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  • 27 December, 2020

  • 14 Min Read

Status of Indian Economy and Predictions for 2021

Status of Indian Economy and predictions for 2021

COVID has taken a toll on the World as on the Indian Economy. But unlike most other peers, India’s economy had already been hurtling downhill before the pandemic hit. There were two quarters of negative growth and widespread mayhem across the economy, except for some sectors like Agriculture. But there is a hope for recovery in 2021.

Why was India hit hard?

  • By the beginning of 2020, India had already gotten off the 8% growth track for several quarters. From 8.18% growth in the gross domestic product (GDP) recorded between January and March of 2018, India decelerated steadily till it was trundling along at half the speed by the end of 2019, growing at just 4.08% this time last year.
  • The lingering effects of demonetisation and a flawed implementation of the Goods and Services Tax were seen as some of the reasons for this sustained decline.

What happened in the quarter between January and March?

  • India’s growth slowed to 3.09% between January and March this year, its lowest quarterly growth rate since 2012. This meant the country’s growth for the financial year 2019­20 was an insipid 4.2%.
  • Several vital signs, including private consumption and exports, were at their worst levels in five or more years, suggesting that even if one were to discount the national lockdown announced at four hours’ notice and implemented in the last week of March, the economy was not getting any better than before.
  • However, COVID­19 and the lockdown accelerated its collapse and unleashed widespread distress for households and wage­earners as almost all movement and economic activity was stopped.

How were the States affected?

  • While officials used the Epidemic Diseases Act of 1897, the rules of the lockdown were tweaked, altered and modified multiple times by the Ministry of Home Affairs.
  • The rules were interpreted differently by State and local administrations.
  • These differences also made inter­State movement tricky for goods as well as the millions of migrant workers who were stuck in their respective urban bases and trying to go back home, as cities and the opportunities they offered ground to a halt along with all trains, flights and buses.

Who benefited from the stimulus package?

  • From an initial clampdown on all manufacturing sectors, barring essential goods like food and medicines, the government gradually realised that even pharma firms cannot make medicines without access to raw material and support services from ancillary industries, from ice factories to transporters, and most importantly, employees who were unable to reach their workplaces in the absence of public transport.
  • Thus, many course corrections were made on the way — E­passes were launched for employees to reach their workplaces and for transport of goods across the country, along with special trains for migrant workers to go back home.
  • In the middle of May, the government unveiled a 20 lakh­crore stimulus and support package for the economy, branding it Atmanirbhar Bharat Abhiyan.
  • Even as it granted a lot of forbearance on banking dues to businesses and retail borrowers, the direct stimulus effect of this package was limited.
  • In fact, some of the reforms it promised, like a new strategic disinvestment policy for public sector enterprises, are still awaited.

Why did the April­June quarter see a sharp fall?

  • The economy contracted nearly 24% in the April­June quarter — the sharpest fall since quarterly growth began to be recorded in 1996. The only sector to deliver positive growth in the period was agriculture.
  • But manufacturing output falling nearly 40%, services 20% and construction 50% from a year ago had a deep impact as these sectors generate the maximum employment.
  • The strict lockdown had taken its toll, with job losses and salary cuts becoming the norm in the formal sector, while the informal sector silently withered.
  • The rest of the world had also gone into the lockdown mode, but the damage to the economy in India was the sharpest among major economies. And despite this, the virus was far from contained and inflation crossed the 6% mark led by rising food prices.

How did unlocking the economy help?

  • While most rating agencies and economists predicted that the economy would shrink by around 10%, India managed to record just a 7.5% contraction in the July­September quarter.
  • Agricultural growth remained constant, while manufacturing managed to record positive growth.
  • However, the rough patch was far from over for services such as retail trade and hotels (particularly impacted by social distancing norms) and sectors such as mining and construction.
  • Among other things, rating agency CRISIL attributed the better­than expected growth to pent­up demand finding expression after months of being locked up at home, cost savings for corporates (read ‘retrenchments lowering staff costs) and a ‘learning to live’ attitude.
  • Government spending — critical for India to get out of this economic rut — collapsed, even as inflation remained high.

What is the RBI’s view on growth prospects?

  • With the economy in a ‘technical’ recession after two successive quarters of contraction, the government unveiled a fresh round of support measures over October and November, and has pinned its hopes on breaking out of negative growth in the October to December quarter.
  • A ‘nowcast’ released by the Reserve Bank of India (RBI) on Thursday suggests that it may indeed be possible, with a slender 0.1% growth. Indeed, several high­frequency indicators clocked remarkable improvements over October and November.
  • But their coincidence with India’s festive season, and a reported flattening in activity after the Deepawali festival, make it difficult to assess if this recovery is real and sustainable.
  • The RBI believes that growth in the first quarter of 2021 will be even healthier as COVID­19 cases continue to dip.

Source: TH

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