After Covid-19 brought life to a halt in 2020 and a portion of 2021, the Indian economy has almost caught up to pre-pandemic growth levels, and its size in absolute terms has almost matched that of the pre-pandemic year (2019). Also, despite handing out large stimulus to alleviate the impact of the virus, the government’s revenues have been doing fantastically well, at least on the tax side, is something that will go down in history. A number of international institutions, including the World Bank, the International Monetary Fund, and the World Economic Forum, have praised India’s policy response to the pandemic, not only for protecting its own people but also for providing medical supplies and equipment to more than 150 countries.
Despite the devastating Delta wave, India’s economy sprung into action and emerged as the world’s fastest-growing major economy in the July-September quarter, the most recent figures available. Along with dealing with the Covid waves, the government has implemented reforms to strengthen manufacturing, which is India’s second largest contributor to the economy after services. Reforms in other areas have also been implemented, and the country is set to meet its export target this year for the first time in a long time. India has also pledged to spending Rs 111 lakh crore on infrastructure by 2025.
But, with the fast-spreading Omicron variety launching a new wave of the pandemic, does 2022 appear to be as hopeful, especially since the administration must cope not only with the virus but also with the equally important issue of assembly elections in seven states? Another important issue facing the administration is the rapid rise in prices and rising unemployment as a result of the closure of numerous small and medium-sized businesses across the country, for which there is no statistics. Supply chain disruptions caused by Covid border controls have already wrought havoc on prices, and if contagious Omicron spreads quickly, labor costs are projected to rise even more.
What happens if items cannot be moved from the point of production to the market because of a port backlog, a border restriction, or a labor shortage? Prices rise as a result of a supply shortage, which is referred to as supply-side inflation in economic terms. As a result, demand and consumption take a significant hit. This is what is happening all across the world, causing inflation-targeting central banks to take a break from easy monetary policy, even if it is ineffective. Rising interest rates will be ineffective in reopening borders or reactivating labor markets. Despite the government cutting the excise levy on gasoline and diesel last month, rising global oil prices have added a new dimension to inflation and led to an increase in food and transportation costs.
According to the RBI’s most recent household inflation anticipation survey, people’ median inflation expectations are expected to rise in the near future. Governor Shaktikanta Das stated in December’s financial stability report that inflation continues to be a source of concern, buffeted by rising cost pressures and posing a major risk to economic prospects. Inflation is terrible not only for the average citizen, but also for the government as a whole. As prices rise, bond rates rise, making borrowing more expensive for the government. The central government’s bond yields are already at an all-time high. The Reserve Bank of India has correctly warned policymakers about supply-side inflation, which is beyond their control. And, if it raises interest rates now, it would simply stifle the economy’s recovery.
When it comes to jobs, they are the single most crucial indicator of economic recovery. Though the unemployment crisis has improved slightly, according to the most current CMIE data, urban joblessness increased to 8.21 percent in November from 7.38 percent in October. In urban India, there is a reduction in salaried jobs, which is a worrying sign. Although the net creation of jobs in the country as a whole has improved, quality jobs continue to be scarce. The reduction in the labor participation rate among those over 15 years old compared to pre-pandemic years is particularly concerning.
Unemployment is a source of concern, since it creates a significant gap between GDP growth and the reality on the ground. The figures reveal that the gross domestic product, or overall economy, is expected to rise by more than 9% in the current fiscal year, which ends on March 31, 2022. It’s a significant improvement from previous year, when the GDP shrank by 7.3 percent. This should result in increased wealth, prosperity, and job opportunities. However, this is not the case. The rationale is because the small and medium sector provides employment to a large portion of India’s population. MSMEs account for over 90% of all jobs, yet the majority of them have closed, leaving individuals and households jobless and forcing millions into poverty. It’s the part of India that doesn’t show up in statistics. They haven’t been documented.
As a result, the GDP numbers appear to be positive thanks to individuals who have succeeded well in the formal sector, as evidenced. Even during the pandemic, formal sector businesses have done well and have continued to grow their market share. However, this has gradually resulted in significant inequality across the country, prompting analysts to warn the administration about the dangers of a ‘K’-shaped recovery. After a recession, a K-shaped recovery occurs when certain areas of the economy resume growth while others lag behind.
