Economics_RS Class 02

A brief overview of the previous class

ECONOMIC GROWTH (05:04 PM)

GDP- Gross Domestic Product

• Total Final value of all Goods and services produced within the domestic territory of India in one financial year.
• In India economic growth is measured using the concept of GDP. Growth is a prerequisite for economic development but Growth alone is not sufficient for ensuring economic development.
• In India, economic growth did not lead to inclusiveness due to the failure of the Trickle-down theory.
• Total Final value of all goods & services produced within the Domestic territory in one financial year.
• GDP= Q*P [Where Q is the quantity of the goods and services produced and P is the price].
• After the independence, our economic growth was driven by PSUs, currently, it is driven by the private sector.
• GDP Growth rate- It is always a percentage. If GDP @2019= 100 and GDP@ 2020= 108, it means the Growth rate is 8%. 
• This GDP growth rate does not mean that development is also there. 
• In Developed countries like the USA where basic necessities are taken care of, economic growth goes very close to economic development.
• When demand is not there because of the Pandemic or speculation etc then the producers will be hesitant to produce thus the Market will fail and GDP will turn negative. During such a situation government uses fiscal policy to spend. Debt for the government increased because there were fewer receipts.

TRICKLE-DOWN THEORY (05:36 PM)

• The government's benefit given to the upper section or the corporates in the form of tax concessions, and subsidies should increase economic growth and the benefits of economic growth should also reach the bottom sections in the form of job creation, poverty reduction, etc.
• In capitalism, the focus is on Growth and increased production. This growth is assumed to percolate down and benefit the other sectors/ bottom sections.
• This Percolation of growth will lead to better education, Better health, etc. But in Countries like India, the bottom sections are not benefitting. 
• The participation of people in the Growth process does not occur when the Health, education, sanitation, etc status are not proper. 
• In India, there was the failure of Trickle Down Theory- I.e. benefits of growth were not trickling down/ percolating down to the bottom sections. 
• When everybody is included in the growth process, The benefits of growth IS reaching the bottom sections=INCLUSIVE GROWTH.
• During the socialistic pattern of growth in India, we failed in ensuring the primary facilities for the bottom sections of society.

RECESSION (05:40 PM)

• The negative growth rate for more than 2 quarters. If the situation exists for a very long period we call itdepression.
• Economic depression is generally associated with job losses and Deflation. 
• The government usesFiscal stimulusor respective reserve banks useMonetary stimulusto handle the economic crisis. 

MONETARY POLICY (05:47 PM)

• Monetary policy deals with the money supply.
• In India, Monetary policy is handled by RBI.
• Monetary stimulus is done by RBI/ central banks/ Reserve banks. It means loans will become cheaper. When RBI is pumping money into the market then it is called Monetary Stimulus. 
• RBI comes up with a Monetary policy to make the loans cheaper. It reduces the Interest rate which incentives individuals to take loans. 
• Pent-up demand- it is nothing but an increase in demand after a steep fall. During the COVID scenario, both monetary policies and Fiscal policies are used for increasing pent-up demand.
• Inclusive growth- It is nothing but including everybody in the growth process of every country i.e. the lower sections should benefit from the growth process and also participate in the growth process.
• The word inclusive growth came up during the 11th Five-Year Plan.
• Demand-pull inflation- If the demand is leading to inflation then it is called Demand-pull inflation. It means too much of money is chasing too few goods or Demand is driving inflation.  

CONTRIBUTION OF SECTORS IN GDP (06:04 PM)

• The general trend is that, in every country in its growth process, the country starts with the Agriculture sector/ primary sector then moves to the secondary sector, and then goes to the tertiary sector. 
• In this process, the labour also moves from the primary sector to the secondary sector.
• In India, today's service sector is the largest contributor to GDP, still, 43% of the workforce is still dependent on the Agriculture sector. In India, there was a direct jump from the Primary sector to the Tertiary sector and the Secondary sector was missed. [* Economic survey called this Premature de-Industrilaization].
• There is too much pressure on land. Contribution is less and income is also at a lower level. 
• In the tertiary sector also, we did not focus on the labour-intensive sector but focused on the Knowledge-based sectors. India failed to create jobs in the secondary sector and the tertiary sector requires high skill.  
• Thus inequality will rise as income from the primary sector is less and in the secondary sector, the income is more than the primary sector. 
• India's Historical path
• In the 1960s India followed the model of Import substitution, and we restricted competition. [Import substitution means no strive towards innovation and efficiency].
• During the same period, South East Asian countries allowed Foreign entities. They adopted the model of an open economy. Foreign companies manufactured products in South East Asian countries and exported from these countries. 
• China also adopted the same model and companies rushed toward China. 
• During British time, Labors were exploited, and the manufacturing sector was not developed. Thus we wanted to protect the manufacturing sector and labourers. If this nascent manufacturing sector is exposed to foreign competition then it may collapse. So India decided to protect the manufacturing sector from foreign competition. This was called import substitution.
• Import substitution Industrialization-
• This model was followed by India in the 1960s to protect the domestic manufacturing sector. The government came up with severaltrade barriersto restrict foreign products and companies from entering India.
• Restricting imports and foreign materials and wanting to protect domestic manufacturing from foreign competition. 
• During the same period, South East Asian countries opened their markets for foreign investments. India's restricted model increased inefficiency due to lack of competition although it helped in developing our manufacturing sectors.
• During the COVID pandemic, there was a global shutdown and the supply chain was disturbed. India adopted the policy of Self-reliant/ Aatmnirbhar Bharat. The logic of Aatmnirbharta is to become strong from the inside. 

