Illustration: Ramandeep Kaur/ThePrint
Illustration: Ramandeep Kaur/ThePrint
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The new year is expected to bring cheer as the world economy recovers from the effects of the pandemic. Hit by the Covid-19 shock, India’s GDP is projected to contract in 2020-21. However, the pace of contraction is expected to be milder than previously anticipated, due to a faster than expected recovery seen in the previous quarter.

The pace of GDP contraction came down to 7.5 per cent in the July-September quarter after a steep 24 per cent decline in the April-June quarter.

While 2020 was unprecedented in terms of the scale of economic contraction, the next year is expected to see a sharp recovery. As the Covid induced restrictions are eased, supply side disruptions are addressed and demand picks up, the economy is expected to bounce back.

After an abysmal performance in the June quarter, the manufacturing sector posted a positive growth in the July-September quarter. The latest numbers showpick-up in industrial production. Agriculture has continued to post a positive growth in both the quarters, partly driven by good monsoon and partly by the policy responses. This leaves the contact intensive services sectors such as travel, tourism and hospitality, which are likely to see a continued slump in demand and uneven recovery.

A robust agricultural growth and a revival in industrial production including production of consumer durables, however, augurs well for the economy. Estimates suggest that the Indian economy could well be the fastest growing Asian economy in the calendar year 2021.


Also read: Ten ways Covid has changed the world economy forever


History of economic contraction in India

While this is the first time the economy plunged into a technical recessioncharacterised by two quarters of negative GDP growth — since India started releasing quarterly GDP estimates in 1998, in the pre-liberalisation period, there were three episodes since 1950-51 when annual GDP contracted. These were the years 1957-58, 1965-66 and 1979-80.

In each of these fiscals, the growth rate fell by 4 or more percentage points. This was a period when the economy was primarily driven by short-lived monsoon and oil shocks. The common driver of contraction in GDP in each of these years was a sharp decline in agricultural growth. In 1957-58, the agricultural GDP posted a contraction of more than 4 per cent. In 1965-66, the drought caused GDP in agriculture to decline by over 11 per cent. The fiscal 1979-80 also saw a sharp fall in agricultural GDP by over 12 per cent. 

However, these episodes of contraction were short-lived and the consecutive years posted a strong recovery in growth. For example, in 1980-81, the GDP surged from -5.20 per cent to 7.17 per cent. The years of contraction are seen to be followed by a strong recovery in the consecutive years.

Different kind of recession

In the US, the National Bureau of Economic Research’s Business Cycle Dating Committee announced that the economy slipped into a recession since February 2020. The unprecedented magnitude of the decline in employment and production has led this period to be designated as recession.

However, the committee signalled that the present episode of recession could be shorter than usual and could last only a few months.

The pandemic has caused the downturn to have different characteristics than prior recessions. The present episode of recession is seen to be deeper due to a record drop in employment but the duration could be shorter. Early indicators such as a rebound in retail sales and production show that the US economy could well be on the path to recovery.


Also read: Every 4 out of 5 small businesses opted for RBI’s moratorium, but asset quality in question


Rebound in economic activity

The contraction in GDP seen in other countries as well as in India is primarily on account of an enforced pullback in economic activity to mitigate the impact of the virus. As the social distancing norms are being eased, economic activity has resumed.

The lockdown forced people to curtail their spending. The Reserve Bank of India (RBI) data shows that household financial savings soared in the June quarter. Household financial savings jumped to 21.4 per cent of the GDP in the quarter as compared to 10 per cent in the January-March quarter.

While households may have raised their precautionary savings due to uncertainty about their future incomes, as the Covid curve flattens, households are likely to spend, resulting in a revival in economic activities in the coming quarters.

The RBI has cut the repo rate by 115 basis points since the onset of the pandemic. The combination of interest rate cuts and unconventional monetary policies could give a boost to credit growth by cutting the lending rate of banks. Recovery in global growth could give an impetus to exports.

Finally, emergency approval for Covid vaccines could push sectors that have been laggards till now. As the uncertainty related to vaccines fades, households would be willing to tap into their savings to spend on contact intensive sectors such as hospitality and tourism. All this will contribute to a healthy growth in 2021.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.


Also read: Mukesh Ambani sold a dream to tech giants for $27 billion. Now he has to deliver


 

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1 COMMENT

  1. Iladidi, Apana bahut ashabaadi ta!
    Indian economy will definitely see a bounce back in 2021-22, not because of any govt. intervention or policy, but because as it has bottomed out in many parameters. It’s really strange why the GOI has not done anything to stimulate the economy whereas most other govt have done. It seems the govt doesn’t want the economical poorer sections to remain poor so that they can be exploited by the richer sections of society. No doubt some rich businessmen have increased their wealth by a higher percentage in this year of pandemic. And it also mostly helped BJP.
    Also there is anther important change: There is shrinkage in the social space in addition to economic space. The way minorities, dalits, poorer sections are exploited, their professional work space has shrunk and it’ll take years to get it back. This has a spiraling effect on economy, and I doubt economy will do well in near future.

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