MACROECONOMICS 1 – ECON1192B WRITTEN ECONOMIC POLICY REPORT the importance of general government expenditure in GDP (measured as % of GDP

MACROECONOMICS – ECON1192B WRITTEN ECONOMIC POLICY REPORT Full Name: Nguyen Anh Tho Student Number: S3818990 Lecture’s Name: Tra Pham Word count: 1384 (Excluding all graphs, figures and tables) Table of Contents Question 1: a Data Collection 2009 – 2019 b Data Collection 2020 c Data Projection 2021 d Explaination Question 2: a Changes of Fiscal Policy in 2020 i Recent Tax and Government Spending ii The budget situation iii The importance of general government expenditure in GDP (measured as % of GDP) .8 iv The ratio of government debt to GDP b Impacts of policy change .9 c Discussion 10 Question 3: 11 Question 4: 12 Question 5: 13 Question 1: a Data Collection 2009 – 2019 Year GDP Growth Rate (annual %) 2009 7.861888833% 2010 8.497584702% 2011 5.241344743% 2012 5.456358951% 2013 6.386106401% 2014 7.410227605% 2015 7.996253444% 2016 8.256305844% 2017 7.043820855% 2018 6.119586841% 2019 4.180727625% Table 1: Indian GDP Growth (annual %) from 2009 to 2019 (The World Bank n.d.) Year Inflation, consumer prices (annual %) 2009 10.88235294% 2010 11.98938992% 2011 8.858360966% 2012 9.312445605% 2013 10.90764331% 2014 6.353194544% 2015 5.872426595% 2016 4.941026458% 2017 2.490886999% 2018 4.860699467% 2019 7.659694743% Table 2: Indian Inflation, consumer prices (annual %) from 2009 to 2019 (The World Bank n.d.) Year 2009 2010 2011 2012 2013 2014 2015 2016 Unemployment, total (% of total labor force) (national estimate) 2.440000057% 2.690000057% 2017 2018 5.329999924% 2019 5.269999981% Table 2: Indian Unemployment, total (% of total labor force) (national estimate) from 2009 to 2019 (The World Bank n.d.) b Data Collection 2020 Indicator GDP Growth Rate (annual %) Table 3: Indian GDP Growth Rate (annual %) (Scroll 2021) 2020 -9.6% Indicator 2020 Inflation, consumer prices (annual %) 5.6% Table 4: Indian Inflation, consumer prices (annual %) (OECD n.d.) Indicator 2020 Unemployment, total (% of total labor force) (modeled ILO estimate) 7.11% Table 5: Indian Unemployment, total (% of total labor force) (modeled ILO estimate) (The World Bank n.d.) c Data Projection 2021 Indicator 2021 GDP Growth Rate (annual %) 7.3% Table 6: Indian GDP Growth Rate (annual %) Projection 2021 (Scroll 2021) Indicator 2021 Inflation, consumer prices (annual %) 4.65% Table 7: Indian Inflation, consumer prices (annual %) Projection 2021 (OECD n.d.) Indicator 2021 Unemployment, total (% of total labor force) (modeled ILO estimate) 6.52% Table 8: Indian Unemployment, total (% of total labor force) (modeled ILO estimate) (The World Bank n.d.) d Explaination From 2009 to 2019, Indian GDP growth rate, inflation rate and unemployment rate are quite stable with positive statistics However, in 2020, COVID19, pandemic has significantly decreased Indian GDP growth rate to negative figure (-9.6%) (Table 3) while Inflation rate and Unemployment rate has respectively increased to 5.6% and 6.52% (Table and 5) It is expected that there will be many positive signs in Indian economic recovery after COVID19 Particularly, GDP growth rate has essential increased to 7.3% (Table 6) Inflation and unemployment rate are forecasted to decrease to respectively 4.65% and 6.52% (Table and 8) Question 2: a Changes of Fiscal Policy in 2020 i Recent Tax and Government Spending Figure 1: Indian Corporate Tax from 2011 to 2021 (Trading Economics n.d.) Figure 2: Value of government expenditure in India from financial year 2014 to 2020, with estimates until 2025 (Statista n.d.) At the end of 2019 when COVID19 pandemic has stared, India has decreased Corporate Tax from 34.61% in 2018 to 25.17% in 2019 (Figure 1) This has been kept the same as 2019’s tax rate at 25.17% in 2020 and 2021 The reduction in corporate aims to stimulate the economy to recover again Furthermore, government spending has consecutively increased from 55.97 trillion Indian rupees in 2019 to 59.37 trillion rupees in 2020 (Figure 2) Particularly, in 2020, Indian government has spent for stimulus packages with value of 1.7 trillion INR on 26 March, 20 trillion INR on 15 May and 2.65 lakh crore on 14 November (KPMG 2020) ii The budget situation Before COVID19, Indian Central Government Budget is 3.77% in 2019 (Figure 1) However, in 2020, COVDI19 has impacted severely to the Indian economy which India has more than 300 thousand new infected cases per day (Gettleman et al 2021) Therefore, the Indian government has increased their spending in 2020 which cause significant