Assignment - 1

Impact of Covid on the Indian Economy

Covid-19, a contagious disease caused by SARS-COV-2 virus, was first detected in Wuhan,
China, in December 2019. The virus quickly spread across the globe resulting in a worldwide
pandemic. It became the greatest global humanitarian challenge since World War II. India
was first affected by this virus in January 2020. As Coronavirus spread across the country,
infecting lakhs of Indians and becoming a mass scare, it did not just affect the health of the
individuals but also created a massive disruption in the economy as well.
The government imposed lockdowns in phases as the cases increased in order to slow down
the spread, which was a huge economic shock and had a cascading impact on all sections of
society. Due to a complete closure of enterprises in all sectors, the economy was stalled,
which was already on a path of cyclical slowdown. Its impact was felt across significant
sectors such as manufacturing, construction, trade, hospitality, etc. The household economy
faced daily losses, majorly owing to unemployment. Information Technology, Software
services, and Agriculture were resilient and were able to cushion the shock of the pandemic
and sustain the economy. Closure of business units, reverse migration, increase in
unemployment rates, and a decline in domestic consumption – are all of these factors that led
to this downward trajectory of the Indian economy. The informal sectors were worst hit by
the pandemic. The government and central banks deployed various measures to support the
economy, such as lowering policy rates.
Below are the three key macroeconomic indicators to reflect the state of economy of India as
hit by Covid-19:

Gross Domestic Product (GDP)

Gross Domestic Product is defined as the monetary value of all final goods and services
produced within a country during a given period of time.
Starting from the early 1990s to the time when the pandemic hit the country, the Indian
economy grew at an average of approximately 7% every year. As the pandemic hit, the GDP
contracted by 7.3% in 2020-21. It seemed to be an outlier, but if looked carefully at the
important variables in the data, the economy had been worsening steadily even before the
pandemic. The growth in the GDP fell to 4.2% in 2019-2020, which was an 11-year low
figure.

Source: RBI staff estimates

Source – https://www.businesstoday.in/
Due to the first wave of the pandemic, the GDP contracted by 24.4% year-on-year in the
April-June quarter of 2020, which was the first GDP contraction in more than forty years.
The individual income dropped by 40% approximately. The economy recuperated well in
early 2021 but was impacted again by the terrible second wave of the pandemic. For the
financial year 2020-21, GDP had contracted by 7.3%, which is the most severe contraction
since India got its independence. With reopening of businesses and easing of restrictions and,
India registered a growth rate of 1.6% in Q4 of FY21, but this low single-digit increase could
not make up for the earlier contractions.
Economic contraction does not only imply a decrease in the GDP number but also marks a
reversal of progress achieved over the years. With economic activities brought to a standstill
because of an aggregate demand shock and a lockdown-induced supply shock, sectors such as
construction and manufacturing received a huge dent.
Manufacturing
Manufacturing contributes to almost 16-17% of the GDP and provides employment
opportunities to around 20% of the nation’s workforce. The first lockdown imposed
restrictions on the movement of goods and people that disrupted the supply chains and
impacted the workforce, thus bringing around all manufacturing activities to a standstill.
Manufacturing output saw a contraction by half from March 2020 to March 2021. Purchasing
Manager’s Index (PMI) measures the direction of economic trends in the manufacturing
sector. Expansion means a figure above 50, and contraction if the figure is below 50. It is
closely watched by business traders, investors, economists, and central banks to decide on
interest rates. The PMI manufacturing fell to 55.4 in March 2021, a seven-month low figure.
Core IIP (Index for Industrial Production) contracted by -4.6% in February 2021 when
compared to 0.9% growth seen in January 2021, indicating setbacks for core manufacturing
activities. The decline in the growth rate of manufacturing indicates a lack of demand and a
structural crisis. As per a report by the Small Industries Development Bank of India (SIDBI),
67% of the MSMEs were temporarily shut for three or more months in FY21 and over half of
the MSMEs noted a decline of over 25% in revenues as per a survey conducted on 1029
enterprises.
The below graph shows the trend for Industrial Output and PMI Manufacturing comparing
data for years 2019-2021.
Source – Economic Survey 2021-22
The key issues that impacted the manufacturing sector are-
 Disruptions in supply chain
 Shortage of raw materials
 Shortage of labour
 Weaker demand
 Liquidity crunch
 Regulatory restrictions
Agriculture
Agriculture remained resilient through all the different waves of the pandemic. A
combination of factors worked in its favor, such as exemption from lockdown measures,
improved availability of labor, bountiful monsoon, and adequate soil moisture. It contributes
to around 18% of GDP. Being the primary driver of the rural economy, agriculture provides
employment to 58% of the country’s population. This sector, along with its allied activities,
grew at 3.6% during FY21 and improved to 3.9% in FY22.
The difficulties faced by the agriculture sector due to the lockdown were mostly from the
demand side. Closure of restaurants, hotels, roadside stalls, and no functions resulted in a
collapse in consumption. There was demand destruction because of a reduction in
consumption translates into lower demand for farm-produced items at the same price –
displaying a leftward shift in the demand curve. The government tried to address this issue by
boosting state crop procurement.
Growth was seen in the allied sectors as well, such as dairying, fisheries, and livestock, acting
as the positive drivers of the growth.
Services
Services account for more than 50% of India’s GDP. Its share in India’s Gross Value Added
(GVA) declined from 55% in 2019-20 to 53% in 2021-22. The sector contracted by 8.4%
YoY in 2020-21, which was driven by contact-based services such as retail trade, hotel,
recreation, transport, entertainment, and tourism.
The non-contact services such as communication, financial, information, and business
services remained resilient.
The services sector saw a decline of 16% during H1 FY2020-21 owing to its contact-
intensive nature. Purchasing Manager’s Index, rail freight, and air freight, which come under
the category of high-frequency indicators, bottomed out in 2020.
Services exports saw a slump in the first three quarters of 2020-21 but surpassed the pre-
pandemic levels in Q4 of 2020-21. It grew by 21.6% during H1 2021-22, gaining strength
from global demand for exports of IT services and software. There was a positive
development in the Indian start-up ecosystem, where 41 start-ups, most of which are in the
services sector, achieved the status of Unicorn in 2021.

