The effects of COVID-19 are being felt by the economies of nations all around the world. In India, COVID-19 has especially weighed down on economic growth in the first two quarters of the 2021-2022 financial year, or FY2021. India was one of the first countries to have gone into a nation-wide lockdown when the pandemic first struck, and as a result, the country’s economy unlocked in phases during the first half of FY2021. However, after a year-over-year (YOY) decline of 23.9% in the first quarter of FY2021, the Indian economy contracted by 7.5% in the following quarter of the same year, and this upward trend of recovery is anticipated for the upcoming third quarter of FY2021 too.
Here, we look at the economic outlook for India for the period of June to September 2021.
The Story So Far
Lately, economic activity in India has been gathering steady momentum at a relatively sustainable pace, even as the country is dealing with the pandemic’s second wave. Key indicators such as strong car sales, rising steel production, increased diesel consumption, and higher goods and services tax revenue collections suggest that although economic activity is nowhere near pre-COVID levels, it is more than the first and second quarters of FY2021.
The graph below indicates the relative economic impact of lockdown in countries:
Source: Google Mobility Data, Oxford’s COVID-19 Response Tracker and IMF Staff Calculations
The blue bars denote the percentage of economic impact caused by the mandated government lockdowns, while the green bars denote the economic impact caused by voluntary social distancing. It should be noted here that the easing of lockdowns does not necessarily mean that economic normalcy will be restored. Citizens may still opt for voluntary social distancing, which in turn is bound to negatively affect the economy of the respective country too.
In India, the uncertainties around COVID-19 have lingered on in the face of the second pandemic wave. While a nationwide lockdown does not seem to be on the cards this time around, localized lockdowns and other social and commercial restrictions are indeed taking a toll on the country’s economy.
An alarming gap between consumer and business confidence has seen business suffering during the pandemic. Until now, the removal of intense social and commercial restrictions, along with a decreased rate of supply chain disruptions is seeing businesses bounce back as the nation gears up for the third quarter of this financial year. On the other hand, health, and financial concerns, as well as employment worries, are so far preventing consumers from spending freely, thereby putting a dampener on the much-needed economic revival.
However, with a successful vaccination drive that has seen over 180 million people being successfully inoculated (at the time of writing this article), Indian citizens are exhibiting greater confidence in stepping out of their homes and spending. Moreover, since restrictions on inter-state movement of goods have been lifted, the supply chain pressure has been eased significantly, and there has been a consequent pickup in the industrial activity rate too. This is largely due to a strong rebound in the manufacturing and services sectors, as well as significant inflow of foreign direct investments (FDIs).
According to the Ministry of Commerce and Industry, the net FDIs raked in by India in the pandemic-ravaged 2020-2021 financial year amounted to a massive US$81.72 billion. Thankfully, FDIs have continued to defy all possible predictions, managing to remain firm in FY2021 too. FDI equity inflow has already increased by 19% in the first two quarters of FY2021, and this upward trend is expected to continue in the upcoming third quarter of FY2021 also.
Impact on MSMEs
The Micro, Small and Medium Enterprise (MSME) sector has always been vital to the Indian economy, being a significant contributor to the country’s Gross Domestic Product (GDP). MSMEs are a huge source of employment and income generation in India and have been identified as a major driver or poverty and development. Understandably, the pandemic’s effect on the MSME sector has a direct correlation with the nation’s economy.
Ultimately, MSMEs in India have been hit severely by the pandemic. Despite strong financial backing, larger corporations and enterprises struggled to weather the pandemic, and are still struggling to do so. In such a situation, MSMEs have had to bear the brunt of COVID-19 owing to several reasons such as a shortage of working capital, cancelled orders and huge supply chain disruptions.
One of the biggest challenges to the MSME supply chain equilibrium in the country is that the pandemic’s second wave has seen fear of infection resurface amongst consumers. Although the lockdown is not in full effect, existing mobility restrictions, social distancing rules and lowered incomes have been causing consumers to save across all income classes. As a direct result, the demand for discretionary goods has remained quite low.
However, as the virus subsides and people start moving about again, the pent-up demand for discretionary goods will also pick pace rapidly, and the economy will benefit from it on all ends. While the first half of FY2021 saw people shifting from physical wholesale markets to online marketplaces, the third quarter is expected to see resurgence in offline sales as social and commercial restrictions are eased.
Impact on the IT/ITES Sector
India continues to be the preferred destination for Information Technology (IT) and Information Technology Enabled Services (ITES) in the world. In the 2020 financial year, India enjoyed a whopping 52% market share in services exports from the country. According to the India Brand Equity Foundation (IBEF), the IT industry accounted for approximately 8% of the nation’s GDP in 2020, and exports are expected to increase by up to 2% in FY2021 with overall export revenue touching US $150 billion.
Moving forward, in the coming quarter, the ITES sector will be defined by how it manages the pandemic crisis. A ‘respond, recover and thrive’ mentality is the need of the day and companies will have to take substantial steps to make up for past losses. Firstly, there is a need to re-evaluate the supply and services chain to understand how disruptions caused by the pandemic can be avoided in the future. Inventory strategies will need to be built and developed to mitigate volatility and risk on all fronts.
Furthermore, at a time of social distancing, the nation’s IT infrastructure will have to be reworked with the implementation of digitally enabled work tools for various business processes to be carried out normally. For instance, the increased use of teleconferencing software has allowed many companies to telecommute and thus operate more efficiently. Forecasts indicate that communications equipment and telecom services will take centre stage as more and more organizations encourage employees to work from home. Similarly, faster access to data, automation and better networking capabilities will arm companies to safeguard their daily operations. Digital transformation remains the top priority for Indian corporations in a pandemic affected world that will remain largely contact-less for the immediate foreseeable future at least.
Ultimately, ITES firms in India are expected to tide through the next 3-6 months with an opportunity to grow exponentially once the pandemic situation subsides further.
What does the future hold?
The economic outlook of India looks optimistic as the third quarter of the financial year approaches. India is seeing a rapid growth in its online ecosystem and the continued infrastructure investments by the government are bound to yield positive results in the days ahead. The Investment Information and Credit Rating Agency (ICRA) believes that India is poised to record a positive, if only marginal, growth in the third quarter of FY2021.
Capital investments are bound to pick up pace after a prolonged lull-period brought on by the pandemic. This momentum is expected to continue as the third quarter approaches, even if some investments are held-up or postponed due to the current situation. After the easing of government restrictions, a renewed optimism amongst businesses is most likely to see fiscal spending, especially on building assets and IT infrastructure, start gaining steady momentum once again. Stimulus measures and other reforms announced by the government, alongside the liquidity measures instated by the Reserve Bank of India (RBI) are expected to further increase industrial activity and demand.
Lastly, the United Nations has recently raised the country’s growth forecast to 7.5% for FY2021, a 0.2% increase from its projection in January, signalling that although India’s outlook for the remaining year still looks fragile, there is an overall resurgence in the market. The UN has also projected that India’s GDP is expected to grow to 10.1% in 2022. These two statistics should serve as relevant indicators of the fact that things will indeed start looking up for the economy in the coming months.