Indian Economy Overview 2020: The rough ride of India during coronavirus times in 2020 is now being termed as ‘The Great Indian Lockdown’ after Gita Gopinath’s (Cheif Economist at the IMF) address. The IMF has forecasted the Global GDP to contract by 3%, a downgrade of 6.3% from earlier estimates. This shrink is estimated after considering the pandemic to peak in the second quarter and recede by the second half of the year. This is an optimistic assumption considering that we do not have a vaccine in sight.
Discussing the economic downturn may be considered trivial in the minds of a few in comparison to the testing pandemic. But considering the fact that we are from a country where 22% of the population is below the poverty line, the toll of an economy in depression could further lead to deaths from starvation. This dilemma poses a significant threat to the country especially if the pandemic is not bought into control in time.
In order to find where the Indian Economy is headed in 2020, we’ll look into the GDP today. The GDP is the market value of all the finished goods and services produced within a country for a particular period. In the midst of the GDP of the whole world shrinking, we take a look at the effects on the Indian GDP to assess where eventually we are headed in the near future.
What does each day of the lockdown mean for the GDP?
Tejal Kanitkar (National Institute of Advanced Studies) and T. Jayaraman (M. S. Swaminathan Research Foundation) have attempted to quantify the impact of the lockdown in their study. Their model assumes the estimated annual output to be distributed uniformly across the year.
They then assess the impact based on the number of working days lost. It estimates the direct and indirect impacts of lockdown on sectors using Input-Output multipliers which are assumed to be constant. The research takes into account four different scenarios based on the number of days lost as depicted by the table shown below.
According to the table, the Indian economy is to suffer a loss of around 13% of the GDP if we are to consider the 1st phase of the complete lockdown and the portion of the complete lockdown in the second phase ( 21 days + 6 days). Here, we did not consider the complete extension period as relaxation were expected state-wise after April 20th.
If, however, we are to consider a situation where the lockdown isn’t lifted till May 3rd (40 days) the losses loom at around 20% of the GDP.
In a worst-case scenario where the COVID-19 cases explode. The government will be forced to extend the lockdown till the end of May. The economy will then be estimated to lose 73 lakh crore i.e a 33% impact on the GDP.
Positive Forecasts of the Indian economy in 2020/21
The only bittersweet news is when the forecasts of the Indian economy are compared with that of other countries. India and China are one of the few major economies that may still expand during the pandemic. The IMF has predicted the Indian economy to grow at 1.9%.
Fitch solutions and Goldmann Sachs have also cut their forecasts of the Indian GDP growth rate for the financial year 2020 -2021 to 1.8% and 1.6% respectively. The IMF has however predicted that the following year the Indian economy will be able to expand at 7.4%. This growth rate will be achievable only if the Indian economy is successfully able to control the outbreak. Additionally, a successful stimulation of the economy along with falling oil prices would enable the Economy to meet the targets.
Challenges that still lie ahead
One of the most important factors that stimulate the economy is wages. In the current scenario of the lockdown, the daily wage workers are already left without a source of income. As businesses keep sinking into losses each day the situation is further alleviated. The Centre for Monitoring the Indian Economy (CMIE) has reported that the unemployment rate has shot up to 24%. As people lose income earning capacity they begin to consume less. And if the consumption is reduced the immediate middlemen also suffer losses and eventually even the production is reduced.
— Agricultural Crisis
The Rabi crop harvest has already taken a hit due to the lockdown as it is labor-intensive. The disruptions of the supply chains have further inflicted misery on the plight of the farmers. Despite this, the RBI has claimed that the agricultural output was at an all-time high. But we have to further discuss the importance of just harvesting and quantity produced.
According to Christophe Jaffrelot ( French Political Scientist), productivity is not the sole determining factor but the price at which it is sold is also important. Farmers in these cases no longer have a minimum support price due to urban bias. Cheaper imports are bought into the market to keep the prices low for the urban population. This, in turn, affects the local farmers and is called an urban bias
— Loans to ailing Businesses
The Indian government has put forward various monetary measures to put more money in the hands of the people to stimulate the economy. These include the rate cuts by the RBI. These rate cuts give people access to loans at cheaper rates. However, the reduction in rates is to work only if the banks pass on the benefits of the reduced rates to businesses. Considering the ailing banking sector is already plagued by high NPA’s (Non-Performing Assets) in the form of bad loans. The banks may be concerned over worsening this issue by giving out loans to businesses affected by the lockdown.
‘The Great Lockdown’ crisis that we face today is significantly worse than the 2008 recession. This is particularly because in the recession majority of the workforce still had the ability to work or at least look for jobs. The IMF has considered multiple scenarios including ones where the pandemic remains strong even after the second quarter and carries into 2021. In this case, we would be looking at an estimated global contraction of 6% followed by no growth in 2021.
On being asked as to “why only India and China are expected to maintain positive growth?”. Gita Gopinath replied that this is due to the fact that India and China are already starting from a low place. She also advised that the priority at the moment should be in dealing with the health crisis. Prof Phillipe Martin put the only way out of the current situation as “ To kill the virus we have to kill the economy, at least in the short term”.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.