Key Highlights of Economic Survey 2020-21

Key Highlights of Economic Survey 2020-21

Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman presented the

Economic Survey 2020-21 in the Parliament today. The key highlights of Economic Survey 2020-21, which is dedicated to the COVID Warriors, are as follows:

Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis

India focused on saving lives and livelihoods by its willingness to take short-term pain for long-term gain, at the onset of the COVID-19 pandemic

Response stemmed from the humane principle that:

• Human lives lost cannot be brought back
• GDP growth will recover from the temporary shock caused by the pandemic

An early, intense lockdown provided a win-win strategy to save lives, and preserve livelihoods via economic recovery in the medium to long-term

Strategy also motivated by the Nobel-Prize winning research by Hansen & Sargent (2001): a policy focused on minimizing losses in a worst-case scenario when uncertainty is very high

India’s strategy flattened the curve, pushed the peak to September, 2020

After the September peak, India has been unique in experiencing declining daily

cases despite increasing mobility

V-shaped recovery, as seen in 7.5% decline in GDP in Q2 and recovery across all key economic indicators vis-à-vis the 23.9% GDP contraction in Q1

COVID pandemic affected both demand and supply:

• India was the only country to announce structural reforms to expand supply in the medium-long term and avoid long-term damage to productive capacities
• Calibrated demand side policies to ensure that the accelerator is slowly pushed down only when the brakes on economic activities are being removed
• A public investment programme centred around the National Infrastructure Pipeline to accelerate the demand push and further the recovery
• Upturn in the economy, avoiding a second wave of infections – a sui generis case in strategic policy making amidst a once-in-a-century pandemic

State of the Economy in 2020-21: A Macro View

• COVID-19 pandemic ensued global economic downturn, the most severe one since the Global Financial Crisis
• The lockdowns and social distancing norms brought the already slowing global economy to a standstill
• Global economic output estimated to fall by 3.5% in 2020 (IMF January 2021 estimates)
• Governments and central banks across the globe deployed various policy tools to support their economies such as lowering policy rates, quantitative easing measures, etc.
• India adopted a four-pillar strategy of containment, fiscal, financial, and long-term structural reforms:
• Calibrated fiscal and monetary support was provided, cushioning the vulnerable during the lockdown and boosting consumption and investment while unlocking
• A favourable monetary policy ensured abundant liquidity and immediate relief to debtors while unclogging monetary policy transmission
• As per the advance estimates by NSO, India’s GDP is estimated to grow by (-) 7.7% in FY21 – a robust sequential growth of 23.9% in H2: FY21 over H1: FY21
• India’s real GDP to record a 11.0% growth in FY2021-22 and nominal GDP to grow by 15.4% – the highest since independence:
• Rebound to be led by low base and continued normalization in economic activities as the rollout of COVID-19 vaccines gathers traction
• Government consumption and net exports cushioned the growth from diving further down, whereas investment and private consumption pulled it down
• The recovery in second half of FY2020-21 is expected to be powered by government consumption, estimated to grow at 17% YoY
• Exports expected to decline by 5.8% and imports by 11.3% in the second half of FY21
• India expected to have a Current Account Surplus of 2% of GDP in FY21, a historic high after 17 years
• On supply side, Gross Value Added (GVA) growth pegged at -7.2% in FY21 as against 3.9% in FY20:
• Agriculture set to cushion the shock of the COVID-19 pandemic on the Indian economy in FY21 with a growth of 3.4%
• Industry and services estimated to contract by 9.6% and 8.8% respectively during FY21
• Agriculture remained the silver lining while contact-based services, manufacturing, construction were hit hardest, and recovering steadily
• India remained a preferred investment destination in FY 2020-21 with FDI pouring in amidst global asset shifts towards equities and prospects of quicker recovery in emerging economies:
• Net FPI inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020, as investors’ risk appetite returned
• India was the only country among emerging markets to receive equity FII inflows in 2020
• Buoyant SENSEX and NIFTY resulted in India’s market-cap to GDP ratio crossing 100% for the first time since October 2010
• Softening of CPI inflation recently reflects easing of supply side constraints that affected food inflation
• Mild contraction of 0.8% in investment (as measured by Gross Fixed Capital Formation) in 2nd half of FY21, as against 29% drop in 1st half of FY21
• Reignited inter and intra state movement and record-high monthly GST collections have marked the unlocking of industrial and commercial activity
• The external sector provided an effective cushion to growth with India recording a Current Account Surplus of 3.1% of GDP in the first half of FY21:
• Strong services exports and weak demand leading to a sharper contraction in imports (merchandise imports contracted by 39.7%) than exports (merchandise exports contracted by 21.2%)
• Forex reserves increased to a level so as to cover 18 months’ worth of imports in December 2020
• External debt as a ratio to GDP increased to 21.6% at end-September 2020 from 20.6% at end- March 2020
• Ratio of forex reserves to total and short-term debt improved because of the sizable accretion in reserves
• V-shaped recovery is underway, as demonstrated by a sustained resurgence in high frequency indicators such as power demand, e-way bills, GST collection, steel consumption, etc.
• India became the fastest country to roll-out 10 lakh vaccines in 6 days and also emerged as a leading supplier of the vaccine to neighbouring countries and Brazil
• Economy’s homecoming to normalcy brought closer by the initiation of a mega vaccination drive:
• Hopes of a robust recovery in services sector, consumption, and investment have been rekindled
• Reforms must go on to enable India realize its potential growth and erase the adverse impact of the pandemic
• India’s mature policy response to the ‘once-in-a-century’ crisis provides important lessons for democracies to avoid myopic policy-making and demonstrates benefits of focusing on long-term gain

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