Session Report
Aasthaba Jadeja
The IMPRI Impact and Policy Research Institute, New Delhi conducted an online spring school program, a one-month immersive introductory certificate training course, Fundamentals of Public Policy – Cohort 2: Awareness of Policies & Governance.
On Day 6 of the Fundamentals of Public Policy – Cohort 2: Awareness of Policies & Governance course, Professor Mukul Asher ji, delivered a presentation on India’s Foreign Policy and Macroeconomic Frameworks.
In his opening remarks, Professor Asher provided an introduction to the core principles and frameworks of macroeconomics. He then established Gross Domestic Product (GDP) as the metric representing the total market value of final goods and services produced within a nation’s economy over a one-year period.
The Symbol of the Indian Rupee
The Government of India officially adopted a new symbol for its national currency, the Rupee, on July 15th, 2010. This symbol, designed by Uday Kumar Dharmalingam, currently an Associate Professor and Department Head at IIT Guwahati, represents a unique fusion of cultural and economic elements.
It incorporates the Devanagari character “Ra,” signifying the word “Rupee” in Hindi, and the Roman capital “R,” ensuring global recognition. The top horizontal line, designated as “shiro rekha” within the Devanagari script, adds a distinctive Indian touch. Notably, the two parallel lines and the space between them possess a dual meaning. They visually represent the horizontal stripes of the Indian tricolour. Additionally, they symbolize the mathematical equal sign, reflecting the nation’s aspiration for a balanced and equitable economy.
Introduction
Within the realm of macroeconomics, a nation’s intricate economic system, characterized by a vast number of transactions and a diverse range of goods and services, undergoes a statistical simplification. This simplification entails conceptualizing the entire economy as a single entity producing a single good, referred to as the “National Product.” This National Product serves as an aggregate measure, encompassing the total market value of all final goods and services produced and exchanged domestically. Fluctuations in its price level directly correspond to the rate of inflation, defined as a sustained increase in the cost of a designated basket of essential goods and services.
Professor Asher elaborates on the core objectives of macroeconomics, highlighting its dual focus. In the long term, macroeconomics strives to achieve stable economic growth alongside robust employment levels. This ideal state signifies the most efficient utilization of a nation’s resources, including labor and capital. In the short term, however, the focus shifts towards mitigating economic fluctuations. These fluctuations can arise from inherent cycles within investment patterns or unforeseen shocks, both internal and external, that can disrupt the economic equilibrium.
Economic growth is traditionally measured by the increase in the real (inflation-adjusted) National Product per capita. Macroeconomic policy interventions aim to achieve a multifaceted set of goals, including the expansion of the National Product, the promotion of employment opportunities, the control of inflation, and the fostering of economic fairness. It is crucial to acknowledge the inherent trade-offs that often exist between these objectives. For instance, excessively rapid growth can trigger an undesirable level of inflation, while measures implemented to control inflation can potentially impede economic growth.
Furthermore, economic growth doesn’t always translate into a significant increase in job creation. As a result, a core principle of macroeconomic policy emphasizes the selection of growth strategies that prioritize the generation of sustainable livelihoods, a concept encompassing a broader scope than mere employment generation.
Basis for Measuring National Product
The concept of National Product measurement gained significant traction in the 1930s due to two key factors. The Great Depression’s devastating impact on output and employment highlighted the need for economic data, while John Maynard Keynes’ economic theories emphasized government intervention through fiscal policy to manage aggregate demand and generate employment. This necessitated the development of robust data and statistical methods for measuring National Product.
The System of National Accounts (SNA) established by the United Nations provides a standardized framework for compiling economic activity measures. This internationally agreed-upon system utilizes specific concepts, definitions, classifications, and accounting rules to ensure consistency in measuring economic indicators like GDP, a widely used metric of economic performance.
The SNA’s accounting framework structures economic data in a way that facilitates analysis, decision-making, and policy formulation. These accounts condense a vast amount of detailed economic information, organized based on economic principles, to provide a comprehensive picture of an economy’s operations. They capture the intricate economic activities occurring within an economy and the interactions between various economic agents and groups.
The SNA framework ensures comprehensiveness by encompassing all designated activities and their consequences for all economic agents. Consistency is maintained by using identical values to represent the repercussions of a single action on all involved parties, adhering to the same accounting rules. Additionally, the framework is integrated, meaning that all outcomes of a single action by an agent are reflected in the resulting accounts, including their impact on wealth measurement captured in balance sheets.
A simplified circular flow diagram depicts the basic interactions in a capitalist economy. Households supply factors of production like labor, land, and capital, while firms provide goods and services in exchange for these factors. In essence, households supply factors and demand goods/services, while firms do the opposite. The sum of all expenditures in this circular flow translates to national income.
The introduction of a government layer adds another dimension. Governments collect tax revenue from households, reducing their spending power, but also spend on goods and services themselves. Financial institutions further complicate the picture by introducing factors like savings and investments. Finally, the external sector encompasses exports and imports. Exports generate income as our domestically produced goods are consumed abroad, becoming part of our GDP. Conversely, imports represent the consumption of foreign-produced goods within our economy.
