India

Here is a snapshot of the changing trends and experiences of a few select industries in 2020:

Automotive industry: Sudden closure of factories leading to unprecedented supply chain disruptions and a collapse in demand acted as a double whammy for the industry. The micro, small, and medium enterprises (MSMEs) such as component manufacturers, dealers, and vehicle financing institutions were among the hardest hit. The industry, however, responded to the crisis through innovative ways, such as digitized and subscribed services, contactless sales, and doorstep delivery/pick-up to reach out to customers. Many firms are activating secondary supplier relationships and securing additional critical inventory and capacity while diversifying sources of import supply beyond China. To improve profits, several organized players are now entering the growing used-car market, which is predominantly dominated by the unorganized sector.¹

Outlook: With the support of various government schemes and pent-up demand, the sector has somewhat rebounded.² However, growth and jobs are expected to remain capped till the pandemic is over.

Trade, hotels, travel, and tourism: Hospitality was probably one of the first few industries hit by the pandemic. Social distancing norms and mobility restrictions led to fewer travels and leisure activities even before the lockdown. Known for creating direct and indirect jobs and the promotion of regional economic and product development, this labor-intensive industry witnessed a sharp reduction in wages and job opportunities.³ Despite credit support and government schemes to several MSMEs in this sector, the rebound has been muted because of continued mobility restrictions and health anxieties among consumers. However, the sector has found mature ways to deal with the pandemic. Several hotels made their venues available for hospital beds and front-line health professionals. Businesses adopted new models and concepts to survive, such as packages targeted at staycation and innovative delivery concepts.

Outlook: The path to profitability may be far off as long as the pandemic persists. The sector’s revival will not only depend on domestic mobility but also on restrictions across international borders. This, in turn, will depend on synchronized efforts by world economies to curb the spread of infection, the success of which has been limited so far.

Media and entertainment: This sector has been hit hard by unemployment and closed productions. During the pandemic, entities improvised and adopted innovative ways to reach out to their audiences, who have now turned to online platforms for music, films, and entertainment.

Outlook: The broadcasting or streaming of live events is expected to offer lower financial returns. Temporary employment contracts and freelance arrangements may keep wage growth in this industry subdued.⁴

Retail industry for essential and nonessentials: Demand for essential goods remained strong while that of discretionary and nonessential goods declined. However, both these segments of the retail industry witnessed a perceivable tilt toward e-commerce services to cater to new shopping habits. With consumers preferring more online transactions to reduce exposure to infection, the retail and FMCG industries have been rethinking their business priorities and strategies to build a flexible distribution network and improve supply chains.

Outlook: The industry will likely see increasing digitization, use of online services and data analytics, and alliances across manufacturers, distributors, promoters, and product developers to differentiate customer experiences, improve margins, and survive the competition.⁵

Pharmaceuticals and health sector: COVID-19 revealed the inadequacy of public health systems and infrastructure in addition to creating a shortage of well-trained health workers. With the support of government spending, however, the sector has ramped up health facilities such as ICU beds, ventilators, and testing capacities. The pandemic has presented an opportunity to shift to the digital medium and improve profitability with better technologies. For instance, trends such as telemedicine and the use of big data for maintaining health records are gaining momentum. Post–COVID-19, India aims to diversify sources or actively produce active pharmaceutical ingredients (APIs) and key starting materials, and reduce dependence on China for imports. Besides, India is likely to play a major role in vaccinating the world.⁶ With several vaccines queuing up for release soon, the industry has been increasing investment and building up capacity to meet the global demand.

Outlook: The health sector and pharmaceutical industry will likely see increased investments as the government focuses more on improving and expanding the reach of existing health care systems and ramping up the upcoming vaccination process, while pharma companies step up new production lines for affordable vaccines.

Technology and telecom: These two industries have played a very important role in responding to the challenges posed by the pandemic. Sectors such as e-commerce, fintech, food-tech, health-tech, and ed-tech have helped the country to deal with lockdowns, movement restrictions, and social distancing in ways that were unimaginable a few years back. From enabling virtual communication and manufacturing ventilators for use in hospitals and homes to bolstering cybersecurity for industries that are going digital, innovations by technology and broadband services companies have helped meet rapidly changing consumer and industry demand.

Outlook: Rising demand for digitization, automation and artificial intelligence, virtual communication, and reliable internet services will likely result in the robust growth of these industries.

