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covid-19

Indian GDP has witnessed a downward trajectory growing by just 4.5 percent in the second quarter of the fiscal year 2020 from 8.87 percent in the second quarter of 2016 (CSO). The economy has faced two disruptions in the span of six months. The first disruption was demonetisation wherein 15.30 lakh crore (approximately 99.3 % of currency) was demonetised from Indian economy on 8th November 2016. This created a huge shortage of money which led to an undeniable economic slump. The second disruption was the hurried announcement of GST on 1st July 2017. Most of the businesses stopped producing due to lack of clarity in tax slabs for a few months. This reduced overall aggregate demand for goods and services and became one of the main reasons for downward trend of GDP. Many industries experienced a decrease in their total sales. Indian automobile industry suffered the most as a consequence.

Crisis in the financial sector also played a role in aggravating the slowdown. Non-Banking Financial Companies (NBFCs) faced huge financial crises due to IL&FS outstanding debt worth Rs. 91,000 crore. In addition, Punjab National Bank scam worth Rs. 11,357 crore gave another blow to the weakened banking system. The increase in gross Non-Performing Assets (NPAs) to 9.9 percent (of total assets) in 2020 is a matter of concern for the banking sector (RBI, 2020). Investments by MSMEs remained low as NBFCs were unable to lend at the required scale. Even an 8 percent corporate tax cut to 22 percent for domestic companies and 15 percent for new manufacturing companies established on/after 1st October 2019, did not result in an increase in corporate investment. Less investment in businesses has led to an increase in unemployment. The unemployment rate was in the range of 8% to 9% in 2019 indicating low employment creation (CMIE, 2020). This reduced disposable income in the hands of people, shrinking aggregate demand (Figure).

covid-19

Devoting some of our lockdown time to self-education makes sense. Besides helping to boost your learning during this economic uncertainty, learning a new skill can give you a sense of control that will help cope with anxiety provoked by the pandemic and it will also boost up the confidence in you.

Even India did not escape from it. The Indian government decided to declare a nationwide lockdown to slow down the spread of the virus and obviously, the nation has to bear financial losses as a consequence of a lockdown. The IMF has downgraded India’s GDP growth rate to 1.9 percent for the fiscal year 2020. IMF has also estimated 1.2 percent GDP growth rate of China and negative for other countries and world viz. U.S. (-5.9), Euro Area (-7.5), Japan (-5.2) and World (-3) for the year 2020. Even the WTO estimates a fall in world trade in the range of 13% to 32% due to the COVID-19 pandemic. India’s unemployment rate spiked to 23.8 percent in March 2020. The increase in the unemployment rate is more in urban areas (25.9%) as compared to rural areas (22.9%).

The government of India and RBI have taken timely steps to inject liquidity in the economy through expansionary fiscal and monetary policies. Nirmala Sitharaman, the finance minister, announced Rs. 1.7 lakh crore package to provide cash and food to poor sections of the society including unorganized labour, women, farmers and Self-help Groups through Pradhan Mantri Gareeb Kalyan Yojana scheme launched on March 26, 2020. Shaktikanta Das, RBI Governor, announced a repo rate cut of 75 basis points to 4.4 percent on March 27, 2020. Banks and financial institutions have been instructed to put a 3-month moratorium on term loans. In addition, RBI announced a comprehensive package to ease financial stress through various other measures. The RBI governor announced a Reverse Repo Rate cut by 25 basis points to 3.75 percent on April 17, 2020. RBI will be providing Rs. 50,000 crores to financial institutions viz. SIDBI, NABARD, and NHB as a special finance facility. Besides, a long-term repo operation (LTROs) 2.0 worth Rs. 50,000 crore will be conducted.

covid-19

Covid-19 pandemic is an unprecedented and uncontrollable disruption to India and the world, as the vaccine is yet not available. India is in the second phase of lockdown and it is expected to continue further in some form or the other.

To give a credible fight to Covid-19, India will have to come up with substantial and timely stimulus packages and other effective measures through fiscal and monetary policies. This will help put India back in the higher GDP growth trajectory. Existing labor force and those who are going to join the labour force in the near future should focus on enhancing skills through training or education to grab future opportunities. India has noticed more enrolment in professional education at the time of slowdown, particularly during the 2008 recession.

Written By -
Madan Survase,
Faculty: at ISB&M, Nande

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