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Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2020-21 in the Parliament today. The key highlights of Economic Survey 2020-21, which is dedicated to the COVID Warriors, are as follows:
Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis
• India focused on saving lives and livelihoods by its willingness to take short-term pain for long-term gain, at the onset of the COVID-19 pandemic
• Response stemmed from the humane principle that:
- Human lives lost cannot be brought back
o GDP growth will recover from the temporary shock caused by the pandemic
• An early, intense lockdown provided a win-win strategy to save lives, and preserve livelihoods via economic recovery in the medium to long-term
• Strategy also motivated by the Nobel-Prize winning research by Hansen & Sargent (2001): a policy focused on minimizing losses in a worst-case scenario when uncertainty is very high
• India’s strategy flattened the curve, pushed the peak to September, 2020
• After the September peak, India has been unique in experiencing declining daily cases despite increasing mobility
• V-shaped recovery, as seen in 7.5% decline in GDP in Q2 and recovery across all key economic indicators vis-à-vis the 23.9% GDP contraction in Q1
• COVID pandemic affected both demand and supply:
- India was the only country to announce structural reforms to expand supply in the medium-long term and avoid long-term damage to productive capacities
- Calibrated demand side policies to ensure that the accelerator is slowly pushed down only when the brakes on economic activities are being removed
o A public investment programme centered around the National Infrastructure Pipeline to accelerate the demand push and further the recovery
• Upturn in the economy, avoiding a second wave of infections - a sui generis case in strategic policymaking amidst a once-in-a-century pandemic
State of the Economy in 2020-21: A Macro View
• COVID-19 pandemic ensued global economic downturn, the most severe one since the Global Financial Crisis
• The lockdowns and social distancing norms brought the already slowing global economy to a standstill
• Global economic output estimated to fall by 3.5% in 2020 (IMF January 2021 estimates)
• Governments and central banks across the globe deployed various policy tools to support their economies such as lowering policy rates, quantitative easing measures, etc.
• India adopted a four-pillar strategy of containment, fiscal, financial, and long-term structural reforms:
o Calibrated fiscal and monetary support was provided, cushioning the vulnerable during the lockdown and boosting consumption and investment while unlocking
o A favourable monetary policy ensured abundant liquidity and immediate relief to debtors while unclogging monetary policy transmission
• As per the advance estimates by NSO, India’s GDP is estimated to grow by (-) 7.7% in FY21 - a robust sequential growth of 23.9% in H2: FY21 over H1: FY21
• India’s real GDP to record a 11.0% growth in FY2021-22 and nominal GDP to grow by 15.4% – the highest since independence:
- Rebound to be led by low base and continued normalization in economic activities as the rollout of COVID-19 vaccines gathers traction
• Government consumption and net exports cushioned the growth from diving further down, whereas investment and private consumption pulled it down
• The recovery in second half of FY2020-21 is expected to be powered by government consumption, estimated to grow at 17% YoY
• Exports expected to decline by 5.8% and imports by 11.3% in the second half of FY21
• India expected to have a Current Account Surplus of 2% of GDP in FY21, a historic high after 17 years
• On supply side, Gross Value Added (GVA) growth pegged at -7.2% in FY21 as against 3.9% in FY20:
o Agriculture set to cushion the shock of the COVID-19 pandemic on the Indian economy in FY21 with a growth of 3.4%
o Industry and services estimated to contract by 9.6% and 8.8% respectively during FY21
• Agriculture remained the silver lining while contact-based services, manufacturing, construction were hit hardest, and recovering steadily
• India remained a preferred investment destination in FY 2020-21 with FDI pouring in amidst global asset shifts towards equities and prospects of quicker recovery in emerging economies:
o Net FPI inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020, as investors’ risk appetite returned
o India was the only country among emerging markets to receive equity FII inflows in 2020
• Buoyant SENSEX and NIFTY resulted in India’s market-cap to GDP ratio crossing 100% for the first time since October 2010
• Softening of CPI inflation recently reflects easing of supply side constraints that affected food inflation
• Mild contraction of 0.8% in investment (as measured by Gross Fixed Capital Formation) in 2nd half of FY21, as against 29% drop in 1st half of FY21
• Reignited inter and intra state movement and record-high monthly GST collections have marked the unlocking of industrial and commercial activity
• The external sector provided an effective cushion to growth with India recording a Current Account Surplus of 3.1% of GDP in the first half of FY21:
o Strong services exports and weak demand leading to a sharper contraction in imports (merchandise imports contracted by 39.7%) than exports (merchandise exports contracted by 21.2%)
o Forex reserves increased to a level so as to cover 18 months worth of imports in December 2020
o External debt as a ratio to GDP increased to 21.6% at end-September 2020 from 20.6% at end-March 2020
o Ratio of forex reserves to total and short-term debt improved because of the sizable accretion in reserves
• V-shaped recovery is underway, as demonstrated by a sustained resurgence in high frequency indicators such as power demand, e-way bills, GST collection, steel consumption, etc.
