Impact of COVID-19 on the Indian Economy

A Brief Background
In early March 2020, India had to face a very complex situation. It was the Global
pandemic popularly known as COVID-19. This pandemic started primarily because of a virus
known as the coronavirus. Although the virus’s origins were traced to China in early
December 2019, it had spread to the entire world in a short period. So much so that the World
Health Organization (WHO) had to declare it a pandemic in early February 2020. In India,
we noticed our Prime Minister one fine evening talking to the entire nation about a one-day
shutdown of the whole country. Little did we expect that this shutdown would transform into
a gargantuan lockdown of the country.
This lockdown from 25th March 2020 was unexpected, and the government had not seen
it coming. It had a domino effect on the entire economy of the country. The ruining of the
world economy had also started. The global nature of our economy - also known as
Globalization - had taken a back seat because now countries were isolated from each other.
Travel was banned entirely from one country to the other, and trade was affected due to the
Collapsing nature of the economy of the individual countries. The Indian economy is
demand-driven. Due to this lockdown, the demand in the Indian market came down
drastically. Different sectors of the economy were differently affected due to this pandemic.
The aviation and tourism sector took the biggest hit, followed by manufacturing. The
agriculture and pharma sectors did comparatively better. This was because everything came
to a standstill, and only essentials like food and medical supplies were allowed. During the
shutdown, individuals were expected to stay indoors because this virus tends to spread from
human to human, and there was no vaccine to prevent the spread of this virus.
As of today, India has witnessed three waves of the coronavirus pandemic. The first
wave was greeted between April and May 2020; the second wave hit the country Between
mid-March and mid-July 2021, lasting for 100 days. This was the deadliest wave where
maximum people lost their lives. The 3rd wave of COVID-19 hit the country in early January
2022 and lasted till March 2022. It was assumed that another pandemic wave might hit the
country around June 2022. But the government’s concerted efforts and an effective
vaccination programme prevented this 4th wave from hitting the country.
Main Issues and Challenges During the Pandemic.
The pandemic had brought with it a myriad of issues and challenges. These challenges
impacted not only the individuals but also the industries at large. As a result of this impact on
the sectors, a series of other problems, such as job losses and a shortage of demand in the
economy, were noticed. An imbalance was thus created in the economy. Following were the
main issues that emerged from this situation:

 Stunted GDP Growth: Gross domestic product, or GDP, is an important metric to

understand the economic health of any nation. In simple terms, it means the total value of
all the goods and services produced in a country in one year. India’s GDP contracted by
7.3% in the fiscal year 2020-211. In March 2020, Sensex and Nifty were at a 4-year low.
Sensex, hovering around 60,000 in September 2022, had reached as low as 29,5002. Nifty
also followed a similar trend. If we follow the definition stated above, we can infer that
the value of the goods and services produced in the country in the fiscal year 2020-21 has
reduced. A steady decline in demand was observed in almost all the goods consumed in
the country. Since people were not allowed to come out of their houses and all economic
 activities had taken a back seat, there was no consumption in the Indian household. India
being a demand-driven economy, had to face the brunt. Negative impact on Aviation &
Tourism industry: Aviation and tourism comprise almost 12% share of the GDP of the
country. This number makes it an important sector which cannot be overlooked. It was
severely impacted during the pandemic. All private airlines were grounded, and only the
government flyer Air India was operational. This took a negative toll on the sector. Any
sector which had no relation to food or health suffered badly since these were the only
two areas where demand shortage was not seen – on the contrary, it grew even higher.

 Job Losses: This term was not new to the Indian diaspora. Even before Covid hit, the
country had been witnessing record unemployment rates. 12 Crore Indians3 had lost their
jobs during the lockdown. There was an impact on Medium, Small and Mini Enterprises,
also known as MSMEs. These MSMEs have a 30% contribution4 to GDP and have
created 90%+ jobs in the country. This explains the job losses. Job losses in an economy
tend to reduce the demand even further. Even the ones in their careers will have a
propensity to save rather than spend. Historically the country has witnessed greater
unemployment in urban areas than in rural areas. COVID-19 has added fuel to the fire by
further increasing this divide. During the lockdown, we saw the migrant labour crisis
wherein migrant labourers (primarily daily wage earners) in tier A cities were forced to
go to their native Hometown because of their work. The country also noticed the issues
and challenges these men and women faced back home. This sparks yet another debate on
the job conditions of the working class in the country, but we can keep that aside for now.

