TASK 9

Relation between Inflation and other indicators:

 High or unpredictable inflation rates are regarded as harmful to an overall economy.

They add inefficiencies in the market, and make it difficult for companies to budget
or plan long-term.
 Uncertainty about the future purchasing power of money discourages investment
and saving
 Inflation can also impose hidden tax increases. For instance, inflated earnings push
taxpayers into higher income tax rates unless the tax brackets are indexed to
inflation.
 With inflation, those segments in society which own physical assets, such as
property, stock etc., benefit from the price/value of their holdings going up, when
those who seek to acquire them will need to pay more for them.
 Positive effects include reducing unemployment due to nominal wage rigidity
 Allowing the central bank more leeway in carrying out monetary policy, encouraging
loans and investment instead of money hoarding

Relation between GST and other indicators:

 Inflation will be reduced as cascading of taxes will be eliminated.

 GST in India has already had a negative impact on the real estate market. It has
added up to 8 percent to the cost of new homes and reduced demand by about 12
percent.
 With GST, India is now a unified market and the foreign investment has increased in
India. The goods that are manufactured within India because of their reduced costs
have become more competitive in international market leading to growth in export.
 Lower rates will increase demand and which in turn increases employment
opportunities. As per experts India will gain $15 billion through GST implementation.
This will lead to more employment, more exports, and the gap between
manufacturing and services are reduced.
 GST would be the key revolution in Indian Economy and it could increase the GDP by
1.0 to 3.0 percent.
 GST implementation is to going to provide impetus to various reforms and polices
introduced by the Government for the ease of doing business and to push India to a
more simple, transparent and tax friendly regime.
 In a nutshell, GST will promote ease of doing businesses, help in reduction of
transactions costs to businesses, boost manufacturing of goods and supply of
services, increase price-cost margins of manufacturers, generate employment
 opportunities for the vast pool of young population with enhanced production
possibility frontiers and push overall GDP growth of the economy in much higher
trajectory
 One of the fears about the Goods and Services Tax (GST), globally, is that consumer
prices can stay higher for longer because tax increases are passed on faster than tax
cuts.

 GST will be proposed to remove the web of tax laws, unnecessary litigations,
cascading effect, no proper refund mechanism of input tax on all types of export and
further.

Relation between Geo political and other indicators:

 Overall geopolitical tension normally decreases new investment because of

uncertainty a decreases production. Also, foreign investors pull out money from
developing nations in the time of crisis
 the risk of associating all GPRs with oil supply shocks driven by geopolitical tensions
in the Middle East, and hence, ending up suggesting that higher GPRs drive up oil
prices.
 Now looking at USA-China trade war. If India can manage to lure away companies
from China and increase their export taking advantage of USA’s hard measures
against China, we can benefit hugely.

Relation between crude price and other indicators:

 A fall in crude price lowers both the trade deficit and, in turn, the current account
deficit since India largely relies on imports for its oil demand. The nation imported
$87 billion in petroleum products, while exports accounted for $35 billion
million between April 2019 and January 2020.
  In the current crisis time (COVID-19 pandemic and economic slowdown), reduced
crude oil prices have been a blessing in disguise to the Indian economy. In general, a
5 % increase in oil prices will impact the trade deficit by nearly $4 billion.
 The price of the oil is fixed by the government and it is at a subsidized rate. And then
the government compensates the companies for selling the oil at lower prices. These
losses are also called under-recoveries. Therefore, the losses incurred because of
compensating the companies losses, adds to the Fiscal deficit of India. But with the
reduced oil prices, the compensation to be paid to these companies also reduces and
which in turn helps in narrowing the fiscal deficit.
   If the oil prices are high, then the country will have to sell rupees and buy dollars to
pay for oil bills. Similarly, if the price of the oil is low, then the current account deficit
is low and the amount of dollars required to pay for oil bills are also low.
  A rise in oil prices leads to a direct increase in the price of goods and services. And it
has a direct bearing on the prices of petrol and diesel. And hence it contributes to
the rise in inflation in the country.Therefore, a reduced price of oil comes as a boon
to the economy of India.
 Additionally, a cut of Re1 in excise duty for both petrol and diesel will lead to an
annual revenue loss of Rs12,000-13,000 crore (or 0.065% of GDP).

Relation between fiscal deficit and other indicators:

 Enlargement of fiscal deficit in relation to the overall economy increase money

supply which in turn leads to accelerated inflation
 As the governments borrow more to finance their fiscal deficits and accumulate
more debt, interest rates tend to go up. The Reserve Bank of India (RBI) is trying to
drive down interest rates and in the process returns from bank fixed deposits (FDs)
have gone down.
 When deficit is used to finance a revenue deficit, aggregate consumption increases
as the government uses the money for consumption expenditure, while there is fall
in investment. This will lead to decline in the GDP growth and the growth rate of
economy will fall
 During recession when there is high unemployment and low income at
macroeconomic level, fiscal deficit is very effective in ending this trend. In order to
revive the economy, the government spends more than its revenue so that income
and employment level in the economy will improve.