• India became the fastest country to roll-out 10 lakh vaccines in 6 days and also emerged as a leading supplier of the vaccine to neighbouring countries and Brazil
• Economy’s homecoming to normalcy brought closer by the initiation of a mega vaccination drive:
o Hopes of a robust recovery in services sector, consumption, and investment have been rekindled
o Reforms must go on to enable India realize its potential growth and erase the adverse impact of the pandemic
• India’s mature policy response to the ‘once-in-a-century’ crisis provides important lessons for democracies to avoid myopic policy-making and demonstrates benefits of focusing on long-term gains
Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa!
• Growth leads to debt sustainability in the Indian context but not necessarily vice-versa:
- Debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD), i.e., the difference between the interest rate and the growth rate
o In India, interest rate on debt is less than growth rate - by norm, not by exception
• Negative IRGD in India – not due to lower interest rates but much higher growth rates – prompts a debate on fiscal policy, especially during growth slowdowns and economic crises
• Growth causes debt to become sustainable in countries with higher growth rates; such clarity about the causal direction is not witnessed in countries with lower growth rates
• Fiscal multipliers are disproportionately higher during economic crises than during economic booms
• Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity
• Fiscal policy that provides an impetus to growth will lead to lower debt-to-GDP ratio
• Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios
• Desirable to use counter-cyclical fiscal policy to enable growth during economic downturns
• Active, counter-cyclical fiscal policy - not a call for fiscal irresponsibility, but to break the intellectual anchoring that has created an asymmetric bias against fiscal policy
Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No!
• The fifth largest economy in the world has never been rated as the lowest rung of the investment grade (BBB-/Baa3) in sovereign credit ratings:
- Reflecting the economic size and thereby the ability to repay debt, the fifth largest economy has been predominantly rated AAA
o China and India are the only exceptions to this rule – China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3
• India’s sovereign credit ratings do not reflect its fundamentals:
- A clear outlier amongst countries rated between A+/A1 and BBB-/Baa3 for S&P/ Moody’s, on several parameters
o Rated significantly lower than mandated by the effect on the sovereign rating of the parameter
• Credit ratings map the probability of default and therefore reflect the willingness and ability of borrower to meet its obligations:
- India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history
o India’s ability to pay can be gauged by low foreign currency denominated debt and forex reserves
• Sovereign credit rating changes for India have no or weak correlation with macroeconomic indicators
• India’s fiscal policy should reflect Gurudev Rabindranath Tagore’s sentiment of ‘a mind without fear’
• Sovereign credit ratings methodology should be made more transparent, less subjective and better attuned to reflect economies’ fundamentals
Inequality and Growth: Conflict or Convergence?
• The relationship between inequality and socio-economic outcomes vis-à-vis economic growth and socio-economic outcomes, is different in India from that in advanced economies.
• Both inequality and per-capita income (growth) have similar relationships with socio-economic indicators in India, unlike in advanced economies
• Economic growth has a greater impact on poverty alleviation than inequality
• India must continue to focus on economic growth to lift the poor out of poverty
• Expanding the overall pie - redistribution in a developing economy is feasible only if the size of the economic pie grows
Healthcare takes centre stage, finally!
