Economic Indicators

To prepare for INDIAN ECONOMY  for any competitive exam, aspirants have to know about  Economic Indicators.  It gives an idea of all the important topics for the IAS Exam and the Economy syllabus (GS-II). Important Economic Indicators terms are important from Economy perspectives in the UPSC exam. IAS aspirants should thoroughly understand their meaning and application, as questions can be asked from this static portion of the IAS Syllabus in both the UPSC Prelims and the UPSC Mains exams.

 

An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles.

 

NATIONAL INCOME
  • National Income is the total value of all final goods and services produced by the country in certain year. The growth of National Income helps to know the progress of the country.
  • In other words, the total amount of income accruing to a country from economic activities in a year’s time is known as national income.
  • National Income includes payments made to all resources in the form of wages, interest, rent and profits.

 

NATIONAL INCOME ACCOUNTING (NIA)
  • National Income Accounting is a method or technique used to measure the economic activity in the national economy as a whole.
  • It is the bookkeeping system which measures the level of economic activity in a given time period
  • NIA sets rules and definition to measure aggregate economic activity and tries to summarise the performance of the economy

 

NIA is mainly done for:
  • Policy Formulation: It helps in comparing the estimates of the past from the future and also forecast the growth rates in future. For example, if a country has a GDP of Rs. 103 Lakh which is 3 Lakh rupees higher than the last year, it has a growth rate of 3 per cent.
  • Effective Decision Making: To estimate the contribution of each of the sectors of the economy. It helps the business to plan for production.
  • International Economic Comparison: It helps in comparing the level of development of countries and provides useful insight into how well an economy is functioning, and where money is being generated and spent. One can compare the standard of living of different nations and its growth rate.
Uses of NIA
  • Indicates the performance of the economy signifying the economy’s strength and failures
  • It helps to find out structural changes in the economy. E.g. – Proportional share of primary sector is declining and tertiary sector is proportionately increasing since late 1990.
  • It helps in assessing the current standard of living
  • Helps in comparison among nations with respect to national income, per capita income.
  • Data help in making suitable changes in policy and approaches to achieve rapid economic development

 

PROBLEMS FACED IN THE ESTIMATION OF NATIONAL INCOME
  1. Conceptual problems: what should be included or excluded in NI?
    • g. which activities of foreign firms or the govt should be considered productive?
    • Services of household – not included as there is no income, no price and no market for service rendered for the household work done
    • Domestic servants are to be included- but quantifying becomes difficult
    • Farm products kept for self-consumption are to be estimated by guess.
    • Output from veggies grown from home garden or terrace garden –not included as there is no accurate estimate for the produce.
  1. Practical or Statistical problems:
    • Small shopkeepers, casual workers etc don’t keep a proper record of their income/expenditure;
    • Non-market activities (self- consumption) are tough to estimate
    • Reliable information is not available due to illiteracy
    • Statistical staff is untrained and inefficient
    • Large regional diversity – language , customs – create a problem in computing the estimates
    • Issue with multiple counting

 

PROBLEMS IN CALCULATING
  • Black money outside the estimates.
  • Non monetisation such as barter system in rural areas are kept out of transaction
  • Household services like care economy not included
  • Social service ,voluntary and charitable work ignored.
  • Environmental cost

 

PHYSICAL QUALITY OF LIFE INDEX

Introduced by M D Morris in 1979, it is the average of three statistics:

    1. Basic literacy rate (at the age of 15 years),
    2. Infant mortality (death of children under the age of one year), and
    3. Life expectancy at age one,
  • All equally weighted on a 0 to 100 scale.
  • It was widely used till 1990, when HDI was introduced.

 

  • INDICATORS
    • GDP
    • Unemployment
    • Inflation
Indicators: GDP
  • Gross Domestic Product is the market value of all the goods and services produced within the domestic territory of a country during a specified time period, usually one year.
  • Accounting Year = Fiscal Year; for India it is 1st of April to 31st of March (next year)
  • Will include the income generated by MNCs in India

 

Domestic Territory = Political frontiers of the country including its territorial waters+ Embassies/Consulates + Military Establishments of the country abroad + Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging to the residents of the country

 

GDP does not include :
  • Capital goods (e.g. machinery) are included in GDP, but intermediate goods (e.g. raw materials) are not.
  • Intermediate goods and services are not included to avoid double counting.
  • Same good can be final (you consuming milk ) or intermediate (milk in the restaurant) depending on the usage.

 

Limitation to usefulness of GDP
  • Impact on environment may be harmful despite increase in GDP.
  • Only give average figure and hide stratification
  • Conditions of poor not indicated
  • Gender disparities not revealed.
  • Does not matter how wealth increase… by war or demand
  • Does not measure sustainability of growth.

 

METHODS OF GDP CALCULATION
  1. EXPENDITURE METHOD

If anything is produced in India then someone must have paid money for that. So, accordingly we can derive GDP = C + I + G + X -M

 

GDP Expenditure Method  

Examples

 

 

 

 

 

(C) Consumption of final goods and services

 

 

 

Purchasing new car, mobiles, computer etc. Both India made & (Imported) foreign made are counted.

 

If existing house, its ‘notional rent’ is counted (i.e. even if you did not rent the property.)

 

DOESN’T INCLUDE:

Purchase of second hand goods, because we are only measuring ‘new’ things “MADE in India” in present year. IGNORE of new house is not counted here, it’s counted in (I)

 

 

 

 

 

 

(I) Investments

 

Purchase of tangible capital assets like New House, Land, Building, Factory, Truck, Machinery.

 

Purchase of intangible capital assets like IPR / Patents, Computer Software etc.

 

Purchase of raw material & intermediate goods, wages to workers for production.

 

Unsold inventory.

 

DOESN’T INCLUDE:

Savings in bank, shares and bonds etc.

Because it’d have been given to

entrepreneur as ‘Capital’ to buy above things.

 

 

 

 

(G) Government Purchases

 

Salaries to employees, Procurement of computer, stationery, fans, tube lights, vehicles etc.

 

DOESN’T INCLUDE:

Government’s scholarship,

Subsidy, ‘Transfer Payments’- pension, maternity benefit, employment allowance. They’re counted in “C” (Private) consumption by the respective beneficiaries.

 

 

 

 

(X-M) Export

MINUS Imports

 

–  Export is added because it means a foreigner must have bought goods/services “MADE in India” so it’s part of India’s GDP.

–  Whereas, Import is subtracted because some Indians must have Consumed (C) foreign products that were not “MADE in India”, So if you do not subtract the ‘Import(M)’, it will give wrong estimation of India’s GDP.

 

 

Total = GDP

 

The GDP thus arrived is called GDP at Current Market Price. When we adjust it with inflation against base year 2011 → GDP at Constant Market Price

 

PRODUCTION/GVA METHOD
  • Estimated by adding the value added by all the firms
  • Value added = Value of Output – Intermediate good = GVA at FC
  • If manage it with taxes and subsidies then It gives GDP at Market Price (MP) – because it includes depreciation (therefore ‘gross’) and taxes (therefore ‘market price’)
  • To reach National Income (that is, NNP at FC)
1.      Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA

 

2.      Subtract Depreciation: NNP at MP = GNP at MP – Depreciation
3.      Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT

 

  • While GVA gives a picture of economy from the producers’ side or supply side, the GDP model gives the picture from the consumers’ / demand side perspective. (Because it considers Indirect taxes and subsidies).
  • Therefore, from 2018-April, RBI decided to use GDP instead of GVA to measure the economic activities for its policy making & big data analytics.

 

MISMATCH IN CALCULATION
  • Theoretically, the GDP calculated by production method should equal to GDP by expenditure method.
  • However, in real life, GDP (production ) does not equal to the GDP (expenditure);attributed to factory production data is systematically captured by Government machinery such as Corporate Affairs ministry’s MCA-21portal, NSO’s Annual Survey of Industries (ASI) But, all of the final private consumption may not be captured in the official statistics due to unreported transactions (e.g. due to black money etc.)
  • As a result, mismatch /discrepancy will be observed in GDP (expenditure) figures, and mentioned in the official NSO report.
  • Therefore, GDP (Production Method GVA) is considered more accurate method among the three methods (Production, Expenditure, Income).
  • So, while NSO computes data using all 3 methods, but official GDP & growth figures are presented based on the ‘Production GVA’ method.

 

GDP CALCULATION METHOD → VIA INCOME (WIPR)
  • This method follows the simple idea that whatever is “MADE in India”, its revenues must have been distributed among the factors of production.

 

GDP = Wages to labourers (W) + Interest on Capital to Lenders (I) + Profits to Entrepreneur / Owners of the firm (P) + Rent on land (R).
  • Estimated by adding all the factors of production (rent, wages, interest, profit) and the mixed income of self-employed.
  • In India, one-third people are self-employed
  • Will get GDP at factor cost.
  • The GDP thus arrived is called GDP at Current Factor Cost.

 

GDP CALCULATION METHOD → VIA INCOME (CSO REAL LIFE)
Theoretical CSO’ real life income formula
Wages Compensation (i.e. Employees salary + Employer’s contribution to his Social Security Account e.g. EPFO / ESIC).
(+) Interest (+) Operating Surplus, Mixed Income. (Because in a family run farm / enterprise it is difficult to separate income and profit, unlike a corporate balance sheet)
(+) Profit
(+) Rent (+) Consumption of fixed assets during production
Total= “GDP at Factor Cost” Here total is called “GVA at Factor Cost”

 

GROWTH RATE &GDP DEFLATOR
  • Growth Rate (%) = [GDP (Present year – Last Year) / Last Year] x 100
  • But, quantitatively the production may not have improved (From 1 kg garlics to 2 kg garlics), and only because of inflation in the prices (₹ 10/kg garlic to ₹ 100/kg) the growth rate may be appear high.
  • Therefore (to remove the inflation impact on growth rate), we must select a base year, and convert the current prices to constant prices.
  • The ratio of these GDPs is called ‘GDP deflator’, it presents a picture of inflation like CPI and WPI but, unlike CPI & WPI it’s not based on a fixed basket of commodities.
  • These figures are revised as the new data arrives / previous data is cross verified & corrected.
  • g. 2019-Jan – NSO says 7.2% growth forecasted for 2018-19 (ending at 31 march 2019), then in 2019-Feb revises it downwards to 7.0%, then 2020-Jan = it says 6.8% (this figure given in Economic Survey 2020), then 2020-Feb NSO says 6.1% was the growth rate in 2018-19
  • NSO will also prepare quarterly growth rates (compared to previous quarters) and then engage in upwards / downwards revision.
  • Similarly, RBI, IMF, Rating Agencies will forecast & then revise it upwards and downwards.

