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Economic Survey 2020-21

Economic Survey 2020-21 1

The year 2020 threw at the world a bedlam of novel COVID-19 virus, threatening all that was taken for granted –mobility, safety, and a normal life itself. This, in turn, posed the most formidable economic challenge to India and to the world in a century. Bereft of a cure or a vaccine, public health policy became central to tackling this all-pervasive crisis. The imperative of flattening the disease curve was entwined with the livelihood cost of an imminent recession, whichemanatedfrom the restrictions ineconomic activities from the lockdownrequired to contain the pandemic. This inherent trade-off led to the policy dilemma of “lives versus livelihoods”.

Governments and central banks across the world deployed a range of policy tools to support their economies such as lowering key policy rates, quantitative easing measures, loan guarantees, cash transfers and fiscal stimulus measures. India recognised the disruptive impact of the pandemic and charted its own unique path amidst dismal projections by several international institutions of the spread in the country given its huge population, high population density and an overburdened health infrastructure.

As shown in Chapter 1 of Volume 1, the intense lockdown implemented at the start of the pandemic

– when India had only a 100 confirmed cases – characterized India’s unique response in several ways. First, the policy response was driven by the findings from both epidemiological and economic research. Specifically, faced with enormous uncertainty about the potential spread of the pandemic, the policy implemented the Nobel-prize winning research in Hansen and Sargent (2001) that recommends a policy focussed on minimising losses in a worst case scenario. Faced with an unprecedented pandemic, loss of scores of human lives captured this worst case scenario. Moreover, epidemiological research highlighted the importance of an initial, stringent lockdown especially in a country where high population density posed difficulties with respect to social distancing. Therefore, India’s policy humane response that focused on saving human lives, recognised that the short-term pain of an initial, stringent lockdown would lead to long- term gains both in the lives saved and in the pace of the economic recovery. The scores of lives that have been saved and the V-shaped economic recovery that is being witnessed – due to the causal impact of the initial lockdown – bear testimony to India’s boldness in taking short-term pain for long-term gain.

Second, India recognised that the pandemic impacts both supply and demand in the economy. The slew of reforms – again unique amidst all major economies – were implemented to ensure that the supply-side disruptions, which were inevitable during the lockdown, are minimised in the medium to long-run. The demand side policy reflected the understanding that aggregate

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 fl 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 fl for enterprises to survive and grow. Imports contracted more sharply than exports, with Forex reserves rising to cover 18 months of imports. Infl      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,

contact tracing, and prevention of onward spread. The exponential rise in the number of daily cases compelled the WHO to title this outbreak a pandemic on 11th March, 2020 – within a period of three months of its emergence. The contagion is still spreading with over 10 crore confirmed cases around the globe and over 2 lakh deaths. The ensuing shock has been extremely unconventional in terms of its size and uncertainty, with its impact dependent on unpredictable factors like intensity of lockdowns, extent of supply chain and financial market disruptions alongside societal response to the associated public health measures. The pandemic has been unique in its wide-ranging effects on almost every section of the economy and the society.


Global Spread

1.2 Since its first outbreak in Wuhan, China, COVID-19 has infected all continents, including Antarctica (in December, 2020), and more than 220 countries. The health shock, though global, has transmitted through different trajectories across countries in terms of total infections, mortalities, and recoveries. In the initial stages of the pandemic, the Advanced Economies (AE) of North American and West European region were disproportionately impacted with more than 70 per cent of the total cases and total deaths (Figure 1). The pandemic quickly intensified in number of Emerging Market and Developing Economies (EMDEs) such as Brazil, India, Mexico, Russia and Turkey– that now constitute around 50 per cent of total cases and total deaths. In recent months, amidst a repeat wave, AEs—particularly the United States and several Euro area countries—have accounted for an increasing share of cases; in EMDEs, outbreaks in the Latin America and the Caribbean, and Europe and Central Asia regions have continued to grow. It is evident that AEs have been affected harder by the pandemic.

1.3 The spread of the pandemic has been in waves as is evident in Figure 2. AEs were experiencing their third waves, both in terms of cases and deaths, at the end of the year while EMDEs (excluding China and India) were facing their second waves. China experienced the first wave of cases in February, 2020 after which it has been able to control the spread. India experienced its first wave till September, 2020 after which it has been able to effectively manage the spread – avoiding the second wave as on date.

1.4 AEs witnessed higher confi cases and deaths on per capita basis too as compared to EMDEs (Figure 3). The third wave in AEs has proven to be more lethal with fatalities exceeding by 5.3 times compared to the second wave and surpassing the level during the fi    wave in December itself.

