How Covid-19 Ruining The Indian Economy? How To Recover From It?

Impact of Corona on Indian Economy How to recover from it

The Coronavirus pandemic surfaced in December last year and took over the whole world by storm and is now defining the global health and economic crisis of our times. This deadly virus is the greatest humanitarian challenge the world has faced since the 2nd World War. Let’s see what are the impacts of corona on Indian economy and what could be done to recover from this?

The virus has penetrated in almost every country in the world and the number of cases across the globe are rising exponentially while the governments and authorities work to contain its spread. India became a fast mover and deployed precautionary measures along with a nationwide lockdown of 21 days to flatten the curve and use the time to play and resource the economy and humanitarian crisis which has taken over the country.

McKinsey has recently published an article which talks about the impact of the pandemic in India and how the country could recover from the same. The Coronavirus has not only brought an unprecedented toll of human casualties but also triggered a deep economic crisis which could be the worst in the recent known history. It is also being said that the global impact on the economy could be worse than what was of the Great Depression.

In order to understand the depth of the impact and probable economic outcome and the possible involvement that would be needed, McKinsey spoke to over 600 people which included the financial experts, the senior economists, and the policy makers in 100 companies spread over several sectors.

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Based on the inputs, the management consulting firm estimated for 3 economic scenarios which could blanket India due to the lockdown as shown in the image below.

Indian GDP Scenarios
Credits: Mckinsey & Company

In the 1st scenario, the economy could contract close to 10% in just the first quarter of the Fiscal Year 2021 (FY21), with the GDP growth dropping to just 1% to 2% for the Fiscal Year 2021. Under this scenario, the lockdown would have been relaxed after the 14th of April (after the completion of the 21 day lockdown) with appropriate protocols put in place for the transportation of not just goods but people as well.

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As per the report from McKinsey, the Indian economic model suggests that even in the case of a quick recovery from this scenario, the livelihood of 80 lakh workers, including those who are in the informal workforce, could be affected. This means that 80 lakh people in India could lose their ability to survive and afford basic necessities such as clothing, food, and housing.

Furthermore, as the corporate and Micro-, Small-, and Medium-size-Enterprise (MSME) fails, along with Non-Performing Loans (NLPs) in the economy could lead to a rise of loans by 3% – 4% points. The amount of government spendings which are required to protect and revive the companies, households and the lenders could hence be around Rs. 6 lakh crore (almost $ 79 billion) or 3% of the Indian GDP.

In the 2nd scenario which we are underway, the economy could take a bigger nosedive by almost 20% in just the first quarter of the Fiscal Year 2021 with a negative growth in FY21 of between -2% and -3%. If the lockdown is further extended until the mid of May following by gradual resuming of supply chai, this could impact a bigger base of 3.2 crore people which could further swell the NPLs percentage points.

The cost of reviving the companies, households, and lender from this stage would be monumental and could even exceed Rs. 10 lakh crore (more than $ 130 billion) or over 5% of the Indian GDP, says the report by Mckinsey.

In the 3rd scenario, where the lockdown is further extended by 2 or 3 weeks could be devastating for the India economy with McKinsey predicting contraction of between 8% and 10% for the Fiscal Year 2021.

This could also happen if the virus comes back a few times over the rest of the year which would require further lockdown causing ever greater unwillingness amongst the migrant workers to resume works over the fear of being stranded far from their homes again. This will seal that the recovery will be slower than a snail’s pace.

How The Coronavirus Has Impacted Different Sectors in India and What is Being Done?

McKinsey, in their report, talked about the impact that COVID-19 assuming the scenario where the lockdown will not go beyond mid-May 2020. In an illustration, McKinsey showed how different sector of India would be affected.

How The Coronavirus Has Impacted Different Sectors in India and What is Being Done?
Credits: Mckinsey & Company

They said that the risk of insolvency may rise in the Indian Financial system as around 25% of the MSMEs and Small- and Medium-side-Enterprises (SMEs) loans could slide into default and in the corporate sector it could be 6%, however, the rate could shoot up in the corporate sector as aviation, power, textile and construction sectors are at a much higher risks.

The report also says that the retail segment’s risk is at 3% which mainly comprise of personal loans for the self-employed workers and small businesses.

McKinsey argued that the liquidity risks associated with the lockdown in the country due to Coronavirus will need urgent attention as the money in terms of payments may start freezing in the SME and corporate supply chains.

Even attention would be needed to increase the liquidity with the banks and the nonbanks to make sure depositor’s confidence is not lost. Even though the RBI announced a Rs. 50,000 crore relief fund for the banks to increase the liquidity, it does not seem enough given the extent of the impact.

Given the massive potential risk of business failures, unemployment, and the financial-system risk in India due to Coronavirus, a comprehensive package of both fiscal and monetary mediations may be needed by the government if the lockdown is extended until the mid of May. Though at the beginning of the initial lockdown where the first one came in relaxation of tax dates and the second came to aid people in both urban and rural areas so control some damage done by the Coronavirus in the country.

Several measures have already been taken such as some mentioned in the paragraph above which amount to almost 0.8% of the Indian GDP. McKinsey advises that additional measures should be considered of Rs. 10 lakh crore or over 5% of the GDP of the Fiscal Year 2021. However, McKinsey said that, “all the estimated requirements may not necessarily be reflected in the fiscal deficit of the current year—for example, some support may be structured as contingent liabilities that only get reflected when they devolve.”

