The Indian Economy: Post-Pandemic Recovery and Future Prospects

Post-Pandemic Recovery and Future Prospects

India’s NDA administration has set a goal of becoming a $5 trillion economy by 2025. To meet this goal, the Indian economy would need to grow at a 9% CAGR; however, given the impact of Covid-19-related lockdowns on the economy, this appears to be challenging. However, there are hints that the economic depression may have reached a nadir, and international institutional investors have already begun to gamble on India’s economic prospects.

In Q1 2020, the Indian economy shrank by 23.9 percent year on year, the worst quarterly contraction ever. In the first quarter of 2020, industrial gross value added declined by 22.8 percent. The statewide lockdown has had a significant impact on almost all sectors, except agriculture, forestry, and fisheries. The manufacturing and construction industries shrank by 39.3% and 50.3 percent, respectively, while the overall services sector, India’s economic engine, shrank by 20.6 percent.

However, there are signs that the worst may be behind us. Manufacturing and industrial operations are progressively returning as the economy is unlocked, and the lockdown-induced pent-up demand is also assisting the economic recovery. The PMI for India improved from 27.4 in April to 58 in October 2020.

The Indian economy has started to recover from the pandemic-induced slowdown on the back of various government initiatives and is expected to carry this momentum into the short-term timeframe.

As the economy began to tank, the government acted quickly to enact the ‘Atmanirbhar Bharat Abhiyan,’ a stimulus plan worth around Rs. 20 trillion (US$ 270 billion) (10 percent of India’s GDP) to revive the economy. It also took new steps to strengthen infrastructure, laws, and job prospects, all of which are expected to contribute to long-term economic recovery and rebuilding.

To ensure India’s economic viability, healthcare must remain a major concern. The initiative seeks to reach 500 million people, particularly the poorest of the poor (40 percent of Indians), and give annual coverage of around Rs. 500,000 (US$ 6750) per family.

The government announced the ‘Make in India’ initiative in 2014 to encourage multinational companies to choose India as their manufacturing hub and to boost the economy through investments in manufacturing and services. The goal of the plan was to boost the manufacturing sector’s contribution to GDP from 16-17 percent to 25 percent by 2025.

With many foreign corporations wanting to transfer their production base away from China as trade tensions between the two countries worsen, India is fighting for a large portion of the supply chain shift. The government announced incentives for specialist electronics makers in March 2020, making them eligible for payments ranging from 4-6 percent of incremental sales over the next five years.

As a result, approximately a half-dozen businesses, including Samsung, Foxconn, and Wistron Corp., have committed to investing $1.5 billion in the country to build mobile phone manufacturing. The government has authorized an Rs. 2 trillion (US$ 27 billion) production linked incentive (PLI) scheme for ten industries, including electronics and technology, automobiles and auto components, pharmaceuticals medications, telecom, networking products, textile products, and food products.

The cornerstone of India’s economic growth is a strong and resilient banking and financial industry. To improve efficiency and accountability, the government is consolidating public sector banks, which are major players in the Indian market.

The Indian economy relies on a delicate balance of government involvement and free-market principles to function. The government has sought to make the Foreign Direct Investment (FDI) policy more investor-friendly and to eliminate policy bottlenecks that have stifled investment inflows into India. From April to August 2020, FDI into India surged by 16 percent year on year to US$ 27.1 billion.

In 2019-20, India’s FDI equity inflow was US$ 49.97 billion, with the service sector garnering the most FDI equity inflow at US$ 7.85 billion, followed by computer software and hardware at US$ 7.67 billion, telecommunications at US$ 4.44 billion, and commerce at US$ 4.57 billion.

Foreign Portfolio Investors/Foreign Institutional Investors (FPI/FII) have been one of the most important drivers of India’s financial markets, who invested Rs. 12.9 trillion (US$ 174.31 billion) in India between 2020 and 2021 (as of September 11, 2020), at a time when most Asian markets are experiencing net outflows. This indicates that investors are optimistic about India’s long-term prospects.

In the future, the government will play a critical role in developing manufacturing and export-friendly laws to help India’s private sector advance its agenda of job creation and economic growth. India is predicted to become a major export and outsourcing hub, with a vital role in many industries’ supply chains.

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