Impact of COVID-19 on Indian Economy

Impact of COVID-19 on Indian Economy

By
Adithya Mokshagundam,24-Apr-2020
Assetmonk-COVID-19-impact-Indian-economy.

Impact on the Global economy

COVID-19 declared a pandemic is the cause of a drastic turnaround across the world. The development came to a halt. There is no production of goods and the burden on world governments to provide for people is increased. There is no export of goods leading to less income.

Travel is impossible and borders are closed not only between countries but also inside the country. There is an abundance of supply of some goods and scarcity of some other goods. People are not in a position to pay taxes leading to further stress on the government. This is a truly global crisis as no country is spared. Countries reliant on tourism, travel, hospitality, and entertainment for their growth are experiencing particularly large disruptions.

This is evident in the figures of GDP Growth projected by the IMF.

Assetmonk-IMF-report-april-2020

source: World economic outlook April 2020

UNCTAD Secretary-General Mukhisa Kituyi said that the economic crisis is unpredictable but it clearly indicates that the things for the developing economies will get worse before getting better.

Apart from India and China major economies projected a -ve Growth. However, there is a silver lining that the economies will bounce back in 2021 provided.

  1. People are able to meet their needs and that businesses can pick up once the pandemic passes.
  2. There should be timely and targeted fiscal, monetary, and financial policies like credit guarantees, EMI moratorium, unemployment insurance, enhanced benefits, and tax relief, etc
  3. As containment measures come off, there should be policies to encourage demand for goods, incentivizing firm hiring, and repairing balance sheets in the private and public sectors to aid the recovery.
  4. Moratorium on debt repayments and debt restructuring may need to be continued during the recovery phase.

One of the typical responses during and post containment is to have trade barriers for importing goods from other countries. However, this will have an adverse effect on the world economy and will lead to disruptions. To avoid the scenario, we need to

  1. To support spending in developing countries bilateral creditors and international financial institutions should provide concessional financing, grants, and debt relief.
  2. The activation and establishment of swap lines between major central banks have helped ease shortages in international liquidity.
  3. The collaborative effort is needed to ensure that the world does not de-globalize, so the recovery is not damaged by further losses to productivity.

Impact on Indian Economy

As a developing country, the impact of COVID-19 on the Indian economy is huge. The GDP growth rate which is already projected at a lower value before Covid -19 is further reduced. The IMF has projected a GDP growth rate of 1.9 for 2020. It is one of the few countries which has a positive growth rate projected. The major import of India is crude oil which is undergoing a price war and has reached the lowest value in the last decade. Also due to lockdown, the consumption of oil is reduced. This has a positive benefit for the country.

The major advantage of Covid-19 is pitching India in the global market as an alternative to China in the manufacturing industry. A lot of companies are looking for alternative locations to serve the purpose of manufacturing plants. One of the examples is the Samsung and Apple companies, Apple has its manufacturing facility based in China leading to loss of production facility during the lockdown. However, Samsung has alternative production plants to ensure supply is not impeded.

We must ensure that we will provide the opportunity to most of these companies to have their production plants in India.


Lockdown effect

  1. GST collections for the FY 2019-20 is more than those in FY 2018-19. However, during the month of March when a lockdown is in place the value is less than that of 2019-20. There is also a significant downtrend from Jan 2020 to March 2020.
  2. Apart from essential services no other services are currently operational. This led to a severe loss in terms of retail revenue. Also, the retail spends from consumers came to a halt.
  3. The number of registrations came to a minimum amount leading to a loss in stamp duty for the government.

The above are the losses to the government revenue due to lockdown. To ensure that the people are not inconvenienced the government has introduced relief measures to support people. This is an additional burden for the government. They are

  1. Announced a package of Rs.1.7 Lakh Crores. Released Rs.27,281 Crores in cash and social transfers.
  2. Released Rs 7,100 crore to states to liquidate pending wages and material.
  3. Limit of collateral-free loans for women self-help groups to be increased to Rs 20 lakh from Rs 10 lakh.
  4. The advance of 75 percent of the PF amount or three months of wages, whichever is lower

Due to Government actions, we are in a condition to look at any kind of exit proposal. Most countries are not even looking for economic revival as they are more focussed on restricting the virus spread.

Currently, we have around 18,658 cases with Maharashtra recording the highest number of cases. However, we have several positives indicators they are

  1. Recovery rate increased to 16%
  2. 411 districts are covid-19 free in India i.e. 51% of the districts
  3. 46% of cases are more focussed in 4 states
  4. The number of days it takes for doubling the cases increases to 7.3 days

This has led the government to look into a post lockdown situation. The Indian Government is treating this as an opportunity to attract countries like the USA, Japan who are looking to divert their investments in China. These countries are looking for allies who can produce high-quality products at reasonable prices.


Post-Lockdown effect

The government has proposed a staggered exit. This is to ensure there is no economic slowdown, while ensuring the safety of people. The proposal will try to kickstart the economy through the careful restructuring of relief to industries. Agriculture and manufacture are 2 industries that should be given priority in the staggered exit. Post that it will be real estate, transport industries.

The manufacturing industry should be the most focussed industry for the government in the staggered exit policy. The industry is essential in ensuring raw materials to be available for further industries like real estate etc. The manufacturing industry has the largest workforce and ensures a livelihood for them. It also ensures there is cash flow in the market as the spending increases and remaining industries will also be benefitted.

The government is looking for a “W” growth curve compared to the previous estimate of a “V” curve.

There is a possibility that the economy will increase post the easing of lockdown. However, there can be cases that will come up later and impact the growth projection leading to a “W” growth curve.

However, one good thing is we are above the remaining countries in terms of rate cuts by RBI. This helps in liquidity. We also expect more initiative from the government towards the manufacturing industry by projecting India as a destination for various companies across the World. We are expecting India to rise above the current situation. We believe the course of economic recovery will be smoother & faster than that of many other countries