Unemployment
The labor market saw a sharp decline during the first wave of Covid-19, where the
unemployment rate touched a record high, and the labor force participation rate plummeted.
Reverse migration happened from urban to rural areas because of lockdowns leading to an
increase in demand for the MGNREGA scheme in the rural areas. Casual laborers were worst
affected – Only 35.3% of the casual labor workforce had jobs during April-June 2020 out of
the total labourers working in the Jan-March 2020. Nearly 50% of this category was not
employed, and 10% moved out of the labor force.

Source - https://www.statista.com/, https://www.cmie.com/

The data in the above graph shows how volatile was the unemployment rate, from being
8.35% in August 2020 to dropping below 7% in the next month itself. This level of volatility
has implications on the earnings and the labor market and creates confusion among people
about whether to enter the labor market. This may also mean that there was a discouragement
effect in the sense that people were quitting the workforce at a faster rate than they did
before.
Even though 2021 displayed an improvement in the figures for the unemployment rate, it was
still high compared to the levels seen in pre-pandemic years. Unemployment in 2021-22
increased to 33.3 million in 2021-22 from 32.9 million in 2019-20. Over one crore people lost
their jobs due to the second wave of the pandemic.
The first lockdown imposed due to the rising covid cases led to the migration of the labor
force to their villages, eventually causing rampant unemployment. The push factors for this
migration were high costs of living in urban areas, limited access to unemployment and social
benefits, and seeking alternate employment opportunities under MGNREGA. With the rise in
unemployment, there is a fall in the amount of money spent by individuals, leading to a
decrease in economic contribution as they have reduced purchase power. Unemployment
results in the rise in poverty levels and affect the country’s economy as the workforce that
could have been utilized to generate resources is dependent on the remaining working
population. As per Okun’s law, a 1% increase in unemployment leads to a reduction in GDP
by 2%. Curtailments imposed to control the spread of the virus had a negative effect on
certain industries such as MSMEs, tourism, hospitality, trade, and manufacturing.
In the case of self-employed people, supply constraints, subdued demand, and restrictions led
to compromised earnings for traders and businesses. There was a fall in the wage rates, and
the pandemic affected women and young workers in a rather disproportionate manner. The
intensified demand for work under the MGNREGA scheme suggested continuing economic
distress. They do not have job protection, and weak social security support accentuates the
economic impact.

