INDIA POST COVID-19: CHALLENGES AND OPPORTUNITIES

I. Introduction[1]

The COVID-19 virus has caused havoc around the World. The preventive measures with various form of restriction and lockdowns, has affected the economy badly. With the number of cases of COVID-19 rising around the world, irreversible losses are caused both to human life as well as economy. The future of Indian Economy depends upon how well it can manage to keep the economy running thorough it policies and actions. The curve of infection is slightly slower in India but its impact has been disastrous in many ways. There was a loss of $4.5 billion dollars every day during the initial lockdown of 21 days.[2] About half of the businesses of the nation are affected severely and supply chains are also the victim of the pandemic. [3]

There will be a deep impact on the economic activity by the extension of the lockdown by the government which can sharply cut India’s GDP forecast for the current financial year, contraction of more than 2% is expected. [4] In its Global Economic Prospects Reports, the World Bank expected India’s GDP to contract by 3.2% in 2020-21. It further indicated a moderate recovery to 3.1% growth in the financial year 2021-22. [5] As per the report, the GDP of India in 2021-22 will be than the GDP of India in 2019-20.

• The Effect of Government’s Relief Package

The Indian economy is entering a contraction phase after a prolonged slowdown. A great stress can be seen in resources both businesses and government.  The government’s policy in response to the COVID-19 pandemic will be a challenge, since it has to distribute very scarce resources to satisfy unlimited demands of the nation.[6] To alleviate the economic fallout, the government had announced a $266 billion support package containing both fiscal and monetary measures worth around 10% of India’s GDP.[7] However, economists have contended that there is very little planned spending and expect its benefits to been seen only in the medium term.

The factors that determine the shape of recovery include the duration of the pandemic, its impact on jobs, businesses and household incomes, the extent of fiscal stimulus provided by the government etc.[8]

The RBI expects the economy to contract in FY21 (2020-2021), however it has not yet given a level to it. Some analysts have predicted if the lack of a vaccine forces the government to continue with the semi-lockdown phase, the economy will contract by as much as 5%.[9] The sharp reduction in the GDP contraction also led to revise up the fiscal deficit estimate by 0.50% to 6.3% as against 4.6% achieved in FY20.

Ii. Effects of lockdown (covid-19 pandemic) on Indian Economy

The COVID-19 pandemic has withered the Indian Economy by bringing it to a halt. The impact of the lockdown ranges from rich to poor. A sharp decline was noticed in India’s industrial production from April when the nation went into lockdown and most of the production houses were shut completely.[10] The index of Industrial Production contracted by 55.5% compared with the same period a year earlier which includes sectors such as mining, manufacturing and electricity. The sharpest decline for the month of June was seen in the Manufacturing of consumer durables.[11] 

A drastic fall was observed in the Business activity in the services sector in May as the pandemic hindered operations and there was minimal demand in the market. A sharp decline was also observed in Domestic travel and tourism sectors which contributed to the fall in services business activity.[12] According the statistics of Society of Indian Automobile Manufacturers, the auto manufacturing sector suffered from the daily turnover loss of approx. $300 million per day for each day of closure during the lockdown.[13] 

India’s GDP is set to contract anywhere between 5% and 10% this year – for the first time in four decades. With industries, transport, shops, and malls shut, economic activity came to a grinding halt in India from the end of March.[14] There a total wipe out of Domestic consumption, which makes up around 57% of GDP. Pay cuts and layoffs, combined with the lack of shopping, completely eroded demand.[15]

In India, job availability has always been a major problem with the employment vacancies being heavily outnumbered by the unemployed candidates. Even before the lockdown, Indian economy has been facing jobless growth i.e. a situation where GDP grows but employment remains stagnant or falls and if this trend continues further, the economic recovery will take a long time. Without enough jobs, households incomes will be under strain and the economic recovery will be sluggish.[16] The decrease in household expenditure since lockdown has had a particularly damaging impact on smaller businesses, which have already been affected by the demonetization policy of 2016, and the goods and services tax (GST) being introduced by the government in 2017.

• Situation of MSMEs in India during COVID 19 Pandemic

Since the financial condition of MSMEs were already not in the best shape before the arrival of COVID-19 Pandemic. Small companies don’t want more debt and get trapped in debt trap during the lockdown. “Some of the MSMEs haven’t still recovered by the impact of GST and demonetization,” remarked Sunil Kumar Sinha, principal economist at India Ratings. “If the demand or sales remain so tepid, they might not be able to repay the debt.”[17] He added that the companies must reach 70% capacity, in order to service debts which can be achieved only if there is an increase in the demand. Further, the problem of lack of demand is not paid much attention by the government though it policies.

