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explained | What are the headwinds and headwinds in the economy?

By on December 25, 2021 0

In which sectors has the recovery accelerated? What needs to be done to support growth?

The story so far: For India, the past year has been one of rebuilding after the ravages of 2020 amid the COVID-19 storm that pushed the already sluggish economy into contraction mode. To refresh the context in which 2021 has risen, the country’s gross domestic product (GDP) growth fell to just 3% in the fourth quarter of 2019-2020. Lockdowns linked to the pandemic brought the economy to a standstill, causing production to drop 24.4% and 7.4% in the first two quarters of 2020-2021, respectively. The resulting destruction meant that job and income losses coincided with the ongoing health crisis, limiting consumption and disrupting production supply chains in all industries, while high-intensity sectors contact such as tourism, catering and other services have hemorrhaged. It was only after the peak of the first wave of COVID-19 in September 2020 that GDP growth resurfaced with a meager 0.5% expansion rate in the third quarter. It was hoped that the new year would help unravel the damage, aided by a rapid vaccination against the novel coronavirus as well as specific policy measures to save and revive the worst affected sectors of the economy.

How did the Indian economy fare this year? Is he out of the woods yet?

In an effort to make up for lost ground, in February Finance Minister Nirmala Sitharaman’s Union budget for 2021-2022 bet on pushing infrastructure spending to revive the economy, but refrained from providing income assistance for those most affected by the pandemic. An ambitious ₹ 1.75 lakh crore target has been set for divestment from public sector companies, supported by a new policy to maintain a “bare minimum” presence of state-owned enterprises, even in strategic sectors . The government explained that an increase in capital spending would trigger multiplier effects by stimulating demand in several sectors and stimulating job creation and consumption. Economists were concerned about the risks of implementing this approach, especially the time that public investment projects may take to bear fruit before the multiplier effects are felt. As the government spoke about the prospects of a strong V-shaped recovery, experts worried that a K-shaped recovery would unfold thanks to a rift between those who needed to protect their lives and livelihoods. , and those who were able to support themselves such as businesses and those in white-collar jobs that had not been too badly affected by the pandemic. The COVID-19 virus, however, was immune to such nuanced debate and decided to play spoiler before the fine print of the budget even fell. By the end of March, India was firmly in the throes of a much deadlier second wave, prompting the Center to unveil new relief measures for the industry as well as vulnerable sections such as the provision of free food grains. (which has now been extended until March 2022). While the virus had taken a heavy toll on livelihoods in 2020, this year it has cost humans far more with many deaths. In contrast, the economic suffering of the second wave was less pronounced and supply chains were less stressed, with restrictions on mobility and business activities localized in all states, unlike the strict national lockdown of 2020. Well sure, that does not mean the second. the wave did not affect growth. After a slight 1.6% increase in GDP between January and March, the economy recorded disappointing growth of 20.1% in the April-June quarter, while the base effect was hoped to be the sharp drop of 24.4% from the previous year would push the number up. . As households were more affected, the share of consumption in GDP fell during this quarter. While manufacturing and construction recovered, the economy’s overall output remained well below pre-pandemic low levels. Gross value added (GVA) was still 7.8% lower than the level observed in the first quarter of 2019-2020, while GDP was still 9.2% lower. Things have improved, according to the latest national accounts data, but only narrowly, as the July-September quarter saw GDP growth of 8.4%, pulling the economy 0.3% above the same quarter in 2019. The first half of fiscal year 2021-2022 has now recorded GDP growth of 13.5% and the Ministry of Finance expects double-digit growth for the full year ending in March 2022. But we cannot yet say that the economy is really out of the woods. The real GVA for the first half of this fiscal year remains 3.7% lower than the first half of 2019-2020 and this difference is even more important for real GDP at 4.4%, underlined the chief policy adviser of EY. India, DK Srivastava. “2021-22 was spent primarily to offset the contraction in 2020-2021. Even if real GDP growth of 9.5% is achieved in this fiscal year, India would only land slightly on the positive side compared to 2019-2020, ”he said.

Which areas are now back to pre-pandemic levels and where does the pain persist?

While the recovery has accelerated despite the second wave, it remains uneven and fragmented, with economists also not convinced of its sustainability. CARE Ratings economists Madan Sabnavis and Kavita Chacko noted that demand and investment have yet to experience a significant and lasting recovery and that any improvement is expected to be limited and gradual as the national economy struggles with a low demand and a moderate investment climate. even before the COVID-19 shock. While agriculture, the only sector to record positive growth throughout the pandemic, has held firm, sectors like manufacturing, mining, power, have recovered above pre-levels. COVID in September. But employment-intensive sectors like construction, contact-intensive commerce and the hospitality industry, as well as financial services and real estate, continue to languish below their pre-pandemic levels.

There are other interesting aspects of the economic trajectory this year. Exports have performed well, reaching record numbers so far, but imports have also increased, pushing India’s merchandise trade deficit to a record $ 22.9 billion in November. The rupee, which rallied after falling below 76 per dollar in March 2020, has weakened again above that bar recently. Tax collections, both direct and indirect, have performed surprisingly well. Goods and services tax revenue has remained above ₹ 1 lakh crore per month for most of the year. While retail price inflation moderated during the initial period of this year after remaining above the central bank’s 6% tolerance level for much of 2020, it has recovered slightly in recent months, hitting a three-month high of 4.9% in November. Wholesale price inflation has also reached an all-time high in the current series of the index, making input costs the number one concern for businesses.

Pradeep Multani, President of PHDCCI, said supply issues such as high raw material prices and raw material shortages are hurting industry margins, especially for small and medium enterprises which generate high numbers. jobs. He believes the government needs to get the economy under control given the risks this poses to consumption and private investment, even though the new variant of the Omicron virus is a new dark cloud on the horizon.

What news can 2022 hold in store for us and what are the biggest risks for growth?

Aside from the uncertain effects of Omicron and other viral mutations, the OECD forecast global growth to slow to 4.5% in 2022, from 5.6% this year as India’s growth is set. at 8.1% for 2022-2023. On the bright side, ICRA chief economist Aditi Nayar hopes that consumption will return to normal, which could increase the industry’s capacity utilization rate and set the stage for a widespread upturn in investment in the industry. ‘by the end of 2022. Economists believe that higher inflation is the biggest risk. for the coming year, as supply chain issues in key components, volatility in commodity and oil prices as well as shipping disruptions are expected to worsen at least in the first half of the year . With retail inflation at a 40-year high in the United States, interest rate hikes could justify a change in the current stance of central bank monetary policy that favors growth over inflation .

India’s policymakers, from the North Block mandarins formulating the budget to the bosses of Mint Street in Mumbai, have their work cut out for them for a soft landing in 2022.