Like many emerging countries around the world, the next few months will be crucial for

India in terms of its economic outlook for the year 2020. With the advent of the coronavirus
pandemic, the path to recovering its economy in the coming few months can be very
uncertain and challenging at the same time. The stark contraction in the GDP of India during
Q1 can itself explain the impact the ongoing virus has had on its economy. With the
government trying to ease lockdown restrictions in many parts of the country which has
contributed to a slight increase in the overall economic activity within the country seems to
be a short-term relief for many, the question regarding the extent of its sustainability is still a
concern. 
Economic Contraction in Q1
When we look at the economy of India from the beginning of the year 2020, it is quite
evident that it had started to slow down way before the coronavirus pandemic. In fact, the
below figure clearly illustrates how it had been shrinking for the previous 7 quarters due to
dwindling exports and investments and also declining demand in its private sector that was
compensated with additional government spending that provided short-term relief in terms of
growth.
This scenario was then further worsened after the pandemic, which leads to the gross
domestic product to decrease to around twenty-three percent from the months of April to
June, which is the Q1 (Appendix 1). This decrease in GDP can be considered as one of the
highest since the 1990s, which was when reporting India’s quarterly GDP data had started.
The myriad of challenges that pandemic bought, ranging from interruptions in local supply
chain networks, closure of several small and medium-sized businesses along and factories,
the GFCF (gross fixed capital investment) decreased by around forty-seven percent. This was
combined with around twenty-six percent reduction in private sector spending. In addition to
this, with international borders being shut, exports also witnessed a reduction by around
19.8%, and imports reduced by around 40.4% due to falling consumer demand and reduction
in the price of oil. In order to lessen the impact caused by COVID-19, higher amounts of
stimulus packages were introduced by the government, thereby increasing consumption
expenditure by sixteen percent (Majumdar, 2020).
Several sectors within the country were hard hit due to the lockdown restrictions imposed by
the government this year, except for a few like forestry and agriculture. For example, if we
take sectors like construction and manufacturing, the growth rate declined by around fifty and
thirty-nine percent. The service sector on the other hand also was hard hit, with a growth rate
plunging by around 20%. On the other hand, the agricultural sector experienced a positive
growth by around 3.4 percent due to people working in different states returning back to their
cities, especially migrant workers returning from major cities in India like Mumbai and Delhi
to rural areas, taking up farming to earn money (Nanda, 2020).
Focusing on the service sector, areas like broadcasting, hotel, and transportation all
experienced decline in terms of growth by around forty-seven percent. With increased social
distancing and lockdown protocols that were introduced by the government during the first
half of the year, areas like tourism and hospitality were one of the areas that were first
impacted and 
there are still no positive signs in terms of recovery as well. Along with this areas like real
estate and financial services sector also saw a decrease in terms of growth by around 5.3%.
Lastly, areas like defence services also plunged by around ten percentage.
Impact on Small and Medium-Sized Enterprises
In the past few months, the number of “micro, small and medium (MSME)” sized enterprises
shutting down due to the pandemic has been increasing as well. In a recent research
conducted by Endurance International, that surveyed around five hundred such businesses in
the initial weeks of June, around 1/3rd of them had responded by stating that they were going
to shut down their business ventures, at least temporarily until the lockdown protocol eases
and things return to normalcy. Several micro, small, and medium-sized business owners are
also now turning towards the government for aid to overcome the difficulties bought in by the
pandemic. For example, in India, around fifty percent of such businesses are now hoping for
the government to provide tax exceptions and loans at cheaper rates or even at no interest to
help recover in the coming months (Financial Express, 2020). Several SMEs are also still
affected by the disruption of domestic supply chain networks and reduced cash flow as well.
This has contributed further to the financial problems that the country was facing pre-
COVID, in terms of non-performing loans and liquidity challenges experienced by many
financial enterprises (Majumdar, 2020).
Unemployment has also increased in recent months. According to a report published by
CMIE (Centre for Monitoring Indian Economy), there were more than twenty million
salaried employees who lost their jobs just between the month of April to August, mainly
from sectors like manufacturing to the hospitality industry (Krishnan, 2020). Some of the
most severely affected individuals were daily wage workers and migrants who had to return
back to their houses in rural villages due to a lack of formal employment contracts.
Structural Reforms and Measures
In order to lessen the impact brought by economic challenges posed by COVID-19, the
Indian government has introduced a ten percent support package for the GDP, which
encompasses both monetary and fiscal aid. The RBI (Reserve Bank of India), in order to
reduce shortfalls related to liquidity and solvency challenges, has also reduced the cost of
capital. In terms of fiscal support that was offered, there were mainly two packages that were
introduced by the government. 
The first fiscal support was brought up at the beginning of the year (March), where the
government rolled out initiatives to address emergency health-related challenges amongst the
poorer sections of the population. For example, cash transfers to bank accounts were made to
support the women in rural parts of India with people with special needs and older aged
people. In addition to this, the provision of food and basic amenities were provided to around
2/3rd of the people in India, and health care workers were also issued medical insurance
(Khera, 2020). 
Another fiscal package was then introduced in May to provide cash support to the thousands
of migrant laborers. Several initiatives were introduced mainly to decrease financial 
burden on them. In addition to this, the government also made sure that small business
owners, agri-business owners and also business in the real estate sector has easy access to
funds. In terms of structural reforms introduced by the government, deregulation of certain
sectors like agriculture and farming, along with reduced entry barriers to around 8 industrial
sectors were made (The Hindu, 2020).
Future of Economic Recovery
The economic recovery in the next few months now will mostly depend on how long the
coronavirus crisis lasts. It will also depend on several other factors like the accessibility of
adequate health care and vaccinations. The faster people have access to the above, the quicker
the economy will recover to normalcy. One of the main reasons for this is because, as long as
the coronavirus infections continue to rise in India, so will anxiousness and fear in the minds
of consumers. With increased concerns regarding job security, health, and finances, the
consumption and demand patterns amongst people can be negatively affected as well. On the
other hand, supply constraints within India can be seen easing compared to when the
lockdown was first implemented. But, with the COVID-19 not coming to an end any time
soon and the advent of the second wave of the virus, as seen in several emerging economies,
can further worsen supply chain networks (Majumdar, 2020).
Another factor that has to be looked into in terms of economic recovery is the trend in private
demand within the country. What we see now is inadequate coordination amongst different
parts of the country to reduce the pandemic and therefore, different states within India are at
different stages when it comes to infection levels. For example, if we look at the urban areas
in India, consumer demand levels are at an all-time low whereas, in rural areas, demand has
not fallen to such levels due to the support that is offered by the government in terms of job
opportunities. Hence since the stages of pandemic across the country are at different levels,
the mobility and consequently trade-related activities will also be affected in the coming
months.
Hence, in order to decrease the impact of the current crises on the Indian economy, both
monetary and fiscal support will be needed from the government. Currently, the government
has already introduced support packages that cross over ten percent of the total GDP to revive
businesses and help people in need. But in the coming months, new initiatives targeting better
employment opportunities, regulations and infrastructure must be introduced as well
(Majumdar, 2020).
With increased uncertainty in terms of economic recovery amidst the pandemic, the
policymakers and regulators in India must be become more agile to grasp opportunities and
blend into the new norms. For example, they can move towards improving capital spending
to increase productivity, create more assets, which then can be monetized to get more
revenue. Major economic reforms that are targeted towards increasing jobs and investment
opportunities within the country will also help in recovering from the slowdown of the
economy. According to the Trade and Development report published this year, the plan for
economic recovery for emerging countries like India must not focus on a macroeconomic
expansion that targets higher employment opportunities and better pay (The Hindu, 2020)
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2020, from: https://www.thehindu.com/opinion/lead/getting-cash-transfers-out-of-a-
jam/article31568674.ece

