LAL BAHADUR SHASHTRI INSTITUTE OF MANAGEMENT,

DELHI

Government, Business and Society PROJECT

To Evaluate the Determinants of Changes in Aggregate Demand (AD) in

India Economy (1980-1990 Vs 2000-2021)

Submitted by Group 1: Aayush Grover (2022/442)

Muskan Aggarwal (2022/409)
Simran Kumari (2022/414)
Aasees Kaur (2022/457)

Submitted to: Dr. Kunwar Milind Singh (Assistant Professor)

Lal Bahadur Shastri Institute of Management, Delhi

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 INDEX

Introduction...............................................................................................................
Identifying Variables..................................................................................................
Reasons for fluctuation in AD in 1980-1990..............................................................
Reasons for fluctuation in AD in 2000-2021..............................................................
Bibliography.............................................................................................................
Appendix..................................................................................................................

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 Introduction
Every economy faces challenges from time to time which affect the lives of people living in the
economy. If we talk about Indian economy, it has changed drastically over the time. During the
1990s, India’s borrowing amounted to Rs. 1173 crores. As a result, LPG (Liberalisation Privatisation &
Globalization) Policy was implemented which changed the economy. Other factors also played role
in affecting the GDP which we will discuss later.

1980 – 1990

The aggregate demand of an economy is determined by a number of factors such as government

policies, economic growth, inflation, and exchange rates. India’s economy underwent significant
changes in the 1980s and 1990s, resulting in significant changes to the aggregate demand of the
economy.

The first factor affecting aggregate demand in India’s economy during this period was government
policies. India’s government adopted a series of economic reforms in the mid-1980s, in an effort to
liberalize the economy and make it more open to foreign investment. These reforms included the
removal of import and export controls, the liberalization of foreign exchange rates, the reduction of
government subsidies and controls, and the introduction of a market-based pricing system. These
reforms had a major impact on aggregate demand in India’s economy, as they allowed for increased
investment from foreign investors.

The second factor affecting aggregate demand in India’s economy during this period was economic
growth. India’s economy grew steadily throughout the 1980s and 1990s, with an average rate of
growth of 5.5 percent per year. This growth was driven by a number of factors, including increased
foreign investment, improved agricultural productivity, rising exports, and the development of new
industries. This economic growth had a positive effect on aggregate demand, as increased economic
activity led to increased consumption and investment.

The third factor affecting aggregate demand in India’s economy during this period was inflation.
Inflation in India increased significantly during the 1980s and 1990s, reaching a peak of nearly 15
percent in the early 1990s. This rise in inflation was caused by a number of factors, including rising

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wages, increasing energy prices, and a devaluation of the Indian rupee. This rise in inflation had a
significant impact on aggregate demand, as it resulted in reduced consumption and investment due
to rising prices.

The fourth factor affecting aggregate demand in India’s economy during this period was exchange
rates. India’s exchange rate with the US dollar fluctuated significantly during the 1980s and 1990s, as
the Indian rupee was devalued several times. This had a major impact on aggregate demand, as a
weaker exchange rate made Indian exports more competitive in international markets and
encouraged foreign investment in the country.

Overall, there were a number of factors that contributed to changes in aggregate demand in India’s
economy from 1980 to 1990. Government policies, economic growth, inflation, and exchange rates
all had a major impact on aggregate demand during this period. These factors combined to create a
positive environment for investment and consumption, resulting in increased aggregate demand in
India’s economy.

2000-2021

Aggregate demand is a key macroeconomic indicator that represents the entire amount of goods
and services required in an economy during a certain time period and at a specific overall price level.
It is a fundamental component of the economic cycle and is commonly used to assess an economy's
overall health. Policymakers place a high value on the factors that influence aggregate demand
because they may have a considerable impact on both immediate and long-term economic success.

