Key Highlights of Economic Survey 2020-21

Print 30-Jan-2021 , 10:19:01 am | By CASANSAAR

Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2020-21 in the Parliament today. The key highlights of Economic Survey 2020-21, which is dedicated to the COVID Warriors, are as follows:

Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis

• India focused on saving lives and livelihoods by its willingness to take short-term pain for long-term gain, at the onset of the COVID-19 pandemic

• Response stemmed from the humane principle that:

Human lives lost cannot be brought back

o GDP growth will recover from the temporary shock caused by the pandemic

• An early, intense lockdown provided a win-win strategy to save lives, and preserve livelihoods via economic recovery in the medium to long-term

• Strategy also motivated by the Nobel-Prize winning research by Hansen & Sargent (2001): a policy focused on minimizing losses in a worst-case scenario when uncertainty is very high

• India’s strategy flattened the curve, pushed the peak to September, 2020

• After the September peak, India has been unique in experiencing declining daily cases despite increasing mobility

• V-shaped recovery, as seen in 7.5% decline in GDP in Q2 and recovery across all key economic indicators vis-à-vis the 23.9% GDP contraction in Q1

• COVID pandemic affected both demand and supply:

India was the only country to announce structural reforms to expand supply in the medium-long term and avoid long-term damage to productive capacities
Calibrated demand side policies to ensure that the accelerator is slowly pushed down only when the brakes on economic activities are being removed

o A public investment programme centered around the National Infrastructure Pipeline to accelerate the demand push and further the recovery

• Upturn in the economy, avoiding a second wave of infections - a sui generis case in strategic policymaking amidst a once-in-a-century pandemic

State of the Economy in 2020-21: A Macro View

• COVID-19 pandemic ensued global economic downturn, the most severe one since the Global Financial Crisis

• The lockdowns and social distancing norms brought the already slowing global economy to a standstill

• Global economic output estimated to fall by 3.5% in 2020 (IMF January 2021 estimates)

• Governments and central banks across the globe deployed various policy tools to support their economies such as lowering policy rates, quantitative easing measures, etc.

• India adopted a four-pillar strategy of containment, fiscal, financial, and long-term structural reforms:

o Calibrated fiscal and monetary support was provided, cushioning the vulnerable during the lockdown and boosting consumption and investment while unlocking

o A favourable monetary policy ensured abundant liquidity and immediate relief to debtors while unclogging monetary policy transmission

• As per the advance estimates by NSO, India’s GDP is estimated to grow by (-) 7.7% in FY21 - a robust sequential growth of 23.9% in H2: FY21 over H1: FY21

• India’s real GDP to record a 11.0% growth in FY2021-22 and nominal GDP to grow by 15.4% – the highest since independence:

Rebound to be led by low base and continued normalization in economic activities as the rollout of COVID-19 vaccines gathers traction

• Government consumption and net exports cushioned the growth from diving further down, whereas investment and private consumption pulled it down

• The recovery in second half of FY2020-21 is expected to be powered by government consumption, estimated to grow at 17% YoY

• Exports expected to decline by 5.8% and imports by 11.3% in the second half of FY21

• India expected to have a Current Account Surplus of 2% of GDP in FY21, a historic high after 17 years

• On supply side, Gross Value Added (GVA) growth pegged at -7.2% in FY21 as against 3.9% in FY20:

o Agriculture set to cushion the shock of the COVID-19 pandemic on the Indian economy in FY21 with a growth of 3.4%

o Industry and services estimated to contract by 9.6% and 8.8% respectively during FY21

• Agriculture remained the silver lining while contact-based services, manufacturing, construction were hit hardest, and recovering steadily

• India remained a preferred investment destination in FY 2020-21 with FDI pouring in amidst global asset shifts towards equities and prospects of quicker recovery in emerging economies:

o Net FPI inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020, as investors’ risk appetite returned

o India was the only country among emerging markets to receive equity FII inflows in 2020

• Buoyant SENSEX and NIFTY resulted in India’s market-cap to GDP ratio crossing 100% for the first time since October 2010

• Softening of CPI inflation recently reflects easing of supply side constraints that affected food inflation

