India’s already weakened economy felt a sharp slowdown in 2020 after extensive lockdowns following the COVID-19 outbreak. This came on the heels of poor growth in 2019, when India’s economy grew a mere 4.9%, the lowest annual increase in more than six years.  

Atradius analysts predict that 2020 will see an 7.4% GDP contraction due to the coronavirus pandemic. Comprehensive lockdowns have had severe consequences for domestic demand, and the room for countervailing policies was limited. 

The Reserve Bank of India (RBI) took appropriate measures by lowering official interest rates, providing liquidity in the market and easing regulations for offering new loans. The RBI will stick to these policies in the coming months due to a large decline of the inflation rate last year. However, the supply-chain disruptions, rising commodity prices and the large amount of liquidity might spike inflation in the upcoming months. The RBI in turn, might tighten monetary policy later this year.

The government did not have much room for fiscal stimulus measures to counter the negative impact of the pandemic in 2020, and that is the case in 2021 as well. The pandemic has raised the government deficit more than 3% to nearly 8% of GDP, and despite economic recovery, it's expected to remain rather large at 6% of GDP in 2021. Government debt has jumped more than 10% to 64% of GDP. Still, there's hope for a 2021 recovery.

Vaccine Rollout 

At first, India lagged behind many other countries in the region on vaccine rollout, but that's beginning to change.

After an initially lukewarm response — due in part to the controversial approval of homegrown Covaxin before it had completed clinical trials — the vaccination drive gained some momentum after Prime Minister Narendra Modi took the injection on March 1 and urged others to follow suit. 

Some of the biggest companies operating in the country have said they will cover the costs of vaccination for their employees and families, including Accenture Plc, Infosys Ltd. and Reliance Industries Ltd., owned by Asia’s richest man Mukesh Ambani.

Indian producers, especially the Serum Institute of India (SII), have been manufacturing more than 60% of the world's total supply of vaccines of all types. They are likely to make up the lion's share of the production of coronavirus vaccines as well. The availability of effective vaccines is bringing hope that the economy can return to normal later this year, but likely not until the second half of the year. The main risk to this prediction is that mutations of the virus may make the vaccines less effective, putting the Indian economy on pause again.

Supply-Chain Shifts

Supply-chain disruptions from China played a significant role in India’s GDP contraction in the first half of 2020. Indian industries that are heavily dependent on imports, such as consumer durables, electronic manufacturing and pharmaceuticals, were most heavily affected. More than 65% of electronic components and almost 70% of pharmaceutical ingredients needed for further processing are imported from China. 

The Indian economy is very large, however, and domestic issues weigh more heavily than external developments. Local supply chains were interrupted as well, and will continue to face problems as long as lockdown measures continue. However, the government has gradually put through several relaxation measures, differing from state to state.

On a positive note, the disruption in global supply chains has created an urgent need for businesses to diversify across geographies. Companies from the U.S., Japan and South Korea have expressed interest in shifting production facilities to India. The large domestic market and improving logistics and digital infrastructure make it a serious contender for global efficiency-seeking investments, especially in the manufacturing sector. Domestically, the pandemic has also demonstrated the need for India to reduce its dependence on external sources and go local instead.

Financial Recovery

In general, Indian banks are sufficiently capitalized, reflected by the capital adequacy ratio of 14.5%. Sectoral risks are also mitigated by a limited dollarization, about 7.5% of both loans and liabilities dominated in foreign currency. However, there still are concerns around credit availability and weak bank balance sheets. Moreover, the net foreign debt of banks (4.7% of GDP) makes them vulnerable to exchange rate volatility. 

After India’s worst economic crisis in a century (disregarding the recessions after both World Wars), 2021 will likely be a year of recovery. Economic growth will be high, supported by a strong rebound in private sector output, positive news on vaccines, and our expectation of a slow policy normalization. A GDP growth rate of 8.5% to 9% is likely, but this can mostly be attributed to the low base of last year. A new wave of infections, financial sector stresses, higher oil prices, and a slow pace of reforms are the main downward risks to any growth estimates. 

For the long term, the outlook is optimistic. India has a leading position in service sectors, an expanding middle class and low unit labor costs. Potential GDP growth in India is now expected to average 5.5% annually in 2019-2028. 

Bert Burger is principal economist at Atradius Credit Insurance.