2021

Managerial Economics
ASSIGNMENT#2
AKSHAT BANSAL

Ishani Mondal
Anil Kumar Kushwaha
Amit Kushwaha
Akshat Bansal
Damaraju Manoj Kumar
Sourav Bhattacharjee
The Pandemic & India’s Response:

The COVID-19 virus - SARS-CoV-2 - was first identified in Wuhan city of China in December 2019. The
infection has represented a critical for the whole world. The trends and patterns in the spread of the
COVID-19 infection across the world showed that affirmed cases spread dramatically once local area
transmission started.
The outstanding ascent in the number of COVID-19 cases being seen every day constrained the World
Health Organization (WHO) to title this outbreak a pandemic on March 11, 2020, within 90 days of its
development.
The primary strategy that appeared to be reasonable, viable, and best suited for control of the
pandemic was the dynamic observation, early recognition, isolation of an affected person, contact
tracing, and counteraction of forwarding spread by practicing social distancing and wellbeing
insurances.
Various non-pharmaceutical interventions (NPIs) such as lockdowns, closure of schools and non-
essential business, travel restrictions, work from Home for various industries, etc. adopted by
countries across the globe. The purpose of these precautions was aimed to slow down the
transmission of infection, reducing the overburdened health care system, development of effective
treatment, and a vaccine.
This crisis was unique as this pandemic required social distancing and limiting physical interactions.
This led to the tradeoff between health and human lives, on the one hand, and the economy and
livelihoods, on the other hand, in the short run.
Indeed, even with no regulation measures, a downturn would have happened due to precautionary
and/or panic behavior of households and businesses around the world confronted with the
vulnerability of managing a pandemic. This is on the ground reality that families and households who
never faced a similar situation played it safe. They initially took precautions and stocking up the
essential and non-essential items. This affected the demand-supply especially of non-essential goods
across the nation. Furthermore, the lockdown supported this behavior and reaction to the pandemic.
The general wellbeing measures, taken on to contain the spread, incited sizeable quick financial
expenses as they prompted the practically full suspension of financial activities, checked utilization
and speculation, just as limited work supply and production.
Coronavirus, in this way, has driven the world to the dilemma of saving 'lives' as the means taken to
straighten the contamination curve, steepened the macroeconomic recession curve as shown in the
figure-1 below.
Following the worldwide situation, India imposed a cross-country 'severe' lockdown for 21 days on
March 24, 2020, and consequently extended till May 31, 2020.
The lockdown gave the truly necessary opportunity to fortify the health system response, increase
testing and guarantee public engagement/awareness towards the act of social distancing.
Confronted with extraordinary vulnerability at the beginning of the pandemic, India zeroed in on
saving lives and livelihoods by its ability to take momentary agony for long-term gain. India perceived
that while GDP development will recuperate from the transitory shock brought about by the
pandemic, living souls that are lost can't be brought back. The reaction to this extraordinary
circumstance depended on epidemiological and economic examination relating to the Spanish Flu,
which featured that an early, exceptional lockdown gave a mutually beneficial technique to save lives
and safeguard livelihoods through financial recuperation in the medium to the long haul.

Figure-1: Trade-off between flattening COVID-19 infection curve and steepening of recession curve

Source: Adapted from Gourinchas, P-O (2020), “Flattening the Pandemic and Recession Curves”, online manuscript.
Equation of Economy & The Equilibrium

Aggregate Demand (AD): Aggregate demand is defined as the total demand for final goods and
services in a given economy at a specific time. It is combination of price level & output level at which
the goods & money markets are in equilibrium. Aggregate demand curve is downward sloping curve
as at higher prices, the purchasing power of money reduces, thereby reducing the demand for output.

The Aggregate Demand (AD) of the Economy is represented by below equation. It is also termed as
Four Sector Model of the Economy.
𝐴𝐷 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋 (Eq. 1)
Where,
C = Consumption spending by households (Private Final Consumption Expenditure)
I = Investment spending by firms/ Business units (Gross Fixed Capital Formation)
G = Government spending (Government Final Consumption Expenditure)
NX = Foreign (Overseas) demand for our net exports

Net exports (NX) = Exports (X) –Imports (M)

Aggregate Supply (AS):

Aggregate supply is the total supply of goods and services that firms in a national economy plan to sell
during a specific time period. It is the aggregate sum of labor and products that the organizations will
sell at a given value level in the economy. Total inventory is the connection between the value level
and the creation of the economy. In the medium run, the AS bend is upward sloping as at more
exorbitant prices, firms will supply more yield.

The Equilibrium:
The AS/AD model is the basic macroeconomic tool for understanding output variations, the price level,
and inflation rate.
 As shown in the graph on LHS, the intersection of AD & AS curves explains the equilibrium level of
price & output in economy.

