1. With improved revenues, government must increase expenditures to push consumption and investment
Annual growth prospects:
While the economic impact of the first wave was more severe, the health impact of the second wave was more serious, due to different nature of scope of lockdowns. The Indian economy would have done better in Q1 of 2021-22 had its performance not been beset by the adverse impact of COVID-19’s second wave.
Growth Required to meet RBI's 9.5% GDP growth forecast & IMF's estimate: A growth of 6.8% for the remaining year would suffice. This should easily be feasible in Q2 since there would still be the benefit of a base effect, considering a contraction of 7.4% in Q2 of 2020-21.
In Q3 and Q4 considering that the real GDP growth in 2020 was positive at 0.5% and 1.6%, respectively, achieving 6.8% growth would be more demanding.
Private Final Consumption expenditure (PFCE) - The Largest portion of our GDP. Its average share over the last three years (2018-19 to 2020-21) was 56.5%.
Growth estimate: In Q1 of 2021-22, it grew by 19.3%, which is marginally below the overall GDP growth. Also, the contraction in PFCE in the corresponding quarter of 2020-21 was relatively larger at 26.2%.It would have grown by 35.5% in this quarter to achieve desired growth.
Private consumption Growth: PFCE mainly depends on income growth and its distribution. Thus, it would be useful to focus on supporting income and employment levels for the MSMEs and informal sectors, which have a higher propensity to consume.
Demand Side Growth: Exports, Gross fixed capital formation (GFCF) & government final consumption expenditure (GFCE)
Exports: Exports grew by 39.1% Q1-2021, over a contraction of 21.8% in 2020-21 corresponding quarter. It is 8.7% higher than the export level in the corresponding quarter of 2019-20.
GFCF: the base effect was quite large. Despite a growth of 55.3% in Q1 of 2021-22, its magnitude was still 17.1% lower than the corresponding level in Q1 of 2019-20.
Government Expenditure(GFCE): The only demand segment which contracted even with reference to Q1 of 2020-21 was government expenditure. It contracted by a margin of (-) 4.8%.
The output side Growth:
Key Service Sector — including trade, transport, storage; grew by 34.3% in Q1 of 2021-22 as compared to a contraction of 48.1% in Q1 of 2020-21. However, relative to its level in Q1 of 2019-20, the output of this large service sector was significantly lower by 30.2% in Q1 of 2021-22.
Significant growth of 5.8% in Q1 of 2021-22 over Q1 of 2020-21 in — public administration, defence and other services. They actually reflected a contraction of 5.0% as compared to Q1 of 2019-20.
Agricultural sector: It showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.
However it can't contribute further in Growth:
Given agriculture’s positive growth in all the quarters of 2020-21, further contribution from this sector to the overall growth may not be expected.
Its average weight to the overall output is also low at about 15%.
Main sectors: It is the high weight manufacturing sector and the two substantive service sectors — trade, transport et. al and financial, real estate et al. — which will have to support growth in the remaining part of the year.
Recovery: Construction and electricity, gas, water supply and other sectors have already started showing a robust recovery.
Government Role: These may respond further to the government’s emphasis on expanding investment in infrastructure.
Impact of Government's intervention: It is reflected by the performance of GFCE on the demand side, and the public administration, defence and other services sector on the output side.
Fiscal Impact of this intervention: Fiscal data of the Controller General of Accounts released on August 31
Higher gross tax revenues (GTR): it grew sharply by 83.1% in April-July of 2021-22 over the corresponding period of 2020-21 and by 29.1% over the corresponding period of 2019-20.
Centre’s fiscal deficit: in the first four months of 2021-22, it amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.
Given the high tax collection, a significant policy space is opening up for the government to raise its demand and its contribution to output in the remaining part of the current fiscal year.
Attempts should be made either to bypass or at least curb the adverse impact of COVID-19’s likely third wave.
Given the fiscal room, both the coverage of vaccination and the pace of investment in health infrastructure should be accelerated within the strategy of expanding the overall infrastructure investment.
As revenues improve, expenditures can be increased. There is no need to reduce the fiscal deficit below the budgeted level of 6.8% of GDP.
Expected Question: Outline the various determinants of GDP in India. What role does Gross capital formation plays in the overall GDP growth? (150 Words)
2. The protracted stand-off over North Korea reinforces the hollowness of the doctrine of deterrence
History of the attempts to bring Korea on Line:
Attempts to persuade North Korea:
The U.S. had initially planned pre-emptive precision strikes on the nuclear sites in 1992, but was deterred against such a misadventure by an initiative towards a 1994 agreement by President Jimmy Carter.
The 1994 Agreed Framework is an executive agreement signed by President Bill Clinton, required Pyongyang to freeze all nuclear activity and allow inspection of its military sites in return for the construction of two light water reactors.
In 1994, Pyongyang barred IAEA access to the Yongbyon complex amid suspicions that the country was generating plutonium from spent fuel.
The accord broke down in 2002.
History of Sanctions:
North Korea was placed on the terrorism list after the 1987 bombing of a South Korean airplane.
In 2002, the former U.S. President George W. Bush eased some sanctions against North Korea.
More controversial was Washington’s decision to revoke the designation of “state sponsor of terrorism” less than two years after Pyongyang’s first nuclear explosion of 2006.
Attempts of Sabotage: In June 2008, in order to buttress its denuclearisation commitment to the U.S. and four other countries, Pyongyang blew up the cooling tower at the Yongbyon complex. The move did little to assuage the concerns of critics, either regarding the plutonium stockpile the regime had amassed or its engagement in clandestine nuclear proliferation.
Later in 2008, Pyongyang barred IAEA inspectors access to its reprocessing plant in the Yongbyon complex and eventually expelled them the following April.
In November 2010 American scientist Siegfried Hecker confirmed that North Korea had rapidly built a uranium enrichment plant at Yongbyon.
Futility of Deterrence:
Apart from the punitive impact of such measures on an impoverished people, the protracted stand-off over North Korea reinforces the hollowness of the doctrine of deterrence.
This begs the question whether proliferation can ever be prevented just because nuclear weapons states want to perpetuate their dominance?
The Biden administration has adopted a pragmatic path of declaring its readiness to resume negotiations with Pyongyang without the grandiose distractions of the Trump era that amounted to exerting little diplomatic leverage.
The UN treaty on complete abolition of atomic arms, whose deliberations were boycotted by all nuclear weapons states, is the morally superior alternative.
Expected Questions: What do you mean by Nuclear Proliferation? What are the potential risks of it and how has its response impacted India and the world? (250 Words)