Figure 3: Per Capita COVID-19 Caseload across Countries

Source: Survey Calculations using data from WHO Note: Data is as on 31st December, 2020


  1. India imposed a stringent nation-wide lockdown during the initial phase of the pandemic in March-April, 2020, followed by gradual unlocking and phasing out of the containment measures. India crossed its peak in mid-September with 11.12 lakh active cases on 17th September, 2020 and 97,860 daily new cases on 16th September, 2020 (Figure 4 (a)). Subsequently, new cases have moved down to less than 16,000 cases per day in January, 2021 despite the festive season and onset of the winter season. The confi   cases in India have touched more than 1.06 crore, representing around 11 per cent of the world’s total case load. India’s share in new cases load globally has drastically come down from 31 per cent in September, 2020 to 4 per cent in December, 2020. The pace of spread has been controlled with doubling time of cases rising from 12 days in May, 2020 to 249 days in December, 2020 (Figure 4 (b)).
  1. The initial spread of pandemic was limited primarily to western and northern zones of the country, which contributed 42 and 22 per cent respectively (Figure 5 (a)). On the other hand, a sharp rise in share of Southern zone was witnessed since July, 2020 with the zone adding more than one-third of the new cases per month on an average. The eastern and central regions each constituted 10 per cent of the total cases respectively during the year. All zones, barring northern region, experienced a single wave of infection till December (Figure 5 (b)). The festive season during October and November led to a second wave of infections in the northern region. In per capita terms, the southern zone had a maximum caseload at 1226 cases per lakh followed by western zone at 1124 cases per lakh; the eastern region had the lowest caseload at 342 cases per lakh as on 31st December, 2020 (Figure 5 (c)).

Note: Data is as on 31st December, 2020; the Zones are defined as per the Zonal Councils

  1. The total death toll in India, as on 31st December, 2020, was 1.48 lakh with more than 50 per cent of the fatalities occurring in western and southern zones of the country. Throughout the pandemic, Maharashtra has been the worst affected state having highest incidence of deaths in India (Figure 6 (a)). All zones, except the northern zone, experienced a single wave in terms of deaths (Figure 6 (b)). The northern region witnessed three death waves, with the third wave proving to be the most lethal as deaths exceeded 1.7 times more than what it was during the fi   wave. In per capita terms, the western zone has been the worst performer with 27 deaths per lakh, followed by northern region at 13 deaths per lakh (Figure 6 (c)). Deaths per capita have been lower in the eastern and north-eastern zones at 6 and 4 deaths per lakh respectively.

The Zones are defined as per the Zonal Councils


1.8 As the first step towards timely identification, prompt isolation & treatment, testing was identified as an effective strategy to limit the spread of infection. Acharacteristic of the pandemic, which aggravated its virulence, was its probable transmission by asymptomatic people. Large- scale testing was, therefore, imperative for quick identification of cases, immediate isolation to prevent spread and timely treatment. It also helped in effective contact tracing and timely isolation of prospective cases. Testing policy has been continuously evolving since the beginning of the pandemic with countries rapidly gearing up the testing capacity to curb the pace of spread (Figure 7).

Note: “Open public testing” is aggressive testing; “Testing if symptoms” refers to testing anyone who shows COVID-19 symptoms; “Limited testing” is when an individual is showing symptoms and meets a laid down criterion like medical worker, overseas travel etc. “No policy” refers to having no testing policy in place.

  1. An analysis of tests per lakh and total cases per lakh shows that countries such as United Kingdom, Argentina, Germany, Colombia, Switzerland, Poland and Peru need to perform more tests as cases per lakh are on the higher side relative to tests conducted (Figure 8). US is an outlier as it has both high tests per lakh and high caseload per lakh as on 31st December, 2020. India lies below the global average of cases, despite being the second worst affected country in the world.

Figure 8: Total Tests vs Confirmed Cases per Lakh

Source: WHO

Note: Data is as on 31st December 2020

  1. India rapidly ramped up its capacity to rapidly scale-up tests. In January 2020, India had only one laboratory testing for COVID-19, at the National Institute of Virology, Pune. Today

there are more than 2300 laboratories across the country, performing molecular tests for its diagnosis – an unparalleled achievement in the history of the Indian health system. India has shown tremendous progress in conduct of daily tests with a dedicated emphasis on expansion of testing infrastructure (Figure 9). Keeping the focus on “Test, Track and Treat”, India has tested nearly 18.5 crore cumulative COVID-19 samples with cumulative test positivity rate at 5.6 per cent, as on 31st December, 2020.

  1. The unprecedented pace of transmission and lethality of COVID-19 triggered a global health crisis that has led to an enormous human toll of over 10 crore confi   cases and over 21 lakh fatalities. Given the unavailability of a potent cure and a preventive vaccine, it was imperative that the spread be contained by implementing various public health measures. However, this presented crucial policy dilemmas before governments across the globe.
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