The AS & AD curves intersect at point “E”.

This point is called equilibrium point as AS = AD where Equilibrium Output is Y 0 and Equilibrium
Price is P0.

As shown in the diagram below, the financial market and the Goods & Services market are interlinked
with two factors namely Income and Interest rates. Any change in these factors has a direct impact on
both markets.
 The ISLM model represents the
equilibrium of between Goods Market &
Money Market. Goods market is
represented by IS (Investment – Savings)
curve. The Money market is represented
by LM (Liquidity preference – Money
Supply) curve. The IS curve variations are
managed with Fiscal Policies
(Government) while LM curve variations
are managed with Monetary Policies of
Central Bank (RBI). The equilibrium is
represented by the graph as shown on the
RHS.

The goods & assets markets are interconnected, both fiscal and monetary policies together impact
output level & interest rates in the economy. Expansionary/contractionary fiscal policy moves the IS
curve to the right/left or outward/inward. Expansionary/contractionary monetary policy moves the
LM curve to the right/left or outward/inward.
 Post lockdown to deal with contraction in economy, the Government of India has announced certain
measures which increased Government spending. The government announced certain infrastructure
projects, loans to be given to MSMEs under the “Aatma Nirbhar Bharat” scheme, etc. These all lead to
increase in Government spending and increase in Investment spending. So, the total demand in the
economy has increased and led to below shown process flow.

Rise in
Enterpreunership Incentive for
Inflation & Prices O/P = Factors of Businesses to Produce Production / Output Employment
Demand Rises
Increases production = f(Land, more to earn more Increases Increases
Labour, Capital, revenue & profit
Enterepreunership)

Impact of Pandemic on Economy:

The table and graph below show the GDP growth of India since FY 16. Since FY 17, the GDP growth has
been in a downward trajectory as GDP has been decreasing sequentially. The pandemic has made it
worse as the stringent lockdown has full brunt on the economy. The GDP in Q1 of 2020-21 has been

GDP Growth

9.67%
8.58% 8.93%
7.56%
6.29%6.11% 6.67% 6.49%6.33%5.84%
5.32% 5.39%
4.61%
3.28%3.01%
1.64%
0.46%

-7.50%

-23.90%
Estimates released by the Ministry of Statistics and Programme Implementation showed that India’s
Gross Domestic Product (GDP) growth rate had contracted by 23.9% for the April to June quarter in FY
2020-21 as shown in the graph below.

In Gross Value Added (GVA) terms, the economy had contracted by 22.8%.

On the demand side, private utilization spending fell by 26.7 percent, bearing an extreme behavioral
shock with demand for optional things diminishing to unimportant levels.

Investment Demand additionally declined by 47.1 % inferable from the following pandemic-prompted
vulnerability. This demand constriction was respectably balanced basically by higher and counter-
recurrent government spending by 16.4 percent.

On the GVA side, the decay was wide-based with the most profound fall of 50.3 % experienced in the
construction sector followed by administrations like an exchange, lodgings, transport, communication,
manufacturing, and mining. Farming arose as the brilliant spot, developing at a sound 3.4 percent.

Demand-side and Supply-side Shocks

The pandemic has caused a unique economic shock that has triggered both supply and demand side
shocks simultaneously. The probable factors of these shocks are shown in the figure below.
 Demand Supply
Increased Uncertainity Closure of Economic Activity

Lower Confidence Restricted Movement of Labour

Loss of Incomes Build-up of Inventory

Weaker Growth Prospects Excess Capacity

Higher production cost due to lower

Fear of Contagion
demand

Curtailment of Spending Supply Chain Disruption

Closure of Contact-sensitive Activities Risk Aversion Among Business

Triggering of Precautionary Savings

Resultant Fall in Consumption &

Investment
The principal request of supply-side disturbances conceivably made second-round impacts on both
demand and supply. The underlying inventory shock, bringing about pay and pay misfortune, could
affect total demand and weaken production capacity resulting in a shortage of supplies. These impacts
were additionally intensified through worldwide exchange and monetary linkages, hosing worldwide
movement and pushing product costs down. The criticism loop of demand and supply produced
potential hysteresis impacts - when families request less, firms get decreased incomes, which takes
care of diminished movement by firms, and consequently reduced the household income.

The Real GDP Growth in year 2020-21 as shown by RBI in their annual report is mentioned below.

Source: RBI Annual report 2020-21

The contribution by individual factors of Aggregate demand is shown below.

Source: RBI Annual report 2020-21

Sector wise bifurcation of various components of GDP are shown below.

