Question

1. It has been often said that it may take years for the spike of unemployment rate in the current environment to be reversed slowly. Eplain the reason for that argument.

2. What is the likeliest outlook for the inflation over the next year or so, given the current economic circumstances?

(both need to be 10-12 sentences long)

Answer 1

1)

That the Indian economy is witnessing a slowdown is no longer a matter of debate after the Union finance minister acknowledged this reality. The days when the Indian economy was the fastest growing seemed distant when the second quarter of 2019-20 saw the growth stumble to 4.5%, the slowest in 26 quarters.

The three drivers of growth, namely, consumption, investment, and exports, have all moved downward. Consumption was reported to be at a four-decade low, with rural consumption lower by 8.8%, while urban consumption barely increased. In the second quarter of the current fiscal, gross fixed capital formation (at constant prices) grew by a mere 1% over the corresponding period of 2018-19, while exports recorded negative growth.

These numbers, in our view, reflect the combined impact of four factors, namely, policy shocks, agrarian crisis, steep increase in unemployment and steady decline in the share of wages and financial sector crisis.

Except for the first, the remaining three are structural impediments that have plagued the economy in the past decades.

Two policy shocks, namely, demonetisation and introduction of GST, were imparted in rapid succession. The micro, small and medium enterprises (MSME) were especially impacted by demonetisation having lost 1.5 million jobs, according to estimates provided by the Centre for Monitoring the Indian Economy. The woes of the MSME sector were exacerbated by a poorly designed GST, which added a significant layer of uncertainty for the small businesses. The jobs and income losses resulting from the policy shocks caused demand shrinkage and sharp decline of investment.

India’s development model is skewed against the interests of the farm sector; the steadily falling share of the sector in the country’s GDP even when it supports an overwhelmingly large section of the working population. In 2005, the National Farmers’ Commission (NFC) emphasised the need for amelioration of the condition of the farming community, especially by increasing minimum support price (MSP) and by extending it for other major crops.

After an initial interest shown by the UPA government to meaningfully increase MSP, this recommendation of the NFC has remained unimplemented. Consequently, the terms of trade between farmers and non-farmers, which had increased up to 2010-11, declined thereafter. At the same time, wages received by farm labour also became less remunerative: they grew by an annual average of nearly 17% between 2007-08 and 2013-14, but in the past three years, their growth was halved. These two developments squeezed rural demand.

The Periodic Labour Force Survey of 2017-18 reported massive decline in agricultural employment and very slow growth of non-agricultural jobs. The unemployment rate stood at 6.1%, of which unemployment rate among the urban male youth was nearly 19% while the unemployment rate for urban female youth was 27% per cent. These figures were the highest in 45 years. Worse still, the total employment witnessed a net decline to 471.3 million in 2017–18 from 472.5 million in 2012—the first ever absolute decline in the post-independence period.

As for the urban sector, KLMES database produced by the RBI, shows that employment growth in manufacturing dropped to 1.4% and in services to 2% between 2011 and 2017 from 2.5% and 2.8 % respectively between 2004 and 2010. During the same period, labour earnings in the manufacturing sector declined from 8.1 % to 5.4% and in the services sector, from 7.2% to 6.1%.

Thus, falling rural income and urban labour earnings as well as skewed income distribution have resulted in domestic demand contraction while falling export growth has affected external demand

Despite continuous capitalisation of the banking sector in the past several years (Rs 1.06 lakh crore in 2018–19 followed by Rs 70,000 crores in 2019–20), non-performing assets continued to grow. It stood at Rs 8.06 lakh crore on March 31, 2019. Even the non-banking financial sector is passing through a crisis. For example, Infrastructure Leasing & Financial Services has reported a negative net worth of Rs 16,935 crore in FY 19. These obviously adversely affected commercial credit off-takes. Financial sector crisis, together with demand slackness and investor pessimism have negatively impacted investment.

Coronavirus pandemic has even worsen the situation and taken away a job of numerous people affecting the lives of various people and country is facing a high decline in aggregate demand of various goods and services due to lockdown

Therefore,it would take a lot of intervention/efforts by government to stimulate demand so as to increase employment in an economy and unemployment will then be reversed slowly.

b)  Inflation Rate in India is expected to be 4.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the India Inflation Rate is projected to trend around 4.50 percent in 2021 and 4.10 percent in 2022, according to our econometric models.