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Tag: economy

  • The Economy of China: A Case Study on the Second-largest Economy in the World

    The world has about 775 crore people living on its surface. If you look at the population graph, you will notice a straight line facing the sky. The rate at which the population is growing makes a steep graph.

    The world is divided into continents and countries. Most people live in china. China is the most populous country in the world. In fact, China has been the most populous for a long time now. When we write ‘for a long time, it means centuries. The first census showed the Chinese population at 583 million and by the fifth census, it had risen to double at 1.2 billion. The Chinese population now has crossed a mark of 1.4 billion people. It also covers most geographical time zones after that of Russia. This means that the country is not just big in population but also huge in the area.

    A big country like that of China needs a lot of products and services. They need a lot of goods to meet the needs of people residing in that country. Some of the goods can be imported and the rest have to be produced in the home country. In fact, most goods that they can’t import or the goods that are not economical to import, they have to manufacture by themselves.

    Not to mention that China is one of the cheapest labour countries out there. In this article, we are gonna cover the economy of this country. We will discuss what comprises the most in this economy and what are its driving factors. Read on to know more about the second-biggest economy in the world.

    China: The Most Populous Country
    China: The Culture
    China: The Economy
    The Reasons for Economic Growth in China
    What can go wrong with China?
    FAQ

    China: The Most Populous Country

    China or the Republic of China (official name) is a country in East Asia. As we mentioned earlier it is the biggest, in terms of population. It contains the largest number of people than any country. This country also spans and covers most geographical time zones after Russia.

    The country has 23 provinces, 4 municipalities, 5 autonomous regions and 2 SARs (Special administrative regions). The capital of China is Beijing. The largest city in China, which is also the financial centre, is Shanghai. In terms of technological and innovative approaches, the city of Shenzhen tops the chart in this country.

    China at its inception emerged as one of the very first civilisations. It was the fertile land basin of a river named Yellow that marked its beginning. After the civilization boom, China also emerged as one of the first economically strong countries. Their time as a strong economic power also remained for almost most of the two millennia (thousand years).

    Also, the political system of this country is based on monarchies. It has been this way for almost a thousand years (Millenia). This means that for those many years, China’s political system was controlled by rulers and then their heirs and then their heirs. This is what we call an absolute hereditary monarchy. This system of political control began from the ‘Xia dynasty in about the 21st Century BCE. Moreover, since then the country of China has seen multiple expansions, fractions and re-unities.

    China: The Culture

    The culture of such a big country is expected to be special and unique. Since very ancient times, the culture has been heavily influenced by the philosophy of Confucianism. Which is a tenet in philosophy. This is also known as a truism and inspires people to live a humanistic, rationalistic and very simple life.

    The culture there in the past also offered examinations, tests. Those exams were to be passed by a person to get a highly prestigious and better status in society. This is one of the reasons why China has a long history of writing and calligraphy. In fact, calligraphy, writing poetry and painting are more celebrated than other forms of art like dancing or dramatics. Its culture also inspires people to be diving deep into the lanes of history to know about their past. This also invokes the trait of an inward-looking behaviour of Chinese people in the past, this ran at a national level of thought process.

    China: The Economy

    It is an aforementioned fact that China is big and has a lot of people. It has to cater to about 1.4 billion people for its sustenance. This really marks that the economy must be big and effective. However, this is not as easy as it seems.

    Even though China is the largest in terms of population, we cannot really say that it is the biggest when it comes to the economy. It is second in terms of magnitude just after the United States. It is important to note that economies are weighed in terms of GDPs. GDP stands for the gross domestic product. That is in simpler terms, the sum total of all the valuable products or services that a country produces in a financial year.

    According to the GDPs, in the pandemic year 2020, China is seen to have the second-largest GDP in the world. Here are the top five countries according to the GDP ranks.

    Highest-ranking countries in the world in nominal GDP
    Highest-ranking countries in the world in nominal GDP

    When we talk in terms of GDP, we measure it in dollars. We can also notice that China may be the second largest in GDP but it is the largest in terms of PPP.

    PPP stands for purchasing power parity. PPP is a popular macroeconomic analysis metric that is used to compare economic productivity and standards of living between countries in purchasing power. The theory follows a theory known as the “Basket of goods” for comparing the purchasing power of different countries.

    China tops the list when we see through the lens of purchasing power parity. This shows us the fact that even if the Chinese economy is the second-largest, the citizens of China are better in purchasing power and economic productivity than that most countries. Please note that PPP here does not mean a paycheck protection program, made by the CARES Act.

    China’s growth rate (In annual terms) is displacing that of the United States of America. Many think that China’s rate will overtake the United States in terms of Nominal GDP too in the upcoming years. Don’t get scared of the terminology “Nominal GDP”. Nominal GDP is a form of GDP that is in the current rates, without accounting for the effect of inflation on the GDP. So, this is a GDP at the current market price.

    There are many reasons for china that made this country get this spot of a top tier pacer in the economic race. We will discuss more in a second. But let us get some overview, China has progressively opened its economy with the whole world, continuously for more than forty years. This reveals a good reason why its economy is on a paced growth and why the standards of people there have been improving vastly.

    The Chinese government has gradually phased out collectivised agriculture too. It means the type of agriculture in which multiple farmers can hold land and share workloads of the agriculture activity. Thus, it helps in sharing Profits and losses among farmers and makes farming a little more smooth sailing.

    Collectivised farming has also boosted flexibility for market prices and increased the autonomy of businesses. When a country’s agriculture is doing well, it can then pay more attention to the industrial sector and thus China’s domestic and foreign trade magnitudes are also rising at a good rate of growth.

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    The Reasons for Economic Growth in China

    By far we have discussed China and its economy. We have seen that it is a rapidly growing economy with such a behemoth sort of population. This might interest you in how this big country is fostering growth with such a huge number of people and how it is able to raise citizens’ standard of living. This is the part of the article where we discuss the reasons for such growth in China. How it is becoming, what it is becoming and what are the main drivers of growth for this economy.

    The Manufacturing Hub of the world

    China, if you don’t know, is the manufacturing hub of the world. If you are using a product that is sold by a brand or even a local product then it is a good possibility that the product would be manufactured in China.

    Yes, look around yourself. Your favourite Apple products are assembled in china, your favourite Converse or Nike sneakers are made in China, and most things that you can think of are manufactured in China. Do you ask for a reason? The reason is obviously cheap labour.

    With such a big population, China has some special benefits over any other country in the world. It can provide a good basis for cheap labour. For that one reason, it has emerged as the global capital of manufacturing items.

    Besides its large hands on the textile industry, the economy also is big on machinery, processing of food items, Cement for infrastructure, consumer goods and many many more fields.

    Moreover, China is not a huge hub only for domestic manufacturing plants, it also caters to the needs of foreign companies to come and manufacture there or assemble items. Famous examples may include Apple. Apple designs their products in California and they are assembled in China. Adding to this, The Chinese software and IT industry grew by over 14.2% from 2018 to 2019, generating revenue of approximately $940 billion.

    Apple Factory in China
    Apple Factory in China

    Heavy Focus on Industries

    Another reason which makes this country a big economy is its industries. As any normal developing country, China knows that for growing its economy, it needs to pay attention to the industries that are set in its territory. So they focus extensively on that.

    China is a super friendly nation when it comes to industries wanting to set up manufacturing plants there. Results of which are the fact that China is the world’s biggest steel manufacturer. This shows a strong will of steel.

    The Chinese government began opening up the economy for the whole world in 1978. Which is also known as globalisation. So it began its reforms for economic development under the leader named Deng Xiaoping. That was a turning point in the history of this big country, after the reforms it went on to become the fastest-growing major country globally.