It must be noted that Indian banks were already bruised before the arrival of COVID-19 pandemic and their condition is expected to deteriorate further as bad loans dent their profitability in the current economic conditions. As per the reports of S&P Global Ratings indicate “Should these conditions prevail beyond fiscal 2021, continued risk aversion, particularly from the more selective private sector banks, could stymie credit growth. This would put yet another brake on the economic recovery.”

• Lack of Demand in the Consumer Base

One of India’s greatest economic assets is its large consumer base. Since the arrival of COVID-19 pandemic and lockdown being introduced across the nation, people have become less optimistic and fearful about the current situation and expectations of future progress has reduced. Data from the Reserve Bank of India showed consumer confidence collapsed last month. The current situation index and the future expectations index were both below 100, indicating that consumers were pessimistic. A reading above 100 represents optimism.[18] Various reports suggest that millions of people in India lost their jobs due to the lockdown, particularly in the informal sector.[19] According to experts, the loss of job would increase the risk of poverty across the country, greatly affecting the daily wage earners and low-income households. As per the information provided by the Centre for Monitoring Indian Economy, the unemployment rate in both urban and rural areas across India rose sharply in late March. The unemployment rate remained severely high in April, before showing signs of progress in May when restriction were partially relaxed and some activities resumed but as the lockdown still continues in several parts of India after the huge number of cases of COVID-19 were witnessed across, the revival of economy to the levels before the COVID-19 pandemic still remains a mammoth task before the government.[20]

III. Recovery of Indian Economy Post Covid-19 Pandemic

With the businesses across the nation dealing with losses, there are fresh challenges to tackle the spread of COVID-19 once the economy reopens. The virus is spreading at a greater pace in India as the country may not able to afford further restrictions and the economic activity restores back to normality.[21] “The risk would emanate from the longevity of the Covid-19 and the extent of the dent caused by it to the economy,” said Harshad Borawake, head of equity research at Mumbai-based mutual fund Mirae Asset Investment Managers India. He further remarked that there could be further delay or derailment of the recovery process, if the lockdown gets reimposed in the key states.

In the instance, economic disruption lasts for a long time resulting in several activities being forgone instead of being deferred. In such a circumstance, and assuming incomes and jobs are not permanently lost, the economic growth recovers sharply and returns to the path it was following before the disruption. This is called a “V”-shaped recovery. However, in case this recovery is slower and takes more time because the economic disruption resulted in several jobs being lost and people losing incomes, drawing down on their savings etc., then the economy will follow a “U”-shaped path. In such a scenario, after the initial fall, the recovery is gradual before regaining its momentum. If this process is more-long drawn than it throws up the “elongated U” shape.

In light of the Covid-induced disruption, there is a possibility of “W”-shaped recovery as well. This shape allows for the possibility of a V-shaped recovery, which is pegged back by a second wave of infections until of course, the economy recovers for the second time. The last scenario is the one policymakers most dread. It is called the “L”-shape recovery. In this type of recovery, the economy fails to regain the level of GDP even after years go by. As the shape shows, there is a permanent loss to the economy’s ability to produce.

. Most economists are unanimous that in the current financial year, India’s economy will contract. The difference of opinion is only about the extent of this contraction. The range varies between minus 4% to minus 14%. Many economists are of the opinion that after hitting rock bottom this year, the economy will start its recovery in the next financial year (2021-22).[22]

According to a detailed analysis by Pronab Sen, former Chief Statistician of India, that was published in Ideas for India over the weekend, India’s economy will contract not just this year but also in 2021-22.

“As things stand, and the government retains the 2020-21 expenditure budget for 2021-22 as well, it is likely that 2021-22 will witness a GDP growth rate of -8.8%. This is a frightening thought since it means that the country could experience a full-blown depression, the first in our history as an independent nation,” writes Sen in his analysis. Given the weakness of the economy going into the Covid crisis as well as the less than adequate fiscal stimulus, India is likely to end up with an “elongated U-shape” recovery.[23]

• Collapse of MSMEs and Informal Sector – A threat to recovery of Economy

There is enormous, perhaps unprecedented, economic pain ahead as the COVID-19 pandemic continues. Both policy and politics will have to play an important role to alleviate this. Bad policy can delay, even derail economic revival. Good politics can ensure that the suffering of the masses is minimized.

