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Economics Club
ARTICLE SERIES – 5
Sept 1 – Sept 7 (2019)
Economics Club
Unemployment Rise
Indian economy is currently facing an economic slowdown, & the downtrends are visible in GDP, which is one of the burning
topics nowadays. An issue which is less showcased in current economic interest includes unemployment. The think tank Centre
for Monitoring Indian Economy (CMIE) released a data reveals India’s total unemployment rate at a 3 year high of 8.4% in
August 2019. According to CMIE, urban unemployment stands at 9.6%, & rural employment stands at 7.8%.
The good thing is, the labor participation rate (LPR) which measure economy active labor force, i.e., the sum of all employed
workers divided by working-age population improved from 42.46 in October 2018 to 43.35 in August 2019. The rise in Labor
participation is good for the economy as it reflects the confidence of labor actively searching for jobs & are interested in
participating in the workforce. However, an increase in labor participation & increase in employment rate is not matching, & the
gap between both is increasing as the day passes by. Hence many people are seeking employment, & not many can get. The
increasing gap causes a concern, if labor treads along the current path, which is high unemployment rate & reduced
employment opportunities, it may discourage them from entering the labor market which causes LPR to decrease.
Solutions:-
• According to the World Bank, India has to create 8.1 mn jobs a year to cope up with the rising unemployment rate. The
manufacturing sector can provide decent income opportunities after pondering upon the current scenarios & an immediate
urgency to create jobs
• Reducing corporate tax, easing lending norms, & relaxing GST rules on a short term basis could increase hiring & boost
productivity in companies.
• Increase cooperation between the government & the states to monitor state-wise job growth & try to pinpoint issues by
comparing it with states having high recorded job growth which helps in government to identify & focus on states that lag.
• Transform India into the innovation-driven economy & export-driven economy.
Kaushik Singh PGP2
Economics Club
Home and Auto Loans to get Cheaper?
Over time it has been observed that the Banks quickly pass on the increased rates to the customers; however, the
downward transmission for the reverse often takes time. On Sept 4, 2019, RBI directed the banks to mandatorily link all new
rates of Personal/Retail loans (auto, home, etc.) & floating rate loans to MSME to an external benchmark w.e.f. Oct 1, 2019.
The external benchmark rates are:
1. Reserve Bank of India Policy Repo Rate
2. Govt of India 3-months or 6-months T-Bill yield published by Financial Benchmarks India Private Ltd. (FBIL)
3. Any other benchmark market interest rate released by FBIL
The move intends to achieve effective downward transmission of Central Bank’s policy rate cuts which could not be quite
attained under the MCLR rate link. However, the transmission would not be immediate & would depend upon the reset
period as decided during the time of taking the loan in the loan contract. To maintain standardisation, understanding, &
transparency, the bank is required to adopt uniform external benchmark within a loan category. Also, it requires Repo linked
interest rates to reset at least once in 3 months & credit risk premium only when borrower’s credit assessment undergoes a
substantial change, as agreed upon in the loan contract.
Since banks have high levels of NPA, they may have to increase spreads over benchmark rates to protect their profitability.
Not just because of high NPA levels but also since the deposit rates may not come down at the same pace as lending rates,
a buffer is needed so that it does not affect the bank’s profitability.
A similar model for Savings Account, where the rates are linked to the benchmark? - Let’s face it, everyone wants income
certainty, and hence on deposits, this would definitely not work, only did SBI try this in the past to fail miserably in the same.
Now, we can also analyse or wait and watch as to how this will affect the borrowing of the customers and also the economic
slowdown, in the time to come. Will there be any effect on the reversion of the Auto sector slowdown? Or is it just another
rate change policy in the banking parlance?
Pratima Gupta PGP2
