Indian Economy unlikely to Recuperate Quickly under Double Whammy of COVID-19 Lockdown and Global Economic Meltdown

 coronavirus india lockdown

Covid-19 which originated in China’s Wuhan city has taken the shape of pandemic all over the world calling for severe medical emergencies world-wide. The world has no vaccine or a drug to control it medically, as such the World Health Organisation (WHO) urges all the nations to implement complete lockdown in their country, which is the only available strategy that can effectively minimize the spread of disease and save more lives. A major part of the world is presently observing complete lock-down which has led to the halt of all economic activities worldwide. In the wake of increasing Corona infected cases, India has also declared 21 days complete lock-down of all social, political and economic activities except the supply of some essential services like groceries, health, banking transaction, petrol pump and LPG gas for a limited period of time each day. India’s 1.3 billion people are strictly decreed to stay at home.

India being the 5th largest economy in the world, locking down of such a large economy will have huge cost towards both global and domestic transactions. If this lockdown continues for a longer period of over one month then it will wreak havoc in the Indian economy. Indian economy is going to be affected not only by the termination of their domestic economic activity but also by the global lock-down scenario. World’s top two economies in terms of both PPP and Nominal GDP, China and US are also suffering due to the Corona virus lock-down. Both the countries aggregately constitute 36% of world GDP (in nominal method) and 24% of global trade. China and US are also the top two leading trade partners of India. As such slowdown of these two huge economies will definitely have negative consequences for Indian economy like decrease in exports and standstill of exporting industries, which can further result into huge amount of unemployment and decline in GDP growth rate. China’s economic growth slowed to 6.2% in the second quarter, which is its lowest growth rate in 27 years. US economy slowed down to 2.1% from the expected growth of 3.1%. Economists are suggesting it will plummet below 2% over the next quarter. Slowing down of these two economies in the wake of Corona crisis and protracted tariff war between them may fuel global economy crisis in the upcoming days.  OECD has marked that world economic growth will decline by half i.e., to 1.5% from 2.9%, and may experience greater economic disruption than the 2008 financial crisis, if the lock-down to contain Corona virus infection persists for a longer period of time. United Nation (UN) estimates that the present crisis may cost $220 billion to developing countries and world economy could lose approximately $2 trillion income. According to the World Bank, East Asian and pacific economy could face significant economic slowdown,  growth in this province may decline to 2.1% against forecast of 5.8% and in worst case scenario growth may plunge to 0.5% and 11 million people may end up below poverty line. World GDP may decline by 2.2% to 4%, estimated loss of approximately $ 3 Trillion.

Economic disturbance caused by this lock-down has led to three major impacts in the Indian economy. First, severe plunge in the stock market led to devaluation and volatility in financial market and slowing down of the industrial production due to global blocked. BSE Sensex started falling uninterruptedly from 41170.12 on 20th Feb to 29468.49 on 31st March which accounts for 28.4% decline in market value and is continuously dropping down till date. In Banking and NBFC sector ICRA anticipates assets quality stress likely to reflect with a lag of 1-2 quarter after removal of moratorium period. This will lead to spike in stressed assets and increased in generation of non-performing assets (NPA’s). Second, complete disruption of supply chain causing cessation of small and major economic activities. It has badly impacted logistics industry and employment there.  Only the supplies of essential services are just keeping this industry going right now. Third, mass exodus of migrant labour from cities to their native villages, who were a huge part of the informal sector. Most of them worked in the Micro, Small and Medium size Enterprises (MSME’s sector), so this mass departure could lead to temporary suspension of production activity or entirely closing down of some of the MSMEs and large enterprises in the short run. Lockdown has forced millions of migrant worker into joblessness. All these factors together are pushing the economy into a tailspin and future uncertainty, if strong expansionary fiscal policies are not taken into consideration. Some industries that have already been hit hardest by the lock down are tourism & hospitality and travel and logistic industry. Confederation of Indian Industry (CII) anticipates the loss of 20 million jobs in tourism and hospitality industry if its activities not pick up by the October. It also assessed that this is one of the worst crisis Indian economy is experiencing which has terribly impacted all the aspects of tourism sector.

According to FAITH (Federation of Associations in India Tourism & Hospitality), tourism industry is running towards the condition of bankruptcy, which could leave around 70% of the workforce in a lurch of mass unemployment. National Sample Survey (NSS) believes Indian economy is on the verge of losing 136 million jobs.

In the short-run, the economy will experience both negative supply and demand shocks. Complete shutdown of MSMEs and big enterprises’ production activities will lead to a decrease in aggregate supply. At the same time, there will be massive shortage of effective demand in the economy due fall in the mass consumptions, ascribable to decrease in the income level of households for various reasons such as increased unemployment, leave without pay or half salary to the employees and decline in business turnover. As a consequence, there will be decrease in profit and investment level which will lead to a fall in aggregate demand. Asian Development Bank (ADB) and National Statistics Office NSO estimates the expected annual growth for the economy is 4% and 5% respectively. All the other credit agencies have also revised their growth model of the financial year 2020 for India. Moody has downgraded growth rate from 5.3 % to 2.5 %, CRISIL has demoted economic growth from 5.7 % to 5.2%, S & P has reduced the growth expectation from 6.5% to 5.2% and Fitch has relegated the expected growth to 5.1% from 5.6%. At a time when the Indian economy is yet to completely recover from the two shocks of demonetization and GST implementation; it is now got stuck into the severe economic obstruction due to Corona lock down.  CARE has accounted for 6.3 – 7.2 lakh crore loss of income to the economy in 21 days of lockdown.

Raghu R. Rajan in his recent interview to India Today, said that government need to be cautious about temporary shocks to the economy does not become a more permanent shock. For now we are seeing downturn in the economy, slow revenue generation, slow cash flow, no income to worker, substantial layoff and MSME’s firms are closing down. The main concerns should be for the government to efficiently bridges between the present time crisis and the period after the lockdown over, when this crisis brought under the control and most importantly the government has to make crucial decision regarding prevention of closing down of MSME’s. Dun and Bradstreet in their forecast estimated that the economy may enter into recession, companies may go bankrupt and the economy’s expected vulnerability cannot be decoupled from the global melt down.

Corona Virus is not only affecting the human respiratory system but now it has also started infecting the respiratory system of the country’s economy. There will be some bigger challenges to the government as to how it will treat this economy’s respiratory ailments in the near future under looming economic recession: For how long the government is going to impose this ongoing lock-down considering the economic health and at the same time control the Corona pandemic? How is the government going to restore faith in financial sector, manufacturing sector and especially in the MSME’s sector? Who will the government bailout and to what extent? If the number of Corona patients increases in the upcoming days to huge numbers like those in US, Italy or Spain then, how is the government going to allocate the limited medical resources, like who will be given attention and extra care or who will not get it (in terms of admission and ventilators)? How is the government going to take care of gig workers, daily wagers, precarious labour and contractual labors, who have lost their job amid this Corona virus lock-down? How is the government going to ensure that all those migrant labour are placed again in the production circuit after the lock-down crisis will calm down? What ought to be the greatest learning from this devastating socioeconomic crisis will be depend on the how we as a political society respond to the double whammy of global health crisis and economic mayhem. Hope this global COVID-19 health crisis along with the massive fall down of global economy alters the government’s and economists’ view on global and domestic economic system and urges them to change the pattern of public expenditure towards the provision of universal health care system, expansion and access of social security programmes to each and every needy people, affordable housing, clean water and environment and free education for all and paved the way for a better society.

Sushant Kumar Singh (Assistant Professor, B N Mandal University, Bihar)



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