    According to a report, the growth rates were averaging 10% over 30 years. China also has three of the ten largest stock exchanges in India. They are located in prime cities like Shanghai, Hong Kong and Shenzhen. They are big in terms of market capitalisation and trading volume. All these factors establish that China is an industrial hub.

    The Medicines industry

    Abbreviated as Pharmaceutical industry. China has one of the best, state of the art medical supply chains. The growth trends in this industry copy the whole of China. It grows almost as China grows, which is rapid. China had the second-largest pharmaceutical market in the world as of 2017.

    The pharmaceutical industry follows the same structure as most of the world. They have manufacturers at the top and then middlemen or distributors and then retail stores communicate directly to the general public. However, the global share of China’s medicines is seen less. With a big population, it is forecasted to grow even more and is still one of the biggest in terms of scale.

    The Population’s Demand-pull

    As mentioned earlier, China is very populous. Which makes it a generator of huge demands. Brands all over the world try to target this demand to get some share of this market. So this has become one of the most important drivers of economic growth for that country. It is a consumer paradise with all types of demands for goods, be it normal or luxury items.

    China has some of the biggest shopping malls in the world. They, not to mention, stimulate growth in a good direction. The retail lines of China contributed about 1.8 trillion dollars to the Gross domestic product.

    China Global Center Mall
    China Global Center Mall

    China is also the home to the E-Commerce giant Alibaba. It is responsible for giving a lasting boost to the already big consumerism in China. A report said that Alibaba on a shopping festival achieved something sort of called a miraculous sale. It touched a sales record of 540.3 billion Yuan (it is about 84.5 billion dollars), which is a huge record for such a huge country. This gave a much-needed boost to the consumer sector. Even today it is one of the benchmarks for sales all over the world.

    Alibaba Logo
    Alibaba Logo

    Tourism and travel is also big sector in China. It reportedly contributed 992 billion dollars to the Chinese GDP in the year 2019. Other sectors that are the prime demand pullers are transportation, construction and estate.

    What can go wrong with China?

    China, however big it may seem from the outside, can go weak from the inside. There can be many premises on which the country is not doing well. For example, China uses a lot of Non-renewable resources to produce power, electricity. The population needs it and the shift in this sector seems impossible. This marks the country as a huge member of the world’s pollution and a big emitter of greenhouse gases.

    As we discussed previously, the China government is a monarch at its core. This makes enough space for corruption. The government is however trying to curb corruption and make the country more flexible and friendly for the world’s businesses. This can take time and if not done correctly can leave a bad impression on the image of China. This problem is not just one faced. It is a multifaceted problem, as it can lead to fewer industries in China and thus low employment rates in the country.

    Speaking of that, China also faces the problem of unemployment. It needs to place people with enough skillsets for employment. Which is also a big deal in a country as big as China.

    In addition to the political and the internal housing issue, one more issue lurks there. The recent downward trend of the labour industry. This means that China is slowly losing the crown of the cheapest labour in the world. The reason for this can be inflation and the digitalised working models and economy. China is losing its position to other cheap labour countries like Pakistan, India etcetera. For India, it is good news but if China has to retain its manufacturing position then it needs to be more ready for this changing technological world.

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    Conclusion

    As we discussed above, China is a big country with a huge population and big demands. It is important to note that it, obviously, also has some cracks. Some cracks in the economy that are not severe but if not cured could sink a big ship.

    The recent Evergrande fail was one such big example of how things can go wrong. China has seen real estate bubbles in its history too. The previous bubble burst and hit the whole world’s market, more recently the Evergrande crisis made the investors scared of investing in China.

    It is a good point to say that “With great powers comes great responsibilities”. China has a load of the most people on the globe, which can be overwhelming to the government. In these times of pandemic, the future remains random and uncertain.

    The fact that the Covid 19 pandemic originated from the heart of China also is affecting the Chinese economy in the wrong manner. It has defamed China in some sense. This is the reason that some industries are looking to shift base to developing countries like India.

    For China, it remains a tough call to tackle a pandemic and the future of its economy. Again, it is not supposed to be easy to handle such a big and populous economy.

    FAQ

    Is China a developed country?

    Yes, China is one of the largest developing countries in the world.

    What is China’s GDP?

    The gross domestic product (GDP) of China is around 14.87 trillion U.S. dollars as of 2020.

    Is China the fastest growing economy?

    Yes, China ranks second in the world’s fastest-growing economy.

  • China’s Evergrande Crisis: Real Estate Sector Sinking in Debt

    A crisis is any event or period that will lead, or may lead, to an unstable and dangerous situation affecting an individual, group, or all of society. Crises are negative changes in human or environmental affairs, especially when they occur abruptly, with little or no warning. – Wikipedia

    Ever since the inception of human life on the planet earth, or even before that time, We have faced Crisis. So much so that it is a part of life and we don’t deface the fact anymore. Crisis has taught us that we lack something, and we need to work more on the present systems to make things more liveable. Making us more decisive, it cures indecision. This is a kind of help in our constant journey of making things better. However, We humans are the dominant species in nature.

    Why, you may ask ? Because we have hacked evolution !

    Ours is the only species that has decided to actually become better or more efficient without waiting for the process of evolution to take place (that is always slow). So, we are the only animal who has hacked evolution. That makes us the most fast-paced living species than anyone. Does that mean we don’t have a crisis anymore? No, we get crises every now and then to showcase us that some things are just so fickle. A house of cards.

    We all are terrestrial mammals, we live on earth, land. Build houses and earn a living. Housing or real estate is a super demanded domain in this world. As population boosts we will want more and more houses, dwellings to accommodate people. Amongst the constantly rising demands for land, it is very imperative for all of us to make sure that land is distributed justifiably. To provide for the need that is round-the-clock. Not to mention, being such a big sector, Housing sector or real estate sector is not oblivious to shockwaves, you know CRISIS. Whenever a wave hits this epicentre, human lives move. It moves to that extent of magnitude which we cannot even measure on a Richter scale.

    China is the world’s most populous country on the globe. Most humans live there. Housing sector is as big as it gets. It has seen its share of crises in this magnanimous sector. A really big economy. It has seen his share of strides and waves of uncertainties on his pupils. Lets see an example for clarity.

    The Real Estate Bubble (2005-2011) in China
    EverGrande Crisis in China
    The Lehman Brothers Financial Crisis
    EverGrande’s Cash Crunch
    Decline in Contract Sales
    Evergrande Crisis Consequences
    Evergrande Crisis Effect on India
    FAQs

    China’s Evergrande Crisis

    The Real Estate Bubble (2005-2011) in China

    Real estate in China is developed and managed by public, private, and state-owned red chip enterprises. In the years leading up to the 2008 financial crisis, the real estate sector in China was growing so rapidly that the government implemented a series of policies—including raising the required down payment for some property purchases, and five 2007 interest rate increases- due to concerns of overheating. But after the crisis hit, these policies were quickly eliminated, and in some cases tightened.

    The Chinese property bubble (2005-2011) was a real estate bubble in residential and/or commercial real estate in China. The phenomenon has seen average housing prices in the country triple from 2005 to 2009. It deflated in 2013.

    Massive doesn’t even begin to describe the situation with China’s property market, but that’s somewhat expected with a population of 1.4 billion people.

    And as the chart below shows, the bubble keeps on getting bigger!

    China Real Estate Bubble
    China Real Estate Bubble

    Well we know that this thing is of the past. This was a crisis and China hopefully learned some things from it. That’s why storms come, to make us more stable. This article is not about the past but for the future. This point in time, we are gonna see another crisis. Maybe more tense than the past. Maybe a more lethal Than past. So, what is it this time ?