To begin, it is critical to realise that aggregate demand is made up of both domestic demand (C + I +
G) and net exports (X-M). Consumer spending (C), investment expenditure (I), and government
spending (G) all boost domestic demand (G). In contrast, net exports are the difference between
exports (X) and imports (Y) (M). Each of these components can be influenced by a variety of
circumstances, which in turn can influence aggregate demand. As a result, the many causes of
changes in aggregate demand in the Indian economy must be considered.

One of the major determinants of changes in aggregate demand in India’s economy is the state of
the country’s fiscal policy. Fiscal policy is the government’s approach to managing its revenue and
expenditure. When the government increases its spending, this can lead to an increase in aggregate
demand as consumers and businesses spend more money. Conversely, when the government cuts

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spending, this can lead to a decrease in aggregate demand as people save more of their money. The
state of the Indian economy’s fiscal policy has changed significantly over the years, from a period of
deficit spending in the early 2000s to a period of surplus in recent years.

The level of interest rates is another important factor of variations in aggregate demand in India's
economy. When the central bank raises interest rates, borrowing costs for firms and consumers rise,
which reduces aggregate demand. When the central bank lowers interest rates, aggregate demand
rises because borrowing costs fall and consumers are more ready to spend their money. The Indian
central bank has been progressively decreasing interest rates over the past two decades, and this
has had a considerable influence on aggregate demand in the country.

Consumer confidence has a significant influence on aggregate demand in India's economy. People
are more willing to spend their money when they are more confidence in the economy, which can
contribute to a rise in aggregate demand. People are more prone to conserve money when they are
less confidence in the economy, which can lead to a reduction in aggregate demand. Consumer
confidence in India has been mainly favourable during the last two decades, contributing to an
increase in aggregate demand.

In addition, the level of government spending also has a major influence on aggregate demand in
India’s economy. When the government increases its spending, this can lead to an increase in
aggregate demand as consumers and businesses spend more money. Conversely, when the
government cuts spending, this can lead to a decrease in aggregate demand as people save more of
their money. The state of government spending in India has fluctuated over the past two decades,
with periods of both increased and decreased spending.

Finally, the level of foreign investment in India’s economy can also have a major impact on aggregate
demand. When foreign investors are more willing to invest in India, this can lead to an increase in
aggregate demand as more money flows into the economy. Conversely, when foreign investors are
less willing to invest in India, this can lead to a decrease in aggregate demand as money leaves the
economy. The level of foreign investment in India has been generally positive over the past two
decades, which has helped to contribute to an increase in aggregate demand.

In conclusion, there are a variety of factors that can affect aggregate demand in India’s economy.
These factors include the state of the country’s fiscal policy, the level of interest rates, the level of
consumer confidence, the level of government spending, and the level of foreign investment. All of
these factors have fluctuated over the past two decades, and understanding how they have changed
can provide valuable insight into the state of the Indian economy.

Identifying Variables
Aggregate demand (AD) is an economic term used to represent the entire demand for goods and
services in an economy at a certain period. It is calculated by adding up consumer expenditure,
investment spending, government spending, and net exports. It is a significant factor of economic
growth and development in India. Changes in aggregate demand in India's economy are affected by
a range of variables, including changes in consumer spending, investment expenditure, government
spending, foreign trade, and the money supply. This study will investigate the many factors of
variations in aggregate demand in the Indian economy.

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Consumer Spending
Consumer spending is a major driver of changes in aggregate demand in India's economy. It is the
sum of household expenditures on goods and services. Changes in consumer spending are
influenced by a range of factors, including changes in consumer confidence, disposable income, the
cost of living, and interest rates.

Consumer confidence fluctuations can have a substantial influence on consumer purchasing.

Consumers are more inclined to spend if they are enthusiastic about the future. On the other hand,
if people are depressed, they are less inclined to spend.

Changes in disposable income can also impact consumer spending. If households have more
disposable income, they are more likely to spend it. Conversely, if their disposable income
decreases, they may be less likely to spend.

Changes in the cost of living can also affect consumer spending. If prices of goods and services
increase, households will have less money to spend on other items. On the other hand, if prices
decrease, households will have more money to spend.

