The onset of the new year 2021 has brought with it two positive developments in India’s socio-economic space. The first is the emergency authorization of the Covid vaccine – Covishield – by Oxford University and the pharmaceutical company AstraZeneca. India enters this picture with the large scale manufacture of this critical vaccine at Serum Institute of India, the world’s largest supplier of vaccines by volume. Another important aspect is the fact that Serum is manufacturing Covishield at a price of $5 – $10 per dose as against a global availability at $35 per dose. This highlights India’s competitive advantage in a critical industry, especially against the backdrop of the global coronavirus onslaught. As such, several countries in Africa and the Middle East have expressed an interest in acquiring this vaccine from India. The Indian Prime Minister, Mr. Narendra Modi, has already initiated regional vaccine diplomacy by providing the vaccine to other South Asian countries and even to a distant ally Brazil.
The second positive news is that the benchmark Indian equity index Sensex is closing in on the 50,000 mark. This bull-run in equities is corporate India’s “thumbs-up” salute to the resurgent India growth story on the eve of Union Budget 2021. The optimism of the business and industry sub-segment of the Indian economy can be sustained in the coming few months. The notional / nominal wealth effect created by the stratospheric equity market will keep investors invested in the markets, while providing companies with adequate funds for capacity building / capital investments. Going forward, these private investments will infuse liquidity in the economy and promote employment opportunities. The consequent payment of salary checks will increase the aggregate demand metric, in turn stimulating the money multiplier and leading to the virtuous production – consumption cycle. Ultimately, if managed well, this can lift India’s GDP from its anaemic depths, supporting the Indian consumer despite the Covid induced recession in the economy. The subsequent revenue injection (by payment of taxes) in public space coffers can give the government more funds for initiating new growth policies. However, at the outset, the government will need to give tax and other incentives to incentivise companies to invest in capital assets.
The key drivers of the Indian economy are Agriculture, Manufacturing and Services. Beginning with Agriculture, the recently introduced Farm Bills are propounding the following –
1. Firstly, they give the farmers the freedom to sell their agri-produce outside the Agricultural Produce Market Committee (APMC) mandis.
2. Secondly, they seek to provide farmers the right to enter into arrangements with agribusiness firms, wholesalers, exporters and processors to sell their farm outputs at pre-agreed upon prices in the future.
3. Thirdly, they propose to remove certain agricultural commodities from the list of essential commodities, implying that their stock holding limits will be removed.
These laws are essentially in support of farmers – they seek to ensure more efficient price discovery, reduce marketing costs, divert vagaries of market functioning away from farmers and attract FDI and private investments into Indian agriculture. However, the laws are being hotly contested by farmers and other vested interests. It is now dependent on the government to convince farmers of the unequivocal benefits these laws seek to bring to the farming community.
The second driver of the Indian economy is Manufacturing. As far as capital investment is concerned, India presently faced a severe deficit in terms of infrastructure. To address this shortfall, the government has set aside Rs. 111 crore, to be invested over 5 years, for the National Infrastructure Pipeline. Furthermore, the government also plans to make Rs. 6000 crore in equity investment in the National Investment and Infrastructure Fund or NIIF. Infrastructure investments typically have a cascading effect in terms of simultaneously stimulating several other sectors of the economy and enabling significant employment generation. These investments will have a salutary effect on the economy going forward.
In other important ideas, following the Covid pandemic and the US – China trade tensions, many countries have started actively considering the idea of off-shoring their component manufacturing and ancillary industries away from China. This move has found its loudest proponents in Japan and the US. In fact, Japan has recently added India as a potential country for manufacturing its supply chain networks.
The final key driver of the Indian economy is the Services sector. The export nerve centre of this sector is the IT – BPM industry. India’s success story in Silicon Valley is already world renowned, with the country providing the highest number of software engineers. India’s IT exports to world markets clocked in at $136 billion in FY2019, and this figure is expected to escalate to $147 billion in FY2020. Going forward, there is expected to be more traction in this sector as India’s demographic dividend of large supply of skilled manpower and relatively lower wage structures makes it cost efficient to on-shore company back-offices to India. This experiment has already witnessed a successful proponent in terms of company call centres. Back-end work is merely a step forward in the same direction.
Among other instances of fiscal assistance, the government has allocated Rs. 75,000 crore for the NBFC sector. This has been done primarily to ensure that they remain financially solvent, and continue to advance credit. In India, NBFCs typically cater to the automobile sector, real estate, MSMEs and to consumers seeking personal loans. Another important aspect of NBFCs is that they ensure direct interaction between the borrower and the lender, thereby eliminating any usurious middlemen. It is because of this facility that the RBI has been trying to increase banks’ lending to NBFCs. For instance, lending by banks to NBFCs for the purpose of onward lending to a priority sector will be considered part of the concerned bank’s priority sector lending targets.
Finally, in order to lubricate the financial supply chain that will move the wheels of this fiscal stimulus, the RBI has taken some critical monetary policy measures. In an unprecedented move, the central bank has drastically reduced the reverse repo rate. This has been done to de-incentivise banks from placing excess reserves with the RBI, and instead encourage them to lend to final consumers. Furthermore, the RBI has also been intervening across the yield curve in an attempt to keep yields low for consumers. This has been done because despite the paring down of lending rates, there wasn’t much demand from borrowers who were already leveraged but unable to repay. Also, banks were reluctant to advance loans at lower rates because they were already bearing the brunt of large scale NPAs. Because of this, there was only limited economic transmission of the RBI’s rate cuts.
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In view of the above, one can draw a positive conclusion about India’s economic future. The next important economic event will be the promulgation of the Union Budget 2021, due to be tabled in Parliament on February 1st.
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