Context: Targeted fiscal support, swifter inoculation will be critical for economy to bounce back.
Various challenges faced by the Indian economy:
Decline in GDP: The latest Provisional Estimate of the Indian economy pegged the contraction in GDP at 7.3% in 2020-2021.
The gap between GDP and GVA (gross value added) growth has been the widest since 2011-12 because of a sharp increase in subsidies, including arrears.
Contact-based services — particularly tourism, hospitality, and airlines — were deeply scarred; the “trade hotels, transport, etc.” category posted the sharpest annual contraction of 18.2%.
Decline in consumption:
Private consumption contracted by 9.1% and was only 3.1% above the 2017-18 levels.
Household savings plateaued at 8.1% in the third quarter, down from a high of 21% in the first.
Declining investments: Gross fixed capital formation fell 10.2% — a good 6.9% below 2018-19 levels; low capacity utilisation and uncertainty will discourage further investments.
Less support from the rural economy: The rural spread of the pandemic raises the risk of supply-chain disruptions for agricultural products.
Growth in rural wages has also softened, and lack of enhanced fiscal support will keep rural consumption demand muted.
Growth maintaining sectors:
Agriculture remained largely untouched by the pandemic and maintained its trend growth.
Manufacturing showed some resilience due to fewer restrictions and the ability to “live with the virus”.
Construction, a highly labour-intensive sector, rebounded sharply in the second half primarily because of increased spending by the government on building highways and rural infrastructure.
Import demand, driven by domestic economic activity, was much weaker than externally-driven export demand.
Way Forward:
Till we have vaccinated a material level of the population, policy support in general and fiscal support, in particular, must serve as a bridge to recovery, especially for vulnerable segments.
To soften the blow to the rural economy, the government must priorities increasing the MGNREGA outlay and providing additional resources for ramping up health infrastructure.