Lastly, changes in interest rates can impact consumer spending. If interest rates increase,
households may be less likely to borrow and spend, while if interest rates decrease, they may be
more likely to borrow and spend.

Investment Spending
Another key factor of variations in aggregate demand in India's economy is investment spending. It is
the entire amount of money that firms spend on capital goods such as new machinery and factories.
Changes in investment spending are influenced by a range of factors, including changes in company
confidence, changes in the cost of capital, changes in credit availability, and changes in taxes.

Business confidence fluctuations can have a substantial influence on investment spending.

Businesses that are positive about the future are more inclined to invest in new capital goods. If
people are feeling negative, though, they may be less willing to invest.

Changes in the cost of capital can also impact investment spending. If the cost of capital increases,
businesses may be less likely to borrow and invest, while if the cost of capital decreases, they may be
more likely to borrow and invest.

Changes in the availability of credit can also affect investment spending. If credit is easily available,
businesses may be more likely to borrow and invest, while if credit is difficult to obtain, they may be
less likely to borrow and invest.

Lastly, changes in the level of taxation can also impact investment spending. If taxes are raised,
businesses may be less likely to invest, while if taxes are lowered, they may be more likely to invest.

Government Spending
Government spending is another important determinant of changes in aggregate demand in India's
economy. It is the total amount of money spent by the government on goods and services. Changes
in government spending are driven by a variety of factors such as changes in government policy,
changes in the level of taxation, changes in the availability of credit and changes in the rate of
inflation.

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Changes in government policy can have a significant impact on government spending. If the
government is feeling optimistic about the future, it may be more likely to invest in public goods and
services. On the other hand, if the government is feeling pessimistic, it may be less likely to invest.

Changes in the level of taxation can also impact government spending. If taxes are raised, the
government may be less likely to spend, while if taxes are lowered, it may be more likely to spend.

Changes in the availability of credit can also affect government spending. If credit is easily available,
the government may be more likely to borrow and spend, while if credit is difficult to obtain, it may
be less likely to borrow and spend.

Lastly, changes in the rate of inflation can also impact government spending. If inflation is low, the
government may be more likely to spend, while if inflation is high, it may be less likely to spend.

International Trade
Another key predictor of variations in aggregate demand in India's economy is international trade. It
is the entire amount of money spent on imports and exports by domestic consumers and
enterprises. Changes in international commerce are influenced by a range of variables, including
exchange rate fluctuations, changes in the cost of imported commodities, changes in demand for
imported items, and changes in credit availability.

Exchange rate fluctuations can have a considerable influence on international trade. If the rupee's
value rises, domestic consumers and companies may be more willing to buy foreign items. On the
other side, if the rupee falls in value, people may be less likely to buy foreign items.

Changes in the cost of imported goods can also impact international trade. If the cost of imported
goods increases, domestic consumers and businesses may be less likely to purchase them, while if
the cost of imported goods decreases, they may be more likely to purchase them.

Changes in the demand for imported goods can also affect international trade. If the demand for
imported goods increases, domestic consumers and businesses may be more likely to purchase
them, while if the demand for imported goods decreases, they may be less likely to purchase them.

Lastly, changes in the availability of credit can also impact international trade. If credit is easily
available, domestic consumers and businesses may be more likely to borrow and purchase imported
goods, while if credit is difficult to obtain, they may be less likely to borrow and purchase imported
goods.

Money Supply
Another key predictor of variations in aggregate demand in India's economy is the money supply. It
is the entire quantity of money in the economy at any one time. Changes in the money supply are
influenced by a number of variables, including fluctuations in the reserve requirement, interest rate
changes, velocity of money, and the money multiplier.

Reserve requirement changes can have a substantial influence on the money supply. If the reserve
requirement is raised, the money supply may fall, whereas lowering the reserve requirement causes
the money supply to rise.

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Changes in interest rates can also have an influence on the money supply. If the interest rate rises,
the money supply falls; conversely, if the interest rate falls, the money supply rises.

