Challenges For Indian Economy: For Full Recovery

Impact of Covid-19 on Indian Economy


The COVID-19 pandemic, which started in the year 2020 in India, affected almost all spheres, be it human health, the economic health of the country, or education. It did make us realise the power of mother nature, and it penetrated to the deepest foundations of human civilization. India was of the opinion, after the victory over the first wave of the pandemic that the situation was well under control. When the covid-19 second wave struck India, it had severe consequences in the form of increased deaths, particularly among the youth, shortage of essential supplies required for treatment, etc. Government’s approach in dealing with the waves was somewhat different. The first wave of covid-19 had nationwide lockdowns, whereas a localized approach was taken up during the second wave. The first wave of the pandemic, being primarily urban in spread, had a greater number of cases in urban areas in comparison to that of the rural areas. In the first wave of the pandemic, the manufacturing and urban economy had come to a complete standstill, whereas, the rural economy, due to less restrictions, did not impact much. Therefore, the primary driver of the rural economy, which is agriculture, provided employment to approximately 58% of the population and continued to grow. With higher number of labours at a cheaper rate and good monsoon rain, the agriculture in India further benefitted. In the financial year 2021, while the overall contraction in GDP was 7.7%, our agricultural economy grew by 3.4%. As per the official data, Indian economy was led to a technical recession as a result of the first wave.

The year 2021 began on a positive note with the government restrictions eased, travel bans lifted, the opening of educational institutions and offices, and people gradually adopting the new normal. But when the second wave hit the country around April-May ’21, chaos was all over the country again. Out of the 50 most severely hit districts, approximately 26 of those were rural areas. The worst impacted were rural areas of states of Maharashtra, Kerala, and Andhra Pradesh. There was a rush of patients to the urban health centers from villages and smaller towns in account of treatment for immense illness caused due to the covid-19. The people in the rural area were seeking help as the health centres lacked adequate medical infrastructure. Along with this, vaccine hesitancy and supply-side restrictions had adversely affected the lives and livelihood of people of rural areas.

Impact of Covid-19 on Indian Economy

  • A stringent and longer lockdown was observed in rural parts of the country during the second wave of the pandemic. Due to lockdowns, the Agricultural Produce MarketCommittee (APMC) Mandis were closed for operations, and during the peak harvest season, the Mandis of Maharashtra, Rajasthan, and Gujarat were closed. Due to such closure, crops were rotting in the fields, leaving the farmers extremely worried due to the chaotic situation. In addition to this, the mandis, the vegetable vendors, and the processing industries were also affected. As per the data, contrasting agricultural wage growth was witnessed during the first and the second wave – while April’20 to August’20 had agricultural wage growth data of 8.5%, the November’20 to March’21 had shown the reduction to 2.9%.
  • The manufacturing sector had suffered both in the first and the second wave of the pandemic. Most of them operated at lower capacity or were completely shut in the backdrop of the covid-19 induced lockdowns. More severe and those of the non-essential manufacturing units faced longer restrictions. Fearing that the lockdown would continue for a much longer period than usual, the workers migrated back to their villages. In addition to this, the local and the global supply chains had not completely normalized after the first wave, which meant that the procurement cost of the raw materials was high for both small and big industries.
  • The foundation of the Indian economy, contributing to more than half of India’s GDP, is the service sector. With improved technology and internet revolution, the decentralisation of the workforce can be done, and one can work from anywhere until one has a proper internet connection. After the first wave, the organizations had to develop necessary infrastructure and the learning processes to work remotely from the respective homes. The first wave was a completely a new situation faced by the employees, and gradually they were adjusting to the work from home and getting productive. Both the employer and the employees adapted to the changing situations, and productivity gradually reached to the pre-covid levels. The impact of the second wave on the service sector had been least, although, initially due to localisation, there was work disruptions among certain groups of people.
  • During the pandemic, there have been changes in employment, consumer sentiment, and changes in individual incomes and expenditures. The employment for the rural areas started declining even before the first wave of the pandemic. Approximately 40 million people lost jobs in urban areas, and in rural India, it was approximate 73 million. However, the second wave had a more drastic impact in terms of mortality and job loss which was not the same as it was in the first wave of the pandemic. This was because no stringent nationwide lockdown Graph Iwas imposed. Young people, women, small traders, salaried employees, daily wage labourers have suffered more job loss, and many of them have chosen farming as an occupation, leading to rise in employment in some parts of the country. Since the beginning of the pandemic, approximately 97% of households have faced a reduction in their incomes. Since the beginning of the pandemic, approximate 97% of households have faced a reduction in their incomes.

After the second wave, the overall situation of the country had started normalising, and as per some reports and analysis, it has been expected that India’s GDP might come back to its pre-pandemic levels. However, there are some challenges before Indian economy fully recovers.