    EverGrande Crisis in China

    China’s second biggest real estate mogul EverGrande is facing a crisis. To be more precise the company is going through financial difficulties. It is having liquidity issues to pay back its lenders. To give you some context, China’s real estate market has been booming in the recent past and to capture the trend and grow, Evergrande had taken up so much debt that they are struggling to pay it off now. The magnitude of this upcoming crisis is such that, if it collapses, people will lose homes. Not only China’s economy but the global economy as a whole could be affected. Lets see what is the scene here,

    The Evergrande Group or the Evergrande Real Estate Group (previously Hengda Group) is the second largest property developer in China by sales, having developed projects in over 170 cities in China. It is ranked 122nd on the Fortune Global 500. It was founded in 1996 by Xu Jiayin. It sells apartments mostly to upper and middle-income dwellers. In 2018, it became the most valuable real estate company in the world. Evergrande Group owns 565 million square metres of development land and real estate projects in 22 cities, including Guangzhou. The company and Alibaba own 50 percent each in Guangzhou Football Club and Evergrande football school is the biggest football school in the world. In the year 2009, the company filed for an IPO, An Initial Public Offering to get public

    As of September 2021, the company is at risk of defaulting on its debt. An estimated 1,500,000 customers could lose deposits on Evergrande homes that have yet to be built.

    “I think ultimately the Chinese authorities will step in to make sure at least the wider financial system doesn’t run into a crisis,”. “If you’re a property developer you’re facing a few bleak months ahead. The key distinction I think is policymakers will allow property developers to suffer considerable pain, but they’ll step in to make sure the banking system is okay.” – Mark Williams, chief Asia economist at Capital Economics.

    Kotak tweeted, the threat over China’s second-largest real estate developer reminded him of Infrastructure Leasing & Financial Services (IL&FS). Last year in September, the infra leasing and financial services company wasn’t able to pay its debt due to shortage of funds. The financial services market felt the tremors, and led to a liquidity crisis. However, the government came to its rescue and hand-picked nominees to replace the board in October. It had extended Kotak’s term as non-executive chairman of the debt-ridden group by one year.

    Lauding the government’s swift decision-making, the 62-year-old veteran banker said the Indian leaders provided calm to financial markets. “The government-appointed board estimates 61% recovery at IL&FS. Evergrande bonds in China trading, approximately 25 cents to a dollar,” he wrote.

    The Lehman Brothers Financial Crisis

    Lehman Brothers Holdings Inc. was a global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merrill), with about 25,000 employees worldwide. It was doing business in investment banking, equity and fixed-income sales and trading (especially U.S. Treasury securities), research, investment management, private equity, and private banking. Lehman was operational for 158 years from its founding in 1850 until 2008.

    The bankruptcy of Lehman Brothers on September 15, 2008 was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate financing for its reorganisation. These discussions failed, and Lehman filed a Chapter 11 petition that remains the largest bankruptcy filing in U.S. history, involving more than US$600 billion in assets.

    The bankruptcy triggered a 4.5% one-day drop in the Dow Jones Industrial Average, then the largest decline since the September 11, 2001 attacks. It singled out a limit to the government’s ability to manage the crisis and prompted a general financial panic. Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure. The government and the Federal Reserve system responded with several emergency measures to contain the panic.

    Radhika Gupta (MD and CEO of Edelweiss) said in a public notice that the real estate sector is highly regulated, given the large role it plays in the Chinese economy. In synopsis, the fund managers(at Edelweiss) do not think that the sector is facing systematic risk(Risk inherent to the entire market). The government is prioritising this issue and rapid regulations are expected. She also advised that investors with a long term horizon should stay patient as fund managers at Edelweiss see a transitory volatility.

    Tweeted as a part of a disclaimer, the Edelweiss Greater China Equity Offshore Fund was at its highest risk on the Riskometer.

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    EverGrande’s Cash Crunch

    Dear Shareholders, I am pleased to present the reports of China Evergrande Group (“Evergrande” or the “Company”) and its subsidiaries (the “Group”) for the year ended 31 December 2020. The Group’s turnover and gross profit for the year amounted to RMB507.2 billion and RMB122.6 billion respectively. Net profit was RMB31.4 billion. Core business profit was RMB30.13 billion. In order to repay the trust and support of shareholders, the Board recommended the payment of a final dividend of RMB0.152 per share for the year 2020, which will be distributed upon approval at the general meeting of the group. – Prof Hui Ka Yan (Chairman of the Board of the Group, Chairman of the real estate group)

    This is quoted from the annual report of 2020 of the company. It paid a dividend. The company was saying it out loud and clearly, that we are fine, Everything is fine, we are paying dividends, Take your profits share, shareholders. Well now we see the whole big picture, Loud and clear.

    Evergrande founder and Chairman Hui Ka Yan continued his precipitous drop in Bloomberg’s wealth ranking as the company’s shares fell to their lowest in a decade. His fortune now stands at $7.3 billion, down from a peak of $42 billion in 2017.

    Smothered by a $300 billion liabilities burden that has crushed its credit rating, share prices and reputation among a once-adoring public. Throughout last week, the concourse outside Evergrande’s mirrored offices in the southeastern city of Shenzhen was occupied by unpaid contractors, angry sales agents and investors scenes echoed across a country where prolonged protest is rarely tolerated.

    Now, as default appears all but inevitable, fears are abounding of a contagion within the Chinese property market — and far beyond.

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    Decline in Contract Sales

    The month of September is typically when real estate companies in China record higher contract sales of properties. However, the ongoing negative media reports concerning the Group have dampened the confidence of potential property purchasers in the Group. The Company expects a significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cash flow and liquidity.

    Here is a little excerpt of previous financial statement to back the downward trend in operations of the company.

    Balance Sheet Excerpt of last year.

    As disclosed in the Operating Statistics Announcements, the contract sales of properties of the Group in each of June, July and August 2021 amounted to RMB71.63 billion, RMB43.78 billion and RMB38.08 billion, respectively, which showed a decreasing trend.

    Announcements and Notices by Evergrande (14 September,2021)
    The Real estate giant also mentioned in a recent public open notice that –

    • No material progress on sales of interests in members of the Group
    • The disposal of the Company’s office building in Hong Kong has not been completed within the expected timetable

    The Problems:

    • The company has $300 Billion debt to bondholders
    • Property sales declining for months and will continue
    • Company owes $103 billion to construction companies and other business creditors
    • Banks are not ready to refinance
    • Company wants to repay debt in the form of property and parking spaces
    • China’s Government has imposed limits on the amount of real estate borrowings, which caused bondholders to withdraw their money
    • EverGrande now needs to pay interest of $83.5 Million on bonds now, with a grace period of 30 days

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    Evergrande Crisis Consequences

    • China stock markets and Global markets, mainly in the US is reacting negatively to the news.
    • Stock markets globally sank on Monday as investors weighed the risk of a spillover from Evergrande’s debt. Bitcoin dropped 5.4 percent this week to $45,025
    • China’s property market is majorly affected and we see the 2008 financial crisis all over again.
    • Evergrande bondholders might sell their other investments too to keep their money as cash at the moment. This might cause market correction
    • In an effort to flatten the crisis curve, China’s central bank boosted its gross injection of short-term cash into the financial system after concern over a debt crisis at China Evergrande Group roiled global markets. The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan.
    Injecting funds to flatten curve.
    • China bails out the company indirectly by asking borrowers(state owned banks mainly) to take the property and parking spaces and waive off the debt.