 High Retail Inflation: Retail inflation is directly linked with crude oil prices in the
international market. The government greatly benefited from low crude oil prices. After
staying close to the $110-a barrel mark from 2011 to 2014, oil prices in India basket fell
rapidly to just $85 in 2015 and further below to around $50 in 2017 and 2018. Due to
COVID-19, the oil prices further came down to $22.5. On the one hand, the sudden and
sharp fall in oil prices allowed the government to completely tame the high retail inflation
in the country, while on the other, it granted the government to collect additional fuel tax.
This means that the government did not pass on the benefits of low oil prices to the Indian
consumer. As a result, no decline in retail inflation was observed.
Detailed Analysis
At the outset, it seems the pandemic came as a blow to the economy. But as our
honourable Prime Minister, during the pandemic, coined the term” AAPDA MEI AVSAR”,
which translates to – an opportunity in disguise, we shall be analysing this case from both
perspectives.
An Abysmal State of Affairs
The picture will never be rosy when the world’s largest democracy and 5th largest
economy worth 3 trillion dollars comes to a standstill. The roads which carried 1.4 million
private vehicles in a day, considered the economy’s veins, were now almost empty. Aircraft
that took a humongous crowd of travellers were now grounded. Malls and movie theatres that
were once flocked by fashion enthusiasts and cinema-goers had to shut down completely.
Schools and universities which imparted knowledge and education to the next generation had
to close immediately. The daily wage earners who started early in the morning, worked
throughout the day and returned late at night had been stripped away from their job. It was an
abysmal state of affairs in the Indian economy.
 Indian economy is characterised by three different types of industries, namely the
primary, secondary, and tertiary sectors. During COVID, all these three sectors were
Simultaneously affected. Below mentioned are the effects that took place on the entire
country.

1. Supply chain disruptions: Since global trade was heavily affected due to the
pandemic, manufacturers across the globe faced difficulties in running their businesses.
As a result, their output was low, and it was nil for most of the products. Since China was
the first country affected by the virus, it was also the first to take the economic hit and
stop its production lines. China, the largest exporter of electronic products, organic
chemicals, nuclear machinery, computer parts, cars and motorcycle parts, toys, fertilisers,
mobile phones, milk products, and iron & steel, could not fulfil this global demand. This
culminated in shortages, which transpired into supply chain disruptions over a brief
period. These disruptions were the reason behind shutdowns and block closures of Indian
manufacturers. This continued even after the lockdown was lifted and still haunts them.
Tata Motors, for example, still announces block closures in most of its plants across the
country. There might be many reasons behind this, but most have a connection with
supply chain disruptions during COVID.

2. Health issues in the country: The pandemic was a health emergency. Although the
death rate of all the virus strains in the first and second waves was the same, more people
died in the second wave. In the first wave, the country was successful in flattening the
curve. Once the positivity rates decreased in India, it was time to open the economy and
bring life back to normal. However, when the second wave hit the country, everyone,
including the politicians, had put their guards down. A complacency was noticed in the
behaviour of the average Indian. More mass gatherings took place, and appropriate
precautions like wearing masks were not taken. State elections in India were scheduled
for the month of April 2021. All these factors collectively triggered a perfect environment
for the virus to spread further. This was the beginning of the second wave. Daily deaths
during the first wave of covid in India stood at around 1100 per day as on 24th Sep 20206.
This was the peak of the standard distribution curve. During the second wave, this toll
was more than 4000 per day and arrived on 22nd May, 20217. During the second wave,
the health infrastructure of the country was tested. There was a shortage of oxygen supply
for medical purposes. This shortage was mitigated by reducing the supply of oxygen in
industries, and the entire stock of oxygen was reserved only for medical purposes.

