The scars of 2020-2021
Fiscal year 2020-21, which ended on March 31, has been a time of unprecedented economic disruption due to the pandemic. The Indian economy is expected to contract by 8% in 2020-21, its largest-ever contraction on record. To be sure, growth rates have recovered — from a 24.4% contraction in the June 2020 quarter to a 0.4% growth in the December 2020 quarter. But the economic pain caused by the pandemic is lingering. Poverty levels and inequality are likely to have gone up. Labour force participation rates have gone down. The gender gap among workers has worsened. The employment intensive sectors have shown less growth compared to others. And there remains lack of clarity about the pandemic’s adverse impact on the tax base.
But even though the domestic economy suffered a big shock, the external environment remained benign in the past year. Oil prices crashed, which allowed the government to reap a tax windfall without stoking inflation. Since major economies increased their public borrowing and fiscal deficits, global finance did not penalise any country for what would have been seen as an unacceptable deviation in normal times. This favourable environment might start receding in 2021-22, as growth picks up in advanced countries and commodity prices start rising. External factors will be more of a constraint this year.
India is also, now, staring at a delayed, but strong, second wave of Covid-19 infections. The last fiscal year began with a complete lockdown, but a second national lockdown is not feasible. At the same time, rising infections will not just take a toll on human lives but also impact productivity and economy. Bringing down infections, through enhanced and aggressive vaccination, has to be top priority from both a public health and economic perspective. But India will also have to do much more to both boost growth — by ensuring that there is indeed public investment as promised in the budget, and creating a more enabling climate for private capital — and ensure equity, given that there is real concern that the next phase of growth will sharpen inequality and there is a dip in planned welfare expenditure. How India gets back its growth, while taking care of the marginalised, will be the big test of 2021-22.