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Projected Impact of Covid-19 on Indian Economy

In Jan 2020, the World Health Organization (WHO) declared COVID-19 as a global health emergency. Since its inception in the inception in Wuhan, China, the virus has been detected in over 189 countries. The focal point of the virus later shifted from China to Italy and then to the United States where the infection in accelerating rapidly (Maital & Barzani, 2020). With more than 3 million infected individuals and thousands of mortalities, more than 79 countries have ordered businesses to close, instructed closure of borders and population to self-quarantine. As a result, people throughout the world are filling for unemployment insurance, increasing the threat of unemployment and the global economic recession (Mohan, 2020).

Moreover, after a delayed reaction, central banks are engaging in interventions in financial markets to stimulate the economy. International Monetary Fund (IMF) reported that spending and revenue measures used by governments to sustain economic activity amounted to around $3.3 trillion and the equity injections, guarantees, and loans amounted to $4.5 trillion. Such a high degree of investment in stimulus packages reflects the significant impact COVID-19 had on the global economy, and the Indian economy is not an exception in this case (Ray et al., 2020). This paper presents an analysis of the way COViD-19 is projected to impact the Indian economy.

The World Bank mentioned that the pandemic has severely disrupted the Indian economy and reported that the over the economy will decelerate to 5% in 2020 and projected a 2.8% sharp growth deceleration in a baseline scenario in 2020. Maital & Barzani (2020) mentioned that the economic impact of the virus on the Indian economy, depends upon various distinct factors like the effectiveness of policy responses, the virus spread itself, and the abrupt changes in the patterns of demand and supply. India went under a complete lockdown from Mar 24 after declaring a self-imposed quarantine. Moreover, a report by the Center for Disease Dynamics (Koshle, Kaur & Basista, 2020),

Economics and policy predicted that as many as 100 million people will contract the infection by June 2020 and the total number of victims is expected to reach 300 to 400 million by July. More than 70% if the Indian economy is under lockdown, with curtailed Labor movements and closed state borders. Industries in India have either significantly reduced or temporarily suspended their business operations. The Asian Development Bank suggested that the lockdown of the economy will take about 2.4% of India’s GDP (Abiad, Arao & Dagil, 2020). In addition to this, one of the leading providers of risk, business advisory, and financial services, KPMG, reported that the cost of lockdown in India could be more than $120 billion. The service sector alone could bear around $2.1 billion, considering the loss to the hospitality and tourism industry.

Furthermore, the Indian economy will also get impacted by a slowdown in the global economy, especially China. With increasing interest rates, fiscal deficit, and unemployment, the Indian economy has seen better days. The outbreak of COVID019 further added the fuel to this fire, sending tremors down Indian trade markets dependent on imports from China. For instance, 45% of consumer durables, 18% of auto component imports, and 66% of electrical components in India come from China. The adverse impact on trade is likely to be greatest for textiles, automotive sector, apparel, and chemicals (McKibbin & Fernando, 2020). This impact became evident when the Indian stock market suffered its worst single-day collapse in history.

This was a result of selling frenzy due to the business uncertainty presented by a coronavirus. The International Labor Organization also confirmed the adverse impact of coronavirus on the Indian economy and reported that the recent outbreak of COVID-19 will push around 5.3 million more individuals into unemployment. Unemployment is further exacerbated by the fact that self-employment, which often provides a means of sustenance during unemployment will not be effective this time (Koshle, Kaur & Basista, 2020). This is so mainly due to the restrictions placed by authorities on the movement of individuals, services, and goods across and within borders. The resulting disruptions in domestic demand and supply will also make it harder for authorities to revive the Indian economy.

In terms of growth estimates, Standard & Poor’s (S&P) reduced the growth estimate for Indian FY21 to 1.8% from 3.5% stating that the peak of COVID-19 will come somewhat later in India. The rating agency further mentioned that the supply and demand shocks will lead to a loss in corporate and household income of about $2.2 trillion (Bartik, Bertrand, Cullen, Glaeser, Luca & Stanton, 2020). GDP of India has been on the continuous decline after FY2018 when it peaked at 7.9. Unemployment was high; businesses were reluctant to take capes plans and exports were down for months. The advent of pandemic augmented the impact of slowing Indian economy.

Klein, Lin, Tseng, Scheuller & Kapoor (2020) identified that sectors like an auto which account for around 10% of India’s’ GDP and provide employment to more than 40 million people were already on a decline because of decreasing sales. Society of Indian Automobile Manufacturers suggested that auto sales hit a decade low in January 2019, and with the loss of income and lockdown, discretionary consumption will further make the situation worse for the auto sector. Moreover, Gumber & Bulsari (2020) mentioned that this will make it challenging for auto companies to retina workers which can further deteriorate the condition of the Indian labour market.

In addition to this, financial and banking services were already facing huge problems with the collapse of DHFL, Yes Bank fiasco, and IL&FS, even before the pandemic. NBFCs, micro-financial institutions, and private banks were aggressively building their retail loan book which can come under significant pressure in case of businesses witness major layoffs (Singh, 2020). To make the situation even worse, these loans are completely unsecured which can result in a slew of defaults, which can bring MFI and NBFC’s to the edge of collapse. Moreover,

IT which is a major player in the Indian economy is also not immune to the pandemic crisis as most of their business comes from North American and European counties that are severely affected by the virus. This can result in a loss of orders, not only form Banking, Financial Services and Insurance (BFSI) segment but also from sectors like tourism, aviation, and retail. Subsequently, the decreasing demand for fuels and the steeper downfall because of the reduction in economic activity may decrease the rate of inflation due to social distancing. Furthermore, RBI can also cut the cost to keep a check on inflation. Economists have also mentioned that the impact of the pandemic will be most significant on linkages, macroeconomic factors, and supply chain.