INDIA's MANUFACTURING DILEMMA (06:28 PM)

• India imposed trade barriers to protect the manufacturing sector. Also, India gave incentives and subsidies to these sectors which also drained our resources. 
• India assumed that the Indian manufacturing sector will use this protection to grow and ultimately they will be able to compete with the manufacturing sector. 
• But the manufacturing sector remained Small. 
• When they remained small, it means no job creation, no expansion, and no innovation. 
• Thus India utilized the resources to protect the domestic manufacturing sector but it did not perform as expected. 

ECONOMIES OF SCALE (06:44 PM)

• When companies are producing on a mass scale, they procure raw materials in bulk and the cost per unit will be less reducing the cost of production. Larger companies can be more price competitive due to better economies of scale. 
• Trade barriers
• It is nothing but barriers to trade. There are two types of barriers. 
• 1) Tariff barrier- These are in the form of tax
• 2) Non-Tariff barrier- These range from Quantitative measures/ Restrictions to Sanitary and Phytosanitary measures (plant and animal health). Examples- Imposing barriers like Pesticide components, Fertiliser restriction. They are Quantitative restrictions as well. 

INVESTMENT, SAVINGS (07:06 PM)

• Investment. 
• It is the proportion of capital goods to the total output of the country. Example- The total output of a country is 100 Rs. 70 Rs worth of goods are consumer goods and 30 rs worth of goods are capital goods then the investment is nothing but 30/100= 30%. 
• In India, domestic savings are a critical factor for investment thereby driving economic growth. 
• The main function of a bank is to accept deposits and give loans. The loans are an asset for the bank. (Assets are those which give returns). Deposits are liabilities for the banks. 
• Domestic households started savings in the bank. From these savings, banks used to give loans. The private player will take the loans and purchase capital goods. This is a private investment. More machines mean there will be more production in the future and an increase in GDP. Savings are a critical factor for economic growth. 
• China in the 1960s allowed foreign players to invest. Thus Chinese growth model was different from the Indian model. India's growth model was driven by Household savings/ domestic savings.  
• Consumption goods and Capital goods.
• Capital goods are goods used for producing other goods i.e. capital goods are purchased for producing consumption goods also.
• Capital goods do not change their size and shape during the process of production, but there is a loss of value of capital goods due to wear and tear which is also termed DEPRECIATION.
• Consumption goods are purchased in order to fulfil Personal consumption needs and these goods are used by consumers and have no use in the future. 
• Consumer goods can be durable, non-durable, and services as well. 

UNEMPLOYMENT (06:29 PM)

• After independence, India's strategy was-
• Trade- Import substitution
• Manufacturing- license raj, PSU led growth, heavy industry since 2nd Five-year plan (capital intensive growth)
• It did not result in desired growth and the situation of poverty, Joblessness, and hunger remained.
• So the government started to focus on labour-intensive sectors, but it also did not succeed. But they also remained small. 
• These manufacturing sectors failed to create jobs because of labour codes. 
• This unemployment challenge still persists and it will further worsen in the case of Industrialisation 4.0. Why?
• We (India, and China) are more into assembling jobs that can be automated easily and labour will be replaced.
• The manufacturing sector + MSME did not perform well in the creation of jobs. 
• The capital-intensive sector does not employ more labour. 
• Types of jobs
• Formal jobs- Working for the government, MNCs having social security and pension
• Informal jobs- When there is no social security.
• [* Twin challenge- Job creation + quality of the job that can not be replaced by Artificial intelligence].
• Unemployment is measured over the labour force and not over the whole population. 
• Labour force 
• All those between the ages 15-59 who are already working (Workforce) + All those who are between 15-59 who are looking for work but no work. 
• Unemployment rate
• Labour force- workforce / Labor force * 100
• Labour-intensive Growth
• Focusing on those technologies will create more jobs. India's growth process was capital-intensive rather than labour intensive
• Creative destruction 
• Creative destruction can be defined as the decay of longstanding practices, procedures, products, or services followed by more innovative disruptive ones
• Capital intensive
• It is a growth model where we use technologies that will replace labour

The Topic for the next class:- Challenge related to skill development and job orientation.