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Monday, April 12, 2021

India’s economic growth in 2021 will be fast, say experts: 5 points you must know

So finally it seems things are moving towards the positive direction in the money front. India has been witnessing surely slow but definite growth in the market finally suffering one of the biggest ever blows following nationwide lockdown triggered by Covid-19 pandemic. The past week has thrown up some heartening news on the economic front. So, how are these positive changes that we should look forward to? And how will they impact our lives? We shall discuss all these factors in this article.

India’s economic growth in 2021 will be fast, say experts: 6 points you must know

First up, after contracting for six months on the trot, India’s exports staged a turnaround and grew in September. The pace of growth was marginal at 5.27% but under the circumstances, any growth is a cheerful development. However, imports declined by close to 20% and that is typically bad news for a growing economy. The hopes of robust sales during the forthcoming festive season is the likely driver for these purchases as dealers stock up. Given the shape of the economy, it is hardly surprising that the focus of such sales is at the lower end of passenger cars and also in rural areas.

An allied improvement was in the demand for petrol, which grew by 2% over September last year,and rose for the first time since the nationwide lockdown was announced in later March. Consumption of diesel, however, registered a fall year-on-year (that is, in September this year compared to September 2019).

1. Some definite signs of growth

There seems to be more demand for personal mobility and less for community mobility, and this is showing up both in the demand for the type of fuel and the type of cars. For instance, jet fuel sales in September were down 54%, year-on-year. But possibly the biggest bit of news was the sharp spike in the Nikkei Manufacturing Purchasing Managers’ Index. This index, which is compiled by IHS Markit and is seen as a proxy for factory-level activity, jumped to 56.8 in September from 52.0 in August. Anything above the 50-level in this index implies growth; anything below 50 implies contraction. According to Reuters, the index registered its highest reading since January 2012.

All this news in September is in stark contrast to August, which saw the output of India’s eight core sectors of infrastructuredecline by almost 9%. What made this decline worse is the fact that it was in comparison to the non-existent growth in August 2019.

2. Is the worst phase over?

The obvious questions then are: Has the Indian economy decidedly staged a turnaround? Is the worst over? Well, if one looks at September, one might be tempted to arrive at that conclusion. But the age-old wisdom is that one swallow doesn’t make a summer. Look, for instance, at what happened when India opened up after the nationwide lockdown in late March and April. The chart below (Source: Nomura), showing the pace of economic normalization, brings out the essential point: That the rate of improvement in economic activity decelerated with each passing month from May to August.

In fact, in some sectors of the economy, such as External (that is, exports, foreign visitors, etc.) and Industry (that is, cement, steel, etc.), the rate of improvement was turned negative in August — look at the green highlights in the chart above. Typically, one would have expected that as the country opened up more and more, the pace of economic normalization would have increased and quickly attained its overall potential.

Yet, according to this index by Nomura economists Sonal Varma and Aurodeep Nandi, as of August, aggregate demand was still less than 70% of potential and aggregate supply was slightly better at 85.7%. Moreover, according to some, even as September ended, economic activity was beginning to stagnate yet again. For instance, Nomura India Business Resumption Index (NIBRI) combines inputs from Google mobility indices, driving mobility from Apple, power demand, and the labor force participation rate to prepare a weekly tracker of economic activity normalisation.

3. Stock investors are hopeful about recovery

Stock investors are taking heart from India’s efforts to re-open its economy, even as the country continues on a trajectory to overtake the U.S. as the country with the most coronavirus cases. The S&P BSE Sensex has rallied almost 11 percent since hitting a more than two-month low on September 24, the best performance among the world’s national equity benchmarks, according to data compiled by Bloomberg. It is less than 2 percent away from wiping out its losses for the year.

A Jefferies Financial Group Inc. model tracking economic recovery this week showed activity in India is already at 93 percent of pre-Covid levels. The country is set to further relax restrictions on gatherings of people and allow schools, multiplexes, and entertainment parks to reopen in some areas from October 15.

The Sensex capped its best week since early June on Friday as the central bank signaled more policy easing ahead and announced a slew of liquidity steps to support the economy. In the past few days, data showing a mild improvement in some economic indicators and optimism over earnings results from a few major firms have also helped boost investor sentiment. India’s biggest carmaker Maruti Suzuki India posted its highest monthly sales in two years in September, as an end to a nationwide lockdown prompted dealerships to stock up ahead of a festive season. Asia’s third-largest economy is set to announce third-quarter growth at the end of November. That number will be closely watched after the economy contracted by a record in the second quarter.

4. What does the International Monetary Fund say?

India will regain its position as the fastest-growing emerging economy in 2021, the International Monetary Fund said recently. The IMF, in its latest ‘World Economic Outlook’ report, said that the Indian economy hit by coronavirus pandemic – is projected to contract by a massive 10.3 per cent this year, but it is likely to bounce back with an impressive 8.8 per cent growth rate in 2021. If the Indian economy achieves the projected growth rate, it will regain the position of the fastest-growing emerging economy, surpassing China’s projected growth rate of 8.2 per cent.

The IMF in its report said that revisions to the forecast are particularly large for India, where Gross Domestic Product (GDP) contracted much more severely than expected in the second quarter. “As a result, the economy is projected to contract by 10.3 per cent in 2020, before rebounding by 8.8 per cent in 2021,” it said. In 2019, India’s growth rate was 4.2 per cent. According to the IMF, India is among those likely to suffer the greatest damage from global warming, reflecting its initially high temperatures. For India, the net gains from climate change mitigation-relative to inaction-would be up to 60-80 per cent of GDP by 2100.

5. What does the World Bank say about India’s growth?

Last week, the World Bank said India’s GDP this fiscal is expected to contract by 9.6 percent. “India’s GDP is expected to contract 9.6 percent in the fiscal year that started in March,” the World Bank said in its latest issue of the South Asia Economic Focus report. “The situation is much worse in India than we have ever seen before,” Hans Timmer, World Bank Chief Economist for South Asia, told reporters during a conference call last week. “It is an exceptional situation in India. A very dire outlook,” he said. There was a 25 percent decline in GDP in the second quarter of the year, which is the first quarter of the current fiscal year in India. In the report, the World Bank said the spread of the virus and containment measures have severely disrupted supply and demand conditions in India.

6. What does RBI say about India’s recovery

RBI Governor Shaktikanta Das recently said, “India’s GDP to contract by 9.5 percent in FY21.” The governor made the statement while addressing media at the end of the three-day meeting of the newly-constituted Monetary Policy Committee (MPC). He added, however, that given the current momentum if some sectors show signs of recovery which are then maintained, a faster and stronger rebound is eminently feasible.

According to the RBI, the 9.5 per cent contraction will be due to disruptions caused by the Covid-19 pandemic that has affected economic activities. Growth “may break out of contraction and turn positive during January-March” due to improving signs of recovery, the central bank estimates. It goes on to add that the Indian economy is entering into a decisive phase in the fight against the pandemic and silver linings are visible in terms of flattening of the curve across the country. RBI Governor Shaktikanta Das explained that India’s recovery is likely to be a three-speed recovery, with individual sectors showing varying paces depending on sector-specific realities.

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