Recovery Pattern of Indian Economy – Post Covid-19

Denotations from Economic Indicators and Recovery Shape

The World Health Organisation (WHO) has declared the COVID-19 outbreak a global pandemic on March 11, 2020. This pandemic has led to a loss of human life worldwide and presents an unprecedented challenge to public health, food systems and work – devastation to social and economic life. Millions of enterprises have faced severe threats, while workers in unorganised sectors are vulnerable due to a lack of quality healthcare access and social protections. The Migrant workers faced severe risks in their transport, working and living conditions and struggled to access support measures put in place by the Government. Many are unable to feed their families and themselves as they do not have any means to earn an income during the lockdown due to the loss of jobs. Troubles to many households due to depleted economic resources and no source of income due to job loss, have been multiplied with a spike in prices of essential goods such as edible oil and pulses. There was a disruption in the domestic and international food supply chain as trade restrictions, and border closures prevented farmers from accessing markets and agricultural workers from crop harvest. Taking into consideration its severe intensity, in the context of India having the highest rate of population density in the world, necessary steps have been taken by the Governments, both at Union and state levels, to prevent the spread of this deadly pandemic.

Despite the efforts to break the chain of infections of the Coronavirus, the economic damage on some sectors has a cascading effect on the medium term growth outlook. The localised lockdowns and restrictions by many states have largely affected the Hospitality Sector (contributes a huge portion of India’s GDP) – business has come to a standstill where they are merely allowed to deliver food. A massive spike has also been seen in unemployment due to the closure of some businesses. The hospitality sector, which is interlinked to the Tourism and travel sector, has crippled again due to the second wave, which was struggling to recover from the devastating losses suffered due to the first wave – resulting in unemployment and bringing severe effects on household income. The aviation and other travel sectors saw a reduction in their revenue generation as people are mostly scared to step out of their houses to opt for such services. The Automobile sector, which makes up nearly half of India’s manufacturing activity, has been hard hit due to the pandemic. Reduction in sales (factory despatches, closure of dealer showrooms) has put brakes on the automobile sector’s recovery. On the other hand, price hikes (rally in metal prices, prices of fuel) could impact consumer sentiments. The real estate and construction sector had also borne the brunt of the pandemic as large numbers of migrant workers were being forced to leave the urban areas. Material shortages have also been another reason behind the precarious condition of the real estate and construction sector.

The Already Falling Aggregate Demand Prior Pandemic made the Pandemic Shock Worse

National Income identity provides the level of aggregate demand existing in the economy. The national income, or output, or GDP (Y) consists of private consumption (C), government consumption (G), investment (I) and net exports (X-M) , which is expressed as-

Y= C+I+G+(X-M)

Aggregate Demand
Aggregate Demand

The above identity of national income provides the level of AD existing in the economy. The economy is said to be in equilibrium when the aggregate supply meets the AD of goods and services. In case of mismatch, the output in the next time period adjusts accordingly to match the level of AD. The following can be observed with regards to the AD components:

  • Consumption (private final consumption expenditure) – the largest contributor to GDP whose growth rate stagnated prior pandemic and thereafter slumped due to pandemic (in the first quarter of 2020-21, declined by 26.7 %, compared to the same quarter of the previous year).
  • Investment (Gross Fixed Capital Formation) crashed by 47.1 % in the 1st quarter of 2020-21, whose growth rate has been -6.5 % in the fourth quarter of 2019-20, implying downslide even before the pandemic.
  • Government Final Consumption Expenditure has been increasing since the last eight years (1st quarter of 2020-21 at 16.5% where its share in GDP has been 18.1 % in the 1st quarter of 2020-21 despite continuous growth, which actually implies that it has reached its limits and this component alone cannot prop up the overall GDP.
Why decrease in Imports not good?
Why decrease in Imports not good?
  • Net Export (difference between exports and imports) –Exports were already negative in the previous quarters due to international trade turmoil and tensions. Due to the pandemic, in the 1st quarter of 2020-21, it slumped even more. Similarly, a decrease in Imports was seen prior pandemic, which further declined due to the pandemic. Net exports getting into positive value might not bode well for Indian economy and it will not be able to revive in the short run if all other current global economic environment factors remain largely unchanged.

What happens when Aggregate Demand falls? The onslaught of the virus aggravated the unaddressed demand problem. The lockdown to contain the virus led to the closure of all manufacturing units and services, resulting in low demands, production cuts, and unemployment rise. The relief package by the Government of India was extensively focused on easing supply, restoring liquidity and building capacity while addressing the inadequate demand problem was missed after the first wave of Covid-19. Certain measure like extending credit to MSMEs and small vendors was not much of a success. Firms demand credit usually, given higher demand expectations and new investment. Despite lifting the lockdown after the first Covid-19 wave, MSMEs were functioning below capacity as there was low demand – making it unlikely for them to demand loans unless and until there is a rampant growth of demand.