• COVID-19 pandemic emphasized the importance of healthcare sector and its inter-linkages with other sectors - showcased how a health crisis transformed into an economic and social crisis
• India’s health infrastructure must be agile so as to respond to pandemics - healthcare policy must not become beholden to ‘saliency bias’
• National Health Mission (NHM) played a critical role in mitigating inequity as the access of the poorest to pre-natal/post-natal care and institutional deliveries increased significantly
• Emphasis on NHM in conjunction with Ayushman Bharat should continue
• An increase in public healthcare spending from 1% to 2.5-3% of GDP can decrease the out-of-pocket expenditure from 65% to 35% of overall healthcare spending
• A regulator for the healthcare sector must be considered given the market failures stemming from information asymmetry
- Mitigation of information asymmetry will help lower insurance premiums, enable the offering of better products and increase insurance penetration
o Information utilities that help mitigate the information asymmetry in healthcare sector will be useful in enhancing overall welfare
• Telemedicine needs to be harnessed to the fullest by investing in internet connectivity and health infrastructure
Process Reforms
• India over-regulates the economy resulting in regulations being ineffective even with relatively good compliance with process
• The root cause of the problem of overregulation is an approach that attempts to account for every possible outcome
• Increase in complexity of regulations, intended to reduce discretion, results in even more non-transparent discretion
• The solution is to simplify regulations and invest in greater supervision which, by definition, implies greater discretion
• Discretion, however, needs to be balanced with transparency, systems of ex-ante accountability and ex-post resolution mechanisms
• The above intellectual framework has already informed reforms ranging from labour codes to removal of onerous regulations on the BPO sector
Regulatory Forbearance an emergency medicine, not staple diet!
• During the Global Financial Crisis, regulatory forbearance helped borrowers tide over temporary hardship
• Forbearance continued long after the economic recovery, resulting in unintended consequences for the economy
• Banks exploited the forbearance window for window-dressing their books and misallocated credit, thereby damaging the quality of investment in the economy
• Forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, not a staple diet that gets continued for years
• To promote judgement amidst uncertainty, ex-post inquests must recognize the role of hindsight bias and not equate unfavourable outcomes to bad judgement or malafide intent
• An Asset Quality Review exercise must be conducted immediately after the forbearance is withdrawn
• The legal infrastructure for the recovery of loans needs to be strengthened de facto
Innovation: Trending Up but Needs Thrust, Especially from the Private Sector
• India entered the top-50 innovating countries for the first time in 2020 since the inception of the Global Innovation Index in 2007, ranking first in Central and South Asia, and third amongst lower middle-income group economies
• India’s gross domestic expenditure on R&D (GERD) is lowest amongst top ten economies
• India’s aspiration must be to compete on innovation with the top ten economies
• The government sector contributes a disproportionately large share in total GERD at three times the average of top ten economies
• The business sector’s contribution to GERD, total R&D personnel and researchers is amongst the lowest when compared to top ten economies
• This situation has prevailed despite higher tax incentives for innovation and access to equity capital
• India’s business sector needs to significantly ramp up investments in R&D
• Indian resident’s share in total patents filed in the country must rise from the current 36% which is much below the average of 62% in top ten economies
• For achieving higher improvement in innovation output, India must focus on improving its performance on institutions and business sophistication innovation inputs
JAY Ho! PM‘JAY’ Adoption and Health outcomes
• Pradhan Mantri Jan Arogya Yojana (PM-JAY) – the ambitious program launched by Government of India in 2018 to provide healthcare access to the most vulnerable sections demonstrates strong positive effects on healthcare outcomes in a short time
• PM-JAY is being used significantly for high frequency, low cost care such as dialysis and continued during the Covid pandemic and the lockdown.
