Indian Economy On Revival Mode

Finance Minister Mrs. Nirmala Sitharaman said that the demand for consumer goods has increased considerably during the festival months. October to March is the festival season in India. Based on the “Nikkei Manufacturing Purchasing Manager's Index (PMI)”, the Finance Minister said that the “economic activity had picked up in the country after the easing of pandemic restrictions and helped by various government measures.” A PMI reading above 50 indicates expansion and below 50 denotes contraction. The analyses have shown that PMI increased from 52 in August to 56.8 in September, the highest since January 2012, said the Finance Minister.

Strengthening the “animal spirits”, a sharp YoY (year-on-year) double digit increase has been noted for the festival sales of car. The two-wheelers sale has seen growth in YoY estimates in some parts of the country. The exports too picked up to positive quadrant with the recovery in components including farm exports, shipments, pharmaceuticals, engineering goods and chemicals contributing to the rise. The FOREX reserves are booming. India’s foreign exchange (Forex) reserves stand at around US$ 555.12 Billion, the highest ever. The international agencies have predicted that Indian economy would bounce back in 2021-‘22. As per the International Monetary Fund (IMF) estimates, Indian economy was the fastest-growing large economy till recently. In 2019-20, India’s GDP growth was 4.2 per cent, while China’s was 6 per cent in 2019.

However, the IMF estimates predict that India’s GDP growth would overtake China’s next year as the Fund predicted India would expand by 8.8 per cent, while China is expected to have growth rate of 8.2 per cent.

Yet another policy announcement is “loan moratorium”, is also going to benefit borrowers. On November 2, 2020, the Supreme Court is scheduled to hear the loan moratorium petitions and will communicate “how to waive interest on interest”. The affidavit filed by the Centre, through the Ministry of Finance, brings relief to a large section of borrowers. The affidavit said the difference between compound interest and simple interest would be deposited in the accounts of borrowers by November 5.

In March 2020, government announced a loan moratorium as part of the “AtmaNirbhar Bharat” economic package to all term loans. This was not a loan waiver but an EMI deferral scheme. The borrowers needed to pay back the staggered EMIs later.

This announcement was only for the loans up to Rs 2 crore that are taken from banks, NBFCs (non-banking finance companies) and state co-operative banks. This include borrowers of housing finance companies and microfinance companies. The MSME, education, housing, consumer durables, etc. are eligible for this loan moratorium.

Finance Minister Nirmala Sitharaman has said there were visible signs of revival in the economy but the GDP growth may be in negative zone or near zero in the current fiscal. This is primarily because of a huge 23.9 per cent contraction in the economy in the first quarter of current fiscal (April-June). The Minister also clarified that the lockdown imposed on March 25th was based on the framework of putting lives before livelihood.

Significantly, the global foreign direct investment (FDI) plummeted by 49% in YoY in the first quarter of 2020, the fall was by up to 40% for the year. As per a UNCTAD report, the FDI flows to EU turned negative for the first time ever, falling to minus $7 billion from $202 billion, while flows to the United States fell by 61% to $51 billion.

The Monetary Policy Committee of RBI has announced their calculations that the economic growth to be plummeted by 9.5 per cent in 2021-22. The MPC has kept the policy rates at “status quo” as the inflation was above 6 per cent, which is the upper bound for the bank’s long term policies. Given the liquidity infusion into the market by fiscal and monetary policy stances, hope to flatten the curve, the epidemiology of the virus can predominantly determine the economic upturn, along with strong fiscal and monetary policies.

Hailing the “animal spirits” of the Indian economy, Prime Minister Narendra Modi has said, the target of India becoming a $5 trillion economy is achievable by 2024.

Script: Dr. Lekha S Chakraborty, Professor & Chair, NIPFP & Research Associate, the Levy Economics Institute, New York.