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The Year That Was And Possibly Will Be

We expect the economy to reach pre-crisis levels by Q3 FY2022 and pencil in double-digits growth in FY2022 after a contraction in FY2021

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The year 2020 saw unprecedented disruptions to lives and livelihood. The extent and intensity of the pandemic induced supply-chain disruptions, a weak labour market, and financial and health anxieties among consumers and businesses. This was evident from the extent of GDP contraction in the first half of the fiscal year.

As policymakers responded to this crisis with stimulus measures and accommodative monetary policies, several structural reforms and schemes were announced that are expected to benefit the nation in the medium to long-term and pave the way to strong growth. Measures to boost self-reliance, agriculture and labour reforms, education policy amendment, or changes in banking regulations, were expedited. Businesses also improved resilience and embraced organisational agility through digitisation and automation, reprioritisation, and de-risking and re-organising supply chains to survive, and then thrive.

As India charters its way through the pandemic and steps into the new year, the question is whether the economy is on the path to recovery in 2021. Keeping in perspective what recent high-frequency data are suggesting, it appears that India may have turned towards the road to recovery.

We foresee several scenarios panning out over the next few years, ranging from optimism to extreme pessimism. However, we are optimistic and see the glass half full as the economy swings between good and bad news. We expect the economy to reach pre-crisis levels by Q3 FY2022 and pencil in double-digits growth in FY2022 after a contraction in FY2021. Reducing infection, lower fatality rates, and the possible release of highly effective vaccines are expected to improve the confidence of consumers and businesses. Pent-up demand for more elastic discretionary goods, especially among the top ten income percentile of the population, may spur private investment that has been contracting for five consecutive quarters now. The lagged buoyancy impact of government spending and reforms, and liquidity measures by the RBI could further boost economic recovery.

We expect prices to ease till mid-2021 because of low demand and low supply equilibrium but rise quickly as soon as infection rates are under control under our optimistic scenario. This is because demand overshoots supply in a very short period. Prolonged low investments leading to capacity constraints and reduced inventories fail to meet the strong rebound in durable goods, leading to stronger core prices.

That said, stronger growth rates in FY2022 could be deceptive. A strong rebound will be the result of the low base effect in FY2021 and Milton Friedman's plucking theory playing out. Despite a quicker rebound, the output levels are likely to remain much below the pre-pandemic GDP levels (during our entire forecast period, which is until FY2023) and the potential output levels, which also have been affected because of the pandemic.

We also acknowledge that the path to recovery may face its share of challenges. The purchasing power of consumers may get impacted if there are continued job losses and low wage growth, especially among the low and middle-income class. According to CMIE, the number of people who feel wealthier this year compared to last year has declined sharply. The negative wealth effect may impact the ability to spend more.

Inflation has remained persistently high. Most likely, the RBI may decide not to reduce policy rates in the next few months. As a result, micro, small and medium enterprises and those in the informal sector will likely continue to face high borrowing interest rates on working capital.

In short, there is likely to be pain in the shortterm but the outlook in the medium-term may improve significantly with the reduced number of infections. With several vaccines waiting in queues to be released, we hope for a better 2021!

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Rumki Majumdar

The author is Economist, Deloitte India

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