Friday, April 19, 2024
HomeOpinionsImpact of Covid-19 on Indian economy and the way forward

Impact of Covid-19 on Indian economy and the way forward

Also Read

Shishu Ranjan
Shishu Ranjan
Economist and Banker

Just a quarter back when nations around the world entered a new decade of the 21st century, who knew that they would be in a complete lock down mode to avoid the loss of lives caused by a pandemic named Covid-19. The world came to know about Covid-19 only in January when Chinese officials first informed the World Health Organization (WHO) about the illness caused due to unknown sources, and later mapped the source of this virus to the Corona family and finally accepted the first death from this virus on 9th of January. However, it was too late to inform the world about this deadly virus and its consequences. Millions of people were already carrying it to different parts of this world. It is important to state here that the Chinese officials tried their best to hide news about this deadly virus initially, evidence of which has now emerged in the public domain. The first case has now been traced to the Chinese city of Wuhan back in Novemberof 2019. When some of the Chinese doctors started discussing the symptoms of the new disease in December, they were officially reprimanded by the Chinese government. Once the number of infected people in China became too high to hide, the Chinese government was left with no option, but to break this news to the officials of World Health Organization (WHO). 

Ultimately, China had to lockdown the city of Wuhan to stop the infected people from further spreading this deadly virus. As Wuhan went into lockdown, commercial activities crashed and the world felt its tremor. Wuhan is an integrated transportation, logistics, automobile, optics industry, and a major education hub for China. Out of the top 500 companies of the world, more than 300 have their presence in Wuhan and that indicates the importance of Wuhan in the world’s economy. With the lockdown, the transportation and communication link disrupted and with it Chinese exports and imports. 

Disruption due to Lockdown

The Indian government realized the scale of the problem when it got an evacuation call from Indian citizens from the locked down city of Wuhan. By that time, India had already stopped its air services to China and three other countries. Soon after, India started its preparation to fight Corona Virus. Bottlenecks started emerging in preparation. For example, it was realized that the major ingredients of the various drugs manufactured in India were imported from China. Lockdown in Chinese cities resulted in running down of input inventories in pharmaceutical industries as well as other industries heavily dependent on Chinese imports. Other nations of the world faced similar problems. 

The disruption of the link between China and rest of world did not stop the spread as millions of people carrying the virus had already left for various parts of the world. Since detection of the infection in the early stages is not possible, countries were fighting an unknown enemy. By the time an infected person showed symptoms, numerous others were already infected. The only way to break the chain of spreading theinfection was to implement a complete lockdown for a fortnight, a period by which the symptoms become clearly visible based on which patients are then treated. However, a complete lockdown involves huge economic costs which no country was willing to take initially. As the days passed, the infection showed exponential growth rate and a devastating impact on nations such as Italy and Spain, and India braced itself for a lockdown to avoid the path of devastation. 

The Indian Prime Minister gave a call of complete shutdown on 22nd March on a voluntary basis, which Indian citizen followed with great discipline. But few rotten lemons started to behave as usual, which forced the Indian Prime Ministers to announce a complete lockdown of the entire country for 21 days. This lockdown has not only crippled the normal life of people, but also shut down the entire Indian economy. With this it can be concluded that the Indian Economy is also now infected from Covid-19, which has been slowing down for the last 2 years.

Covid-19 Impact on the Indian Economy

With the announcement of a lockdown, the trade and commerce of non-essential commodities are being shutdown. The Economic Survey had estimated the contribution of Trade, Hotels, Transport, Communications & Services related to broadcasting for the year 2019-20 to be 18.3%. It should also be noted that these sectors are labor intensive in India and therefore provide huge employment opportunities. Shutdown will impact this sector the most and therefore, is expected to reduce the GDP and employment significantly in short and medium run. 

Health of aviation sector needs a special mention. The Aviation sector has been one of the focus area of the NDA government in order to increase connectivity between tier 2 cities. Due to dedicated policies like UDAN, the aviation sector had shown healthy growth. However, the balance sheet of the air carriers have been under stress due to high operational expenses, which includes high fuel taxes. With the shutdown, the aviation sector is going to witness its sharpest decline in many decades. With cancellation of tickets and flights due to lockdown, and citizens avoiding airports in fear of contamination by international tourists, losses are expected to run in the billions. Indigo had already announced salary cuts for its employees to fight the Covid-19 financial stress. The salary cut in this sector will further reduce the purchasing power and therefore, will ultimately reduce demand. The impact of such demand reduction will be felt by other industries and the Indian economy will slowly drift towards aggregate demand crisis leading to economic recession. 

Banking sector is another sector infected from Covid-19. All businesses hit by shutdown will have immediate repercussion on regular EMI payment. For example, hotels and restaurant owners will find it very difficult to manage their operational cost and pay their scheduled EMI. It will take a long time before hotels and restaurants can run to their full capacity even after the containment of this pandemic. The Aviation sector similarly will find it difficult to service their financial obligations to the bank. Other trades and businesses will also face demand curtailment and therefore, reduced revenue. In such scenarios, Banks will see their asset quality deteriorate and increased Non-Performing Assets (NPA) will further erode the financial health of the banking sector. Though the RBI providing relief to banks and customers on term loans EMIs through moratorium is expected to provide time, the stress is difficult to mitigate due to recessionary impact on the overall business environment, which is predicted to stay beyond three months. 

One sector which most likely won’t recover in the entire 2020-21 financial year is the tourism sector. Tourism in India showed double digit growth in recent years based on increased Foreign Tourist Arrivals (FTA) and domestic tourism. This sector provides green growth and healthy foreign exchange reserve. With tourists cancelling their plansto travel due to fear of infection, people engaged in this sector are facing a gloomy future. Hotels, restaurants, guides, transportation modes (air, rail, road, and waterways), handicrafts, adventure sports, mountaineering services, etc. are heavily dependent on the tourism sector. With no revival of tourism in sight, huge employment loss is on the way in short to medium time frame.

