State of the Economy Report 2020: What is V-shaped economic recovery?

The Reserve Bank of India (RBI) released its 'State of the Economy Report 2020' on 21 January 2021. RBI in its report has stated that the shape of the economic recovery in FY 2021-22 will be V-shaped, where 'V' stands for 'Vaccine'.
Created On: Jan 27, 2021 20:51 IST
Modified On: Jan 27, 2021 21:34 IST
State of the Economy Report 2020 | V-shaped economic recovery
State of the Economy Report 2020 | V-shaped economic recovery

On 21 January 2021, the Reserve Bank of India (RBI) released its 'State of the Economy Report 2020'. RBI in its report has stated that the shape of the economic recovery in FY 2021-22 will be V-shaped, where 'V' stands for 'Vaccine'. 

What is V-shaped recovery?

V-shaped recovery is witnessed when an economy suffers a sharp economic decline followed by a strong recovery. 

"2020 turned out to be a year in which everything changed. The year 2021 has commenced with countries across the world in a massive vaccination drive," the RBI report mentioned. 

On 16 January 2021, India rolled out the largest vaccination drive in the world with plans to inoculate about 300 million people on a priority list, making its entry in the exclusive V5 Club.

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Highlights of the State of the Economy Report 2020:

1- India has so far succeeded in ducking the second wave of COVID-19 and by end of 2020, India has ‘bent it like Beckham’. 

2- The recovery rate in India has improved to 96.1%-- second highest in the world. 

3- The Mortality rate in India is 1.4%-- lower than the world death rate of 2.2%.

4- Merchandise imports finally emerged out of contraction over 9 consecutive months and grew by 7.6% (y-o-y) in December 2020.

5- Bank Credit demand has increased at a pace above 6%, reversing a 5-month stretch of sub-6% growth. 

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The Global Setting: 

1- The global economic recovery has slowed. 

2- The World Bank in its Global Economic Prospects (GEP) stated that the global economy is estimated to have contracted by 4.3% in 2020. India is expected to expand by 5.4% in 2021. 

3- Amongst the developing economies, India will suffer the loss of USD 950 billion. The ongoing COVID-19 pandemic may exacerbate risks around the accumulation of debt on the one hand and a prolonged slowdown in potential output on the other.

4- Food prices have registered a surge in Emerging Market Economies (EMEs) due to a confluence of factors-- governments shoring up their food reserves, logistical hassles, etc. 

5- Crude oil prices continued to rise in December 2020 and the first half of January 2021 due to the positive developments on the vaccines for COVID-19 and extension of production cuts by organization of the petroleum exporting countries (OPEC) plus. The World Bank estimated that the oil demand has declined by a historic 9% in 2020.

6- Gold saw prices scaling an all-time high in August 2020 with gains of 25.1% due to safe-haven demand and unprecedented monetary accommodation, making it a top-performing asset in 2020. 

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7- The global manufacturing PMI moderated to 52.7 in December 2020 and has remained in an expansion zone for the whole of H2:2020.

8- As per the World Trade Organization (WTO), the volume of world merchandise trade showed an improvement of 11.6% in Q3:2020, after a contraction of 12.7% in the previous quarter. However, there was a contraction of 5.6% in Q3 on a y-o-y basis. According to the World Bank, the world trade volume declined by 9.5% in 2020. 

Domestic Developments:  

1- As per the report by Mint tracker, the six largest Indian states (Maharashtra, Tamil Nadu, Uttar Pradesh, Karnataka, Gujarat and West Bengal) have registered 87% of the normal footfalls in public places, the best levels so far in the ongoing COVID-19 pandemic. 

2- Domestic trading activity as reflected in issuance of E-way bills expanded at a brisk pace with a growth of 15.9% y-o-y basis-- intra-state by 17.3% and inter-state by 13.8%. The number of E-way bills issued during December 2020 was the highest. 

3- Electricity consumption expanded at 5.0% on a y-o-y basis due to increased heating load. 

4- Collection under Goods and Services Tax (GST) surged to an all-time high of Rs. 1.15 lakh crores in December 2020. 

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5- The Refinitiv-Ipsos Consumer Sentiment Index inched up by 2.1% points in December 2020 and the improvement was recorded on employment conditions, personal finance, investment climate and in the outlook for the economy. 

6- Alliances between e-commerce and Kirana stores may expand to meet the rising demand for delivery. 

7- The sales of residential units may witness a sharp uptick in Q3:2020-21, supported by favourable interest rates, still restrained housing prices, steep discounts by developers to clear inventory, and reduction in stamp duty by a few states. 

8- Fast-Moving Consumer Goods (FMCG) market in India expanded by 17%. 

9- Improvement is noted in the labour market with a gradual pick up in employment, as per the household survey of the Centre for Monitoring Indian Economy (CMIE). The labour force participation rate recovered to 40.06% in December 2020 from a low of 35.57% in April 2020. 

