The India Economic Forecast 2021 summarizes key economic and social developments over the past year. It also presents findings on the evolution of policy reforms, external/global conditions, and financial-market dynamics from world-recognized financial institutions and multinational professional services authorities, assessing their implications for the country’s medium-term economic outlook. 

OECD’s Economic Outlook 2021 projected India to become the fastest-growing G20 economy in 2021. The second COVID-19 wave and new coronavirus variants, however, has resulted to a 7.7% contraction of the Indian economy in 2020. India’s severe COVID-19 crisis has had adverse impact on the country’s current economic recovery momentum and outlook. For the first time in 125 days, the country reported the lowest coronavirus cases; but at 30,093 new infections in July 20, it hardly provides a much-needed break for the extremely overwhelmed health care system.  

India’s economic growth projection for the 2021-22 fiscal year has been downgraded from 11% to 10%, according to the Asian Development Outlook report in July 2021. “The projection for FY 2022, by which time much of India’s population is expected to be vaccinated, is upgraded from 7.0% to 7.5% as economic activity normalizes,” the report showed. “Then a second wave of the pandemic induced many state governments to impose strict containment measures. New COVID-19 cases daily peaked at more than 400,000 in early May, then fell to a little over 40,000 in early July.”  

Two-year loss on expected GDP growth  

This chart provided by the Ministry of Statistics and Program Implementation shows how the Indian economy has been hit. India’s GDP from goods and services in the financial year 2019-2020 was almost $2 trillion (4% growth) but it was just $1.8 trillion in 2020-2021 was just $1.8 trillion (-7.3% fall). According to the National Council of Applied Economic Research (NCAER), an 8.4% real GDP growth for 2021-2022 would bring back the GDP to more than $2 trillion. But due to COVID-19 disruption, the Indian economy have failed to reach the level of $2.2 trillion GDP – a two-year loss on expected overall economic production.  

Wholesale and retail inflation are trending up 

India faces ever-increasing prices due to the coronavirus surge of the second wave. Retail inflation is at 6.3% in May 2021, which has breached the 2% to 6% target range set by the Reserve Bank of India and has spiked sharply due to increased fuel and food prices. Wholesale price-based inflation, on the other hand, is at a record high of 12.94% in May 2021 which has severely impacted lower- and middle-income families. 

“The high rate of inflation in May 2021 is primarily due to low base effect and rise in prices of crude petroleum, mineral oils viz. petrol, diesel, naphtha, furnace oil etc. and manufactured products as compared to the corresponding month of the previous year,” the Commerce and Industry Ministry said. 

Non-essential spending among Indian consumers continues to contract 

The biggest engine of India’s economic growth is private consumer expenditure. This demand for goods and services is what accounts for more than 55% of all GDP in a year. Before the pandemic, Indian consumers have already been postponing non-essential spending. As people experienced either job loss or salary reduction, the trend has become worse. The second COVID-19 wave brought an all-time low consumer confidence as big and small businesses refuse to seek new loans or carry out new investments.  

“Consumer confidence further weakened for the current period; the current situation index (CSI), which has been in negative territory since July 2019, fell to a new all-time low as consumer perceptions on general economic situation and employment scenario lowered further,” the RBI said.  

Household spending further weakened driven by a negative view on the household income, the employment scenario, and the general economic situation. According to Fitch Solutions, inflationary pressures will drive spending cut among Indian consumers which will outpace income growth.  

“If unemployment is more severe than forecasted, if employees are working fewer hours than pre-pandemic, or if people are taking lower-paying jobs, this will put further downside pressure on disposable incomes,” Fitch Solutions explained. 

Five Factors Towards Economic Recovery  

1. Availability of a treatment and vaccine 

There is no specific COVID-19 treatment available, but vaccines can help prevent the disease from getting critical. Unless India gets a significant majority of its population vaccinated, there is no economic recovery. The slow pace of vaccination and the possibility of a third wave may bring with it another round of disruption.  

