What Covid -19 Outbreak Means for The Indian Economy? | NRI | உலக தமிழர் செய்திகள்| NRI updated news | NRI tamil news

What Covid -19 Outbreak Means for The Indian Economy?

April 13,2020 


As the Covid-19 pandemic sweeps through the world with now  about 1.3 million cases confirmed and nearly 70,000 deaths recorded, one country – the world’s second most populous and the Asia’s third largest by the size of the economy -seems to have slowed the exponential growth of the coronavirus. India’s Ministry health shows only 1,466 confirmed cases as of April 1, with 38 succumbed their life to the virus. If this tally of infection is considered against the 1.3 billion population, it would come around 0.1 number of cases per one million people. The comparative figure for china is 56 per million, Italy 591, Iran 207, Spain 316 and USA 431. These five countries accounted for around 75% of the total number of global cases as of March 30. The possibility of India’s originally reported corona infected cases being grossly understated due to the carrying out of extremely small number of testscannot be ruled out. As of 25 March, the government has established 118 testing labs, with a cumulative capacity to conduct 15,000 tests every day. At all cost, India with one of the highest population densities in the world should avoid the exponential growth in the numbers of cases and deaths as reported in China, Iran and Italy.

The economic impact of the Covid 19 outbreak on the Indian economy will be driven by the nature of the virus and the collective responses – global, national and local – to curb the spread of the virus and interrupt transmission. To understand the nature of the virus, its spread and transmission potential, a scientific approach based on facts and dataneeds to be adopted. Three factors will determine the effectiveness of responses and subsequently the economic impact, namely leadership to develop policies that are science based and data driven, governance to implement the policies and provide support to the essential service providers, and accountability to ensure that everyone is together in taking actions and precautions to overcome this problem.

Covid 19 will spread further before fading

The Covid-19 outbreak has turned out to be far worse than expected after India reported its first case at the end of January 2020. With the closure of the borders for outsiders, India declared a self-imposed quarantine on March 12. It went under complete lock down from the mid-night of March 24 to combat the spread of Covid 19. India is now at the beginning of the critical stage 3, which indicates community transmission during a virus outbreak. In Stage 3, an epidemic usually spreads fast, as it becomes difficult to trace the original source of transmission. A report by the Centre for Disease Dynamics, Economic and Policy predicts that in the next two months, a large number of people in India are likely to contract the Covid 19 infection and these numbers are expected to increase further by July

Eventually, the virus could burn itself out as virtually all other epidemics have in past history. Moreover, as SouthKorea has shown, with right measures- testing, isolation, contact tracing and monitoring in place- the rise in the new infections can be brought under control. So, the key is whether Indian health care system can respond quickly to this challenge. The next big question is whether sufficient health infrastructure and supportive equipment for effective treatment regimes can be devised to reduce the fatality rate and ensure that the affected persons can get back to normalcy and work as soon as possible. Many working Indians lack adequate health care benefits, while the majority serve in the informal sector where they have to show up to get paid.

 The Right policy responses are vital to control the economic damages 

The critical need when economies suffer a shock like the global pandemic is to ensure that the initial impact on the economy is not amplified and there are sufficient shock absorbers in the system to mute the long-term effect. Aa part of containment efforts, state borders are closed, labor movement is curtailed, schools and training courses are suspended across the countryMajor companies in India have temporarily suspended or significantly reduced operations in a number of manufacturing facilitiesNearly all two-wheeler and four-wheeler companies have stopped production till further notice. The Investment bank Nomura estimates that the lockdown would cost about8.5% of GDP to IndiaLast week Amazon announced that it would stop sale of non-essential items in India so that it can focus on essential needs . Barclays said that the cost of the 21 day lock- down will be US$120 billion. All the airlines except Air India have grounded their domestic and international flights, the loss of which is estimated to be US$ 500-600 million. In India, the service sector accounts for 55% of GDP. It is estimated that the loss to the tourism and hospitality industry will be about US$2.1 billion for March and April alone.  

