Assignment: Effect of COVID-19 on Indian Economy

Discipline: Economics

[An Assignment submitted to Himachal Pradesh National Law University, Shimla]

Course In-charge Submitted by

Dr Harichand Thakur Savvy Thakur

B.A. LL.B. 1s Semester

102020213

HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA

16 MILE, SHIMLA-MANDI NATIONAL HIGHWAY, GHANDAL

DISTRICT SHIMLA, HIMACHAL PRADESH-171014

Ph. 0177-2779802, 0177-2779803, Fax: 0177-2779802

 Acknowledgement

I wish to take this opportunity to offer my sincere gratitude to my academic supervisor, Dr.
Harichand Thakur, Himachal Pradesh National Law University, Shimla. Without his kind
direction and proper guidance, this study wouldn’t have come to fruition.

I would also like to show my gratitude to my batchmates for their insight and reviews that
greatly assisted me through my writing this paper.
The study was undertaken with the help of Himachal Pradesh National Law University, Shimla,
and I am very thankful for having been given the opportunity.

Last but not the least; I would want to thank everyone who guided me throughout the process of
making this study a successful venture
Introduction

Coronavirus (COVID-19) is a contagious disease caused by SARS-CoV-2 which was first

identified amid an outbreak of respiratory illness cases in Wuhan City, Hubei Province, China.
It was reported to the WHO on December 31, 2019 and has since spread all over the world.
Corona can be referred to as a black swan event. Two key features of black swans are that their
occurrence is highly unlikely and their impact is very big, which was also the case for the 9/11
terrorist attacks in 2001 or the global financial crisis of 2008/2009. This current shock is deeper
and broader and impacts almost the entire real economy.

With an increasing number of coronavirus cases, the government has locked down transport
services, closed all public and private offices, factories and restricted mobilization. In this time,
when pre-existent economic slowdown is further aggravated by COVID-19, the economy has
moved towards recession as it shrank for a second straight quarter. This situation especially
affects the unorganized sector and semi-skilled jobholders alongside the overall economy. Covid
restrictions have led to a larger stop sign across areas like consumption, manufacturing, exports
and capital flows.

Consumption: Lockdown and Social Distancing forced people to stay at home which resulted
in plummeting consumption levels. A lot of people also lost their jobs and suffered pay cuts
which forced them to cut down on consumption.
Manufacturing: Due to lockdown there was a large scale disruption of manufacturing
activities even essential products suffered the brunt of this disruption

Exports: Exports were paused because the global supply demand chain was severed due to the
pandemic

Capital flows: Pandemic causes risk aversion and Emerging markets felt the impact of capital
outflows or slowdowns in Capital Inflows.
Before delving into what went wrong with the indian economy due to COVID it is imperative to
understand the economic conditions pre-covid to fathom the impact it had on the economy.

Indian Economy before COVID

Even before the pandemic, since FY 2018–19, India's growth was falling, 8% in Q4 FY18 to
4.5% in Q2 FY20. In January 2020 itself, well before India's lockdown or reactions to the
pandemic, the International Monetary Fund reduced India's GDP estimates for 2019 and also
reduced the 2020 GDP forecast.

The 2016 Indian banknote demonetisation and goods and services tax enactment in 2017 led to
severe back to back disruptions in the economy.On top of this there had been numerous banking
crises such as the Infrastructure Leasing & Financial Services crisis and government scheme
failures such as that of 'Make in India'.There was also a significant "income crunch" for both
rural and urban sectors in the year prior to the lockdown.

A major driver of growth in any economy is investment by the private corporate sector. In the
pre-Covid19 period, nominal values of private sector investment had been declining. The total
outstanding investment projects between 2015-16 and 2019-20 declined by 2.4%, whereas new
projects announced fell by 4%, as per data from the CMIE (Centre for Monitoring Indian
Economy). Consumption expenditure had also been falling, for the first time in several decades.