• Causal impact of PM-JAY on health outcomes by undertaking a Difference-in-Difference analysis based on National Family Health Survey (NFHS)-4 (2015-16) and NFHS-5 (2019-20) is following:
- Enhanced health insurance coverage: The proportion of households that had health insurance increased in Bihar, Assam and Sikkim from 2015-16 to 2019-20 by 89% while it decreased by 12% over the same period in West Bengal
- Decline in Infant Mortality rate: from 2015-16 to 2019-20, infant mortality rates declined by 20% for West Bengal and by 28% for the three neighbouring states
- Decline in under-5 mortality rate: Bengal saw a fall of 20% while, the neighbours witnessed a 27% reduction
- Modern methods of contraception, female sterilization and pill usage went up by 36%, 22% and 28% respectively in the three neighbouring states while the respective changes for West Bengal were negligible
- While West Bengal did not witness any significant decline in unmet need for spacing between consecutive kids, the neighbouring three states recorded a 37% fall
- Various metrics for mother and child care improved more in the three neighbouring states than in West Bengal.
• Each of these health effects manifested similarly when we compare all states that implemented PM-JAY versus the states that did not
• Overall, the comparison reflects significant improvements in several health outcomes in states that implemented PM-JAY versus those that did not
Bare Necessities
• Access to the ‘bare necessities’ has improved across all States in the country in 2018 as compared to 2012
o It is highest in States such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura
o Improvement in each of the five dimensions viz., access to water, housing, sanitation, micro-environment and other facilities
o Inter-State disparities declined across rural and urban areas as the laggard states have gained relatively more between 2012 and 2018
o Improved disproportionately more for the poorest households when compared to the richest households across rural and urban areas
• Improved access to the ‘bare necessities’ has led to improvements in health indicators such as infant mortality and under-5 mortality rate and also correlates with future improvements in education indicators
• Thrust should be given to reduce variation in the access to bare necessities across states, between rural and urban and between income groups
• The schemes such as Jal Jeevan Mission, SBM-G, PMAY-G, etc. may design appropriate strategy to reduce these gaps
• A Bare Necessities Index (BNI) based on the large annual household survey data can be constructed using suitable indicators and methodology at district level for all/targeted districts to assess the progress on access to bare necessities.
Fiscal Developments
• India adopted a calibrated approach best suited for a resilient recovery of its economy from COVID-19 pandemic impact, in contrast with a front-loaded large stimulus package adopted by many countries
• Expenditure policy in 2020-21 initially aimed at supporting the vulnerable sections but was re-oriented to boost overall demand and capital spending, once the lockdown was unwound
• Monthly GST collections have crossed the Rs. 1 lakh crore mark consecutively for the last 3 months, reaching its highest levels in December 2020 ever since the introduction of GST
• Reforms in tax administration have begun a process of transparency and accountability and have incentivized tax compliance by enhancing honest tax-payers’ experience
• Central Government has also taken consistent steps to impart support to the States in the challenging times of the pandemic
External Sector
• COVID-19 pandemic led to a sharp decline in global trade, lower commodity prices and tighter external financing conditions with implications for current account balances and currencies of different countries
• India’s forex reserves at an all-time high of US$ 586.1 billion as on January 08, 2021, covering about 18 months worth of imports
• India experiencing a Current Account Surplus along with robust capital inflows leading to a BoP surplus since Q4 of FY2019-20
• Balance on the capital account is buttressed by robust FDI and FPI inflows:
o Net FDI inflows of US$ 27.5 billion during April-October, 2020: 14.8% higher as compared to first seven months of FY2019-20
o Net FPI inflows of US$ 28.5 billion during April-December, 2020 as against US$ 12.3 billion in corresponding period of last year
• In H1: FY21, steep contraction in merchandise imports and lower outgo for travel services led to:
o Sharper fall in current payments (by 30.8%) than current receipts (15.1%)
o Current Account Surplus of US$ 34.7 billion (3.1% of GDP)
• India to end with an Annual Current Account Surplus after a period of 17 years
• India’s merchandise trade deficit was lower at US$ 57.5 billion in April-December, 2020 as compared to US$ 125.9 billion in the corresponding period last year
• In April-December, 2020, merchandise exports contracted by 15.7% to US$ 200.8 billion from US$ 238.3 billion in April-December, 2019:
o Petroleum, Oil and Lubricants (POL) exports have contributed negatively to export performance during the period under review
o Non-POL exports turned positive and helped in improving export performance in Q3 of 2020-21
o Within Non-POL exports, agriculture & allied products, drugs & pharmaceutical and ores & minerals recorded expansion
• Total merchandise imports declined by (-) 29.1% to US$ 258.3 billion during April-December, 2020 from US$ 364.2 billion during the same period last year:
o Sharp decline in POL imports pulled down the overall import growth
o Imports contracted sharply in Q1 of 2020-21; the pace of contraction eased in subsequent quarters, due to the accelerated positive growth in Gold and Silver imports and narrowing contraction in non-POL, non-Gold & non-Silver imports
o Fertilizers, vegetable oil, drugs & pharmaceuticals and computer hardware & peripherals have contributed positively to the growth of non-POL, non-Gold & non-Silver imports
• Trade balance with China and the US improved as imports slowed
• Net services receipts amounting to US$ 41.7 billion remained stable in April-September 2020 as compared with US$ 40.5 billion in corresponding period a year ago.
