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

MACROECONOMICS 1 – ECON1192B
WRITTEN ECONOMIC POLICY REPORT
Full Name: Nguyen Anh Tho
Student Number: S3818990
Lecture’s Name: Tra Pham
Word count: 1384
(Excluding all graphs, figures and tables)


Table of Contents
Question 1:................................................................................................................................................. 3
a.

Data Collection 2009 – 2019.......................................................................................................... 3

b.

Data Collection 2020...................................................................................................................... 4

c.

Data Projection 2021..................................................................................................................... 5

d.

Explaination................................................................................................................................... 5

Question 2:................................................................................................................................................. 6
a.

Changes of Fiscal Policy in 2020...................................................................................................6

i.

Recent Tax and Government Spending....................................................................................6

ii.

The budget situation.................................................................................................................. 7

iii.

The importance of general government expenditure in GDP (measured as % of GDP). .8

iv.

The ratio of government debt to GDP..................................................................................8

b.

Impacts of policy change...............................................................................................................9

c.

Discussion..................................................................................................................................... 10

Question 3:............................................................................................................................................... 11
Question 4:............................................................................................................................................... 12
Question 5:............................................................................................................................................... 13


Question 1:

a. Data Collection 2009 – 2019
Year
GDP Growth Rate (annual %)
2009
7.861888833%
2010
8.497584702%
2011
5.241344743%
2012
5.456358951%
2013
6.386106401%
2014
7.410227605%
2015
7.996253444%
2016
8.256305844%
2017
7.043820855%
2018
6.119586841%
2019
4.180727625%
Table 1: Indian GDP Growth (annual %) from 2009 to 2019 (The World Bank n.d.)
Year
Inflation, consumer prices (annual %)
2009
10.88235294%

2010
11.98938992%
2011
8.858360966%
2012
9.312445605%
2013
10.90764331%
2014
6.353194544%
2015
5.872426595%
2016
4.941026458%
2017
2.490886999%
2018
4.860699467%
2019
7.659694743%
Table 2: Indian Inflation, consumer prices (annual %) from 2009 to 2019 (The World Bank
n.d.)
Year
2009
2010
2011
2012
2013
2014
2015

2016

Unemployment, total (% of total labor force) (national estimate)
..
2.440000057%
..
2.690000057%
..
..
..
..


2017
..
2018
5.329999924%
2019
5.269999981%
Table 2: Indian Unemployment, total (% of total labor force) (national estimate) from 2009 to
2019 (The World Bank n.d.)
b. Data Collection 2020
Indicator
GDP Growth Rate (annual %)
Table 3: Indian GDP Growth Rate (annual %) (Scroll 2021)

2020
-9.6%

Indicator

2020
Inflation, consumer prices (annual %)
5.6%
Table 4: Indian Inflation, consumer prices (annual %) (OECD n.d.)
Indicator
2020
Unemployment, total (% of total labor force) (modeled ILO estimate)
7.11%
Table 5: Indian Unemployment, total (% of total labor force) (modeled ILO estimate) (The
World Bank n.d.)


c. Data Projection 2021
Indicator
2021
GDP Growth Rate (annual %)
7.3%
Table 6: Indian GDP Growth Rate (annual %) Projection 2021 (Scroll 2021)
Indicator
2021
Inflation, consumer prices (annual %)
4.65%
Table 7: Indian Inflation, consumer prices (annual %) Projection 2021 (OECD n.d.)
Indicator
2021
Unemployment, total (% of total labor force) (modeled ILO estimate)
6.52%
Table 8: Indian Unemployment, total (% of total labor force) (modeled ILO estimate) (The
World Bank n.d.)
d. Explaination

From 2009 to 2019, Indian GDP growth rate, inflation rate and unemployment rate are quite
stable with positive statistics. However, in 2020, COVID19, pandemic has significantly
decreased Indian GDP growth rate to negative figure (-9.6%) (Table 3) while Inflation rate and
Unemployment rate has respectively increased to 5.6% and 6.52% (Table 4 and 5). It is expected
that there will be many positive signs in Indian economic recovery after COVID19. Particularly,
GDP growth rate has essential increased to 7.3% (Table 6). Inflation and unemployment rate are
forecasted to decrease to respectively 4.65% and 6.52% (Table 7 and 8).


