Friday, February 26, 2021

Indian Economy on the Path of Expansion

The blanket lockdown of the whole India by the Government of India in response to the COVID19 pandemic has given a never seen before shock to the Indian economy. However, different economic indicators started indicating the revival of economic activities post gradual relaxations granted in the lockdown since May 2020 by different states. However for more than two quarters, things remained very difficult for the economy. Considering the fall in the aggregated demand in the economy, the government was forced to suspend the Insolvency and Bankruptcy Code (IBC) so that individuals and businesses could get enough time and space to adjust in the post pandemic recession and the events of defaults could be avoided. This single decision has been very helpful for the whole banking sector. Although it has adversely impacted the revenues of the banking sector but has been very helpful in dealing with the non-performing assets (NPA).

Different surveys by different agencies along with the RBI are clearly indicating that the economy is back on the path of recovery and expansion. High frequency indicators tracked by Nomura and 8 indicators tracked by Bloomberg News indicate that the economic activities are almost back to pre-pandemic levels. Some indicators clearly indicate that the Indian economy is on the path of the expansion now.

The high frequency indicators tracked by Nomura such as mobility, power consumption and labour participation index along with the index for the economic activities suggest that the Indian economy is on the fast track of recovery with economic activities only about 1.9% below the pre-COVID19 levels (Thamos, 2021). These high frequency economic indicators have been improving continuously for more than six months barring a few exceptions such as mobility and labour participation indicators. The PMI as well as the IIP have also been showing upward movement. However it will take longer than expected for the mobility and labour participation indicators to achieve the pre-pandemic levels. This will completely depend on the confidence in the economy. 

Out of 8 indicators tracked by Bloomberg News, 5 indicators have been steady, 2 indicators posted growth and 1 indicator deteriorated in the month of January in comparison to the previous period (Nag, 2021). According to the survey the indices for the consumer activity and industrial activity in the economy have increased by 11.4% and 1% respectively. In the third quarter of the current fiscal year, the gross domestic product (GDP) has expanded by 0.5% in comparison to the last year. As per RBI data, the credit growth in the economy during the month of December 2020 was more than 6% after six months (RBI, 2021a). Credit to all the sectors registered growth apart from the credit to industry and personal loan (RBI, 2021b). The Markit India Purchasing Managers’ Composite Index (PMI) has risen to 52.8. PMI above 50 indicates expansion in the economic activities. This clearly indicates that the Indian economy has exited the recessionary phase and transitioned to the growth phase.

Mobility indicators as per Nomura are still 10-15% below the pre-pandemic levels but with the lifting of lockdown restrictions to progressively minimal level, the mobility indicators will improve over time to achieve the pre-pandemic levels however would be dependent on the risks associated with different strains of novel coronavirus found in India. Considering the experiences in the Eastern Europe, risks are still high and will keep affecting the overall sentiments in the economy. However as per Bloomberg, there has been improvement in the indices for consumer activities as well as the industrial activities. It is the most significant improvement for the economy as it will result in increased consumer confidence leading to a positive sentiment and environment in the economy as whole. If the consumer confidence continues to improve for a few more months, it is expected that the private investment in the economy will pick up which will result in more employment opportunities. This will further improve the overall confidence in the economy.

The continued recovery in the Indian economy since May 2020 and possible expansion in third quarter of the fiscal year suggests that Atma Nirbhar Bharat Package as well as the RBI’s accommodative monetary policy stance have been successful in reviving the demand in the economy as well as churning the supply chain. The revival of economic activities back to the pre-pandemic levels is the most important signal of recovery and growth in the economy than the GDP growth rates (due to base effect). But it must be kept in mind that one year back (during pre-COVID era), the situations at the economic front were not very upbeat. Rather Indian economy was struggling with a plethora of problems such as slowdown in the economy, mess in the banking and financial services sector, stabilization of the GST regime and increasing fiscal deficit. So there is light at the end of the tunnel but there is a need for better policy response as there persists the risk of elevated core inflation in the economy.


  • Nag, A. (2021, February 25). India’s Recession Exit Gains Momentum on Services, Manufacturing. Retrieved from Bloomberg: 
  • RBI. (2021a, January 21). State of the Economy. Retrieved from RBI: 
  • RBI. (2021b, January 29). Sectoral Deployment of Bank Credit – December 2020. Retrieved from RBI: 
  • Thamos, T. (2021, FebruARY 16). ‘Economic activity close to pre-covid levels’. Retrieved from Mint:
- Dr. Rajeev Kumar Upadhyay
Download this article in pdf: Indian Economy on the Path of Expansion

No comments:

Post a Comment