reduction of its budget Particularly, the Indian Central Government Budget is deficit with -9.5% of GDP in 2020 (Figure 1) Figure 3: Indian Central Government Budget (% of GDP) from 2009 to 2020 (Trading Economics n.d.) iii The importance of general government expenditure in GDP (measured as % of GDP) Year General government final expenditure (% of GDP) 2017 10.75% 2018 11.092% 2019 12.029% Table 9: Indian general government final expenditure (% of GDP) (The World Bank n.d.) The Indian total government expenditure to GDP in 2020 is 17.7% (Nahata 2021) This is a significantly increases of India total government expenditure to GDP which is recorded at 12.029% in 2019 (Table 9) iv The ratio of government debt to GDP Figure 4: Indian National debt from 2016 to 2026 in relation to gross domestic product (Statista n.d.) The Indian government debt to GDP has been essentially increased since 2019 Particularly, Indian national debt to GDP has increased from 73.89% of GDP in 2019 to 89.56% of GDP in 2020 (Figure 4) b Impacts of policy change Aggregate Demand is affected by consumption, investment, government spending and net exports At the initial equilibrium A, Indian economy are experiencing a recession due to COVID19 pandemic Therefore, when Indian government increases their spending from 55.97 trillion Rupees in 2019 to 59.37 trillion Rupees in 2020 (Figure 2), the Aggregate Demand also increases However, the taxation cut and increases of government spending cause will cause the multiplier effect Particularly, government spending will be poured out to the market which household will receive and spend it Thus, the consumption also increases Meanwhile, firms will have more funds to reinvest due to tax cut which also increases in investment This means a dollar is spent by government or tax cut can increase more than a dollar in real GDP Hence, in short term, AD curve will shift rightward from AD1 to AD2 The AD2 cuts the SRAS1 at new Equilibrium B which reflects the higher quantity of goods and services (Y2 – Real GDP) at the higher price level (PL2) As a result, the inflation has increased to boost the economy and eliminate recession Furthermore, at B, the economy can operate at the full employment and stable economic growth However, the multiplier effect might not be strong enough to push the AD1 to AD2 For example, the household and firms might partially spend the money from government spending and tax cut Therefore, the crowding-out effect will make the AD curve shift leftward from AD2 to AD3 which cuts SRAS1 at new equilibrium C At point C, the economy does not operate with full employment which lower the real GDP from Y2 to Y3 at the lower price PL3 In long run, the Indian economy will adjust to make SRAS curve cut the AD curve at the LRAS Hence, SRAS1 will shift rightward to SRAS2 to cut AD3 and LRAS at the new equilibrium D The point D shows that the economy has improved to operate at full employment to produce higher real GDP Y2 with lower price level PL4 This also reflects lower inflation comparing to point B Figure 5: AD/AS Diagram c Discussion The multiplier effect can be limited by crowding-out effect In reality, increases of government spending will increase the quantity of goods and services which is emerged from the increases of AD curve Therefore, people will demand for more money to spend and buy goods and services This leads to the rise of interest rate Therefore, investors will reduce their investment as the cost of borrowing fund to invest is rising As a result, the Multiplier effect will not be as strong as in theory Furthermore, government spending also increase consumption People will not completely spend all their money which is from government spending Hence, multiplier effect is also reduced impacts in this situation Regarding the Crowding-out effect, this effect can increase its effect when people have pessimistic expectation for the future For example, government spending will be poured out for banks which will distribute to firms or investors These firms will pay salary for employees who pay for consumption This boosts the whole economy through increasing consumption, investment and government spending However, the COVID19 situation in India has impacts the views of employees to save more Thus, they spend less in consumption and firms also spend less in investment The Crowding-out effect will be stronger and slow down the fiscal policy Therefore, the Indian Fiscal Policy is less effective in deal with servere COVID19 situation Question 3: Figure 6: Indian Inflation Rate