Uploaded by shdarshan984

MBE IS-LM Model Assignment

What is Economic Slowdown, Recession and Depression? `
Economic slowdown: An economic slowdown occurs when the rate of economic growth slows an
economic slowdown occurs when the rate of economic growth slows in an economy. Countries
usually measure economic growth in terms of gross domestic product (GDP), which is the total
value of goods and services produced in an economy during a specific period of time.
A situation in which GDP growth slows but does not decline. For example, if GDP goes from 5%
growth to 3% growth, an economy is experiencing a slowdown. Most analysts do not consider a
slowdown to be a recession, but unemployment may rise and productivity may decline
Recession: A recession is a macroeconomic term that refers to a significant decline in general
economic activity in a designated region. It is typically recognized after two consecutive quarters
of economic decline, as reflected by GDP in conjunction with monthly indicators like
employment. Recessions are officially declared in the U.S. by a committee of experts at the
National Bureau of Economic Research (NBER), who determines the peak and subsequent trough
of the business cycle which demonstrates the recession.
Depression: A depression is a severe and prolonged downturn in economic activity. In economics,
a depression is commonly defined as an extreme recession that lasts three or more years or leads
to a decline in real gross domestic product (GDP) of at least10 percent
Depression, in economics, major downswing in the business cycle that is characterized by sharply
reduced industrial production, widespread unemployment, serious declines or cessations of
growth in construction activity, and great reductions in international trade and capital
movements. Unlike minor business contractions that may occur in one country
independently of business cycles in other countries, severe depressions have usually been nearly
worldwide in scope.
Where does India stand today?
India is facing economic slowdown. There are number of reason by which we can say India is
facing slowdown:
1. The government has not taken any decisions on many items during the election - for
example the mining licensing renewals and exploration of oil and gas.
2. There has been a stalemate on new solar farms due to anti-dumping duty and price
capping which the government has created a double whammy.
3. The new EV policy has a lot of holes to be plugged and import duties need to be reduced
with clarity on charging points etc. which needs to be addressed.
4. Additionally, the MSME industry in India is languishing without bank credit and this has
dried up without banks addressing their credit issues.
5. The offshore wind farms have also been stalled without any decision on land allocation…
in fact this is a common problem for all renewables.
6. Slow implementation of infra projects with delays on all fronts.
7. No policy on land use and allocation as well as on labour reforms which were expected
8. No sale of PSUs and reduction in red tape after the initial period. This should be an
ongoing activity of sale of Air India, sale of banks which are lending and having huge bloat
with corrupt bank officials and little to no oversight.
Some Industries and their statistics
Automobile slowdown
Automobile sales, which had already declined in the first quarter of 2019-20, further slumped in
Q2 due to the worst-ever monthly drop recorded in August and a continued decline in September
GDP from Manufacturing
GDP From Manufacturing in India increased to 5765.60 INR Billion in the third quarter of 2019
from 5681.04 INR Billion in the second quarter of 2019. GDP From Manufacturing in India
averaged 4630.45 INR Billion from 2011 until 2019, reaching an all time high of 6167.49 INR Billion
in the first quarter of 2019 and a record low of 3331.04 INR Billion in the third quarter of 2011.
GDP from Mining
GDP from Mining in India decreased to 727.76 INR Billion in the third quarter of 2019 from 988.87
INR Billion in the second quarter of 2019. GDP From Mining in India averaged 784.28 INR Billion
from 2011 until 2019, reaching an all time high of 1139.86 INR Billion in the first quarter of 2019
and a record low of 556.18 INR Billion in the third quarter of 2012.
GDP from Agriculture
GDP From Agriculture in India decreased to 3651.61 INR Billion in the third quarter of 2019 from
4335.47 INR Billion in the second quarter of 2019. GDP From Agriculture in India
averaged 4126.42 INR Billion from 2011 until 2019, reaching an all time high of 5869.41 INR Billion
in the fourth quarter of 2018 and a record low of 2690.74 INR Billion in the third quarter of 2011.
Finance Minister on Economic Slowdown:
Finance minister addressing the economic slowdown –
Sitharaman said the government had taken several measures to address issues faced by the
various sectors, including recapitalising public sector banks and consolidating them.
