2020 may have been the worst year in Indian economic history. Thanks to a 68-day national lockdown from March 25, 2020, imposed to prevent the spread of the Covid-19 pandemic, economic activity has gone into a spin. India’s gross domestic product (GDP) suffered an annual contraction of 24.4% and 7.4% in the quarters ending June and September 2020. The annual GDP contraction 2020-21 was the most significant never recorded: 7.3%. The large-scale disruption (and its favorable base effect the following year) ensured that barring another catastrophic event, growth rates would increase dramatically in 2021, especially starting in the June quarter.

The second wave of Covid-19 – it peaked on May 9 in terms of a seven-day average of new daily cases – was the kind of disaster that even statisticians expect in their calculations. While the second wave was much more severe in terms of infections and deaths, the economy was spared to some extent as there was no national lockdown. This ensured that the second wave disturbance and sequential recovery, as tracked by some high frequency indicators, was better than that seen in the first wave.

This is one of the main reasons why the overall growth numbers are not expected to be good. However, a simple comparison of GDP growth rates – the Reserve Bank of India’s projection of 9.5% growth in 2021-2022 to a 7.3% contraction in 2020-2021 – can give a picture misleading recovery. An example shows this clearly. If India’s GDP was 100 in 2019-20, it has fallen to 92.7 in 2020-21 and is expected to rise to 101.5 in 2021-22. Recovery is not as good as it looks. Even if the Indian economy had grown by 4% per year – this was the growth rate in 2019-20 and the lowest since 2008-09 – in 2020-21 and 2021-22, GDP in the last year would be 108.2. Higher GDP translates into higher per capita incomes for the population.

That the Indian economy has strayed from its long-term growth path due to the impact of the pandemic – the International Monetary Fund (IMF) slashing India’s potential growth rate from 6.25% to 6 % is the most important institutional recognition of this fact – is only part of the story.

What is more important, and still not fully understood due to the lack of adequate data at the moment, is the difference in how the pandemic has affected the rich and the poor, both at the corporate and household level. .

Anecdotal accounts offer what can be described as circumstantial evidence. Corporate profits, for example, have grown at a rapid pace even as inflation eats up real wages. This suggests that the poor have suffered much more than the rich as a result of the pandemic disruption. A direct reflection of this can be seen in different measures of economic sentiment. The RBI Consumer Confidence Index is still well below pre-pandemic levels, while the price / earnings multiple (PE) for BSE continues to be at high levels.

In fact, there is a growing consensus (of course, there are also divergent views) that even if there is no disruptive third wave – the exact assessment of the threat of the Omicron variant of Covid-19 is still understood at the time. to write this article – it is the distributive impact of the pandemic that could have the most important consequences for the long-term prospects of the economy. It is the non-rich who spend most of their income or what economists call marginal propensity to consume. The failure of the RBI’s Monetary Policy Committee (MPC) in December 2021 to revise its growth forecast for the quarters ending in December 2021 and March 2022 despite higher GDP growth than expected in the September 2021 quarter supports this argument.

What has further blurred the economic tracks in 2021 is the multifaceted impact of inflation.

First, there is the “terms of trade” or the effect of relative prices in India. Non-food inflation has increased at a much faster rate than food inflation. This means that the prices of debts for farmers are increasingly lagging behind the prices of debts. This will undoubtedly reduce their purchasing power, and therefore the rural component of aggregate demand. It should be remembered that agriculture was the only sector to escape a contraction in 2020-21, providing a critical cushion for the economy. Agriculture growth could still be high in 2021-2022, but with the deterioration of the “terms of trade” the demand cushion may not be the same.

In 2021, there was also lingering uncertainty in international commodity markets due to concerns about the pandemic. Demand outlook for a large number of commodities; crude oil being the most important, can change drastically depending on the state of the pandemic in the world. And nobody knows for the moment with a reasonable degree of confidence what the latter will be. Brent crude prices fluctuated sharply in 2021, going from a low of US $ 50.37 on January 4 to a high of US $ 85.76 on October 20 before falling back to US $ 71.52 on December 20. Uncertainty over oil prices also means that the tension between fiscal prudence and inflation / demand will not end in 2021. The central government has made significant windfall gains on petroleum taxes by 2020 and 2021, and this has been accompanied by a sharp increase in fuel inflation.

The year 2021 also saw a supply side aspect to inflationary uncertainty, in large part due to the disruption of global value chains. Not only has this led to a price increase; most household appliances and automobiles have become significantly more expensive, there is also a supply constraint in the literal sense of the word. This has become a major headwind, even for the demand of the rich.

Unless the Omicron variant of the Covid-19 virus causes the workload trajectory to spike sharply, 2022 will not have any economic surprises. Certainly, there is a possibility of downward revision of the GDP figures for 2020-21, as the figures for the informal sector are integrated. What must be observed, however, is whether the gap in recovery dynamics between the haves and have-nots is narrowing or not. If this does not happen soon, there is a real possibility that the formal sector will also lose its growth momentum, especially when the pent-up demand component of the rich has dissipated.