COVID Decimation: Factors that shaped India's Economy in 2021

The rapid rise in COVID-19 numbers, combined with reports of vaccine shortages, could exacerbate India's situation, especially for India's poorer citizens.

The previous fiscal year (2020-21) began with the country being put under one of the strictest (and most ill-planned) lockdowns in history when the pandemic hit. Few would have predicted that April 2021 would be worse than April 2020 in terms of COVID-19 cases at the time. Indeed, preliminary government figures from last year indicated that no new COVID cases would be filed after May 16, 2020.

COVID instances, on the other hand, have shown a "V-shaped" recovery. In the last count, India had 1.75 times the number of chronic cases in September 2020.

Worse, this new surge is occurring despite a year of knowledge about the critical need to adopt COVID-appropriate behaviour and the availability of numerous vaccines. The government's mismanagement of the vaccination campaign resulted in various locations declaring shortages, coupled with the people's willful disregard for social distancing norms, leaves no one safe.

There have been five main factors to watch in 2021 that have shaped the Indian economy.

  1. The 2020-21 Saga: The Pandemic

At the start of the year, antibodies were found in a significant portion of the population, resulting in a decrease in the number of vulnerable people, thereby slowing the pandemic. However, the situation worsened once again. Vaccine manufacturing began on a wide scale globally, and many people in India were able to receive vaccinations. It helped in reducing the number of people getting infected. Every day, more people became more at ease with the risks, and their economic activity grew.

  1. Demand from the public/consumer

Market demand plummeted during the lockdown period. Part of it was purely mechanical: there would be no sales if people could not go to stores. Transportation and hospitality businesses were among the services that suffered a setback. Consumer demand fell after the lockdown because, first, people's incomes had shrunk, and second, even when incomes began to rise, there was concern over whether this would be a gradual increase or whether the economy would crash again. Another concern was that the nation would revert to lockdown if the death toll rose and hospitals continued to be overcrowded. As a result, market demand remained uncertain.

These concerns had subsided as the number of deaths decreased and the health system's ability to handle COVID patients improved. As a result, there has been a decrease in economic uncertainty and a rise in consumer demand. However, the second wave made us stand way behind than we initially started. However, there are concerns that lower employment levels would result in lower wages, which would keep demand depressed even though it increased due to pent-up interests.

  1. Investment

Private investment is the most significant determinant of India's economic health. Higher levels of uncertainty lowered investment demand. Businesses will have a more stable market to invest in as the economy's volatility decreases. However, the recession has harmed the balance sheets of many businesses, especially small businesses. Since companies were unable to repay loans, the RBI granted a moratorium to companies with bank loans for the duration of the lockdown. While the moratorium was beneficial, reduced demand, fixed costs, and the need to repay existing loans pressured businesses.

Financial and non-financial balance sheets would have a direct impact on the degree of investment revival. The old agenda of firm resolution still holds sway. The Insolvency and Bankruptcy Code must be reinstated, and the FRDI Bill must be revisited to provide a resolution process for financial companies.

  1. Fiscal deficit

Because of the economic downturn, the government's tax revenue has plummeted. For 2020-21, the fiscal deficit is forecast to be in the range of 6.2% to 6.5%.

The size of the deficit would determine the government's ability to spend more. If the debt rises above acceptable levels, the government's investment ability will be hampered again next year.

  1. Inflation

Inflation has been that in India over the last few months. Since demand was suppressed, everybody assumed supply-side issues caused by the lockdown caused it. However, even though supply-side issues and transportation bottlenecks have been resolved, inflation remains higher than the objective and even exceeds RBI's target band. Higher inflation, especially in the food sector, affects not only the poor's purchasing power but also creates more uncertainty for businesses.

The RBI's hard-won reputation in the post-2015 era — of focusing on inflation and having the resources to combat it — is now being called into question. The government and the RBI must maintain their commitment to the inflation targeting mechanism that has enabled India's macroeconomic stability.

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