 

GDP replaced GVA (2018)
  • While GVA gives a picture of economy from the producers’ side or supply side, the GDP model gives the picture from the consumers’ / demand side perspective. (Because it considers Indirect taxes and subsidies).
  • Therefore, from 2018-April, RBI decided to use GDP instead of GVA to measure the economic activities for its policy making & big data analytics.

 

GDP AND BACKSERIES CONTROVERSY
  • During Manmohan Singh govt (PM), GDP base year was 2004-05.
  • In 2015, PM Modi changed GDP base year to 2011-12. Then, Manmohan Singh govt. updated / re-adjusted GDP figures as per the new base year.
  • The (new) GDP-data thus re-produced for 2005-2011 is called “Back series” data.
  • In August 2018: National Statistical Commission (MoSPI) → Committee on Real Sector Statistics under the Chairmanship of Dr. SudiptoMundle discussed various approaches to prepare such Backseries.
  • In November 2018, NITI released backseries data, showing UPA/Congress times GDP growth was pathetic.

 

Critiques alleging “Methodology is misleading, and MoSPI/CSO should have released the report. NITI Aayog should not have released it on their behalf. So, it’s all Modi govt’s manipulated data just to show his growth figures are higher.”

Average Growth rate Base year

2004

Base year 2011
UPA-1 era (2004-09) 8.1% ~ 6.7%

(using Backseries)

UPA-2 era (2009-14) 7.0%

 

~ 6.7%

(using Backseries)

Modi-era

(2014-2018*)

N/A

 

~ 7.4%

 

Economic Survey 2020: India GDP is not overstated.

2015à India changed its GDP Base year from 2004 to 2011. It was done to comply with the System of National Accounts (SNA-2008) of the United Nations.

Using 2011 as base year prices, India’s-
Average annual GDP growth rate was approximately 7% (2011 to 2016).
Average annual GDP growth rate was approximately 7.5% (for the last five years that is 2015-2019).
2019-March: Former RBI Governor Raghuram Rajan expressed doubt over India’s 7% growth rate. He felt it was overstated.
2019-June: Former CEA Arvind Subramanian published a research paper:

·         He compared the growth rate figures against India’s exports, imports, loans to industry, petroleum consumption, railway freight traffic, electricity consumption, etc.

·         He did not find strong evidence of 7% GDP growth. He estimated it’s only 4.5%.

·         That means, India’s growth rate has been overestimated by 7.0-4.5 = 2.5%.

·         So, if Raghuram Rajan & Arvind Subramanian are right then either:

a)      The Government’s data collection methodology is wrong and/or

b)      Collected data is manipulated / doctored.

 

ES2020: CEA Subramanian K. has dedicated a entire chapter to prove how above criticism (By Raghuram Rajan and Arvind Subramanian) is invalid.

  • First rough estimate of National Income was done by Dadabhai Naoroji for 1867- 68; published in his book Poverty and Un-british rule in India (famous for its Drain of Wealth theory)
  • First scientific estimate made by Prof V K R V Rao (1931-32)
  • GoI estimated the National Incomefor the first time in 1948-49 through the Ministry of Commerce
  • National Income Committee was set up in 1949 (Chairman – Dr P C Mahalanobis)

 

Shifting base years to 2017 & 18

2018-Feb: MoSPI declared that it’ll ‘initiate’ steps to change base years:

 

Indicator

 

Present Base year

 

Proposed New Base Year from 2019
GDP & IIP 2011 2017-18
CPI 2012 2018-19

 

This is proposed to ‘accommodate’ the changes take place in the economic scenario of the country (e.g. GST, Demonetization, RERA).

 

CRITERIA FOR SELECTION OF BASE YEAR
  • Normal year – neither too high nor too low
  • Latest possible year
  • Relevant data for that year should be readily available

 

CITY-LEVEL GDP (PROPOSED)
  • In 2018, the Ministry of Housing and Urban Affairs (MoHUA) asked the Economist Magazine’s EconomistIntelligence Unit (EIU) to prepare feasibility of calculating City level GDP for Indian cities.
  • This can help the municipal administrators to know the economic potential of their area, and decide municipal property tax rates & user fees; development projects for water / sanitation / transport / infrastructure accordingly.

 

ECONOMIC (BUSINESS) CYCLE
  • Business cycles are fluctuations in economic activity that an economy experiences over a period of time.
  • Business cycles are generally measured using the rise and fall in the real gross domestic product (GDP) or the GDP adjusted for inflation.
  • It is also known as the economic cycle or trade cycle.
  • The stages in the business cycle includeàexpansion, peak, recession or contraction, depression, trough, and recovery.
  • Business cycles are measured by the National Bureau of Economic Research in the United States

 

Expansion
  • This is the first stage.
  • When the expansion occurs, there is an increase in employment, incomes, production and sales.
  • The economy has a steady flow in the money supply and investment is booming.
Peak
  • Peak is when the economy hits a snag,having reached the maximum level of growth.
  • Prices hit their highest level, and economic indicators stop growing.
Recession Phase
  • From peak prosperity to moving downwards.
  • Usually evident from continuous negative growth rate for two successive quarters (6 months).E.g.USA 2007-09 in the aftermath of Subprime crisis
Depression Phase
  • Severe and long lasting Recession e.g. USA 1929-39 in the aftermath of stock market crash.
  • It resulted in great fall in GDP, income, employment, industrial production, and wholesale-retail sales.
  • Consumer confidence and investment levels also drop.
Trough

 

  • This period marks the end of the depression, leading an economy into recovery.
Recovery
  • The economy starts to turn around.
  • Low prices spur an increase in demand, employment and production start to rise, and lenders start to open up their credit coffers.
  • This stage marks the end of one business cycle.

 

Notable recessions in the past:
  • The Post-War Recession: (November 1948 – October 1949) – As returning veterans returned to the workforce in large numbers to compete for jobs with existing civilian workers who had entered the workforce during the war, unemployment began to rise.
  • The Oil Crisis Recession: (November 1973 – March 1975) – This long, deep recession was brought on by the quadrupling of oil prices and high government spending on the Vietnam War, which further led to stagflation and high unemployment.
  • The Iran/Energy Crisis Recession: (July 1981 – November 1982) – This long and deep recession was caused by the regime change in Iran, which exported oil at inconsistent intervals and at lower volumes, forcing prices higher.
  • The Gulf War Recession: (July 1990 – March 1991) – Iraq invaded Kuwait. This resulted in a spike in the price of oil in 1990, which caused manufacturing trade sales to decline.
  • The 9/11 Recession: (March 2001 – November 2001) – The collapse of the dotcom bubble, the 9/11 attacks contributed to this relatively mild contraction of the U.S. economy.
  • The Subprime mortgage crisis/ Great Recession: (2007) – It was a period of marked general recession observed in national economies globally. It was concluded as the most severe economic and financial meltdown since the Great Depression by the IMF. The emergence of sub-prime loan losses in the US in 2007 began the crisis and exposed other risky loans and over-inflated asset prices.

 

COVID 19 and recession:
  • According to the latest United Nations Conference on Trade and Development (UNCTAD) analysis, the world economy will go into recession due to the coronavirus pandemic.
  • The commodity-rich exporting countries will face a $2-$3 trillion drop in investments from overseas in the next two years.
  • This would spellserious trouble for developing countries, with the exception of China and India.
  • However, an explanation as to why and how India and China will be the exceptions is not given in the report.
  • Fiscal and forex constraints are bound to tighten further over the course of the year.
  • UNCTAD has hence called for a $2.5 trillion rescue package for these nations.

 

POST-COVID19:V-SHAPED RECOVERY FOR INDIA
  • If GDP growth suffers a sharp economic decline→ then quickly recovers. So graph will appear “V- shaped“.
  • 1918- 1920: Spanish Flu: USA growth falls to (3.5%)→after wards quickly recovers to(7.5%)=V-shaped recovery.
  • 2020:CEASubramanian K. predicts, “History will repeatit self for India-If Coronavaccine is found sooner.”

 

GDP GROWTH OF INDIA AND ECONOMIC SURVEY 2020

According to ES2020, GDP Growth rate of India & World is reducing.

Real Growth 2017-18 2018-19 2019-20 2020-21(Estimated)
India 7.2% 6.8% 5.05 = 5.8% (IMF’s world economic outlook)

>> 5.8% World Bank’s Global Economic Prospects

 

GDP GROWTH OF INDIA AND ECONOMIC SURVEY 2020
  • Protectionism in Chinaand the USA, US-Iran geopolitical tensions which have affected global trade.
  • Consequently the investment and manufacturing production has decreaseeven in the G7 and OECD group of countries. India’s not the only country suffering from exports.
  • Sharp decreasein the automobile purchase. This problem will further worsen with Bharat-6 emission norms. Such vehicles are more expensive compared to the previous models.

 

Real Growth 2017-18 2018-19 2019-20 2020-21 (Estimated)
→ 6.0-6.5% as per Economic

Survey 2019-20

World 3.8% 3.6% 2.9% 3.3% (IMF’s world economic

outlook)*

 

VIRTUOUS CYCLE OF GROWTH
  • In India, investment slowed down in the aftermath of mounting Non-performing assetsTwin balance sheet syndrome (TBS) & IL&FS-NBFC Crisis
  • Although now things are improving, but, it takes two to four years for the cycle to restart again
  • IMF research found that if there is a sudden uptake in loans, it will increaseproduction, employment and demand. But this positive effect remains only for a short term.
    • In the long term, it will cause a decrease in growth rate.
    • Same has happened in Indiaà during the mid-2000s (before the subprime crisis), the lending quantity was very high resulted into later decreasein growth.
  • According to critiques, the demonetization and GST too have harmed the growth rate but ES20 chose to remain silent on that part.

 

CHALLENGES OF DECLINING GROWTH RATE: ECONOMIC SURVEY 2020
  • US-Iran geo-political will increase crude oil price → weaker rupee → higher inflation → reduced consumption → GDP declines.
  • Even after the Insolvency Bankruptcy Code, the badloan resolution process has been very slow. Banks reluctant to give loans to the corporate sector → GDP unable to expand.
  • Government’s National Infrastructure Pipeline (NIP) aims to spend 102 lakh crore on infrastructure in the next five years. But then government will have to borrow more money → rise in fiscal deficit → crowding out of the private investors → GDP unable to expand.
  • Unless real estate developers reduce home prices, It is difficult to sell the unsold homes → Builders will not build new homes → decrease in demand of Steel and cement → GDP unable to expand.
  • 2019: India is among the top 5 economies of the world in terms of GDP at current US$ trillion i.e. USA (21 Tn$), China ($14), Japan ($5), Germany ($3.9), India ($2.9)
  • 2024-25: We plan to increase the size of our economy to 5 trillion. But to achieve this, we need 9% GDP Growth rate annually, which is rather difficult because presently we are struggling around 5% & Corona lockdown will make the matters worst.