Fortunatelypolicy makers in New Delhi and State Capitals are learning to do the right things. The 25 billion core rupee relief package announced by the Finance Minister on March 26 is a good first step towards alleviating the distress caused by the virus. It covers various sections of the vulnerable segments from farmers, women and small businesses to organized workers, who would get a sizable insurance cover of about $7,000. It offers to pay very small business enterprises that have been forced to shut down their operations, and also to employees earningmeagre salariesThe Finance Minister needs to look into the ways to provide assistance to medium and large sized businesses that may run out of credit and become insolvent. The Reserve Bank of India deserves  appreciation for its methodical and credible reaction with the decision to reduce the repo rate, the rate at which commercial banks borrow money by selling their securities to the Central bank by 75 basis points to 4.4 %. A moratorium of three months of equated monthly installment on all outstanding bank loans was announced on March 27.

The troublehowever, is that the policy response at the global level is not yet effectiveIndia is among the 15 most affected economies due to the coronavirus epidemic. The production in China has slowed down, which has an impact on the performance of the Indian economy. For example, 18 percent of auto-component imports, 45 percent of consumer durables and 67 percent of electronic components comes from China. As per the UNCTAD report for India, the trade impact is estimated to be the most for the chemicals sector at 129 million dollars, textiles and apparel at 64 million dollars and the automotive sector at 34 million dollars. 

The extraordinary summit of G20 leaders, wherein India a leading member, on March 26 ended with  a statement of promising actions by individual countries; but, it missed the kind of aggressive and coordination action needed to calm consumers, businesses and financial investors that happened during 2008 global financial crisisThe Indian stock market on 23 March suffered its worst single-day rout in history with investors stuck in a selling frenzy as the coronavirus disrupted businesses and forced several states into lockdown.  The NSE Nifty 50 index sank by 12.98% to a near four-year closing lowwhile the S&P BSE Sensex fell by 13.15% to 25,981.24. The rupee hit a record low of 76.16 against the US dollar.  Coordinated action at global level to remove the trade restrictions on medical and food supply to India, financial market stabilization and coordinated rate cuts are immediately required. It requires India to take a lead role within G20 to lessen the lasting economic and financial market damages from the endemic.

What is the likely Recovery Path?

While India may be able to avoid a large economic slump, the path back to growth under Covid -19 will depend on range of drivers, such as the extent to which demand will be delayed or foregone, whether shock is truly spike or lasts, or whether there is structural damage. It is reasonable to draw three broad scenarios. First, V-shaped, which is classic real economy shock recovery – a displacement of output, but growth eventually rebounds sharplyThe second, U-shaped recovery – where the shock persists but some initial growth is resumed. The third is the scenario, where significant structural damage is done with some permanent losses of output due to the slackness in the labormarket, and capital formation abilities.

The coronavirus relief package appears to keep the public spending within the budget as much as possibleBut, at some point of time sooner or later, India will have to address the deficit shackles and inflation. With GDP growth rate crashing to a six-year low of 4.5%, non-performing assets rising to 10% level, India need to be innovative in the coming months, to have a V shaped recovery. There are enough ideas to borrow from other countries such as the USA which recently approved a $2 trillion stimulus package. 

Indian public and private sectors should plan for the best and prepare for the worst scenarios, keeping in mind that V shaped recovery is the plausible and complacent scenario both conceptually and empirically. In other words, the next few months could be troublesomebut things should become better after that. Policymakers need be concerned and alert, but not unduly pessimistic. Finally, a gradual opening up of the lock down measures in a phased manner will be critical to avoid a second wave or peak in the viral spread. This can be done by first opening schools, universities, educational institutions and businesses, while gatherings such as sport events, conferences and other large-scalegatherings are relegated to the last depending on the characteristics and behavior of the virus. This will be the responsibility of everyone – government, businesses, educational institutes, and citizens – joining together to cooperate in implementing the economic policies health procedures outlined by national leaders. Working together while staying apart is important today in order to have a major impact on the economic recovery path.

- Kalirajan, Professor of International Economics, Australian National University

- Anbumozhi Venkatachalam, senior environmental economist, Economic Research Institute for ASEAN and East Asia, Jakarta 

- Kumaresan, Former Executive Director of WHO, New York

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