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Fiscal year 2020-21: A macroeconomic review

Fiscal 12 months 2020-21 ends at the moment, March 31. With an estimated annual contraction of 8% in GDP, 2020-21 has been the worst 12 months when it comes to financial efficiency in India since 1950-51, the earliest interval for which knowledge is out there.

Whereas the Indian economic system was shedding progress momentum for a number of years earlier than the pandemic, the exceptionally unhealthy progress efficiency in 2020-21 is basically on account of the 68-day lengthy laborious lockdown which was imposed on March 25 2020 to stop the unfold of Covid-19 infections within the nation, and persevering with restrictions on financial and leisure actions for the remainder of the 12 months.

To make certain, the economic system has been recovering with the easing of restrictions. India’s GDP re-entered progress territory within the quarter ending December 2020.

What was 2020-21 like for the Indian economic system past the quarterly enchancment from a 24% GDP contraction within the first quarter to a 0.4% progress within the third quarter of the 12 months? Listed here are 4 charts that specify this.

1. The pandemic’s influence has been totally different on totally different sectors

The headline GDP variety of 8% contraction doesn’t seize the differential influence of the pandemic on totally different sectors of the economic system, one purpose why some consultants say that the restoration isn’t a V-shaped one, however Ok-shaped.

Agriculture was the least affected by the pandemic and is anticipated to develop at 3%. The most important purpose? Lockdown restrictions by no means prevented any on-farm exercise.

Nevertheless, with a share of simply over 16% in whole Gross Worth Added (GVA), agriculture might do little to cushion the general efficiency of the economic system. Each companies and business are anticipated to have suffered a contraction of barely greater than 8%.

To make certain, it’s companies which emerged the most important drag on total incomes, given its share of 54.6% in GVA.

Even inside companies and business, employment-intensive sectors resembling commerce, resort and eating places and building, have suffered a much bigger contraction in financial exercise. And 2021-22, sadly, isn’t starting properly, with not less than some restrictions imminent on account of the continuing second wave of infections.

2. Labour markets nonetheless bear the scars of pandemic

We don’t have complete official employment statistics for the fiscal 12 months 2020-21. To make certain, the Periodic Labour Drive Survey’s (PLFS) findings for the quarter ending June 2020 – quarterly rounds solely take a look at city areas – have been launched earlier this month.

These numbers present that unemployment charges greater than doubled to achieve 20%-plus through the lockdown. Nevertheless, PLFS numbers don’t inform us concerning the subsequent restoration in city areas or the state of employment in rural areas.

Personal sources such the numbers collected by Centre for Monitoring Indian Economic system (CMIE) and different high-frequency surveys resembling Buying Managers’ Index (PMI) and Nomura India Enterprise Resumption Index (NIBRI) have highlighted a seamless weak spot in labour markets regardless of an enchancment in manufacturing ranges.

CMIE estimates additionally recommend that the pandemic has led to an additional worsening of the gender hole in India’s labour markets.

The persevering with weak spot in labour markets, if it persists, is prone to generate demand aspect headwinds for progress going ahead.

3. First meals, now a non-food inflation downside within the making

Retail inflation as measured by the Client Value Index (CPI) stayed above 6%; the higher restrict of the Reserve Financial institution of India’s tolerance band, repeatedly between April and November 2020.

Whereas headline CPI progress fell sharply from 7.6% in October 2020 to simply 4.1% in January 2021, it accelerated as soon as once more in February to five%.

The essential distinction between inflation in 2020 and 2021 is the trajectory of meals and non-food costs. The 2020 inflationary surge and subsequent moderation was largely pushed by meals costs, however over the previous few months non-food inflation has been slowly gaining momentum within the economic system.

Specialists have attributed this to varied elements together with excessive taxes on petrol and diesel, corporations making an attempt to make up for misplaced incomes through the lockdown by elevating costs, a spike in international commodity costs and an inflation in costs of varied sorts of companies.

The spike in non-food costs is prone to put strain on buying powers and in addition stop RBI’s financial coverage committee from slashing rates of interest any additional (they’ve been on maintain since Could 2020).

In the meantime, costs of some essential meals objects resembling edible oils and pulses proceed to develop at a excessive price.

4. Will the pandemic impair India’s tax-GDP ratio?

Among the many greatest uncertainties relating to the pandemic’s influence on the Indian economic system is its influence on taxes. Even provisional estimates for the central authorities’s tax collections in 2020-21 will solely be out there in Could.

The federal government slashed its Finances Estimates (BE) of 2020-21 Gross Tax Income assortment by greater than 21% within the Revised Estimates (RE) which have been revealed within the 2021-22 Finances.

Even the 2021-22 BE quantity for Gross Tax Income is lower than the 2020-21 BE goal.

That is even though the federal government has had a windfall achieve in taxes through elevated excise duties on petrol and diesel. The 2020-21 RE and 2021-22 BE quantities underneath Union excise duties is 35% and 25% greater than the 2020-21 BE quantity.

These statistics increase a severe query concerning the pandemic’s influence on India’s tax era means.

Whereas this can’t be answered with certainty in the meanwhile, any dent within the authorities’s tax era means is prone to enhance tensions in an already stretched fiscal federalism framework and in addition restrict the state’s means to offer aid to these worst affected by the pandemic.

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