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Indian economy Impact of Corona
August 23 2020

The Impact of Covid19 on the Indian economy

Shekhar SengarBusiness and Economy

The Indian economy grew 4.2 per cent in FY 2019-20 and 3.1 per cent in the quarter ended March 31 2020, indicating that the economy was already shrinking before the Covid19 lockdown started. Last year (FY 2019-20) the economy recorded 5.2 per cent growth in the first quarter ending June. First quarter report for the fiscal year 2020-21 would be officially released on August 31, 2020. Corona has severely impacted economic activities in the country. The post corona outbreak lockdown that lasted more than two months had remarkable adverse effect on supply chains, retailing, manufacturing, especially the SMEs. Experts opine that even at the lower end of the range, the contraction will be historic. They warned that a recovery may take a while as the virus spreads and infection numbers rise, prompting further localised closures. Their contraction estimates ranged from 13.6% to 25.7% and are in line with those seen in other countries hit hard by the coronavirus. They suggested that India needs to gain control over the outbreak to ensure that economic recovery is sustained warning that local lockdowns were hurting the nascent recovery. According to a poll conducted by the Economic Times, Covid-hit Indian economy may have shrunk 14-26% in Q1.

India Ratings sees a 13.6% contraction, the least in the poll. Chief economist DK Pant said no quarter in the fiscal year would see positive growth. Think tank National Council of Applied Economic Research (NCAER) forecast the steepest decline of 25.7%.

With a similar outlook of no positive growth this year, Sonal Varma, Nomura’s chief economist for India and Asia excluding Japan, pegged the first-quarter contraction at 15.2%.

According to India’s retail association, sales of non-essential items – such as clothes, electronics, furniture – fell by 80% in May 2020. Even sales of essential goods – such as groceries and medicines – dipped by 40%.The near future looks uncertain as infections as the government is yet to announce uniform procedures for businesses that are reopening. Meanwhile sales are expected to slide further down, even as high-street shops, malls and other commercial markets are scheduled to reopen gradually.

One of the silver linings in a populous country like India is that not all businesses were closed during the lockdown – those deemed essential, from agro products to power, food supply to healthcare – continued operating. And more businesses have been allowed to reopen since early May. But they are all bogged down by low demand, falling exports, labour shortages and new rules of operation requiring social distancing and other safety measures to curb the pandemic.

India’s growth engine was actually sputtering well before the threat of outbreak arrived. Once one of the fastest growing economies in the world, its growth slowed to 4.7% last year – the slowest level in six years. Unemployment was at a 45-year high last year. Industrial output from the eight core sectors at the end of last year fell by 5.2% – the worst in 14 years. Small businesses had only just begun to recover from the controversial 2016 currency ban (demonitisation) that came as a body blow to the cash-consuming informal economy. Now, experts say the coronavirus outbreak is likely to further cripple the already frail economy

Looking forward

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, suggests that here is need for  a structured approach to on-and-off lockdowns and have a comprehensive fiscal plan to help the states so that the states can get the desired confidence and mojo back! As of now, containing the virus in rural areas must be the top priority.

The Indian government has made all efforts within the given constraints to reverse the adverse effects of the Covid pandemic on the Indian economy. India has announced a $23bn (£18bn) relief package to help India’s unorganized/ informal industry employees, constituting about 94% of the working population of India and contributing about 45% to its overall output. This industry is already bearing the brunt of the lockdown with thousands finding them unemployed overnight. The package includes a combination of direct cash transfer benefits and food security measures.

Shekhar Sengar
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