 

Global Risk Report

World Economic Forum’s (WEF’s) Global Risks Report 2020 shows that the global risks over the coming decade. Notable risks are:

2020: weather, climate, natural disasters, biodiversity loss, water crisis, weapons of mass destruction (WMD)

2019:similar to above and cyber security , data theft, data fraud.

 

Declining Growth rate and India
  • Among the BRICS Nations, India’s growth rate is still relatively better and stable than Brazil, China, Russia.
  • Even though the GDP growth rate is falling, Bombay Stock Exchange (BSE) SENXSEX is improving. Which means both domestic and foreign investors are still investing enthusiastically in the shares of companies → Which means they are confident that the Indian economy will improve in the upcoming days.
  • By doing the quarterly growth analysis since 1996, CEA Subramanian K. found India’s business cycle is about 13 quarters.
  • Meaning, after every 13 quarters, we will achieve the highest level and then it will start to fall.
  • Presently we are at the “Fall phase”, But definitely improve after that as per the historic trend of our business cycles.

 

World Bank-ICP’s GDP series based on PPP
  • UN Economicand Social Council→United Nation’s Statistical Commission→ International Comparison Program (ICP)
  • ICP’s goal is to convert data on Purchasing Power Parities (PPPs) so GDP and price levels can compared. More on PPP.
  • 2020-JuneàWorldBankreleasednewdatasetsfor2017,usingICP.

 

GDP for 2017 Entire World #1 China #2 USA #3 India

$1= rupee 21 (PPP)

(PPP $, Trillion) 120 Trillion Abt 20 trillion Abt 20 trillion 8 trillion
% of total 1005 16.4% 16.3% 6.7%

 

Budget-2019 and $5 Trillion Economy

 

Year India’s GDP in trillion $ (Current Prices)
2014-15 1.85 trillion
2018-19 2.70 trillion
2019-20 2.90 trillion
2024-25 5 trillion targeted

 

  • 2019-Aug: GDP growth sharply fell, FPIs exiting on large scale from India. So, Finance Minister Nirmala. S announced Fiscal Stimulus.

 

  1. Rangarajan(Former RBI Governor) opinion àIndia cannot achieve 5 trillion dollar economy by 2025, because to achieve it, we will have togrow at 9-10% annually but at present we are struggling with 5-6% growth rate.

 

ES2020 strategy to Achieve $5 Trillion Economy
  • Savings – It’s the Income excess of Consumption. Subdivided into Private Savings [by households & business firm] and Public Savings by Govt organizations.
  • Investment – It’s the domestic Savings + NET foreign money which is put in Real (physical) Assets like machines, tools, buildings, office spaces, storehouses, roads, bridges, airports
  • GFCFà Gross Fixed Capital Formation Rate (GFCF) = INVESTMENT – DISPOSAL of assets (liquidation, condemnation). Thus, GFCF shows the net increase in physical assets. It does not considers depreciation, and land purchases.
  • Capital Output RatioàIt is the amount of capital needed to produce one unit of output. It depends on factors such as technological progress, prices of capital goods / machinery. In India, High Capital Ratio is among the reasons for subdued growth rates.

 

ES2018 had observed:
  • Pre-Subprime crisis, above indicators had peaked over 30% of GDP. But then falling down, then struggling zig-zag.
  • Pre-subprime crisis our growth rate was in peak 9%, presently struggling in ~7% range.
  • Some countries take as much as 17 years to come out of such crisis.
  • If we want to quickly recover, & bring our growth rate back to 9% then we mustincrease investment → GFCF will increase → then growth rate will automatically increase → savings will automatically increase.

 

 

Increasing Investment / GCFC: should be our urgent priority:

·         Resolve TBS,

·         Encourage Make in India & Startup India,

·         Reforms in Tax Laws,

·         Labour Laws,

·         Environment Clearance,

·         Faster FDI approval etc.

Increasing / mobilizing savings is important but should not be our urgent priority: ·         PMJDY,

·         Pension-Insurance schemes,

·         Sovereign Gold Bonds,

·         Unearthing black money,

·         Demonetization etc.

 

Economic Survey 2019 also reiterated the similar theme, that private investment is necessary for boosting growth.

 

Q. Economic growth in country X will occur if______(CSE-2013)

  1. There is technical progress in the world economy.
  2. There is population growth in X.
  3. There is capital formation in X.
  4. The volume of trade grows in the world economy.

 

 

Q. Despite being a high saving economy, capital formation may not result in significant increase in output due to____________(CSE-2018)

  1. Weak administrative machinery
  2. Illiteracy
  3. High population density
  4. High capital-output ratio

 

$5 Trillion Economy and strategy of NITI to Achieve

  1. Increase the Gross Fixed Capital Formation (GFCF) from present 29% → 36% of GDP by 2022-23. To increase Public Sector and/or Government led-investment:
    • Must improve Tax:GDP by combating tax evasion and tax avoidance.
    • Must decrease Revenue deficit by combating Subsidy leakage through JAM-trinity.
    • Government has to exit from loss making public sector enterprises.
    • To mobilize private households’ investment– PPP for Infrastructure.
    • To mobilize domestic & foreign companies’ investment – Addressing the NPA crisis, reforms in the FDI policy, Ease of Doing Biz etc.
    • Greater coverage in Sovereign Gold Bond, Jan Dhan Account, Pension-Insurance schemes etc; Preventing Ponzy& Chit Fund scams.

 

  1. Increase India’s growth rate to 9- 10%. Increase size of Indian economy (GDP) to $5 trillion USD.For this we must increase our ‘Net Exports’:
    • Address various bottlenecks in our agriculture and manufacturing sector.
    • Ease the complex labour and land laws.
    • Industrial Revolution 4.0, artificial intelligence, IoT etc.
    • Skilling Youth, increasing female participation in labour force.
    • Renewable energy to decrease import bill.
    • Trade agreements with like-minded countries & regional blocks

 

5 Trillion economy: Conclusion
  • Higher economic growth can help increasing employment avenues for citizens & tax revenues for the Governments.
  • Collectively, this results in improved living standards through higher expenditure on health & education by both the citizens and the State.
  • Therefore, we must leave no stone unturned to accomplish above targets / address above challenges on priority basis.

 

Wealth Creation and ES2020
  • Until the entry of Europeans, India has been the dominant global economic power.
  • Then our GDP growth started to decline during British Raj and Nehruvian Socialism.
  • But since 1991’s LPG reforms, again we are back on track.

 

Benefits of wealth creation by private entrepreneurs: ES2020

 

  • Employees, suppliers, retailers à Increase income, jobs and employment opportunities.
  • Government àEnhancing and broadening of tax collection
  • Common citizen à Increased quality of roads, schools, hospitals created through the tax revenue

 

Ancient and modern thinkers/economists to suggest how to broaden our wealth: CEA Subramanian K

 

Thinker

 

How CEA Subramanian K. links their ideas with wealth creation
 

 

 

 

 

 

Kautilya

 

  • Kautilya’s Arthshastra book is centred around Varta(economic policy), Dandaneeti(law and enforcement), Anvikshiki(philosophical and ethical framework) and Trayi(cultural context)
  • Kautilya asked the King to remove all obstructions to economic activity and provide economic freedom to the citizens.
  • So, incumbent govt should also focus on Ease of Doing Biz
 

 

Thiruvalluvar Tamil poet and philosopher

  • Thiruvalluvar’sThirukural book advocates wealth creation through ethical means.
  • Govt should provide equal opportunity for new entrepreneurs, incumbent govt should avoid Pro-Crony policies of Manmohan Singh Govt.→ improve EoD.
  • There should be no shame in privatization (Strategic disinvestment) of the government companies, Because after privatization their profitability has increased.
 

 

 

 

 

Adam Smith

(Father of Economics)

 

  • Adam Smith’s book ‘An Inquiry into the Nature and Causes of Wealth of Nations’ described “Invisible hand of the free market is instrumental in economic growth”.
  • But Government intervention in free market often harms more than it helps.
 

 

 

 

 

 

 

 

 

 

 

 

 

David Hume, Scottish Philosopher

  • “We should assume every man is a dishonest person, his actions are always driven by private interest. So, effective supervision required”.
  • So, we’ve to regulate the Shadow banking sector more vigorously.
  • We must deal with the wilful defaulters responsible for the high level of NPA.  Use Artificial intelligence, Machine Learning etc. also envisaged and create PSBN network.
  • ·         American Share market regulators has 15x times the number of employees than SEBI. So, we also need to increase manpower in regulatory bodies.
 

 

 

Motivation

  • Maslow’s Motivational Pyramidà “Individuals are not driven just by physical / material, but they also have needs of self-esteem and self-actualization”.
  • Confucius: “if Government guides the people with penalties → they’ll shamelessly evade the law. But if the Government guides them with virtue → people will become upright.”
  • Therefore we should use the ideas of behavioral economics to increase their morale to: Give up subsidies andHonestly pay taxes
 

 

 

 

 

 

 

 

 

 

 

 

Trust

  • Adam Smith’s book ‘The Theory of Moral Sentiments’ described, “while people are sometimes selfish, they also derive pleasure from seeing the happiness of others.
  • Absence of such mutual sympathy / trust can result in financial disasters, as seen in Subprime Crisis, Global Financial Crisis, India’s NPA & Wilful defaulters.
  • So, trust is a ‘public good’ similar to ‘public park’– everyone benefits from it. Government &entrepreneurs should try to build trust with citizens and with each other.

 

Economic Policy Uncertainty and ES2019
  • Economic Policy Uncertainty Index (EPU) index Started in 2016, by three US-based economists—Scott Ross Baker, Nick Bloom and Steven J. Davis.
  • They capture countries’ newspapers’ headlines related to economic policy uncertainty, and then rank the nation accordingly.
  • 2011-12: economic policy uncertainty was the highest in India.
  • 2G Scam, Coal allocation scam, Subprime Crisis, Global Financial Crisis.
  • During this time, the government did not take the corporate friendly reform decisions or reverted its original decisions fearing the media scrutiny, judicial scrutiny, protest by the labour unions.

