GS Paper 3
Syllabus: Effects of liberalization on the economy
Source: Indian Express
Direction: No so important article, but do keep a watch on the impact of US economic policies on the Indian Economy.
Context: Normally when the US Fed (central Bank) raises its interest rate to control inflation, it raises the fear of recession as consumption and demand decrease (people have less money) and so unemployment surges. However this time the US economy is creating jobs even as the Fed is hiking rates.
Recent Trend:
Economic output in the US is contracting in line with the Fed’s rate-tightening. But companies are still hiring in droves.
-
-
- Over the past six months, jobs have been created in the US at the rate of nearly half a million a month.
- Lowest unemployment: 3.5%, the unemployment rate is the lowest since 1970 in the US.
-
Reason for this Labour market paradox:
As against the previous crisis ( pandemic-induced 2020 recession, financial crisis of 2007-08, and the dot-com bust of 2000-01) have all been because of excessive debt-related built up in housing and Internet infrastructure, and it took nearly a decade for the economy to absorb them. By contrast, excess liquidity, not debt, is the most likely catalyst for a recession trend today. And so the economy is able to bounce back with more job creation.
Fed hikes’ impact elsewhere
A sharper-than-expected hike in rates in the US leads to:
-
-
- foreign investors leaving emerging markets like India and investing more in the US (greater interest rate)
- Impact on currency markets, stemming from outflows of funds: Depreciation of Rupee
-
What is a Recession?
It is a macroeconomic term that refers to a slowdown or a massive contraction in economic activities for a long enough period, or it can be said that when a recessionary phase sustains for long enough, it is called a recession.
Depression:
It is a deep and long-lasting period of negative economic growth, with output falling for at least 12 months and GDP falling by over 10% or it can be referred to as a severe and prolonged recession.
Insta Links
Link between rising food prices and central banks raising interest rates
Mains Link
Although the article is about US Economy, but link it with its impact on India including FII and FDI investment and depreciation of currency rate (thus making Indian import costlier). Now attempt the Qn.
Q. Analyse the impact of recent interest rate hike by US Federal Reserve (Fed)’s on Indian economy. (250 Words)
Prelims Link
Know the basic terms: Recession, Inflation, Interest Rate and its impact, RBI’s role, impact of depreciation and appreciation on Currency etc. These are very important topics. Don’t miss it.
Which among the following steps is most likely to be taken at the time of an economic recession? (UPSC CSE 2021)
a. Cut in tax rates accompanied by increase in interest rate.
b. Increase in expenditure on public projects.
c. Increase in tax rates accompanied by reduction of interest rate.
d. Reduction of expenditure on public projects.
Answer: B
If the interest rate is decreased in an economy, it will (UPSC CSE 2014)
(a) decrease the consumption expenditure in the economy
(b) increase the tax collection of the Government
(c) increase the investment expenditure in the economy
(d) increase the total savings in the economy
Answer: C
In the interest rate is decreased, it becomes easier to borrow money at a low-interest rate and therefore individuals/companies will increase their investment expenditure.
