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Indian Economy 2020

By K R Sudhaman

With green shoots visible after an economic slowdown for several quarters at the beginning of 2020, Finance Minister Nirmala Sitaraman unleashed a medium-term reform agenda in February Budget this year to make India a $5 trillion economy. But this plan went awry with Coronavirus Pandemic afflicting the entire World. With prolonged lockdown in India and elsewhere the Indian economy went for a tailspin.

 

As a result, there was a recession in most parts of the World, and practically all large economies barring, China, clocked negative growth, unprecedented for decades. With life limping back to normal In the hopes of vaccine becoming a reality in the near future, several economies including India are showing signs of economic recovery with the woes induced by the Coronavirus pandemic slowly vanishing.

 

Though it may still be too early for India to conclude that the economy has turned the corner, there is a strong possibility of a V-shaped recovery and some analysts have already forecast that India may again be the fastest growing economy overtaking China in 2021-2022. A few have even forecast a double-digit GDP growth on the back of low and a negative base. There is certainly a crisis of confidence in the economy at the present juncture and Nirmala Sitharaman will do well to push big-ticket structural reforms in her Budget next February to return to a high growth path on a sustained basis.

 

While the pandemic has brought a strong headwind for the Indian economy, it is to be noted that the economy had already been slowing down for several quarters before the pandemic. While the GDP growth had slowed down from 8 percent in the Q1 FY19 to 3.1 percent in the Q4 FY20, investment levels during the same period had declined from 30 percent of the GDP to nearly 26 percent. Thus, while the full resumption of economic activities may take us back to 2019-20 income levels, accelerating the growth trajectory requires addressing structural problems, said M Govinda Rao, Chief Economic Advisor, Brickwork Ratings.

 

The government will have to initiate measures not only to ensure the resumption of economic activities but also to address structural problems, the Brickwork rating agency said. Besides the progressive relaxation of restrictions, it suggested that the most important stimulus the government must undertake without any further delay is to clear all the pending bills of contractors.

 

It will be pragmatic to undertake reforms in the tax structure. Further, reducing the tax rates on construction materials such as cement, steel, paints, and plywood from the ‘sin’ rate of 28 percent to a general rate would help revive the labor-intensive construction sector. The same is the case with passenger automobiles.

 

There is no denying the fact that India is facing the worst economic crisis since 1991 and the fourth since Independence. Reviving the economy needs swift measures, which included increased government spending and programs for robust employment generation.

 

The complete 68-day lockdown and gradual unlock-1, 2, 3, and 4 of the economy of India is showing its effects now. Merely putting money in the hands of the poor to spur demand might not work at this juncture as most of them used up their savings in the last few months in the face of job losses. So putting any money in their hands now will only go to replenish their savings thereby not fulfilling the task of encouraging consumption spending. So better ways would be to step up public spending on infrastructure and on other job-creating measures revive
demand.

 

The GDP growth in Q1 FY21 contracted by a massive 23.9 percent. The ongoing recovery continues to face at least two risks: growing infections across the country and rising stress in state finances. But the good news is that the Purchasing Managers’ Index (PMI) for manufacturing recorded at 52 in the month of
August. A PMI value above 50 signifies the expansion of economic activity. PMI (manufacturing) was in the contraction zone between April and July. Maruti Suzuki, India’s largest carmaker sold 21.7% more cars in August 2020 than it did in the same month last year. To be sure, these numbers are dispatches to dealers and not retail sales. However, these numbers do suggest that consumer demand is picking up with the easing of lockdown restrictions.

 

India cannot claim to be out of the woods yet but positive signs are visible and the budget if crafted well could make economic recovery sustainable. Covid 19’s disruption has not fully played off yet and one has to be cautious while pushing growth.

 

The Nomura India Business Resumption Index (NIBRI) reported being at 75.7 in the week ending August 30. This is better than what it was earlier, but the latest values are 24 percentage points less than pre- pandemic levels compared to a 31 percentage point deficit in July.