 

Economic Policy Uncertainty (EPU) Index

  • EPU index has been developed by Baker, Bloom and Davis.
  • The index is created by quantifying newspaper coverage of policy-related economic uncertainty.
  • The index reflects the frequency of articles in leading newspapers that contain ‘economic’ the following or triple: ‘economy”; ‘uncertain’ or ‘uncertainty”; and one or more policy related words like ‘fiscal policy’, ‘monetary policy’, ‘PMO’, ‘parliament’ etc.

 

  • 2016-17: increased due to Demonetisation, GST. But during this stage it was not as bad as the uncertainty during 2011-12.
  • From 2014 onwards India’s EPU has declined although in a zigzag manner with occasional spikes during Demonetization – GST etc. Whereas Global EPU has increased in zigzag manner- due to the Policies pursued by Donald Trump, BREXIT, Iran, N.Korea, OPEC, Trade war between USA and China etc.
  • During high EPU: domestic investors hold up their decision to invest into financial market. They prefer to invest in gold (large BOP), land / real estate (Black money). FPI inflows decline during are volatility of exchange rate.
  • However, the relationship between FDI growth and volatility of exchange rate is weak. Because Foreign Direct Investors are entering a market for long term. They look at multiple factors beyond just the exchange rate. They look at taxation, monetary policy, consumer sentiment etc. all which are reflected by EPU.
  • Low growth of FPI, FDI = Corporates are deprived of the new capital from the domestic and foreign investors → it affect the factory expansion, job creation and GDP growth.

 

Addressing  Economic Policy Uncertainty (EPU): ES2019

Reducing economic policy uncertainty is critical for both domestic investment and foreign investment. Therefore, ES2019 suggested following reforms:

 

 

 

 

 

 

Makingpolicies more predictable

 

Top-level policymakers must ensure that their policy actions are predictable. E.g.

1.      From which date Bharat Stage emission norms will become effective?

2.      From which date GAARor E-Way Bill will become effective?

Union Budget (2016) proposed to impose income tax on the money withdrawn by subscriber from his EPFO fund. Later, due to labour unions backlash it was reverted.

 

Union Budget (2019) proposed to hike surcharge on the income tax of super-rich, then due to a backlash by foreign investors, it was reverted.

 

 

 

Respect boundaries

 

Judiciary, legislature and executive should respect each other’s boundaries. Executive and legislature should not create a vacuum which could encourage Judicial Overreach such as firecracker ban, or no selling of liquor on highway hotels, which may create new challenges in economy.
 

 

 

 

 

 

 

 

 

 

 

 

Keep consistency in promises

 

Government / Regulators should maintain broad consistency in actual policy with the forward guidance. They should reduce ambiguity/arbitrariness in policy implementation. E.g.

1.      2018-Dec: Monetary policy Committee keeping “Calibrated Tightening”. Means in the next meeting they would either ‘hold’, or ‘increase’ repo rate. No chance of cutting the repo rate. Yet in 2019-Feb, they cut the repo rate.

2.      Similarly, Government should avoid changing the goalposts and deadlines of Fiscal Responsibility and Budget Management Act. Then consistency becomes hard to find and harder to follow.

 

 

 

 

 

 

 

 

 

 

 

 

 

Monitoring Policy implementations

 

 “What gets measured gets acted upon”. Therefore, Government must monitor its performance in the Economic Policy Uncertainty Index on a quarterly basis. We should construct India-specific sub-indices of economic uncertainty To monitor our performance.

The actual implementation of policy occurs at the lower levels, where ambiguity gets created and it compounds the economic policy uncertainty. Therefore, staff should be trained and implementation processes should be certified (by NITI etc) before implementing policy.

Poorly drafted laws full of ambiguities, amendments, clarifications and exemptions = endless litigation. E.g. Provisions related to Capital Gains Tax in the Income Tax Act 1961: Vodafone-Hutch case.

Policy Uncertainty: Conclusion
  • Indian faces economic uncertainty from many fronts which are beyond our control e.g. Poor monsoon, BREXIT, OPEC Oil cuts, Geopolitical disturbance in the Korean Peninsula and Western Asia (Iran), protectionism and tariff wars.
  • While policymakers cannot control above ‘economic and diplomatic uncertainties’, they can definitely control economic policy uncertainty.
  • Successive economic surveys have found that greater private investment is necessary for economic growth in India. EPU can spook investors and spoil the investment climate in the economy, therefore Government must strive for 100% policy certainty on the economic fronts.

 

$5 TRILLION ECONOMY AND ATMA-NIRBHAR BHARAT
  • 2020-March: Government of India initiated nation-wide lockdown to prevent the spread of Corona/COVID-19 pandemic.
  • This lockdown affected the in come and livelihood of everyone from corporate companies to common citizens of India.
  • Therefore,to revive the economy ,PrimeMinister of India launched AtmaNirbharBharat stimulus package in 2020-May to revive the Indian economy.
  • It’scentred on five pillars of– Economy, Infrastructure, System, Demand and Vibrant Demography

 

Country Japan Malaysia Singapore India
Stimulus package as a % of GDP 20% 16.2% 12.2% Just 10%

 

If govt. tried to give bigger fiscal stimulus then-
  • Rise in Fiscal Deficit will result into low rating by Credit Rating Agencies. This has impact on Flight of Foreign Investors
  • Currency exchange rate volatility.
  • If the deficit is monetized by RBI printing more currency → demand side inflation like Post-WW1.

 

Conclusion
  • Thus, Atmanirbharbharat focuses on the well-being of the poors, credit to MSME, ease of doing biz for the corporate sector, reforms in agriculture and catalysing the development of infrastructure.

 

GNP TO NNP TO PER CAPITA INCOME
  • Primary income (or factor income) = wages, interest, profit, rent
  • Secondary income (or transfer payments) = gifts, donations, charities, fines
  • GNP is the total value of final goods and services by normal residents of India within an accounting year.
  • GDP includes the contribution made by non-resident producers – who work in the domestic territory of other countries – by way of wages, rent, interest and profits. For example, the income of all people working in Indian banks abroad is the factor income earned abroad.
  • Net factor income from abroad is the difference between the income received from abroad for rendering factor services and the income paid for the factor services rendered by non-residents in the domestic territory of a country.

 

GNP= India’s GDP + Primary income earned by residents from overseas- Primary income earned by non-residents from India.

 

In brief, GNP (Market Prices) = GDP + NFIA (net factor income from abroad).

 

  • GNP ignores secondary income, the incomes from sale of second hand (used) goods.
  • Whenever something is produced, capital assets get consumed due to wear and tear. This wear and tear is called Depreciation. Since, depreciation does not become part of anybody’s income, so it has to be subtracted.

 

Net National Product (NNP at Market Price) = GNP – Depreciation.

 

Net Domestic Product (NDP) = GDP – Depreciation

 

  • However, here we are getting the NNP at ‘Market Prices’. We’ve to convert it to Factor cost.

 

NNP (Factor Cost) = NNP (Market Price) (-) Indirect Taxes (+) Subsidies.

 

  • Theoretically ‘net’ is a better measure of the health of an economy than ‘gross’ but it is difficult to estimate net values. So GDP & GNP are commonly used measures .

 

Per Capita Income (प्रति व्यक्ति आय) 2016 2017 2018-19 2019-20*
Population in Crores 129 131 >133cr >134cr
Per capita income @ Current Prices 104659 114958 >126000 >135000
At t Constant Prices (@BaseYear2011) 82931 87623 >92000 >96000

 

NET ECONOMIC WELFARE
  • The major problem of GNP as a measure of welfare is that it measures the commercial transactions taking place in the economy while the welfare of the individuals depends on many other non- transactional aspects.
  • This concept of NEW was popularized by Paul Samuelson.
  • NEW ECONOMIC WELFARE = GNP + Housewives’ Services + Value of Leisure – Expenditure on defence – Cost of Environmental degradation.
  • Practically, it is tough to estimate this. Therefore, it was not widely adopted.

 

PER CAPITA INCOME (PCI)
  • Per capita income (PCI) measures the average income earned per person in a given area, in a specified year.
  • It is calculated by dividing the area’s total income by its total population.
  • It is not a satisfactory indicator of economic development because it increases if the overall national income increases, without regard to the composition of the national income.
  • For example, even if the govt produces a lot of weapons during war, PCI will go up.
  • It does not take into account the welfare dimension (poverty, literacy, political liberty, environment etc).

 

 

 

 

 

 

 

 

 

 

FACTOR COST (FC) Vs MARKET PRICE (MP)

  • FC includes rent, wages, interest and profit. FC is used for estimating growth (e.g. our annual GDP numbers)
  • Ø  NNP (Factor Cost) is the National Income of India
  • MP = FC + Net Indirect Taxes (taxes on goods and services )
  • Net Indirect Taxes = Indirect Taxes – Subsidies
  • Therefore, GDP at MP = GDP at FC + Net Indirect Taxes
  • GDP at MP can increase merely by increasing the taxes, even without increase in production
 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT PRICES

Vs CONSTANT PRICES

 

  • Current Values estimated at prevailing (current) prices
  • GDP at current prices is called Nominal GDP
  • Govt always gets its data in terms of Nominal GDP and then converts it to Real GDP
  • GDP at current price can increase because of inflation – not a true indicator of increase in production. So it is not used.
  • Constantà Values estimated at the prices of a base year
  • For India, the base year is 2011-12 (earlier it was 2004-05)
  • GDP at constant prices is called Real GDP
  • Growth is always estimated at constant price
  • So, when we say that the GDP growth rate of India in 2016-17 was 6.5 %, it is estimated at factor cost and constant prices.
  • GDP at Constant Prices is called Real GDP – it cannot increase without a real increase in production.

 

GDP AND NATIONAL INCOME
Gross National Income (GNI)
  • According to OECDà GNI as GDP + NET receipts from abroad (wages, interest, profit, rent) plus net taxes & subsidies receivable from abroad. Here, ‘Wages and salaries’ from abroad = ‘Guest’ workers who reside abroad for less than 12 months and whose centre of economic interest remains in their home country

 

National Disposable Income
  • National Disposable Income= NNP + Other Current Transfers from rest of the world (remittances, gift, donations etc.)National Disposable Income gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal.