Private Final Consumption Expenditure (C) Government Final Consumption Expenditure (G)

Gross Fixed Capital Formation (I) Exports & Imports (NX)

Source: NSO & Economic Survey 2020-21 Volume-2

Gross Value Added (GVA) Method:

The value of final goods & services as of now produced in a country throughout some period is named
as GVA based computation. Goods & services currently produced & exclude transactions involving
used goods.
In this method, the value of final goods and services are considered i.e., double counting is avoided.
All the Goods & services considered, are produced within the country regardless of the
ownership/nationality of the producing firm.
The GVA also indicates the status of Aggregate Supply of the Economy.

The contribution of various sectors in calculation of GVA in case of India is as shown below.

Source: https://statisticstimes.com/economy/country/india-gdp-sectorwise.php

As indicated in RBI report, the growth of eight sectors of GVA have been negative except for
Agriculture & Allied Sectors. The below table showing Real GVA growth has been reproduced for ready
reference.
 Source: RBI Annual Report 2020-21

Other important component of GVA i.e., Industrial Production has also been shown in table below.
This indicator covers various sectors and the impact of pandemic and their growth.

Source: RBI Annual Report 2020-21

 Source: RBI Annual Report 2020-21

Economy Revival Formula from RBI Annual Report 2020-21:

For a self-sustaining GDP growth trajectory post-COVID-19, a durable revival in private

consumption and investment demand together would be critical as they account for around 85 per
cent of GDP. In view of the limited share of government consumption demand in GDP (at around
13 per cent in 2020-21), a rebound in private demand is essential to sustain the recovery. Typically,
post-crisis recoveries have been led more by consumption than investment; however, investment-
led recoveries can be more sustainable and can also lift consumption in parts by better job
creation. In either case, private demand plays a pivotal role.

The Solution for Revival of Economy:

Government of India (GOI) and Reserve Bank of India (RBI) have taken swift policy measures for short
term and long term in order to revive the economy at the earliest to provide immediate relief to all
stakeholders who suffered due to the pandemic.

The four-pronged strategy implemented is shown below.

 Source: Macroeconomic Report June 2020; https://dea.gov.in/monthly-economic-report-table

Fiscal Policy: To bring back the economy on track i.e. bring AD & AS in equilibrium along with IS –
LM in equilibrium and bring animal spirit in economy, GOI has announced various packages in a timely
manner.

GOI has used following policy tools to achieve the targets as mentioned above.
 Source: Economic Survey 2020-21, Volume 2

A carefully designed fiscal measures has following targets & stakeholders in broad term.

Measures Policy Target Stakeholders

Health Care Workers

Health Care Infrastructure
People Below Poverty Line
Farmers
Health
Low Income Group
Welfare
Migrant Labours
Fiscal Policy Measures Tax Measures
Businesses & Industries
Demand Push
MSME
Investment Push
Construction & Infrastructure
Retailers, Wholesalers, & Traders
Cottage Industry
Middle Class

Fiscal Measures & Their Impact on The Economy

The public authority's emergency reaction has relieved harm, with a financial upgrade of 20 trillion
rupees, just about 10% of GDP. Likewise, the Reserve Bank of India (RBI) authorized conclusive
expansionary monetary policy.
However, banks got to just 520 billion rupees out of the crisis ensured a credit window of 3 trillion
rupees. Truth be told, corporate credit in June is lower than June last year far beyond anyone's
expectations after bank loaning's fall.
S&P has assessed the nonperforming advances would increment by 14% this financial year. Companies
have deleveraged resigning old obligations and accumulating cash, as have families. Recuperation
through venture and utilization has slowed down. These patterns are exacerbated because of the
pandemic.
The assembling Purchasing Managers Index (PMI) recuperated 50% since May yet at 47.2 % it stays in
negative territory. Administrations offer over the portion of GDP yet its PMI, even in the wake of
bobbing back, stays low at 33.7 % in June.
Utilization of power, petroleum, and diesel has recovered from the lockdown lows however are as yet
10-18 percent beneath June 2019 levels.
Farming has been the splendid spot, with 50% higher rainstorm crop planting and compost utilization
up 100%. Joblessness levels had spiked to 23.5 percent however with a mid-June recuperation to 8.5
percent—and afterward crawled up again imperceptibly.
The National Rural Employment Guarantee Scheme (MNREGA) and supply of financed food grains
have gone about as valuable supports holding joblessness down and guaranteeing social security. 36
million individuals looked for work in May 2020 (25 million in May 2019). This went up to 40 million in
June 2020 (a normal of 23.6 million during the 2013-2019 period). The public authority has sloped up
designation to the most significant level ever, adding up to 1 trillion rupees. Likewise, notwithstanding
an intensely financed supply of rice and wheat, an exceptional plan of the free stockpile of 5 kilograms
of wheat/rice per individual for a long time was begun and since reached out by an additional three
months, covering 800 million individuals. There have additionally been cash moves of 500 billion
rupees to ladies and farmers.
Notwithstanding, MNREGA has an upper bound of 100 days ensured work and it likewise doesn't cover
metropolitan regions. Agriculture can't assimilate more work, with gigantic basic camouflaged
joblessness. A post-pandemic study shows that the MSME market anticipates that earnings should fall
up to 50 percent this year. The bigger firms are seen better. In any case, small and medium enterprises
(SMEs), who have negligible admittance to formal credit, establish 99.2 percent of all MSMEs. These
are the biggest wellspring of employment outside horticulture. Their resistance to ricochet back could
see India face further financial and economic pressures. The economy is withstanding both organic
market shocks, with the discount costs list declining strongly.
We distinguished labor market pressures toward expanded neediness, both in the extensive and
intensive margins. India needs to increase MNREGA, present an ensured metropolitan work plan, and
lift further money moves to helpless families. Government endeavors have been huge in
macroeconomic arrangement (financial upgrade and money-related extricating) to alleviate the
difficulty. However, monetary space is narrowing, requiring the World Bank and other worldwide
monetary establishments to move forward and help turn away much more prominent difficulty.
Likewise, continuous advances towards structural economic policy changes should proceed.

