Despite three COVID waves, India's economy rebounded strongly, according to a US Treasury assessment

13 Jun 2022 , 01:16 PM

Despite three big COVID-19 waves, the Indian economy has returned strongly, according to a report to Congress released on Friday by the US Treasury. The US Treasury said in a semi-annual report that India’s severe second wave impacted significantly GDP through the middle of 2021, postponing the country’s economic recovery.

“However, as India’s vaccine rollout increased, economic activity rebounded sharply in the second half of the year,” the Treasury noted, praising India’s vaccination efforts.

It reported that by the end of 2021, around 44% of India’s population had been completely vaccinated and that after shrinking 7% in 2020, output had rebounded to pre-pandemic levels by the second quarter of 2021, with full-year 2021 growth of 8%.

India has been dealing with a third large epidemic caused by the Omicron type since the beginning of 2022, although the number of deaths and broader economic consequences has been minimal, according to the report.

In the face of the pandemic in 2021, the Indian government continued to offer economic assistance to the economy, according to the report. According to the report, the overall budget deficit for the fiscal year 2022 is expected to be 6.9% of GDP, which is greater than deficits before the pandemic.

The Reserve Bank of India has retained its key policy rates at 4% since May 2020, according to the Treasury, but it began progressively unwinding the exceptional liquidity measures meant to boost growth during the early stages of the coronavirus epidemic in January 2021.

Following a current account surplus of 1.3 % of GDP in 2020, India’s first since 2004, the country’s current account deficit increased to 1.1 % of GDP in 2021.

A substantial deterioration in India’s trade deficit, which extended to USD177 billion in 2021 from USD95 billion the previous year, prompted the return to a current account deficit, according to the report.

Furthermore, given the economic recovery and rising commodity prices, notably energy costs, goods imports grew particularly quickly in the second half of 2021, resulting in a 54 % year-on-year rise in 2021. India’s exports increased by 43 % in 2021, but at a slower rate than imports, according to the report.

According to the report, India’s services trade surplus (3.3 % of GDP) and income surplus (1.3 % of GDP) balance the country’s larger goods trade deficit.

According to the Treasury, remittances increased by 5% in 2021, reaching USD87 billion, or 2.8 % of GDP, and India’s external situation was substantially in line with economic fundamentals and acceptable policies in 2021, with an expected current account shortfall of 0.3 % of GDP.

According to the research, India’s bilateral trade imbalance with the US has increased dramatically in the last year. Between 2013 and 2020, India and the United States had bilateral goods and services trade surpluses of over USD30 billion.

The goods and services trade surplus in 2021 was USD45 billion, up from USD34 billion in the four quarters leading up to December 2020. In 2021, India’s bilateral goods trade surplus increased by 37% to USD33 billion, while the bilateral services surplus increased by 29% to USD12 billion.

As the US economy recovered significantly in 2021, the recovery was mostly driven by increased US demand, notably for goods, according to the Treasury.