  • MSME – MSMEs have been the most dynamic source of development and growth of the country. The MSMEs offers huge employment opportunities and creates a regional balance by generating industrialisation to remote rural areas and the backward areas of the country. There are approximately 6.3 crore MSMEs which contributes about 29% of the country’s GDP by the international and national trade – according to the MSME Ministry Data released on 16th May 2021. For India to become $5 trillion economy by 2025, it is very crucial for the MSMEs to grow, considering the above facts and figures, and its importance in the economy. The MSMEs of the country had suffered a lot when demonetization happened in 2016. This, no doubt, had brought the micro enterprises closer to digitalization, but they also had to go through an unstable and tough phase. There was a large segment of people who made their transaction in cash and was not familiar with digital payments, be it debit or credit cards, or online banking. Demonetization had affected their businesses drastically for a certain period of time. In addition to this, the implementation of GST in the year 2017 also affected the MSMEs. With the introduction of GST, most of them were brought under the tax net, and it also increased compliance costs and other operating costs for the MSMEs.

During the pandemic, the MSMEs have been one of the most vulnerable sectors due to its financial resource availability, size, and the scale of businesses. As per some surveys, approximately 95% of the firms were negatively impacted due to stringent nationwide lockdowns during the first wave, and till August 2020, approximately 70% of the businesses were somewhat disrupted. Although we know that the restrictions have been eased, but till February 2021, 40% of businesses were facing severe disruptions. Some of the barriers faced by the MSMEs are access to finances, productivity, and accessing market. A survey conducted by the All-India Manufacturers Organisation states that the self-employed MSMEs, which is 35% of the MSME sector, have started closing up their units by observing carefully that they do not find any scope of their business recovery.

  • There has been increased digitalization during the pandemic, which had drastically changed the consumer behaviour. Because of the ease, it offers and, keeping in mind the safety of health, consumers are more comfortable in choosing online shopping for almost everything. Also, with improved technology and internet services, a rapid shift to e-learning worldwide has been quite easy during the pandemic. But not everyone has access to internet and hence, are not receiving things they require in the correct timeframe. Without proper accessibility and availability of technology, it is a significant challenge for the underprivileged ones to receive services.
  • GDP – For the year 2019-20, India estimated GDP of about Rs. 146 trillion – meaning it produced goods and services worth that amount. In the last financial year 2020-21, the GDP fell to Rs.135 trillion, which is fall of (or minus) 7.3%. In the current financial year 2021-22, the GDP is expected to grow back to its pre-pandemic info 1levels and registering a growth of 8.3%. This implies that India has lost full two years of growth in terms of overall economic production. If we say, for instance, had the situation been absolutely normal and there was no pandemic, and India is growing by 6% in both the years, India’s GDP would be reaching Rs. 164 trillion (or Rs. 18 trillion more than what is likely to be the GDP). There are also chances that India might do a little well than expected, which is, achieve GDP of Rs. 149trillion approximately – but even then, India would be far from achieving what it would have without the disruptions caused due to the pandemic.

K-shaped or V-shaped Recovery? 

As per the government officials, India had a V-shaped economic recovery, and the reasons mentioned behind this fast-paced recovery were growth in digital transactions, rail freight, power consumptions, highway toll collections, e-way bills, and GST collections. A V-shaped recovery has been characterised as a rapid and effective recovery in terms of economic performance after witnessing an acute decrease in the economy. But there have been discussions that India had a K-shaped recovery rather than a V-shaped. Why is it so? Different socio-economic groups in India have faced the economic ravages of the pandemic, which was quite uneven. Post pandemic, there have been instances that the incomes of the upper segment of the population have been protected and a rise in wealth has been observed. The lower sections have lost jobs, savings, income, and purchasing power. It has been observed that the formal sectors and households having a good strong balance sheet might have taken its pace and are experiencing robust growth, but the informal non-farm sector, small households are trapped in a vicious cycle of indebtedness and poverty and is yet to improve.

A K-shaped recovery is such which splits the economy into two – where the divisions are as per the class, geographic locations, industry lines, etc. In such a recovery, the economy gradually and continuously widens the gap between those that are doing quite well and those who are not.

The pandemic has widened the wealth and income inequality in the society. Accessing the digital infrastructure has further amplified the division in social sectors such as the health and education. There has been enlargement in gap between the unorganised and organised sector.

  • Increasing wholesale and retail inflation- India has been facing ever increasing prices in the backdrop of the pandemic due to various factors. The headline retail inflation, which is actually the rate at which price increases for consumers, had stayed above the RBI’s estimated comfort rate (2% to 6%) between November 2019 to November 2020. After a small time period of relief, the inflation rate crossed the upper limit of 6% again in May’21. As per the data released by the Ministry of Statistics and Programme, in December’21, Consumer Price Index (CPI) was measured 5.59% year-on-year. On the other hand, the Wholesale Price Index (WPI) increased to 14.23% in November’21 from 12.54% in October’21, which is quite high. The CPI depicts a measure for all the household items, whereas the WPI depicts the producer prices in India, which pertains only to goods. So, the average movement of wholesale good prices are captured by WPI and also used as a GDP deflator (the ratio of value of good the economy produces at current prices at a particular year to that of the prices that prevailed during the base year). The inflation for food and beverages for November’21 increased to 4.47% from 1.87%. Inflation has been a great concern for India for the past couple of years. The inflationary pressures are created due to the factors such as the supply chain disruptions, elevated commodity prices, the cost-push pressures – affecting the economy of not only India but also all over the world.

