The COVID- 19 pandemic posed the most formidable economic challenge to India and to the world in a century. Governments and central banks across the world deployed a range of policy tools to support their economies such as lowering key policy rates, quantitative easing measures, loan guarantees, cash transfers and fiscal stimulus measures.
India’s GDP was estimated to contract by 7.7 per cent in FY2020-21, composed of a sharp 15.7 per cent decline in first half and a modest 0.1 per cent fall in the second half.
Reasons:
Demand-side and Supply-side Shocks
The pandemic has been a unique economic shock that has triggered both supply and demand side shocks simultaneously across economies around the world.
Increased uncertainty, lower confidence, loss of incomes, weaker growth prospects, fear of contagion, curtailment of spending options due to closure of all contact-sensitive activities, the triggering of precautionary savings, risk aversion among businesses and resultant fall in consumption and investment – leading to the first order demand shock.
The supply chain disruptions caused by closure of economic activity and restricted movement of labour lead to the first order supply shocks.
Silver Lining
Sector-wise, agriculture remained the silver lining while contact-based services, manufacturing, construction were hit hardest, and have been recovering steadily. Government consumption and net exports have cushioned the growth from diving further down.
Agriculture was set to cushion the shock of the COVID-19 pandemic on the Indian economy in 2020-21 with a growth of 3.4 per cent in both Q1 and Q2. It is the only sector that has contributed positively to the overall Gross Value Added (GVA) in both Q1 and Q2 2020-21.
The index of eight core industries, which make up around 40 per cent of the index, registered a growth of (-) 2.6 per cent in November, 2020 as compared to a growth of 0.7 per cent in November, 2019 and (-) 0.9 per cent in October, 2020. Consequently, IIP, after registering positive growth in October 2020 slipped back into contractionary zone in November, 2020.
V- shaped economic recovery
Economic recovery can take many forms.
V-shaped – A sharp fall in GDP and a quick increase and turn around thereafter.
U-shaped– A sharp fall in GDP that remains flat for some time and then starts moving up.
L-shaped– A sharp fall in GDP that remains flat for long with no signs of turning up.
Double L-shaped– A sharp fall in GDP that remains flat for a while and again GDP dips and remains flat.
India resorted to lockdown to stop the spread of the pandemic that resulted in a 23.9 per cent contraction in GDP in Q1, FY 2020-21, however government claimed V-shaped economic recovery evidenced by only 7.5 per cent decline in GDP in Q2.
This was also supported by the recovery across all key economic indicators, which continued upward movement starting July 2020. Government also cited resurgence in high frequency indicators such as power demand, E-way bills, GST collection, steel consumption, etc. as evidence to economic recovery of India; record-high monthly GST collections marking the unlocking of industrial and commercial activity; a sharp rise in commercial paper issuances, easing yields, and sturdy credit growth to MSMEs, revamped credit flows etc.
Causes of concern
In the aftermath of COVID-19, Global output was expected to witness the sharpest contraction in a century, contracting in the range of 3.5 – 4.3 per cent in 2020 as per the estimates provided by IMF and World Bank (Figure 12). The cumulative loss to global GDP over 2020 and 2021 is estimated at around USD 9 trillion – greater than the economies of Japan and Germany combined. Loss of output is anticipated to be more severe in AEs at 5.4 per cent compared to EMDEs, excluding China, which stood at 5.0 per cent for the year 2020.
Global trade was projected to contract by 9.2 per cent in 2020—comparable to the decline during the 2009 global recession but affecting a markedly larger share of economies.
India’s imports contracted more sharply than exports, with Forex reserves rising to cover 18 months of imports. Inflation, mainly driven by food prices, remained above 6 per cent for much of the year; the softening in December suggests easing of supply-side constraints.
High food prices remained a major driver of inflation in 2020. However, inflation in December, 2020 fell back into the RBI’s target range of 4 +/- 2 per cent to reach 4.6 per cent year-on-year as compared to 6.9 per cent in November. This was driven by a steep fall in food prices, particularly of vegetables, cereals, and protein products and favourable base effects. After consistently rising for six months since Q1:2020-21, headline inflation also eased sequentially in December. However, fuel inflation remained sticky owing to higher crude oil prices. Core inflation remained elevated on a yearly basis but eased as compared to the previous month.