Dear readers,
Throughout the year at ExplainSpeaking, we have strived to make sense of the most important developments in the Indian economy. As the year ends, here are the 2020 highlights and five things to look out for in 2021.
The 2020 calendar year started on a rather weak note as India’s GDP growth rate hit a six-year low in 2019 and then progressively slowed further. Here is an article incorporating the findings of former chief economic adviser Arvind Subramanian to explain how and why the Indian economy was losing its growth momentum.
Since the Union budget is now presented on February 1, much of January’s focus was on understand the budgeting exercise. Providing context was this article on why the poor of India are still poor. According to the Global Social Mobility report of the World Economic Forum, in India, it would take 7 generations for a member of a poor family to achieve an average income; in Denmark, it would only take 2 generations to do it.
A key concern that led to the 2020-21 budget was the decreased credibility of budget figures. With Covid-19 wreaking havoc on the economy even before the start of the new financial year, this problem is likely to remain.
Another key concern in the Budget, and this is likely to be a concern in the next Budget 2021-22 as well, was adherence to fiscal rectitude. But the ugly truth about India’s adherence to the FRBM Act is that, thanks to Indian politicians ignoring the key revenue deficit metric, fiscal consolidation now really hurts India’s economic growth.
As it turned out, the Budget for 2020-21 it was nowhere near the big budget many expected. It was clear that the central government did not have the resources to provide a stimulus to the economy.
What was even more concerning was that State finances were also increasingly stressed.. It is noteworthy that the Indian states, taken together, spend one and a half times more than the central government spends through its budget.
Taken together, it meant that at a time when India’s growth rate was at a six-year low, and was slowing down, governments, both at the central and state levels, were quite short of money.
It is at this juncture that the Covid-19 pandemic hit the Indian economy. Already on March 22, the day of the Janta curfew, we gathered this Sectorial analysis That explains how the Indian economy was much more vulnerable now than when the global financial crisis hit in 2008-09.
A woman wearing a protective mask carries shopping bags during the Dhanteras festival at Lajpat Nagar Market in New Delhi, India, on Friday, Nov. 13, 2020 (Photographer: Prashanth Vishwanthan / Bloomberg).
When India entered a national blockade, the government announced its initial set of measures (called PM Garib Kalyan Yojana) to limit the damage. the Reserve Bank of India too much to counter “The Great Lockdown” you saw crude oil prices turn negative for the first time in history.
As the adverse effects of Covid-induced outages became apparent, we tried to explain some of the bigger questions:
In early May it was clear that no immediate additional help from the government, the Indian economy could face widespread financial ruin.
Finally, on May 12, Prime Minister Narendra Modi announced the Atma-Nirbhar Bharat Abhiyan Package, with special attention to the MSME sector. But there were many reasons why this the package was criticized as plain GDP growth continued hesitate and Moody’s downgraded India.
One area of particular concern during this phase was the call to ban trade with China, thanks to the growing border conflict between the two countries. We explain why a general ban on trade with China will be counterproductive for India and why more generally policy is moving towards atma-nirbharta or self-reliance is neither new nor likely to be successful.
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A woman and child walk out of a music store as a rental sign is displayed on a floor below that the tenant recently vacated in Bengaluru (AP Photo / Aijaz Rahi)
Then in early September, the first official estimates from India showed that the the national economy had contracted almost 24% in the April-May-June quarter, making India one of the world’s worst-hit major economies.
It was now clear that after growing at an average annual rate of around 7% since the start of economic liberalization in 1992, the Indian economy was likely to contract more than 7% in 2020-21.
In December, it was clear that India had entered a technical recession. Furthermore, given that this contraction occurred as a consequence of the secular slowdown in the GDP growth rate from 2016-17 onwards, the economic stress was manifesting itself in increase in unemployment, increasing poverty and declining health and well-being of citizens in general.
From the RBI perspective, persistently high inflation it continually undermined its ability to drive growth.
So what does 2021 have in store for us?
There are five key concerns.
One, rapid resolution of farmer disturbances. The data shows that agriculture in India is quite low remunerative And as such, this sector has been calling for reforms. However, for the reforms to work, the government must learn from China’s experienceand it must gain acceptance from the farming community. The government must understand that it is better to avoid persistent protests on the street, whether over economic issues such as farm laws or non-economic issues, such as the CAA-NRC issue, when the broader idea is to free the economy from the clutches of a government. . recession.
Pedestrians crossing the zebra crossing in the inner circle market area of Connaught Place, New Delhi.
Second, the Union budget for 2021-22 must establish a convincing policy framework to boost economic activity in India in the medium term. Annual incrementalism will be counterproductive because economic agents, be it large companies reaffirming their investment plans or migrant workers deciding to return to work or families deciding between buying a bigger car and having additional savings, are already plagued by all kinds of uncertainties.
A good starting point would be for the government to correctly assess and honestly declare the true pace of the Indian economy. In recent years, the government has upset the pace of economic growth or misunderstood the reasons for slowing growth and, as a result, has found itself behind the policy curve.
The first advance estimates for GDP growth in 2020-21 will be released on January 7 and will provide the closest approximation before the budget is presented on February 1.
Third, deal with the drop in extended regulatory tolerance, either in the way of not recognizing non-performing assets in the banking system or suspend the operation of the Bankruptcy Code.
Fourth, quickly make the vaccine available to the general public because it is the surest way for the economy to recover.
A migrant family on their way home to Uttar Pradesh, in front of the Mayur Vihar metro station in Delhi on May 14, 2020.
Last but not least, stay aggressive about your participation in the global economic recovery. Over the past decade, more and more countries have become insular and protectionist. For the past 3-4 years, India has also been guilty of turning away from international trade, for example by deciding not to join the RCEP. But there are several opportunities where India can still deepen its trade ties. A possible free trade agreement with the UK is a good example.
I wish you the best in 2021!
Udit
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