Question 2:
a. Changes of Fiscal Policy in 2020
i. Recent Tax and Government Spending

Figure 1: Indian Corporate Tax from 2011 to 2021 (Trading Economics n.d.)

Figure 2: Value of government expenditure in India from financial year 2014 to 2020, with
estimates until 2025 (Statista n.d.)
At the end of 2019 when COVID19 pandemic has stared, India has decreased Corporate Tax
from 34.61% in 2018 to 25.17% in 2019 (Figure 1). This has been kept the same as 2019’s tax
rate at 25.17% in 2020 and 2021. The reduction in corporate aims to stimulate the economy to
recover again. Furthermore, government spending has consecutively increased from 55.97


trillion Indian rupees in 2019 to 59.37 trillion rupees in 2020 (Figure 2). Particularly, in 2020,
Indian government has spent for 3 stimulus packages with value of 1.7 trillion INR on 26 March,
20 trillion INR on 15 May and 2.65 lakh crore on 14 November (KPMG 2020).
ii. The budget situation
Before COVID19, Indian Central Government Budget is 3.77% in 2019 (Figure 1). However, in
2020, COVDI19 has impacted severely to the Indian economy which India has more than 300
thousand new infected cases per day (Gettleman et al. 2021). Therefore, the Indian government

has increased their spending in 2020 which cause significant reduction of its budget. Particularly,
the Indian Central Government Budget is deficit with -9.5% of GDP in 2020 (Figure 1)

Figure 3: Indian Central Government Budget (% of GDP) from 2009 to 2020 (Trading
Economics n.d.)


iii. The importance of general government expenditure in GDP (measured as % of
GDP)
Year

General government final expenditure (%

of GDP)
2017
10.75%
2018
11.092%
2019
12.029%
Table 9: Indian general government final expenditure (% of GDP) (The World Bank n.d.)
The Indian total government expenditure to GDP in 2020 is 17.7% (Nahata 2021). This is a
significantly increases of India total government expenditure to GDP which is recorded at
12.029% in 2019 (Table 9).
iv. The ratio of government debt to GDP

Figure 4: Indian National debt from 2016 to 2026 in relation to gross domestic product
(Statista n.d.)
The Indian government debt to GDP has been essentially increased since 2019. Particularly,
Indian national debt to GDP has increased from 73.89% of GDP in 2019 to 89.56% of GDP in

2020 (Figure 4)


b. Impacts of policy change
Aggregate Demand is affected by consumption, investment, government spending and net
exports. At the initial equilibrium A, Indian economy are experiencing a recession due to
COVID19 pandemic. Therefore, when Indian government increases their spending from 55.97
trillion Rupees in 2019 to 59.37 trillion Rupees in 2020 (Figure 2), the Aggregate Demand also
increases. However, the taxation cut and increases of government spending cause will cause the
multiplier effect. Particularly, government spending will be poured out to the market which
household will receive and spend it. Thus, the consumption also increases. Meanwhile, firms will
have more funds to reinvest due to tax cut which also increases in investment. This means a
dollar is spent by government or tax cut can increase more than a dollar in real GDP.
Hence, in short term, AD curve will shift rightward from AD1 to AD2. The AD2 cuts the SRAS1
at new Equilibrium B which reflects the higher quantity of goods and services (Y2 – Real GDP)
at the higher price level (PL2). As a result, the inflation has increased to boost the economy and
eliminate recession. Furthermore, at B, the economy can operate at the full employment and
stable economic growth. However, the multiplier effect might not be strong enough to push the
AD1 to AD2. For example, the household and firms might partially spend the money from
government spending and tax cut. Therefore, the crowding-out effect will make the AD curve
shift leftward from AD2 to AD3 which cuts SRAS1 at new equilibrium C. At point C, the
economy does not operate with full employment which lower the real GDP from Y2 to Y3 at the
lower price PL3.
In long run, the Indian economy will adjust to make SRAS curve cut the AD curve at the LRAS.
Hence, SRAS1 will shift rightward to SRAS2 to cut AD3 and LRAS at the new equilibrium D.
The point D shows that the economy has improved to operate at full employment to produce
higher real GDP Y2 with lower price level PL4. This also reflects lower inflation comparing to
point B.