Money supply can be influenced by changes in the velocity of money. If the velocity of money rises,
the money supply rises; conversely, if the velocity of money falls, the money supply falls.

Finally, changes in the money multiplier can have an effect on the money supply. The money supply
may grow if the money multiplier is increased, whereas the money supply may fall if the money
multiplier is lowered.

Reasons for fluctuations in AD in 1980-1990

Banking Sectors Reforms

Starting from 1960, government started taking over major Indian Banks. In 1960, SBI was given
control of 8 state associated banks. Later in 1969, 14 more banks were privatised and in 1980 4 more
banks were privatised. Privatization at the micro-level increases efficiency, quality, diversity of
options, innovation, lowers costs and prices, and eventually increases firm profits. High incentives,
reduced government interference, strong competition, and reinvestment may all be downloaded.

1984 Sikh Riots

The Sikh riots of 1984 were a series of violent clashes between the Sikh community and the Hindu
majority in India.

The riots had a profound effect on the Indian economy, particularly the aggregate demand.
Aggregate demand is the total amount of goods and services that people in the economy are willing
and able to buy. It is a key factor in determining the level of economic activity and growth. When
aggregate demand falls, economic activity slows, leading to lower economic growth and an increase
in unemployment.

The Sikh riots of 1984 caused a significant fall in aggregate demand in India. This was due to several
factors. Firstly, the riots created an atmosphere of fear and violence in the country, which led to a
decrease in consumer confidence and a reduction in consumer spending by almost 4% . Many
people were afraid to venture outside their homes or to go out shopping.

This decrease in consumer spending had a significant effect on the aggregate demand in the
economy. With fewer people spending money, businesses had fewer customers and, as a result,
profits fell. This meant that businesses had to reduce their investment, which further reduced
aggregate demand.

Secondly, the riots caused a sharp increase in the cost of inputs for businesses. Many businesses
were unable to obtain their inputs due to supply disruptions caused by the riots, and as a result had
to pay higher prices for their inputs. This increased the cost of production, which reduced the profits
of businesses and further reduced aggregate demand.

Finally, the riots had a significant effect on the Indian currency. The Indian rupee depreciated sharply
against other major currencies due to the riots, reducing the purchasing power of the currency and
further reducing aggregate demand. The rupee fell against the US dollar from 11.36 to 12.37.

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Overall, the Sikh riots of 1984 had a significant effect on the Indian economy. The riots caused a
reduction in consumer confidence, an increase in the cost of inputs, an increase in poverty and
inequality, and a depreciation of the Indian rupee. All these factors combined to cause a significant
fall in aggregate demand in the economy, which had a profound effect on economic growth
and unemployment.

1989
The stagnation of the Indian economy in 1989 was because of the prudent fiscal and monetary policy
of the government. The government maintained a high level of interest rates at around 7.5%, which
helped to keep inflation in check at 7.1% in 1989. The government also kept the fiscal deficit under
control, by maintaining a high level of revenue and controlling expenditure. This ensured that the
government was able to maintain a balance between aggregate demand and aggregate supply.

The period of 1989 was a period of stagnation in the Indian economy. This was made possible by the
adoption of a series of economic reforms by the Government of India. These reforms were aimed at
liberalising the Indian economy and encouraging foreign investment. This period saw the growth of
the Indian economy in terms of industrial production and GDP.

Reasons for fluctuations in AD in 2000-2021

There were many factors that led to increase in AD during this period. There were many reforms that
played role in this like the liberalisation policy, Patent Act, Companies Act etc. These are explained
below-

Foreign Exchange Management Act 1999

It is a collection of laws that permits the Reserve Bank of India to enact regulations and allows the
Government of India to enact rules governing foreign exchange in accordance with India's foreign trade
strategy. It filled the loopholes of FERA and helped in attracting foreign investments to India which is very
evident from the graphs.

Patent Act 2005

The Patent Act 2005 in India is a revolutionary piece of legislation that has had a profound impact on
the country’s economy. The Act provides a legal framework for the protection of intellectual
property rights in India, as well as establishing a system for granting patent rights. The Act came into
effect in 2005 and replaced the old Indian Patents Act of 1970.