from May 2020 to April 2021 (Trading Economics n.d.) The sudden increases in government expenditure of Fiscal Policy have led to the increases in Aggregate Demand which boost the economy with higher inflation in 2020 In recent months, the inflation rate has decreased from 5.52% in March 2021 to 4.29% in April 2021 (Figure 7) Furthermore, in 2021 – 2022, government estimates to spend 3483236 crore INR comparing to 3450305 crore INR in 2020 – 2021 (Union Budget 2021) Therefore, it is expected that the Indian inflation rate might increase 4.9% in May 2021 to deal with serve situation of COVID19 pandemic (IMF 2021) Therefore, there is a risk of inflation if the Indian government continues to spend more for boosting the economy Data supports my findings and the AD/AS diagram In short run, the AD curve shift rightward from AD1 to AD2 which create new equilibrium B with higher real GDP at higher price level P2 However, in long run, the economy stabilize itself by shifting SRAS1 to SRAS2 to cut AD2 at C which reflects lower real GDP and higher price level P3 This is the risk of inflation Figure 7: AD/AS Diagram Question 4: Year CAB (Billion NX (Billion NY (Billion NT (Billion current US$) current US$) current US$) current US$) 2019 -29.763 -73.452 -29.378 72.213 2018 -65.599 -105.918 -29.757 70.612 2017 -38.168 -72.212 -26.423 62.949 2016 -12.114 -41.579 -27.361 56.572 2015 -22.457 -63.249 -23.36 63.096 Table 10: Current Balance Account and its component in the last five years (The World Bank n.d.) COVID19 has negatively impacts the Current Account Balance of India in 2020 which recorded to be deficit of $2.6 Billion in Q3, FY20 (The Indian Express 2021) Furthermore, COVID19 situation has become severely in India, hence, it is observed that there is deficit of $2.6 billion in Q3, FY21 (The Indian Express 2021) Because of COVID19, the exports of India have been pulled down 34.6% in March 2020 which led to the trade deficit of $9.8 billion (Mishra 2021) Furthermore, Indian government is attempting to increase imports of vaccination in 2021 to tackle COVID19 which also contribute to the trade deficit (Reuters, Das & Pal 2021) Hence, Net Exports will negatively decrease However, it is observed that there are increases by 13% in Foreign Direct Investment of India in 2020 (Elegant 2021) This implies that Net income from abroad and Net current transfer might also increase and COVID19 might not have strong impacts on these two components Question 5: Mr Hung stated that the government will try to promote businesses as well as consumption in the crisis Particularly, the government will allow businesses to delay for paying tax for months during economic crisis Therefore, they can reduce pressure of tax burden on businesses During months, businesses can use surplus funds which incurred from delaying for paying taxes to reinvest for generating more profit This increases the investment as well as consumption The investment firms will pay salary for employees Hence, employees can pay more for household consumption The Aggregate Demand is made from C (Consumption), Investment (I), G (Government Spending), NX (Net Exports) Therefore, C and I increases will result in the shifting rightward of AD curve This will increase the real GDP of the whole economy Reference list: Elegant, NX 2021, ‘Foreign investment cratered in 2020 India was a surprise bright spot’, Fortune, 27 January, viewed 23 May 2021, Gettleman, J, Yasir, S, Kumar, H, Raj, S & Loke, A 2021, ‘As Covid-19 Devastates India, Deaths Go Undercounted’, The New York Times, 24 April, viewed 23 May 2021, IMF 2021 Inflation rate, average consumer prices, IMF, viewed 23 May 2021, KPMG 2020, ‘India: Government and institution measures in response to COVID-19’, KPMG, December, viewed 23 May 2021, Mishra 2020, ‘Covid-19 pulls down India's exports by 34.6% in March; 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General government final expenditure (% of GDP) 2 017 10 .7 5% 2 018 11 .09 2% 2 019 12 .02 9% Table 9: Indian general government final expenditure (% of GDP) (The World Bank n.d.) The Indian total government. .. Year Inflation, consumer prices (annual %) 2009 10 .8823529 4% 2 010 11 .9893899 2% 2 011 8.85836096 6% 2 012 9. 312 44560 5% 2 013 10 .907643 3 1% 2 014 6.35 319 454 4% 2 015 5.87242659 5% 2 016 4.9 410 2645 8% 2 017 2.49088699 9%. .. 2 013 6.38 610 64 0 1% 2 014 7. 410 22760 5% 2 015 7.99625344 4% 2 016 8.25630584 4% 2 017 7.04382085 5% 2 018 6 .11 95868 4 1% 2 019 4 .18 072762 5% Table 1: Indian GDP Growth (annual %) from 2009 to 2 019 (The World