The macro economy in 2021

INDIA - Report 11 Jan 2021 by Ila Patnaik

The 2021 budget announcement will come on February 1. In this note, we review the overall macroeconomic situation.

While vaccines will help reduce fear, India is at the late stage of the epidemic through the onset of herd immunity.

Household consumption remains below pre-pandemic levels. Interaction-intensive services have not recovered, and increased economic uncertainty has made households save more. This is exerting a drag upon aggregate demand.

Debt contracts for individuals and firms are apparently in a state of calm. However, this is not because of the economic well-being of borrowers. Many borrowers are under "moratoriums" but these will have to come to an end one day. The bankruptcy code has been suspended until March 31, 2021. Stressed debt contracts are not generating over problems of default or bankruptcy, which has created an atmosphere of calm, but the underlying stress has not gone away.

Aggregate projects "under investment" have been weak from 2011 onwards. In particular, private projects "under implementation" have fared poorly. There was a nominal decline over calendar year 2020.

There was a 2.6% decline in the number of employed persons from December 2019 to December 2020. This comes in the context of a longer-term weakness in employment. Most jobs are created through private investment, and there is a link between weakness in private investment and weakness in employment growth.

While headline inflation has exceeded the upper limit of 6 per cent that is embedded in the inflation targeting framework, aggregate demand remains weak, and there is a fair chance of inflation coming back into the required range without requiring significant rate hikes.

Tax revenues are likely to be weak, and the government is likely to remain cautious in spending and deficits. The outlook for the economy will be shaped by household consumption, the resolution of non-financial firms, and the health of the financial system.

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