• Mild contraction of 0.8% in investment (as measured by Gross Fixed Capital Formation) in 2nd half of FY21, as against 29% drop in 1st half of FY21

• Reignited inter and intra state movement and record-high monthly GST collections have marked the unlocking of industrial and commercial activity

• The external sector provided an effective cushion to growth with India recording a Current Account Surplus of 3.1% of GDP in the first half of FY21:

o Strong services exports and weak demand leading to a sharper contraction in imports (merchandise imports contracted by 39.7%) than exports (merchandise exports contracted by 21.2%)

o Forex reserves increased to a level so as to cover 18 months worth of imports in December 2020

o External debt as a ratio to GDP increased to 21.6% at end-September 2020 from 20.6% at end-March 2020

o Ratio of forex reserves to total and short-term debt improved because of the sizable accretion in reserves

• V-shaped recovery is underway, as demonstrated by a sustained resurgence in high frequency indicators such as power demand, e-way bills, GST collection, steel consumption, etc.

• India became the fastest country to roll-out 10 lakh vaccines in 6 days and also emerged as a leading supplier of the vaccine to neighbouring countries and Brazil

• Economy’s homecoming to normalcy brought closer by the initiation of a mega vaccination drive:

o Hopes of a robust recovery in services sector, consumption, and investment have been rekindled

o Reforms must go on to enable India realize its potential growth and erase the adverse impact of the pandemic

• India’s mature policy response to the ‘once-in-a-century’ crisis provides important lessons for democracies to avoid myopic policy-making and demonstrates benefits of focusing on long-term gains

Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa!

• Growth leads to debt sustainability in the Indian context but not necessarily vice-versa:

Debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD), i.e., the difference between the interest rate and the growth rate

o In India, interest rate on debt is less than growth rate - by norm, not by exception

• Negative IRGD in India – not due to lower interest rates but much higher growth rates – prompts a debate on fiscal policy, especially during growth slowdowns and economic crises

• Growth causes debt to become sustainable in countries with higher growth rates; such clarity about the causal direction is not witnessed in countries with lower growth rates

• Fiscal multipliers are disproportionately higher during economic crises than during economic booms

• Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity

• Fiscal policy that provides an impetus to growth will lead to lower debt-to-GDP ratio

• Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios

• Desirable to use counter-cyclical fiscal policy to enable growth during economic downturns

• Active, counter-cyclical fiscal policy - not a call for fiscal irresponsibility, but to break the intellectual anchoring that has created an asymmetric bias against fiscal policy

Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No!

• The fifth largest economy in the world has never been rated as the lowest rung of the investment grade (BBB-/Baa3) in sovereign credit ratings:

Reflecting the economic size and thereby the ability to repay debt, the fifth largest economy has been predominantly rated AAA

o China and India are the only exceptions to this rule – China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3

• India’s sovereign credit ratings do not reflect its fundamentals:

A clear outlier amongst countries rated between A+/A1 and BBB-/Baa3 for S&P/ Moody’s, on several parameters

o Rated significantly lower than mandated by the effect on the sovereign rating of the parameter

• Credit ratings map the probability of default and therefore reflect the willingness and ability of borrower to meet its obligations:

India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history

o India’s ability to pay can be gauged by low foreign currency denominated debt and forex reserves

• Sovereign credit rating changes for India have no or weak correlation with macroeconomic indicators

• India’s fiscal policy should reflect Gurudev Rabindranath Tagore’s sentiment of ‘a mind without fear’

• Sovereign credit ratings methodology should be made more transparent, less subjective and better attuned to reflect economies’ fundamentals

Inequality and Growth: Conflict or Convergence?

• The relationship between inequality and socio-economic outcomes vis-à-vis economic growth and socio-economic outcomes, is different in India from that in advanced economies.

• Both inequality and per-capita income (growth) have similar relationships with socio-economic indicators in India, unlike in advanced economies

• Economic growth has a greater impact on poverty alleviation than inequality

• India must continue to focus on economic growth to lift the poor out of poverty

• Expanding the overall pie - redistribution in a developing economy is feasible only if the size of the economic pie grows

Healthcare takes centre stage, finally!