 

Personal Disposable Income
  • Personal Income – Personal Tax Payments (e.g. income tax) – Non-tax Payments (e.g. fines)

 

World Development Report by World Bank
  • World Bank has published it annually since 1978.
  • 2020- theme: Trading for Development in the Age of Global Value Chains.
  • Earlier, World Bank used above income classifications for analytical purposes only. But since 2018, high income countries required to pay “extra surcharge” on loan interest by International Bank for Reconstruction and Development (IBRD).

 

Types of country Defined in terms of gross national income (GNI) per person
High Income $12,376 or more e.g. Israel (its GNI >$40,000)
Upper – Middle Income $3,996 and $12,375 e.g. China (its GNI >$9,000)
Lower – Middle Income $1,026 and $3,995; e.g. India (its GNI >$2,000)
Low Income $1,025 or less

 

LIMITATIONS OF GDP
  • Impact on environment may be harmful despite increase in GDP.
  • Only give average figure and hide stratification
  • Conditions of poor not indicated
  • Gender disparities not revealed.
  • Does not matter how wealth increase… by war or demand
  • Does not measure sustainability of growth

 

CRITICISM OF GDP & PER CAPITA INCOME
  1. GDP doesn’t give us true picture of Indian economy because:
    • Presence of unorganised sector of economy implies that, not all the production data is captured.
    • To avoid any scrutiny by income tax and GST tax officials, the businessmen deliberately show low level of production during the surveys conducted by CSO/NSSO/NSO/MOSPI.
    • Large size of parallel economy which functions on black money and cash.

 

2.Provides only quantitative picture and does not consider the qualitative aspects / negative externalities e.g. More coal based thermal power production= more GDP, disregarding how much pollution it created.

    • So, Economist Peter Wood (1980s) came up with the Green accounting & Green GDP concept to consider environmental costs as well.

3.Ignores non-marketed activitiesg. domestic work done by mother.

 

4.Ignores the Opportunity Costg. A child labour produced ₹ 25000 rupees worth firecracker annually which will be added in GDP. But, child labourer could not pursue education else he could have become a doctor/engineer and produced ₹ 5,00,000 worth of annual goods and services – such angles are not considered in computing GDP.

 

5.Ignores inequality of income among people.

    • So, later on Gross Happiness Index, Physical Quality Of Life Index, Human Development Index etc were invented.
Two data collection agencies in India

 

 

Central Statistical Organisation (CSO)

  • Estimates National Income
  • CSO with new series of national accounts with 2011-12 base year for computing size of economy growth.
  • It includes data on unorganised manufacturing and services.
 

National Sample Survey Organisation (NSSO)

  • Collects data on employment, poverty, consumption, expenditure, etc
  • Sample Surveys conducted annually, but Large Sample Surveys conducted every 5 years .

 

Economic Growth Vs Economic Development

 

Growth If the production of goods and services increases, we call it Economic Growth
 

 

 

Development

It means that process of Economic Growth which leads to improvement in the general welfare of people is called Economic Development. It means progressive changes in the socio-economic structure of the country.

 

Sustainable Development is development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs.

 

GROWTH

Increase in production

  • Quantitative
  • Uni dimensional
  • Indicator are real GDP and real per capita income
  • Can happen without development

DEVELOPMENT

  • Increase prod. And welfare
  • Qualitative
  • Multi dimensional
  • Indicator are human development index, physical quality of life index, net economic welfare Cannot happen without growth

 

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if_______________(CSE-2018)

  1. Industrial output fails to keep pace with agricultural output.
  2. Agricultural output fails to keep pace with industrial output.
  3. Poverty and unemployment increase.
  4. Imports grow faster than exports.

 

 

PREVIOUS YEAR QUESTIONS

 

2019 Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in 2019 good shape? Give reasons in support of your arguments.
2019  ‘In the context of neo-liberal paradigm of development planning, multi-level planning is expected to make operations cost effective and remove many implementation blockages.’-Discuss.
2018 How are the principles followed by the NITI Aayog different from those followed by the erstwhile Planning Commission in India?
2017 Among several factors for India’s potential growth, savings rate is the most effective one. Do you agree? What are the other factors available for growth potential?
2015 The nature of economic growth in India in described as jobless growth. Do you agree with this view? Give arguments in favour of your answer.
2014 Capitalism has guided the world economy to unprecedented prosperity. However, it often encourages short-sightedness and contributes to wide disparities between the rich and the poor. In this light, would it be correct to believe and adopt capitalism driving inclusive growth in India? Discuss.

 

INDICATORS – INFLATION
  • Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads:
    1. Increase in demand
    2. Reduced supply.
  • Deflation is inverse of above definition. Deflation occurs when the inflation rate falls below 0%

 

E.g.Suppose for Rs.100, last week you bought 10 pen. This means that the cost of 1 pen was Rs. 10. This week when you approached the same shop- keeper and paid Rs.100 to get 10 pen, he gave only 5 pen. He also explained that the price of pen has increased, and now the price of one pen is 20.

 

INFLATIONARY AND DEFLATIONARY GAPS

In his book “General Theory on employment, interest, money”, British Economist J.M.Keynes (1883) said, “when economy is functioning at full employment, aggregate supply will match aggregate demand.” At this equilibrium, we will have ‘General Price’ level → any increase → inflation, any decrease → deflation.

 

Aggregate Demand = Consumption(C) + Investments(I) + Govt Purchases (G) + {Exports (X) –– Imports (M)}

Inflationary Gap

It could have occurred because of:

  • ↑ Money supply
  • ↑ Propensity to consume
  • ↑ Investment expenditure
  • ↑ Fiscal deficit
  • ↑ NET exports
  • High growth → higher Aggregate demand → could lead to inflation.
Deflationary Gap

It could have occurred because of

  • ↓ Money supply
  • ↑ Propensity to save / Consumer delaying purchase with hopes of further fall in prices
  • ↓ Investment expenditure
  • ↑ Fiscal consolidation
  • ↓ NET exports
  • Depression / Recession that results into falling ‘Aggregate demand’.

 

Deflationary gapà Aggregate supply > Aggregate demand (at full employment level)

 

 

 

Inflationary Spiral

When inflation increases, workers demand higher wages to keep up with the cost of living → firms pass these higher labor costs on to their customers → higher prices → more inflation → ……
 

 

Deflationary Spiral

 

 

Fall in prices → lower profit to firm → lower production, lower wages / workers laid off → lower demand → lower prices → and same cycle goes on.

 

Q. A rise in general level of prices may be caused by___________________________(CSE – 2013)

  1. An increase in the money supply.
  2. A decrease in the aggregate level of output.
  3. An increase in the effective demand.

Answer Codes:

(a) 1 only

(b) 1 and 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

 

 

Q. Economic growth is usually coupled with__________________________(CSE – 2011)

  1. Deflation
  2. Inflation
  3. Stagflation
  4. Hyperinflation

 

 

INFLATION: TYPES BASED ON CAUSATION

 

 

 

Demand Pull Inflation

It is “too much money chasing too much goods”. Prices are rising because people have excess money à demands for goods and services exceeds the available supply. MGNREGA, pay commission, PM KISAN scheme, Universal Basic Income (UBI) could result into this.
Monetary inflation When RBI printing of more money results in inflation
 

 

 

Cost-Push Inflation

 

Price rise due to increased cost of inputs e.g.

–  Expensive crude oil → higher costs for Transport Companies.

–  Trade / labour unions’ protests / strikes → wage hike.

–  Natural disasters → Lower potato / chilly production → Chips makers have to pay more for inputs.

 

Profit – Push Inflation

 

When Cartels / Monopolists / Oligopolists deliberately cut down the supply / production or hike the prices because of greed / profit motive. E.g. OPEC group oil production cut.
 

 

 

Built-in-Inflation

 

Linked to the “price/wage inflationary spiral” i.e. when inflation rises, workers demand higher wages to keep up with the cost of living → firms passing these higher labor costs on to their customers as higher prices → more inflation.
 

 

 

Repressed Inflation

 

During war, Govt imposes price controls and rationing to keep prices under check. But the moment such controls are withdrawn, prices will go up (because traders will want to cover up their previous losses by raising prices). This is called Repressed Inflation.
 

Stagflation

 

Persistent high inflation, high unemployment and low growth resulting into a stagnant economy.
 

 

Skewflation

 

Term to denote episodic price rise in one / small group of commodities while Inflation in the remaining goods and services remain usual. E.g. pulse / tomato / onion inflation in India.
 

Headline Inflation

 

It is the measure of the total inflation within an economy, usually presented in the form of CPI or WPI.
Core inflation

 

Headline inflation minus inflation in food & energy articles. Accordingly, it can be CPI (Headline) or WPI (Headline).
 

 

 

 

Reflation

 

Philip curve we learned that deflation → unemployment, so, RBI tries to stimulate economy by increasing the money supply, Govt tries to give ‘fiscal stimulus’ by reducing taxes / increasing public procurement…. Such actions take economy from deflationary path towards inflation path, this is process is ‘Reflation’.
 

 

 

 

 

 

 

Structural Inflation

 

Inflation that is part of a particular economic system. A complete change in economic policy would be needed to get rid of it. e.g.

–  To keep farmers happy, Govt keeps raising MSP for wheat / rice but not so much for pulses → inflation in pulses.

–  APMC reforms not taken → cartelization & hoarding → inflation in vegetables.

–  When global crude prices are falling, Govt raises Excise / VAT to get more money for their schemes, so, petrol-diesel not getting cheaper & so on…

Hoarding inflation

 

Accumulation of huge quantities of goods and releasing them into the market in condition of scarcity at higher prices.
Imported inflation: Country depends on imports has its prices rising due to exchange rate.

 

Implications of Stagflation for policy making

Stagflation is considered to be a problematic condition for governments to handle. This is because;

  • It presents a situation when despite of low demand the prices keep going up.
  • When an economy is in recession, the governments try to revive the economy by cutting interest rates or increasing government spending to put boost the demand, which leads to inflation.
  • However, these inflationary measures cannot be applied in stagflation because inflation is already very high and such measures would further result in prices spiralling out of control.

 

INFLATION TYPES BASED ON SPEED OF INCREASE

 

Creeping Inflation: ~4% per annum. It’s regarded safe and essential for job creation and economic growth.
Walking / Trotting Inflation: Over 4% onwards → Running Inflation is when it shifts to double digit.
 

 

 

 

Galloping / Hyperinflation:

Very high level. 20%-100% and sometimes even 10,000% or more, as observed in Germany after Treaty of Versailles due to monetized deficit. Modern day Venezuela and Zimbabwe due to mis-governance of ruling parties resulting into broken economy & shortage of essential commodities. Here, money becomes quite worthless and new currency may have to be introduced.

