MACROECONOMICS

Assignment
COVID-19: Macroeconomic Implications for India

Submitted To: Submitted By:

Arun Kumar Giri Raghav Mishra

2018B3A70801P
The extensive spread of COVID-19 outbreak, across borders and geographies, has severely impacted almost
the whole world and triggered significant downside risks to the overall global economic outlook. The outbreak
of the Covid-19 pandemic is an unprecedented shock to the Indian economy. The economy was already in a
parlous state before Covid-19 struck. With the prolonged country-wide lockdown, global economic downturn
and associated disruption of demand and supply chains, the economy is facing a protracted period of
slowdown. Here we talk about how it has impacted India’s economy from macroeconomic perspective.

Assessing the exact impact for India is hard with uncertainty on how long the pandemic would last. Even
before the Covid-19 pandemic struck India, the country’s economy was losing momentum with real GDP
growth tumbling over the previous nine consecutive quarters. As a result, the country entered into this
pandemic on a weak economic footing and these legacy issues could significantly dampen any prospects of
quick economic recovery. According to the International Monetary Fund, India will be the large economy
worst hit by the Covid-19 pandemic. The Fund now says that Indian GDP in the ongoing financial year, which
began in March 2020, will contract by 4.5%. Just a month ago, it had been predicting 2% growth for the year.
The sharp fall in the capital market indices, the depreciation of the rupee, and the reversal of the 10-year
government bond yields are some indicators of the impact this pandemic have had on the Indian Economy. A
survey conducted by the Federation of Indian Chambers of Commerce and Industry shows that more than 53
percent of the respondents have felt the impact of COVID on their operations and 80 percent reported a
decline in business cash flows. The decline in the cash flow has impacted the macroeconomic variables like
Balance of Payments, Inflation, Economic Growth and Unemployment severely over the last few months. The
inflation implications may be more complex. It is true that overall aggregate demand will fall and, reinforced
by falling oil prices, general inflation will fall. However, food price inflation for basic food items (less price
elastic) will also be affected by actual and expected disruptions to supply - production, and particularly
distribution and marketing. The impact of even marginal increases in food price inflation on welfare of those
who have lost incomes may be severe.

What initially was as an exogenous blow has rapidly transformed into a domestic shock. It is a rare event that
has hurt both supply and demand across the globe, through various channels. Covid-19 first caused a supply
shock. Then, the demand shock followed. Discussing about the impact on supply, The lockdown has
mandated factory shutdowns of all non-essential commodities and services activities, such as transport,
hospitality and education. Along with this the restrictions on movement has created blockages in transport of
goods from one part of the economy to another hindering the sales and slowing down the supply in the
market. Lockdowns across the globe have disrupted global supply chains, affecting availability of inputs for
several industries, especially auto, electronics and pharmaceuticals, affecting India’s import. One of major
impact of the pandemic and the followed countrywide lockdown has been on the labour supply. Reverse
migration in India have temporarily lead to a shortage of available workforce, especially in the informal
sector. This shortage has slowed down the revival of the economy after the lockdown was lifted. Another
problem which is most critical is the drying of cashflows in the market. Loss of sales have crunched the
working capital for micro, small and medium enterprises (MSMEs), which might even lead to shutdowns of
many. The ability to raise capital might get more restricted amid tightening financial conditions adversely
affecting the domestic markets which could lead to low income and more unemployment along with inflation.
Overall on can say that the supply disruptions has been due to higher input prices and reduced profitability,
leading to decline in capacity building. Now, looking on its impact on demand, there has been cuts in
consumer spending as the lockdown has severely restricted spending on nonessential goods and services. The
demand in the global market has also decreased severely which has hurt India's exports, which fell 34% on-
year in March. Moreover there have large loss of income and employment in the job creating sectors during
this pandemic because of continuous falling of company’s profits that have resulted in pay cuts and layoffs.
Most vulnerable are the workers in the informal sector – a dominant part of India's workforce, gig economy
workers in the transport sector, and low-skilled workers who cannot ‘work from home’. The pandemic-
induced slowdown and uncertainty have come at a time when India’s consumer and business sentiment was
already weak. This mean consumers could increase precautionary spending and postpone purchases in sector
such as automobiles and real estate. This leads to slowdown in these sectors which were already weak before
the pandemic in India. Firms could also postpone investment decisions further in affecting the aggregate
demand of India. Investment decision are also effected by the reduced wealth of the investors due to falling
share prices leading to low investment in various sector hindering the revival of country’s economy. These
various supply and demand disruptions are influencing each other and dragging the Indian economy into a
downward spiral

Another sector important from macroeconomic view and has implications from this pandemic is banking and
financial sectors which has been under a lot of stress. Banks have had major exposure to stressed industries
and MSMEs which are severely affected, also with rising consumer loan default because of high
unemployment and household leverage there has been stress on banks’ impact credit growth. The pandemic
has roiled financial markets across the globe. Almost all market classes have seen large volatility and
witnessed significant decline in values. Leading to huge losses in the sector affecting the investment decisions
of the inventors and eventually affecting India’s economy which is eminent from a sharp depreciation of rupee
against the dollar which has worsens the trade deficit as export’s contribution to GDP is low. Such a shock has
hit India’s financial system when its health was already weak. The weakness has gradually transmitted from
public sector banks to non-banking financial companies (which are stung by defaults and crisis of confidence)
and even private sector banks.

In Conclusion, due to this pandemic, the Indian economy has seen a reduction in aggregate demand,
production has a negative effect, supply chains and imports have been disrupted. The unavailability of raw
materials and movement of millions of migrant workers, slowing global trade and shipment and travel-related
restrictions imposed by nearly all affected countries have a major long term impact. The supply chains may
not normalize in the near future. Currently, several industries are struggling owing to the complete disruption
of supply chain. The longer this crisis lasts, the more difficult it will be for organizations to stay afloat. This
will negatively affect production in almost all domestic industries. The ripple effects can be seen on
investment, employment, income and consumption, pulling down the aggregate growth rate of the economy.
That is why Government policies will have to such so as to revive the economy at faster rate.