Shaktikanta Das, Governor, Reserve Bank of India (RBI), noted in a latest speech today that the past year has witnessed unimaginable misery and agony across the world entailing large destruction of human life and wealth. Governments and central banks across the globe unleashed conventional and unconventional policy support to fight its devastating adverse impact. Globally, governments unveiled large fiscal stimulus packages in 2020 amounting to nearly $14 trillion (13.5 per cent of world GDP) to contain the spread of the pandemic (IMF, 2021) and consequently, deficit and debt levels soared. In India also, the central government announced a series of economic packages, initially focussing on protecting vulnerable sections of the society followed by counter-cyclical measures to provide an impetus to consumption and investment for resurrecting growth.
The Reserve Bank undertook several conventional and unconventional measures in the wake of COVID-19. Other than conventional measures, the RBI introduced long term repo operations (LTROs) and targeted long-term repo operations (TLTROs) to augment system as well as sector-specific liquidity to meet sectoral credit needs and alleviate stress. Special refinance facilities were provided to select all India financial institutions (AIFIs), while a special liquidity facility for mutual funds (SLF-MF) was introduced to ease redemption pressures. Unlike many central banks, the RBI’s asset purchases did not dilute its balance sheet and hence, did not compromise on core principles of central banking. These purchases were confined to risk-free sovereign bonds (including state government securities) only.
The impact of COVID-19 induced deceleration on GDP and trade if compared with the GFC of 2008, reveals contrasting trends. Global GDP is estimated to have contracted by 3.5 per cent during 2020, much higher than the contraction of 0.1 witnessed during the GFC; while global merchandise trade is estimated to have only contracted by 9.2 per cent during 2020 as against a contraction of 22.3 per cent during 2009. This differential pattern could essentially be attributed to the major role played by domestic drivers across countries – induced by lockdowns – during the recent episode.
Even though merchandise trade has shown incipient signs of revival since end-2020, recovery in services trade is yet to gain traction as subdued cross-border tourism and travel restrictions continue to weigh on the overall performance of the sector. Uneven global trade recovery led by a few Asian countries and select sectors such as medical equipment and electronic products raises concerns regarding its sustainability.
The impact of demand and supply shocks is also reflected in the balance of payments. While commodity exporting countries faced lower current account surpluses due to negative shocks to their net terms of trade, net commodity importing countries such as India benefited, recording either lower deficits or even surpluses. Unlike most of the other major economies, India’s services exports gained traction from software exports. Domestic information technology (IT) companies benefitted from growing global demand for core transformation services as their customers focused on new models for IT operations during the pandemic. Remittance inflows fell amid widespread job losses in host countries. Nevertheless, the decline in remittances was more than offset by the lower trade deficit and robust net exports of services.
The manufacturing sector is spearheading the growth recovery as many contact intensive services sub-sectors are severely affected by the crisis. The initiatives by the Government under the AatmaNirbhar Bharat Abhiyaan and Union Budget 2021-22 towards developing a vibrant manufacturing sector and infrastructure acknowledges the strong linkages they have with the rest of the sectors. The Production Linked Incentive (PLI) Scheme aims to make India an integral part of the global value chain. This, along with reforms in labour market, can go a long way in propelling growth to an elevated trajectory for the manufacturing sector and reap its employment potential.
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