As the nationwide lockdown increases, the economy is stumbling down the hill. The impact of the initial 21-day lockdown, now extended to 30th April, is severe. The lockdown will add side stress to an already slow economy. The impact is estimated to be much worse than the aftermath of 2016 demonetization or the 2017 GST rollout. We don’t need an expert economist to determine the current state of the supply side of the economy. The production, distribution, and retail of all the products and services, with the exception of essential items is at a standstill. In this blog we will glance over the short-term and long-term effects of the lockdown on the Indian economy. This eagle eye view will help us determine the direction and assess the current situation based on the data from recognized bodies and media sources.
According to Business Today, the GDP growth rate has been falling since Q4 of FY18. If there is a deviation, it’ll be due to the NSO (National Statistical Office) revising its data on February 28, 2020, drastically cutting down growth rates in the first three-quarters of FY19.
According to the experts at Business Today, this lockdown affects a minimum of 55% or Rs. 2 lakh crore. This is only due to the lockdown of the central government. The state governments had induced partial and smaller lockdowns adding to this amount. If you think that when everything reopens and people rush out to buy things that can stabilize the loss occurring now, then it is important to note that this does not add to the GDP, as the goods are already produced and accounted for. A couple of months down the line the final production and sale may resume.
As the full production resumes, there will be many unemployed without an income. As a result, the demand side will be a significant worry. This lockdown has forced many productions to halt and many employees to lose their jobs. When the lockdown ends, many will not have the means or the resources to buy things.
Rangarajan, an economist from Business Today said “In the financial year 2020, we would be lucky if the growth rate is 3.5% (full fiscal). In the first half, we would be lucky if the growth rate is 0. In the second half, the growth could revive by as much as 7%, taking the average growth for the year to 3.5%. In Q1 of financial year 2021, the growth rate will be negative.”
The News18 estimates that the Indian economy will see only 2% growth in 2021. Investment Information and Credit Rating Agency of India Limited (IICRA India) said that the lockdown will cut the country’s GDP forecast during the COVID-19 pandemic and it expects the economy to grow at just 2%. The rating agency’s VP said that it is highly uncertain when the situation will normalize. But they are expecting a downturn through multiple indicators of service and manufacturing industries from March 2020. This will include activities like travel, hospitality, construction, transport, exports, electricity, and manufacturing of non-essential items.
The global economy slowing down and lockouts will affect sectors that have a higher dependency on global demand. The key impacted markets can be of Europe, North-America, and South-East-Asia.
The CMIE (Centre for Monitoring Indian Economy) shared a report on April 5, stating that the unemployment rate has increased to 23.38% from 8.41% (on 22nd March). This sudden spike has caused a stir amongst the working class. The inevitable lockdown is driving the economy in troubled waters and possibly drowning it.
According to a forecast by Care Ratings, it is estimated that 80% of production activity is at a halt during the lockdown, the economy is losing Rs. 35,000 – 40,000 crore on a daily basis. Cumulatively it is difficult to imagine the total damage done. It can take months, if not years to repair the destruction caused. It will be critical to see what steps the Finance Ministry will take in order to restore the economy.
In an interview with News18, Radhika Pandey from the National Institute of Public Finance and Policy, or NIPFP, a research institute under the finance ministry said that “The Indian economy was already passing through a period of slowdown. With the COVID-19 forcing a complete lockdown, any possibility of a rapid recovery in the near future looks grim. Consumption of non-essential items will be adversely impacted in light of the lockdown. The informal sector will be hit and the MSME”—medium and small and micro enterprises—“sector which works on tight margins, will feel the impact of demand destruction.”
Over the past years, the economy has taken many hits like demonetization and the GST roll-out under the current government but it has bounced back to a respectable degree. This sector slow-down on top of the six-year low GDP rate of 4.5% is breaking any prospects that can save the future growth. The low development and unemployment are becoming two sides of the same coin. Investment and consumption are mingled. In order to start the entire cycle, there has to be prospects and possibilities for investments. As the economy is showing no signs to pick any pace up even after relief funds and economic injections. There is an upside as the essential items like sanitizers, soaps, masks, and medical equipment are high in demand, the sector is showing promising growth and the pharmaceuticals are making unbelievable profits. The silver lining to this storm is that the authorities are paying the financial cost to keep the citizens safe and control the pandemic. This quarter will prove to be make or break for this financial year. If the lockdown increases, we may see many adverse repercussions. Is the Indian economy equipped to bounce back? It is difficult to say at the moment as consumerism is plummeting. Hence, in the meanwhile, all we can do is give our two cents and hope for the best.