Name: Radhika G

Register Number: 20MBA1028

Impact of COVID 19 on aggregate demand in the Indian Economy

Introduction:

Domestically, the impact of the corona virus pandemic COVID-19 could lead to slowdown in domestic
demand. This will result in erosion of purchasing power due to job losses or pay cuts and slow-down
effect of deferred demand will have a longer lasting impact on different sectors, especially where demand
is discretionary in nature. The COVID 19 is creating destruction for the Indian economy. Due to the
coronavirus induced lockdown is weakening the country’s GDP growth since it is having major
disturbance across multiple sectors. Covid-19 has left the world in great health and economic stress
affecting both lives and employment. The global economy is facing an unprecedented slump. Since the
Indian economy was dealing with a downturn long before the health crisis hit us, India is under a bigger
strain. While the slowdown led to a mere 4.2% growth rate in FY19-20, the emergence of the Covid-19
virus and the onset of the lockdown put India under deep distress taking away many lives. The economic
situation is especially grim such that despite rolling out a relief package worth Rs. 20 lakh crores, the
India’s forecasted growth rates for FY20-21 were slashed to -4.5% by IMF.

Findings:

Problem of Inadequate Demand

Before Pandemic:

Indian economy has been experiencing a slowdown since 2017-18, as is evident in the figure below. The
reasons cited by the government for the slowdown have ranged from lower industrial growth to falling
private consumption[ii] to low global growth. Undeniably, there is validity in all these claims – but all of
them are rooted in decreasing domestic demand.
Aggregate Demand is the sum private consumption, private investment, government expenditure and net
exports. Domestic demand requires the consideration of the first three. As stated above, India was already
facing a slump in private consumption. Furthermore, the slowdown in private investment reached a
sixteen-year low in September’19 and the government’s capital expenditures have been decreasing as a
percentage of India’s GDP. Inevitably, demand fell.

when demand for goods and services fall, production is adjusted accordingly. To cut costs due to lower
production and sales, wages are lowered, and people are laid off. As unemployment starts to rise, the
people who lost jobs, further cut down on their consumption and the economy finds itself in a vicious
cycle. The course of this was evident in India even before the pandemic or the lockdown.

Falling Annual Industrial Index of Production Growth Rising Unemployment Rate

The only way to get out of this vicious cycle was to stimulate demand; however, the steps taken by the
government (like slashing corporate taxes, bank recapitalization and mergers, GST rate cut, amongst
others), prior to the pandemic, were mostly supply-oriented.

GDP Now & Then:

India's GDP growth for the current financial year is expected to tumble to 4.3 per cent in Q4. The COVID-
19 pandemic will impact in significant adverse economic crash globally.
 India GDP Trend
Inference:

In the above table and bar graph, we can see that India’s real GDP was on a continuous downward trend
and spread of the pandemic is going to affect it even worse. Government has taken steps to control its
spread, such as nationwide restriction for 45 days and a complete lockdown of states. This have brought
a situation where there is no economic activity and could impact both consumption and investment.
During FY 2015-16 the GDP was 7.5% in Q1 then there was a fall in Q3 which was 7.3%, however it
rose to 7.9% in Q4. India’s GDP is slow down to 5.00% Q1 financial year 2019-20, this is the lowest in
5 years. Moreover, GDP was slipped down to 4.5% in Q2 financial year 2019-20, however it marginally
improved to 4.7% in Q3. Few sectors lag themselves from the global chain due to the threat of the deadly
virus as a result there is less reliance in intermediate imports. To recapitulate investment, private
consumption and external trade, which are the three major contributors to GDP, may get hit. The Indian
Government has pronounced an array of revival packages to overcome the circumstances, e.g. additional
funds for healthcare, food security, sector related incentives and tax incentives. The RBI also on 27th Mar
announced numerous steps which would make available US$52 billion (₹374,000 crore) to the country's
financial system. On 29th Mar central government agreed for the movement of all essential consumables
during the lockdown. On 3rd Apr the government of India released more funds to states for handling the
corona virus totalling to US$4.0 billion (₹28,379 crore).

When the pandemic hit

Given the demand problem was left unaddressed, the onslaught of the virus aggravated it. The lockdown
to contain the virus led to closure of all manufacturing units and services that did not cater to essential
items. This distress of the Indian economy was thus, magnified as the circle of low demand, production
cuts and rising unemployment were intensified in the lockdown. As showcased below, the PMI fell down
to 27.4% and Unemployment rose to 23.5% in April 2020 (the first month of complete lockdown).
While expectations prevailed that the lifting of the lockdown will lead to a rapid V-shaped recovery as
supply shock is eased, that did not happen. Certainly, the indicators recovered a little as the lockdown
restrictions eased in May. Manufacturing PMI rose from a mere 27.4% in April to 30.8% in May to 47.2%
in June, though that still implied a contraction. The unemployment rate went down from its extreme high
levels of above 23% in April and May to almost 11% in June – as indicated in the below figure. However,
the growth was still stunted despite the ‘Unlock’ and way below the already marginal pre Covid-19
figures.

