The Year That was – Economy & Policy

The year 2020 is possibly the most horrible year since the end of second world war. The all-pervasive influence of the pandemic made the turbulence of last few years a breeze. However, that was not the only crisis India, as a nation had to face with China creating another trouble spot on the borders. Here is a look at some of the far-reaching events of the year.

The lockdown imposed during April-June’20 to handle the pandemic had its toll on the GDP. Indian economy suffered severe jolt with the GDP declining by as much as 23.9% for the quarter ended June’20. Worst hit were trade and construction, declining by 50% and 47% respectively. Manufacturing was almost equally hit with a decline of close to 40%. From the expenditure side, GFCF (Investments) suffered the most severe with a decline of 47%. While the second quarter recouped a good part of loss with moderate decline of 7.5%, government curtailed its expenditure. Against growth of 16% in Q1, government final consumption expenditure (GFCE) declined sharply by 22%. This was an attempt to manage its finances with gross borrowings projected to increase to Rs 12 lakh crore, up from budgeted projection of less than Rs 8 lakh crore. Relief for the government was significant increase in tax revenue which stood at Rs 2.65 lakh crore in Q2, almost double of Rs 1.36 lakh crore recorded in Q1.

The economic impact of Covid-19 led to even more severe social loss in the form of unprecedented job losses. As per EPFO (Employees’ Provident Fund Organisation), as many as 25 lakh people lost their jobs from organized sector during April & May’20 combined. (This is only organized sector data and impact on unorganized sector is not available). To help the affected population, government expanded the coverage of MGNREGA and allocated additional Rs 40,000 crore in May’20. As per government report, over 60 crore person days of jobs were provided in June’20, double the figure of 30 crore in June’19. The job scenario appears to be limping back to normal. As per the EPFO data, net payroll addition to EPFO was 14.9 lakhs during Sept’20, 70% more than August. Net employment generated in the first six months reached 80% of the employment generated in the same period last year. However, “Trading” and “Construction” are still facing stress. For Trading, total addition is only 32% of previous year’s six-month figure whereas for construction, it is 65%.

Other than government’s relief measures, the monetary policy committee (MPC) and RBI also did their bit to keep the economic engines running. MPC adopted a ultra-loose monetary policy to provide enough liquidity in the market and bring down the cost of funds. Repo rate was reduced by 1.15 percentage points in the first two meetings on top of earlier rate cuts effected since Feb’19. Repo rate now stand at 4%, against 6.5% till Jan’19. While credit off-take hasn’t picked-up significantly, it has certainly brought down the cost of funds and helped corporate sector post significant increase in profits during Sept’20 quarter. With limited off-take, banks are flush with funds, depositing that with RBI. Daily under liquidity adjustment facility (LAF) has risen sharply to Rs 4.4 lakh crore in Nov’20 against Rs. 2.4 lakh crore in Nov’19. While the policy measures give out the accommodative signal, the next challenge for MPC would be to keep an eye on inflation and calibrate the reversal of easy money policy.

Covid-19 was not the only crisis Indian economy faced; stand-off with China sapping significant part of energy. The core of the matter is India’s build-up of road infrastructure near India’s border with China which China objects to. The crisis forced India to look at its trade relationship with China which was skewed in favour of China, possibly, with a desire to keep peace with the enemy. India suffers significant trade deficit with China, with India’s exports to China being just one-fourth of imports.  Figures are $65 bn and $16.6 bn, implying a trade deficit of over $48 bn or a massive Rs 3.4 lakh crore. The trade imbalance with China has taken a gigantic proportion over last 20 years with trade deficit increasing from only $200 million in 2000 to $58 billion by 2018! How far the government’s ‘Vocal for local’ campaign and measures such as Production Linked Incentives (PLI) scheme reduce the deficit, time will tell.

In another far-reaching reform measure, government passed three bills liberalizing the farm sector, dubbed 1991 moment for farm sector . The three bills allow farmers to sell their produce outside APMC, allow farmers freedom to enter into agreement with a “sponsor” and allows market players such as food processing companies, wholesalers, large traders etc build stock of food grains as per their business plan. The objective is to give farmers multiple options and break the monopoly of mandis and the middlemen. The bill may, in the longer-run, reduce the dominance of Punjab and Haryana and their middle-men in government procurement which together account for more than 60% of wheat procurement (with only 28% share in production). This is so because these two states produce significant amount of surplus, after keeping aside their needs, which stands at 89-90% for Punjab and 80-85% for Haryana, for both wheat and rice.

One thought on “The Year That was – Economy & Policy”

Leave a Reply

Your email address will not be published. Required fields are marked *