    Evergrande Crisis Effect on India

    • Sensex and Nifty are at great heights and thus are more volatile to corrections.
    • Short term corrections may happen
    • Over a medium term, India can benefit from the situation because the Chinese crisis cause increased money flow into the Indian markets
    • This crisis can put the rupee under pressure. If Evergrande is allowed to default, the market could see a massive sell-off with significant contagion risks for global financial markets – HDFC bank economist’s report.
    • If one single company that owes $304 billion can develop financial exposure to hundreds of lenders, millions of investors in bonds and stocks, and hundreds of thousands of homebuyers, Then we cannot be sure of big corporations anymore in china.
    • Indian steel still sees a strong spine as evergrande goes to a cash crunch.
    Improvement In indian steel sector
    • Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors feels till now Evergrande issue looks localised and Chinese policymakers should be able to handle it using steps like restructuring. He believes the Indian economy and Indian equity market is set for exciting times ahead. “While the global trend of digitalization is a megatrend favouring the Indian economy, domestically, formalization is another megatrend adding further positivity to Indian equities,” he said.

    So, what shall happen tomorrow, for sure we can’t predict it to a nice accuracy, But we can surely see that what we are facing is risk, Uncertainty or maybe the silence before a storm. Let’s call it a crisis.

    FAQs

    What is Evergrande crisis?

    Evergrande is an enormous company embedded across China’s financial system and economy, that relies mainly on real estate.

    What does Evergrande do?

    Evergrande Group is an investment holding company in China. It is involved in real estate business. Evergrande group does development, investment, and management of real estate properties.

    Who is the founder of Evergrande Group?

    Xu Jiayin (Hui Ka Yan) has founded Evergrande Group, headquartered at Shenzhen, Guangdong, in 1996.

  • Revisiting the Financial Crisis of 1991- A Case Study

    The economic crisis that jolted the Indian subcontinent in 1991 did not happen overnight. It was facilitated by a plethora of factors including poor economic policies, trade deficits that lead to the Balance of Payment crisis, inefficient public sector etc. The economic imprudence of the 1980s had started to set the tone for the impending crisis which was called a “policy-induced crisis par excellence” by Joshi and Little in their seminal work.

    Inconsistent Rise and Falls
    Import Liberalisation and its Ramifications
    Political Instability and other indigenous and Exogenous Factors
    The Deal With the IMF (International Monetary Fund)
    Balance of Payment Crisis
    The Gulf War
    The Revival of the Indian Economy
    FAQ

    Inconsistent Rise and Falls

    As the country’s fiscal policies were going loose at the behest of the country’s worst drought since independence and a global oil shock in 1979 caused by the Islamic revolution in Iran, the recommendations of the seventh Finance Commission was rather one-sided than concentrating on means to cater to both consumers and suppliers.

    It recommended a significant increase in the revenue shares of states without easing the responsibilities of the central government, which caused the existing fiscal deficit of the government to sour.

    The increasing political assertions of the marginal groups along with the decaying powers of political institutions also resulted in mere populist measures to address problems that were not only insufficient but also short-termed.

    Along the same line, the country saw an increase in procurement prices with no corresponding increase in issue prices. Taxes were reduced and subsidies burgeoned ten times their value last year.

    Import Liberalisation and its Ramifications

    Deviating from its regular economic conservatism in 1976 the Indian government liberalised import which was expected to increase the supply of intermediate and capital goods. However, export growth could not keep up with it.

    By 1985, imports swelled and India was facing twin deficits. One that of fiscal deficit and the other that of trade deficit. Average fiscal deficits moved up to 6.5% from 5% in the 1970s. The only factor that held everything together was the increasing remittances from employees in the Gulf region.

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    Political Instability and other indigenous and Exogenous Factors

    The central government was going through a tumultuous time as the ruling party (Janata Party) split into two and collapsed. This political instability was accompanied by severe drought and the oil shock of 1979.

    As agricultural productions nosedived by a sixth in terms of trade, oil prices and current account deficit soured. It was only the timely procurement of food grains over the year that saved the nation from famine.

    The Deal With the IMF (International Monetary Fund)

    In order to expand the energy sector, exports and savings, along with reviving the Indian economy the central government approached the IMF to fund its package in 1980. The IMF however, resorted to different financial measures which the country had to abide by.

    Later, the Chandra Sekhar government failed to pass the budget and the poor ratings given by Moody made India ineligible for any short term loans. In this situation, the IMF also stopped their financial assistance which forced the government to mortgage the country’s gold for bailing out.

    In May 1991, India had to airlift more than 20 tones of gold to raise $240 million. Although the desperate move was heavily criticized, it was inevitable.

    Newspaper cutout of 1991
    Newspaper cutout of 1991

    Balance of Payment Crisis

    The 1980s also saw a BoP crisis as the current account deficit remained between 40% and 50% of the exports in the latter half of the 1980s. It resulted in the increase of external liabilities in the 1990s, 50% of which as owned by the public sector. India’s forex reserves started to deplete as imports increased.

    By July 1991, India had only less than $1 billion in its foreign reserves which can last to fund three weeks of imports. The major cause of the Balance of Payment crisis was the inability of exports to catch up with imports, improper management of the investment savings which resulted in deficit and depending on non-concessional external borrowing to cater to that deficit.

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    The Gulf War

    The Gulf War in the 1990s was the tipping point for the already fragile Indian economy. The fuel prices skyrocketed which affected the prices of all goods in the country. The war also meant that a lot of Indians lost their jobs and had to come back. Thus, the remittances which held the economy together was not available anymore. India fell into a deep economic crisis where it was at a disadvantageous position from all sides.

    The Revival of the Indian Economy

    The Narsimha Rao government with Manmohan Singh as the Finance Minister, began its journey towards economic recovery. First, to reduce inflation and promote internal markets, export subsidies were cut.

    The value of the rupee was first depreciated by RBI to 9% and then to 11%. Further, domestic supply constraints were cleared and doing business was made easier by reducing the complexity of procuring permits and licenses.

    India: Gross domestic product (GDP) in current prices
    India: Gross domestic product (GDP) in current prices

    The economy was liberalised, privatisation was promoted. Foreign Direct Investments were also largely encouraged. Industries were given better structural and operational freedom which helped them expand and develop. The budget of 1991-92 was more about continuing these economic reforms to sustain and strengthen the changes.

    Conclusion

    The efforts of the Narasimha Rao government was not in vain. Indian economy started to boom in the years that followed. At a time when the country is struggling with negative growth rates and shrinking GDP, the lessons learned from the 1991 financial crisis should be revisited and analysed so as to come up with efficient solutions. There is absolutely no doubt that there will be flaws.

    Even the economic reforms of 1991 also had its own flaws and it still bears the grunt of the criticisms. However, it is important to come up with valuable reforms that can save the economy from an economic depression like in 1929.

    FAQ

    What caused the 1991 currency crisis in India?

    The 1991 financial crisis was caused due to currency overvaluation.

    Who was the finance minister of India in 1991?

    Manmohan Singh was the finance minister of India in 1991.

    Who was the prime minister in 1991 in India?

    P. V. Narasimha Rao was the prime minister of India in 1991.

  • How Does Fuel Pricing Affects all the Industries?

    The price of fuel has always been a concerning issue in the country. When the pricing of Fuel rises, it majorly impacts the lives of the common man and the wholesome economy. And, soon after the latest round of fuel price hike by the OMCs (Oil Marketing Companies), the prices of petrol and diesel increased prominently. And if the prices keep on increasing, the lives of citizens and the economy will be highly affected.

    The price of Petrol has reached up to INR 90 per litre and in some places, it has crossed the limit of Rs 100. And The same case with the Diesel too.

    The increased fuel pricing has become such a problem that people are even smuggling from neighbouring countries. The rise in fuel price brings a devastating impact on the economy majorly, which is already suffering from the Covid crisis.

    The rise in fuel prices affects most transportation industries. Also, businesses depend on logistics and transportation chains.

    In this article, we have discussed the effects of increased fuel prices on the economy including other industries and to the lives of common people. Let’s get started!