And added, “However, a package of this order of magnitude may be essential in supporting those dealing with the possible steep declines in aggregate demand and in protecting the financial system from the possible solvency and liquidity risks arising from stressed companies if scenario 2 or scenario 3 plays out.”

How Covid-19 Ruining The Indian Economy? How To Recover From It?

They claim that as an aftermath to this the household demand could be boosted beyond the support which is provided to the underprivileged households which the Indian government had already announced.

They argue that consideration should be given to the “income-support program” wherein the government not only pay a part of the payroll to the 6 crore informal contractual but also the permanent workers which are linked to firms and provide direct monetary support to 13.5 crore informal workers which are not on any kind of company payroll.

They also say that India’s own digital-identity frame – Aadhaar – could effectively enable mechanisms for the direct support which includes PMJDY (Pradhan Mantri Jan Dhan Yojana), PM-KISAN (Pradhan mantra Kisan Samman Nidhi) and also to the landless beneficiaries in MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act).

They also recommend concession for the home buyers in terms of tax rebates for a time-bound period which could in turn lead to the elevation of the real-estate sector and also unlock the “job multiplier”.

They also advise that to protect the MSMEs from bankruptcy and give them liquidity support, they could receive money from the banks which are refinanced by the Reserve bank of India (RBI) and also a loan for the first time borrowers could be administered via the Small Industries Development Bank of India (SIDBI). They also said the credit backstops from the Government could be established for the new “NPLs Timely payments to MSMEs by large companies and governments could be encouraged by promoting bill discounting on existing platforms.”

For the large companies, they recommend that the banks should be allowed to restructure the debt on their balance sheets. In addition to this, the requirement to raise capital should be made less tiresome and time-consuming process. They also say that the Government of India can consider infusing capital via temporary Troubled Asset Relief (TARP) or any similar program in select sectors which are more distressed such as travel, auto, textile, logistics) with making sure that the workers and the MSMEs in the value chain are safe.

Also Read: 7 Most Common Reasons For Personal Loan Rejection

They also advise that the government can take a similar approach for both banks and nonbanks to strengthen their capital along with measures to increase their liquidity.

McKinsey said that in order to manage the macroeconomic consequences caused by such a huge stabilisation package the Government of India may need to consider an effective way of communication to the population and the sectors that these measures are just temporary.

Given that the country’s fiscal resources are constrained and already under a lot of stress as a consequence the Centre suspended the hike in DA until July of 2021 after announcing the hike in March. The team at McKinsey says that the RBI may need to open the reserves and help the increased of the government at such times.

They added that this RBI spending “tracked as a COVID-19 portion of the budget to boost transparency. The inflationary effects may be low, as lockdowns severely constrict demand and the fiscal support provided would be a substitute for expenditure rather than additional stimulus. Price increases could, however, occur in some sectors, such as food, so appropriate steps would be needed to maintain harvests and keep the food supply chain operating smoothly.”

The government, in the middle of the month, also said that there will be some activities and operations which can resume from the 20th of April to help the economy recover a little.

The one thing we all can agree on is the fact that the novel Coronavirus came with an unprecedented scenarios which not a single nation was prepared for, talking about the losses in both economic and human front, India has been applauded by many nations and organisations globally.

However, as it has happened, and the economy has been impacted additional packages would be required from the government of India which would be implemented in a timely manner to boost the pace of recovery and avoid further damage to the livelihood, society, economy and the financial sector of the country.

Amongst the initial relief package was also the relaxation in the due date of payment of premiums which came in as soon as the lockdown was extended until the 3rd of May. However, McKinsey says, now there will be a need to shift the focus to reforms to increase investment and productivity, creation of jobs on a faster pace and improvement of the Indian fiscal health.

This means that the Indian government will have to further introduce “reforms in infrastructure and construction and accelerating investments in health, affordable housing, and other urban infrastructure” said the report of McKinsey.

The states can also help the central government with them increasing their spendings and institutions such as the National Investment and Infrastructure Fund (NIIF) can set-up both long term foreign and domestic capital quickly.

McKinsey said such reforms will “Make in India sectors to become globally competitive and boost exports (such as electronics, textiles, electric vehicles, and food processing), strengthen the financial sector, deepen household financial savings and capital markets, and accelerate asset monetization and privatization to raise resources.”

As it has been discussed and seen that many new containment and hotspots are being added and removed everyday, so it would be difficult to lift off the lockdown even gradually, though the lockdown could be removed from the zones which have not reported any case in the past 28 days but with people travelling, a person could be a carrier of the virus and not know it as the virus may be dormant in his body but could be deadly for the other person.

It will be a huge task for the government both state and centre to decide which zone should not resume operations and which zones should have extended lockdowns. Then there are officers and education, a school from a green zone may start operating but the students may live in a hotspot, how will the student cope, how will his parent(s) travel to work, and what about the fees and other expenses, there is a lot riding on the government and whatever decision Prime Minister Narendra Modi led government will take will have consequences.

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Shivani Singh

Shivani has been an avid reader of newspapers since her childhood and likes to know what is happening around the world. Her love for news and bringing forth the absolute is what drove her writing for the people. She has worked in the industry for over 4 years and believes that people’s basic rights should always be honoured. Apart from reading, she is a foodie and loves to try her hands-on cooking different cuisines.

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