Is there a way out? First, the government must recognize the amount of the informal economy’s damage and, in the 2019 Union Budget, provide benefits to them correspondingly. In their pre-Budget meeting with Union Finance Minister Nirmala Sitharaman, many states demanded this. Even during the pandemic year, the government was able to raise tax income.
While the majority of it should go toward infrastructure development, particularly in the health and education sectors, a portion of it should also go toward alleviating the pains of the economy’s informal sectors. The administration has put a lot of work into making the tax system more robust. It remains to be seen if it is used for capital expenditure or whether assembly elections in the seven states divert a significant portion of it. The BJP is in control in six of the seven states that are up for election, and it wants to keep all of them, even if the government has to take some fiscal risks.
Is India currently experiencing a recession?
With two consecutive quarters of negative growth, India experienced a recession for the first time in history in the first half of fiscal year 2020. In the first quarter of the fiscal year 2020-21, the gross domestic product (GDP) shrank by a historic 24.4 percent.
Is a recession expected in 2021?
Unfortunately, a worldwide economic recession in 2021 appears to be a foregone conclusion. The coronavirus has already wreaked havoc on businesses and economies around the world, and experts predict that the devastation will only get worse. Fortunately, there are methods to prepare for a downturn in the economy: live within your means.
Is the Indian economy in a slump?
In the year 2020, the Indian economy had its first-ever technical recession, with gross domestic product (GDP) growth lasting negative for two consecutive quarters. In the first quarter of the previous fiscal year, GDP shrank by a record 24.4 percent.
Is a recession on the horizon?
Without price restrictions, I see the Fed raising the Fed Funds Rate in 2022 and tightening further in 2023. As a result, the next recession might start as early as the fall of 2023, but not more than a year later. If the recession does not start on time, it has simply been postponed, not eliminated.
How long do economic downturns last?
A recession is a long-term economic downturn that affects a large number of people. A depression is a longer-term, more severe slump. Since 1854, there have been 33 recessions. 1 Recessions have lasted an average of 11 months since 1945.
What is the state of the economy in 2021?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
In 2021, what would India’s GDP be?
In its second advance estimates of national accounts released on Monday, the National Statistical Office (NSO) forecasted the country’s growth for 2021-22 at 8.9%, slightly lower than the 9.2% estimated in its first advance estimates released in January.
Furthermore, the National Statistics Office (NSO) reduced its estimates of GDP contraction for the coronavirus pandemic-affected last fiscal year (2020-21) to 6.6 percent. The previous projection was for a 7.3% decrease.
In April-June 2020, the Indian economy contracted 23.8 percent, and in July-September 2020, it contracted 6.6 percent.
“While an adverse base was expected to flatten growth in Q3 FY2022, the NSO’s initial estimates are far below our expectations (6.2 percent for GDP), with a marginal increase in manufacturing and a contraction in construction that is surprising given the heavy rains in the southern states,” said Aditi Nayar, Chief Economist at ICRA.
“GDP at constant (2011-12) prices is estimated at Rs 38.22 trillion in Q3 of 2021-22, up from Rs 36.26 trillion in Q3 of 2020-21, indicating an increase of 5.4 percent,” according to an official release.
According to the announcement, real GDP (GDP) or Gross Domestic Product (GDP) at constant (2011-12) prices is expected to reach Rs 147.72 trillion in 2021-22, up from Rs 135.58 trillion in the first updated estimate announced on January 31, 2022.
GDP growth is expected to be 8.9% in 2021-22, compared to a decline of 6.6 percent in 2020-21.
In terms of value, GDP in October-December 2021-22 was Rs 38,22,159 crore, up from Rs 36,22,220 crore in the same period of 2020-21.
According to NSO data, the manufacturing sector’s Gross Value Added (GVA) growth remained nearly steady at 0.2 percent in the third quarter of 2021-22, compared to 8.4 percent a year ago.
GVA growth in the farm sector was weak in the third quarter, at 2.6 percent, compared to 4.1 percent a year before.
GVA in the construction sector decreased by 2.8%, compared to 6.6% rise a year ago.
The electricity, gas, water supply, and other utility services segment grew by 3.7 percent in the third quarter of current fiscal year, compared to 1.5 percent growth the previous year.
Similarly, trade, hotel, transportation, communication, and broadcasting services expanded by 6.1 percent, compared to a decline of 10.1 percent a year ago.