 

The report notes that “the recovery is uneven and the recurring weakness in the labor market highlights the fragility of household demand”.
It also attributes some of the recoveries to post-lockdown pent-up demand. It is also likely hood of states facing a shortfall of 2.35 lakh crore in GST compensation cess payments. They will also suffer because of the shortfall in other central taxes. The good news is that monthly GST collections have now crossed the Rs only lakh crore mark in the last two months.

 

India’s GDP (at constant 2011-12 prices) was estimated at Rs 26.9 trillion (US$ 363.49 billion) for the first a quarter of FY2020-21, against Rs 35.35 trillion (US$ 477.67 billion) in the first quarter of FY2019-20,
showing a contraction of 23.9%, compared with 5.2% growth in the first quarter of FY2019-20. India needs to increase its rate of employment growth and create 90 million non-farm jobs between 2023 and 2030’s, for productivity and economic growth according to McKinsey Global Institute. The net employment rate needs to grow by 1.5% per year from 2023 to 2030 to achieve 8-8.5% GDP growth
between 2023 and 2030.

 

A major positive aspect of the Indian economy is surging foreign reserves towards the $600 billion marks and the current account remaining in the positive territory providing that much headroom for much needed fiscal stimulus without impinging upon the already widening fiscal deficit. The swelling foreign
exchange reserves and the increased dollar purchased have put more liquidity in the system. This is a good sign at the present juncture.

 

The Union Budget, presented by Nirmala Sitharaman in the Parliament on February 1, 2020, aimed at energizing the Indian economy through a combination of short-term, medium-term, and long-term measures. Total expenditure for 2020-21 is budgeted at Rs 37.14 trillion (US$ 531.53 billion), an increase of 13% from 2019-20 (revised budget estimates)

 

.Numerous foreign companies are setting up their facilities in India on account of various Government initiatives like Make in India and Digital India. The Government is trying to boost the contribution made by the manufacturing sector with an aim to take it to 25% of the GDP from the current 17%. Besides, the Government has also come up with the Digital India initiative.

 

The Government has subsequently announced various economic packages, having a cumulative worth of around Rs 20 trillion (US$ 283.73 billion) and is almost 10% of India’s GDP to provided much needed stimulus to revive the economy hit by the lockdown.

 

With stimulus in place and more expected in the forthcoming budget as India’s economy opens up and life fast returning to normal in course of time the country’s GDP is expected to reach US$ 5 trillion by FY25 and achieve upper-middle income status on the back of digitization, globalization, favorable demographics, and reforms.

 

India is also focusing on renewable sources to generate energy. It is planning to achieve 40% of its energy from non-fossil sources by 2030, which is currently 30%, and has plans to increase its renewable energy capacity from 175 gigawatts (GW) by 2022.

 

India is expected to be the third-largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to a shift in consumer behavior and expenditure pattern, according to a Boston Consulting Group (BCG) report. It is estimated to surpass the USA to become the second-largest economy in
terms of purchasing power parity (PPP) by 2040 as per a report by PricewaterhouseCoopers.

 

In Sum, there are positive signs now and the Indian economy is looking to kick-start, but challenges too are manifold with the coronavirus disturbing the applecart and macroeconomic fundamentals. The inflation too  has started surging at a time when RBI and government wants to keep the interest rate low to kick-start the economy. There are several reform challenges as well coupled with the need to push the government’s disinvestment and privatization program of public enterprises.

 

The farmers’ agitation is a disturbing factor to agricultural growth which has been looking good so far. The plate is full for Nirmala Sitharaman and it would be interesting to see how she proposed to steer the economy back to a high growth path and make India a global manufacturing hub through Modi’s Atma Nirbar program.

 

Indian Economy 2020/Indian Economy 2020/Indian Economy 2020/Indian Economy 2020

 

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