Written by Aakriti Badyal
Home to a population of over 1.3 billion people, India has been largely economically impacted by the COVID-19 pandemic. Prior to the pandemic, India had been facing an economic downturn growth rate declining since the fiscal year 2018. COVID-19 has exacerbated the situation and India’s economy shrank by a record 23.9% last quarter. Currently, the National Statistical Office states that the growth of GDP will be 5% in 2019-20, a sharp decline in GDP from the growth rate of 8.2% in 2016-17.
In the 2000s, India’s economy was booming by rapidly growing into the field of information technology and outsourcing, as well as exports until the 2010s, when the economy began to slump. What were the causes of this fall in the economy?
In the year 2003-2008, India’s economy was thriving with an annual growth rate of 8-9%. Thanks to increased global demand and the global economic upswing in the early 2000s, this boom in the economy attracted an increase in investment, especially in infrastructure which allowed for an increase in FDI in India. In 2008, like the rest of the world, India was impacted by the Global Financial Crisis and as a result, the export growth rate slowed down from 15% to 5% leading to a depreciation of the Indian rupee and increase in interest rates. This led to lower profits from investments in India and adversely impacted company borrowers from outside the country. By 2015, stressed firms who had defaulted for over 90-days accounted for 40% of corporate debts and this rise in debts caused an increase in Non-Performing Assets of Banks from 2.3% in 2008 to 11.5% in 2018. As a result, the Indian Central Government attempted to help banks by injecting capital into public sector banks to mitigate the burden of these Non-Performing Assets.
Despite all this, the Indian economy continued to grow, despite the demonetization of the Indian rupee and initiation of the Goods and Services Tax regime. Due to declining global oil prices in 2014 and India being an importer of crude oil, this boosted GDP growth from 1.0 to 1.5% from 2015 to 2017. Coupled with an increase in world demand in 2017 and 2018, resulting in non-oil export growth, greatly benefitted India’s economy. These events made it seem as though India’s GDP was steadily climbing.
All of these events along with unsuccessful government schemes have resulted in a slowed-down economy that is steadily heading towards a contraction in growth. In March 2020, similar to the rest of the world, COVID-19 has tremendously impacted the Indian economy, in particular, the agricultural, construction and export industry took a huge hit, and unemployment in the organized as well as unorganized sector had increased and continues to unequally impact different socio-economic groups.
In particular, retail inflation in India has increased at an alarming rate, much higher than what was expected in July 2020. In August 2020, India’s retail inflation rate is marked at 7% on food prices. As a result of this inflation, the central bank – Reserve Bank of India, RBI, has halted plans on cutting down the interest rates. Typically, when the economy is suffering from high inflation rates, especially on primary, necessary goods, such as food, the central bank would raise interest rates to disincentivize consumer spending in the economy and decrease aggregate demand. However, in the current economic situation resulting from the pandemic, this food inflation is considered a cost-push inflation that causes a fall in the short-run aggregate supply of food. This occurred due to the 21-day national lockdown on 25 March 2020 announced by the Prime Minister of India, Narendra Modi. Only essential services were allowed to function, such as shops dealing with food items. Due to a lack of clarity on what classifies as essential services and workers, local police units prevented workers from commuting to work at food manufacturing plants and farms and stopped trucks from delivering food items. Additionally, factory managers shut down their workplaces out of fear for potential legal actions taking place against them. Resulting from non-payment of wages, there has also been a mass migration of workers from affluent urban regions to their villages and towns in rural India. All these factors combined led to a national food shortage in India and has caused an increase in food prices due to supply chain issues.
As a result of the current economic situation, the RBI and Indian government have been using a mixture of monetary and fiscal policies to address the overall economic situation in India and mitigate the impact of COVID-19 on the economy. Despite increasing inflation with the food industry, it is expected to be short-term and that food supply chains will resume to pre-COVID levels as the economy continues to open. Based on that reasoning, the RBI is more focused on the contracting economy and is steadily lowering interest rates in order to revive the economy; as of now, the interest rates are paused at 4%. Lowering interest rates work in favor of borrowers and businesses who are in need of loans. This then helps increase aggregate demand in India and hopefully address the impact of India’s contracting GDP. However, by not cutting down interest rates, this could continue to further lead India into its recession and further increase unemployment rates that have already increased dramatically due to COVID-19.
In spite of the contracting GDP, India has slowly recuperated their economy in terms of employment and consumer spending. The Indian Government had approved a fiscal stimulus of US$28 billion to help overcome the contraction. As of now, unemployment rates have reached pre-COVID levels from 23% in April to 9% in August. According to Indian economists, they expect a V-shaped recovery to take place in the economy as it is the best possible outcome. However, this is contingent on how well India can contain the virus. As of now, India has managed to slow down the spread of the virus and recovery rates are increasing in the subcontinent. With COVID-19, the trajectory of GDP growth has been adversely affected. However, if the national government continues to invest in improving factors of economic growth such as the National Educational Policy 2020 and other supply-side policies, this could positively affect long-term economic growth amongst the population of India. In order to specifically address the impacts of COVID-19 in India, the government must help support MSMEs (Micro, Small & Medium Enterprises) by providing tax cuts and debt reliefs as the majority of MSMEs are run by middle to lower class economic groups. MSMEs are important to India’s economy as they provide employment opportunities and help develop the rural areas. Additionally, cutting personal taxes would help in putting more money in the hands of the people thus improving the purchasing power and support their demand for essential goods such as food. Nevertheless, like other countries, India’s economy can only heal with time and only after the pandemic is fully controlled, then the government can take steps to be able to revive the economy and focus on India’s economic growth through effective policymaking.