Impact of Covid-19 on the Indian economy
Coronavirus (Covid-19) is an unpredictable pandemic that came as a big challenge for every economy (developing, developed and under-developed) in terms of every aspect. Talking for the Indian economy, the pandemic brought several challenges; one of them is to maintain a GDP growth rate. After demonetization, the economy started to come in balance, but this led to a GDP growth rate of -23.9%. As per KPMG Report, (2020), 3 determinants of the GDP growth rate, personal consumption, investment, and external trade will severely be impacted, as pandemic led to the lockdown of the economies, impacting the demand and in turn, led to a recession. According to the RBI reports personal consumption is increased to around 1.2CR from 2019-20, exports are 37 lakhs (almost same as 2019-20), and investment rates haven’t mentioned.
The major impact that occurred on the demand sidedoes not mean that the supply side did not get affected. Of all the sectors (majorly the financial sector), their demand and supply-side markets get affected severely due to this pandemic. After unlocking the economies, the Indian economy will come back-on track but to attain the same GDP level of 7%-8% will take years. Though it is expected that by this the 4th quarter of year 2020, the economy will be able to come on track again.
On the demand side, the major impact occurred on consumption due to job losses, fall in income levels, closing of the business such as cinema hall, shopping malls, colleges & institutes and many more. Another reason for the fall in the demand for consumption is people are still afraid to spend money for trade (known as demand for transitive purpose) and save for future for Emergency or/and precautionary purpose. The sectors whose demand size is majorly impacted is tourism, hospitality, aviation, construction, and transport. Although, this pandemic affect the daily earner the most.
Being China, a major importer of India, mainly for the automobile industry, organic chemicals, plastics, and fertilizers impacted India’s supply-side (including exports). India being dependent on the importers for the raw materials and intermediate goods, and shutdown of factories due to lockdown resulted in the slowdown of the economic activities, hampered the investments of India severely as well. Even after the unlock phase, manufacturers are bearing an extra cost in terms of production, as they have to use half of the employees(as per government policy) and the cost is same, which will lead to higher prices for some goods.
Covid-19 led to uncertainty in the financial sector, as due to income reductions and job losses lead to defaults, and in turn affecting consumption. This also led to the wealth erosions and expected to continue as the equity markets are still volatile due to the pandemic effects. Money demand has 3 components, transactive, precautionary and speculative. Talking about the money demand during the pandemic, people’s demand for transaction purpose has become quite limited, in other words, they are doing expenditure on only relevant stuff, whereas, the precautionary purpose demand has increased, and people saving for the speculative purpose has fallen, as people are being more risk-averse.
We all know that each coin has two faces. Though, the pandemic of Covid-19 has deserted our social lives and has made us thirsty for it, no doubt it has had a lot of positive impacts that cannot be denied. So, let us take a look at some of the long-term positive consequences of the coronavirus pandemic:
- A more digital economy: Covid-19 is the shock that is forcing everyone to adopt digital in everything — from buying groceries to seeking online consultations with a doctor for minor conditions.
- Global supply chains will be redrawn: China has been the factory of the world for quite some time now and as a result, it has become the pillar of global supply chains for everything from chips to drug APIs. The world has realized that it might not be good idea to put all eggs in one basket means that countries like India that have long waited for their turn to make for the world would increasingly see more foreign businesses, set up base and generate large scale employment.
- Policy reforms gathering pace: The coronavirus pandemic has led India to initiate reforms that have been stuck in red tape for decades. For instance, the government has liberalized the coal sector and changed certain labor laws that were said to have been hindering businesses. Moreover, the government has also announced Agri market reforms such as bringing in legislation that will allow farmers to sell their produce to whoever they choose.
- Liquidity rush in the capital markets: Central banks all around the world have cut interest rates and launched borrowing programs to inject cash into the capital markets.
Economic crises often lead to creative destruction — a churning where inefficient systems and businesses are weeded out and new contenders emerge. Moreover, apart from all the first-order economic impacts listed above, the coronavirus pandemic will also make our healthcare systems stronger and perhaps compel us to reconsider our relationship with the environment and nature. These potential changes could go a long way in helping the world leap equitable and sustainable development.