Global and Indian Economic Prospects for 2021

31 Mar 2021

As fiscal year 2020-21 ends on 31 March, let us take stock of the economic situation.

The year 2020-21 would be remembered by the unprecedented crisis brought on by COVID -19, which altered the entire economic paradigm like no other event in the recent past. The pandemic and the subsequent lockdown disrupted economic activity, travel, supply chains, and more. As a result, the world over, the economies went into a tailspin and economic activity diminished significantly.

Governments responded to the crisis with stimulus plans and increasingly reset their economic strategies. Globally, the fiscal stimulus to combat the pandemic has topped trillions of dollars and expansionary monetary policy has cushioned growth to a large extent.

As a result, the world economy is gradually heading towards revival. The IMF has revised its forecast for the global economy, which is now estimated to contract by about 3.5 per cent in 2020, an upgrade from its previous prediction of (-) 4.5 per cent made in June 2020.

Global Growth Trajectory

As per the latest growth forecasts by the International Monetary Fund (IMF), the global economy is set to rebound sharply in 2021, expanding 5.5 per cent which is an upward revision from 5.2 per cent forecast in October. This signals expectations of an improvement in economic activity driven by vaccine rollouts and additional fiscal policy support to offset the immediate challenge posed by the pandemic.

The path and strength of recovery, however, is expected to vary across countries depending upon the access to medical intervention, effectiveness of policy support and other structural characteristics.

IMF World Economic Outlook Projections – Select Regions and Countries

Emerging and developing Asian economies, which account for half of world growth, are projected to grow at 8.3 per cent during 2021 as against a (-) 1.1 per cent growth in 2020. In China, domestic policies could push the pace of growth to 8.1 per cent in 2021. India, in contrast, is expected to pick up pace to 11.5 per cent in 2021.

Looking at quarterly trends, the Indian economy posted a positive GDP print of 0.4 per cent during the third quarter of this fiscal as against a contraction of 24.4 per cent and 7.3 per cent in the previous two quarters. For the entire year, GDP is estimated to contract by (-) 8.0 per cent based on the second advance estimates of CSO.

Domestic Real GDP Growth (y-o-y%)

In a positive development, growth was driven by significant recovery in the manufacturing and construction sectors. Investment demand also grew by 2.6 per cent in 3QFY21 after showing lackluster performance for several quarters now. Government spending also stepped up sharply with a focus on capex, adding acceleration to growth over the third quarter. Moreover, many high frequency indicators have shown improvement. All this reinforces the view that the economy is on the way to recovery.

This observation is further strengthened by the recovery seen in the corporate sector performance after the collapse witnessed in the first quarter of 2020-21. Net sales improved as it grew by 9.0 per cent on year-on-year terms in Q3FY21 after contracting by 0.6 per cent and 31.3 per cent in the previous two quarters. Overall profitability, too, continued to improve to 16.3 per cent in Q3FY21, up from 12.6 per cent in the previous quarter.

Corporate Performance Snapshot

No doubt, the challenge from the pandemic is far from over. With adequate safeguards in place and an accelerated vaccination drive, the second wave of the pandemic in the country could have low impact on economic activity so that the pace of growth continues in 2021-22 and beyond.