• COVID-19 pandemic emphasized the importance of healthcare sector and its inter-linkages with other sectors - showcased how a health crisis transformed into an economic and social crisis

• India’s health infrastructure must be agile so as to respond to pandemics - healthcare policy must not become beholden to ‘saliency bias’

• National Health Mission (NHM) played a critical role in mitigating inequity as the access of the poorest to pre-natal/post-natal care and institutional deliveries increased significantly

• Emphasis on NHM in conjunction with Ayushman Bharat should continue

• An increase in public healthcare spending from 1% to 2.5-3% of GDP can decrease the out-of-pocket expenditure from 65% to 35% of overall healthcare spending

• A regulator for the healthcare sector must be considered given the market failures stemming from information asymmetry

Mitigation of information asymmetry will help lower insurance premiums, enable the offering of better products and increase insurance penetration

o Information utilities that help mitigate the information asymmetry in healthcare sector will be useful in enhancing overall welfare

• Telemedicine needs to be harnessed to the fullest by investing in internet connectivity and health infrastructure

Process Reforms

• India over-regulates the economy resulting in regulations being ineffective even with relatively good compliance with process

• The root cause of the problem of overregulation is an approach that attempts to account for every possible outcome

• Increase in complexity of regulations, intended to reduce discretion, results in even more non-transparent discretion

• The solution is to simplify regulations and invest in greater supervision which, by definition, implies greater discretion

• Discretion, however, needs to be balanced with transparency, systems of ex-ante accountability and ex-post resolution mechanisms

• The above intellectual framework has already informed reforms ranging from labour codes to removal of onerous regulations on the BPO sector

Regulatory Forbearance an emergency medicine, not staple diet!

• During the Global Financial Crisis, regulatory forbearance helped borrowers tide over temporary hardship

• Forbearance continued long after the economic recovery, resulting in unintended consequences for the economy

• Banks exploited the forbearance window for window-dressing their books and misallocated credit, thereby damaging the quality of investment in the economy

• Forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, not a staple diet that gets continued for years

• To promote judgement amidst uncertainty, ex-post inquests must recognize the role of hindsight bias and not equate unfavourable outcomes to bad judgement or malafide intent

• An Asset Quality Review exercise must be conducted immediately after the forbearance is withdrawn

• The legal infrastructure for the recovery of loans needs to be strengthened de facto

Innovation: Trending Up but Needs Thrust, Especially from the Private Sector

• India entered the top-50 innovating countries for the first time in 2020 since the inception of the Global Innovation Index in 2007, ranking first in Central and South Asia, and third amongst lower middle-income group economies

• India’s gross domestic expenditure on R&D (GERD) is lowest amongst top ten economies

• India’s aspiration must be to compete on innovation with the top ten economies

• The government sector contributes a disproportionately large share in total GERD at three times the average of top ten economies

• The business sector’s contribution to GERD, total R&D personnel and researchers is amongst the lowest when compared to top ten economies

• This situation has prevailed despite higher tax incentives for innovation and access to equity capital

• India’s business sector needs to significantly ramp up investments in R&D

• Indian resident’s share in total patents filed in the country must rise from the current 36% which is much below the average of 62% in top ten economies

• For achieving higher improvement in innovation output, India must focus on improving its performance on institutions and business sophistication innovation inputs

JAY Ho! PM‘JAY’ Adoption and Health outcomes

• Pradhan Mantri Jan Arogya Yojana (PM-JAY) – the ambitious program launched by Government of India in 2018 to provide healthcare access to the most vulnerable sections demonstrates strong positive effects on healthcare outcomes in a short time

• PM-JAY is being used significantly for high frequency, low cost care such as dialysis and continued during the Covid pandemic and the lockdown.