Financial Express. (2020). COVID-19 impact intense on MSMEs: Survey. Retrieved on 9

September 2020, from: https://www.financialexpress.com/industry/sme/covid-19-
impact-intense-on-msmes-survey/2003744/

Krishan, M. (2020). India will take “years” to recover from unemployment crises. Retrieved
on 9 September 2020, from: https://www.dw.com/en/coronavirus-india-will-take-
years-to-recover-from-unemployment-crisis/a-54959382

Majumdar, R. (2020). A long, winding, and uncertain road to recovery. Deloitte Insights.
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https://www2.deloitte.com/uk/en/insights/economy/asia-pacific/india-economic-
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Nanda, S. (2020). As migrant workers return home to villages, India’s farming sector sees
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farming-sector-sees-green-shoots

The Hindu. (2020). Amid COVID-19 impact, Indian economy forecast to contract 5.9%in
2020: UN. Retrieved on 9 September 2020, from:
https://www.thehindu.com/news/national/amid-covid-19-impact-indian-economy-
forecast-to-contract-59-in-2020-un/article32675047.ece

The Hindu. (2020). India’s farm exports to get a boost with deregulation of key agri-produce,
say experts. Retrieved on 9 September 2020, from:
https://www.thehindubusinessline.com/economy/agri-business/indias-farm-exports-
to-get-a-boost-with-deregulation-of-key-agri-produce-say-
experts/article31594501.ece
APPENDIX

Figure 1: India's economy contraction: Q1 / FY2021

Figure 2 Supply and Demand disruptions due to COVI-19 effect on market sentiment