explained | What are the head and tailwinds in the economy?

the story So Far: For India, the past year has been about rebuilding from the ravages of 2020 amid the COVID-19 storm, which pushed an already slowing economy into contraction mode. To refresh the context in which 2021 began, the country’s Gross Domestic Product (GDP) growth slowed to just 3% in the fourth quarter of 2019-2020. The pandemic-related lockdown sent the stalled economy into free fall, reducing production by 24.4% and 7.4%, respectively, in the first two quarters of 2020-21. The resulting destruction meant job and income losses accompanied by an unfolding health crisis, cramping consumption and disrupting production supply chains in industries, while contact-intensive sectors such as tourism, restaurants and other services bleed. It was only after the first COVID-19 wave peaked in September 2020 that GDP growth in the third quarter crawled back to the surface with a modest growth of 0.5%. The new year, it was hoped, would help highlight the damage, aided by rapid vaccination against the novel coronavirus as well as specific policy steps to protect and revive the worst-hit sectors of the economy.

How has the Indian economy performed this year? Is it out of the woods yet?

To make up for lost ground, in February, Finance Minister Nirmala Sitharaman’s Union Budget 2021-22 emphasized on infrastructure spending to revive the economy, but refrained from providing income support for those hardest hit by the pandemic. Did. An ambitious ₹1.75 lakh crore target was set for disinvestment from public sector enterprises backed by a new policy to maintain ‘minimum’ presence of state-owned firms even in strategic sectors. The government clarified that higher capital expenditure would trigger the multiplier effect in many sectors by reducing demand and boosting job creation and consumption. Economists were concerned about the implementation risks of this approach, which could take time for public investment projects to come to fruition before the multiplier effect subsides. While the government spoke of the prospects of a swift V-shaped recovery, experts expressed concern about the K-shaped recovery, thanks to a divergence among those who need to protect their lives and livelihoods. , and who were able to sustain themselves like corporates and those. In white-collar jobs that weren’t too badly hit by the pandemic. However, the COVID-19 virus was immune to such nuanced debates and decided to spoil the budget before the fine print sunk in. By the end of March, India was in the grip of a very deadly second wave, prompting it. The Center will unveil new relief measures for industry as well as vulnerable sections such as providing free food grains (which has now been extended till March 2022). If the virus had taken a heavy toll on livelihoods this year in 2020, it claimed a far higher human cost with a higher mortality rate. In contrast, the economic pain from the second wave was less pronounced and there was less pressure on supply chains, in contrast to the tough 2020 nationwide lockdown that imposed restrictions on mobility and business activities in states. Of course, this is not the second to say. The wave did not harm the development. After a sharp 1.6% growth in GDP between January and March, the economy grew at a whopping 20.1% in the April-June quarter, when it was expected that the base effect of the sharp 24.4% slide in the previous year could boost the numbers. Will increase more. , As households were more severely affected, the share of consumption in GDP fell during the quarter. While manufacturing and construction recovered, the economy’s overall output remained well below pre-pandemic levels. Gross Value Added (GVA) was still 7.8% shy of the level seen in the first quarter of 2019-20, while GDP remained lower at 9.2%. According to the latest national accounts data, things have improved, but only – the July to September quarter recorded 8.4% GDP growth, dragging the economy up by 0.3% from the same quarter in 2019. The first half of the financial year 2021-22 now registered a growth of 13.5% GDP and the finance ministry expects double-digit expansion for the full year ending March 2022. But one cannot say that the economy has come out of the woods yet. DK Srivastava, Chief Policy Advisor, EY India, pointed out that the real GVA for the first half of this financial year is 3.7% lower than the first half of 2019-20 and for real GDP, the gap is even bigger at 4.4%. “2021-22 has been mostly spent making up for the contraction in 2020-21. Even if real GDP growth of 9.5 per cent is achieved in this fiscal, India will only land on the positive side as compared to 2019-20,” 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 is still uneven and fragmented, with economists also unconcerned about its stability. CARE Ratings economists Madan Sabnavis and Kavita Chacko noted that demand and investment are yet to see a meaningful and sustainable pick-up and that any recovery was expected to be limited and gradual as the domestic economy continues to grow with low demand and a weak investment. She was struggling with the atmosphere. Even before the COVID-19 shock. While agriculture, the only sector to register positive growth during the pandemic, has remained firm, sectors such as manufacturing, mining, power have recovered above pre-COVID levels till September. But employment-intensive sectors such as construction, contact-intensive trade and the hotel industry, as well as financial services and real estate, continue to fall below their pre-pandemic levels.

There are some other interesting aspects to this year’s economic trajectory. Exports have performed well, reaching record numbers so far, but imports are rising as well, pushing India’s trade deficit to an all-time high of $22.9 billion in November. The rupee, which fell below $76 to a dollar in March 2020, recently weakened that mark again. Both direct and indirect tax collections have performed surprisingly well. The Goods and Services Tax revenue stood at over ₹1 lakh crore per month for most of the year. While retail inflation moderated early this year after remaining beyond the central bank’s 6% tolerance limit through large parts of 2020, it has risen in recent months to a three-month high of 4.9% in November Is. Wholesale price inflation has also hit an all-time high in the current series of the index, making input cost the number one concern for businesses.

PHDCCI President Pradeep Multani said that supply side issues such as high commodity prices and shortage of raw material are affecting the margins of the industry, especially for small and medium enterprises which generate high employment. He believes the government needs to handle the economy given the risks to consumption and private investment, even though the new virus variant is a fresh dark cloud on the Omicron horizon.

What could be good news in 2022 and what are the biggest risks to growth?

Excluding the uncertain effects of omicron and other virus mutations, the OECD forecasts global growth to slow to 4.5% in 2022, from 5.6% this year, pegging India’s growth at 8.1% for 2022-23. On the bright side, ICRA Chief Economist Aditi Nair expects consumption to normalize which could boost the industry’s capacity utilization rate and set the stage for broad-based investment revival by the end of 2022. Economists believe that high inflation is the biggest risk factor for the coming year. Supply chain problems, volatile commodity and oil prices as well as shipping disruptions are expected to deepen at least in the first half of the year. Chances are. With US retail inflation hitting a 40-year high, a hike in interest rates could warrant a change in the current monetary policy stance of the central bank, which is prioritizing growth over inflation.

India’s policy makers, be it the Mandarins of North Block preparing the budget or the owners of Mint Street in Mumbai, have finished their work for a smooth landing in 2022.