2020, the year that was: Coronavirus shadow may not go anytime soon

Achieving a vaccine roll-out on a scale that social-distancing norms can be dispensed with can't be expected for most of 2021

At the beginning of 2020, nobody could have predicted that it would turn out to be one of the worst years for the Indian economy in memory. Quarterly growth in gross domestic product (GDP) had begun to slow, but even so there was some optimism about the course of the year.

But, although very few knew of it, the novel coronavirus was already raging through the city of Wuhan in the closing days of December 2019. The lockdowns and social distancing that followed the spread of the coronavirus have impacted growth everywhere, but in no G-20 country as much as in India. GDP shrank by about 24 per cent year-on-year in the second quarter of the calendar year, the one in which lockdown restrictions were the most intrusive.

The bounce-back since then has been modest. The Reserve Bank of India (RBI) expects the economy to grow in the last two quarters of the financial year 2020-21 – but barely. Various estimates of growth over the financial year range from a contraction of 7.5 per cent to about 10 per cent.

The year 2021 will be as much under the shadow of the coronavirus as was 2020. Recovery may have begun, and vaccines may be in the pipeline – but achieving a vaccine roll-out on a sufficient scale that social-distancing norms can be dispensed with cannot be expected for most of 2021. The Economist magazine describes recovery in the time of Covid-19 as “the 90-per-cent economy”, meaning that output will always remain depressed below potential.

However, during the course of the year, the fact of the low base provided by the cataclysmic economic prints of 2020 means that 2021 will, superficially, appear to be a year of high growth. Nomura expects India to be the fastest growing economy in Asia during the coming year – a reflection more of the fact that it was among the worst performers in 2020 than of the strength of the recovery.

The Indian growth engine was sputtering even before the pandemic hit, reflected in the low quarterly growth numbers in 2019-20. But 2020 also demonstrated some notable reforms, including to labour codes and the agricultural sector. The question for 2021 is whether these reforms will be carried forward, or whether they were a one-time burst of activity brought on by the pandemic. The ruling party faces some major electoral tests in 2021, including elections in West Bengal; whether it will stay the course on reform under these conditions remains to be seen. 

Indian GDP expansion is slower than in its past high-growth phases because there is insufficient private investment in the economy. This has been driven by overcapacity and persistent government borrowing. The numbers for the next year’s Union Budget, therefore, will take on extra prominence.

While the finance ministry has so far been careful to not indulge in the sort of borrowing extravaganza that has characterised the Western response to the pandemic, the Union finance minister has stated that the government will now spend without worrying overly about the fiscal deficit. Restoring demand might be considered a priority, but it is also true that investment will not recover in the presence of greatly elevated government borrowing. The most important number of 2021 may indeed be the government’s total planned market borrowings for the year.

One consequence of the enormous liquidity being pumped out into the global economy has been buoyant stock markets worldwide. In August, RBI Governor Shaktikanta Das even said outright that the stock market was “disconnected from the real economy”. Globally, retail, part-time and amateur investors also helped underpin the rise in share prices, as did the effect of the pandemic on bond yields. These factors are not likely to go anywhere anytime soon.

On the other hand, some analysts believe the markets may have priced in too soon a recovery in growth, and the significant tail risk of another major spurt in Covid-19 cases is being ignored. While the price-earnings ratio is elevated in the Indian markets, bullish analysts also point out that the forward P/E is not too far away from the five-year average.

Yet in the real economy, the scars of the pandemic will continue to define 2021. It is still hard to tell the effect on unemployment, migrant workers, poverty, and the informal sector of the lockdown and of the pandemic more generally. SMEs have already been scarred by demonetisation and the goods and services tax roll-out. As for poverty more broadly, recent reports quoting data from the large-scale National Family Health Survey have caused grave disquiet in that it shows some progress against malnutrition has been reversed in recent years. This is in spite of the major efforts made by the government not only on expanding access to welfare but also in its sanitation and clean drinking water programmes. In 2021, therefore, questions will be asked about both inclusion and growth.