Page 375 - ES 2020-21_Volume-1-2 [28-01-21]

2 Economic Survey 2020-21 Volume 2

demand, especially that for non-essential items, reflects precautionary motives to save, which
inevitably remains high when overall uncertainty is high. Therefore, during the initial months of
the pandemic when uncertainty was high and lockdowns imposed economic restrictions, India
did not waste precious fiscal resources in trying to pump up discretionary consumption. Instead,
the policy focused on ensuring that all essentials were taken care of, which included direct
benefit transfers to the vulnerable sections and the world’s largest food subsidy programme
targeting 80.96 crore beneficiaries. Government of India also launched Emergency Credit Line
Guarantee Scheme to provide much needed relief to stressed sectors by helping entities sustain
employment and meet liabilities.

During the unlock phase, when uncertainty declined and the precautionary motive to save
subsided, on the one hand, and economic mobility increased, on the other hand, India has ramped
up its fiscal spending. A favorable monetary policy ensured abundant liquidity and immediate
relief to debtors via temporary moratoria, while unclogging monetary policy transmission.
India’s demand-side policy, thus, underscores the idea that pressing on the accelerator while
the brakes are clamped only wastes scarce fuel.
India has been able to avoid the second wave while ably managing to flatten the epidemiological
curve, with its caseload peaking in mid-September. As shown in Chapter 1 of Volume I, the
initial stringent lockdown was critical to saving lives and the V-shaped economic recovery. The
continuous drop in daily cases and fatalities bespeak India’s escape from a Sisyphus fate of back-
and-forth policy responses, enabling continual unlocking of the economy. As anticipated, while the
lockdown resulted in a 23.9 per cent contraction in GDP in Q1, the recovery has been a V-shaped
one as seen in the 7.5 per cent decline in Q2 and the recovery across all key economic indicators.
Starting July, a resilient V-shaped recovery is underway, as demonstrated by the recovery in GDP
growth in Q2 after the sharp decline in Q1, a sustained resurgence in high frequency indicators
such as power demand, E-way bills, GST collection, steel consumption, etc. The reignited inter
and intra state movement and record-high monthly GST collections have marked the unlocking of
industrial and commercial activity. A sharp rise in commercial paper issuances, easing yields, and
sturdy credit growth to MSMEs portend revamped credit flows for enterprises to survive and grow.
Imports contracted more sharply than exports, with Forex reserves rising to cover 18 months of
imports. Inflation, mainly driven by food prices, remained above 6 per cent for much of the year;
the softening in December suggests easing of supply-side constraints.
India’s GDP is estimated to contract by 7.7 per cent in FY2020-21, composed of a sharp 15.7 per
cent decline in first half and a modest 0.1 per cent fall in the second half. Sector-wise, agriculture
has remained the silver lining while contact-based services, manufacturing, construction were
hit hardest, and have been recovering steadily. Government consumption and net exports have
cushioned the growth from diving further down.
The V-shaped economic recovery is supported by the initiation of a mega vaccination drive
with hopes of a robust recovery in the services sector. Together, prospects for robust growth in
consumption and investment have been rekindled with the estimated real GDP growth for FY
2021-22 at 11 per cent. India’s mature policy response to this “once-in-a-century” crisis thus
provides important lessons for democracies to avoid myopic policymaking and demonstrates the
significant benefits of focusing on long-term gains.

1.1 The year 2020 witnessed unrivalled turmoil with the novel COVID-19 virus and the
resultant pandemic emerging as the biggest threat to economic growth in a century. The World
Health Organization (WHO) declared COVID-19 a ‘Public Health Emergency of International
Concern’ (PHEIC) on 30th January, 2020 and advised that all countries should be prepared
for containment, including active surveillance, early detection, isolation and case management,