V-Shaped Economic RecoveryApprox Read Time: 6 min
- The Union Minister for Finance recently presented the Economic Survey 2020-21 in the Parliament.
- The Survey underlines that the year 2020 was dominated by the COVID-19 pandemic and global economic downturn.
- The lockdowns and social distancing norms brought the already slowing global economy to a stop. Global economic output is estimated to fall by 3.5 percent in 2020 (IMF January 2021 estimates).
- To deal with this, governments and central banks across the world used various policy tools to support their economies such as lowering lending rates, loan guarantees, cash transfers etc.
- India’s policy implemented the Nobel-prize winning research in Hansen and Sargent (2001) that recommends a policy focussed on minimising losses in a worst case scenario.
- India adopted a unique four-pillar strategy of containment, fiscal, financial, and long-term structural reforms.
- Fiscal and monetary support was provided, to support the vulnerable sectors during the lockdown and to boost consumption and investment while unlocking.
- A favourable monetary policy ensured abundant liquidity (money supply) and immediate relief to debtors through temporary moratoriums (delaying the loan repayment).
- Various reforms were implemented to ensure that disturbances on the supply-side, are minimized in the medium to long-run.
- The demand side policy focused on ensuring that all essentials were taken care of, which included direct benefit transfers to the vulnerable sections and the world’s largest food subsidy programme.
State of Indian Economy:
- India’s GDP is estimated to contract by 7.7 % in FY2020-21, which includes a sharp 15.7 % decline in first half and a modest 0.1 % fall in the second half.
- Contact-based services, manufacturing, construction were hit hardest, and have been recovering steadily.
- Industry and services are estimated to contract by 9.6 % and 8.8 % during the year.
- Agriculture has helped to reduce the shock of COVID-19 on the Indian economy in FY2020-21 with a growth of 3.4 % in both Q1 and Q2.
- Government consumption and net exports have supported growth from declining further, whereas investment and private consumption have had a negative impact on growth.
- As India’s economic mobility and pandemic trends improved indicators like E-way bills, rail freight, GST collections and power consumption not only reached pre-pandemic levels but also crossed previous year levels.
Support from external sector:
- The external sector provided a much needed support to growth, with India recording a current account surplus (CAS) of 3.1 % of GDP in the first half of the year.
- The CAS was largely supported by strong services exports, and weak demand leading to a contraction in imports.
- Consequently, the foreign exchange reserves rose to cover 18 months of imports in December 2020.
- India is expected to have a Current Account Surplus of 2 % of GDP in FY2020-21, a historic high after 17 years.
- India remained a preferred investment destination in FY 2020-21, with Foreign Direct Investments (FDI) shifting to emerging economies due to quicker recovery.
- Net Foreign Portfolio Investment (FPI) inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020.
Current account surplus:
- Current account surplus is a measurement of a country’s trade where the value of the goods and services it exports exceeds the value of the products it imports.
- The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.
- Bank credit (loans) remained low in FY 2020-21 due to risk aversion (avoiding risk). However, credit growth to agriculture and allied activities accelerated to 7.4 % in October 2020 from 7.1 % in October 2019.
- Credit growth to the services sector accelerated to 9.5 % in October 2020 from 6.5 % in October 2019.
- October 2020 also saw strong credit flows to sectors such as construction, trade and hospitality.
- High food prices remained a major factor of inflation in 2020. However, inflation in December, 2020 fell back into the RBI’s target range of 4+/-2 % to reach 4.6 % compared to 6.9 % in November.
- This was driven by a steep fall in food prices, particularly of vegetables, cereals, and protein products.
- India’s real GDP is expected to record a growth of 11 % in 2021-22. This projection is in line with International Monetary Fund’s (IMF) estimate of real GDP growth of 11.5 % in 2021-22 for India and 6.8 % in 2022-23.
- India is expected to emerge as the fastest growing economy in the next two years as per IMF.
- The V-shaped economic recovery is supported by the initiation of a mega vaccination drive with hopes of a strong recovery in the services sector and prospects for strong growth in consumption and investment.
- This path would lead to a growth in real GDP by 2.4 percent over the absolute level of 2019-20. This implies that the economy would take two years to reach and go past the pre-pandemic level.