Tough days ahead

In the midst of all the gloom, robust agriculture and an expected revival in industrial sector offer hope

The Indian economy has been facing tough challenges as the coronavirus pandemic brought all activities to a grinding halt. The latest estimates released by the National Statistical Office (NSO) paint a further gloomy picture. The economy is estimated to report the worst-ever contraction of 7.7% in 2020-21. Construction, manufacturing, mining and services sectors are to be the worst hit. However, the first advance GDP estimate released by the NSO, ahead of the Union Budget, is marginally better than the initial estimates released earlier when many financial institutions and rating agencies had forecast a double-digit contraction for the economy. In December, the Reserve Bank of India (RBI) had also marginally improved its growth forecasts raising it to -7.5% from its earlier forecast of -9.5%. In 2019-20, the economy had grown at 4.2%. Even after the gradual lifting of the lockdown, the services sector, requiring physical customer presence like tourism, hospitality and aviation, is still struggling to get back to the pre-Covid levels. The agriculture sector has proved to be a silver lining this fiscal year while the manufacturing too showed a partial recovery in the second half of the fiscal year. The economy had contracted by a record 23.9% in the April-June quarter, the decline was arrested in the July-September quarter when it contracted by 7.5%. The gross fixed capital formation, which serves as an indicator of the investment demand in the economy, is expected to decline in 2020-21 by 13.6%.

However, in the midst of all the gloom, robust agricultural growth and an expected revival in industrial production, including production of consumer durables, offer hope in the post-Covid world with the imminent rollout of the vaccines. There are some optimistic estimates that India could well be the fastest growing Asian economy in the calendar year 2021. No doubt, this is the first time the economy plunged into a technical recession—defined by two successive quarters of negative GDP growth —since India started releasing quarterly GDP estimates in 1998. In the pre-liberalisation period too, there were instances of annual GDP contraction. However, the periods of contraction in India were followed by a strong recovery in consecutive years. For instance, in 1980-81, the GDP surged from -5.20% to 7.17%. Compared with earlier instances of recession, the present episode is seen to be deeper due to a record drop in employment. However, now that the air of uncertainty over Covid-19 vaccines is beginning to clear, millions of households would be willing to tap into their savings to spend on contact intensive sectors such as hospitality and tourism. All this is expected to contribute to a rebound in the economic growth in 2021.

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