Covid-19: Shaking Indian Economy

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Authors: Dr Parvez Abdullah/Azra Mufti

Pandemics come with huge costs, they endanger human lives and world economies, COVID-19 is no exception. China, being the epicenter and also the second-largest world economy has come to a standstill. The tremors have been felt in the Indian economy as well. It has caused the economic slowdown, trade disruptions, unemployment and price hikes. In addition to this, stock prices and bond yields are plunging too; this is an inescapable sorry state of affairs. India is one of the top fifteen countries that are affected most by the pandemic which is alarming. The longer this pandemic lasts, the greater the risk that this sharp downturn morphs into a financial crisis. According to CII (Confederation of Indian Industry), GDP (Gross Domestic Product) of India could fall below 5 percent in the financial year 2021, if stringent policies are not taken.

It does not require an economist or financial expert to predict that prolonged lockdowns in an already derailed economy would severely impact the supply side of the economy. The effects would be adverse than hastily thought out steps of demonetization and GST rollout. The lockdown that was announced in March should have been done in the month of January to avoid the colossal impact. People who thronged to departmental stores for panic purchasing made a mockery of social distancing. Rating agencies like Moody’s and Crisil have announced that COVID-19 will be an economic tsunami for India. Moody’s has even predicted the slash of GDP from 5.3 percent to 2.5 percent; Goldman Sachs has cut India’s FY21 real GDP to 1.6 percent from 3.3 percent. In addition to this, there are several liquidity constraints on banking sectors that can act as an obstacle to economic growth. With fewer vehicles plying on roads, petrol consumption has slashed by 16.4 percent according to data released by Petroleum Planning and Analysis Cell.

What makes the matters worse is that RBI has refused to give growth projection. Gita Gopinath, chief economist at IMF wrote in a blog post that the reluctance on part of consumers and businessmen to spend has resulted in subdued demand. Also, India is dealing with supply shock which will cause a production slowdown. The agriculture sector in India that employs about 60 percent of the workforce is to be severely affected by the pandemic as the season for crop harvesting is due. The absence of labor force and transportation problems will have serious implications on the rural economy in India. The real estate sector will also get a blow due to lockdown. According to Care Ratings, automobiles could see volume declining by 15-16 percent in FY20, which will directly impact steel and manufacturing industries. According to CMIE, the unemployment rate in January was 7.16 percent, in February it hiked to 7.78 percent and in March it has increased to 8.74 percent. There are certain measures that can be taken to soften the blow. Gita Gopinath has suggested that the central banks in India should be ready to provide ample liquidity to banks and non-bank finance companies. Governments could offer temporary and targeted credit guarantees for near term liquidity needs of these firms struggling with liquidity.

Dr. Parvez Abdullah is Assistant Professor, BGSBU and Azra Mufti, is an Author

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