Most economists are unanimous that in the current financial year, India’s economy will contract. The difference of opinion is only about the extent of this contraction. The range varies between minus 4% to minus 14%. Many economists are of the opinion that after hitting rock bottom this year, the economy will start its recovery in the next financial year (2021-22).[24]

As per Animesh Saxena, President, Federation of Indian Micro and Small & Medium Enterprises (FISME), “Only 30 to 40% MSME units have opened for work in Unlock Phase 1. Most MSMEs have a limited number of people and most of them are technically qualified and you need them to run your operation. Around 30 to 40% units have opened and work has begun as they had some unfinished orders to complete, which they were unable to do because of the shutdown but consumer demand and repayments of loan still remain a great concern for the MSMEs who are continuously suffering financially from COVID-19 pandemic.”[25]

The revival in consumption, meanwhile, will be driven by discretionary as well as non-discretionary spending. Non-discretionary spending refers to things like groceries and other essential items. Unsurprisingly, this category remained largely unscathed during the lockdown. And as the uncertainty surrounding income and jobs reduces, economists believe that some people will be able to raise their discretionary spending on non-essential goods.[26] “The sale of clothing and consumer durables like refrigerators and air conditioners may revive during the December quarter of financial year 2021,”said Sunil Kumar Sinha, principal economist at India Ratings. He further remarked “Automobile sales may also rebound in the festive period in the current financial year.”

The weakening of businesses and the crippling of India’s informal sector are major problems. “Balance sheets in the financial sector and some corporate sectors have deteriorated during the downturn and could present a hurdle to the recovery,” said Vishrut Rana, an economist at New York-headquartered S&P Global Ratings. “A smooth recovery in labour markets, including in the large informal sector, is key in supporting the economic recovery.”[27]

According to some economists, the government’s $266 billion Covid-19 package, which focuses on indirect measures like providing access to credit and infusion of equity, will provide relief but it isn’t enough to support beleaguered micro, small and medium (MSME) enterprises. “There is an assumption that MSMEs will be able to avail credit and then use it for survival” said Sinha. “Even if they are able to re-start their businesses, unless there is a revival of demand who will they sell their goods to?”[28]

IV. Conclusion – The Way Forward

The recent trends shows that India's economic recovery is more likely to be a ‘U’ or ‘W’ shaped rather than ‘V’ as the impact of COVID-19 will be profound on a nation that was already struggling for growth prior to the pandemic, analysts said. As per the reports of Centrum Institutional Research, “Before the onset of COVID, Indian economy had slowed down to 4.5 per cent GDP growth, not participating in the global resurgence of 2018 and 2019”.[29] For India, the outbreak of pandemic came at most inopportune time as the economy showed nascent signs of recovery after bold measures, from both the government and the Reserve Bank of India.[30]

The rural economy is likely to recover faster than the urban economy. It is expected that the forecast of a normal monsoon, its timely onset coupled with prospects of a bumper crop output along with minimum support price (MSP) hike and recently announced rural focused programmes augur well for the rural economy.[31] This bodes well for rural income and demand. These developments are likely to cheer farmers and policy makers as they hold potential to diminish the impact of the COVID-19 pandemic.  According to the reports of Centrum Institutional Research, “These trends emerge as a silver lining amid an imminent growth contraction in FY21".

The future of Indian Economy will highly depend on important factors like the overall duration of the pandemic, the effect on jobs and household incomes, the extent of fiscal stimulus provided by the government etc. Further the package will do little to stimulate growth unless it includes planned government spending and its benefits of several measures are expected to only be seen in the medium term. It further depends on the policies introduced by the government to protect MSMEs and informal sector in the country and to boost consumer demand. Some of the industries who has faced the worst outcome during the difficult COVID-19 times also demand encourament from the government to ensure their revival and recovery.

The Indian government’s decision to remove most of the restrictions has provided much-needed relief to businesses, large and small. Despite this, the demand scenario is expected to remain weak for most of the current financial year as the lockdown continues after witnessing a spike in cases of COVID-19 across India.[32] However it could make a comeback next year. According to Vishrut Rana, an economist at New York-headquartered S&P Global Ratings “The resumption of normal economic activity will drive much of the growth”. He further remarked “Households will spend more normally as opposed to cautious and limited spending amid the Covid-19 outbreak. Firms will also restart delayed investments and as consumption revives, credit rating agencies expect India’s economic growth to rebound.”[33]

It is true we have not found the cure for COVID-19 pandemic as yet, but we are seeing the world finding ways to try to return to 'new normal'," “as work from home” has become the best alternative to keep the economy running during the difficult COVID-19 times. Office Work, Education, Grocery markets etc. have all been using online mode of work to keep their businesses running, however this has also brought opportunities and difficulties both. Many major industries like aviation, entertainment and real state have witnessed a permanent damage by the arrival of COVID-19 pandemic, adapting to the changing times to become capable to cope with the pandemic and to ensure revival of the Indian Economy and progress of the nation seems to be the most practical way, which is a challenge as well as an opportunity for Indian Economy post COVID-19.