Focus: GS-III Indian Economy
Why in news?
The spread of COVID-19, the deadly pandemic, which has impacted several sectors especially transport, tourism and hotel industries, could impact the economic growth of the country by 90 basis points.
- On the demand side, inoperability analysis for three sectors, namely transport, tourism and hotels, shows significant impact on demand and hence output.
- On an aggregate basis, we estimate that the impact of a 5% inoperability shock could be 90 basis points on GDP from trade, hotel and transport, storage and communication segments, that could be spread over FY20 and FY21, with a larger impact in FY21.
- Since China is an important source of critical inputs for many sectors, the supply shock can lead to higher price of inputs, which, in turn, could affect the price of all the commodities up the supply chain.
- A simultaneous demand and supply shock to the economy will also have implications for the banking sector.
- The demand side shock is expected to lead to an output loss of 1.2% in banking and insurance combined.
What Is Demand Shock?
- A demand shock is a sudden surprise event that temporarily increases or decreases demand for particular goods or services.
- A positive demand shock is a sudden increase in demand, while a negative demand shock is a decrease in demand.
- Both a positive demand shock and a negative demand shock will have an effect on the prices of goods and services.
What Is a Supply Shock?
- A supply shock is an unexpected event that suddenly changes the supply of a product or commodity, resulting in an unforeseen change in price.
- Supply shocks can be negative, resulting in a decreased supply, or positive, yielding an increased supply; however, they’re often negative.
- Assuming aggregate demand is unchanged, a negative (or adverse) supply shock causes a product’s price to spike upward, while a positive supply shock decreases the price.