High frequency indicators (figure 1) of urban consumption demand show that sales of passenger
vehicles as well as consumer durables growth contracted in February 2020. Overall, urban
consumption appears to have lost steam in Q4. Among the indicators of rural consumption,
motorcycle sales and the consumer nondurable segment remained in contraction in February
2020, reflecting weak rural demand.
(Figure 1)

However COVID made the preexisting conditions even worse. To stop the spread of the virus the
government resorted to impose various phases of lockdowns wherein people weren’t allowed to
leave their houses. Instead of discussing whether the lockdown imposition was successful or not
the paper would loom over the economic aspect of the same. The lockdown dampened the
chances of revival of consumption.
Impact of COVID in Indian Economy

Effects on Different Sectors of Indian Economy

The Indian economy, one of the developing economies is facing huge trouble from market
shutdown as the downfall of the economy would lead to a market recession without proper flow
of funds. All the sectors are getting adversely affected.

Agriculture and Food Processing

The poultry sector which is the fastest growing sub-sector of the Indian agriculture ecosystem
and where India has created a foothold at the global level (India is the third-largest producer of
eggs and fifth largest producer of broilers) is already facing losses to the tune of 150-200 crore
each day. Social media has been spreading rumors by correlating COVID-19 infection to the
consumption of meat and poultry products. This has caused enormous destruction in demand for
poultry products and the prices realized by farmers have crashed to Rs 10-15 per kg – whilst the
production cost of about Rs 70 – 80 per kg 1.

Capital Markets

In the present scenario, there is a need to ensure a steady flow of funds to the industry through
the primary markets and therefore certain rules are needed to be changed to make this easier.
Some additional measures are also required to decrease instability in the market.

1https://www.business-standard.com/article/companies/covid-impact-indian-ports-to-see-5-8-slump-in-
cargo-volumes-in-fy21-120062901154_1.html
Pharmaceuticals

China accounts for 70% of India’s active pharmaceutical ingredients (APIs)2. The active
pharmaceutical ingredients (APIs) are essential for any country for pharmaceutical
manufacturing countries. As COVID-19 cases in India increased to 101K, medicines are going to
be increasing in demand since there are not enough APIs to manufacture and therefore the
market will witness all-time high prices.3

Tourism

There is a great scope for India on cultural and historical tourism which attracts domestic and
foreign nationals throughout the year. As a result, a large number of COVID-19 cases are foreign
tourists. The matter of concern here is that since visas are being suspended and tourist attractions
are shut down for an indefinite period, the whole tourism industry took a great hit. There is a
great loss on the part of attractions, restaurants, agents and operators, and hotels. It is expected
that the pandemic could end up crippling the tourism industry for the near foreseeable future.

Aviation

Ever since the Indian government suspended the domestic and international flights, the Aviation
Industry is suffering a daily loss of Rs. 75-90 crore and the Indian aviation industry will require
additional funding of Rs 325-Rs350 billion over FY 2021-2013 according to rating agency ICRA
limited.4 In short, the aviation industry is undergoing severe losses since the flight operations

2 Source: Rail Drishti.

3 “A third shock”, Mahesh Vyas, CMIE Economic Outlook, 16 March, 2020.
4 Force majeure or an ‘act of God’ is a contractual clause that refers to an unnatural event such as an
earthquake, fire, war, or other such situation which prevents parties from continuing or performing
their contractual provisions.
were canceled. The pandemic has affected the industry that it will need either a government
package or has to levy additional charges on the passengers to be back on the track.

E-commerce

Ever since the pandemic struck our country, the government has issued several advisories related
to social distancing and to avoid leaving home for unnecessary purposes. It led to organizations
asking their employees to work from home. Moreover, the lockdown has made things worse
because it led to an increase in demand as people were asked to refrain from leaving homes,
especially in red and orange zones. But since there was a complete lockdown, the E-commerce
websites were not able to deliver the goods. This resulted in a loss to both consumers and
corporations.

