A Glance at the Recession Point of Indian Economy due to Covid-19
Author By Riya Jariwala
Abstract- The Corona Virus Pandemic is one of a kind situation faced by all countries around the globe. By slowing down an already weak economy in the face of worsening global geopolitical situation, this Pandemic has paralyzed any hopes of a revival. As the world hopes for a steady recovery both in terms of the economic and social downfall, authorities look at damage control and mitigation measures by way of fiscal and monetary policy reforms as the way forward.
This article analyses the varied impacts of the Corona Virus Pandemic on the Indian economy and is an endeavour to simplify its dynamics without resorting to statistics, data, or numbers.
The Corona Virus Pandemic has spread with alarming rates, infecting millions and leading to stringent social distancing norms. This brought most economic activities to a standstill owing to a recurrent lockdown of business and commercial establishments, restricted movement of people and other regulations imposed by the Central or state government or the district administrations in some cases.
Mounting pressure on weak healthcare systems shut down of tourism and hospitality sectors, and dwindling remittances amidst growing debt are some of the consequences felt by citizens world over. Disruption in supply-chains has become a norm rather than an anomaly. In addition, the attempt at containing the pandemic has triggered an unprecedented collapse in oil demand and a crash in oil prices.
This has been perceived as the deepest global recession in the last century despite extra-ordinary support extended to Industries by Governments in the form of fiscal and monetary policy relaxations.
“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.”
Impact of Global Crisis on Indian Economy:
CRISIL stated that this was India’s worst recession since Independence and predicted the economy to shrink by 5% in the current fiscal. It elaborated that this blow would be cushioned by the agricultural sector assuming a normal monsoon. Furthermore, it was forecasted that non-agricultural sectors and services such as education, tourism, travel could be worst hit leading to extended job and income losses as these sectors were larger employers.
While oil-exporting economies would be damaged to the core owing to the reducing oil demands and decreasing oil prices, this would reap short-term gains to emerging economies like India which heavily relies on oil imports. In addition, the oil price plunge would act as a catalyst for energy reforms and help deepen them once the immediate health crisis subsides.
Despite the deterioration in the fiscal position, India has announced stimulus packages to spur economic activity amidst partial lockdowns and containment efforts. The Reserve Bank of India announced a series of relaxations to ease financial stress such as granting of 3 months moratorium on term loan instalments; deferment of interest payments for 3 months on working capital facilities; easing of working capital financing requirements by reducing margins or reassessment of working capital cycle, exemption from being classified as ‘defaulter’ in supervisory reporting and reporting to credit information companies; extension of resolution timelines for stressed assets; and asset classification standstill by excluding the moratorium period of 3 months, etc. by lending institutions. These measures were with effect from 1st March 2020. This has given people a sigh of relief from interest payment burdens, increased cash flow and facilitated working capital requirements for at least 6 months.
The contraction in global demands has added to the woes of traders engaged in import and export of goods in India. In order to ease the difficulties in production and realisation cycles suffered by such traders, several temporary measures have been enacted. For instance, the time period for completion of outward remittances against normal imports (i.e. excluding import of gold/diamonds and precious stones/jewellery) into India has been extended from six months to twelve months from the date of shipment. Furthermore, the maximum permissible period of pre-shipment and post-shipment export credit sanctioned by banks has been increased from 12 months to 15 months.
Agriculture and Informal Sector:
In India, 8 out of 10 workers are self-employed predominantly constituting the informal sector. These informal firms tend to be labour-intensive and more prevalent in the services sector. These have been hit hard by measure to curtail social interactions. Large swathes of the informal workforce are vulnerable particularly in construction, manufacturing and service sectors.
In India, the inability of informal workers(or self-employed) to earn a living and gain access to health care has led to migration from urban to rural areas, which may cause the virus to spread further. Furthermore, the initial lockdown across the country gave rise to a new phenomenon of ‘Reverse Migration’ whereby the daily wage workers returned to their respective hometowns and villages from Industrial and Commercial centres in Metropolitan cities. This led to large scale unemployment and disguised employment since these rural centres were mainly agrarian and did not have adequate job opportunities. Furthermore, the stricter migration laws implemented by respective state governments in the wake of the return of its working-class to home-states added to the woes of the poverty-stricken labour class.
Although agriculture has proved to be a relatively bright spot in this crisis, farmers producing for urban markets may experience massive income losses as they would unable to sell their produce during the lockdowns and face supply-chain disruptions due to incessant lock-down, inadequate logistic support, inter-state and intra-state travel restrictions and mandis perceived as the newest hotspots for the virus.
Way forward for the Indian Economy:
This recession is unique as this is the only recession not triggered by external factors such as oil price shocks, Latin American debt crisis, monetary policy responses to high inflation etc. Furthermore, this is a synchronous recession as it has affected both industrialised nations as well as emerging economies. Since the nature of this recession is distinct, the time we may take to recover from it would also be different. This recovery would totally depend on factors such as policies adopted to fight the virus and stimulus and reform packages.
The Reserve Bank of India (RBI) stimulus package announcement begins with a quote of Mahatma Gandhi –
“It is when the horizon is the darkest and human reason is beaten down to the ground that faith shines brightest and comes to our rescue.”
An accommodative monetary policy as proposed by RBI by way of both conventional and unconventional measures will help in proactively managing liquidity, maintaining normalcy in the financial systems and financial markets and revitalising the Indian Economy against the backdrop of a deteriorating global outlook for economic activity.
 Jerome Powell, Chair, The U.S. Federal Reserve System. https://www.crisil.com/en/home/our-analysis/views-and-commentaries/2020/04/covid-19-impact-on-economy-corporate-revenue-and-profitability.html https://m.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3859#FA1 https://openknowledge.worldbank.org/bitstream/handle/10986/33748/211553-Ch01.pdf (Pg.36-40) https://www.crisil.com/en/home/our-analysis/views-and-commentaries/2020/04/covid-19-impact-on-economy-corporate-revenue-and-profitability.html https://openknowledge.worldbank.org/bitstream/handle/10986/33748/211553-Ch01.pdf (Page 40)