    Effects of Increased Fuel Price
    How Increased Fuel Prices Affects Other Industries?
    Relationship between fuel prices and economy
    FAQ

    Effects of Increased Fuel Price

    When the fuel prices rise, we know businesses and households are affected broadly. However, it impacts majorly through two things- Inflation and reduced economic growth. Let’s get started with Inflation first,

    Inflation

    In inflation, the products made up of petroleum are affected directly. Moreover, it indirectly affects the industries of manufacturing, heating and transportation. This can lead to an increase in the price of many other products and services.

    And according to the increase in fuel price, the consumption price also increases based on the production.

    Reduced Economic Growth

    The increased price of oil highly affects the economy as well. It reduces the growth of the economy through the demands and merchandise of goods other than fuel. It reduces the demands of those goods because of the increased price of producing them.

    How Increased Fuel Prices Affects Other Industries?

    Retailers

    As fuel is the basic essential to transportation for every mankind. Therefore, they spend a large fraction of their income on fuel purchasing and due to this, the retailers suffer the most as the discretionary spending’s by customers become very low. And if the fuel prices rise, the supplier would deliver its products very rarely to the malls and shopping centres.

    And this would highly affect the marketing sector and increase every material’s price.

    Public Transportation

    When the fuel prices rise, people often prefer public transportation ridership. Because sharing the transport would cost less compared to driving your own vehicle with so expensive fuel in the tank. This also saves from the wastage of fuel in the traffic and would cost less for people. The usage of public transportation is becoming higher in every place with the increased fuel prices.

    Airlines

    Airlines’ largest operating cost goes to the fuel expenses which is directly related to oil procurement. When the fuel prices rise, the airlines are affected broadly from the core of their surface.

    Therefore, when the fuel prices rise the airlines are compelled to increase the charges on the flight tickets from their customers. This results in fewer airways travelling and a huge burden of expenses for the people.

    So when such a scenario happens, the airlines tend to buy or sell the future estimated fuel prices through the investment perspectives. This is called fuel hedging. Besides, this will protect the airlines against the increased fuel prices.

    Automobile Industry

    The automobile industry is widely dependent on fuel consumption. These industries would fall apart if the fuel prices keep increasing. That’s why the automobile industry put its main focus on the manufacturing of smaller, fuel-efficient vehicles such as electric or hybrid vehicles. These could travel up to 250 miles based on their charging extent.

    People have also highly preferred such modification and the purchasing of these vehicles has been increasing over time.

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    Relationship between Fuel prices and Economy

    In the 1970s, the two aforementioned huge fuel shocks were noted based on high unemployment and low growth. This period is also referred to as Stagflation. So it’s likely to say that the fuel prices are directly linked to the economy and anything if unusual happens, the economy is affected majorly. The fuel prices cause a wide fluctuation in the economy of the country.

    Looking back at history, the 1990s and 2000s were recorded as the most huge economic fluctuation period compared similarly to the fuel shocks of the 70s. The relationship between these two could be very convenient as well as challenging. This widely affected the GDP growth and unemployment rate in the country.

    Conclusion

    Over a long time, many economists and analysts have debated on the extent of the effect caused by the fuel prices on the economy of the country and the lives of common people. However, with the recorded research and data we can not deny the fact that the spending habits, consumers confidence correlates with the increased fuel prices.

    And when the price of fuel increases, the economy including many other industries are affected on a wide scale and results in some absolute alternatives or faces loss. The lives of normal people have affected the most and this benefits some industries as well as cause some major loss to others.

    Many surveys have been made on such situations and all those have proved some relation either direct or indirect between the fuel prices and economy of the country.

    FAQ

    Which industries are affected by the oil prices?

    Airlines, Transportation and Automobiles are some of the most affected sectors by the rising fuel prices.

    Why are fuel prices increasing in India?

    Fuel prices have been rising in India due to a rise in crude oil prices in the international market.

  • A Case Study on America’s Rising Debt and its GDP

    The debt of the United States is the national debt that is controlled and acquired by the federal government of the U.S. to the Treasury security holders. According to the report by March 2021, the United States debt crossed over $28 trillion. This came to be so high that this was more than the economic production of the US calculated annually.

    With the history of so many years, US debt has been increased by the slump that lowered the tax revenue. However, the Congress government has spent a lot more than this to facilitate the economy over time.

    Besides, other services such as the Military have proven to be one of the biggest contributors who have been used for the benefits of medical care and others. And with the world pandemic in  2020-21, the spendings on the counterbalance of the situation has added more to the debt. But the good thing is, all this will be resolved once the pandemic ends.

    Till then, other methods such as increasing taxes and a tight budget could help in reducing the debt. And this wide combination of budget growth, tax cutoff and recessions have brought the national debt-to-GDP ratio to a record level. But when there is a problem, to solve it, we have to face some consequences. And so the United States government would have to face the economic consequences.

    In this article, we will discuss a case study on the U.S. debt and its GDP. Let’s get started.

    United States National debt about GDP
    United States Finances
    The ratio of debt to GDP
    United States Debt History
    America’s debt vs GDP
    FAQ

    United States National debt about GDP

    The relation of the gross domestic production (GDP) with the national debt of the US has been rising since 2016. And the estimated data shows this would continue till 2026. The graph from 2016 to 2019 has been pretty high in the projection. By the record of 2019, the United States national debt was estimated to be around 108.19% of the GDP.

    Total Public Debt as Percent of GDP
    Total Public Debt as Percent of GDP

    United States Finances

    The national debt of the United States has had several ups and downs but since the 90s the graph has kept rising. And so as the public debt, which is known as the total money borrowed by the nation to facilitate and cover up the budget deficits. However, the monthly records of debt have been quite stable.

    Even after the recession of 2008, the national debt of the United States has proven to be pretty steady and progressive. And the estimations have shown, it will keep rising in the upcoming years. Although the budget cuts and the lower employment opportunities have hurt the American economy, which is still recovering from such a crisis. Therefore, the national debt of the US, as well as the national debt of US per capita, has quadrupled since the last 1990s.

    Besides the excessive progress, the national debt of the United States is still not counted among the top 10 highest national debt countries with relation to its GDP. However, countries such as Italy, Japan and Greece have far more figures than the US.

    The ratio of debt to GDP

    The Debt-to-GDP ratio of a country is calculated as the ratio between the country’s national debt and its Gross Domestic Production (GDP). This ratio measures the country’s currency and is calculated every year. When the Debt-to-GDP ratio comes low that shows that the country is sufficient enough for producing and selling different goods and services and it does not require any further debt for this purpose.

    Moreover, many other factors such as wars, interest rates and recessions also affect the debt acquiring and borrowing rates and its choice to incur more debt. However, the countries with the high Debt-to-GDP ratio face different crisis and its recovery takes time. The Debt-to-GDP ratio impacts the country’s economic situation.

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    United States Debt History

    Soon after the revolutionary war of 1790, the united state government initiated its footsteps towards the debt. And after the 1790s, the debt has acted as the major help in times of war or economic recession for the U.S. government over centuries.

    However in the period of deflation which is known for decreasing the debt size. But, actually, the real worth of debt is enhanced during this period. In the deflationary period, the money value is heightened while the access to loads of money becomes tougher.

    According to the record of 2020, estimated by three Congressional Budget Office, the public debt was equal to 98.2% of the GDP. Later, it reached up to 99.4% and 105%. This was the peak of the debt-to-GDP percentage since 1946. In the 1970s, the debt faced several periods, and it stood stable.

    But, from the beginning of the 1980s, the debt rose drastically. This was seen till the early 1990s, When the U.S. was under the presidency of Reagan and Bush. However, the ratio came down to 30.9% in 2001. But under the presidency of George W. Bush, it rose again.

    Later, the U.S. faced several financial crisis and suffered the Great Depression period as well. This brought a major uprise in the debt percentage and during the presidency of Obama, the debt rose to 75.9% of GDP in 2008 and then, in his second term in 2016, it raised 73.3%.

