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Impact of COVID-19 on Indian Economy: Will the Atma Nirbhar COVID-19 Stimulus Package be Sufficient for India's Economic Recovery?

Aug 1, 2020 10:10 AM 4 min read
Editorial

As COVID-19 continues to wreak havoc on the global economy for more than 3 months now, policy makers are desperately seeking ways to mitigate its disasters. Needless to say, a global slowdown could have dire implications on emerging markets like India.

The previous growth estimate of 5.8% made by the International Monetary Fund (IMF) for FY21 was slashed down to a paltry 1.9%. The World Bank has estimated India’s growth for the same fiscal at a mere 1.5%-2.8% - the lowest since the 1991 economic reforms. But what is more perturbing is that these estimates might in fact be downright optimistic in the light of the further extension of the lockdown.

What distinguishes the present pandemic from the previous ones is its glaring impact on the Indian economy. In fact, the International Monetary Fund called it the worst downturn in the global economy since the Great Depression.

What's more unsettling is that the pandemic couldn't perhaps have come at a worse time, since the Indian economy was witnessing a downward shift well before the first couple of cases of the virus had been registered.

 

Impact of COVID-19 on Indian Economy: Will the Atma Nirbhar COVID-19 Stimulus Package be Sufficient for India's Economic Recovery?

 

In the light of these events it's safe to say that the Prime Minister's ₹20Lcr ($c. $281bn) Atma Nirbhar Bharat COVID-19 Economic stimulus package was well-timed. Though a number of economists believe that the actual stimulus package amounts only 2% of the GDP in reality, as opposed to the 10% claimed by the Government.

Most critics affirm that it fails to provide the stimulus that the economy needs. The salient features of the package include a stimulus to Micro, Small and Medium Enterprises (MSMEs) through a ₹3Lcr ($40bn) loan scheme; helping other stressed business sectors such as Non-Banking Financial Companies (NBFCs), power distribution companies and the real estate sector, provisioning of free food grains to migrant workers for the next two months, provisioning of a ₹1Lcr ($13bn) subsidy to agricultural cooperative societies, hiking the allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) by ₹40,000cr ($5.3bn), extension of credit facilities to street vendors, interest subvention for small businesses, etc.

Although the actual amount of the package might be less than what's claimed, it'll still prove to be a huge burden on the shoulders of an already strained economy. The Government already had to resort to a second tranche of $1bn loan from the World bank to support the relief measures for the pandemic. And it's uncertain how much more damage the economy will have to bear in the near future.

The current Covid-19 India Economic Package the Government has offered is more focused on credit enhancement measures, which might be useful over a longer horizon but neglects the needs of the present market.

Private consumption spending, which accounts for 55-60% of GDP, extended a downtrend as growth slid to 2.7%. Investment activity contracted for a third consecutive quarter and shrank 6.5%. The data clearly suggests that the root cause of the economic decline is a demand drought caused by a multitude of factors induced by the pandemic (fear being the greatest of them). To encourage consumers to spend, the Government needs to provide a fiscal stimulus - one that puts money directly into the consumer’s pocket, revitalizing the appetite for goods and services and spur investors’ confidence.

 Impact of COVID-19 on Indian Economy: Will the Atma Nirbhar COVID-19 Stimulus Package be Sufficient for India's Economic Recovery? 

Another major concern is the remigration of migrant workers and informal sector workers to their hometowns as resources wane out and the lack of adequate living space hits hard, especially in a pandemic that requires physical distancing. These migrant workers were a vital piece in the country’s economy, responsible for a whopping 10% to the GDP. Consequently, despite the ease in restrictions, businesses are finding it hard to regain their footing due to labour shortages. The immediate course of action for the Government should be to provide them with an emergency income until the situation recuperates. To make working in cities an attractive option for them the center needs to revise workplace social security laws and minimum wage standards.

Looking at the present state of events, the decision to reopen economic production might seem logical. But the virus doesn't care for the economy in the least. Opening up of workplaces even before the number of cases have peaked can pose an extraordinary challenge in the months to come. The already overburdened healthcare system in India might not be able to handle the increased number of patients this decision will inevitably accompany. One might argue that the increased investment in the healthcare sector has strengthened it enough to handle the surge, but it's important to note the even though ventilators and beds can be manufactured at an increased rate, dearth of skilled healthcare professionals will exist. Increasing the size of the workforce requires carefully planned investment in education and skill development.

While the Indian economy battles the virus and its ramifications, the Chinese government has leveraged its early containment of the virus to the fullest by following a calibrated approach - one that stems from a deliberate and strategic progression conceived over the years.

These progressive measures can put China on the apex of emerging industries like high-end equipment manufacturing, unmanned vehicles and cybersecurity.

Competing with these "early bird" advantages of China would require a well-planned and calibrated action plan from the Indian Government, the lack of which has been ‘apparent’ to say the least.

The RBI, which cut interest rates on May 22nd has been explicit in its predictions that the financial state of the nation can begin to recover no sooner than October 2020. But for even that to happen, the Center needs to be a lot more proactive with its policies.

 

Written by Samarth Arora

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