rate to lower rate for stimulating lending. Therefore,
RBI's lower interest rate is more successful than SBV's in encouraging lending.

Q3 Open Economy
Nominal and Real exchange rate
Goods VND INR Real Exchange Rate
1 iphone 13 64GB 21,990,000 79,900 1.076706094
1 Starbuck Latte Tall 80,000 250 0.92603125
1 Mc Donald’s Big Mac 70,000 194 0.821257429
1 LV Speedy 30 Monogram Canvas 39,694,864 74,500 0.556157215
1 pair of Levis’s Jeans 1,240,540.00 1938 0.462933513
Total Value 63,075,404 156,782 0.736566191
Due to Domestic Price Level/Foreign Price level=63,075,404/156,782=402.31 different from
INR 296,33 the nominal exchange rate. As a result, PPP is invalid, which suggests that the
buying power of VND vs SGD is not equal, and that the same amount of cash can't be used to
purchase the same quantity of a commodity in Indiaas it can in Vietnam.
Nominal rate: 296,33 VND/INR
Real exchange rate: (Foreign Price * Nominal Exchange Rate)/ Domestic Price
Speedy 30 Monogram Canvas, Starbuck Latte Tall, Mc Donald’s Big Mac, 1 pair of Levis’s
Jeans is less than 1, which means that the same amount of INR can buy less of each item in
Vietnam than it can in India. Therefore, Vietnam should import these things or India should sell
them. However, the real exchange rate for a iphone 13 is higher than 1. As a result, things should
be purchased in Vietnam or exported from Vietnam because they are purchased in greater
quantities in Vietnam than in India using the same amount of INR.
The scope of a potential arbitrage has various restrictions (Tarko & Farrant, 2019). The
McDonald's Big Mac and the Starbucks Latte cannot be traded since they must be consumed
right once and cannot be kept for a long time. Second, before exporting, Vietnam must take into
account the cost of shipping, tariffs, and taxes.
Q4 Industry Engagement
The speaker spoke about FTAs and their impacts on current policy. Link to Topic 3 Trade is an
important application of technology. By reducing trade barriers, FTAs will advance technology
and quicken economic growth.
The budget, consumers, healthy competition, and the legal system are the next areas where the
FTA has an impact. The Statebank's choice will also influence whether or not FTA will have an
impact on interest rates. However, it will have an indirect effect rather than a direct one.
FTA's distinctive features have an effect on the economy. The extent of a property right
influences whether the owner is required to pay a high or low price. Under the FTA, the "trade-
related" environment is bigger and more flexible. In topic three, it was discussed how exporting
things imposes technical standards and requirements on the products, and how we may use this
knowledge to develop new products that adhere to the standards and requirements. It can
therefore advance technology and human capital, which affects the economy.
 Reference
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Greitens S C (2022) China’s Response to War in Ukraine.
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Prasad A and Reddy C P (2009) Global financial crisis and its impact on India, Journal of Social
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Seshaiah S V, Reddy T K and Sarma I R S (2018) General government expenditure and
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Tarko V and Farrant A (2019) The efficiency of regulatory arbitrage, Public Choice, 181(1),
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