 

Q. Which one of the following is likely to be the most inflationary in its effect? (CSE – 2013)

  1. Repayment of public debt
  2. Borrowing from the public to finance a budget deficit
  3. Borrowing from banks to finance a budget deficit
  4. Creating new money to finance a budget deficit

 

Base Effect of Inflation
  • Suppose price of 1 kg tomatoes = 100 (2010), 110 (2011), 120 (2012). So, as such their price is increasing at the rate of ₹ 10 per year.
  • However, the percentage rise in inflation over previous year is 10% for 2011 (110 vs 100), and 9.09% for 2012 (120 vs 110).
  • Thus, the choice of base (denominator) could make the inflation look too high or too low even if the price rise has been same as the same.

 

Q. A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?(CSE-2011)

  1. It is the impact of drastic deficiency in supply due to failure of crops
  2. It is the impact of the surge in demand due to rapid economic growth
  3. It is the impact of the price levels of previous year on the calculation of inflation rate
  4. None of the statements

 

EFFECTS OF INFLATION ON INDIVIDUALS

 

Effect During Inflation During Deflation
 

 

 

On

Businessman, Borrowers

 

They make huge profits because the price of final product is rising at a much faster speed than the price of raw materials. They make losses because prices of final products fall faster than the cost of production→ lay-off workers to cut salary bill.
 

 

 

 

 

 

On

Fixed Income

Groups, Lenders

 

Salaried individual, pensions suffer.

 

Lenders suffer because even if borrowed money is returned their ‘real Purchasing Power’ would have declined due to the fall in Real Interest Rate.

While they will benefit because the value (purchasing power) of money will increase, but some workers / employees will lose their jobs during deflation as per the Philip Curve.
 

 

 

 

 

 

Currency itself

 

Since rupee’s purchasing power will decline, its exchange rate value will weaken against foreign currencies, as foreigners get less keen to buy from India. Reverse will happen.

 

 

Q. Find correct statement(s): (CSE-2013)

  1. Inflation benefits the debtors.
  2. Inflation benefits the bondholders.
  3. Both A and B
  4. Neither A nor B

 

IMPACT OF INFLATION
Positive Impact:
  • Inflation is good for the economy upto reasonable limits. This according to RBI is 5%.
  • Moderate inflation stimulates growth.
  • Moderate inflation allows adjustment of prices.
  • Moderate inflation allows adjustment of real wages.
  • Inflation may reduce the severity of economic recession.
  • Tobin effect- can increase the investment.

 

Negative Impact
  • Real income of people would decrease.
  • Inflation is regressive in nature.
  • Would increase income inequalities.
  • Capital formation is adversely affected.
  • Interest rates were increased by RBI.
  • Promote hoarding and speculation. Thus Promotes generation of Black Money.
  • Standard of living would reduce.

 

COMBATING INFLATION OR DEFLATION

 

Agency Fighting inflation Fighting deflation
 

RBI

 

Tight / dear / Hawkish Monetary Policy to make the loans expensive Cheap / Easy / Dovish – to make loans cheaper
 

 

 

 

 

 

 

 

 

 

Govt

 

Tax deduction / exemption / subsidy benefits towards producers to decrease the cost of production. Curtailing Fiscal Deficit.
Curtailing schemes and subsidies that are increasing money in the hands of beneficiary without increasing production.Ordering RBI to issue inflation Indexed Bonds, Sovereign Gold Bonds
Essential commodities act, Stock limits, minimum export price, FCI’s Open Market Sale Scheme, Operation Greens for TOP, Price stabilisation fund, Offering higher MSP to farmers to increase cultivation of a particular crop etc.
Tax deduction / exemption / subsidy type benefits to consumers to encourage purchase / consumption. (e.g. cut GST on Television, Computers, Cars) Increasing the expenditure on public projects e.g. highway, dam etc. to boost demand in steel / cement industry → workers get money → demand → towards inflation .

 

CPI, WPI, IIP & OTHERS

 

 

 

 

Laspeyre

German economist Etienne Laspeyres formula is used in calculation of WPI, CPI and IIP index. It is a weighted arithmetic mean (average) of a basket of commodities that tracks price / production level against the base year.
 

Paasche Index

German economist Hermann Paasche’s index tells us what today’s “Basket” of commodities, would have cost at the base year’s price.
 

Fisher Index

 

American Economist Irving Fisher’s index is the Geometric mean of (Laspeyrese and Passche), to give a more accurate picture.

 

INFLATIONINDICES
Inflation Index Agency Base year
Consumer Price Index: 1) Rural

2) Urban

3) All India.

 

 

 

 

NSO, MoSPI

 

2012

 

Consumer Food Price Index (CFPI)

 

2012

 

CPI Industrial Workers (IW)

 

Labour Ministry’s Labour Bureau

 

2001
CPI Rural labourers (RL),Agri. labourers (AL)

 

1986
Wholesale Price Index (WPI)

 

Economic Advisor to DPIIT, Commerce Ministry 2011

 

Q. Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers?(CSE-2015)

  1. The Reserve Bank of India
  2. The Department of Economic Affairs
  3. The Labour Bureau
  4. The Department of Personnel and Training

 

CPI (All India), NSO and Base Year: 2012
Monthly CPI Components in (All India) Index → (decreasing order) Wt.

 

Food & Beverages 45.86
Services: (Transport & communication > Health > Education > Recreation) 20.62
Housing 10.07
Fuel & Light 6.84
Clothing / footwear 6.53
Misc. Personal care (soap etc) 3.89
Household goods & Services 3.80
Pan Masala, Tobacco, Intoxicants 2.38
Total Weight 100

 

For Individual CPI for Urban and Rural areas, these weights are assigned differently. E.g. CPI rural has zero weight to housing & 54.18 weight to food and beverages.

 

Headline CPI The inflation figure arrived based on all of the above components of CPI (All India).
Core CPI Headline CPI Minus Inflation in food & energy)

 

Inflation rate %: how is it calculated?

Index value of Headline CPI (All India) was 148.6 (2019-Nov) and 140.8 (2018-Nov). Therefore,

Trend
  • CPI was towards Inflationary path in UPA/Manmohan era.
  • CPI was towards Deflationary path during Modi 1.0 era (2014-19)- mainly due to falling food prices. Food commands ~46% weight in CPI calculation.
  • Modi 2.0 era (2019-May onwards): back to inflationary path due to oil, onion etc.

 

Wholesale Price Index, EA-DPIIT, Base: 2011

 

Monthly WPI Components in descending order → Wt.
Manufactured products: Processed Food, Edible Oil, Paper Products, Chemicals, Plastic, Cement, Metal Products, Transport Equipments etc. -64%
Primary Articles:

A. (Unprocessed) food articles, eggs, meat-fishes, oil seeds etc. (~19%)

B. Crude Petroleum (~2%)

C. Minerals (-0.8%)

-23%

-13%

 

 

Fuel & Power: High Speed Diesel (HSD) > Petrol > LPG -13%
Total 100

 

WPIà Monthly growth is zigzag although towards deflationary path nowadays. During initial Modi raj it even went into negative zone for some months due to fall in global crude price (although since Union/State Govts kept raising Excise/VAT so it was not felt in real life).

 

Other Inflation Indices

 

Index Features
 

Producer’s Price Index (PPI)

WPI covers only goods but not services.

 

Whereas, PPI covers both goods and services. It measures price change from sellers’ perspective. OECD nations use PPI to measure inflation at wholesale level. Their PPI only measures price (and not PRICE + Taxes).

 

2014: DPIIT setup Dr. B.N.Goldar Committee to explore this for India.

 

 

Experimental Service Price Index

 

EA to DPIIT preparing these experimental indices separately for Railway Services, Port Services, Air Services, Postal Services, Telecom Services, Banking Services, Insurance,
 

 

 

Banking Business Service Price by RBI.

 

 

 

It measures the inflation in the fees charged by Banks for NEFT- RTGS, Mobile Banking, Card Transactions, Issuing Demand Drafts / Bank Guarantee, annual fees for opening DEMAT account etc. [Base Year 2011]
 

 

Inflation Expectation Survey for households

 

 

RBI quarterly survey of ~5k households across 18 cities, asking them what is their ‘expected level’ of inflation for the next 3 months and 1 year.
 

 

 

 

RESIDEX by National Housing BankNHB)

Measures inflation in the residential house prices in selected Indian cities. 2018

Reforms

NHB changed base year from 2012 to 2017.

NHB introduced new indices to measure inflation in Land Price, Building Materials & Housing Rental.

 

INFLATION OBSERVATIONS BY ES-2020
  • The World bank observed that Inflation has decreasing across developing nations between (119%) 1993 to 4.8%(2018) because of:
    1. Monetary and fiscal policy
    2. Structural reforms to raise production.
  • However, inflation is on rising trendin 2019 for India.

 

 

 

Before 2018

CPI (Urban) << CPI (Rural). But since 2018: CPI (Urban) >> Rural due to higher level of food inflation
 

 

2018-19

Some areas have witness higher level of inflation than all India average. E.g. Lakshadweep Andaman (geographical isolation), Manipur (frequent highway Bandh/blockades), Kerala (floods) etc.