“I just want to highlight that 32 steps were taken by me… Every step that is pertaining to different
sectors, whether it is MSME (micro, small and medium enterprises) or banks… these steps… I
She said the direct tax-to-GDP ratio rose from 5.5% in FY15 to 5.98% in FY19. Also, revenue
receipts have grown by 18%, revenue expenditure by 13.97% and capital expenditure by 15.31%
in the first half of this year.
“Everything is coming down? Not at all,” she said in response to Opposition criticism. “We are
conscious of the challenges faced by sectors... we shall ensure every sector and challenges are
heard by us.”
Measures taken by Government to control slowdown
In his August 12 interview to ET (bit.do/e4AcL), Prime Minister Narendra Modi reiterated his progrowth, pro-investor intent. But despite some important reforms like goods and services tax
(GST), Insolvency and Bankruptcy Code (IBC), foreign direct investment (FDI) liberalisation, and
better ease of doing business and infrastructure, the overall impression of his first term hasn’t
been investor friendly.
Revoke the recent increase in taxes for high-income. This may also repair confidence among FPIs
in Indian markets.
Abrogation of Article 370 had been the biggest decision of the Modi govt, which would help
people of Leh, Ladakh, and Jammu and Kashmir in getting all sorts of welfare benefits. "It's been
35 days, not even a single bullet has been fired in Kashmir. No civilian has died. Only 1 or 2
standalone militant activity has taken place. There's absolutely no restriction apart from 144 in
few parts," he said, adding that international media had reported fake news on the Kashmir issue.
Talking about the Triple Talaq Bill, Javadekar said it had empowered Muslim women. "They never got their
right due to vote bank politics. We made sure their rights are intact."
On the success of PM Modi's flagship scheme Ayushman Bharat, Javadekar said 41 lakh patients had
benefitted from the scheme so far. "Over 10 crore e-cards have been issued. Few states like Delhi stayed
away from Ayushman Bharat but I'm sure citizens of Delhi will force the govt to adopt Ayushman Bharat,"
he said. He said the government was aiming at making drinkable water available in every household. "The
Centre aims to get water to every house of this country in the next 5 years,"
Hinting at other measures like steps to improve exports, easing credit, making more money
available by early repayments to vendors and front-loading of banks recapitalisation, Sitharaman
said the government has been working on sector-specific measures.
Sitharaman had on September 20 announced lowering of the base corporate tax rate to 22 per
cent from 30 per cent for companies that do not seek exemptions, and reduced the rate for new
manufacturing companies to 15 per cent from 25 per cent.
Including surcharges and cesses (levies to raise funds for specific purposes), the effective
corporate tax rate will drop by nearly 10 percentage points to 25.2 per cent for corporates in
general and 17.01 per cent for new manufacturing companies.
Took back the idea that all listed companies must have 35% public shareholding.
Reduce statutory liquidity ratio (SLR) and direct State banks to lend, instead of buying more
government security (G-Sec) debt.
Policy of Government: Corporate tax reduced from 30% to 22%
On September 20 announced lowering of the base corporate tax rate to 22 per cent from 30 per
cent for companies that do not seek exemptions, and reduced the rate for new manufacturing
companies to 15 per cent from 25 per cent.
Goods Market Situation:
The policy is at the demand side. As the tax would reduce, the disposable income would increase.
It means the purchasing capability will increase. Hence the MPC will increase, the consumption
increases and the aggregate demand increase.
So in Goods market, the aggregate demand will shift upward.
Real GDP
Money Market Situation:
Increase in disposable income and consumption capacity, will reduce the demand for bond from
the money market and demand of liquidity will increase. So the money demand curve will shift
rightward and rate of interest will increase.
Real Money Supply
Generally this effect is not shown and the direct economic effect is shown in IS-LM Graph. Here
the rate of interest has direct effect in Goods Market and Investment will fall down and the
Crowdy Amount effect will take place and Real GDP will increase along with the rate of interest.
IS-LM Graph
Real GDP
From the above diagram it can be seen that the IS curve will shift rightward and hence there is
increase in Income level and Rate of interest.