Graph 2The non-food non-fuel component of CPI – the Core Inflation, at the retail level was 6.08% in November’21, whereas the wholesale core inflation for November’21 was 12.3%. Such high inflation means that the manufacturers are trying to shift the burden of higher input costs to the output prices even when the demand is recovering unevenly.

The most important bargain which exists in the economy is whether the producers are increasing the commodity prices and to what extent, or not increasing them at all. The confidence of producers raising prices is when they expect the demand would be price inelastic, i.e., demand is Graph 3less sensitive to changes in price. Such a case arises when it is assumed that consumer incomes are good and the higher commodity prices do not hurt them much. Such situations also arise when producers are of the opinion that even if the competitors would offer lower prices to the consumers, it won’t hurt them much.

During the pandemic, countries were quite worried about inflation, while in India, this has been a matter of concern even before the pandemic – making the situation even more drastic and worrisome. In addition to this, the demand in India has not taken up its pace as it was Graph 4pre-pandemic. Since May’20, the Reserve Bank of India, despite India entering into a Technical Recession, has not lowered the Repo rates – due to increased inflation. As long as necessary, the RBI has decided to continue with the accommodative stance to recover and bolster Indian economy and continue to ease the pandemic effects on the economy while simultaneously ensuring that the inflation rate remains within the target.

  • The adoption of loose monetary policy by the central banks of developed countries to ease the damage that is caused by the pandemic requires utmost attention now. For instance – the Federal Reserve of the United States of America had stepped in and had taken multiple actions in order to keep credit flowing to mitigate the pandemic induced economic damages. With cheap money floating in the economy, and the demands rising, it has resulted in a price rise beyond a considerable limit. The Indian government must be careful and take necessary steps before hand in order to mitigate any sort of adversities caused by such policies.
  • The global price rise increases the import inflation. In other words, we can say that whatever is imported by India is likely to become expensive. Inflation in advanced economies such as the USA, will force their central banks to abandon their loose monetary policies.
  • In addition to this, the Indian Economy is impacted in two ways. First, Indian firms may face increased costs if they are seeking to raise capital abroad. Second, the monetary policy has to be adjusted domestically, increasing interest rates by RBI (tighten monetary policy) to prevent currency depreciation.
  • This will further result in inflation to increase as the production costs will go up.

Way Forward

  1. Managing the Inflation Levels – As already mentioned, the high inflation levels are a great cause of concern for the country. The RBI is expecting fiscal measures and the supply side measures to address the high inflation rates in the country. In addition to this, it fears that the inflationary pressures would lead to a rise in input prices. It has been said that a reduction in excise duty and the value-added tax on diesel and petrol will reduce the inflation by way of indirect and direct effects, which is operating through transportation and fuel costs. The food prices can be controlled by suppressing the supply side in case hoarding takes place and by easing import limits on oilseeds and pulses. Other measures that can be taken by the are addressing supply bottlenecks, the income generating capacities of lower income households should be taken care off, and focusing more on the growth of the economy.
  1. Addressing Unemployment – In August 2021, the Standing Committee on Labour had released it reports saying that approximately 90% of the workers are from the informal sector and includes migrant labourers, contractual workers, street vendors, construction workers, etc. The central and the state governments were recommended by the committee to encourage entrepreneurial opportunities, strengthen the social security measures, attract investments in developing small industries and traditional manufacturing sector, promote vocational training courses, maintain a database of the workers working in the informal sector, etc. Further various other schemes such as the Aatmanirbhar Bharat Rojgar Yojana, Pradhan Mantri Garib Kalyan Yojana, Pradhan Mantri Street Vendor’s Aatmanirbhar Nidhi, Atal Beemit Vyakti Kalyan Yojana, etc. have been implemented by the government to safeguard and support the workers and address related challenges caused by the pandemic.
  1. Info 3The issue of inequality has to be managed as fast as possible for the maintenance of peace and harmony. Proper opportunities and accessibility, if given to those who require – the underprivileged ones – could prove beneficial, and a positive momentum could be created as a result.
  1. A deep and wide-ranging structural reform is the need of the hour – in areas such as the financial sector, power, and foreign trade. Utmost attention is to be provided to areas such as health, education, land, and labour, in cooperation with the states.


India being the fifth largest economy in the world has to focus on a sustainable growth recovery, and just focusing on the numbers will not prove to be much of the help. Investment is the path which will help in growth momentum, and, gradually, India will be on the path of economic recovery. The aim is not just achieving the pre-pandemic level numbers but to improve even more than that and perform even better. Of course, this path of economic recovery will be very challenging and not be an easy task – but the government has to tackle them to put India to the orbit of higher growth.




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