CII BLOG

Economic recovery continues to strengthen

03 Aug 2021

With continuing moderation in the global COVID-19 case count, the world is gradually moving towards recovery. The IMF expects the global economy to grow at 6.0% in 2021 after it contracted by 3.2% in 2020. The US is leading the way in global recovery as the impact of the pandemic recedes, bolstered by large scale stimulus, investment in infrastructure and exports. However, it is not yet clear that the pandemic will continue to recede, given that the pace of vaccination has slowed down in the US. In emerging Asia, there has been an increase in the number of cases in countries such as Indonesia and China, leading to curbs on economic activity. The IMF has marked down their forecast for emerging and developing countries while revising up the forecast for advanced economies.

Global Economic Growth projections

The recovery in most economies, including India, is dependent on increasing the pace of vaccinations against new variants of COVID-19. India has been moving ahead with the task of vaccination at a brisk pace with around 47 crore doses been administered as of end-July 2021. About 33% of the adult population have been inoculated with the first dose and nearly 10% of the adult population have been fully vaccinated.  Given the large size of India’s population, a key challenge is to reach the vaccine to the remote corners of the country and to overcome vaccine hesitancy among certain sections. Till then, fear of a third wave will present hurdles to a complete recovery.

That said, it is evident that the economic damage from the second wave has been far less than that from the first wave. Data points from the first quarter of FY22 are much better than the same period of the previous year, simply due to the base effect. In June 2021, GST collection fell below the INR 1 Lakh crore mark but has recovered again in July to Rs 1.16 lakh crore, pointing towards a continuing recovery.

With widespread resumption of economic activity, and a strong base effect, GDP is expected to grow at 9.5% in 2021-22. However, this would take the economy to a level only slightly above that in 2019-20. Any further improvement will be dependent on the level of consumer demand that has been severely impacted by the loss of livelihoods due to the successive waves of the pandemic.

The performance of agriculture is a key determinant of rural income and demand in a country where over half the population is dependent on agriculture. The monsoon rainfall is gradually coming back to normal though the temporal and regional distribution remains uneven, leading to uncertainty in the kharif crop sowing season. As of 30th July, the total crop sown area has declined by almost 6% as compared to previous year.

Another risk is the rise in the price of base metals and energy which are key inputs for industry. The price of steel and iron ore have jumped sharply over the past 12 months. Fuel prices have surged globally, leading to increases at the retail level as well. Lower taxes on fuel are recommended to ease the pressure on incomes, allowing for a faster revival in consumer sentiment and spending while containing inflation.

India’s retail inflation (CPI) has printed at 6.3% in June 2021. It was the second time in a row that the inflation rate had surged over and above RBI’s threshold of 6% largely as the commodity prices continue to harden.

On a positive note, FDI in India increased by 26.7% in 2020 to touch USD 64.1 billion (as per UNCTAD), at a time when global FDI flow declined by 34.7%. Much of this was driven by cross border M&As, which surged 83% to USD 27 Billion with deals in ICT, health, infrastructure and energy. In addition to the surge in capital inflows, India also recorded a surplus in its current account in FY21. As a result, forex reserves have risen to historic highs of over USD 600 billion.

A durable economic recovery would require capacity creation by industry. The RBI has kept interest rates low in order to encourage credit growth while the Government has provided credit guarantees to provide liquidity support. However, businesses are yet to start investing in a big way, given that current capacities are adequate for meeting consumer demand.