Monetary Policy: Traditionally, whenever any disruption occurs in Economy, then it is RBI which
acts as first line of defense. Hence to support GOI in implementation of Fiscal Policies and revival of
economy, RBI has taken various measures.
RBI has used following policy tools to achieve the targets as mentioned below.

Source: Economic Survey 2020-21, Volume 2

The monetary policy & measures has following targets & stakeholders in broad term.

Measures Policy Target Stakeholders

Commercial banks like regional rural banks, small finance banks and
Local Area Banks
Co-operative banks and all-India Financial Institutions
NBFCs like housing finance companies and micro-finance
Policy Rates institutions
Monetary Liquidity Real State Sector
Measures Asset Purchases Businesses & Industries
Loan moratorium MSME
Construction & Infrastructure
Retailers, Wholesalers, & Traders
Cottage Industry
Middle Class
Monetary Policy in the Time of COVID-19:
In nations like India, the intrinsically weak financial circumstance of Indian banks and real shortage
levels to the side, the subject of inflation stays a major test.
The monetary policy reaction is somewhat unique. Growing the cash supply in the economy brings
down loan fees enough for essential interests and investments in the economy to proceed. This
detours the in any case disintegrating impacts of rising acquiring costs at the hour of the recession and
a money crunch.
In any case, we are on rare occasions. Designated relief packages are the best way to contain a portion
of the desperate expenses of the driving force of the economy coming to a standstill, at the same time,
more significantly, in lives being saved.
Central Bank can impact financing costs through an action called open market activities. There are
multiple manners by which the Central Bank can participate in open market operations (OMO), yet
what it ordinarily does is purchase security and thus, underwrite or capitalize the banks. This is known
as expansionary monetary policy.
This adds credit to bank monetary records that are, thusly, boosted to give out loans. This pushes
down the general interest rates on loans making it less expensive to acquire cash. How does this assist
at a time like the COVID-19 pandemic? All things considered, the economy is basically in a freeze and
no movement suggests any new investments. In any case, an expansionary policy like this mitigates a
portion of the risk factors for the business area to acquire at the present time.
The Indian monetary policy reaction has been to lessen the repo rate to 4.4 percent. It additionally
sliced the reverse repo rate to 3.75 percent to deter banks from stopping cash with the Reserve Bank
of India (RBI) and urge them to give out credits all things being equal.
The Central bank can't print cash to straightforwardly support the public authority shortage on the
grounds that the dangers to financing through cash are complex and nations that have experienced
the destiny of out-of-control inflation have frequently observed its belongings to be intense, re-setting
directions of development for ages later. Venezuela in South America, African nation Zimbabwe, and
erstwhile Weimar Germany have all filled in as fitting instances of examinations with expansionary
arrangements policies.
The RBI, in any case, reported a few different measures to keep up with liquidity since its April 27th
declaration to cut repo rates. Among them, the RBI has:
i) conducted Targeted Long-Term Operations (TLTO) with non-banking financial companies
(NBFCs) to give them admittance to less expensive capital for a more extended timeframe.
ii) provide extra renegotiating alternatives to All India Financial Institutions (AIFs) that assume
a vital part in giving advances to the rural, country, and independent company areas.
iii) expanded ‘ways and means’ (WMA) limits for both the Union and state governments to help
them in endeavour alleviation measures.
These actions have been attempted with the expectation that banks will loan advances and financial
backers will create utilization of this open door to get to capital at much lower costs. States also have
been boosted to plunge into a sizable lump of their drawing arrangements with the RBI, which are a
lot less expensive than market advances. Nonetheless, specialists have said that these actions actually
demonstrate inadequately and may not be sufficient to give as a very remarkable pad as is needed
considering the present situation.