The revised GDP released for April-June(Q1) and July-September(Q2) was -24.4% (instead of -23.9%) and -7.3% (instead of -7.5%) – the repercussions of Covid-19 marking a Technical Recession.

GDP for October-December (Q3) grew by 0.4%, whereas quarter-four that ended on March 31, 2021, it stood at 1.6%, indicating India came out of the technical recession. For the full financial year 2020-21, however, the GDP contracted 7.3%. The increment in Q4 was driven mainly by the manufacturing sector and the construction sector (6.9% and 14.5% respectively in Q4 2021 as compared to -4.2% and 0.7% in Q4 of 2020). The GFCE (private investment) grew at 10.9 % in Q4, indicating that investment momentum has taken the pace alongside the government expenditure.

Indicators of Economic Recovery

As per the Reserve Bank of India, the overall impact of the Covid-19 2nd wave on real economy seemed limited in comparison with the first wave – the reason being localised lockdowns to curb renewed surges in infections, work-from-home protocols, online delivery models, e-commerce and digital payments. Some of the indicators for economic recovery are as follows:

Indicators of Economic Recovery
Indicators of Economic Recovery

NIBRI Index: Nomura’s India Business Resumption Index (NIBRI) ,a Japanese brokerage weekly tracker of the pace of normalisation in the economic activity which captures and tracks demand indicators such as the demand for power, labour force participation etc. – during the national lockdown, it recorded 44.8 for April-June 2020 and 98.1 in February 2021. The slowdown in the economic recovery in April 2021 due to the 2nd wave of Covid-19 localised lockdown measured 90 by NIBRI.

GST Collection: GST collections had crossed the mark of Rs 1 lakh crore successively for the last eight months. The increase in GST collection since last September is the result of rising commodity prices and heightened economic activity. It indicates that anxieties related to Covid-19 have abated, and consumer demand is perking up.

Export Increment: The export figures have seen a huge jump. According to Department of Commerce data, exports grew by around 60% as compared to last year.

FPI flows and economic recovery Investments: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are important sources of funding economies. Foreign capital are used to develop infrastructure, set up manufacturing facilities and service hubs, and invest in other productive assets such as machinery and equipment, which contributes to economic growth and stimulates employment. A strong inflow also implies foreign exchange reserves to increase significantly – FY ended march 2021 increased over $100 billion (IT, pharma, telecom and digital economy sectors attracted most of the flows).

Economic Recovery Shape

Types of recovery Shapes
Types of recovery Shapes

As per the Economic Survey 2020-21, the economic recovery of India was meant to be V- shaped economic recovery after the deadly pandemic ravaged all key sectors of growth and disrupted demand. The reason behind such a forecast being reduction of lockdowns along with the support of the Atmanirbhar Bharat Mission which has placed the economy firmly on the path of recovery. The mega vaccination drives stimulated rapid growth in service sectors and also increased consumption and investments. Some high frequency indicators such as the e-way bills, GST collections, power demand, etc were also reasons behind v-shaped recovery.

Info 4The Indian economy’s recovery is likely to be K-shaped instead of V-shaped as there have been rising inequalities that are ready to hit the consumption and growth prospects. The resultant growing inequalities being moral issues, can also erode consumption and long-term growth prospects.

A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times or even magnitude. This leads to a change in the structure of economy as economic outcomes and relations are changed before and after the recession – making the existing problem of economic inequalities worse. The paths of different parts of the economy when charted together may diverge and hence , K-Shaped – where the split suggests systematic inequalities in economy and society.

K shaped RecoveryThe initial months of the pandemic adversely affected the organised and the unorganised sectors of the Indian economy. The organised sector gradually adapted to the new normal whereas, the unorganised sector faced challenges in every step. Capital Market’s 60% shoot up compared to the last year 2020 or GST collection crossing 1trillion mark can be examples of such adaptations. Moreover, there have been reports that said that the wealth of the top 100 billionaires increased by Rs. 12 trillion, which was in contrast with 13 million people who lost jobs.  K-shaped graph 2Thus, it denotes that the income of households at the top seems to be protected with the savings rates increased, ensuring their future consumption while households at the bottom with a larger share of employment lost jobs resulting in permanent loss of income and hence, drag on demand. People are put in a debt situation as there is an increment of out-of-pocket expenditure.

The out-of-pocket expenditure can push millions of people below the poverty line and lead to an increase in rural poverty. Additionally, the labour workforce participation has shrunk, and economic distress has increased amongst them. Consequently, they are trapped in the vicious cycle of poverty.