Figure 5: AD/AS Diagram
c. Discussion
The multiplier effect can be limited by crowding-out effect. In reality, increases of government
spending will increase the quantity of goods and services which is emerged from the increases of
AD curve. Therefore, people will demand for more money to spend and buy goods and services.
This leads to the rise of interest rate. Therefore, investors will reduce their investment as the cost
of borrowing fund to invest is rising. As a result, the Multiplier effect will not be as strong as in
theory. Furthermore, government spending also increase consumption. People will not
completely spend all their money which is from government spending. Hence, multiplier effect is
also reduced impacts in this situation.
Regarding the Crowding-out effect, this effect can increase its effect when people have
pessimistic expectation for the future. For example, government spending will be poured out for
banks which will distribute to firms or investors. These firms will pay salary for employees who
pay for consumption. This boosts the whole economy through increasing consumption,
investment and government spending. However, the COVID19 situation in India has impacts the
views of employees to save more. Thus, they spend less in consumption and firms also spend


less in investment. The Crowding-out effect will be stronger and slow down the fiscal policy.
Therefore, the Indian Fiscal Policy is less effective in deal with servere COVID19 situation.
Question 3:

Figure 6: Indian Inflation Rate from May 2020 to April 2021 (Trading Economics n.d.)
The sudden increases in government expenditure of Fiscal Policy have led to the increases in
Aggregate Demand which boost the economy with higher inflation in 2020. In recent months, the
inflation rate has decreased from 5.52% in March 2021 to 4.29% in April 2021 (Figure 7).
Furthermore, in 2021 – 2022, government estimates to spend 3483236 crore INR comparing to
3450305 crore INR in 2020 – 2021 (Union Budget 2021). Therefore, it is expected that the
Indian inflation rate might increase 4.9% in May 2021 to deal with serve situation of COVID19
pandemic (IMF 2021). Therefore, there is a risk of inflation if the Indian government continues

to spend more for boosting the economy. Data supports my findings and the AD/AS diagram.
In short run, the AD curve shift rightward from AD1 to AD2 which create new equilibrium B
with higher real GDP at higher price level P2. However, in long run, the economy stabilize itself
by shifting SRAS1 to SRAS2 to cut AD2 at C which reflects lower real GDP and higher price
level P3. This is the risk of inflation.


Figure 7: AD/AS Diagram
Question 4:
Year

CAB (Billion

NX (Billion

NY (Billion

NT (Billion

current US$)
current US$) current US$)
current US$)
2019
-29.763
-73.452
-29.378
72.213
2018
-65.599
-105.918

-29.757
70.612
2017
-38.168
-72.212
-26.423
62.949
2016
-12.114
-41.579
-27.361
56.572
2015
-22.457
-63.249
-23.36
63.096
Table 10: Current Balance Account and its component in the last five years (The World Bank
n.d.)
COVID19 has negatively impacts the Current Account Balance of India in 2020 which recorded
to be deficit of $2.6 Billion in Q3, FY20 (The Indian Express 2021). Furthermore, COVID19
situation has become severely in India, hence, it is observed that there is deficit of $2.6 billion in
Q3, FY21 (The Indian Express 2021). Because of COVID19, the exports of India have been
pulled down 34.6% in March 2020 which led to the trade deficit of $9.8 billion (Mishra 2021).
Furthermore, Indian government is attempting to increase imports of vaccination in 2021 to
tackle COVID19 which also contribute to the trade deficit (Reuters, Das & Pal 2021). Hence,
Net Exports will negatively decrease. However, it is observed that there are increases by 13% in
Foreign Direct Investment of India in 2020 (Elegant 2021). This implies that Net income from
abroad and Net current transfer might also increase and COVID19 might not have strong impacts
on these two components.

Question 5:
Mr. Hung stated that the government will try to promote businesses as well as consumption in
the crisis. Particularly, the government will allow businesses to delay for paying tax for 6 months
during economic crisis. Therefore, they can reduce pressure of tax burden on businesses. During
6 months, businesses can use surplus funds which incurred from delaying for paying taxes to
reinvest for generating more profit. This increases the investment as well as consumption. The
investment firms will pay salary for employees. Hence, employees can pay more for household
consumption. The Aggregate Demand is made from C (Consumption), Investment (I), G
(Government Spending), NX (Net Exports). Therefore, C and I increases will result in the
shifting rightward of AD curve. This will increase the real GDP of the whole economy.


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