Economic Survey 2020-21: Vol 2 Ch 1: State of the Economy 2020-21: A Macro View

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State of the Economy 2020-21: A Macro View

This Chapter essentially talks about how the pandemic disrupted the economies around the world, including the Indian Economy, and how gradually they all seek to recover. It focuses on the measures taken by India to tackle the economic crisis and how the economy is now on the path of a V-shaped recovery.

“Doing the right things at the right time is the rope

which binds the wealth, making it boundless.”

– Thirukkural, Chapter 49, Verse 482.

The year 2020 threw the world into the confusion and uproar created by the novel COVID-19 virus, threatening all that was taken for granted –mobility, safety, and a normal life itself. This, in turn, posed the most formidable economic challenge to India and to the world in a century.

Spread of the Pandemic in India:

  • The initial spread of pandemic was limited primarily to western and northern zones of the country, but a sharp rise in the share of Southern zone was witnessed since July 2020 with the zone adding more than one-third of the new cases per month on an average. 
  • All zones, barring northern region, experienced a single wave of infection till December. The festive season during October and November led to the second wave of infections in the northern region.
  • The total death toll in India, as of 31st December 2020, was 1.48 lakh with more than 50% of the fatalities occurring in western and southern zones of the country. Throughout the pandemic, Maharashtra has been the worst affected state having the highest incidence of deaths in India.


Policy Dilemmas Underlying Covid-19

‘Lives Vs Livelihoods’ 

  • Given the fast spread of the pandemic, the immediate public health policy priority was, ‘flattening the epidemiological curve’ to mitigate the impact of the spread.
  • Countries, accordingly, across the globe adopted various non-pharmaceutical interventions (NPIs) like social distancing measures via work & school closures travel bans, cancellations of public events and restrictions of internal movement and, by social isolation measures via quarantining infected people from the population, tracing infected person contacts and enhanced testing.
  • COVID-19, therefore, led the world to the predicament of saving ‘lives’ or ‘livelihoods’ as the steps taken to flatten the infection curve, steepened the macroeconomic recession curve.

Demand-side and Supply-side Shocks

  • The pandemic has been a unique economic shock that has triggered both supply and demand-side shocks simultaneously across economies around the world.
  • Increased uncertainty, lower confidence, loss of incomes, weaker growth prospects, fear of contagion, curtailment of spending options due to closure of all contact-sensitive activities, the triggering of precautionary savings, risk aversion among businesses and resultant fall in consumption and investment – leading to the first order demand shock.
  • The supply chain disruptions caused by the closure of economic activity and restricted movement of labour lead to the first order supply shocks. 

  • The feedback loops of demand and supply generated potential hysteresis effects – when households demand less, firms get reduced revenues, which feeds into reduced activity by firms and thus reduced household income. 
  •  The pandemic, therefore, posed unprecedented dilemmas before policymakers – lives vs livelihoods and flattening the twin curves of pandemic and the resultant economic recession.


Sectoral Impact of Covid-19

  • In terms of employment shock, contact-sensitive sectors like trade, hotels, transport, tourism, etc. are likely to undergo a shock proportional to the respective employment share, with informal workers likely to bear the larger brunt.
  • The construction and mining sectors, that employ a larger share of informal workers, have been severely affected by the pandemic-induced lockdowns.
  • Agriculture was largely insulated from the lockdown in India as timely and proactive exemptions from COVID-induced lockdowns to the sector facilitated uninterrupted harvesting of rabi crops and sowing of Kharif crops. However, supply chain disruptions impacted the flow of agricultural goods leading to high food inflation and adverse the initial impact on some major agricultural exports.
  • The manufacturing sector was hit hard in the first quarter but has since picked up though mining still remains impacted.
  • Construction and Services sector were hit the hardest due to the pandemic induced requirements of social distancing and minimizing of personal interaction

