Effect of Covid-19 on Indian Economy – A short Article

So, the world is currently struggling with the corona pandemic. Schools, Universities, Offices, Factories all are under lock down. Due to this pandemic we surged with a huge loss of human capital. We can’t ignore the fact that the outbreak of COVID-19 in China is expected to have a significant impact on the economy globally including economic slowdown, trade, supply chain disruption, commodities, and logistics. World Economy is going down and according to one of the report of IMF the world is going to hit the biggest recession of the last 100 years.

While it took the country 70 days to report its first 5,000 cases, the next 5,000 have come in just six days, indicating a rise in the doubling rate of the infection. In the 1st 21 days lock down country has surged with an expected loss of 7-8 lakh crore approximately. Despite of this worst economic condition our Honorable Prime Minister Shree Narender Modi Ji has today bravely took a decision to extend the lock down period by further 19 days till 3rd of May 2020, which indeed the demand of current situation. He gives the importance to the life’s of human capital and not to economy. The Government of India has announced a variety of measures to tackle the situation, from food security to the poor class and daily wagers, extra funds for healthcare, to provide financial aid to other states, to sector related incentives; moratorium on EMI’s and tax deadline extensions. On 6 April a 30% salary cut for one year was announced for the President, Prime Minister and Members of Parliament.

 Earlier World Bank and credit rating agencies had downgraded India’s growth for fiscal year 2021 with the lowest figures India has seen in three decades the since economic liberalization in the 1990. Now with the extension of lock down, Barclays a UK based Investment Bank has downgraded the Indian GDP growth estimates to 0, holding that the economic fallout will be worse than it had earlier estimated. Let me tell you one more thing Unemployment in the US has made headlines over the last two weeks because nearly 10 million (or 1 crore) Americans have filed for unemployment benefits, breaking all records by some distance. And about 12 crore job losses in India during the same period. You could add all the unemployed in Europe at that time and yet not cross 7-8 crore. Indian lock down has clearly caused the biggest one-stroke job-destruction ever recorded in history.

The Corona pandemic has not only brought healthcare and critical infrastructure into focus from an FDI perspective, but has also weakened companies in other sectors and made them easy targets for creditors and opportunistic buyers for hostile takeovers. Like Chinese firms are acquiring discounted assets around the globe. However after acquisition of stake in HDFC and ICICI by Chinese Entity, Indian Govt has made changes in the FDI regulations.

In terms of trade, China is the world’s largest exporter and second-largest importer. It accounts for 13% of world exports and 11% of world imports. The lock down will affect around 500 million people in the country that will deeply impact its consumption of goods.

We know that exports leads to an increase in the access to the foreign currencies, which increases the forex reserves, national income, the turnover and the surpluses of the government. Export is one of the biggest contributors to an Indian economy but due to worldwide lockdowns especially in those countries with whom India has biggest export share as shown below in the chart, now this could adversely affect the Indian economy. On the other hand although huge import is not good for the economy of any country, however import becomes sometimes necessity to increase the quality of domestic products so that product become marketable in the domestic as well as outside Indian market. India trade and economy largely depends upon Foreign Trade And due to worldwide lock down, the entire production chain, trade setup is disturbed.

So the Question is What Could be the possible effect of Recession?

If a highly populated developing country like India where more than 50% population is below the poverty line falls into Recession then the value of Indian rupee will fall further, the unemployment problem of economy will rise drastically, there would be fall in the production so the prices of commodities and services with go up exponentially, hamper of business. The lower and middle income group will be worst hit by recession with no jobs; no money to meet their requirements, cost of living may go down. Due to cuts in expenditure social norms may be affected. Fresh investments and entrepreneurship would not be encouraged in such an environment.

Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. As economy majorly depends upon consumption and production.

In my opinion Government should do following-

  • Implement Either Zero rate interest policy or Negative interest rate policy
  • Increase the money flow in the Indian market by various means
  • Should make such policies to increase employment or Personal Disposable income of person.
  • Should provide all necessary support to MSME, Small business, etc
  • Extend the benefit of Sec 80 JJAA of Income Tax Act to all assesses.

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May 2021