10- Under the Mahatma Gandhi National Rural Employment Act (MGNREGA), around 26.5 million households sought employment in December 2020-- 16.5% higher than in the preceding month.

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11- The risks to India’s export prospects emerge due to the shortage of container supplies caused by supply chain disruptions across the globe, reduced the capacity of shipping lines, empty containers getting stranded at ports during lockdowns, reduction in port manpower limiting the speed of cargo handling, and consequent congestion in the ports. 

12- India’s current account remained in surplus in July-September 2020. However, the current account surplus has started to shrink in Q2 and may moderate further in H2:2020-21.

13- The aggregate supply conditions strengthened through December 2020 due to resilience in agriculture and revival in manufacturing activity. The PMI manufacturing expanded in December 2020 to 56.4, higher than the reading of 56.3 in November 2020. 

14- Coal India Limited (CIL) recorded a 6.3% growth in coal production in Q3. More than 1.8 million vehicles were registered across India in December 2020-- a growth of 10.3% for the first time in COVID-19 period. Sale of mini-trucks, pick-up vans, etc. surged as more Indians turn to online shopping, increasing the need for last-mile delivery logistics.

15- The services PMI expanded at 52.3% in December 2020 due to an increase in new domestic work intakes. Passenger vehicle sales accelerated in December 2020 due to the growing preference for personal mobility amid the ongoing COVID-19 pandemic. 

16- CPI inflation eased sharply to 4.6% in December 2020 due to a substantial correction in food inflation - by 5% to 3.9 % in December 2020. Vegetables and cereals drove the sharp disinflation in food inflation. Prices of Onions and Potatoes registered a sharp fall in December 2020. 

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17- The crude oil prices edged up to US$ 53 per barrel (1-13 January 2021). Increase in domestic excise duties and state taxes pushed up pump prices to historically high levels. Domestic kerosene prices rose in January 2021. LPG prices remained unchanged after witnessing a sharp increase of around Rs. 100 per cylinder in December 2020. 

18- CPI excluding food and fuel remained elevated at 5.5% in December 2020 due to telephone charges, education expenses and some softening in gold prices. Prices in respect to personal care, pan, tobacco and other intoxicants continued to exhibit double-digit inflation in December 2020. Also, transport and communications inflation remained elevated in December 2020 due to motor vehicles prices, petroleum product prices and transportation fares.

19- CPI food inflation is witnessing considerable softening due to sharp corrections in vegetable prices. Also, prices of eggs and poultry, meat and fish may also ease due to increased bird flu infections in January 2021. 

Financial Conditions:

1- To enable banks to exploit the synergies between central bank liquidity under on-tap Targeted Long-Term Repo Operations (TLTRO) scheme and the Emergency Credit Line Guarantee Scheme 2.0 (ECLGS 2.0) of the Central Government, the RBI expanded the scope of the on-tap TLTRO to all stressed sectors identified by the Kamath Committee, in addition to five sectors announced under the scheme on 21 October 2020. 

2- Money market rates rose briefly due to advance tax outflows, moving closer to the reverse repo rate. The spread of the collateralised tri-party repo rate and market repo rate vis-à-vis the Weighted Average Call Rate (WACR) narrowed from (-) 32 basis points (bps) and (-) 29 bps in November 2020 to (-) 7 bps each in December 2020. Also, the rates on Certificates of Deposit (CDs), 91-day treasury bills and on commercial paper (CP) moved closer to overnight rates, although they continued to trade below the reverse repo rate. 

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3- Corporate bond yields softened across the rating spectrum with the yield on 1-year, 3-year and 5-year AAA-rated bonds declining by 205 bps, 184 bps and 122 bps, respectively, from 22 May 2020 to 31 December 2020. On the other hand, the spread on 1-year, 3-year, 5-year AAA and 3-year BBB-rated corporate bonds declined by 180 bps, 145 bps, 96 bps and 54 bps, respectively, during the said period. 

4- Reserve Money (RM) adjusted for the first-round impact of changes in the Cash Reserve Ratio (CRR) increased by 18.3% y-o-y as on 8 January 2021 (11.3% a year ago), powered by the ongoing surge in Currency in Circulation (CiC) on the components side and Net Foreign Assets (NFA) on the sources side. 

5- Money supply recorded a y-o-y growth of 12.5% as on 1 January 2021 (10.1% a year ago), backed up by aggregate deposits growing by 10.9%. (9.8% a year ago). 

6- Growth in SCBs credit to commercial sector broke out of sub-6% levels and picked up to 6.7% on 1 January 2021 (7.5% a year ago), responding to green shoots of the economy. On a cumulative basis, banks have extended credit of Rs. 2,93,007 crores to the commercial sector from April 2020 to January 2021-- an increase of 31.7% over a year ago. Credit growth to agriculture and services sectors increased in November 2020, while credit to industry continued to contract. Personal loan growth slowed with personal vehicle loans as an exception. 