• Resilience of the services sector was primarily driven by software services, which accounted for 49% of total services exports
• Net private transfer receipts, mainly representing remittances by Indians employed overseas, totaling US$ 35.8 billion in H1: FY21 declined by 6.7% over the corresponding period of previous year
• At end-September 2020, India’s external debt placed at US$ 556.2 billion - a decrease of US$ 2.0 billion (0.4%) as compared to end-March 2020.
• Improvement in debt vulnerability indicators:
o Ratio of forex reserves to total and short-term debt (original and residual)
o Ratio of short-term debt (original maturity) to the total stock of external debt.
o Debt service ratio (principal repayment plus interest payment) increased to 9.7% as at end-September 2020, compared to 6.5% as at end-March 2020
• Rupee appreciation/depreciation:
o In terms of 6-currency nominal effective exchange rate (NEER) (trade-based weights), Rupee depreciated by 4.1% in December 2020 over March 2020; appreciated by 2.9% in terms of real effective exchange rate (REER)
o In terms of 36-currency NEER (trade-based weights), Rupee depreciated by 2.9% in December 2020 over March 2020; appreciated by 2.2% in terms of REER
• RBI’s interventions in forex markets ensured financial stability and orderly conditions, controlling the volatility and one-sided appreciation of the Rupee
• Initiatives undertaken to promote exports:
o Production Linked Incentive (PLI) Scheme
o Remission of Duties and Taxes on Exported Products (RoDTEP)
o Improvement in logistics infrastructure and digital initiatives
Money Management and Financial Intermediation
• Accommodative monetary policy during 2020: repo rate cut by 115 bps since March 2020
• Systemic liquidity in FY2020-21 has remained in surplus so far. RBI undertook various conventional and unconventional measures like:
o Open Market Operations
o Long Term Repo Operations
o Targeted Long Term Repo Operations
• Gross Non-Performing Assets ratio of Scheduled Commercial Banks decreased from 8.21% at end-March, 2020 to 7.49% at end-September, 2020
• The monetary transmission of lower policy rates to deposit and lending rates improved during FY2020-21
• NIFTY-50 and BSE SENSEX reached record high closing of 14,644.7 and 49,792.12 respectively on January 20, 2021
• The recovery rate for the Scheduled Commercial Banks through IBC (since its inception) has been over 45%
Prices and Inflation
• Headline CPI inflation:
o Averaged 6.6% during April-December, 2020 and stood at 4.6% in December, 2020, mainly driven by rise in food inflation (from 6.7% in 2019-20 to 9.1% during April-December, 2020, owing to build up in vegetable prices)
o CPI headline and its sub groups witnessed inflation during April-October 2020, driven by substantial increase in price momentum - due to the initial disruptions caused by COVID-19 lockdown
o Moderated price momentum by November 2020 for most sub groups, coupled with positive base effect helped ease inflation
• Rural-urban difference in CPI inflation saw a decline in 2020:
- Since November 2019, CPI-Urban inflation has closed the gap with CPI-Rural inflation
- Food inflation has almost converged now
- Divergence in rural-urban inflation observed in other components of CPI like fuel and light, clothing and footwear, miscellaneous etc.
• During April-December, 2019 as well as April-December, 2020-21, the major driver of CPI-C inflation was the food and beverages group:
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