• Causal impact of PM-JAY on health outcomes by undertaking a Difference-in-Difference analysis based on National Family Health Survey (NFHS)-4 (2015-16) and NFHS-5 (2019-20) is following:

Enhanced health insurance coverage: The proportion of households that had health insurance increased in Bihar, Assam and Sikkim from 2015-16 to 2019-20 by 89% while it decreased by 12% over the same period in West Bengal
Decline in Infant Mortality rate: from 2015-16 to 2019-20, infant mortality rates declined by 20% for West Bengal and by 28% for the three neighbouring states
Decline in under-5 mortality rate: Bengal saw a fall of 20% while, the neighbours witnessed a 27% reduction
Modern methods of contraception, female sterilization and pill usage went up by 36%, 22% and 28% respectively in the three neighbouring states while the respective changes for West Bengal were negligible
While West Bengal did not witness any significant decline in unmet need for spacing between consecutive kids, the neighbouring three states recorded a 37% fall
Various metrics for mother and child care improved more in the three neighbouring states than in West Bengal.

• Each of these health effects manifested similarly when we compare all states that implemented PM-JAY versus the states that did not

• Overall, the comparison reflects significant improvements in several health outcomes in states that implemented PM-JAY versus those that did not

Bare Necessities

• Access to the ‘bare necessities’ has improved across all States in the country in 2018 as compared to 2012

o It is highest in States such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura

o Improvement in each of the five dimensions viz., access to water, housing, sanitation, micro-environment and other facilities

o Inter-State disparities declined across rural and urban areas as the laggard states have gained relatively more between 2012 and 2018

o Improved disproportionately more for the poorest households when compared to the richest households across rural and urban areas

• Improved access to the ‘bare necessities’ has led to improvements in health indicators such as infant mortality and under-5 mortality rate and also correlates with future improvements in education indicators

• Thrust should be given to reduce variation in the access to bare necessities across states, between rural and urban and between income groups

• The schemes such as Jal Jeevan Mission, SBM-G, PMAY-G, etc. may design appropriate strategy to reduce these gaps

• A Bare Necessities Index (BNI) based on the large annual household survey data can be constructed using suitable indicators and methodology at district level for all/targeted districts to assess the progress on access to bare necessities.

Fiscal Developments

• India adopted a calibrated approach best suited for a resilient recovery of its economy from COVID-19 pandemic impact, in contrast with a front-loaded large stimulus package adopted by many countries

• Expenditure policy in 2020-21 initially aimed at supporting the vulnerable sections but was re-oriented to boost overall demand and capital spending, once the lockdown was unwound

• Monthly GST collections have crossed the Rs. 1 lakh crore mark consecutively for the last 3 months, reaching its highest levels in December 2020 ever since the introduction of GST

• Reforms in tax administration have begun a process of transparency and accountability and have incentivized tax compliance by enhancing honest tax-payers’ experience

• Central Government has also taken consistent steps to impart support to the States in the challenging times of the pandemic

External Sector

• COVID-19 pandemic led to a sharp decline in global trade, lower commodity prices and tighter external financing conditions with implications for current account balances and currencies of different countries

• India’s forex reserves at an all-time high of US$ 586.1 billion as on January 08, 2021, covering about 18 months worth of imports

• India experiencing a Current Account Surplus along with robust capital inflows leading to a BoP surplus since Q4 of FY2019-20

• Balance on the capital account is buttressed by robust FDI and FPI inflows:

o Net FDI inflows of US$ 27.5 billion during April-October, 2020: 14.8% higher as compared to first seven months of FY2019-20

o Net FPI inflows of US$ 28.5 billion during April-December, 2020 as against US$ 12.3 billion in corresponding period of last year

• In H1: FY21, steep contraction in merchandise imports and lower outgo for travel services led to:

o Sharper fall in current payments (by 30.8%) than current receipts (15.1%)

o Current Account Surplus of US$ 34.7 billion (3.1% of GDP)

• India to end with an Annual Current Account Surplus after a period of 17 years

• India’s merchandise trade deficit was lower at US$ 57.5 billion in April-December, 2020 as compared to US$ 125.9 billion in the corresponding period last year

• In April-December, 2020, merchandise exports contracted by 15.7% to US$ 200.8 billion from US$ 238.3 billion in April-December, 2019:

o Petroleum, Oil and Lubricants (POL) exports have contributed negatively to export performance during the period under review

o Non-POL exports turned positive and helped in improving export performance in Q3 of 2020-21

o Within Non-POL exports, agriculture & allied products, drugs & pharmaceutical and ores & minerals recorded expansion

