When there was negative growth in every sector in the pandemic, the agriculture sector alone was such that it had a positive growth rate.
Indian Economy 2020: In the history of the world, the year 2020 will be remembered as the worst time of ‘corona epidemic’. The COVID 19 epidemic severely affected the economies of the world. The Indian economy also recorded a record negative growth. The first quarter of June, ie, in the financial year 2020-21, the growth rate was negative 24 per cent. COVID 19 lockdown and all the economic activity that came to a standstill were the main reasons for this. There were many such changes in the midst of all these, whose positive effect will be seen in the coming time. In this epidemic, when there was negative growth in every sector, agriculture was the only sector which had positive growth. That is, the agricultural sector proved to be the foundation of the Indian economy in a way.
However, this epidemic not only changed the economic outlook on a large scale, but also changed the priorities of the government and the spending and saving habits of common people. The strong side of the government was that the government continued its efforts to maintain spending and economic reform, not caring much about the fiscal deficit. At present, it cannot be said exactly how successful the government was in putting its reform measures on the ground. We tried to understand these important issues from HDFC Bank’s Chief Economist Abheek Barua, what changed in the Indian economy during the COVID 19 epidemic, what changed from consumer to small business.
1. Agriculture and rural economy showed strength
Baruah explains, during the COVID 19 pandemic, the power of agriculture and rural economy was understood and there was more dependence on them. The impact of the epidemic was comparatively less on the rural economy. The areas connected with it also performed better than others. In the first half of FY 2021, agricultural growth grew at a rate of 3.4 per cent and in the first quarter it was the only sector which recorded positive growth. Baruah estimates that agriculture’s share of GDP in FY 2021 could reach 16 per cent, compared to 14.6 per cent in FY 2020. That is, the epidemic brought agriculture and its related sector as a huge opportunity.
2. Consumers have changed spending habits
Abhik Barua says, the epidemic saw a wide change in the behavior of consumers. Guidelines for living at home, social distance and work from home have changed the way consumers behave. For example, due to social distancing, the emphasis of consumers on buying personal vehicles increased, which is giving a boost to the auto sector. Secondly, all the services that were connected to each other were severely affected, whereas ecommerce and digital services saw strong demand.
According to Barua, shopping in ‘online’ mode can be gauged by the fact that UPI payments have increased continuously since May 2020. Apart from eShopping of goods, there was a good demand for online services such as online education, consultancy or health services. In addition, electronic items such as laptops, commuters, smartphones and healthy food products were the most hit items in Corona. It is likely that this behavior of consumers may continue even after the epidemic.
3. Pandemic teaches ‘saving’ habit
Due to COVID 19 epidemic, a change has been observed in the habits of household savings. In fact, the uncertainty created due to the impact of the epidemic on the economic growth rate has greatly encouraged the savings habits in 2020. Due to this, this year saw an increase in deposits of banks. According to Reserve Bank estimates, household financial savings rose to 21.4 percent of GDP in the first quarter of FY 2021, up from 10 percent in the fourth quarter of FY 2020. Most of the trend was seen towards mutual funds and insurance. Due to higher returns in the stock, net household investment in mutual funds increased to 1.7 per cent of mutual GDP in the first quarter of FY 2021.
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4. Impact on MSMEs and Services
The most negative impact of the corona epidemic was on small, medium businesses ie MSME sector and connectivity services. It is gradually improving with the help of schemes like the Emergency Credit Line Guarantee Scheme ie ECGL. Travel, tourism, transport, hotels and restaurant industries were severely affected in the service sector due to the health disaster. With the availability of COVID 19 vaccine, recovery in these sectors is expected. However, the hope of immediate relief seems slim.
5. RBI supports monetary policies
In the era of Corona epidemic, when the economy has been in decline, many important policy decisions were made by RBI. The Reserve Bank of India (RBI) did not make any change in policy rates from May 2020 to boost the growth rate, while retail inflation remains above 6 percent. Apart from this, the RBI ensured adequate liquidity in the system and took necessary measures to keep down the cost of borrowing. Therefore, despite a comprehensive borrowing scheme from the government this year, 10 years of trade remains at a low level.
Focus on increasing spending for the economy
The economy is in a phase of negative growth due to the Corona epidemic. Despite this, the government is in a mood to increase government spending to boost growth. Finance Minister Nirmala Sitharaman had said in an interview recently that the government can increase spending to support the economy, even if it further increases the budget deficit. The government will not decide to reduce the incentive spending (relief package) in a hurry. Apart from this, it will be ensured that all government companies continue capital expenditure. There is a need to increase expenses in the situation like this at the moment and there is no need to be worried about fiscal deficit.
According to a report by SBI Research, the trend of government spending is shocking. This year, the government announced several reforms worth about Rs 24 lakh crore. This includes 20.97 lakh crores in April (which includes 8.01 lakh crores of RBI), 0.73 lakh crores in October and 2.65 lakh crores in November 2020. Its aim is to boost supply and demand. Most of these expenses are in the form of subsidies and transfers. This includes collateral free automatic loan, subordinated debt, equity infusion for 3.70 lakh crore MSMEs. Apart from this, declarations like Credit Guarantee Scheme for NBFCs, Kisan Credit Card Loans, Loans up to Rs 10,000 for Street Vendors, Pradhan Mantri Awas Yojana, Credit Linked Subsidy, 2% Interest Subvention in Shishu Mudra Loans were included.
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However, in the second quarter of FY 2021, government expenditure decreased to 3.62 lakh crore, from Rs 4.86 lakh crore in the first quarter. Looking at the data of the Control General of Accounts (CGA), there was a decline in both revenue and capital expenditure in the second quarter as compared to the first quarter of FY 2021. During the period under review, there was growth of (-) 19.5 per cent in revenue expenditure and (-) 12.1 per cent in capital expenditure. A good thing in this is that despite the decline in spending, there is an improvement in growth. There is room for further improvement in the fourth quarter.
Fiscal deficit expected to be 8% of GDP
According to the SBI Research report, the revenue collection of the government may be less than the budget estimate of 3.8 lakh crore rupees. At the same time, the government has spent more due to COVID, which has increased to 4.5 lakh crores. On the other hand, according to the latest trends regarding CGA spending, the government can reduce some of its budgetary expenditure, which is around 50 thousand to 80 thousand crore rupees. Considering all these things, it is estimated that the fiscal deficit in FY 2021 can be 7.8-8.0 percent of GDP or about 15.5-15.8 lakh crore.
GDP growth in previous quarters
Q1FY21: (-)23-9%
Q4FY20: 3.1%
Q2FY20: 4.5%
Q3FY20: 4.7%
Q1FY20: 5%
(Source: CSO)