Inflation
Inflation rate of increase in the prices of goods and services. Inflationary stress indicates that
a nation’s economy is in jeopardy. It is crucial to ascertain one’s purchasing power.
In India, the Wholesale Price Index (WPI) and Consumer Price Index (CPI) are used to
measure inflation. WPI has prices of the manufactured goods, whereas the CPI has prices of
the food articles and services. Headline inflation has seen volatility caused by movements in
the food and fuel inflation that were majorly influenced by supply disruptions and
fluctuations in international commodity prices. The key concern has been that high inflation
will potentially impact resources and growth as India is a consumption-driven economy.
The CPI inflation averaged 6.6% from April to December in 2020. It witnessed inflation
during this period due to disruptions caused by the lockdown, leading to a substantial
increase in the price. When compared with 2021-22 (April to December), the CPI moderated
to 5.2%. It stood at 5.6% YoY in December 2021, which was within the targeted tolerance
band. Prices of most of the essential materials were under control during this time because of
effective supply-side management. Pick up in economic activity and the low base in the
previous year were other factors that led to the improvement.
Learnings and Way Forward
The pandemic has made us realize the fact that there needs to be a reorientation of our
thoughts on conventional policies. The significance of adequate provisioning of public goods
surfaced with this crisis. The importance of public goods had been undermined because of an
over-reliance on market mechanisms resulting in the creation and supply of private goods.
Non-exclusion and non-rivalry, the two defining features of public goods, have been eroded
in many cases, leading to the conversion of erstwhile public goods to private goods. For
example, covid-19 blurred the roles of the market and state in provisioning healthcare, which
comes largely under the state. The limits of the market were exposed since supply expansion
is not elastic to a rise in demand. There is a critical need for public-private partnerships in the
healthcare system to integrate medical knowledge, expertise, and digital transformation.
As per RBI’s report on Currency and Finance in 2021-22, India may take another 13 years to
overcome the losses faced due to the pandemic. A timely rebalance of fiscal and monetary
policies should ideally be the first step in the journey of reforms. Public expenditure on
education and health is needed to raise the quality of labor, along with the focus on
innovations in the R&D and technology sector. More investment is needed in agricultural
research and development to meet the dual goal of nutritional security and improvements in
farm income. The government of India should be reaping the demographic dividend as the
proportion of people in the working age of 15-65 peaks. Instead, the labour participation rate
has been falling, particularly in the female category. India has to get its women into
productive activity to become a miracle economy.
The government should inject capital through investments, grants, and loans and increase
activity via public & private partnerships. Recovery of the economy depends on the revival of
the private demand that could be led by consumption in the short run but mostly will depend
on the direction of investments, in particular from the government, either through fiscal
stimulus or increased expenditure of capital. The pandemic has exposed the existing
inequalities in society, especially for those who are employed in the informal sector. The
government should focus on an inclusive and equitable development that comprises the
provision of income support. People working in the informal sector are most vulnerable to
economic shocks and needs greater access to social safety nets such as pension schemes and
insurance, and formal credit.
The last two years have been hard for the economy owing to repeated waves of infection,
inflation, and supply chain disruptions. It created a challenging environment for
policymakers. It is crucial to expand the distribution of vaccination which is not just a health
response but also critical for opening up of the economy, especially for the contact-intensive
sectors. Higher rates of vaccination will provide for greater mobility and support demand
recovery. The rural infrastructure also needs to be strengthened to spur the growth of agro-
based industries, improve the purchasing power, provide better access to the market for
farmers, and promote entrepreneurship.
The government needs to provide continuous fiscal support, and push for growing
investments in areas such as renewables, supply-chain logistics, e-commerce, and
digitalization to step up the growth and close the formal-informal gap in the economy.
References
 Economic Survey for the year 2020-21 and 2021-22
 RBI’s report on Currency & Finance
 https://m.rbi.org.in/
 https://www.cmie.com/
 https://economictimes.indiatimes.com/
 https://indianexpress.com/
 https://www.thehindu.com/
 https://www.businesstoday.in/
 https://www.business-standard.com/
 https://statista.com/