Education

With the announcement of a nationwide lockdown, schools and colleges were also closed in
March. March is crucial as many of the board exams and college exams were scheduled in
March and April. Moreover, in many institutions, the syllabus is also not complete. Although
online remedial classes are being provided in the majority of the institutions, students are
worried about the exams.

Real Estate and Construction

The year 2019 was difficult for the real estate sector as it suffers to struggle with funding crises
amid NBFC and banking sectors. Moreover, the economic slowdown has further exacerbated the
sufferings resulting in poor housing demand.
On the other hand, there has been a mass exodus of migrant workers ever since the government
has announced lockdown. Since there was no source of income left for the workers to sustain
their daily needs, they were left to be dependent on the government for food and other
necessities. But the fear of pandemic has forced them to go back to their homes from large cities
like Delhi and Mumbai. With railways, roadways and airways came to a standstill, they were
forced to walk down to their homes with some of them living as far as 1000 kilometers. This led
to a huge crisis and also the uncertainty of their return.

Hence, the pandemic has hit almost every sector of the economy in India and the recovering
process is difficult at such times. Not only India but the whole world is facing such an economic
crisis and for coping up with the pandemic loss the organizations which have the responsibility
to balance the economy in such adverse conditions are taking steps to give a helping hand to the
countries falling apart economically at the global or international level.

Overall Macro Impact

Three major components of aggregate demand- consumption, investment, and exports are likely
to stay subdued for a prolonged period of time. In addition to the unprecedented collapse in
demand, widespread supply chain disruptions will continue for a while due to the unavailability
of raw materials, exodus of millions of migrant workers from urban areas, slowing global trade,
and shipment and travel related restrictions imposed by nearly all affected countries.

The supply chains are unlikely to normalise for some time to come. Already several industries
are struggling owing to complete disruption of supply chains from China. The longer the crisis
lasts, the more difficult it will be for firms to stay afloat. This will negatively affect production in
almost all domestic industries.

This in turn will have further spillover effects on investment, employment, income and
consumption, pulling down the aggregate growth rate of the economy. At this stage, the possible
duration of the underlying health crisis remains uncertain. In addition there are multiple
unknown factors such as the true extent of impairment suffered by the different sectors of the
economy, the magnitude of deterioration of the balance sheets of economic agents such as firms
and households, the ability of both the formal and informal sectors to bounce back to normalcy
once the lockdown is fully relaxed and most importantly, the potential destruction of the
productive capacity of the economy.

Therefore, it is difficult to fully comprehend the extent of the damage that the Indian economy is
currently incurring. Some of the statistics available now already highlight the severity and
duration of the slowdown the economy may experience going forward.

After some amount of recovery in economic activity in June, 2020 the slowdown has resumed
once again in most of the sectors. The improvement seen in most high-frequency indicators in
June after the dramatic collapse in the April-May period has begun to wane since mid June. This
is presumably due to the renewed lockdowns all over the country and damage to consumer
sentiment and overall economic productivity.

(figure2)

Electricity demand declined to 30% below last year’s levels (figure 2) and gradually recovered
thereafter. Since June end there has been no further moderation in the pace of deceleration in
electricity demand. Vehicle registration related transactions declined dramatically in end March
and April, began improving since May but have begun falling again in the first couple of weeks
of July (figure 3).

(figure 3)

Overall cargo throughput at majority of theIndian ports was down by around 20% year on year in
March and April, particularly in cargo segments such as petroleum products, thermal coal and
containers.5

This contraction was recorded despite the fact that the port sector is counted among ‘essential
services’ and was primarily due to the shock to global trade and reduced domestic industrial
activity owing to the lockdown.