    America’s debt vs GDP

    When a country’s debt is estimated it comes incredibly high. And in a country such as America, the value is quite large. However when the national debt is compared with the annual GDP, then only the financial deficits of a country could be measured.

    The American debt went stable till 2007, but a drastic change was seen during the global financial crisis period. During this time in 2012, the debt rose to 95% of the GDP. After this, the debt kept on rising. And, during the pandemic of 2020 and 2022, the GDP percentage crossed over 100%.

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    Conclusion

    The United States has faced such an economic situation before also in the 1970s. And, now with the debt of over $27 trillion which includes some mandatory spendings such as health care which requires around $2.7 trillion. The total revenue’s 50% comes from the income taxes of an individual.  

    The pandemic has made things more delicate and tough and until it is completely over, the economic crisis will continue along with the rising debt-to-GDP ratio. Well, in this article, we briefly discussed the American debt and its cooperation with the GDP.

    FAQ

    What is the current debt of United States?

    The current U.S. debt is $23.3 trillions as of 2020.

    Which country has no debt?

    Brunei is one of the countries with the lowest debt. It has a debt to GDP ratio of 2.46 percent among a population of 439,000 people.

    How much is the world in debt 2020?

    The global debt total is at all-time high of $281 trillion by the end of 2020.

  • List of Economic Relief measures announced by the Government for Startups and Businesses

    The Covid-19 had created a huge impact on the Indian economy and the lockdown due to the second wave had left a lot of people unemployed and a lot of businesses around the country to be closed down. However, the Government has announced various Economic Reliefs to boost the economy concentrating on various businesses and startups. In this article let’s look at more information on the Economic Relief Measures.

    Economic Relief Measures – Latest News
    Loan Guarantee Scheme
    ECLGS
    Support to the Tourism Industry
    Atmanirbhar Bharat Rozgar Yojana
    Subsidy on Fertilizers
    Underwriting of Additional Projects
    Other Economic Relief Measures
    FAQ

    Economic Relief Measures – Latest News

    The Finance Minister of the country, Nirmala Sitharaman had addressed the press conference on 28 June 2021 and has discussed about various economic relief measures. The Finance Minister has addressed various reliefs for the sectors affected due to Covid-19.


    Loan Guarantee Scheme

    The Finance Minister has announced a Loan Guarantee Scheme for the affected sectors due to Covid-19 of around INR 1.1 lakh crore. The Government will provide a guarantee coverage that is 70% for new projects and around 50% for the expansion and the duration for the guarantee will be up to 3 years.

    This is concentrated on the health sectors and medical infra specially targeting the underserved areas would get an amount of INR 50,000 crore. Other sectors would get INR 60,000 crore and the interest rates would be around 8.25 % p.a.

    ECLGS

    The Emergency Credit Line Guarantee Scheme of an additional INR 1.5 lakh crore has been announced. The coverage on Contact-Intensive sectors will be continued and the loan amount that is proposed and the limit of admissible guarantee is expected to increase above 20%.

    Support to the Tourism Industry

    The Government has announced to provide support to the tourism industry by providing monetary support to more than 11,000 travel and tourism stakeholders and tourist guides. The tourism sector will also be provided with loans under the new loan guarantee scheme for areas affected due to Covid.

    The Government has announced that it would provide loans that are 100% guaranteed up to INR 10 lakhs for the Travel and Tourism sector agencies and an amount up to 1 lakh for the licensed tourist guides.

    The Finance Minister also announced that they would provide free tourist visas and conveyed that once the issuance of visas is restarted the first 5 lakh visas will be issued free of cost and that is offer will be available only once per person. This scheme will be valid till 31 March 2022 or until the number reached 5 lakh tourists.

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    Atmanirbhar Bharat Rozgar Yojana

    The Atmanirbhar Bharat Rozgar Yojana has been extended from 30 June 2021 to 21 March 2022. The scheme provides incentives for the employers in order to increase the new employment opportunities through EPPFO.

    The Government has also approved an outlay of INR 22,810 crore that is expected to benefit around 58.50 lakh beneficiaries by providing them with a monthly wage of around INR 15,000. So far, the benefits of around INR 902 crore have been given to around 79,577 beneficiary establishments.

    Nirmala Sitharaman also stated through the press release that through this scheme from the last October until 18 June 2021 around 2.14 million people have been benefited from around 79,577 establishments.

    Subsidy on Fertilizers

    An additional subsidy for P&K fertilizers and DAP fertilizers has been announced. The NBS subsidy has been increased to INR 42,275 crore in the FY 2021-22 from INR 27,000 crore in the FY 2020-21. An additional amount of INR 14,755 crore is announced to be provided for DAP as well as NPK based complex fertilizers.

    The Government has also conveyed that an amount of INR 85,413 crores has been paid to the farmers.

    Underwriting of Additional Projects

    The Finance Minister also said that there would be underwriting of the additional export projects through the EXIM bank that is worth around INR 33,000 crore. The Minister also conveyed that in the span of the next 5 years there would be an equity infusion in the Export Credit Guarantee Corp of INR 88,000 crore.

    Other Economic Relief Measures

    Some of the other announcements during the press release include providing a viability gap funding of INR 19,041 crore for broadband connectivity in villages through Public Private partnerships, flexibility in claiming incentives linked to production by the large-scale electronics manufacturers, etc.

    Conclusion

    Narendra Modi, the Prime Minister of India had tweeted that the announcements will help in stimulating the economic activities, boost the production and increase the exports as well as increase the employment opportunities.

    FAQ

    How did Covid 19 impacted Indian economy?

    The economic impact of the COVID-19 pandemic in India has been largely disruptive. India’s growth in the fourth quarter of the fiscal year 2020 went down to 3.1%

    Is the Visa free under the Economic relief measure by the government?

    The first 5 lakh visas will be issued free of cost and the offer is only available once per person.

  • Importance of Ethanol in Economy and why India is Spending $7 Billion in Ethanol production?

    India has been planning to shift more into a much greener source of energy. The country has decided to increase the production of Ethanol to increase the production by 2025. Let’s look at the importance of Ethanol in the economy and why India is planning to spend an amount of around USD 7 billion for the production of Ethanol.

    Ethanol Production in India – Latest News
    The reason why India is Spending $7 Billion in Ethanol production
    How Ethanol is made in India?
    How will Ethanol benefit Indian Economy?
    FAQ

    Ethanol Production in India – Latest News

    India has announced that the country is planning to spend an amount of USD 7 billion in order to boost Ethanol production as the country is planning to reduce the dependency on importing the foreign oil and to increase the roll out of much more greener sources of energy.

    India’s oil secretary, Tarun Kapoor had conveyed in an interview that in order to meet the 20 % ethanol blended fuel standard by the year 2025, there will be a requirement of 10 billion litres of Ethanol.

    The reason why India is Spending $7 Billion in Ethanol production

    The Ethanol production target is estimated to be more than triple the amount of Ethanol that is going to be produced as compared to the Ethanol production as of November 2021. As of now, Ethanol produces 9% of the gasoline blend added Tarun Kapoor.

    This move is expected to require around USD 500 billion for the investments in order to build new bio-refineries. The Prime Minister of India, Narendra Modi had also conveyed in the month of June 2021 that the target of the nation in order to make gasoline of 20 % ethanol by the span of 5 years by 2025 is expected to save a huge amount for the country.

    The increase in the Ethanol production is expected to save around USD 4 billion annually. This move will also help in increasing the use of renewable sources of energy as India is the world’s third largest importer of oil and this will help in turning the excess rice and damaged foods of the country into Ethanol.

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    How Ethanol is made in India?

    As of now, the majority of the country’s Ethanol output is made up of the molasses that is obtained from sugarcane. However, the South Asian nations are trying to push for much more production from sources other than sugar which is estimated to make only 10 % of the contribution to the Ethanol production.

