{"id":4395,"date":"2019-09-14T22:50:47","date_gmt":"2019-09-14T17:20:47","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=4395"},"modified":"2019-09-14T22:50:47","modified_gmt":"2019-09-14T17:20:47","slug":"indias-economic-revival","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/indias-economic-revival\/","title":{"rendered":"India\u2019s Economic Revival"},"content":{"rendered":"<p><strong>Relevance: Mains: G.S paper III: Indian Economy<\/strong><\/p>\n<p><strong>Why in news?<\/strong><\/p>\n<ul>\n<li>Apart from the trade war, media in the United States is actively discussing this in the context of a relative fall in the returns of long-term government bonds vis-\u00e0-vis bonds of shorter maturity; the so-called \u201cinverted yield curve.\u201d<\/li>\n<\/ul>\n<p><strong>Analysis<\/strong><\/p>\n<ul>\n<li>The experience of government responses since the global recession of 2008, which preferred monetary easing over a genuine fiscal stimulus across the globe, does not inspire much confidence.<\/li>\n<li>Indian policymakers too do not seem to have learnt much from the global failure of monetary policy as a way out of a slowdown.<\/li>\n<li>There seems to be a general consensus among the policymakers, despite concrete evidence to the contrary, that economic activity can be manoeuvred through changes in the interest rates.<\/li>\n<\/ul>\n<p><strong>Latest Development<\/strong><\/p>\n<ul>\n<li>The Reserve Bank of India has accepted the government\u2019s view and decreased the repo rates by 35 bps (100 bps = 1 per cent) in its last monetary policy review meeting.<\/li>\n<li>The expectation is that credit-financed private investment and consumption would pick up as a result of a fall in the cost of credit and bring the Indian economy back on its feet.<\/li>\n<\/ul>\n<p><strong>Why consumption cannot revive the economy<\/strong><\/p>\n<ul>\n<li>A relationship between consumption and current income, that acts like a principle in is that consumption and current income is a cyclic process. So, when the expectations of future incomes is less, consumption will be unsuitable for revival<\/li>\n<li>It is for this reason that Keynes called consumption a passive factor when it came to the question of how to revive a flailing economy.<\/li>\n<\/ul>\n<p><strong>Role of Investors (Borrower)<\/strong><\/p>\n<ul>\n<li>Two factors that is considered for investing is the profitability and the interest rate.<\/li>\n<li>When a company is running below capacity, it makes no sense to the invester, creating more capacity by investing only because the cost of loans have come down.<\/li>\n<li>Credit and its cost may be a necessary condition, but not a sufficient one to influence investment.<\/li>\n<li>This means that investment too is indirectly a function of demand, past and current, and therefore cannot expect investments to happen when the credit costs are reduced.<\/li>\n<\/ul>\n<p><strong>Roles of Banks and NBFCs (Lenders)<\/strong><\/p>\n<ul>\n<li>For the fall in repo rate to percolate down to the borrower (like the investors), the banks and the NBFCs has to reduce their rate of interest charged: There can be 2 types of cases<\/li>\n<\/ul>\n<ol>\n<li>The lenders have to bring down their rates, which may not necessarily happen for various reasons.\n<ul>\n<li>Lenders may want a higher margin of security during difficult times because of piling non-performing assets and failing non-bank lending institutions.<\/li>\n<\/ul>\n<\/li>\n<li>Even if they bring it down, like it is happening now, at least with some public sector banks, the banks may go slow on the volume of the credit.\n<ul>\n<li>So, the banks may bring their lending rates down, but still be wary of lending except to very creditworthy borrowers.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<ul>\n<li>What matters for the expansion is not just the incremental cost, but the volume of loans too.<\/li>\n<li>Therefore, even the necessary condition, that is reducing the credit cost may not get created.<\/li>\n<\/ul>\n<p><strong>Way Forward<\/strong><\/p>\n<ul>\n<li>Keynes had argued that fiscal policy is far more effective since it directly influences the level of activity.<\/li>\n<li>Indeed, fiscal expenditure has the potential to revive the economy, but, unfortunately, because of the Fiscal Responsibility and Budget Management Act, that has been given up.<\/li>\n<li>The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits.<\/li>\n<li>A fixation of the deficit target to 3.3% of the gross domestic product in the last budget means that the government expenditure itself becomes a function of the current income.<\/li>\n<li>Unless these self-imposed constraints are broken, there is hardly any scope for revival and the recession would have to run its full course before revival begins.<\/li>\n<li>The Indian economy is not just in a trough of a usual business cycle, it is also going through a structural crisis, that is, it is a crisis of both the trend and the cyclical component of economic activity.<\/li>\n<li>While the cyclical component can be tackled through tinkering fiscal policy, the trend in the economy requires deeper intervention.<\/li>\n<li>It would require identifying sources which can deliver equitable and sustainable growth. Perhaps, this is an opportune time for a new green deal.<\/li>\n<li>The government could, among other initiatives, aggressively invest in green infrastructure as a specific form of fiscal intervention.<\/li>\n<li>Such expenditure has the usual benefit of generating a multiplier, but it has several additional benefits. Green growth is usually more inclusive both because of its higher employment elasticities as well as its environment-conserving potentialities.<\/li>\n<li>In short, without a comprehensive plan about the future of the Indian economy, quick-fixes alone will not serve us well in the long run, but then we have a government in power which does not believe in plans anymore!<\/li>\n<\/ul>\n<p><strong>Difference between monetary and fiscal policy<\/strong><\/p>\n<ul>\n<li>Monetary policy involves changing the interest rate and influencing the money supply.<\/li>\n<li>Fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy.<\/li>\n<\/ul>\n<p><strong>Monetary policy<\/strong><\/p>\n<ul>\n<li>Monetary policy is usually carried out by the Central Bank\/Monetary authorities and involves:<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Setting base interest rates<\/li>\n<li>Influencing the supply of money.<\/li>\n<\/ul>\n<\/li>\n<li>The Central Bank may have an inflation target of 2%. If they feel inflation is going to go above the inflation target, due to economic growth being too quick, then they will increase interest rates.<\/li>\n<li>Higher interest rates increase borrowing costs and reduce consumer spending and investment, leading to lower aggregate demand and lower inflation.<\/li>\n<li>If the economy went into recession, the Central Bank would cut interest rates.<\/li>\n<\/ul>\n<p><strong>Fiscal policy<\/strong><\/p>\n<ul>\n<li>Fiscal policy is carried out by the government and involves changing:<\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li>Level of government spending<\/li>\n<li>Levels of taxation<\/li>\n<\/ul>\n<\/li>\n<li>To increase demand and economic growth, the government will cut tax and increase spending (leading to a higher budget deficit)<\/li>\n<li>To reduce demand and reduce inflation, the government can increase tax rates and cut spending (leading to a smaller budget deficit)<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance: Mains: G.S paper III: Indian Economy Why in news? Apart from the trade war, media in the United States<\/p>\n","protected":false},"author":1,"featured_media":4359,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[123,42,43],"tags":[392],"class_list":["post-4395","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","category-general-studies-iii-technology-economic-development-bio-diversity-environment-security-and-disaster-management","category-indian-economy","tag-union-public-service-commission-upsc"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4395","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=4395"}],"version-history":[{"count":1,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4395\/revisions"}],"predecessor-version":[{"id":4396,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/4395\/revisions\/4396"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/4359"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=4395"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=4395"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=4395"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}