Railway freight which is an important indicator of economic activity was down by more than
35% year on year in April and began recovering slowly since May, a trend which has continued
in July.6 India's aviation, tourism and hospitality industries have already sustained maximum
damage because of the Covid-19 outbreak, and after the lockdown, it is questionable to what
extent they will be able to ride out this storm.
5 See Carlsson-Szlezak et al (2020) on Covid-19 and global economy.
6 Ficci.in (2020), http://ficci.in/spdocument/23195/Impact-of-COVID-19-on-Indian-Economy-
FICCI-2003.pdf
The shutdown is bound to push India's fast-growing aviation industry into peril. The Centre for
Asia Pacific Aviation (CAPA) has assessed that the Indian aviation industry will post staggering
losses worth nearly $4bn this year. There will also be large scale cascading effects for the
hospitality and tourism industries. Hotels and restaurant chains across the country are closed
right now. They are unlikely to witness a pick-up in demand even when the lockdown is relaxed.
Their businesses will suffer for several months, sparking worries of large-scale layoffs.

The World Travel and Tourism Council has projected that travel could fall by 25% in 2020
putting to risk 12-14% of the jobs in the sector. This translates into 50 million jobs at risk,
globally.

According to estimates from CMIE’s Consumer Pyramids Household Survey, travel and tourism
accounts for five per cent of total employment in India (nearly 20 million jobs). Hotels and
restaurants account for another 4 million jobs. Employment in the travel and tourism industry has
already been declining since late 2017. 7These sectors are going to be disproportionately affected
during the on-going crisis.

Google has released a mobility report, which shows changes in the footfalls and length of stays
at different types of places across the country during the lockdown period against a baseline. The
baseline they use is the median value for the corresponding day of the week, during the 5-week
period Jan 3- Feb 6 2020. The left hand panel of figure 4, shows the percentage change in
number of visits and duration of stay at different places against the baseline whereas the left hand
panel shows an average of five categories of places from the left hand panel, excluding
residential. After a steep decline in April which only marginally recovered in June, the major
improvement in July has only been recorded in the grocery and pharmacy sectors both of which
are essential sectors.

7 India looks to cut reliance on China for APIs, Bioworld.com (2020),

https://www.bioworld.com/articles/434213-india-looks-to-cut-reliance-on-china-for-apis
(figure 4)

With all non-essential businesses closed, most industries have been witnessing a drastic decline
in sales. Revenue losses will force businesses to either close down or opt for wholesale
retrenchment of workers.

Operations of a large number of companies in specific sectors will not see business getting back
to normal even after the lockdown ends, as the labour has moved out. Even capital intensive
sectors such as real estate, consumer durables, and jewellery may not see a demand revival for
several months or quarters. Data from the Consumer Pyramid household level survey of the
CMIE shows that the overall weekly unemployment rate went up drastically from an average of
9% in March to around 23% in May and to as high as 35% by early-June. It was higher in the
urban areas compared to the rural areas.

In June the unemployment rate fell sharply to 11% reflecting the first round of relaxation of
lockdown restrictions. There was also a significant recovery in the labour participation rate.
Since then the unemployment rate has been stagnant at 11%. This is still higher than the pre-
lockdown rate but significantly less than what was recorded during the peak of the lockdown
from end March to end May.
The labour participation rate recovered faster than the unemployment rate but in July this too has
been slowing down indicating some sort of a plateauing out. The firms in the private corporate
sector which have been deleveraging for the last few years in response to the TBS crisis and
those with relatively deep financial pockets, will perhaps be able to tide over this episode, also
depending on which sector they are operating in. A large number of firms will however struggle
to survive. They have to pay rents, salaries, debts etc., even as their revenues will steadily keep
falling as people change lifestyles and cut back on expenditures. Many of these firms will end up
defaulting on their loans due to persistent fall in revenues.

