India’s GDP in 2019-20 was Rs 203 lakh crore (trillion) in nominal terms. A 5% contraction in 2020-21 GDP — widely estimated to be the extent of economic decline this year — will entail a loss of at least Rs 10 lakh crore. There is also a possibility that the contraction in nominal GDP is significantly more than 5%. As Covid-19 infections continue to increase, and more importantly, expand their geographical footprint in India, the economic cost of the pandemic will increase. What has made matters worse is the uncertainty about when the pandemic will peak. Ideally, the government should reserve its biggest stimulus for when the infection curve is flattening.
The Indian economy was already in the midst of a deceleration phase — perhaps among the worst it has seen — even before the pandemic. This weakened its ability to stand up to a shock as severe as Covid-19 and the lockdown imposed to fight its spread.
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India imposed one of the harshest lockdowns in the world to prevent the spread of the Covid-19 virus. Economic activity came to almost complete standstill for almost a month, and stuttered along for another month-and-a-bit (the lockdown lasted 68 days in four phases). Among the worst affected were millions of migrant workers who were stuck without even basic means of sustenance. Once the restrictions were eased, there was some revival of economic activity. However, infections started growing rapidly around this time. India is now witnessing the re-imposition of localised lockdowns across various cities and states. Both current and future business and consumer sentiment are likely to be jittery given this context.
To be sure, India is not the only country facing this dilemma. A blog by the International Monetary Fund’s Managing Director Kristalina Georgieva says that prospects of a global economic recovery remain uncertain. While a medical breakthrough could reduce the contraction this year and help achieve a better than expected recovery compared to what the IMF’s June World Economic Outlook (WEO) predicted (4.9% in 2020, 1.9 percentage points below the April 2020 WEO forecast) , a second wave could mean that world GDP remains flat this year and next.
Given India’s size, even as the pandemic shows signs of plateauing in a few states, it rears its head in others; it has been expanding its geographical footprint from the more industrialised, urbanised states to poorer regions. If Covid-19 infections are not contained in eastern states such as Bihar, getting back migrant workers to restore economic activities in regions, where the infections have already peaked will be very difficult. India also has a short window before the economic crisis starts pinching rural India. Right now, the country is in the middle of the peak kharif (monsoon crop) season, and favourable rains have meant more sowing of crops and, therefore, more work. Agricultural and MGNREGS employment have kept rural livelihoods afloat. But both agricultural employment and MGNREGS allocations might end at the same time if the non-farm economy does not return to normal.
While the humanitarian crisis facing migrant workers and the poorest rightfully attracted a lot of attention during the lockdown, the economic challenges associated with the pandemic will shift to more complicated terrain with time. In a speech at the SBI Banking Conclave last week, Reserve Bank of India Governor Shaktikanta Das hinted at a big disruption in the financial sector. Non Performing Assets (NPAs) are likely to increase in a big way once the current moratorium on loans ends.
With revenues likely to remain subdued – there is no clarity on the sanctity of budget numbers — the government will have to take a call on whether to protect livelihoods or production capacity. Bailouts to private capital, unlike free ration to the poor, often trigger political criticism in India. However, it is not wise to allow firms, which were otherwise viable, to go belly-up because of the pandemic’s economic disruption. This will only make the task of economic recovery more difficult.
None of these are easy challenges. It is important that policy makers focus on the long, and in all likelihood, painful road to recovery. This will require foresight, clarity and willingness to make difficult political choices. There cannot be any place for complacence or bravado at the moment.