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What will India's Economic Recovery Post COVID-19 Outbreak Look Like?

Former Managing Director of Ahmedabad Stock Exchange
Jul 8, 2020 7:01 AM 4 min read
Editorial

The Government is optimistic about the trajectory of recovery of the Indian economy post the COVID-19 global pandemic-induced economic crisis, and expects a V-shaped recovery, said TV Somanathan, Expenditure Secretary, during a recent online conference. “I must tell you that we are somewhat optimistic that among the various shapes of recovery....we are expecting something like a V-shaped recovery. This year being at the bottom of the V and the next year being closer to the top of the V,” Somanathan said. 

The statement came amid initial improvements in various indicators from rising goods and services tax collections to falling unemployment, showing a gradual pick-up in India's economic activity since May.

However, Gita Gopinath, Chief Economist with the International Monetary Fund (IMF) cautioned that an initial spike may not lead to a 'V-shaped' recovery. “My fear is that the beginning of the recovery will show a spike initially, and then going forward, I think we could end up with something much more flat,” Gopinath told the Britain's House of Commons Treasury Committee. “It’s a little too early at this point to project what the rest of that path would look like.”

Globally, this will likely be a prolonged recovery, with activity levels below pre-crisis levels even by the end of 2021. There are still upside risks, she said. Gopinath also reminded the British lawmakers that the impact of the COVID-19 pandemic on developing and poor countries is much worse. “The UK having negative growth of 10% is very different to a low-income country having a negative growth rate of 10%,” she said. The projections for poverty in such countries are “really sad.” The sectors worst affected by the coronavirus pandemic are job intensive, and low-skilled workers, the young, women and minorities have taken a disproportionate hit, Gopinath said.

 

What will India's Economic Recovery Post COVID-19 Outbreak Look Like?

 

Many economists and analysts are not as optimistic about India's economic growth and recovery as the Government is for a V-shaped recovery. 

Private Final Consumption Expenditure is the prime driver of Indian economy with about 60% share in GDP of India. Without a demand stimulus, a V shaped recovery is not plausible. Bogged down by job losses, pay cuts and dwindling business income, private consumption is limited to only 'essential consumption'. Discretionary consumption and credit- led consumption are a strict 'No...No' right now, particularly in urban India. The stimulus package announced by the Government does not have a large fiscal stimulus component to pump prime the private consumption. 

Agriculture is the only ray of hope for the Indian economy. The forecast of a normal monsoon, its timely onset coupled with prospects of a bumper crop output along with minimum support price (MSP) hike and recently announced rural-focussed programmes augur well for the rural economy which may recover faster than the urban economy.

India’s economic recovery is more likely to be a ‘U’ or ‘W’ shaped rather than ‘V’ as the impact of COVID-19 will be profound on a nation that was already struggling for growth prior to the pandemic, analysts said.

Before the onset of coronavirus pandemic in India, economy growth had slowed down to 4.5%, not participating in the global resurgence of 2018 and 2019, Centrum Institutional Research said in a report.

Given the last two years lacklustre growth, the Government has limited resources to support demand in the economy. Thus, we believe that the impact of Covid will be profound in India and the recovery will be more ‘U’ or ‘W’ than ‘V’ expected in some advanced economies, it said.

Centrum report also said India went for an early lockdown beginning March 25th, delaying the peak. “However, early lockdown though contained the infections and mortalities; it will delay the peak also. Some estimates say that India may peak as late as November. This extended period of peaking out will also keep people at home for a longer period, affecting the economic resurgence,” it said.

Economic recession and recovery are often charted in the most common shapes such as U, V and W. V-shaped recessions begin with a steep fall, but trough and recover quickly.

W-shaped recessions begin like V-shaped recessions, but turn down again after false signs of recovery are exhibited. Also known as double-dip recessions, because the economy drops twice prior to full recovery. 

In a U-shaped recovery, the economy experiences a sharp decline without a clearly defined trough but instead a period of stagnation followed by a relatively healthy rise back to its previous peak. A U-shaped recovery is similar to a V-shaped recovery except that the economy spends a longer time slogging along the bottom of the recession rather than immediately rebounding. 

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