3. High unemployment rate: The manufacturing sector contributes 17% of the country’s
GDP. This sector employed nearly 51 million Indians in the year 2016-17. In 2018 this
figure reached 40 million – a decline of 21%. During COVID-19, this value was further
reduced by 45% to 27.3 million. (Ref. Fig.1) Thus, we observe that unemployment
already existed in the country before the pandemic. COVID-19 added fuel to the fire.
Almost all sectors and industries showed a decline in employment rates except the
agricultural sector. This sector observed an increase in employment; however, the
country’s overall employment rate declined.
4. Demand Shock: While it is understandable that when people are bound to stay
indoors, and economic activity almost stops in the country, demand will decline.
Therefore, think tanks anticipated the government would slowly see a ‘V’ shape recovery
when the lockdown is lifted. Contrary to this popular belief, it did not happen. At least not
immediately.
High Hopes of Recovery
5. Stock market indices: There was turbulence seen here as well. A steep market decline
was observed at the outset of the pandemic in early March 2020. Within a short span of 2
weeks, the stock market indices (Sensex and nifty) were at a 4-year low value. Investors
across the globe lost 9 trillion dollars during the pandemic. However, during this
lockdown period, the nation learned stock market trading. In 2014, the number of active
users with Zerodha was 18,000. During the first wave, this figure was 1.4 million users;
in the financial year 2022, it was close to 6.3 million8. This showed that financial literacy
in the country was comparatively better post-pandemic.

6. Infrastructure of the country: India's infrastructure was also tested during these times.
The following were the main categories of infrastructure which mattered during these
times:
a. Medical/ Health: as mentioned earlier, the oxygen supply to hospitals was
disrupted entirely during the second wave. The country was not prepared for what
was coming. In major hospitals, there was a shortage in the number of beds.
Hospitals across the government had to pick and choose patients who could be
admitted. For those who were able to secure a bed, the next challenge was oxygen
supply. The country had first witnessed such a dire situation since independence.
The government devised new ways of producing oxygen. Many hospitals
commissioned oxygen plants within their premises. This further added to the
economic activities of the country.
b. Education: Education moves from classrooms to bedrooms. Generally, in India,
the average household has two mobile phones. The pandemic forced Indian
consumers to purchase different devices for their children. Although we observe
that demand for devices has increased, there is also an increase in the average
screen time of kids.
c. Digitalization: since everything became contactless, so did the payment system.
since demonetisation, the digital India initiative of the government was patronised
by like-minded Indians. During covid, we see the actual use of digitalisation

7. Work From Home & Hybrid model: if classrooms shifted to bedrooms, then offices
moved to the home. WFH culture had existed in the country before covid. IT sector
employees sporadically used its benefit. During Covid, the entire sector used it
extensively. There are many benefits from this model. Employees were no longer
required to be in a particular location since working remotely. Due to this, major cities
like Bengaluru and Pune witnessed people vacating their rented spaces and moving to
their hometowns in other parts of the country. Although it was a slight blow to the
economy of the tier A cities, The smaller cities where these kids came saw an upsurge in
economic activities. For example, registered vehicles frequency has significantly
increased in Jamshedpur, Karnataka, and Maharashtra. The firms also benefited from the
 WFH model. Their overhead expenses were reduced. On the one hand, electricity and
another essentials needed to run the business disappeared from the balance sheets. On the
other hand, employee productivity also increased since employees were now working
when they had to commute; It was a win-win situation for both. But there were many
disadvantages of this model. So, a new model was devised called the hybrid model. Here
employees were given the flexibility to work from home and to come to their offices.
An Opportunity in Disguise
8. Alternate to China: as the world blamed China for spreading this virus, there is
another debate and discussion going on in the minds of top global leaders and politicians.
as we have seen, supply chains got disrupted a demand shock crippled the entire world.
Then entire economic downturn was witnessed the world is now looking for alternatives
for its manufacturing factory: China. This means the top companies of the world who
with their manufacturing facilities in this country, are now looking for alternative
destinations that can produce goods with the same efficiency and cost as China can make
cheap goods since there is a reasonable labour force available in the country. This labour
is skilled to carry out the necessary activities. There are districts within that country
which specialise in only one product. A group of such districts come together
systematically to form the supply chain. During the pandemic, it was this supply chain
that got disrupted. Politically also, China has differences from many nations. From a
business perspective, such differences decrease the likelihood of suitable conditions for
doing business. Therefore, countries such as India and Vietnam which are more friendly
with the western world are preferred as a convenient alternative to China.

