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India’s economic forecast 2021: what’s coming next

Bader Al Hussain

PaySpace Magazine Analyst

 


Introduction

Since the turn of the 21st century, the Indian economy has made remarkable progress on the back of vibrant and liberal economic reforms, resulting in a more open economy. The restrictions related to foreign capital were gradually eased to allow foreign investment in various sectors of industry, especially IT and IT-enabled services. The largest increase was witnessed in the Business Process Outsourcing (BPO) market as the western companies took advantage of low-cost workers coupled with the availability of one of the largest pools of English-speaking population in the world. However, some events such as COVID-19 and the demonetization of an economy casted dark shadows on the upward trajectory of economic performance.

India's economic forecast

India’s economic forecast 2021: what’s coming next. Source: pexels.com

Economy at glance

As per the second advance estimates (SAE) for 2020-21, India’s current real gross domestic product (GDP) at current prices stood at INR. 195.86 lakh crore (equivalent to US$ 2.71 trillion) in FY21.

According to Hurun Global Unicorn List, India is also the fourth-largest unicorn base in the world accounting for more than 21 unicorns cumulatively valued at US$ 73.2 billion. By 2025, India is expected to have approximately 100 unicorns and these companies are expected to create ~1.1 million direct jobs according to the Nasscom-Zinnov report ‘Indian Tech Start-up’.

The challenge for India after coping with COVID-19 is its need to increase its rate of employment growth and to create 90 million non-farm jobs between 2023 and 2030 to sustain its productivity and economic growth according to McKinsey Global Institute. The net employment rate needs to grow by 1.5% per year from 2023 to 2030 to achieve 8-8.5% GDP growth between 2023 and 2030.

India’s foreign exchange reserves stood at US$ 582.04 billion, as of March 12, 2021, according to data from RBI.

Indian economy in 2020

The advent of COVID-19 reversed some of the gains made in terms of poverty alleviation and economic development. After 25th March 2020, the strict national lockdown was implemented, having a significant impact on the informal sector together with the poor segment of the society. The countrywide lockdown resulted in a 25% fall in the economic output on, year-on-year basis. Thus, according to the World Bank, the GDP of India for the fiscal year 2021 contracted by an estimated 8.5%.

Some of the recent developments in the Indian economy are enumerated as follows:

  1. Exports from India for the period, April 2020 to February 2021 were US$ 439.64 billion. This was a 10% decrease over the same period last year. Whereas imports for the period, April 2020 to February 2021 were estimated at US$ 447.44 billion, 20.83 percent lower over the same period last year.
  2. Purchasing Managers’ Index (PMI) for manufacturing declined to 57.5 in February 2021, according to IHS Markit.
  3. Tax revenue experienced the opposite trend as gross tax revenue stood at US$ 15.58 billion in the month of February 2021, up from US$ 14.51 billion.
  4. Cumulative FDI equity inflows in India stood at US$ 749.39 billion between April 2000 and December 2020.
  5. India’s Index of Industrial Production (IIP) for January 2021 stood at 135.2, against 136.6 for December 2020, reflecting a dip in industrial production.
  6. Consumer Food Price Index (CFPI, combined inflation was 3.87% in February 2021, against 1.96% in January 2021.
  7. Consumer Price Index (CPI) aggregate inflation was 5.03% in February 2021, against 4.06% in January 2021.

Current COVID-19 situation

On 28th April 28, 2021, COVID-19 cases in India surpassed 18 million. Given the understated nature of this figure by the government, in no time, India is going to have the highest COVID-19 affected population in the world. The explosive rise in the demand for oxygen cylinders diverted the oxygen supply from the industry to the health sector. Additionally, in order to curb the significant rise in the COVID-19 cases, the government has imposed one of the toughest lockdowns in the world.

Indian economy outlook for 2021 and beyond

Owing to the above-mentioned scenario, International Financial Institutions (IFIs) such as IMF and World Bank, have slashed the double-digit economic growth that was expected for FY22. After

“Localised containment measures will act as a drag on growth,” said Teresa John, who is an analyst at Nirmal Bang Equities Pvt. in Mumbai. It is worth noting that 10 Indian states that account for about 80% of the country’s COVID-19 cases contribute approximately 65% to the national economic output.

Source: Bloomberg

Here it is pertinent to state that the Indian government did give a stimulus package as did the US government. Therefore, it is prudent to assume that most of the savings of the middle income and low-income classes have been evaporated in order to meet the operating expenses during the period of economic and health crises.

“Given the heavy borrowing program and the evolving macro situation wherein growth concerns are again coming back due to the second wave of the pandemic and on the other side inflation could remain sticky, we think bond yields will struggle to soften despite RBI’s very laudable efforts,” said B. Prasanna, head of global markets, trading, sales and research at ICICI Bank Ltd.

“While the rapidity with which cases are rising is high, it is also expected that this wave will be relatively short-lived,” said Kotak Mahindra Bank Ltd.’s Upasna Bhardwaj, who is among the few to have downgraded the economy’s growth forecast — by 50 basis points to 10% for the current year. “Nonetheless, uncertainty remains,” she said.

Indian stock market performance

Indian stocks witnessed one of the highest foreign outflows from its equity funds. As per a Bloomberg report, foreign investors have sold over $1.1 billion through April 23. This was recorded as one of the largest foreign outflows since March last year.

“Foreign investors are worried about the potential near-term impact on company earnings and recovery,” said G Pradeepkumar, chief executive officer at Union Asset Management Co. “It is a tactical call as markets too have run up significantly and investors have decided to take some money off the table.”

The concerns related to a spike in coronavirus cases have contributed to the country’s benchmark stock index as NSE Nifty 50 is becoming one of Asia’s worst performers.

Conclusion

The long-term risk for Indian businesses pertains to the high-contact services that were badly hit during the pandemic and during the recent lethal second wave of COVID-19 has completely devastated their balance sheets. However, there is a reluctance by economists to revise the growth forecast for FY22 as they expect this crisis is going to be over soon. This confidence stems from the fact that the government is rolling out a fast-paced vaccination program and has assured the full support of fiscal and monetary policymakers.

On the fiscal side, it is pertinent to mention that the government has a limited fiscal space, as it has already incurred a record borrowing of 12.1 trillion rupees ($168 billion) this fiscal year to stimulate the economic activity in the country. On the monetary side, interest rates are already at a record low amidst looming inflation concerns.

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