In Q3 FY22, financial, real estate, and professional services growth was 4.6 percent, compared to 10.3 percent in Q3 FY21.
During the quarter under examination, public administration, defense, and other services expanded by 16.8%, compared to a decrease of 2.9 percent a year earlier.
Meanwhile, China’s economy grew by 4% between October and December of 2021.
“India’s GDP growth for Q3FY22 was a touch lower than our forecast of 5.7 percent, as the manufacturing sector grew slowly and the construction industry experienced unanticipated de-growth.” We have, however, decisively emerged from the pandemic recession, with all sectors of the economy showing signs of recovery.
“Going ahead, unlock trade will help growth in Q4FY22, as most governments have eliminated pandemic-related limitations, but weak rural demand and geopolitical shock from the Russia-Ukraine conflict may impair global growth and supply chains.” The impending pass-through of higher oil and gas costs could affect domestic demand mood, according to Elara Capital economist Garima Kapoor.
“Strong growth in the services sector and a pick-up in private final consumption expenditure drove India’s real GDP growth to 5.4 percent in Q3.” While agriculture’s growth slowed in Q3, the construction sector’s growth became negative.
“On the plus side, actual expenditure levels in both the private and public sectors are greater than they were before the pandemic.
“Given the encouraging trends in government revenues and spending until January 2022, as well as the upward revision in the nominal GDP growth rate for FY22, the fiscal deficit to GDP ratio for FY22 may come out better than what the (federal) budget projected,” said Rupa Rege Nitsure, group chief economist, L&T Financial Holdings.
“The growth number is pretty disappointing,” Sujan Hajra, chief economist of Mumbai-based Anand Rathi Securities, said, citing weaker rural consumer demand and investments as reasons.
After crude prices soared beyond $100 a barrel, India, which imports virtually all of its oil, might face a wider trade imbalance, a weaker rupee, and greater inflation, with a knock to GDP considered as the main concern.
“We believe the fiscal and monetary policy accommodation will remain, given the geopolitical volatility and crude oil prices,” Hajra added.
According to Nomura, a 10% increase in oil prices would shave 0.2 percentage points off India’s GDP growth while adding 0.3 to 0.4 percentage points to retail inflation.
Widening sanctions against Russia are likely to have a ripple impact on India, according to Sakshi Gupta, senior economist at HDFC Bank.
“We see a 20-30 basis point downside risk to our base predictions,” she said. For the time being, HDFC expects the GDP to rise 8.2% in the coming fiscal year.
In India, who declares a recession?
A recession is defined as a drop in general economic activity that lasts for two quarters (six months) and is followed by a drop in income, sales, and employment. Four years of negative GDP growth have been recorded in India’s independent history. -1.2 percent (FY58), -3.66 percent (FY66), -0.32 percent (FY73), and -5.2 percent (FY73) respectively (FY80). The current recession is distinct from prior recessions in that it presents a new set of issues.
What might cause a downturn?
In general, an economy’s expansion and growth cannot persist indefinitely. A complex, interwoven set of circumstances usually triggers a large drop in economic activity, including:
Shocks to the economy. A natural disaster or a terrorist attack are examples of unanticipated events that create broad economic disruption. The recent COVID-19 epidemic is the most recent example.
Consumer confidence is eroding. When customers are concerned about the state of the economy, they cut back on their spending and save what they can. Because consumer spending accounts for about 70% of GDP, the entire economy could suffer a significant slowdown.
Interest rates are extremely high. Consumers can’t afford to buy houses, vehicles, or other significant purchases because of high borrowing rates. Because the cost of financing is too high, businesses cut back on their spending and expansion ambitions. The economy is contracting.
Deflation. Deflation is the polar opposite of inflation, in which product and asset prices decline due to a significant drop in demand. Prices fall when demand falls, as sellers strive to entice buyers. People postpone purchases in order to wait for reduced prices, resulting in a vicious loop of slowing economic activity and rising unemployment.
Bubbles in the stock market. In an asset bubble, prices of items such as tech stocks during the dot-com era or real estate prior to the Great Recession skyrocket because buyers anticipate they will continue to grow indefinitely. But then the bubble breaks, people lose their phony assets, and dread sets in. As a result, individuals and businesses cut back on spending, resulting in a recession.