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Indian Economy – Post-Pandemic Recovery and Outlook

IBEF, Knowledge Centre

Dec 15, 2020 08:23

Introduction

The NDA government has set a target to make India a US$ 5 trillion economy by 2025. The Indian economy would need to expand at a ~9% CAGR to achieve this target; this currently looks difficult given the impact of Covid-19 related lockdowns on the economy. But signs suggest that the economic downturn may have bottomed out, and foreign institutional investors have already started placing bets on the future prospects of India’s economy.

The Indian economy contracted by 23.9% YoY in Q1 2020—the largest GDP contraction recorded in a quarter. The industrial gross value added fell by 22.8% in Q1 2020. Almost all sectors, except for the agriculture, forestry and fishing sector, have been hit hard because of the nationwide lockdown. The manufacturing and construction sectors shrunk by 39.3% and 50.3%, respectively, while the overall services sector, the key driver of the Indian economy, contracted by 20.6%.

However, there are indications that the worst is probably over. As the economy gets unlocked, manufacturing and industrial activities are gradually resuming and the lockdown induced pent-up demand is also aiding the economic rebound. India’s PMI recovered from 27.4 in April 2020 to ~58 in October 2020.

The Indian economy has started to recover from the pandemic-induced slowdown on the back of various government initiatives and is expected to carry this momentum into the short-term timeframe.

 

Government Initiatives

As the economy went into a freefall, the government was quick to introduce a stimulus package, ‘Atmanirbhar Bharat Abhiyan’, approximately worth Rs. 20 trillion (US$ 270 billion) (~10% of India’s GDP) to jumpstart the economy. In addition, it took fresh measures to improve infrastructure, regulations and job opportunities that will likely aid in sustained economic recovery and rebuilding.

The ‘Atmanirbhar Bharat Abhiyan’ aims to make the country self-reliant with a focus on local manufacturers and service providers. The five pillars of this programme are economy, infrastructure, technology-driven systems, demography and demand. It emphasises on enhancing import substitution, reviving demand and promoting export-oriented industrialisation as the key drivers of India’s future economic growth. Banking, businesses & MSMEs and agriculture are some of the key beneficiaries of this initiative with 24.4%, 17.2% and 16.3% allocations, respectively.

Healthcare needs to remain the top priority to achieve the economic sustainability of India. The scheme aims to cover >500 million beneficiaries, primarily the poorest (40% Indians) and provide coverage of approximately Rs. 500,000 (US$ 6750) per family, per year.

Also, building resilient and sustainable infrastructure would help increase the production of capital goods, provide employment and revive private sector confidence. Investments in infrastructure could be a way to achieve this objective. The Rs. 111 trillion (US$ 1.5 trillion) National Infrastructure Pipeline (NIP) built on ‘Infrastructure Vision 2025’ was announced in December 2019 (the pre-COVID-19 world).

The ‘Make in India’ initiative was launched by the government in 2014 to encourage international firms to select India as their manufacturing centre and galvanise the economy by investments in manufacturing and services. The initiative aimed to increase the manufacturing sector’s contribution to the GDP to 25% by 2025 from ~16-17% at present. With numerous international companies looking to shift their manufacturing base from China due to intensifying Sino–US trade friction, India is vying to occupy a major share of the supply chain shift. In March 2020, the government announced incentives for niche electronics manufacturers that make them eligible for a payment of 4-6% of their incremental sales over the next five years. As a result, about two dozen companies such as Samsung, Foxconn and Wistron Corp., have pledged $1.5 billion worth investments to set up mobile phone factories in the country. The government has approved a production linked incentive (PLI) scheme with an expenditure of ~Rs. 2 trillion (US$ 27 billion) for 10 sectors, including electronics and technology products, automobile and auto components, pharmaceuticals drugs, telecom and networking products, textile products and food products.

A sound and resilient banking and financial sector is the key to the economic prosperity of India. The government is consolidating the public sector banks, which are the key players in the Indian market, to increase efficiency and accountability. The NPA (non-performing assets) crisis—that has been plaguing the PSBs in India—is also being addressed with the government looking to set recovery targets for the same.

 

Investments

The Indian economy operates on a delicate balance of state intervention and free market principles. The government has progressively worked on making the Foreign Direct Investment (FDI) policy more investor friendly and removed the policy bottlenecks that have been hindering investment inflows into India. FDIs in India have increased by ~16% YoY to US$ 27.1 billion from April 2020 to August 2020.

FDI equity inflow in India stood at US$ 49.97 billion in 2019-20, with service sector attracting the highest FDI equity inflow of US$ 7.85 billion, followed by computer software and hardware at US$ 7.67 billion, telecommunications sector at US$ 4.44 billion and trading at US$ 4.57 billion.

Foreign Portfolio Investors/ Foreign Institutional Investors (FPI/FII) have been one of the biggest drivers for India’s financial markets; invested ~Rs. 12.9 trillion (US$ 174.31 billion) in India between 2020 and 2021 (as of September 11, 2020), at a time when most Asian markets are suffering from net withdrawals. This points to a high investor confidence in the long-term prospects of the Indian markets.

 

Demographics

India’s population is among the youngest in the world. By 2022, the median age in India will be 28 years; in comparison, it will be 37 in China and the US and 45 in Western Europe. India’s working age population is much larger than its non-working age population. Thus, India currently enjoys a demographic dividend, which is said to have commenced in 2005 and expected to last until 2055. India is also the second-most populous country in the world with ~1.3 billion citizens. However, for India to reap the economic benefits of a vast and burgeoning working population and develop into an economic superpower, it will have to ensure to create a high number of skilled jobs.

According to a McKinsey report, rate of employment needs to be increased, by creating ~90 million non-farm jobs between 2023 and 2030's, for a sustained economic growth. The net employment rate needs to expand at least 1.5% per year from 2023 to 2030 to achieve 8-8.5% GDP growth between 2023 and 2030.

 

Conclusion/Outlook

Going forward, the government will play a pivotal role in creating manufacturing and export-friendly policies to aid the private sector in India to push forward the agenda of employment and economic growth. India is expected to become a significant export and outsourcing hub, central to supply chains across many industries.

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