After experiencing one of the world’s tightest lockdowns and recording the deepest GDP contraction among G20 economies in the second quarter of 2020, the Indian economy is recovering, albeit with some hesitancy. While agriculture has benefited from favourable weather conditions, manufacturing and services are penalised by remaining containment measures and uncertainty. Significant social hardship persists and the fall in the unemployment rate must be seen against the background of declining labour force participation.
Supply chain disruptions have pushed inflation above the target range of the central bank. GDP is set to shrink by 10% in fiscal year (FY) 2020-21, with household consumption sluggish and investment largely unresponsive to easier monetary conditions. Despite a projected rebound of around 8% and 5% in FY 2021-22 and FY 2022-23, respectively, due to base effects and returning confidence, the GDP loss will be substantial.
COVID-19 is exacerbating pre-existing vulnerabilities related to poverty, high informality, environmental degradation and lack of employment opportunities. To increase resilience, the government has responded with three stimulus packages, but additional fiscal measures are needed to mitigate the damage, together with a credible medium-term consolidation plan. The reform effort has continued, notably in the areas of agriculture and employment. However, poor performance of public banks, a pervasive regulatory burden, and understaffing of the judiciary hinder the proper allocation of resources needed for inclusive growth.
Income has increased fast in recent years and millions of Indians have been lifted out of poverty. India has also become a key player in the global economy. The implementation of an ambitious set of reforms has supported economic activity and helped put a break on inflation and on both fiscal and current account deficits.