    The Government has also conveyed that they would provide financial assistance for setting up the distillation units which will rely more on molasses and the grains for raw materials. According to Tarun Kapoor, the country is expected to reach a stage where the contribution for production of Ethanol will be 50 % grain based and 50 % sugar based.

    Production volume of ethanol in India
    Production volume of ethanol in India

    How will Ethanol benefit Indian Economy?

    The Ethanol industry will create a lot of jobs in the economy both direct and indirect jobs other than these the Ethanol will boost the rural economies; the co-product provides a valuable market for the corn grown.

    Ethanol also helps in reducing the dependency on energy dependence and will reduce the importing of oil barrels of the country. The Ethanol biorefineries also make more than the fuel they also contribute towards food by providing nutritious animal feed like distillers grains. This is one of the most sought-after animals feeds as it is very nutritious.

    Ethanol also contributes towards removing carbon from the environment which is expected to remove around pollution caused by 10 million cars on the road. It is also a cleaner and more greener option compared to the traditional fuel options.

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    Conclusion

    Ethanol has already been extensively adopted in the United States and has been contributing to the country’s economy. The approach taken by the Government of India towards increasing the production of Ethanol will be a significant step in the major sectors of the economy from Automobile to Agriculture.

    FAQ

    Who is the largest producer of ethanol in India?

    Uttar Pradesh has become on of the highest producer of ethanol in the country with the number of distilleries producing the solvent from heavy molasses, a by-product of cane juice.

    Is ethanol production profitable in India?

    The profit on ethanol production has come down to 5rs/litre.

    What is Ethanol used for?

    Ethanol is an industrial chemical; it is used as a solvent, in the synthesis of other organic chemicals, and as an additive to automotive gasoline (forming a mixture known as a gasohol).

  • Why Experts believe GDP of India will grow by 10% this Financial Year

    The major cities of India have been under lockdown from the month of April and most of them have increased the lockdown to 31 May 2021 as of now. Even after the economic shutdown the Indian business magnate Rakesh Jhunjhunwala has conveyed positive sentiments towards the Indian economy and stock market, whereas certain institutions have conveyed that they expect around 10% growth in the GDP of the country. Let’s look at what they have spoken about the growth of the GDP in India.

    Rakesh Jhunjhunwala on GDP of India
    Rakesh Jhunjhunwala on Future of Indian Economy
    Rakesh Jhunjhunwala on Centre’s economic management
    Other Analysts on GDP of India
    FAQ

    Rakesh Jhunjhunwala on GDP of India

    In an interview with a senior journalist, the Indian business magnate, Rakesh Jhunjhunwala has disapproved of the sentiments of the media and showed a positive approach to the Indian economy. The interviewer had spoken to Rakesh Jhunjhunwala about various issues faced by the country such as growth rate, investment and GDP and added that the country is facing an economic crisis.

    Rakesh Jhunjhunwala had conveyed down all the worries and said that he expects that the country would have a 10% growth for this fiscal year.

    He added that considering the unexpected situation faced by the country, he expects the market to revive by the month of July which is with the reduction in cases due to the second wave of the pandemic.

    Rakesh Jhunjhunwala on Future of Indian Economy

    While the journalist had expressed about the rise in economic problems in the country such as rise in unemployment, the decline in the purchasing power of the individuals and added a question asking when the citizens of the country are losing their lives, no money in their pocket and while the bodies are floating on the river how the stock market was doing well.

    To the question, Jhunjhunwala answered that the market works on reality and not on the basis of sentiments. He said that the GST collection in the country during the month of April was 1.41 lakh crores and there has been a rise in the income of all the major companies from the past 3-4 quarters.

    The journalist had asked another question asking if the market is being manipulated and how can there be a positive sentiment by the investors when the unemployment is increasing. To this, he answered by saying that investments are made based on the future projections and it looks promising.

    GDP of India
    GDP of India

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    Rakesh Jhunjhunwala on Centre’s Economic Management

    After ensuring that the country’s economy is far from sinking, Jhunjhunwala had conveyed that he would give a score of 9 out of 10 for the economic management of the Centre. He also added that the effect of introducing major reforms in the sector such as agricultural, mining, labor and power sectors will be seen later.

    He also pointed out the digitalization made by the government which has helped people to transfer money easily within minutes whereas a few years back people had to pay transactional fees and wait for a while to transfer the money.

    He said that the GDP growth is in the right direction and added that the only way to get rid of poverty is to increase in growth which will, in turn, increase the wealth of the people.

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    Other Analysts on GDP of India

    Whereas multiple analysts and financial agencies have downgraded the GDP for the country for the present fiscal year. Barclays had predicted the GDP growth of India to be more than 10% in the beginning but now they have lowered it to 10%. The latest forecast was done by JP Morgan who has lowered it to 9%.

    The Chief Economist of the SBI group has said that there is a possibility for the economy of India to grow to the sub of 10% during the FY 2022. He added that the month of April was somewhat a washout, while May has been a complete washout and June is also expected to have a little bit of washout.

    FAQ

    Is India doing good in GDP?

    India’s economy had expanded by 3.1 per cent in the March quarter and FY20 GDP growth was around 4.2 per cent.

    What is the growth rate of Indian economy in 2020?

    GDP at Current Prices or Nominal GDP in the year 2020-21 is estimated to attain a level of Rs 195.86 trillion, as against Rs 203.51 trillion in 2019-20

    Which sector is backbone of Indian economy?

    MSME is considered as a backbone of Indian Economy.

    Conclusion

    He said that when all these factors are being taken into consideration the situation of the country is not looking so good. SBI economists have also cut the forecasts of the Indian economy from 11% to 10% and he added that they are focusing on that number until 31 May 2021.

  • Why UN believes India should invest in its Infrastructure to Revive the Economy

    India’s economy has been heavily hit due to the ongoing coronavirus pandemic and before the economy could recover the second wave has taken the country towards a roller coaster ride. The major cities in the country have been under lockdown in order to contain the virus. UN has recently mentioned that investment in infrastructure will help the Indian economy. Let’s look at how that is possible.

    UN’s Solution to India to revive the economy
    Sectors Indian Government should prioritize
    Deficit financing and the Public Sector
    Economy of other countries
    State of India’s Economy
    Requirement for the Indian Economic Recovery
    FAQ

    UN’s Solution to India to revive the economy

    According to a UN expert, India has to heavily invest on its infrastructure if they want to recover from the widespread economic destruction faced by the country due to the coronavirus pandemic. The country will have to invest in infrastructure even if they have to go towards deficit financing.

    Hamid Rashid who is the head of the UN Development Research Branch had conveyed in an interview to IANS TV on 12 May 2021 that, A crisis is always considered as an opportunity and an investment made at the right time in the right sector will create a multiplier effect in recovering the economy and also would make a substantial difference in the lives of people.

    He added saying that seeing India’s condition right now would make us a little despondent but he conveyed that there is a silver lining in their view where he cited the opportunity for the public sectors to invest in vital areas and the signs of progress in containing the virus.

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    Sectors Indian Government should prioritize

    Hamid Rashid continues saying that developing countries like India do not have an option to finance a stimulus programme similar to the US but he added that the country can make proper investments through Public Sector in order to recover the economy.

    He added that the Government will have to prioritize two major sectors health and digital. This is expected to be considered as an opportunity for the government and the Public Sector to increase their investments in the health infrastructure and digital infrastructure. This will create more jobs in the economy and in turn increase the demand for goods and services which will lead to the recovery of the economy.

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    Deficit Financing and the Public Sector

    In India currently, the shortage of oxygen is a huge constraint for India in order to save lives. This is an opportunity to create the right environment so that the businesses can invest more in building the healthcare capacities.