9. Growth destination: As mentioned above, many companies and countries prefer India
as a partner in doing business. For example, Apple Inc. now manufactures its new iPhone
in India. Similarly, companies like Samsung Have Partnered which state governments to
manufacture their new smartphones. Chinese company Xiaomi Also manufacture its
smartphone in India.

10. Investments: As per the Government of India, the foreign direct investments (FDI)
inflow has increased by 23% post covid (March 2020 to March 2022) to USD 171.84
billion. This figure was USD 141.1 billion between February 2018 and February 2022.
The top 3 investor countries were Singapore, followed by the United States of America
and Mauritius. The top 3 sectors that drew investments were computer software and
hardware, the service sector, and the automobile industry. Karnataka Delhi and
Maharashtra were the top 3 destinations for investors.9

Role of Macroeconomy During COVID-19

Macroeconomics is defined as the branch of economics which studies economic problems at
the aggregate level of the economy, i.e., considering the whole economy. It deals with
subjects like national income, national output, employment etc. The term ‘macro’ means
large. So, macroeconomics is that part of economic theory which studies the behaviour of
aggregates of the economy as a whole. It studies the performance of the economy as a whole
and not of any individual firm or business. It focuses on the study of problems like inflation
unemployment poverty etc. The domain of macroeconomics includes hardening of interest
rates, strengthening of the Rupee against the Dollar, and stagnation of economic growth. The
other name of macroeconomics is income and employment theory.
The main tools of macroeconomics are:
1. Monetary policy: The Reserve Bank of India (RBI) is the controller of this policy.
The tools used in this policy are Bank rate, cash reserve ratio (CRR), repo rate,
reverse repo rate, marginal standing facility rate (MSFR) and statutory liquidity ratio
(SLR). As discussed earlier one of the main problems that emerged during the
pandemic was high retail inflation. Inflation is high when the prices of commodities
increase in the domestic market. High prices are usually coupled with high demand,
but during this period it was observed That although demand was low prices of
commodities went up. Therefore, the interest rates were slashed to increase the
liquidity in the Indian market. When liquidity is high, the demand also increases.
When high demand is coupled with higher supply then prices will decrease thereby
decreasing inflation.

2. Fiscal Policy: In a nutshell, it is that policy which guides the government in deciding
how much money it should spend, where should it spend and from where will it get
that money. The government discusses these questions with a lot of people including
policymakers, bureaucrats, and subject matter experts. When it comes up with a plan
of how much to spend, where to spend and where to get that money, then it makes a
statement to inform the citizens of the country. This statement we famously call THE
BUDGET. The question of ‘how much money’ to spend is done in an expenditure
statement. It tells us how much money the government will be spending. The question
of ‘where to spend’ tells us how much money the government will be spending on
various sectors like health, education, defence, industries, agriculture, railways etc. It
also says how much subsidy will be there for various sectors. The question of ‘where
that money will come’ to the government is from taxes, income, grants, borrowings or
selling assets. As discussed earlier, the government did not reduce the oil prices in the
country thereby taking up the benefit of reduced global prices of crude oil. Post-
pandemic the government announced a 20,00,000-crore package for the Indian
economy.10. This package was a part of the fiscal policy adopted by the government.
When government spends on health, the health infrastructure of the country improves.
When it spends on education, the educational infrastructure improves. When it spends
on railways the overall connectivity of the country streamlines the different
aggregates of the economy.