Although a majority of people are back to work yet the employment structure has undergone drastic changes. For example- younger and women have lost jobs and still struggling for employment – the workforce is shifting to informal employment (particularly self-employment).

If inequality is increased or decrease in competition occurs due to COVID-19, it could actually have an effect on the trend of growth in developing economy by hurting productivity and tightening political economy constraints. To contain the damage to potential growth, government has to focus on capital spending.

Factors for Economic Recovery

The government has introduced stimulus packages for the relief of people and economic recovery when the pandemic hit. The Atmanirbhar Bharat Abhiyan, which was announced in four tranches by Union Finance Minister Nirmala Sitharaman in May 2020 emphasized on land, labour, liquidity and laws. The first tranche focused on MSMEs, NBFCs, real estate, power sectors, etc. The second tranche was concerned with providing free food grains to migrant workers who did not possess ration cards(ONE NATION ONE RATION CARD SCHEME, affordable rental housing, subvention relief ,etc) . Agricultural marketing reforms were taken up in the 3rd tranche and 4th tranche focused on the sectors of defence, aviation, power, mineral, atomic and space – giving a huge emphasis on privatisation. Distribution of free foodgrains to all the beneficiaries by the government will be of great help to poor jobless people and migrants. Unlike last year, the government will not distribute any free pulses due to inadequate stocks in the warehouse, but if distributed, might satisfy nutritional needs of many.

The household savings in India has increased drastically during the pandemic and it also has hit the consumer sentiments to a great extent. Household savings in India shot up after a short decline when the lockdown was eased during the 1st wave – implying that with ease of restrictions, households of these economies were in a strong position to spend. However, the recovery process could be hurt as a large lower-income base has lost jobs and incomes.

The consumer sentiments in India fell to a great extent as compared to the US or UK, implying effects of lockdown more severe in India – the sentiment recovery probably will not be the same. The recovery in consumer spending in India is likely to be concentrated in the richer households (earning more than a million rupees ) once the pandemic is lifted.

Way Forward

Vaccination And Covid- Appropriate Behaviour

Although there has been a shortage of vaccine supplies, it is essential to vaccinate more people at an even faster rate as there are several vulnerable groups like the labour force, so that the real economy does not get disrupted due to multiple covid waves. Even after vaccination, no leniency shall be there in following the basic covid appropriate behaviour of wearing masks, maintaining social distancing and hygiene protocols. The working class people who commute on a daily basis in hotspot areas should be vaccinated faster regardless of age, as only healthy citizens can contribute positively to the overall growth of the economy.

 Managing Elevated Inflation Levels

India has to balance the growth imperatives and inflation concerns very cautiously. Various policies by the RBI to support economic growth have increased ways and means regarding advances and allowed them to borrow more from RBI.

Way forward

 Investment- Centred Approach

Strengthening and stepping up the pace of investment in infrastructure and many other projects should be a right step for economic growth.

 Role of Government Policies

The growth projection also depends upon the policies adopted by the government, specially the monetary and fiscal policies. Massive economic reforms have been adopted when the pandemic was at its peak. India has freed up many sectors from over-regulation by government interference which will prove to be fruitful in faster and better economic growth.

 Blue Economy

Investing in the blue economy can help nations address the covid crisis and make sure that the global community builds back sooner and better. There exists huge potential for sustainable economic activity and job creation after the crisis. Niti Aayog has set up a high-level panel for better coordination and integration of GOI’s initiatives in the Blue Economy. There are five blue stimulus actions that can build a sustainable ocean economy in India as well as globally – investment in coastal and marine ecosystem protection, sewage and waste water infrastructure for coastal communities, sustainable marine aquaculture , incentives for zero-emission marine transport and sustainable ocean based renewable energy. The collaboration between India and Norway in this context will help plan and improve the management of ocean resources and enable an expansion of ocean industries without harming the environment.

Conclusion

There is no doubt that Covid- 19 has put India in a very critical place especially when on one side government revenues have declined and on other spendings declined. Thus, a failure to support demand-induced measures might worsen the situation even more. Strategies in terms of fiscal support for vulnerable sections to deal with aftermath of health crisis also have to be chalked out. India, as the fifth largest economy in the world, has to focus on the sustainable growth recovery and relying on just the growth numbers would not help much. Although India is slowly and gradually moving ahead towards economic recovery, yet in order to do better, more concrete plans have to be formulated and the rate of investments has to be largely increased for sustaining this growth momentum. Besides, a new reform agenda has to be formulated that will bring GDP to pre-crisis levels and ensure a growth rate higher than the pre-pandemic levels. This is no less than a war that needs to be fought together to save the world’s largest democracy from the wrath of the deadly virus.

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