The Patent Act 2005 has also had a positive effect on the Indian economy. By protecting intellectual
property rights, the Act has enabled innovators to freely explore new ideas and commercialise their
inventions. This has led to increased investment in research and development, as well as increased
employment opportunities. It has also led to the growth of a new industry sector dedicated to the
protection of intellectual property. This has opened up new markets and created hundreds of new
jobs in the country.

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Overall, the Patent Act 2005 in India has had a positive effect on the economy, creating new
opportunities for innovators and entrepreneurs, as well as stimulating investment in research and
development. It has also enabled the Indian economy to compete more effectively in
the global market.

Financial crisis 2007

The financial crisis of 2007 had a major impact on the Indian economy. The collapse of the United
States housing market, the subsequent collapse of the world’s largest financial institutions and the
resulting global financial crisis had far reaching implications for the Indian economy.

The Indian stock markets were severely affected by the crisis. The benchmark Sensex index, which
had risen to a peak of 21,000 in January 2008, fell to a low of 8,160 in October 2008. This was a
decline of 61.6% from the peak. The crash in the stock markets wiped out trillions of rupees of
investor wealth.

The financial crisis of 2007 had a major impact on the Indian economy. It led to a slowdown in
growth, a depreciation of the rupee, a decline in credit growth, a decline in corporate investments,
job losses and an increase in the fiscal deficit. These impacts are still being felt today and are likely to
be felt for some time.

Companies Act 2013

The Companies Act 2013, which came into effect from April 1, 2014, is a major milestone in India's
corporate law reforms. This new act replaced the archaic Companies Act of 1956, and is aimed at
promoting better corporate governance and transparency in the Indian corporate world.

The Companies Act 2013 has brought in sweeping changes to the way companies are registered,
operated, and regulated in India. The main objective of this Act is to ensure easy registration of
companies and efficient regulation of corporate affairs. It also seeks to ensure greater transparency
and disclosure in the functioning of companies.

The Companies Act 2013 has had a positive effect on the Indian economy. It has made it easier to set
up and run companies, and also encouraged better corporate governance and transparency. It has
also brought in corporate social responsibility and provided a better framework for corporate
governance. All these measures have contributed to improving India's economic growth and creating
a more conducive environment for businesses.

Covid-19 pandemic 2019

The Covid-19 pandemic in 2019 had a severe impact on the Indian economy, leading to a dramatic
decrease in economic growth and an increase in inflation. The pandemic caused a severe disruption
in the production and supply chain of goods and services, resulting in a sharp drop in economic
activity. This was further exacerbated by the nationwide lockdown imposed in March 2020, which
led to a complete shutdown of the economy. This resulted in a sharp contraction of the Indian
economy, with Gross Domestic Product (GDP) shrinking by 23.9% in the first quarter of 2020-21.

Additionally, the pandemic also caused an increase in inflation, as a result of the sharp rise in
commodity prices, due to the disruption in the supply chain. Inflation rose to 6.6% in June 2020, the

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highest level in six years. This was mainly due to the increase in food prices, triggered by the
lockdown and supply chain disruption. The disruption also caused an increase in fuel prices, which
further pushed up inflation.

Findings

1) AD demand is majorly affected by the consumption expenditure.

2) It is also evident that there has been a significant increase in Indian population which
is now 139.34 Crores (2021) from 69.8 Crore(1980).
3) India is a hotspot of foreign investments. FDI inflow have increased 20 fold in last 20
years and in 2021, India has the highest FDI inflow of $83.57 billion.
4) Gross fiscal deficit of India has also improved as compared to 1980s which has also
led to increase in AD.