 

Thalinomics byES-2020
  • Thalinomics is a concept to estimate how much ₹₹ a common person pays for a Thali (platter of food) across India.
  • Between 2015 to 2018, the Thali price has reduced:
    1. Across all regions of India
    2. For both veg and non-veg thalis.
  • While Thali prices reduced between 2015-18, they have increased in 2019.
  • But allover, thali’s affordability has increased for poor families.
  • Consequently, a family of five people is able to save >₹10,000/per year because of reduced prices.
  • ES-2020 appreciated various schemes of current govt. for:
    1. Increasing food production and
    2. Making food more affordable.
Index of Industrial Production (IIP)

IIP is a monthly index prepared by CSO, Base Year 2011 and Laspeyres Index Formula.
IIP measures production of 407 item groups related to:

  1. Primary goodsàdirectly obtained from natural sources e.g. Ores, Minerals, Crude Oil; And energy goods such as Petrol, Diesel, Electricity (Both Renewable and Non-Renewable).
  2. Capital goodsàPlants & machinery used for further production e.g. Boilers, Air & Gas Compressors, Engines, Transformers, Commercial Vehicles etc.
  3. Infrastructure/constructiongoodsàg.paints,cement, cables, bricks and tiles, rail materials, etc.
  4. Intermediate goodsà which goes as input in production e.g. Cotton yarn, Plywood, Steel Tubes/ Pipes, Fasteners, etc.
  5. Consumer durablesà Products directly used by consumers and having a longer durability (2 years or more). E.g. Pressure Cooker, TV, AC, Tyres, Telephone , Mobile, Cars, Motorcycles, Scooters, Jewellery etc.
  6. Consumer non-durablesàProducts that are directly used by consumers and can’t be preserved for long periods. e.g. Soyabean Oil, Milk Powder, Maida, Rice, Biscuits, Sugar, Tea, Cigarettes etc.
Sector Weight% Item groups
Mining 14.373 1
Manufacturing 77.633 405
Electricity 7.994 1
Total 100 407

 

Observations of ES2020 on IIP

Compared to 2017, there has been a fall in IIP for 2018 and 2019 because:

  • NPA problem, ILFS-NBFC crisis – conracted amount of Loans moving toward the MSME
  • Protectionism in US/EU levying higher import taxes on Indian products → decreased demand of Indian goods in foreign market → decreased Indian production.
  • Persistent decreasing demand in automobile, real estate sector → steel, cement production decreasing
  • Coal production decreases because of Excessive rainfall during monsoon, labour strike in mining States in 2019.
  • Trade war – Between china and USA impacted IIP in India.

 

Index of Eight Core Industries
  • Prepared by EA-DPIIT, Base Year 2011, It’s similar to IIP index focusing 8 core industries
  • Descending order of weight à Refinery Products > Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement>Fertilizers.
  • Collectively, these 8 industries command 40.27% weight in the overall IIP.

 

Q. In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?(CSE-2015)

  1. Coal production
  2. Electricity generation
  3. Fertilizer production
  4. Steel production

 

Q.1 Which of the following are among the 8 Core Industries of IIP?______________(CSE-2012)


1.Cement

2.Fertilizers

3.Natural Gas

4.Refinery products

5.Textiles

Answer Codes:

(a) 1 and 5 only

(b) 2, 3 and 4 only

(c) 1, 2, 3 and 4 only

(d) 1, 2, 3, 4 and 5

 

OTHER INDICES

Indexes Features
 

 

 

 

Annual Survey

of Industries (ASI)

 

  • By CSO, covering all registered units under factories act, and electricity companies.
  • Not Surveyed: Defense Factories, Oil-gas Storage, Restaurants, Hotels, Café, Computer Services, Departmental Units such as Railway Workshops, Govt. Mints, Sanitary, Water Supply, etc.
Index of Service Production (ISP)

 

  • Because IIP & ASI only cover manufactured items &electricity, so, CSO working on (Experimental) Index of Service Production covering Banking, Insurance, Education, Telecom and transport.
 

 

 

RBI’s OBICUS

 

  • Order Books, Inventories and Capacity Utilization Survey.
  • Quarterly survey to assess consumption & investment demand.
 

 

 

 

 

Economic Health Indices by Commercial Banks

 

  • HSBC’s Purchasing Manager Index (PMI)àby surveying 400+ companies senior executives.
  • SBI’s Composite Index based on its loan portfolio, inflation, consumer spending etc.
  • Suchindices have scale of 0-100 points.
  • Above 50 means economic growth,
  • Below 50 means contraction compared to previous period.
 

 

 

 

Baltic Dry Index

 

  • London’s Baltic Exchange measures the cost to transport raw material by sea. If increasing → world economy is growing, and vice versa. Post-Subprime crisis fell, then rose from 2016-18, then again falling in 2018 due to protectionism.

 

Q. Find correct statement(s):______(CSE-2013)

  1. Inflation benefits the debtors.
  2. Inflation benefits the bondholders.

Choose the correct option:

  1. A only
  2. B only
  3. Both A and B
  4. Neither A nor B

 

INDICATORS – UNEMPLOYMENT

  • Unemployment refers to a situation where a person of working age who is looking for work is unable to find employment.
  • According to the Bureau of Labour Statistics, for someone to be termed as unemployed, they have to meet these three conditions:
    • They do not have any job, not even a temporary or part-time job.
    • They are currently available for work.
    • They have actively searched for a job in the past four weeks.
  • According to BLS (Bureau of Labor Statistics), people who have stopped looking for work are not regarded as unemployed.
  • They are not even counted as part of the labor force.
  • If, for example, an unemployed person wins some money through the lottery and stops looking for work as they enjoy their new found wealth, that person is not considered as unemployed.

 

 

Sustainable Development Goal – 8

 

 

 

 

 

Voluntary Unemployment:

A person is out of job on his own choice. Either he wants higher wages or doesn’t want to work at all. Voluntary unemployment is likely to occur when the equilibrium wage rate is below the wage necessary to encourage individuals to supply their labour.
Involuntary unemployment: Prevailing wage rates, but unable to find work due to factors beyond his control.

 

TYPES OF INVOLUNTARY UNEMPLOYMENT

 

Types Features
 

 

 

 

 

 

 

 

 

 

 

Cyclical

 

  • Economy goes through boom-bust cycles.
  • During bust / recession / depression when workers are laid off on mass scale.
  • Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in aggregate demand (Total demand).If the decline in aggregate demand is persistent, and the unemployment long-term, it is called either Demand Deficient Unemployment in general, or Keynesian unemployment.
  • E.g. Maruti removed 3000 workers in 2019-Aug because car sales are dip.
 

 

 

 

 

 

 

 

 

 

Frictional

 

  • Frictional unemployment, also called search unemployment, occurs when workers lose their current job and are in the process of finding another one.
  • There may be little that can be done to reduce this type of unemployment, other than provide better information to reduce the search time.
  • This suggests that zero unemployment is impossible at any one time because some workers will always be in the process of changing jobs.
 

 

 

 

 

 

 

 

 

 

 

Disguised Unemployment

 

  • It is a form of unemployment where it may seem that some people are employed, when in fact they are not. Also referred as hidden unempl-oyment
  • Common in developing countries where increasing populations result in a surplus in the labor force, where employees are working in a redundant manner.
  • E.g. Farming family of 6 persons produces 400kgs of wheat, but even if you remove 3 persons still production remains at 400kgs of wheat.
 

 

Seasonal

 

  • Labourers in Agriculture, Salt-pans, Sugar Mills, Ice- factory, Tourist spots, Marriage Catering-Orchestra etc.
Under employment

Educated unemployment

 

  • Person is employed but not in a befitting position or salary corresponding to his qualification.
  •  e.g. M.Com working as peon in MNCs, M. Tech working as Bank clerk etc.
 

 

 

Technological

unemployment

  • Technological unemployment occurs when men are replaced with machines e.g. Textile / Automobile.
  • 2018-Sept: World Economic Forum released “Future of Jobs Report”. It says, by 2025, machines will do more work hours than humans in 12 industrial sectors. As a result, 75 million worker jobs may be lost, but 133 million new jobs may emerge in robot repair/robot software design etc. Hence urgently workers need to be reskilled.
 

 

 

 

 

 

 

 

Open / Structural

unemployment

  • Structural unemployment occurs when certain industries decline because of long term changes in market conditions creates a mismatch between the skills needed by employers and the skills that workers possess.
  • Lack of jobs when person’s skill/qualification is insufficient for the jobs available in the market
  • e.g. An IT Graduate knows machine design but demand is for Catia pro experts.

 

Q. Disguised unemployment generally means_____ (CSE-2013)

  1. large number of people remain unemployed
  2. alternative employment is not available
  3. marginal productivity of labour is zero
  4. productivity of workers is low

 

OTHER TYPES OF UNEMPLOYMENT
Classical Unemployment
  • Also referred to as induced unemployment or real wage unemployment. Caused when wages are ‘too’ high.
  • Occurs in situations where wages are higher than the laws of supply and demand, forcing companies to lay off the other employees.
  • It is caused by one of the following situations:
    • Powerful trade unions negotiate for salaries and benefits that are above the market equilibrium.
    • legal minimum wages are higher than the market equilibrium.
    • Wages set by long term contracts exceed the equilibrium due to recession, forcing a company to lay off some workers.
  • This explanation of unemployment dominated economic theory before the 1930s, when workers themselves were blamed for not accepting lower wages, or for asking for too high a wage.

 

Regional Unemployment
  • When structural unemployment affects local areas of an economy, it is called ‘regional’ unemployment.
  • Labour market immobility is that it can create regional unemployment, which is a type of structural unemployment.

 

Natural Unemployment
  • Natural unemployment is defined as the lowest rate of unemployment that an economy can support. It can be considered as a baseline below which the levels of unemployment cannot decline. So, an economy that has reached this point is said to be at full employment.
  • It is termed as ‘natural’ because it is caused by other factors that are independent of the state of the economy. Natural unemployment may be due to frictional, structural or classical unemployment.
  • No economic or market fix can be made to eliminate natural unemployment. Economists consider a natural unemployment rate of around 4% to be an indicator of a healthy economy.

 

STRUCTURAL UNEMPLOYMENT AND LABOUR MOBILITY
  • Labour immobility is likely to increase structural un-employment. This is because those industries that are growing and need labour, often called sunrise industries, are not necessarily able to employ the same workers who have been displaced in the declining, sunset industries.

 

  • There are three types of labour immobility:
    • Geographical immobility
    • Industrial immobility
    • Occupational immobility

 

  • Information failure also contributes to labour immobility because workers may be immobile because they do not know where all the suitable jobs for them are.

 

Geographical immobility

  • Occurs when workers are not willing or able to move from region to region, or town to town.
  • Other factors such as strong social and family ties, and parents being unwilling to disrupt their children’s education by changing schools, immense house price variation

Occupational immobility

  • Occupational immobility occurs when workers find it difficult to change jobs within an industry. For example, it may be very difficult for a doctor to retrain to be a dentist.

 

Industrial immobility

  • Industrial immobility occurs when workers do not move between industries, such as moving from employment in motor industry to employment in the insurance industry.

