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India’s economic challenges and revival post-COVID-19

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India is likely to end up with an elongated U-shape recovery. After hitting rock bottom this year, the economy will start its recovery in the next financial year (2021-22). But it sure will not be easy and It just won’t be straightforward.

From the beginning of the Covid-19 crisis, economists have been remarkably united on what policymakers should and should not worry about from an economic perspective. The very sharp fall in GDP resulting from health-related restrictions, as well as individuals’ own decisions, is not the main concern – indeed, it is necessary to suppress the virus and therefore allow economic recovery. Rather it is to prevent permanent damage to the economy that government and policy makers should worry about.

For India, the pandemic sauntered on stage when the economic slowdown in India had already begun. At now, there are two stories that we are hearing on India recently, first that if a vaccine or treatment isn’t developed soon, the number of Covid-19 cases in India may increase to 2.87 lakhs per day by Q12021 (Source: MIT Research). Second story about plateauing of the pick up on economic activity following the relaxation of a nationwide Covid-induced lockdown.  These underscore the uncertainty surrounding the future course of the pandemic – spread and when will it peak, vaccine, etc. This uncertainty has very real implications, has made businesses and consumers jittery and unsure with no capacity nor appetite for consumption and will continue to upset any chance of resumption of normal business activity. With each passing week, the economic stress continues to build because individuals earning less and, as a result, holding back consumption. That essentially translates to the economy working well below its potential.

An already-slowing Indian economy has been derailed with the onslaught of Covid crisis and some damage off course will be long-lasting. But, most economists are unanimous that in the current financial year, India’s economy will contract. The difference of opinion is only about the extent of this contraction. The range varies between minus 4% to minus 14%.

While that enormous challenge looms, many economists are of the opinion that India is likely to end up with an elongated U-shape recovery. After hitting rock bottom this year, the economy will start its recovery in the next financial year (2021-22). But it sure will not be easy and It just won’t be straightforward.

The fight will be about increasing economic activity

With the lockdown, the economic activity came to a grinding halt in India from the end of March. Domestic consumption almost wiped out. Pay cuts and layoffs, combined with fear of spread led to lack of shopping  and completely eroded demand.

While the non-discretionary spending on groceries and other essential items remained largely unscathed during the lockdown, the revival in consumption, will be driven by discretionary as well as non-discretionary spending. Despite the Indian government’s decision to remove most the demand scenario is expected to remain weak for most of the current financial year. But it could make a comeback next year.

And as the uncertainty surrounding income and jobs reduces, economists believe that some people will be able to raise their discretionary spending on non-essential goods during festive season and the rafter flowing into 2021

Increase in Employment

The depth of the slowdown in the current financial year means that a rebound is inevitable but unemployment could hamper the recovery process. The issue of migrant workers will have an impact on the economic growth and availability of quality workers in the post-COVID-19 world will be a challenge

India should be wary of the challenges in smooth recovery in labour markets. While GDP in India was growing, employment remained stagnant and if this trend continues, it’s another problem. Without a boost in employment, households incomes will be under strain, consumer sentiments will be low and the economic recovery will be sluggish.

MSME- challenge of credit and demand

Some of the MSMEs which were impacted by GST and demonetisation haven’t still recovered. The damaging impact on smaller businesses challenges has exacerbated with the reduction of household expenditure owing to Covid-19 and drying up of cashflows and investment.

The government has chosen the credit and monetary policy route to boost the economic growth rather than the fiscal mode. The $266 billion Covid-19 package, which focuses on indirect measures like providing access to credit and infusion of equity, may provide relief but is it enough to support beleaguered micro, small and medium (MSME) enterprises? Because, even if they are able to re-start their businesses, their ability to bounce back is connected to revival of demand. If sales remain so tepid, they might not be able to repay the debt.

The virus complication

Not just the MSMEs, India’s aviation and hospitality, travel and tourism, fashion and lifestyle, auto industries have been facing their own set of problems. The revival in these sectors expected to take much longer and will have a cascading effect on the overall economy.

Overall all businesses are grappling with losses/ reductions. The reopening of the economy is posing fresh challenges as the spread of the virus is gaining pace. Despite the relaxation in restrictions, the economic activity is limping back to normality, and the extent of the dent would emanate from the longevity of the Covid-19. If lockdown gets reimposed or restrictions enhanced/ extended, then it could lead to the delay or derailment of the recovery process.

Conclusion

COVID-19 pandemic is a significant shock to economies all around the world. Even the major economies like the USA have been badly mauled, with unemployment rising and a cut in economic growth despite a $3 trillion stimulus. The Pandemic has caused a shock for the Indian economy as well. Consumption, manufacturing, exports, capital flows, the legs on which the Indian economy had been growing have all been impacted adversely.

India came out of lockdown about 2 months back with restrictions still in many parts of the country. There is no magic quick fix or  shortcut to stimulate and restart demand in an economy, which is the most important key to economic revival next to vaccine becoming available. This will take time, patience and continuous effort. Amidst this uncertainty, what will be key to revival is how people come out of their homes, how people restart their lives, how will it impact demand organically and availability of capital when businesses are ready to kick start production to service demand.

Crises always leave permanent scars and also create lifelong learnings. In all likelihood, this time won’t be different. But we also know that it sure won’t be easy.

Namit Makhija

Student

Views expressed are personal.

Picture Source: Internet

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