2021 and beyond: Looking through the macroeconomic forecasting lens

As India continues to grapple with the pandemic stepping into the new year, the question is where the economy is on the path to recovery. Recent high-frequency data suggests India may have turned toward the road to recovery.⁷

As discussed in our earlier article, we expect double-digit growth in FY2022 in the light of our best-case scenario.⁸ Lower infection and fatality rates, and the possibility of widespread vaccine deployment are expected to improve consumer and business confidence. Pent-up demand for more elastic discretionary goods, especially among the top 10 income percentile of the population that could not spend because of mobility restrictions, may spur private investment that has been contracting for five consecutive quarters now. The lagged buoyancy impact of government spending and reforms and liquidity measures by the Reserve Bank of India (RBI) may further boost the economic recovery.

Nevertheless, the path to recovery may have a few challenges. High inflation, job losses, poor wage growth, and low asset values may impact the consumer’s purchasing power, especially among the low- and middle-income class. The RBI may not be able to reduce policy rates in the near term amid inflation concerns. As a result, MSMEs and the informal sector will likely continue to face high borrowing interest rates on working capital. Low demand and credit availability will likely impact investment spending. Despite a quicker rebound next year, the output levels are likely to remain much below the prepandemic GDP levels and the potential output levels during our entire forecast period, which is until FY2023.⁹

In short, there is likely to be pain in the short term but the outlook in the medium term may improve significantly with a reduced number of infections.

All eyes are on union budget 2021–22: What to expect

While the availability of vaccines, reduced infections, and increased mobility will be key to economic and industrial revival, it is becoming obvious that different industries will likely see different rebound paths until the pandemic is over. The role of government policy measures and their effectiveness will, therefore, be important in determining the strength and pace of the revival. We expect the budget to be socially inclusive and growth-augmenting and the primary focus will likely be to:

Boost health and social care and defense resources: This pandemic is unlikely to be the last one India may witness and the government has to ensure better preparedness and resilience in times of emergencies and beyond. The government will likely increase budget allocation for building resilient health systems and infrastructure from the current 3.5% of GDP to at least 5% this year and target to reach the world average of 10% over the next 10 years.¹⁰ Besides, the government may also allocate spending for procurements and upgrading of defense resources to support operational capacities amid geopolitical tensions.

Provide targeted support to select industries: A few industries and sectors have suffered more than the others with delayed prospects for recovery, such as hospitality, and can play a significant role in creating direct and indirect jobs, such as infrastructure. The budget may announce policies and schemes targeted toward these industries and allocate more resources to support their revival. For instance, some of the measures could be to provide support to enterprises, create jobs, and boost wages for industries such as hospitality and fashion; offer targeted credit line support to stressed MSMEs and industries supporting MSMEs, such as automotive; and spending on the health and economic well-being of workers in stressed industries.

Improve the ease of doing business environment: The government will have to focus on improving the business ecosystems and attracting foreign investment to realize its vision of self-reliance. To ensure a consistent reform framework for policy certainty over the long term, the government can consider:

• Rationalizing the tax structure, with changes to the GST rate structure and easier compliances
• Allocating resources for investment in transport and logistics planning with the objectives of enhancing manufacturing and trade competitiveness
• Investing in economic corridors after a careful assessment of comparative advantages and identification of sectors and value chains
• Allocating resources to ensure social and health protection to workers, inclusion, and fair value to landowners while implementing labor and land laws
• Focusing on skill development as India steps into a new digitized and technologically advanced regime that will generate less repetitive and more intellectual jobs requiring cognitive skills

Support domestic demand and create jobs: The government will likely allocate higher resources on infrastructure spending and agriculture schemes to support jobs and income for low- and semi-skilled workers and create demand for goods produced by MSMEs. The high multiplier effects of these sectors will boost domestic demand sustainably. Spending is also likely to increase toward infrastructure-focused skill development opportunities and for teachers and medical staff with a focus on upskilling and reskilling talent. Tax cuts (for both personal and corporate income) are likely to be introduced albeit for those that have been most hit by the pandemic.

Generate resources to fund government expenses: The government will have to find ways to fund the allocated budget and manage fiscal balance. External borrowing, strategic disinvestments, and public-private participation could be a few options that the government may explore.

The good news is the government has already initiated several of these measures.¹¹ What will be important is to keep the foot on the pedal and prioritize spending on productive projects while de-risking them. The budget allocation should build on forward-looking initiatives by focusing on digitization and identifying areas and strengths for indigenous production, and ensuring that no one is left behind.