 

REASONS FOR UNEMPLOYMENT
  • Economic slowdown: Currently, sectors like auto, real estate, banking, construction, agriculture and MSMEs – which contribute a considerable amount towards India’s GDP – are facing a sharp demand slowdown.
  • Preference of voluntary unemployment: Voluntary unemployment is preferred over low-paying jobs (i.e. adopting the ‘wait-and-watch’ policy for the right job profile and remuneration.
  • Downgrading of employment: i.e. hiring of candidates, with higher but superfluous qualifications, for elementary positions (e.g. news reports of PhD holders applying for peon vacancies)
  • Lack of Industry: Academia cohesion: Disparity between colleges’/universities’ curriculums and industry requirements/ expectations.
  • Lack of vocational training: which renders many unemployable

 

Government Steps for employment generation
  • MUDRA Bank Micro Units Development Refinance Agency (MUDRA) Bank
  • Start Up India and Stand Up India Schemes
  • Make in India Program profile and remuneration.
  • The apparel and garments sector received a special package
  • Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA)

 

WORKERS CLASSIFICATION BY NSO
 

Self-employed

 

·         Those who work for themselves & charge ‘fees’. They do not sell their labour power to anyone else for a “wage”, so they are their own ‘boss’.

·         Subcategories:

1) Own Account

2) Partners / Owners / Employers Of Business Firm

3) Unpaid Family Labourers

Regular wage/salaried employees They sell their labour to employer, for predetermined wages/salary. Their job continuous round the year.
Casual workers They sell labour for ‘wage’ but employerhires them for very short time period on daily or monthly basis.

 

Table 2: Number of workers in each category in PLFS: 2017-18

High to low 1 2 3 4 5
(Male, Female Combined)

 

Own account workers

 

Casual workers

 

salaried employees

 

Unpaid family labourer.

 

2% Employer (those who give jobs to others)
Male only Same descendingorder as above.
Female only

 

Unpaid family labourers

 

Casual worker

 

salaried employee

 

Own account workers

 

0.5% Employer within female labourers

 

‍Census-2011 classification of workers

 

Worker type

 

Employed for this much duration in a year
Main worker

 

6 months or more. (183 days to be precise)
Marginal worker Less than 6 months.

 

Unemployment And Unorganized Sector
  • An unorganized sector firm is not registered under any law such as Shop Establishment Act, Factory Act, Companies Act, Statutory Corporation, Govt org etc.
  • Unorganized sector consists of individuals / self-employed workers engaged in non- trade-unionized casual / seasonal work with irregular payments & lack of social security coverage like EPFO/ESIC.
  • Government has enacted Unorganized Sector Workers’ Social Security Act, 2008 to provide them with life and disability cover, health and maternity benefits, old age protection etc.

 

 

Indicative Examples of Unorganized worker

 

 

 

 

 

Occupation wise

Small and marginal farmers, landless agricultural labourers, share croppers, fishermen, those engaged in animal husbandry, beedi rolling, labelling and packing, building and construction workers, leather workers, weavers, artisans, salt workers, brick kilns and stone quarries
Nature of employment Attached agricultural labourers, bonded labourers, migrant workers, contract and casual labourers.
Specially distressed categories Toddy tappers, Scavengers, Carriers of head loads, Drivers of animal driven vehicles, Loaders and unloaders.
Service categories Midwives, Domestic workers, Fishermen and women, Barbers, Vegetable and fruit vendors, Newspaper vendors etc.
Miscellaneous Cobblers, Hamals, Handicraft artisans, Handloom weavers, Lady tailors, Physically handicapped self-employed persons, Rickshaw pullers, Auto drivers, Carpenters, Tannery /Power loom workers and Urban poor.

 

 

Unorganized

worker

Unorganized worker is a Person working in above sectors. There are more number of workers in unorganized sector, than in the organized sector.
 

 

 

Informal worker

Informal worker is a Person who is not in the formal records / contract of a firm. So he could be in unorganized sector and he could be even in ‘organized sector’ e.g. driver / Security Guard/ gardener, delivery boy of Zomato etc.

Table: Number of workers in each category in PLFS: 2017-18

(image)

 

Approx.. Amt in cr Organized Unorganized = Total
Formal 4.4 0.3 4.7
Informal 4.6 37.7 42
= Total 9 38 47cr

 

NSO SURVEYS

 

 

NSO surveys

 

Quinquennial Employment and Unemployment Surveys Periodic Labour Force Survey (PLFS)
 

 

Frequency ofSurvey

 

Every 5 years. Starting from 1972 Last survey done in 2011-12. Then discontinued Annual, Startedsince2017

 

2017’sresultannouncedin 2019.

 

 

 

Households which are surveyed by NSO

 

Non-agricultural workers in rural and urban areas

 

75% of the surveyed house should have a minimum one class10 pass person.

 

Both urban & rural, agro & non-agro covered.

 

 

UNEMPLOYMENT RATE (UR)
  • Labour force Those who are ‘working’ (or employed) and those ‘seeking or available for work’ (may called as involuntarily unemployed).
  • Unemployment rate finds involuntarily unemployed persons via following formula:

 

Current

Weekly Status

  • If not employed even 1 hr work in a week
Current

Daily Status

  • If not employed even 1 hr work in a day in a given week.
 

 

 

 

 

 

Usual Status

(US)

 

  • It’s further subdivided into:

1.      Principal Activity Status (PS)

2.      Subsidiary Economic Activity Status  (SS)

  • If person’s usual status (PP+SS) was “Unemployed” for majority of the year →he is deemed unemployed.
  • In official reports, this figure is given more prominence.
  • 2019-Jun: NSSO’s periodic labour force survey (PLFS) says unemployment rate is 6.1% as per (US PS+SS: 2017) which is highest in last 45 years. **

 

WORKER POPULATION RATIO (WPR)

It is the percentage of employed persons in the population.

LABOUR FORCE PARTICIPATION RATE (LFPR)
  • LFPRis the percentage of a persons in labour force (i.e. working or seeking or available for work) in the population.

201737% (male + female in rural + urban combined). It can’t be 100% because there will be children, elderly outside the ‘15-59’ age group meant for workers.

 

ES20 observed between 2004 to 2017, LFPR (Female: rural+urban) steadily decreasing because:
  • More and more proportion of women pursuing higher studies → their entry in the job market is delayed.
  • Rising in income of (some) rural men → their wives have stopped working as labourer and just playing domestic housewives role.
  • Increase dmechanization of agriculture & animal husbandry → Drop in demand for female agricultural workers.
  • Drop in textile/leather exports due to US/EU protectionism → decrease in demand for female workers
  • Drop in real estate sales → decreased construction of new buildings →drop in female laborers
  • Cultural factors, social constraints and patriarchal norms restricting mobility and freedom of women.
  • Many rural / small-town girls don’t have require knowledge of computer and English to get jobs in emergent Startup sector.

Prudential solution will be government schemes for skill development and entrepreneurship among women.

 

UNEMPLOYMENT DATA

 

 

Household Surveys:

E.g. Employment-Unemployment Survey (NSSO), Annual Labour Force Survey (Labour Bureau)
 

 

 

Enterprise Surveys:

E.g. – Economic Census (by MOSPI), Annual Survey of Industries (MoSPI), Unorganized Sector Surveys of Industries and Services (NSSO), Quarterly Employment Survey (QES) (Labour Bureau)
 

Social Security Schemes:

E.g. – Employees’ Provident Fund Organization (EPFO), Employees’ State Insurance Corporation (ESIC)
Administrative data: It includes tax returns and filings, pension and medical insurance programs
 

Data from government schemes:

It includes estimates via MGNREGA, MUDRA, job creations under programs such as ICDS, PMKVY, DDUGKY etc.
Emerging sources: GSTN, Big Data analytics

 

 

URBAN EMPLOYMENT
  • India is in the midst of a massive job’s crisis. The unemployment rate has reached a 45-yearhigh (6.1%) in 2017-18 as per data from the Periodic Labour Force Survey (PLFS) report of the National Sample Survey Office (NSSO).
  • According to the PLFS report, the unemployment problem is especially aggravated in India’s cities and towns.
  • Aside from unemployment, low wages and precarity continue to be widespread.
  • Centre for Sustainable Employment, Azim Premji University, recently published policy brief “Strengthening Towns through Sustainable Employment”, which propose the creation of a National Urban Employment Guarantee Programme.

 

Idea of an urban employment programm
  • The idea of an urban employment programm is gaining traction in political and policy debates.
  • In Madhya Pradesh, the State government has launched the “Yuva Swabhiman Yojana” which provides employment for both skilled and unskilled workers among urban youth.
  • Green New Deal: In the United States of America, ‘Green New Deal’ proposals provide for a ‘Green Job Guarantee’ which enshrines ‘a legal right that obligates the federal government to provide a job for anyone who asks for one and to pay them a liveable wage’.
  • Given the State’s relative neglect of small and medium towns and to avoid migration to big cities, such a programme can cover all ULBs with a population less than 1 million.
  • In the context of the present employment crises, it is worthwhile considering to introduce an employment guarantee programme in urban areas.

 

Conclusion
  • An urban employment guarantee programme not only improves incomes of workers but also has multiplier effects on the economy.
  • It will boost local demand in small towns, improve public infrastructure and services, spur entrepreneurship, build skills of workers and create a shared sense of public goods.
  • Hence, the time is ripe for an employment guarantee programme in urban India. Hence we need new ways to promote the sustainable development of India’s small and medium towns.

 

WAYS TO CREATE JOBS
  • Shift development focus towards labour intensive sectors to create more jobs, such as food processing, leather and footwear, wood manufacturers and furniture, textiles and apparel and garments.
  • Cluster development to support job creation in micro, small and medium enterprises (MSMEs), with a specific focus on incentivizing these MSMEs to grow bigger to generate more jobs.
  • Formalisation of workforce – where growth in jobs must be inclusive and new jobs need to be decent and secure with better work conditions including social security benefits and the right to organise.
  • Expansion of the organized sector to create well-paid high productivity jobs.
  • Greater focus is required on better and relevant skilling opportunities so as to compete with neighbours and global competitors.
  • Expansion in export market by developing Coastal Employment Zones (CEZ), using better technology, and improving on quality to remain competitive.
  • Incentivizing industry – Reducing corporate tax, easing lending norms and relaxing GST rules on a short-term basis are some of the reforms that could give companies more room for hiring and boosting productivity.
  • The public investments in health, education, police and judiciary to create many government jobs.
  • The government should introduce reforms to quell the wage gap and get more women to become a part of the country’s workforce.
  • India will have to shed its service-led structure and transform into an innovation-driven economy and focus on becoming a creator rather than an adopter.

 

Skilling and Apprenticeship is the need of the hour
  • Another novel aspect is the creation of a skilling and apprenticeship programme for unemployed youth with higher education who can sign up for a contiguous period of 150 days (five months), at Rs.13,000 a month for five months.

These employed workers can assist with administrative functions in municipal offices, government schools, or public health centres, and for the monitoring, measurement, or evaluation of environmental parameters.

 

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