    There is also a need to gaping the digital infrastructure in the country. The countries like India do not have an option to raise taxes in order to meet the infrastructure requirements of the country and hence will have to choose deficit financing. Deficit financing is basically borrowing money from the future.

    Hamid Rashid has said that deficit financing is not a bad idea if the investments are made right. He added that deficit financing is not just necessary but it’s a must. When the businesses can’t take risks, when the private sector or the hospitals can’t take risks, then the only entity that can take risks is the Government.

    So, he said that what we have seen crisis after crisis is Public sector Investments and these investments are the ones that brings countries out of the crisis.

    He also added that with deficit spending one has to be very careful because if the amount is not invested properly then it would create a huge financial burden for the government and this debt balloon will increase over time.

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    Economy of other countries

    He had provided information about the Chinese and the Western economy. China had used investments for economic recovery. He added that the western side approach to fight against the coronavirus pandemic was through creating a demand side support by giving money to the households.

    Whereas China had chosen to increase their investments during the pandemic and it led to the creation of more jobs and now the demand has been increasing and the economy of China has seen a recovery and is expecting a growth rate of 8.2 % this year.

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    State of India’s Economy

    Hamid Rashid’s branch is involved in making the economic forecasts which are used as a base for policy suggestions. The mid-year report which was released on 11 May 2021 has forecast that Indian economy would see a growth of 7.5% this year and would see a rebound of 10.3 % next year.

    When the report was being prepared it was just the beginning of the second wave in the country and if the figures were recalculated right now the growth would be even less optimistic because of certain downside risks.

    He added that there is still a huge opportunity for India for the recovery as they are just starting from a very low base. Last year there was a significant contraction of the economy and this is considered to be the recovering stage. If the pandemic is under control within a month according to assumptions then there would be chances for the growth.

    If the Covid-19 cases increase for several months or for a full quarter then this target would seem very difficult and would see a downfall when the numbers will be updated. He said that if we remain optimistic then a 7.5 % growth rate is still possible.

    India's GDP
    India’s GDP

    Requirement for the Indian Economic Recovery

    The most important element required for the recovery of the Indian economy is considered to be vaccination. This will increase the confidence of the consumers and the businesses as it is very vital for the recovery.

    The news reports create a fear in the minds of people which stops the businesses to invest more as they will have a pessimistic approach and the consumers would not spend more as they feel that there are more bad days coming.

    Hamid Rashid conveyed that this is about managing the expectations and the best way to manage the expectations of the people right now is by ensuring everyone gets vaccinated as soon as possible which will help in the recovery of the economy.

    FAQ

    Is India a mixed economy?

    Yes, India has adopted a mixed economy.

    What is the important sector of Indian economy?

    Agriculture is the most important sector of Indian economy.

    Is Indian economy growing or not?

    India’s economy is estimated to contract by 6.9 per cent due to the coronavirus pandemic.

    Conclusion

    Covid cases in the major cities have been reducing but there is still concern about the infections being spread to the rural areas. Vaccination, social distancing and other measures are expected to work even though it doesn’t create any magic but would help in containing the virus.

  • The Economic Outcomes of the Suez Canal crisis

    The recent news about the blockage of the Suez Canal has gained a lot of popularity on social media. The pictures of the blockage have been widely spread in the online world as memes. But the economic outcomes of the blockage of Suez canal are severe.

    Let’s look at the Economic Outcomes of the Suez Canal crisis

    What happened at Suez canal
    Economic outcome of the Suez Canal crisis
    Loss due to the Suez Canal crisis
    Effect on Crude oil prices
    Other consequences due to the Suez Canal crisis
    FAQ

    What happened at Suez canal

    A giant cargo ship which is 400 meter in length has blocked the Suez Canal. The Canal has been blocked by the ship for the past few days. The ship which is operated by the Taiwanese transport company evergreen marine is one of the world’s largest biggest container vessels.

    The ship weighs 200,000 tones and has a maximum capacity of 20,000 containers. It is said that the ship had lost control after it entered the narrow passage of the Suez Canal from the Red Sea. The salvage company which is trying to refloat the ship has said that it might take weeks for them to complete the task.

    Peter Berdowski who is the CEO of Dutch company Boskalis who is also one of the rescue teams trying to free the ship has said that depending on the situation, they can’t exclude that it might take weeks.

    Economic outcome of the Suez Canal crisis

    The ship has stopped 12% of the world’s seaborne trade and has already cost losses of billions. Almost 50 percent of the container ships pass through the Canal on a daily basis and around 30% of the global container traffic passes through it.
    The current situation is expected to cause a great damage to the global trade. It is expected that the prices of all essential commodities will increase.

    Suez Canal Crisis
    Suez Canal Crisis

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    Loss due to the Suez Canal crisis

    The experts fear that the blockage has led to severe effect on the economy and the global trade. The blockage is costing around 400 million (around INR 2.8k crores) per hour, as ships are asked to take a longer route to reach their destinations.

    Experts have said that this is the worst ship blockage ever witnessed. It is said that many cargo ships which have been diverted would take another 5-6 days to reach their destination.

    Effect on Crude oil prices

    It is said that more than 200 containers carry crude oils through the Canal on a daily basis. Experts have also told that the major hit would be for the small tankers and the crude oil exports from Europe to Asia.

    The director of Asia oil at FGE Sri Paravaikkarasu has said that around 20% of Asia’s Naphtha which is crude oil is supplied through the Suez Canal. He said that re-routing of the ships would add more amount of fuel consumption for the ships that is around 800 tones and increase its operating expenses.

    The shortage in the availability of the crude oil will lead to a jump in the crude oil prices. It is said that the crude oil prices have already increased due to the fear of the crude oil Suez Canal blockage in the past few days.

    Data from Refinitiv has suggested that around 30 oil tankers have been waiting at both the sides of the Suez Canal. David Fyfe who is a chief economist at Argus Media which is a market research firm said that around 5-10 percent of the global shipments passing through the Suez Canal are crude oil, refined oil, and liquefied natural gas shipments.

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    Other consequences due to the Suez Canal crisis

    Lars Jensen who is an independent container shipping expert based in Denmark has said that basically anything you see in the stores would be in shortage because of the blockage in the Suez Canal.

    This includes everything from toilet papers, coffee, furniture, clothes, shoes, exercise equipment to car parts, carpets, and electronics. The blockage has also delayed e-commerce product deliveries which even include food.

    Ian woods who is a marine cargo lawyer and partner at the London-based firm Clyde and Co. has said that, there are commodities worth millions of dollars on other ships waiting for the blockage to be cleared.

    If the blockage is not cleared quickly then they would consider taking longer routes which will increase the operational charges and these extra charges will be carried down to the consumers.

    It is said that eventually the consumers will have to pay the price and this blockage would have a deep impact on the end consumers. The exact amount and the exact effect of the blockage are not yet analyzed but the more it delays the consequences will increase.

    Each day of delay will add more billions of dollars of losses towards the global trade and the economy.

    FAQ

    What country owns the Suez Canal?

    The Suez Canal is operated and owned by Egypt.

    What country built the Suez Canal?

    In 1854, Ferdinand de Lesseps, the former French consul to Cairo, secured an agreement with the Ottoman governor of Egypt to build a canal 100 miles across the Suez.

    Why did Great Britain want to control the Suez Canal?

    Great Britain wanted to control the Suez canal, because it allowed them quicker access to its colonies in Asia and Africa.

    When did Britain buy the Suez Canal?

    In 1875 Britain bought Suez Canal from the Egyptians in £4million worth of shares.

    Conclusion

    However, Egypt’s Suez Canal Authority is looking forward to cooperating with the United States in efforts to refloat the container ship which has blocked the Suez Canal for the past few days. According to Arab News, the Canal revenue for Egypt was $5.6 billion in 2020.