Manufacturing Purchasing Managers Index Unemployment Rate

This slow march to recovery has led many to believe that once covid-19 is contained, the V-shaped
recovery India is hoping for, will come knocking. However, scepticism over the anticipated V-shaped
recovery is still valid, especially given the rising Covid-19 cases, the inadequate fiscal response – that
didn’t address the demand problem appropriately, and limited fiscal space.

Demand Side Impact

Essential Consumption by Sector % Share

Food & Non-alcoholic beverage’s 27.0%
Narcotics, Tobacco and Alcoholic Beverages 2.0%
Clothes & Footwear 6.0%
Housing, Gas/Other Fuels, Water & Electricity 14.0%
Health Care 5.0%
Transport & Logistics 18.0%
Communication 3.0%
Culture & Recreation 1.0%
Learning & Education 4.0%
Hotels & Restaurants 2.0%
Other Goods & Services 15.0%
 % Share

Food & Non-Alcoholic Beverage’s Narcotics, Tobacco and Alcoholic Beverages

Clothes & Footwear Housing, Gas/Other Fuels, Water & Electricity
Health Care Transport & Logistics
Communication Culture & Recreation
Learning & Education Hotels & Restaurants
Other Goods & Services

Essential Consumption Expenditure by Sector

The lockdown is to have an ample impact on the economy, majorly on consumption which is one of the
biggest components. The above pie chart & table shows the private consumption. Sudden stop of urban
activity has caused slowdown in consumption of non-essential goods. The 45 days of lockdown would
severely impact the domestic supply chain and affect the availability of essential commodities.

Contribution to GDP by Different Sector

The above pie chart shows the contribution to GDP by different sectors. The projected GDP growth of
1.9% by IMF “International Monetary Fund” for India during financial year 2021- 22 is the maximum
among G-20 nations. Just in single month unemployment percentage rose from 6.7% on 15th Mar to 26%
on 19th Apr. In the above chart it is revealed that consumer and retail business sector have the highest
GDP contribution that is 18%. Then comes the food and agriculture sector which is an essential
commodity and it contributes 16.5% GDP. Transportation and logistics sector which is also an essential
commodity, it contributes 14% GDP. Telecom is one of the most significant sectors during this pandemic
since it helps the employees to work from home, enhances timely communications of businesses, its
contribution to GDP is 6.5%.

The above bar graph shows the FDI equity inflow of different sectors. On 18 April 2020, according to the
DPIIT “Department for Promotion of Industry and Internal Trade”, India changed its foreign direct
investment (FDI) norm to control, ‘opportunistic takeovers/acquisitions' of Indian companies due to the
current pandemic". In above chart it shows that in telecom sector it has highest FDI equity inflow that is
8 %. It seems that consumer and retail sector have the lowest FDI equity inflow that 0.44%.