• Total merchandise imports declined by (-) 29.1% to US$ 258.3 billion during April-December, 2020 from US$ 364.2 billion during the same period last year:

o Sharp decline in POL imports pulled down the overall import growth

o Imports contracted sharply in Q1 of 2020-21; the pace of contraction eased in subsequent quarters, due to the accelerated positive growth in Gold and Silver imports and narrowing contraction in non-POL, non-Gold & non-Silver imports

o Fertilizers, vegetable oil, drugs & pharmaceuticals and computer hardware & peripherals have contributed positively to the growth of non-POL, non-Gold & non-Silver imports

• Trade balance with China and the US improved as imports slowed

• Net services receipts amounting to US$ 41.7 billion remained stable in April-September 2020 as compared with US$ 40.5 billion in corresponding period a year ago.

• Resilience of the services sector was primarily driven by software services, which accounted for 49% of total services exports

• Net private transfer receipts, mainly representing remittances by Indians employed overseas, totaling US$ 35.8 billion in H1: FY21 declined by 6.7% over the corresponding period of previous year

• At end-September 2020, India’s external debt placed at US$ 556.2 billion - a decrease of US$ 2.0 billion (0.4%) as compared to end-March 2020.

• Improvement in debt vulnerability indicators:

o Ratio of forex reserves to total and short-term debt (original and residual)

o Ratio of short-term debt (original maturity) to the total stock of external debt.

o Debt service ratio (principal repayment plus interest payment) increased to 9.7% as at end-September 2020, compared to 6.5% as at end-March 2020

• Rupee appreciation/depreciation:

o In terms of 6-currency nominal effective exchange rate (NEER) (trade-based weights), Rupee depreciated by 4.1% in December 2020 over March 2020; appreciated by 2.9% in terms of real effective exchange rate (REER)

o In terms of 36-currency NEER (trade-based weights), Rupee depreciated by 2.9% in December 2020 over March 2020; appreciated by 2.2% in terms of REER

• RBI’s interventions in forex markets ensured financial stability and orderly conditions, controlling the volatility and one-sided appreciation of the Rupee

• Initiatives undertaken to promote exports:

o Production Linked Incentive (PLI) Scheme

o Remission of Duties and Taxes on Exported Products (RoDTEP)

o Improvement in logistics infrastructure and digital initiatives

Money Management and Financial Intermediation

• Accommodative monetary policy during 2020: repo rate cut by 115 bps since March 2020

• Systemic liquidity in FY2020-21 has remained in surplus so far. RBI undertook various conventional and unconventional measures like:

o Open Market Operations

o Long Term Repo Operations

o Targeted Long Term Repo Operations

• Gross Non-Performing Assets ratio of Scheduled Commercial Banks decreased from 8.21% at end-March, 2020 to 7.49% at end-September, 2020

• The monetary transmission of lower policy rates to deposit and lending rates improved during FY2020-21

• NIFTY-50 and BSE SENSEX reached record high closing of 14,644.7 and 49,792.12 respectively on January 20, 2021

• The recovery rate for the Scheduled Commercial Banks through IBC (since its inception) has been over 45%

Prices and Inflation

• Headline CPI inflation:

o Averaged 6.6% during April-December, 2020 and stood at 4.6% in December, 2020, mainly driven by rise in food inflation (from 6.7% in 2019-20 to 9.1% during April-December, 2020, owing to build up in vegetable prices)

o CPI headline and its sub groups witnessed inflation during April-October 2020, driven by substantial increase in price momentum - due to the initial disruptions caused by COVID-19 lockdown

o Moderated price momentum by November 2020 for most sub groups, coupled with positive base effect helped ease inflation

• Rural-urban difference in CPI inflation saw a decline in 2020:

Since November 2019, CPI-Urban inflation has closed the gap with CPI-Rural inflation
Food inflation has almost converged now
Divergence in rural-urban inflation observed in other components of CPI like fuel and light, clothing and footwear, miscellaneous etc.

• During April-December, 2019 as well as April-December, 2020-21, the major driver of CPI-C inflation was the food and beverages group: