COVID-19 AND
ITS IMPACT ON INDIAN ECONOMY
Introduction
1. Towards
the end of 2019, the news of a novel coronavirus started emerging from Wuhan
in China. While the spread was rapid and effect on those infected horrifying,
the scale of devastation that it has come to acquire, was rarely imaged. Even
the experts and agencies like WHO also did not consider it very serious in the
initial stages. It is only when the virus spread out to other countries and a number of casualties started rapidly rising, that world took cognizance and
national level efforts started to contain the spread.
2. The threat was larger than World Wars in its spread and engulfed almost the entire
world, forcing nations to take unprecedented steps of widespread lockdown
bringing the economies to a screeching halt. With complete energy diverted
towards Corona battle, everything else became secondary in priority. In the
second-most populous country in the world, India also announced 21 days
lockdown to prevent the country from an imminent disaster. While efforts at war
footing have been launched, it is premature and uncertain to assume that the
impact of the virus has been contained. There are suggestions of the virus coming back
even to those regions that were considered to have successfully contained it and
were proceeding to open up the restrictions.
3. Under
these evolving conditions, it is difficult to say with certainty as to what will
be the long-term impact of Coronavirus on the world in general and on India in
particular. But this paper attempts to assess the short- and medium-term impact
of this virus on the Indian economy.
The Pandemic
4. Before
Corona pandemic, there were similar occasions that led to mass infection and
deaths. The flu pandemic of 1889, that started from Russia, spread to a large part
of the world within a short time and claimed close to one million lives. Similarly,
Spanish flu of 1918, the deadliest of the pandemics so far, infected close to 500
million people and claimed about 100 million lives. Likewise, the Asian flu,
SARS, Ebola, and AIDS have claimed millions of lives in the past. However, the
mortality rate of Coronavirus is much higher as per current statistics.
5. Since
Nov 2019, the COVID-19 has spread across the world and has exponentially infected
close to a million people and has claimed about 50,000 lives. The sharp and
rapid rise in the number of cases has made even the most powerful nations look
helpless and meek. China, however, appears to have flattened the curve to
contain the pace of spread after enforcing some of the very stringent measures.
The spread, after being relatively flat in the initial stage, took a steep
upwards turn in March and indicates almost vertical climb of the curve (Figure
1).
Figure 1: Exponential
Rise of Corona Cases in the World[1]
Figure 2: Daily Cases in India
7. India’s
response to contain the virus has been much better than expected and includes bold
measures like 21 days lockdown, a period when this
piece is being written. As the day-wise figures indicate, the social
distancing measures put into place seem to have an effect. Various models have
been put out on the likely impact of these measures on the spread of the virus.
Based on a study conducted by Rajesh Singh and R Adhikari titled ‘Age
Structured impact of social distancing on the COVID-19 epidemic in India’ only
two scenarios are likely to bring the spread under control in India. The first
is three sets of lockdowns of 21 days, 28 days and 18 days with a gap of 5 days
between each period bringing the spread under control by 10 Jun 2020 and thee
second is a single lockdown of 49 days, bringing the spread under control by 13
May 2020. It can this be assumed that normalcy would return earliest by Mid May
2020 and latest by end Jun 2020 if the measures are effective.
8. There
are a large number of experts who have also given their advice on the spread
and ways to contain the spread. This article intends to update readers on the
possible economic impact that this pandemic is likely to have based on an
informed assessment of the situation and various reports published.
The Economic Impact
9. In
recent past before the outbreak of Coronavirus, India had witnessed economic
slowdown for a variety of reasons. The quarterly growth had been declining successively
for six quarters up to Q2 FY20 and started to show signs of some recovery in
the Q3 FY20 when the quarterly growth of 4.7% was registered. With many
structural reforms and measures to boost the growth, it was expected that
growth may pick up in following few quarters.
Figure 3:
Quarterly GDP of India
10. However,
due to unprecedented measures that had to be taken to contain the spread of the
virus, the economy with various constituent sectors staring at medium to long
term shocks.
11. As
economic engine is more like a sluggish giant that takes time to respond to
measures, the lockdown shock is like application of emergency breaks that stops
the movement rather quickly, but takes much longer to accelerate post the halt.
The situation is likely to accentuated by widespread migration of labours and
their subsequent slow return back to their workplaces post return of normalcy. Hence,
even in the best-case scenario of infection containment at the end of lockdown
in mid-April 2020, the economic recovery is likely to take much longer time.
12. As
the negative impact of the pandemic commenced in Feb / March 2020 when most of
the current fiscal year was over, the current fiscal is not likely to manifest
much of the negative impact. However, as the lockdown will continue in next
fiscal FY 20-21, the first and second quarters are likely to be worst affected,
particularly the first quarter. As
indicated above, there may be two broad scenarios for India. One 21 days
lockdown and second 49 days lockdown. In both the scenario, the economic impact
is likely to significantly different.
13. The estimates
of the likely economic impact has been made on the basis of following presumptions:
-
(a)
The estimates have factored in the following sectors
of economy: -
(i) Agriculture, Forestry
& Fishing.
(ii) Mining & Quarrying.
(iii) Manufacturing.
(iv) Electricity, Gas, Water
Supply & Other Utilities.
(v) Construction.
(vi) Trade, Hotels, Transport,
Communication & Services related to Broadcasting.
(vii) Finance, Real Estate
& Prof Services.
(viii) Public Administration,
Defence & Other Services.
(b) These are the same sectors
that are indicated in the calculations of GVA & GDP for the economy in the
data published by Ministry of Statistics and Programme Implementation (MoSPI). Out
of the above, the impact has been assessed as follows: -
Sector /
Item
|
Share of
GDP
|
Likely Impact
|
(i) Agriculture,
Forestry & Fishing
|
17.60%
|
Least
|
(ii) Mining
& Quarrying.
|
2.12%
|
Moderate
|
(iii) Manufacturing
|
15.13%
|
Severe
|
(iv) Electricity,
Gas, Water Supply & Other Utilities
|
2.57%
|
Least
|
(v) Construction
|
7.61%
|
Severe
|
(vi) Trade,
Hotels, Transport, Communication & Services related to Broadcasting
|
18.29%
|
Severe
|
(vii) Finance,
Real Estate & Prof Services
|
21.25%
|
Moderate
|
(viii) Public
Administration, Defence & Other Services
|
15.44%
|
Least
|
(c) The impact has also been
graded with Q4 FY 19-20 least affected and Q1 FY20-21 most severely affected.
Things will gradually return to normal in subsequent quarters.
(d) As the decline is sharp,
the recovery is also likely to be sharp as economy will start functioning again
after the lockdown. However, due to a number of factors, it will take longer to
attain pre-Feb 20 growth rates. Out of the total impact, 70% has been assumed
to occur during Q1 FY 20-21, 20% in Q2 and 10% in Q3.
(f) On sectors like
construction and manufacturing, the recovery will be even longer due to large
scale migration of labour. Migration of labours will also have some impact on
agriculture sector as well.
(g) The estimated quarterly
GDP, in these two scenarios of lockdown, is indicated in Figure 4 below.
Figure 4: Estimated
Quarterly GDP Growth / Contraction Post Lockdown
14. With
these quarterly numbers rolling out, the estimated GDP growth for FY 19-20 is
estimated to be around 3.3% (against 5% earlier) and that of FY 20-21 to be 2.8.%
(against 5.9% earlier) in case of 21 days lockdown and (-) 2.8% if the lockdown
is extended to 49 days period.
15. In
case of first scenario of 21 days of lockdown, in FY 20-21 the economy is
likely to suffer loss of GDP to the tune of ₹ 9.66 Lakh
Cr (4.6% of GDP). However, in case of second scenario of 49 days lockdown
rolling out, the loss is estimated to be ₹ 20.96
Lakh Cr (9.48% of GDP).
16. While
the overall economic impact has been estimated here, there are sectors like
tourism, aviation, railways, road transport, construction, manufacturing amongst
others that will suffer more than the others.
Economic
Stimulus
17. With the
economy facing grave risk, the government has come out with stimulus to minimise
the likely loss to the economic activities and more importantly, to support the
people at the bottom of the income pyramid who are likely to suffer the most.
18. The package
has been a graded response that has attempted to address one issue at a time.
It started with relaxing some compliance requirements, followed by a package
for the weaker section of populace and measure to increase liquidity with maintain
financial stability.
19. The
package for the vulnerable sections of the society is estimated to cost ₹ 1.7 lakh Cr wherein the measures include providing food grains at highly
subsidised rates, cash transfers, free cooking gas cylinders for three months,
insurance for frontline health workers amongst others. This cost of this
package may be partly borne by some PSUs, but a major portion will add to the
fiscal burden of the central government. In addition to the package announced by
the central government, almost all states have come out with some relief plan
for the vulnerable strata of the society like providing daily meals and shelter
to the needy.
21. However,
considering the impact on the economy that may vary from about 4.6% to 9.5% of
the GDP, the package of ₹ 1.7 Lakh Cr (0.8% of GDP) appears highly inadequate. In case we consider
the scale of packages that have been announced by other countries (close to 10%
of their GDP), the package appears even more insignificant.