3. Exchange rate policy: The exchange rate is the rate at which one country converts its
currency value to the other country’s currency value. There are mainly 2 types of
exchange rate systems:
a. flexible exchange rate system: Here the currency’s value is allowed to
fluctuate according to the foreign exchange market
b. fixed exchange rate system: Here the value of the currency is fixed against the
value of another currency or gold
 India maintains of floating exchange rate system, which is a hybrid model of these
two systems. During and after the pandemic this policy was the least relevant.

What Lessons Did COVID-19 Teach Us

1. Be prepared for the unexpected. On 22nd March 2020 when Prime Minister Modi
came on camera, little did we expect that the country will be shut down for an entire
day. all businesses were worried about their production on this day. little did they
expect that for the next 2 months the production will be completely stopped. adding
fuel to fire, little did they expect that when these businesses will start opening there
will be no demand. therefore, one very important lesson that covid 19 taught everyone
was to be ready for anything that comes up.
2. Honing up skills is extremely important. When remote learning started it was the
teachers who had to struggle and not the students. This was because most of the
teachers were not familiar with the devices and even if they were familiar with them,
learning the intricate features of apps such as Microsoft Teams, Zoom and Google
Meet was challenging for them.
3. The importance of digitalization. COVID-19 give this generation the opportunity to
use digital payment systems extensively. The older generation although faced issues
in using them, the millennials and the middle-aged took the maximum benefit out of
it. as a result, in the Indian economy, many payment apps emerged. In India, this
revolution was started by Paytm followed by PhonePe and BharatPe. Suddenly there
was an upsurge in such companies. a new concept of BNPL came into the Indian
context. BNPL stands for buy now pay later.
4. Multitasking your employees and frequent job rotation. As demand decreased during
covid, So did the requirement of individuals also fell. In such a situation if employees
possess only limited skill sets It will be very difficult for the management to run the
show without skilled employees. Therefore, to avoid this, multitasking of employees
should be done by frequent job rotation. For example, if I have painters, electricians,
welders and forklift operators in my facility, the ideal situation should be that
everyone should be able to deliver all jobs. However, due to constraints, this might
not be achievable 100%. But at least 50% of the job should be cross-skilled. Cross-
skilling is achieved only by job rotation.

Citations:
1. https://economictimes.indiatimes.com/news/economy/indicators/indian-economy-
contracts-by-6-6-pc-in-2020-21/articleshow/89248879.cms#:~:text=Indian
%20economy%20contracted%20by%206.6,per%20cent%20in%202020%2D21.

2. https://www.thehindubusinessline.com/portfolio/personal-finance/how-sensex-nifty-
have-raced-ahead-of-global-peers-since-march-2020/
article36798563.ece#:~:text=India's%20equity%20indices%20have
%20outperformed,as%20at%20end%2DMarch%202020.
3. https://www.thehindu.com/data/data-over-12-crore-indians-lost-their-jobs-during-the-
coronavirus-lockdown-in-april/article61660110.ece

4. https://www.bajajfinserv.in/insights/what-is-msme-and-impact-on-the-indian-
economy#:~:text=MSMEs%20make%20a%20crucial%20contribution,of%20the
%20country's%20total%20exports.

5. https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart

6. https://github.com/CSSEGISandData/COVID-19

7. https://github.com/CSSEGISandData/COVID-19

8. https://www.statista.com/statistics/1056530/india-zerodha-number-of-active-
customers/#:~:text=In%20fiscal%20year%202022%2C%20the,over%20six
%20million%20active%20customers.

9. https://pib.gov.in/PressReleasePage.aspx?PRID=1826946#:~:text=It%20may%20be
%20noted%20that,USD%20141.10%20billion)%20in%20India.

10. https://bfsi.economictimes.indiatimes.com/news/industry/pm-narendra-modi-
announces-rs-20-lac-crore-economic-package/75699302#:~:text=He%20added%2C
%20%22Modi%20called%20this,businesses%20including%2C%20fishermen%20and
%20farmers.
Fig. 1