As with the disease that it impacts the lowest income group the most, the infected economy will also hit the unorganized sector the most. With the shutdown, the people engaged in the unorganized sector working as street vendors, daily wage earners, auto/ taxi drivers, domestic helps, self-employed in non-essential services, and other such categories have become jobless from day one and will be for the entire period of thelockdown. Many people from these categories are migrants and have been returning to their home with the announcement of the lockdown. The primary challenge is to provide food and shelter. The government initiative to provide free rations, cash transfers, and free cooking gas are few basic steps to ensure that no resident dies due to hunger. However, the adverse impact of the disruption in the unorganized sector on the aggregate demand of Indian economy is certain. 

Finally, the net exports i.e. exports less imports is the only lever that can lift the aggregate demand and Indian economy in the short run. However, all developed economies have shut their doors for external economies for two reasons. One, the nations are going into lockdown and therefore, means of transportation are disrupted. Two, the nations want to divert their resources to fight this pandemic. Both of these reasons are leading to import curbs and thereby, reducing any chances of Indian export gaining momentum in the near future. 

The Way Forward

Covid-19 infected patients need ventilator support to survive and recover. So does the infected/ quarantined economy, albeit from the government. While the Central government and RBI have announced a few such supportive measures these won’t be enough to support the economy over the short to medium term.

RBI has already eased monetary policy. Now, it is up to the central and state government to put their levers of fiscal policy in the highest gears. Public spending will revive the economic activities, create demand for goods and services and put the money into hands of working people resulting in increase of aggregate demand. 

The most important is the type of public spending required by central and state governments. Public spending on consumption goods or services, subsidies, and welfare schemes are also capable of raising the aggregate demand. But, this route is susceptible to inflation resulting from supply constraint and higher liquidity in the economy. However, if  public spending is done on investment goods and services, it will create long term capacity to have a healthier Indian economy. Public spending on  infrastructure is the need of the day to cure the ailing Indian economy. 

The second most important question is of spending on type of investment expenditure by governments. Governments need to prioritize the investment expenditure as per the developmental needs of different states. For example, lesser developed states like Bihar need to spend on health and education. Time and again, Bihar is seen unprepared for fighting various infectious diseases and resulting in deaths. Millions of Biharis have to migrate to other states to get good education and health services. More developed states such as Gujarat, Maharashtra and Tamil Nadu have increased their public spending in technological innovation, which is one of the most critical determinants of growth. 

Technological innovation not only determines the growth, but also enables the state to fight unforeseen dangers at lower costs. For example, the outbreak of Corona pandemic required testing kits in large numbers at a low cost. India is currently using  imported kits which cost around Rs. 4,500 per test conducted. An Indian company took this as an innovation challenge and produced a kit which yielded the test result in lesser time and cost only about Rs. 800. Similarly, the entire world is facing ventilator deficiency. If Indian innovation solves this problem, this will be an Indian aid to humanity beside the economic benefits associated with its production, distribution, and sale. 

The central government needs to prioritize public spending in sectors strategic to its national interests. The experience of world trade disruption has necessitated that India invest in its health care to become self-reliant in the pharmaceutical industry and health care equipment. Central government also needs to spend on digital infrastructure to enable last mile connectivity in finance and communication. The lockdown has necessitated people to be at home, yet connected efficiently to the rest of world for information. Employees need to work from home which can only be possible with robust digital connectivity. Essential services can remain uninterrupted only if we have a strong digital economy to support  minimum physical movement.

Identification of suspected patients, tracing their contacts in minimum time, and then quick hospitalization is a small example in current situation where the digital economy has helped to combat this pandemic. The central government also needs to prioritize world class research on strategic areas of national importance such as defense, communication, health, science, technology, railways, aviation, agriculture, and education. If India increases the public spending in these areas even at the cost of increased fiscal deficit, the economy would return to a healthier state in the medium to long run. 

The private sector also needs to contribute in the way forward. Indian entrepreneurs will have to take this opportunity to invest in the manufacturing industry, which will become an engine of growth by providing huge employment opportunities, increased demand and supply and increased exports to the rest of world. The successful fight against this Corona pandemic by India has the capacity to attract world attention and will be part of our soft power in foreign diplomacy. Many Multi-National Companies (MNCs) will be happy to shift their manufacturing base from China to India. Indian private industry is already competitive in many fields such as automobiles, pharmaceuticals, agro-based products, and aero-space. The easing of monetary policy and world recession has provided the Indian industry a once in a life time opportunity to identify the area of growth and invest heavily to arrive at a win-win situation for everyone. 


Overall, there is no doubt that the Indian economy has been infected with Covid-19 and requires a ‘ventilator’ like support in the short run to survive which the Indian government and the RBI have already done. However, much more is needed to fully cure the infection and make the Indian economy much healthier than it ever was. For this, the central government as well as state governments will have to use fiscal measures.

It is important to note that the type of fiscal measure and the type of industry where government need to focus will be determinant of Indian economy’s health in medium to short run. Further, the private sector needs to rise to the occasion and treat this as opportunity to invest in areas which are beneficial for them as well as the economy. Monetary policy of the RBI has already set the field to convert this recession into an opportunity for them. India has survived similar situations in the past and India will survive (and hopefully thrive) this time too. 

  Support Us  

OpIndia is not rich like the mainstream media. Even a small contribution by you will help us keep running. Consider making a voluntary payment.

Trending now

Shishu Ranjan
Shishu Ranjan
Economist and Banker
- Advertisement -

Latest News

Recently Popular