Public health specialists are worried that despite having less than one percent positivity rate in the national capital and halting all exports in April, India has covered only 4% of its vast population. Economist Aayog Arvind Panagariya has also raised questions if the slow pace of vaccination was due to vaccine hesitancy or because of insufficient production of vaccines. 

“On Monday, we did not have a single dose of Covid-19 vaccine available. Even on Tuesday, we could get only about 700 doses of the vaccine that will be finished in two days,” a senior doctor from Lok Nayak Hospital, the biggest government-run hospital, said.  

“I don’t think the recent spurt can be maintained, given what we know of the supply situation,” said Gautam Menon, a professor of physics and biology at Ashoka University. “The single-day spike seems to have been the result of a concerted effort by some states, who may have stockpiled doses for this purpose. We would need to get to about 10 million doses per day to ensure that a future wave is less potent.” 

2. Government’s policy stimulus measures 

The federal government has announced a slew of reforms and relief measures to overcome the slowdown caused by the pandemic control strategies, to ease the radical impact on trade and commerce, and to resuscitate the overall economy. 

• Measures to ease compliance and tax burden for businesses including multiple deadline extensions for filing returns, reduction on interest rates, and extension of compliance completion  
• Trade facilitation measures such as 24/7 customs clearance, dedicated help desk for export-import (EXIM) trade, cancellation of levy charges, and a special refund and drawback disposal drive for MSMEs 

• Fiscal measures such as the Emergency Credit Line Guarantee Scheme (ECLGS) to grant unsecured loans to enterprises and MSMEs  
• Employees Provident Fund Support for businesses and organized workers including non-banking finance institutions (NBFCs) and micro finance institutions (MFIs) 
• Comprehensive stimulus package to allot $35 billion for infrastructure, healthcare, and private public collaboration 

3. The secondary industry impact  

The economic impact of the second Covid-19 wave is gradually taking a toll on many financially significant sectors such as hospitality, tourism, automobile, aviation and travel, and real estate and construction. Capacity building and industrial building will remain sluggish if there are uncertainties around the following: 

• Negative productivity impact due to job losses and business defaults 
• Continued supply-chain disruptions 

• Slow credit on financial sectors 
• Possibility of several outbreaks 
• Stringent restrictions on many economic activities 

4. The demand recovery 

Rural demand will hold up for some time due to government support, normal monsoon, and forecasted record agricultural production. But Covid 2.0, according to India Ratings and Research, has resulted to a more muted demand and expenditure which may eventually drain the overall economy. “A downward force on consumption and demand in rural areas this year will hit us. Rural demand saved us in 2020. A health crisis of this measure will put pressure on out-of-pocket expenses for many families,” it explained. 

Urban demand, on the other hand, will result to lesser sales of more discretionary goods and big-ticket items such as automobiles as urban Indian consumers become pessimistic about the future. “Real personal consumption expenditure (PCE) fell in 2020 as options for spending declined and the economic impact of the pandemic cut into people’s wallets. Savings too increased last year as even employed people held back on spending amid economic and health-related uncertainty,” according to Deloitte State of the Consumer Tracker.  

5. Peoples’ perception and trust  

Caution and fear arise due to people perception on the spread of the virus, how the government and businesses are safeguarding their needs, and the implication on their financial security. There is lower mobility and lower private consumption among the population due to a higher penetration of the virus and the stringency of lockdown measures. How much fiscal headroom does the government have left to allay citizens’ concern and to prevent negative economic spillovers?  

“In industries ranging from technology to farming and manufacturing, business is being called upon to demonstrate both its ability and integrity – the key building blocks of trust,” according to the Edelman Trust Barometer. First, even at the cost of a slower economic recovery, health and safety must remain our number one priority. Second, businesses and governments must be committed to collaborative efforts in developing, testing, and mass-producing an effective vaccine. Third, business leaders should reinvent their companies in ways that benefit both their business interests and those of society. 

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