How is India recovering from the economic slowdown

  • Ritesh Pathak
  • Nov 10, 2020
  • Financial Analytics
How is India recovering from the economic slowdown title banner

The pandemic situation caused by the spread of coronavirus is slowly but hopefully getting better. The deadly virus has claimed the lives of lakhs of people across the globe and crores of people are under the effect of it. 

 

To curb the spread, countries went on to impose nationwide lockdowns. Cities were shut completely, there was no movement for months. People were stranded at their homes and even economic activities were also completely halted. This was a massive blow for every segment of people, from daily wage laborers to the corporate people. 

 

The effect of this was reflected in the numbers when the government released the data on GDP for Q1 of the FY 2020-21. India hit the lowest GDP numbers of the last four decades. The numbers showed a contraction of 23.9% in the first quarter ( Read the blog What does the 24% shrink in India’s GDP mean?). Different reasons were being guessed behind this contraction but the pandemic was the major one to be blamed for this. It was not just India that witnessed a contraction, the top economies like the United States, UK, Japan were also among the severely hit nations.

 

Now, India has crossed the second quarter and has entered the third quarter already, we may see the recovery phase. The GDP numbers will be released later this month. So, in this blog, we will be talking about the possible ways in which India is recovering from the major blow. We will try to understand the recoveries in particular sectors. 

 

 

What is economic growth and its key drivers?  

 

To better understand the recovery phase, we must know about the economic growth and the contributors to economic growth. There are two ways to understand economic growth. Put in simpler terms, economic growth is an increase in the production of goods and services over a period. The growth comes from aggregate gains in production. 

 

Higher economic growth means an increase in income, inspiring consumers to spend more eventually leading to a higher material quality of life or standard of living. 

From the economist point of view, growth is commonly modeled as a function of physical capital, human capital, labor force, and technology. This means that to achieve economic growth the quantity and quality of the working-age population, the tools that they have to work with, and the recipes that they have available to combine labor, capital, and raw materials should be increased. 

 

Now, having understood what economic growth is, we should now look at the contributors in brief:

 

  1. Physical capital- The category of physical capital includes tangible assets from the plant (workplace), equipment, and tools used by firms, to even roads (infrastructure). Physical capital can contribute to growth in mainly two ways- (i) increase in the quantity of physical capital i.e. increasing the number of operating tools and (ii) increasing the quality i.e. investing in high-end machines. In the end, greater physical capital implies more output. 

 

  1. Human Capital- This falls under the intangible assets category. Human capital means the skill of the population or the workforce. As with all intangible assets, human capital too can not be measured or can not be assigned with a fixed value. However, the one way to major human capital is to look at the average levels of education in an economy. So, to deepen the human capital, the workers should be trained and made skillful. This increases efficiency and can further result in growth. 

 

  1. Technology- We are living in the 21st century, so, the importance of technology can not be ignored. One thing that must be clear is that technology here will not just mean smartphones, computers, or any electronic devices. Technology is a combination of invention and innovation. So, the development of HYV seeds was a technological advancement in the agriculture sector. Technology includes new ways of organizing work, like the invention of the assembly line, new methods for ensuring a better quality of output in factories, and innovative institutions that facilitate the process of converting inputs into output. So, any type of advancement leads to the betterment and increases productivity. 

 

“Technological innovation is indeed important to economic growth and the enhancement of human possibilities.”

- Leon Kass, American Physician

 

  1. Labor force- Today, we may see machines around us, performing most of the tasks but there are areas which require humans. In economics, the term used is ‘labor force’. To serve a larger population, countries require a larger labor force. In a country like India, where the unorganized sector has a significant contribution to economic growth, a greater labor force becomes an important factor. Human capital can be generated only if there are humans. So, the labor force plays a significant role in economic growth.

 

So, these were the most important contributors to economic growth. There are others but they all somehow fall under these four key drivers of any economy. Moving further in the blog, we should now look at the recoveries in different areas that will cut the negative growth recorded in the first quarter.

 

Referred Blog: COVID-19 impact on Financial Markets 

 

 

What were the worries?

 

Indian economy was opened after being entirely shut for two months. However, since the spread of the coronavirus is still a threat, activities are not being operated at full-fledge. The worries about the recovery phase were genuine because the path to recovery seemed dull. There were suggestions on how India can overcome this economic crisis. India’s GDP numbers are fuelled by four factors- demand from private individuals, demand generated by private sector businesses, third is the demand from the government, and the last is the net demand on GDP after subtracting imports from the exports. 