Disruption In Global Economy by the Pandemic

  • Since 2018, the growth momentum in global output was on a weakened footing owing to various factors like trade tensions, political instability, slowed demand and reduction in industrial activity.
  • COVID-19 pandemic accentuated the deceleration by causing severe demand and supply disruptions.
  • Economic activity has been paralysed by:
    • reduced mobility, 
    • uncertainty regarding the post-pandemic economic prospects and policies has impacted investment;
    • disruptions in education have decelerated human capital accumulation; concerns about the viability of global value chains;
    • and the adverse impact on international trade and tourism.
  • The month of April 2020 became the month of “Global Lockdown” with world economic activity coming to a standstill – leading to a steep fall in output during the second quarter of 2020.
  • Most commodity prices rebounded from their mid-2020 lows as strict lockdowns were gradually lifted and demand firmed.
  • Global trade is projected to contract by 9.2% in 2020– comparable to the decline during the 2009 global recession but affecting a markedly larger share of economies.
  • Trade has, however, played a critical role in responding to the pandemic, allowing countries to secure access to vital food and medical supplies.
  • The pandemic has exacerbated the risks associated with a decade-long wave of global debt accumulation. General government debt in major economies rose during 2020. Debt is likely to rise further as governments finance the recovery by facilitating the transition of capital, labour, skills, and innovation to a post-pandemic economic environment.
  • An effective vaccination campaign, restoration of consumer and business confidence, as well as continued monetary and fiscal support, are expected to lift the global output by 4.5 – 5.5% in 2021.
  • But some downside risks may come up like- the possibility of mutant strains, delays in vaccine procurement and distribution, disruptive effects on potential output from the pandemic, and financial stress triggered by high debt levels and weak growth.

Indian Economy on the Path of a resilient V-shaped recovery

  • The economy witnessed a sharp contraction of 23.9% in Q1: FY 2020-21 and 7.5% in Q2: FY 2020-21 due to the stringent lockdown imposed during March-April, 2020. Since then, several high-frequency indicators have demonstrated a V-shaped recovery.
  • The fundamentals of the economy remain strong as gradual scaling back of lockdowns along with the astute support of the Atmanirbhar Bharat Mission have placed the economy firmly on the path of revival.
  • The recovery could be seen through sectoral progress:
    • The year saw the manufacturing sector’s resilience, rural demand cushioning overall economic activity and structural consumption shifts in booming digital transactions. 
    • Agriculture is set to cushion the shock of the COVID-19 pandemic on the Indian economy in 2020-21 with a growth of 3.4 per cent in both Q1 and Q2. Sowing remained healthy while procurement continued unabated, firming up buffers and channelizing supply, while ensuring food security throughout the year.

  • Rural demand has remained resilient empowered by the government’s thrust on the rural economy and infrastructure in previous years. Govt measures like MNREGA have been reinforced by rural digitalization and financial inclusion drives which also aided in smooth implementation of demand push measures during COVID-19.
  • Initiatives to spur skill development, entrepreneurship, Self Help Groups and livelihoods have further empowered the rural economy to combat the COVID-19 induced vagaries. Critical steps such as PM-KISAN, adoption of cost plus 50% formula for MSP, focus on irrigation via PM Krishi Sinchai Yojana, micro-irrigation scheme, promoting economies of scale through FPOs, and institutionalizing e-NAM (Electronic national agricultural market), and promotion of agricultural mechanization through subsidies and custom hiring centres, have contributed to nourishing the agricultural sector, which remains a silver lining to India’s growth story of FY 2020-21.
  • V-shaped recovery in industrial production was also observed over the year. Manufacturing rebounded and industrial value started to normalize. The index of eight core industries, which make up around 40% of the index, registered a growth of (-) 2.6% in November 2020 as compared to a growth of 0.7% in November 2019.
  • Revitalized inter and intra-state movement along with a sustained spurt in industrial and commercial activity heralded the economy’s return to normalcy. E-way bills, electronic toll collection, rail freight and port cargo traffic not just recovered but surpassed previous year levels in Q3: 2020-21. 
  • E-way bills are a strong leading indicator of revenue collections, supply chain corrections and logistics growth. They generated have regained stronger momentum in December with double-digit growth of 12.3%.
  • High food prices remained a major driver of inflation in 2020. However, inflation in December 2020 fell back into the RBI’s target range of 4 +/- 2% to reach 4.6% year-on-year as compared to 6.9% in November.

