The present Article is written by Aaditi Shah under the National Article Writing Competition organised by LeDroit India discussing about the economic consequences of Covid-19 and the need for epidemic preparedness.

ABSTRACT:

The outbreak of the COVID-19 pandemic is a striking shock to the Indian economy. The Indian economy was already appalling before COVID-19 struck. Then subsequent lockdown raises serious economic concerns and catastrophes. The progression of the disease and it’s economic impact is highly uncertain which makes it difficult for policymakers to formulate a pertinent policy response. In this article, we will discuss the state of the Indian economy before and after the pandemic, and set forth a set of policy recommendations. 

INTRODUCTION:

The COVID-19 outbreak is caused by the SARS-COV-2 virus. This outbreak was triggered in December 2019 in Wuhan city in Hubei province China and it continues to spread across the world. We are in the middle of a global COVID-19 pandemic, which is inflicting two kinds of thunderbolts: (1) health shock and (2) economic shock. Given the nature of the disease which is highly contagious, the ways to contain the spread include social distancing, self-isolation at home, the closer of institutions and public facilities, restrictions on mobility, and even lockdown of an entire country. These actions have lead to distressing actions on the economy. On April 9, the chief of International monetary fund, Kristalina said that the year 2020 could see worst global fallout since the great depression in the 1930s, with over 170 countries likely to experience negative per capita Gross domestic production (GDP) growth due to raging coronavirus pandemic.

GLIMPSES OF COLLAPSING INDIAN ECONOMY BEFORE COVID-19:

The Indian economy was horrendous even before the COVID-19 pandemic. GDP rate has been on a downward path since the 2015-16. According to the official statistic, GDP growth slowed down 4.2% in 2019-20, the lowest since 2002-03. The manufacturing sector has grown merely by 0.03% in fiscal year 2019-20 compared to 5.7% in the previous year. The construction sector too declined by 1.3%, consumption expenditure has also been falling, for the first time in several decades. The lockdown has diminished any chance of revival of consumer demand and private investment.

ECONOMIC LINKAGES:

Developing countries like India have severe consequences for employment as 81% of employment is informal in nature (ILO, 2018). A nationwide lockdown has a high economic impact on lower sections of society which mostly are daily earners and engaged in the informal economy. The macroeconomic impacts of COVID-19 on India’s national and sub-national levels are uncertain. India is already running through economic distress after the adoption of demonization in 2016 (India today, 2020). After the emergence of COVID-19 people regarded it as a double hit to the Indian economy. It has created a supply shock which also has the potential to create demand shock.

The exact span and deepness of crises are not known right now and time will reveal the real picture.

SECTORS VULNERABLE WITH THE ONGOING ECONOMIC CRISIS:

INFORMAL SECTOR:

India has a vast, informal sector, the largest in the world, employing close to 90% of it’s working for population and contributing more than 45% to the overall GDP. 

This sector was hit by two consecutive shocks in a short period. The first demonization in November 2018 followed by goods and services tax. With the COVID-19 outbreak, the already struggling informal sector has been disproportionately affected.

BANKING SECTOR:

During crisis times, one sector of the economy that is required to play a crucial role in terms of alleviating the pressures on the real economy is the financial sector. During crisis times, one sector of the economy that is required to play a crucial role in terms of alleviating the pressures on the real economy is the financial sector. However, the banking sector in India is badly broken. The problems in the banking sector have been adversely affecting credit growth and by the time the pandemic hit India, these problems had begun to hurt the debt markets as well which also play an important role in the context of financial intermediation. This has become a serious choke point as the Indian economy struggles to come to terms with this unprecedented shock.

INDIA’S AVIATION, TOURISM, AND HOSPITALITY INDUSTRIES:

These industries are sustaining maximum damage. According to the consumer’s pyramid and household survey travel and tourism account for 5% of total employment in India (nearly 20 million jobs). Hotel and restaurants account for another 4%. These sectors are disproportionately affected during the ongoing crisis. 

AGRICULTURE AND RURAL ACTIVITIES:

The agriculture sector is critical as a large number of workers and the entire country’s population are dependent on this sector. The adverse impact of Covid-19 on agriculture has been much less as compared to manufacturing and services. However, the initial lockdown did affect agricultural activities and the necessary supply chains through several channels: input distribution, transport hurdles, marketing, and processing. Closure of restaurants, transport bottlenecks, etc reduced the demand for fresh produce, poultry, and fisheries products, affecting producers and suppliers.

SET OF POLICY RECOMMENDATIONS:

The objective of the policy is to mitigate the effect of shock on economic agents in both the informal and formal sectors and to help them bridge over the crisis. The thunderbolts of COVID-19 and lockdown are operating at 2 levels

  1. Creating supply-side disruptions
  2. Triggering reduction in aggregate demand

The need of the hour is policy actions to deal with both supply and demand-side problems.

SUGGESTIONS:

  1. Establishing liquidity support lines to avoid the stigma associated with applying for support.
  2. Give the IMF a role in a network of central bank swap lines.
  3. Allow IMF to borrow from the market as it could significantly increase IMF firepower.
  4. Investment in sustainable infrastructure is the best way to boost economic activity and create employment.
  5. Building resilience for the most vulnerable- providing employment guarantees, a universal basic income, providing vital resources for subsistence.
  6. Regulating enabling technology as it will lead to employment in the e-commerce sector and help to support future response and resilience.

Conclusion:

Covid-19 has posed an unprecedented challenge for India. The eventual damage to the economy is likely to be significantly worse than the current estimates. Policy makers need to be prepared to scale up the response as the events unfold so as to minimise the impact of the shock on both the formal and informal sectors and pave the way for a sustained recovery. At the same time they must ensure that the responses remain enshrined in a rules-based framework and limit the exercise of discretion in order to avoid long-term damage to the economy.

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