3 reasons why Indian economy seems to be on the rebound

·5 min read

As the world got hit by harsh lockdowns and significant human cost after the onset of the COVID-19 pandemic last year, there was a debate on which English language alphabet will the economic recovery look like.

The Indian economy was bouncing back smartly in the last two quarters of the financial year and it looked like settling on the letter ‘V’ after prognostications of dalliances with ‘K’, ‘L’, ‘U’ and even ‘W’.

But then the second wave of the pandemic starting in late February has brought the country to a halt yet again. Just as various investment banks and multilateral agencies were talking about a double-digit real gross domestic product (GDP) growth for financial year 2021-22, the ferocity of the second wave changed everything.

The month of April 2021 will be remembered as one of the lowest points in Indian history, as the second wave of the pandemic led by a rapacious mutant ravaged the country.

The healthcare infrastructure lagged the upsurge of the caseload by two to three weeks in most states, leading to unforgivable misery. While it will be very difficult to heal the micro-impact of the pandemic on individuals and families, a robust economic bounce-back is critical to the macro response. 

The month of May has brought three encouraging pieces of news on the economic front.

Firstly, Indian exports in April 2021 touched $30 billion for a second successive month in a row. Exports had hit their highest-ever level of $34 billion earlier in March. This is significant, because Indian exports have struggled to cross the $30-billion monthly threshold for time immemorial.

There have been very few $30-billion export months for India and suddenly in the middle of the pandemic, we have got two in a row.

The best part about these two monthly sprints has been the fact that exports from sectors like pharmaceuticals, electronic equipment, machinery and engineering goods have done well, in addition to the traditional export areas like textiles, handicrafts, leather and chemicals.

Will Indian exports cross the $350-billion annual mark and perhaps nudge towards $400 billion? There is a long way to go, but the fact that there has been a broad-based sectoral improvement is a good sign.

Secondly, India received $83 billion in global remittances in 2020, remaining at the top of the list of remittance destination countries. When the first wave of the pandemic had struck, the World Bank had predicted a sharp drop of foreign exchange flows into India, pegging the potential downturn at 20%. As 2020 came to an end, the World Bank itself has estimated the remittances to be at $83 billion, a very small drop from 2019.

This inflow was important at two levels. First, it appears that despite a gloomy global economy, Indians and, more broadly, the people of Indian origin were largely able to hold on to their employment well enough to take care of their business and family interests in India. 

Second, there was no curtailment by these people of Indian origin in their investment plans in India. Remittances from foreign countries are often used for asset purchases and financial investments in India, apart from meeting extant spending needs.

Despite a very sharp downtick in the economic activity in India, these investments seem to have largely been preserved.

Thirdly, India also attracted the highest ever foreign direct investment (FDI) in the financial year 2020-21. FDI equity inflows into India grew from $49 billion in the last financial year to $59 billion in 2020-21.

Total FDI, inclusive of reinvested earnings and other capital, grew 10% to $81 billion from $74 billion in 2019-20. These FDI inflows also signify investor confidence in the Indian economy for the long term.

The FDI came in a wide range of sectors like computer hardware and software, construction, infrastructure, pharmaceuticals and services. This is a positive sign as industries associated in manufacturing and design activities saw fresh investments, not just the traditional areas in the computing world.

The FDI flows also indicated that India will remain a destination for overseas firms to grow as a manufacturing location. This aspect assumes even more focus than ever in a world marred by supply chain volatility and uncertainty.

Even if China remains the undisputed global leader in manufacturing, many firms will employ a China-plus-one strategy or diversify new production lines elsewhere. In either scenario, India has a chance to gain and it appears that at least in some sectors, this process seems to be afoot.

With India aiming to attract new manufacturers in a host of sectors through production linked incentives (PLI), the trifecta of local market attractiveness, near-term investment boosting measures and the need to look beyond China for exports may finally be taking shape.

A strong economic revival remains sine qua non for the Indian government to emerge stronger out of the pandemic.

Expanding vaccination coverage may significantly slow down the pandemic but that stage is more than 8-10 months away for India. Meanwhile, the country has to co-exist with the virus and a critical ingredient of success will be return to economic normalcy.

The road ahead to recovery is peppered with complexity and ambiguity. The new financial year seems to have started on the right note. Fiscal policy interventions, new trade pacts and a rapid deployment of the planned PLI program will remain key to success.

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