A Year of Cautious Optimism

Context: While the growth will trend upwards in 2021, it will need to be interpreted with caution.

Positive indicators of the economy: (Green shoots)

• Corporate Profitability: led to economic revival in the third quarter; it is critical as these numbers are used in the calculation of value-added, which is part of GDP estimation.
• Prospects of V-shaped recovery: most sectors will witness a normal activity, even in areas such as hotels, tourism, aviation, and media.

Steps taken by various stakeholders:

• Union government: through Atmanirbharta, culminating in the Budget.
  • Production Linked Incentive (PLI): Dual focus on infrastructure and incentives to investments.
  • Policy reforms: in Real estate, power and construction.
  • Strong Capital Expenditure push along with fiscal consolidation (fiscal deficit of 4.5% by 2025-26).
• Reserve Bank of India: promised to continue accommodative policies, giving a signal of managing liquidity notwithstanding the large borrowing programme of the government.

Challenging indicators of the Indian economy:

• Mediocre performance: GDP in 2019-20 was Rs 146 lakh crore and Rs 134 lakh crore in 2020-21. Hence, a 10% growth will take the Indian economy to just Rs 147 lakh.
• Pressure due to State government borrowings: on the availability of funds, considering that private sector demand has been lacklustre so far this year.
• Inflation: global commodity prices have already started going up, leading to a rise in core inflation.
  • Rise in petrol and diesel prices, along with the unwillingness of the government to reduce taxes, have the potential to upset inflation projections. (may lead to rise in manufacturing goods inflation.)
  • Possibility of an adverse monsoon: as last four years were good seasons, giving price shocks to vegetables like onion.
• Poor consumption growth: due to poor job creation affecting income growth.
• Declining investment: gross fixed capital formation declined - 24.2% in 2019-20 from 34.3% in 2011-12.
  • Non-Performing Assets and risk-averse nature of banks have also impacted investments. 
  • Surplus capacity in industry: with the capacity utilization rate being 63.3% in the second quarter of 2020-21 shows a slow growth in private investments.

Conclusion: Growth will trend upwards in 2021-22, but it has to be interpreted with caution, keeping a check on the consumption meter while pushing the investment pedal along with keeping inflation in check.