Economic stabilization policies aim to achieve equilibrium in various aspects. These imbalances can include savings deficits, trade deficits (like India’s merchandise trade deficit countered by a surplus in services trade), income deficits, budget deficits, weak markets for goods/services or factors of production. Strategies to address these imbalances include mobilizing savings, attracting foreign direct investment (FDI) to enhance investment projects, promoting exports while reducing imports, reforming factor markets, raising national income and government revenue, controlling expenditure, and reforming goods and services markets.
The exchange rate, representing a currency’s value, significantly influences export and import demand. A depreciation in our currency makes our exports cheaper, potentially increasing their volume depending on price elasticity of demand. However, a weaker currency also translates to higher domestic costs for imported goods, thereby pushing up inflation.
While conventional National Income analysis and measurement serve policy purposes, it’s crucial to recognize the importance of environmental and social capital for societal well-being. Environmental capital encompasses natural resources like rivers, forests, and air quality, while social capital includes social cohesion, human capital, legal systems, and cultural aspects. These factors aren’t directly measurable in National Income calculations, but policymakers must acknowledge their significance by incorporating them qualitatively into decision-making processes. Furthermore, the sheer complexity of economic transactions emphasizes that absolute values of National Income, GDP, etc., might be less valuable than analyzing changes in cost derivatives.
Basic Concepts in Macroeconomics
- Expenditure Accounts – The size of national product is measured as the sum of all real final expenditures. It contains
- C – Private Consumption,
- I – Investment (Private Investment, government investment or change in inventories is regarded as investment)(Gross Capital Formation) or (sum of gross fixed capital formation and increase in stocks),
- G – Government Consumption or Expenditure,
- X – Exports and
- M – Imports.
- Income Accounts – It includes
- CE – Compensation to Employees,
- OS – Gross Operating Surplus and
- T – Taxes collected by the government.
Generally,
(C+I+G+X-M) = (CE+ OS+ T)
Measurement of Price Level and Inflation
It is usually done through Prices Indices-
- CPI – Consumer Price Index
- GDP Deflator
- Specific Sectoral Indices- eg. Oil Price Index, Energy Price Index
- Export Price Index and Import Price Index
All indices have a base year and the base year value is either 1 or 100.
Different Measures of National Product
- GDP = C+I+G+X-M
- GNI= GDP + Net Remittances from Abroad
- NNI = GNI – Depreciation of Capital Stock
- Sustainable NNI = NNI – Depreciation if Environmental and Social Capital
Short Run Stabilization
Achieving economic equilibrium necessitates maintaining both internal and external balance. Internal balance focuses on price stability, aiming to keep inflation within a moderate range (2-3%) while ensuring full employment. External balance, on the other hand, pertains to a balanced balance of payments, ideally achieving a perfect equilibrium. The recent global economic crisis of 2008, with its lingering effects, and the ongoing Covid-19 pandemic have significantly heightened the challenges of striking a balance between achieving these goals alongside economic growth, financial stability, and fiscal sustainability.
Methods for Policy Intervention for SR Stabilisation include Monetary Policy, Exchange Rate Policy, Fiscal Policy and Wage-Price Policy.
- Monetary Policy
- Open market Operations, Reserve Deposit Ratio, Discount Lending Window
- Net result changes Money stock and Interest Rates, Gradual- minimal intervention
- Aggressive intervention to alter overall demand in the economy
Recently, Central Banks have been aggressively purchasing assets, both public and private. This is equivalent to conducting fiscal policy by central banks.
- Exchange Rate Policy
- Buy and Sell Local Currency Units in exchange for World Price Currency in currency markets
- The net result is similar to Monetary Policy
- Fiscal Policy
- Change taxes and/or government spending
- The net result has an impact on total demand in the economy but can crowd out monetary policy outcomes
- Wage-Price Policy
- Voluntary and/or induced changes to prices
- The net result affects the total supply of goods and services in the economy
India’s GDP 2024
Interim Budget 2024-25 estimates India’s nominal GDP to grow by 10.5% to Rs. 327.7 trillion during the upcoming Fiscal. The growth is estimated to come on top of the nominal GDP of Rs. 296.6 trillion as per the first advance estimates of GDP for 2023-24 released by the National Statistical Office (NSO). India’s per capita GDP in 2024 was 2850 USD but there are wide variations across the country. Gross Capital Formation in India was reported as 31.04% in 2022, according to the World Bank collection of development indicators, compiled from officially recognised sources. India’s Gross Saving Rate was measured at 30.2% in March 2023.
Conclusion
In conclusion, Professor Asher emphasized that the macroeconomic framework serves as a comprehensive accounting system. This system provides the foundation for establishing economic goals and designing effective policies. He underlines the critical role of robust data in formulating sound policies. Professor Asher also acknowledged the growing complexity of macroeconomic policies in today’s globalized world.
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Acknowledgment: Aasthaba Jadeja is a Visiting Researcher at IMPRI.