 

The first two were not supposed to contribute to the recovery unless there was an intervention from the third, the government. Individuals and private companies were already running out of capital to spend so the government had to provide them the same. The central government came up with stimulus packages to aid different sectors and it is planning to come up with more such packages. 

 

“No one is saying that this is the end of the stimulus or that we have exhausted all our options. If any sector requires help at any point in time, we will intervene. We are in consultations with various business groups, CII, Ficci, and various MSME groups and we have been getting various suggestions. We will come out with measures. As we have done in the last seven months, we will intervene at the right time and we will ensure that we will do everything possible and in the best interests of everyone,”

- Ajay Bhushan Pandey, Revenue Secretary, India

 

 

How is India recovering

 

The month of November has brought some good news with it. Indian economy seems to be recovering from the major blow in the first quarter and it is healing at a faster rate than it was anticipated. Some top news related to economic growth came in the first week of November. 


The image shows the key points that reflect the recovery in the Indian economy.

Key points that reflect the recovery


 

  • On 1 November, data on GST collection was released by the finance ministry. GST collection in the month of October stood over 1.05 lakh crore. It was the first time since February that GST collection crossed the 1 lakh crore mark. The total number of GSTR-3B returns filed till October 31, 2020, is 80 lakh. The number is important because the revenue collected in October was 10 percent higher than the 95,379 crore revenue collected in the same month last year. 

 

  • A monthly survey by IHS Markit revealed data about India’s manufacturing Purchasing Manager Index (PMI). India’s manufacturing sector activity improved for the third straight month in October with companies raising output to the greatest extent in 13 years amid robust sales growth. India Manufacturing Purchasing Managers’ Index (PMI) rose from 56.8 in September to 58.9 in October. In April, the index had slipped into contraction. In PMI terminology, a number above 50 is termed as expansion while anything below 50 denotes contraction. 


 

“Levels of new orders and output at Indian manufacturers continued to recover from the COVID-19 induced contractions seen earlier in the year, with the PMI results for October highlighting historically-sharp monthly rates of expansion,”

- Pollyanna De Lima, Economics Associate Director, IHS Markit.

 

  • The demand for cars and two-wheelers saw a rise in the second quarter. On October 28, Maruti Suzuki announced that during the quarter ended on September 30, the company registered net sales of INR 176,893 million, higher by 9.7% compared to the same period previous year. On October 29, TVS Motor announced the quarter that ended on September 30, 2020. It reported a revenue of INR 46.2 billion as against INR 43.5 billion in the second quarter of 2019-20 registering a net growth of 6%. Hero MotoCorp announced that during the second quarter that ended on September 30, 2020, its revenue from operations stood at INR 93.7 billion up by 23.7% against INR 75.7 billion in Q2 FY 2020-21. However, analysts are worried because the spurt in demand for vehicles may be due to the festive season that will subside by the end of December.  

 

  • A surge in home sales was also recorded in the second quarter. Knight Frank India reported that during the July to September period (Q2), the number of home sales across eight major cities in India jumped by 2.5 times to 33,403 units compared to 9,632 in the previous quarter. It also reported a 4.5 times surge in new residential launches from 5,584 units to 31,106 units. However, the weighted average prices saw a year-on-year decline of three to seven percent.

 

Also read: Digital Currency and Cryptocurrency: Types and Benefits

 

 

Conclusion 

 

India was the most severely hit nation, economically, due to the outbreak of the disease. A contraction of 23.9% is threatening to a developing economy. It was the worst performance in four decades. The Gross Domestic Product (GDP) numbers are predicted to decline for the FY 2020-21. 

 

Fitch has projected a contraction of 10.5% for this fiscal. The International Monetary Fund (IMF) has projected the Indian economy to grow at -10.3% in 2020. The 2020 projection for India is a downgrade of -5.8 percentage points from the IMF’s June projection for the country. “Revisions to the forecast are particularly large for India, where GDP contracted much more severely than expected in the second quarter,” the report said.


 

The image shows IMF projections on the economic growth of different countries.

IMF projections on the economic growth


However, the situation now seems to be improving. India is expected to rebound in 2021 with 8.8% growth. Economic growth can be achieved by investing in the right areas that have been mentioned in the blog.

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