Reduction in an urban transaction can also lead to a steep fall in the consumption of goods that are not essential and due to customer sentiment and weak domestic consumption, there might be a delay in investment. In terms of sector-wise impact, 20% of chemical production has been adversely impacted due to disruptions in the supply of raw material (Koshle, Kaur & Basista, 2020). Moreover, the outbreak has impacted the movement of cargo service providers, as per day vessel has declined by more than 70%. The impact on the auto industry has been already mentioned, while the impact on the pharmaceutical industry has resulted in disruptions in drug export. The estimated impact of COVID-19 on various sectors of the Indian economy is mentioned in the table below.

Sector

Growth rate

Financial, real estate and professional services

-17.3%

Electricity, gas, water supply, and utility services

-13.9%

Trade, transport, hotels, communication and broadcasting services

-9.7%

Manufacturing

-6.3%

Public admiration, defence, and other services

-0.4%

Mining and quarrying

-14.7%

Construction

-13.3%

Overall GVA

-9.3%

Source: (Koshle, Kaur & Basista, 2020)

Moreover, the analysis of COVID-19’s economic impact by McKinsey & Company suggested that there are 3 possible scenarios related to the changes in India’s GDP because of the pandemic.

image illustrates Three economic scenarios model India GDP estimates

Source: (McKinsey, 2020)

The first scenario suggests that the economy could contract by around 10% in the 1st quarter of 2021, with a 1 to 2 % growth rate of GDP. In this scenario, the lockdown would be relaxed early and the amount of government spending required to revive the economy will be around $79 billion or 3% of the country’s GDP. In the second scenario, the Indian economy could reduce by around 20% with a 2 to 3% reduction in growth rate. In this case, the cost of stabilizing the economy would be more than $130billion or 5% of India's GDP (McKinsey, 2020). In this scenario, the loss of economy would vary according to the sector with more than a 30% reduction in consumption. The economic impact of COVID-19 according to the sector is mentioned below.

image illustrates The economic impact of COVID-19 in India will vary by sector

Source: (McKinsey, 2020)

Scenario 3 suggests a deeper economic contraction of approximately 8 to 10% in 2021. This could necessitate more lockdowns, causing much slower recovery and an increase in unemployment. Also, considering the magnitude of business failure, unemployment, and financial risk, the Indian economy will require a comprehensive package of monetary and fiscal interventions (McKinsey, 2020). This can be triggered progressively as economic conditions evolve and become more favourable.

As evident from the above-mentioned data, the pandemic can prove to be lethal for developing countries. With nonperforming assets rising to 10% and growth of GDP crashing to a 6 year low of 4.6%, India needs to be innovative to facilitate a V-Shaped recovery (Rani, 2020). The country should also borrow ideas from other countries in terms of providing disaster relief packages. Moreover, the private and public sectors in India should prepare for the worst and plan for the best scenarios, taking into account that a V-shaped recovery is not a guarantee (Gumber & Bulsari, 2020).

Several measures have been provided to limit the negative impact of a pandemic on the Indian economy and to ease the distress of households in India. The provided measures amount to 0.8% of GDP, however, additional measures are required to effectively stimulate the Indian economy. For liquidity support, banks can provide liquid lines to MSME, and banks can be allowed to restructure debt on balance sheets to raise capital. Moreover, the government can consider infusing capital into distressed sectors to safeguards MSME and workers (Mohan & Bhattacharjee, 2020). Overall, dividing system-wide, credible, and stabilization package in a timely fashion is required to improve the pace of recovery and to mitigate the impact of the pandemic on the Indian economy.

References

Abiad, A., Arao, R. M., & Dagli, S. (2020). The Economic Impact of the COVID-19 Outbreak on Developing Asia.

Bartik, A. W., Bertrand, M., Cullen, Z. B., Glaeser, E. L., Luca, M., & Stanton, C. T. (2020). How are small businesses adjusting to COVID-19? Early evidence from a survey (No. w26989).National Bureau of Economic Research.

Gumber, A., & Bulsari, S. (2020). COVID-19 Impact on Indian Economy and Health: The Emergence of Corona-Economics.

Klein, E., Lin, G., Tseng, K., Schueller, E., &Kapoor, G. (2020). COVID-19 for India Updates (Doctoral dissertation, Princeton University).

Koshle, H., Kaur, R., & Basista, R. (2020). Breakdown of Business and Workers in India: Impact of Corona Virus.

Maital, S., & Barzani, E. (2020). The Global Economic Impact of COVID-19: A Summary of Research. Samuel Neaman Institute for National Policy Research.

McKibbin, W. J., & Fernando, R. (2020). The global macroeconomic impacts of COVID-19: Seven scenarios.

Mckinsey. (2020). Getting ahead of coronavirus. Retrieved from https://www.mckinsey.com/featured-insights/india/getting-ahead-of-coronavirus-saving-lives-and-livelihoods-in-india#

Mohan, D. (2020). What will be the economic consequences of COVID-19 for India and the world?.

Mohan, D., & Bhattacharjee, A. (2020). A lockdown is the health response to fight coronavirus, but where is the economic plan?.

Rani, R. (2020).The Impact of Corona Virus on Indian Economy. Studies in Indian Place Names, 40(60), 3618-3626.

Ray, D., Salvatore, M., Bhattacharyya, R., Wang, L., Mohammed, S., Purkayastha, S., ...& Zhou, Y. (2020). Predictions, the role of interventions and effects of a historic national lockdown in India's response to the COVID-19 pandemic: data science call to arms. medRxiv.

Singh, K. (2020). How to Manage the Economic Fallout of the Coronavirus. Change.

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