BIBLIOGRAPHY
https://pib.gov.in/PressReleasePage.aspx?PRID=1826946
https://www.worldbank.org/en/home

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https://www.rbi.org.in/scripts/PublicationsView.aspx?id=20634
https://cleartax.in/s/fema-foreign-exchange-management-act
https://rbi.org.in/scripts/his_Chro1985to1991.aspx
https://www.macrotrends.net/countries/IND/india/gdp-growth-rate

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APPENDIX

Gross Gross
Year Fiscal Year Fiscal
Deficit Deficit
1981-82 4.93
2000-01 5.46
1982-83 5.40
1983-84 5.69
2001-02 5.98
1984-85 6.79
2002-03 5.72
1985-86 7.55
2003-04 4.34
1986-87 8.13
2004-05 3.88
1987-88 7.34
2005-06 3.96
1988-89 7.08
2006-07 3.32
1989-90 7.10
2007-08 2.54
1990-91 7.61
2008-09 5.99
1991-92 5.39
2009-10 6.46
1992-93 5.19
2010-11 4.80
2011-12 5.91
2012-13 4.93
2013-14 4.48
2014-15 4.10
2015-16 3.87
2016-17 3.48
2017-18 3.46
2018-19 3.44
2019-20 4.59
2020-21 9.36

India
         

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 Indicator Name
Final Gross fixed
consumption capital General government final
Years expenditure formation consumption expenditure Net Exports
1980 163030988939.29 36661822392.37 17983899851.76 -5786286235.56
1981 165954198994.33 38441270710.36 18625727108.20 -5098886823.30
1982 171249039435.83 42179310569.33 20417894245.09 -4334098438.98
1983 186910754482.60 44894514904.60 22025110079.42 -4398716071.41
1984 180250751261.90 44235900850.15 21970917685.16 -3060537739.34
1985 195098643412.82 50695257071.49 25413996144.61 -5559187409.09
1986 210914482587.10 57020070823.45 28758522474.48 -4548547295.98
1987 232654341142.00 68205918069.83 33285953697.04 -3838531827.12
1988 242384054729.32 69911895235.28 34417255372.43 -4211595183.99
1989 236049824184.99 72757777655.31 34233634236.36 -3362660841.18
1990 251521172783.24 83718295868.55 36224062036.94 -4492297406.47

India
         
Indicator Name
General
government final
Final consumption Gross fixed capital consumption
Years expenditure formation expenditure Net Exports
2000 354513217160.81 121884722798.78 55963056448.98 -4245767256.57
2001 368490057154.42 145303707587.12 57094901666.05 -4254868577.75
2002 382824139263.44 145894922116.49 58260569083.24 -5045851659.19
2003 439852545441.49 172190533346.32 66094649923.29 -4233284369.73
2004 487583927750.50 217766328831.07 73784792171.69 -12662301532.54
2005 555766446476.00 268718756601.37 85041906343.74 -22898296050.02
2006 619748008187.94 315785264193.08 92168697919.31 -29981104763.59
2007 798453757984.83 435747980743.62 119995857352.21 -49726385780.67
2008 805841227907.80 416232080897.72 126345385007.91 -62024933903.85
2009 904693988089.04 455592333212.31 153775741830.84 -73425765697.03
2010 1101423274556.54 556807221592.64 184445165510.01 -74620847983.64
2011 1226760926734.35 625550709869.21 202075268929.40 -119283202737.81
2012 1227163968391.32 611106070669.36 195262201308.24 -122906094752.53
2013 1261474206844.74 581076135092.15 191152515788.76 -55375054071.03
2014 1398200610122.73 613374369550.29 212902376803.13 -60893641789.17
2015 1460638226562.39 604426918417.80 219368252547.41 -48309642033.96
2016 1597267269306.12 646867728339.15 236560353038.53 -40526497027.08
2017 1842570823752.73 747127182545.30 285489367368.50 -83759162706.02
2018 1895065687252.67 796366024922.39 292543990083.36 -101665623511.04
2019 2036472954675.09 809293067034.32 310432240169.54 -73069975364.26
2020 1943557070621.76 709204900244.36 322437176354.33 -10338790204.11
2021 2242837269709.35 898945329386.68 360487310390.37 -65051629079.34

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