22. Apart
from this, the cost of free medical treatment and quarantine of the suspected
cases, where most of the government machinery including armed forces are
involved, will also be significant.
23. To
ease the pressure on liquidity and to maintain the stability of the financial
system of the country, RBI also took some significant steps. Considering that
the COVID-19 impact is more predictable in the long run, than in the short run,
the impact is time inverted.
24. The
RBI thus would have to support businesses as well as to take measures to
inspire business confidence and the measures taken seem to point in the right
direction. This includes the following: -
(a) Safeguarding liquidity
conditions in the banking system through repo and CRR cuts. The CRR cut of 1%
alone (4% to 3%) is expected to infuse 1.37 lakh crores liquidity into the
banking system. Additionally, the increase in Marginal Standing Facility limit
to 3% from 2% will also provide additional liquidity of a similar amount.
(b) The repo rate has been cut
by 75 basis points to 4.4% with reverse repo being cut by 90 basis points to
4%.
(c) The RBI has put in
measures to protect continued flow of credit to the real economy through
fundamental recalibration of the targeted longer-term refinancing operations
and a universal forbearance program for stressed sectors to long term bank
credit flow.
(c) To give relief for
borrowers, the RBI has allowed a three-month moratorium on all term loans. This
would provide stability and ease the stress on individuals and organisations.
23. While
these measures have provided much needed immediate relief to the business community,
there were demands from the sectors like tourism and aviation, that are suffering
the most during the lockdown period.
Fiscal Deficit
24. With the
economic activity suffering, it is bound to have a negative impact on the fiscal
health of the central as well as state governments. While it will take some
time to compile the combined fiscal deficit post-Corona pandemic, the impact on
fiscal deficit may not be very significant as the major cash outflows will
occur in next fiscal FY 20-21.
25. If we
consider the economic package of ₹ 1.7 Lakh
Cr announced on 27 Mar 20 alone, the effective fiscal deficit, after taking
into account the extra-budgetary sources as well, is estimated to touch 7.3%
for FY 20-21, as against the budgeted target of 3.5%. This may increase even
further, if additional stimulus is provided, which at this stage appears
inescapable. The condition is likely to get more aggravated with declining tax
collections.
Figure 5: Estimated Fiscal Deficit Post Corona
Lockdown (1.7 Lakh Cr Package)
26. However,
under the present exceptional circumstances, sticking to FRBM targets and
containing the Government expenditure may not be very desirable as the primary
aim is to minimise the losses to the economy. With Indian economy having the
potential to attain 12% nominal GDP (8% real) in normal conditions and given
the present rate of growth of public debt of ~ 8%, the debt to GDP ratio of the
Central Govt. can be raised by 2 to 4%[2]. This would provide
extra headroom to the Government to provide much-needed stimulus to the
economy.
Impact on Stock Markets
27. The severity
of the impact of COVID-19 can also be assessed with the help of the sharp corrections
that have taken place in stock markets around the world. Similarly, the NSE Nifty in India crashed
from a high of 12246 in Feb to a low of 7610 in March 2020, a decline of about
39%. Though the stock market has witnessed heavier crashes in the past, the
rate of decline in March 2020 was the most severe.
Figure 6: NSE
Nifty 50 Index
Post Corona World
28. Having
seen the impact of COVID-19 on Indian economy, let's look at post-Corona World. After
the world recovers from this pandemic, the world is not likely to be same
again. There will be systemic readjustments amongst various nations as well as
in the individual lives of humans. Some points are highlighted here: -
(a) World Supply Chains will
gradually readjust to reduce their risk of over-dependence on China. This may
result in world realigning towards countries like India that can offer
alternatives to China in cheap and young labour.
(b) Nations will practice more protectionism
and less of globalisation.
(c) Countries will focus more
of medical research in general including viruses.
(d) Countries will take up
creation of medical infrastructure as a priority area. Most companies /
countries engaged in manufacture / supply of medical equipment are likely to
benefit.
(e) WHO is likely to witness
some changes in its leadership and re-write is SOP on response to situations
like Corona in future.
(f) In finance risk, hedging
will gain more importance. The insurance sector is likely to benefit in general.
(g) Countries may witness
reduction in high levels of polarisation in political and social classes.
(h) Digital transactions will
get a boost.
(j) Personal finance will
also, witness a structural change where more focus will shift to the creation of
risk pool or emergency pool of money.
(k) Work from home will
become more acceptable across sectors. Working from home brings down
establishment costs and technology can ensure a minimum level of output.
(l) Post lockdown, the birth rate may see a
spike similar to the baby-boom post-world war.
(n) Visits to theatres,
tourist places may see a temporary decline for some time.
No comments:
Post a Comment