7- The surplus liquidity conditions eased interest rates. The Median Term Deposit Rate (MTDR) declined by 146 bps from March to December 2020, with a decline in shorter tenor deposits of maturity of up to one year-- 163 bps. The early adjustment in deposit rates bodes well for transmission to lending rates. The 1-year median MCLR softened cumulatively by 95 bps during the said period. 

8- On 31 December 2020, BSE Sensex touched 47,751-- an increase of 83.8% from 23 March 2020 (25,981). 

9- The listing of two Initial Public Offerings (IPOs) in December 2020 aggregated to Rs. 1,351 crores, took the total resource mobilisation through mainboard IPOs to Rs. 15,971 crores during 2020-21 (up to December 2020), marking a sharp rebound from Rs. 10,487 crores in the corresponding period of the previous year. 10 out of 13 IPOs generated positive listing day gains and all IPOs generated positive returns on an offer to date basis. Food processing, information technology (IT) and chemicals sector generated the highest returns for investors. 

10- Net Foreign Direct Investment (FDI) increased through August-November 2020 due to fresh equity investments. Net Foreign Portfolio Investment (FPI) inflows remained robust in December 2020 due to the continued global monetary and fiscal stimulus, weakening of the US dollar and a robust revival in appetite for emerging market economies including India. Net investment under Voluntary Retention Route (VRR) was to the tune of USD 0.2 billion. 

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11- In the foreign exchange market, the Indian rupee (INR), buoyed by robust capital inflows on COVID-19 vaccine news, appreciated by 0.9% against the US dollar in December 2020. By the end of December 2020, the INR appreciated by 3.2% and closed at Rs. 73.05 against the US dollar. In terms of the 36-currency Real Effective Exchange Rate (REER), the INR appreciated by 2.2% in December 2020.

12- India’s external debt remained contained at USD 556.2 billion, as per the statistics released by the Ministry of Finance, Government of India on 31 December 2020.

13- Gross Non-Performing Assets (GNPA) ratio of all SCBs has declined in successive quarters to 7.5% in September 2020. Macro stress tests carried out in the latest Financial Stability Report (FSR) of January 2021 indicate that the GNPA ratio of SCBs may increase to 13.5% by September 2021 under the baseline scenario, which may escalate to 14.8% under a severe stress scenario. 

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14- Digital transactions continued to surge in December 2020. Transaction values through Real-Time Gross Settlement (RTGS) plummeted through the pandemic with a growth of 3.3% in December 2020. On the other hand, National Electronic Funds Transfer (NEFT) transactions grew by 31.6% in volume in December 2020. Unified payment interface (UPI) transaction volume remained above the historic 2.2 billion marks, while transaction values increased by 105.5% over December 2019. Transactions through Immediate Payment Service (IMPS), National Electronic Toll Collection (NETC) and Bharat Bill Payment System (BBPS) surged, hitting double-digit levels in both volume and value growth.

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As mentioned above, the recovery of the economy will be 'V' shaped. E-commerce and digital technologies are bright spots in the economic recovery of the country. Japanification stares at much of the advanced world, while for emerging economies, the potential output will be a lot flatter.

Also, GDP is in striking distance of attaining positive territory and inflation easing closer to the target, further supporting the recovery. Merchandise trade has rebounded in early January 2021, pointing towards the slow healing of domestic demand and the unlocking of export energies. Current account surpluses are ebbing as domestic activity regains vigour. Foreign investment flows are witnessing imminent upturn

In H1:2021-22, GDP growth will benefit from statistical support and will be consumption-driven. Rabi sowing has surpassed the normal acreage before the end of the season, huge agriculture production is expected in the year 2021. 

As we already know that India is the global capital for vaccine manufacturing, a surge in pharmaceuticals exports may be noted with the start of vaccination drives globally. 

Agriculture exports have remained resilient and under the Production Linked Incentive (PLI) scheme, the food processing industry has been accorded priority. 

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On 7 January 2021, the World Economic Forum released a report on 'Indian Cities in the Post Pandemic'. The report mentioned that the pandemic presents a historic opportunity to build back better and create a new urban paradigm-– one that enables Indian cities to be healthier, more inclusive, and more resilient. 

An urban reform agenda can be set up across seven thematic pillars: planning, housing, transport, environment, public health, gender, and vulnerable populations.

The RBI report also underscored that the slippage ratios have been falling and loan recoveries are improving even as provisioning coverage ratios have risen above 70%. 

"It will take years for the economy to mend and heal, but innovative approaches can convert the pandemic into opportunities. Will the Union Budget 2021-22 be the game-changer?" the RBI report stated. 

Source: RBI

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