Relation between PMI and other factors:

 PMI indicates the economic health of the manufacturing sector. It is based on five
major indicators: new orders, inventory levels, production, supplier deliveries and
the employment level. Increasing PMI is a sign of increased manufacturing activity. 
 Increased manufacturing activity will constitute to reducing fiscal deficit like IIP and
contribute to more GST collections and Increase in GDP growth rate. 
 High PMI and Unemployment rate are inversely proportional 
 High PMI might increase inflation. In that case RBI will increase repo rate. PMI
increasing means more foreign investment coming to the country will boost the GDP.
High production can turn into more export as well.
 Relation between BoP and other factors:

 Balance of payments forms a part and chunk of our GDP and when it increases the
GDP and growth rate increases and vice versa .
 PMI will be declining because of rising Current Account deficit and gradually lowers
the IIP.
 FDI will be reduced if there is increase in Current Account deficit as the country will
be engaging in imports.
 To get more FDIs and FPIs, the government must make changes in policies such as
widening the limit of foreign investments to attract foreign investors.
 Low purchasing power due to currency depreciation will lead to India paying more
for importing Crude oil as India imports almost 90% of Crude Oil to meet the country
demands.
 Capital account increase leads to more purchasing power and a stronger currency
which will eventually lead to declining fiscal deficit. All this will lead to more investor
confidence which leads to more FDI and a rise in PMI and IIP. This might increase the
inflation rate, to tackle that the RBI will increase the repo rate and CRR.

Relation between CAD and other factors:

 A substantial or considerable CAD is not always considered negative, especially for

the developing economies like India. A widening CAD for a short time period can be
good as it can help the country to increase its local productivity and exports in the
future
 Moreover, foreign investors also do not show a keen interest in investing in
countries with higher CAD.
 However, if there a negative CAD for the longer period of time, then it can spell more
trouble for the country as it can lead to exchange rate depreciation, loss of jobs and
investor confidence.
 Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary
policy, which is used to regulate the money supply, level of inflation and liquidity in
the country. The higher the CRR, the lower is the liquidity with the banks and vice-
versa.
 During high levels of inflation, attempts are made to reduce the flow of money in the
economy. For this, RBI increases the CRR, lowering the loanable funds available with
the banks. This, in turn, slows down investment and reduces the supply of money in
the economy. As a result, the growth of the economy is negatively impacted.
However, this also helps bring down inflation.
  On the other hand, when the RBI needs to pump funds into the system, it lowers
CRR. which increases the loanable funds with the banks. The banks thus extend a
large number of loans to businesses and industry for different investment purposes.
It also increases the overall supply of money in the economy. This ultimately boosts
the growth rate of the economy.

Indian Economic Outlook for FY-21

Due to the measures adopted to prevent the spread of the Coronavirus Disease 2019
(Covid-19), especially social distancing and lockdown, non-essential expenditures are being
postponed. This is causing aggregate demand to collapse across the globe.Projected the
country's annual median GDP growth for 2020-21 at (-) 4.5 per cent. With the rapid spread
of COVID-19 pandemic manifesting into an economic and healthcare crisis globally, the
latest forecast marks a sharp downward revision from the growth estimate of 5.5 per cent
reported in the January 2020.The pandemic outbreak has severely impacted the economic
activities as the country had to go through a lockdown to check spread of the virus.
However, the restrictions are being gradually eased.

Agriculture seems to be the only sector with a silver lining right now. There is an apparent
upside as far as the performance of monsoon is concerned this year and the water reservoir
levels in the country stand at good levels.Even though activity in sectors like consumer
durables, FMCG is gaining traction, majority of the companies are still operating at low
capacity utilisation rates. Labour availability and feeble demand remain as major issues for
the companies
Right now, the service sector, especially travel, tourism, and hospitality, is the worst hit.
Gradually the shock will spread to manufacturing, mining, agriculture, public administration,
construction – all sectors of the economy. This will adversely affect investment,
employment, income, and consumption, pulling down the aggregate growth rate of the
economy. We are already seeing some early numbers that highlight the severity and
duration of the crisis the economy may experience going forward.

To create funds for this , the government may cut capital expenditure and readjust the
capex allocations for revenue expenditure. In any case, demand for capex is likely to be
muted and the government may instead reprioritise money under these heads for spend on
health, agriculture, greater cash transfers as some of the likely priorities. The Budget had
allocated around Rs 4 trillion towards capital expenditure in FY21 and a large part of this
could be used for relief measures.. Efforts towards liberalisation of FDI policy must be
complemented with improving infrastructure and ease of doing business in the country.
Therefore, fresh investments will be difficult to come by in the near to medium term. Also, a
significant change in consumption patterns is expected on back of uncertainty with regard
to jobs and income losses