Last fiscal year, which ended March 31, was nothing less than a roller coaster ride for the Indian economy. Economic activity was hit hard by the national lockdown order announced in late March 2020, with the economy slowly opening up only in the second half of the fiscal year. As a result, GDP growth decreased by 16% year-on-year (yoy) in the first half of the fiscal year, only slightly recovered (0.4% yoy) in the third quarter of fiscal year 2020-21. For its part, the government provided a large stimulus and budget expansion to stimulate growth (combining both supply and demand measures). However, as soon as there was growing optimism about India’s economic recovery, the second wave of COVID-19 came as a huge shock to businesses and consumers alike.
India’s daily new cases are hitting a higher peak each day, with the country contributing nearly 20% of the total number of new daily cases globally. The situation is of course quite alarming and worse than the peak situation of last year. By 2020, it will take three months for cases to rise from 10,000 daily cases in mid-June to a peak of more than 90,000 daily cases in mid-September, while in the second wave, it only takes six weeks to expand. self. The total number of COVID-19 in India is now more than 13.8 million with more than 172,000 deaths. Daily numbers soared, with more than 185,000 reported on April 13.
The IMF raised its GDP forecast for India for the period 2021-22 / 2010 to 12.5%, while also highlighting the downside risks to growth. The Reserve Bank of India, during its April monetary policy meeting, kept its conservative GDP forecast of 10.5% for fiscal year 2021-22. and does not change policy rates. Citing the risk of the second COVID-19 wave, the RBI predicts a quarterly trajectory of 26.2% in the first quarter of the fiscal year (April to June 2021), 8.3% in in the second, 5.4% in the third and and 6.2 percent in the fourth.
Economists are divided. While many kept their double-digit growth forecasts, others quickly revised them downwards, taking signs from current restrictive measures and partial lockdowns in some of the largest states, where the The infection is spreading rapidly.
We discuss a few key issues to keep in mind when discussing India’s future economic trajectory.
First, states like Maharashtra, Madhya Pradesh, Punjab and Chhattisgarh, which are seeing the highest increase in COVID-19 cases, account for more than 30% of India’s GDP. Partial closures and restrictions in these states could affect economic performance in the first quarter. If, like last year, these shutdowns last longer due to uncontrolled infection, the damage could be even more widespread. While the manufacturing industry may not be directly affected by the partial shutdown, the impact on the communications services sector – sectors such as hotels, travel and tourism – will have a digital impact. Because these sectors are strongly backward linked with other sectors of the economy. The RBI survey of consumer sentiment also paints a bleak picture, as the consumer confidence index fell to 53.1 in March from 53.5 in January 2021 due to economic conditions. economy deteriorates. Expectations for next year also saw a 9-point drop.
Second, although economic activity has recovered, the high frequency indicators show that the recovery has not been uniform so far. While leading indices such as Purchasing Managers’ Index (PMI), sales of tractors & two-wheelers (reflecting rural demand), Sales of goods and services tax, Bill of lading E and Rail freight traffic shows sustained growth in 2021, broader indicators like the Index of Industrial Production (IIP), core sector performance, exports and passenger vehicle sales. is witnessing an uneven path of recovery.
The performance of the core sector, which in particular represents the eight infrastructure sectors, was rather bleak. After the six months of contraction starting in March 2020, the headline index has not increased, with an average growth rate from September 2020 to February 2021 of -0.8%. This is particularly worrying because these industries have strong backward and backward linkages with others, and the increase in activity in these industries can exponentially affect the output and employment of other industries. other sectors. The eight core sectors include coal, electricity, crude oil, natural gas, steel, cement, fertilizer and refining products and account for nearly 40% of the IIP’s share. Except for electricity, steel and fertilizer, other core industries have yet to recover from the pandemic shock. If core sector performance continues, India’s IIP figures won’t see any significant resurgence over the next few months. Industrial production continues to go sideways (0% growth over the same period) since September 2020.
Third, in the manufacturing sector, the rebound was quite fragile, with different sectors recovering at different rates. Examples are food products, chemicals, pharmaceuticals, rubber and plastics, base and fabrication metals, computers, electronics and optics, electrical equipment, machinery, automotive, and equipment. Transport equipment is returning to positive growth. But textiles, leather products, wood products, coke and refined petroleum, nonmetallic minerals, other manufacturing, beverages, tobacco, clothing, paper, printing and furniture have yet to come. out of wood.
Fourth, the government has limited the financial space to put in place a massive aid program in case things go downhill. Due to uncertainty over the path of the pandemic, the private capital expenditure cycle will take time to recover; therefore, it will have to wait before private investment provides any support for GDP growth. However, the government’s production linkage incentive scheme could provide some relief for manufacturers planning to invest in leading industries.
Amid all this gloom, of course, there is quite a bit of silver lining. Unlike last year, India’s vaccination is on the rise. India has vaccinated more than 100 million people (7% of the population) with at least one dose and fully vaccinated more than 13 million people (1% of the population). This speed should be increased further. In addition, agricultural growth and rural demand have so far been quite strong, which are expected to support growth. Furthermore, support from a recovery in global growth and the realization of the Union Budget’s proposed capital expenditures will reinforce India’s economic recovery.
Going forward, India’s headline growth numbers should be treated as a drop-off salt as the 2020 low base effect will overshadow some of the tacit trends associated with a recovery that are already fragile and not. evenly. With the COVID-19 cases accelerating, India’s future development path will be a bumpy one.