  • The fiscal arithmetic was impacted by the adverse impact on government revenues and elevated expenditures, as the Government enhanced spending during the unlock phase. However, gross GST collections (Centre plus states) gained buoyancy October onwards, crossing the `1 lakh crore mark consecutively for 3 months, thereby providing a much-needed boost to the Government’s revenue position.
    • States, however, witnessed a contraction in total expenditure by 4.1% year-on-year during April-October 2020. While revenue expenditure of states did not see any significant uptick during this period, growth in capital expenditure of state governments emerged out of eight months of consecutive decline to record positive growth in October 2020.
    • Government and RBI led liquidity support measures, increase in limits of ways and means advances, and relaxation of rules governing withdrawals from the Consolidated Sinking Fund (CSF) enabled bond markets to absorb pressures of increased government borrowings and added to their buoyancy.
    • The external sector provided an effective cushion to India during these uncertain times. India’s merchandise exports fell by 21.1% in the first half of 2020-21. The contraction for imports was even severe at 38.8%. Exports, however, revived gradually as the rate of contraction eased to 5.0% in Q3:2020-21. India recorded a current account surplus of 3.1% of GDP in the first half of the year largely supported by strong services exports.
    • India remained a preferred investment destination in FY 2020-21. During April-December 2020, equities witnessed an inflow of at USD 30.0 billion, five times its previous year value – India was the only country among emerging markets to receive equity FII inflows in 2020.

  • Robust capital inflows along with a weak dollar lent an appreciating bias to the Indian rupee since end June 2020. However, RBI’s prudent interventions in the foreign exchange market limited appreciation.

K-Shaped Recovery

The economic survey talks about V-shaped recovery, but some experts assert that India is undergoing a K-shaped recovery.

What is a K-shaped recovery?

  • A K-shaped recovery happens when different sections of an economy recover at starkly different rates.
  • Households at the top of the pyramid are likely to have seen their in- comes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption. Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes

What are the macro implications of a K-shaped recovery?

  • With the top 10% of India’s households responsible for 25-30% of total consumption, one could argue consumption would get a boost as this pent-up demand expresses itself.
  • Upper-income households have benefitted from higher savings for two quarters. What we are currently witnessing is a sugar rush from those savings being spent.
  • To the extent that households at the bottom have experienced a permanent loss of income in the forms of jobs and wage cuts, this will be a recurring drag on demand, if the labour market does not heal faster.
  • To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-impeding because the poor have a higher marginal propensity to consume (ie they tend to spend (instead of saving) a much higher proportion of their income.

Policy response across the globe:

Governments and Central Banks, the world over, have deployed various measures to stimulate the economy through liquidity support and regulatory changes.

  • An unprecedented fiscal response at $11.7 trillion globally, or close to 12% of global GDP (as of September 11, 2020), has provided lifelines to vulnerable households and firms.
  • These measures include additional spending or forgone revenue, temporary tax cuts, cash and in-kind transfers, unemployment benefits, wage subsidies, and liquidity support, including loans, guarantees, and equity injections by the public sector.


India's Strategic Multi-Pronged Policy response:

  • India adopted a graded four-pronged pre-emptive, and pro-active strategy consisting of (i) containment measures, (ii) calibrated fiscal support focussed on essentials during lockdown and demand push during the unlock phase, (iii) financial measures and (iv) structural reforms to combat COVID-19.
  • A nationwide ‘stringent’ lockdown for 21 days provided the much-needed time to strengthen the health system response, ramp up testing and ensure public engagement/awareness towards the practice of social distancing.
  • Government of India and the RBI have undertaken multidimensional efforts to maintain financial stability and provide necessary regulatory support to ease both demand and supply constraints posed by the pandemic.
  •  The demand stimulus was introduced in a phased manner with prior focus on measures to provide a cushion for the poor and vulnerable sections of society and to the business sector (especially the MSMEs).
  • This included:
    1. one of the world’s largest foodgrains distribution programme,
    2. direct cash transfers to 42 crore individuals,
    3. more than 20 crore Women Jan Dhan accounts,
    4. cash support to building and construction workers,
    5. `30,000 crores additional emergency working capital funding for farmers through NABARD, additional pension payments,
    6. provision for free gas cylinders,
    7. additional allocation under MGNREGS,
    8. as well as government guarantees for credit,
    9. postponement of financial deadlines etc.
    10. To ameliorate corporate stress, the Government suspended the initiation of fresh insolvency proceedings of Insolvency & Bankruptcy Code 2016 for defaults arising on or after 25th March 2020 till 25th March 2021. 
  •  Further, Garib Kalyan Rojgar Abhiyaan (GKRA) was launched on 20th June, 2020 for a period of 125 days in 116 districts of 6 States to boost employment and livelihood opportunities for migrant workers who had returned to their villages and similarly affected citizens in rural areas due to COVID-19 pandemic.
  • Measures by RBI included:
    1. Open Market Operation (OMO) purchases
    2.  Targeted Long Term Repo Operations
    3.  reduction in the Cash Reserve Ratio (CRR) requirement of banks from 4% of net demand and time liabilities (NDTL) to 3%.
    4. raising banks’ limit for borrowing overnight under the Marginal Standing Facility (MSF),
    5. `50,000 crores Special Liquidity Facility for mutual funds and
    6. refinance facility worth `75,000 crores for all India financial institutions i.e., NABARD, NHB, SIDBI and EXIM Bank.
    7. A key measure taken by RBI and Government of India during H1:2020-21 to ameliorate the liquidity constraints faced by NBFCs, was to set up a Special Purpose Vehicle (SPV) to purchase short-term papers from eligible NBFCs/HFCs, which could then utilise the proceeds to extinguish their existing liabilities
    8. loan moratorium from 1st March 2020 to 31st August 2020
  • India has also emerged as a leading supplier of the vaccine to various countries with the initiation of exports to Brazil and Morocco. 


  • The structural reforms and the policy push under the Atmanirbhar Bharat Mission are aimed at strengthening the fundamentals of the economy – which should put the economy on a strong growth path once the economy recovers from the pandemic shock. These need to be sustained to bolster the Indian economy to reach its potential growth.
  • The swift roll-out of the vaccine gives strength to the optimism on both health and economic fronts – igniting hopes of a robust recovery in the services sector, private consumption, and investment.


Key terms at a glance:

Current account surplus It refers to positive current account balances, meaning that a country has more exports than imports of goods and services.
V-shaped recovery It is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
Hysteresis effect It refers to an event in the economy that persists into the future, even after the factors that led to that event have been removed. Hysteresis can include the delayed effects of unemployment, whereby the unemployment rate continues to rise even after the economy has recovered.
E-Way Bill is an Electronic Way bill for movement of goods to be generated on the eWay Bill Portal. A GST registered person cannot transport goods in a vehicle whose value exceeds Rs. 50,000 (Single Invoice/bill/delivery challan) without an e-way bill that is generated on
Fiscal stimulus  It refers to policy measures undertaken by a government that typically reduce taxes or regulations—or increase government spending—in order to boost economic activity. 
Loan Moratorium A moratorium period is a period during a loan term when the borrower is not obligated to make a payment. It is a waiting period before the borrower starts making fixed monthly payments.
Long Term Repo Operations LTRO is a tool in which central bank(RBI) offers money to banks for a period of one to three years at the prevailing repo rate (currently at 5.15 per cent). The banks in turn offer government securities with same or higher tenure as collateral to the central bank.
Marginal Propensity to consume It is a metric that quantifies induced consumption, meaning, the increase in personal consumer spending occurs with an increase in disposable income. The proportion of disposable income which individuals spend on consumption is known as the propensity to consume.


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