Sector Short Term Impact Long Term Impact

Consumer & Slowdown of cash alteration for all
categories though food and grocery
Retail Business
retail would be less impacted
Auto Short term fluctuations in raw
material prices have been witnessed.
Power Cost may increase if prolonged for
longer period Since electricity is an
essential service, hence limited impact
Supply chain will be a major challenge
Demand for the non-essential product would
be a large impact since it won’t boost
immediately because consumers will hesitate
to purchase unnecessarily due to the fear of
infection.
China imports 25% of India's automotive part.
Disturbances in supply of raw
materials would impact the import.
Reformations likely to be slow if COVID-19is
sustained for a longer time. Government
grants for funding may cause delay due to
diversion of financial
support to other sectors
Telecom Slowdown of demand for new
subscriptions. Slowdown of demand
for mobile phones
Aviation & Demand for turbine fuel will gradually
decline due to shutdown of
Tourism
international
and domestic travel. The World Travel
and Tourism Council (WTTC) estimates
"the crisis to cost the tourism sector
at least USD 22 billion, the travel
sector shrinking by up to 25% in 2020
resulting in a loss of 50 million jobs
Food & E-commerce based food delivery
platforms that have constraints are
Agriculture
likely to be impacted. Low impact on
vegetables, milk, fruits etc. Edible oils
are major imports and this may have
low impact
Transportation Short term variations in material cost.
Low impact cue to raw material
& Logistics
supply challenges. Demand for labour
avail ability will be reduced.
Sector Short Term Recommendations
Consumer & GST waivers or tax incentives will
provide relief for retail players.
Retail Business
Auto Allowing income tax deduction on auto
loan will be favourable for consumers.
Cut in interest rates on delayed payment
of tax for three months.
Power Creating a well-equipped emergency
response team to include advanced
training and proactive maintenance of
near failure equipment. Deferring billing
cycle temporarily connecting
disconnected users.
Telecom Relaxation of regulatory compliances.
Revival of quality of service norms
similar to work from home guidelines to
be initiated.
Aviation & Fuel infrastructure and into plane
charges to be discontinued with high
Tourism
priority.
Suspension of manufacturing facilities is will
largely affect the telecom sectors due to
COVID-19.
As per international Air Transport Association
2020"Global revenue loss for the passenger
business is estimated between USD 63 billion
and USD 114 Billion.
Supply chain will be the major challenge as
many states are evolving their strategies for
food supply chain. Food categories like tea,
meat, spices, seafood that are exported to
U.S, Europe, China are heavily impacted due
to both decrease in demand and domestic
supply chain issues.
Due to decreased passenger movement on
urban transportation systems will
reduce utilization of assets such as MRTS,
SRTS, cab aggregators etc which will
unfavourably impact their revenue and
operations.
Long Term Recommendations
Reforms the manufacturing rules for
essential commodities-faster clearance so
that will it will be easier for the consumers.
Relaxation in duty drawbacks/allow imports
of critical to retail markets.
Develop a repayment support scheme for
automobile and related firms especially the
other dealers and auto component
manufacturers and sellers
Contingency measures and advanced
training to manpower, management of
demand volatility and large-scale power
outages among other occurrences.
Implement 5G which will allow
implementation of ARVR in deploying health
solutions to isolated areas. Establish
profound use of various tools for ease in
work from home.
GST holiday for all travel and tourism services
to be waived for the next 12 months from all
the state government for entire tourism
industry. Aviation turbine

Food & RBI and finance Minister will support the
industry and the employees in the short
Agriculture
term. There should be strict regulations
against fake news propaganda impacting
farmers and food processors. e.g.
poultry. Packaging of food items should
be
consider as essential category.
Transportation & Derived tax benefits in the short term.
Working capital/ loan repayment help in
Logistics
the short term from the banking sector.
fuel needs to be brought under the bracket
of GST @ 12% to provide immediate relief to
the airlines with full input tax credit on all
goods and services.
Existing infrastructure of GST, FASTAG
should be used for smooth movement of
essential food items. This will help in long
term stability in food sector.
Fair and transparent pricing of all relevant
transport and logistic services through price
caps etc. Policy support and standardisation
for hygienic travel.

India’s relief package

While the Prime Minister’s Atmanirbhar Package claimed to be worth 10% of India’s GDP, the actual
fiscal cost to the government (considering only the new relief measures) was just 0.75% of the GDP.
Furthermore, it was extensively focused on easing supply, restoring liquidity and building capacity, while
addressing the real root of the problem – inadequate demand – was missed.

The issue of demand stretched so far that even good measures like extending credit to MSME and small
vendors could not be very successful because of underlying obstacles rooted in inadequate demand. For
instance, while, banks to begin with were disinterested in lending to small players, lower demand faced
by MSMEs did not create any valid reason for these entities to borrow more. This is because, usually,
firms demand for credit given higher demand expectations or new investment. Despite lifting of the
lockdown, MSMEs were functioning below full capacity given low demand — which, then, makes it
unlikely for MSMEs to demand loans until there is a rampant increase in demand.

While only focusing on supply and liquidity gaps without paying adequate attention to demand in general,
would anyway lead to inappropriate and incomplete effects, the need to remedy the demand problem was
more intense in India, given that the country was already facing low domestic demand. Even those G-20
countries which had healthy economies and soaring demand pre-covid indulged in a demand-focused
fiscal stimulus to fight the pandemic. Whereas in India’s case, the fiscal measures which would have
catered to addressing the demand problem more rapidly – like cash transfers, unemployment benefits, etc
(indicated in red in the graph) – are well below those in both its developed and developing counterparts.
 Additional spending & forgone
Loans,
revenueEquities
Additional& Guarantees
spending & forgone
revenue

Country Fiscal Measures in Response to the COVID-19 (% of Pandemic)

Conclusion & Future:

Undeniably, the Covid-19 has put India in a rather tough spot. At one hand, the government revenues
have fallen leading to less fiscal space to spend; while on the other hand, the inability to spend and failure
to support demand-inducing measures, in a crisis like this, will plausibly worsen the already bleak future
that lies ahead. However, a failure to invest in demand at this crucial stage might haunt India in the longer
run. Having been in motion for quite some time, the slowdown having been triggered by the pandemic,
could lead to a prolonged downturn leading to massive health and economic costs. If not addressed
urgently, the problem of inadequate demand could prove to be fatal for growth.