The firms that were near insolvency will end up in the bankruptcy process (which too is likely to
get jeopardised further owing to the lockdown measures), and those that were undergoing
insolvency resolution process under IBC will most likely get pushed to liquidation. Several large
business houses have already invoked the provisions of force majeure to stall the payment of
license fees, rents etc., and to restrain the invocation of penalties. 8 This further highlights the
severity of the problem at hand. Over and above the domestic problems, the Indian economy will
also continue to get affected by the global recession that may last for a while. 9 This is bound to
have spillover effects through financial and trade linkages of India with the rest of the world.
Already foreign investors have been pulling money out of the Indian financial markets and are
fleeing to safe assets as stock markets have crashed.

India's GDP dipped by 23.9% between April to June as the Pandemic took hold of the economy.
This is the worst that India's GDP has ever contracted is at a 24 year low. This in comparison to
last year, when GDP was up by 5.2%.

The COVID-19 crisis being a temporary external shock, much like demonetisation in 2016 but
much larger in scale, can theoretically lead to a quick bounce-back in economic activity but the
actual pace of the recovery in industrial production and even the wider economy will depend on
the policy environment created by the government after the crisis.

8 https://www.accuweather.com/en/in/national/covid-19
9 Rhik Kundu, All flights will remain suspended at least till the end of this month (2020),
https://www.livemint.com/companies/news/covid19-flight-services-to-remain-grounded-at-least-till-
31-may-11589725112803.html
Suggested Measures

As supply recovers while commodity prices remain constrained, there is an opportunity to switch
from the low credit and money growth that characterized India’s post 2011 growth slowdown, to
a credit-led recovery that also reduces the financial sector stress. Financial conditions can be
relaxed, especially as essential structural improvements are adequate and over-tightening created
stress.

The post Covid-19 macro-financial package could trigger a virtuous growth cycle, by raising
marginal propensities to spend above those to save, as demand is kept a step ahead of gradual
relaxation in supply constraints. Activating India’s large domestic demand can potentially
insulate from global shocks and a likely prolonged shrinking of trade.

To improve the fiscal space and manage high levels of debt distress, a growing call for extending
the debt moratorium under global initiatives like the Debt Service Suspension initiative is timely.
Central banks can continue to keep the balance of supporting the economy and maintaining
financial stability. This further involves enhancing tax reforms and improving debt management
capacities, while using limited fiscal space to invest in priority sectors. Exploring sustainability-
oriented bonds and innovative financing instruments options such as debt swaps for SDG
investment should be explored further.

Fiscal space is still constrained, however. In order not to overstrain government finances,
stimulus should work through the financial sector, be targeted, temporary and self-limiting.
Financing schemes will have to be designed to minimise impacts on future fiscal deficits, while
maximising growth revival. Fiscal stimulus can be increased to the point where reduction in debt
ratios due to increased growth equals the increase in debt ratios from further borrowing.
Changing the composition of expenditure and cutting flab would enhance the growth boost.

In addition to economic considerations, the policy paradigm must mainstream affordable,

accessible and green infrastructure standards, while promoting social equality and environmental
sustainability principles as enshrined in the Paris Agreement. As we scale up the use of digital
technology and innovative applications, the financing support of micro, small and medium-sized
enterprises must go hand in hand with these national job-rich recovery strategies.

As the impact falls on the world over, thus the regionally coordinated financing policies are
essential to restart trade, reorganise supply chains and revitalise sustainable tourism in a safe
manner. Across Asia and the Pacific, governments must pool financial resources to create
regional investment funds. Strengthening regional cooperation platforms to ensure that all
countries receive an equitable number of doses of the vaccine on short notice to everyone
everywhere is particularly essential.
Conclusion

India has to fight on two fronts simultaneously - the ongoing corona impact and the impact of her
own blunders committed in the immediate past. The corona and the immediate past blunders
have together complicated many things in India. The positive outcome of the COVID19 is,
Indians have rightly and seriously realised their socio - economic priorities. They now
understand that their economy requires a holistic approach of renaissance. The solution cannot be
piecemeal. The road ahead for India will have to be defined considering the following four
pillars of economic equilibrium and sustained growth.