Editorial Analysis for 27th August 2020

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Mains: General Studies- II: Governance, Constitution, Polity, Social Justice and International relations.


Three weeks after its monetary policy committee decided to hold fire (refrain from comment) on interest rates amid accelerating retail inflation, the RBI has forecast more pain for the economy.


  • Its assessment of the economic landscape and its prognosis(prediction)for near-term prospects posit(proposes) a stark picture.
  • Demand being hollowed out by the severe shock to private consumption, public finances strained by the imperative(need)of funding mitigation(reducing) measures, anaemic(weak) appetite for investment among corporates and credit-flow-impeding risk aversion(prevention) among bankers, to name but a few.
  • The COVID-19-induced economic contraction that manifested itself in the fiscal first quarter, is now almost certain to extend through the July-September period, the RBI said in its Annual Report.
  • RBI observed that the “reimposition or stricter imposition of lockdowns” in different parts of the country in July and August had mainly contributed to damping the tentative revival in momentum seen in the preceding two months,
  • It said several recent high-frequency indicators pointed to an unprecedented retrenchment(reduction)in activity.
  • Noting that the services sector has been a prime mover of the Indian economy, the central bank flagged the fact that whatever consumption had survived the shock was now manifesting as essential spending with services including transport and hospitality almost completely eviscerated(deprieved).

 Additional Information:

  • revenue expenditureis a cost that is charged to expense as soon as the cost is incurred. By doing so, a business is using the matching principle to link the expense incurred to revenues generated in the same reporting period. This yields the most accurate income statement results.
  • The impact of budget deficits on private investment is an unsettled issue. If budget deficits are to be financed by borrowing, interest rates must rise so that capital markets can reach equilibrium. High interest rates, in turn, result in a decreased investment, hence the crowding-out effect.
  • On the other hand, if budget deficits help boost economic growth, investors could become more optimistic and decide to invest more, hence the crowding-in effect.
  • Finally, if an increase in deficits due to tax cuts today is to be matched by tax increases in the future, interest rates and investment may not change.

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