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Indian Economy: How Will 2020 Impact 2021?

Efforts by the Indian government to flatten the virus curve through stringent lockdown measures will result in a steep economic contraction.

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“Sometimes even to live is an act of courage.” Those words are as true today as when they were written two millennia ago by the Roman Stoic philosopher, Seneca. The coronavirus pandemic is affecting millions and it is imperative to understand the unprecedented shockwave it has created – shattering social structures and disrupting economies and markets, with the ripples felt by almost every individual, business and nation.  

The Covid-19 outbreak in India has severely impacted the economy in myriad ways, with the lockdown halting the entire nation. It came at a time when the Indian economy was already slowing due to weaknesses in the financial sector and falling consumer demand for goods. Sectors already suffering, including logistics, aviation, transport, and tourism, are struggling to absorb the impact on the economy of the coronavirus pandemic.  

There are parallels between the emerging economic crisis and the financial crash of 2008. Like then, investment institutions and banks, including the IMF and Goldman Sachs, as well as the global rating’s agencies, such as Moody’s and S&P, have slashed growth projections, with India and other countries forecast to enter a ‘deep recession’. But the scale of the 2020 downturn is likely to be far greater than what followed 2008 – (see figure below – sources at the bottom of the article).

Efforts by the Indian government to flatten the virus curve through stringent lockdown measures will result in a steep economic contraction. In its April 2020 policy review, the Reserve Bank of India, warned: “The macroeconomic and financial landscape has deteriorated, precipitously in some areas.” 

Like other countries around the world, India too is grappling with the conundrum of reopening the economy – protecting and restoring activity this year to help shape a return to growth in 2021 – while containing the spread of the virus, and potentially further lockdowns.  

From the rubble of a virus-hit economy how can India quickly rebound and rebuild itself?

How will 2020 impact 2021?  

The pandemic is undoubtedly redrawing the landscape, but it is difficult to develop an economic blueprint for the post Covid-19 future because we have never before experienced the measures put in place to stem the spread, such as suspended transport, inoperative plants and stalled projects. Effects will differ to some extent across the Indian states as they follow specific economic strategies. Tourism has been severely hit, and will continue to suffer, no more so than in Goa where tourism is the mainstay of the state’s economic development strategy. The consequences for small firms, labour and for investment in tourist and transport infrastructure will be harsh. 

Even the high-performing districts in India have been badly impacted by the lockdown – 130 districts classified as red zones account for 41% of national economic activity, 38% of industrial output and are the most industrialised regions. Lower economic activity in these areas has spread to suppliers and revenues have slumped. The collective consequence of disruptions to supply chains, operations and travel are reverberating across almost all sectors of the economy, leading to:

Higher unemployment – further reducing demand and impacting production and capacity utilisation, and damaging corporate results 

Shortage of labour – migrant labourers have suffered greatly during the lockdown. The Government of India has increased the money going into the Mahatma Gandhi National Rural Employment Guarantee Scheme, which provides livelihood security in rural areas through 100 days of paid employment for adults who volunteer to do unskilled manual work. Under Covid-19 migrant labour obviously feels safer working closer to home rather than moving across states, but this will reduce the availability of workers for other sectors and regions. 

Severe liquidity crunch – working capital issues/solvency risk for sustained periods could lead to defaults on loans and may increase stranded assets in the banking sector.

Potential losses will vary by sector, but some industries that are suffering, such as airlines, hotels, automotive, construction and real estate, are likely to continue to bear the brunt into 2021. 

Covid-19 is unprecedented, so it is difficult to accurately make projections for economic growth, but it is possible to highlight some of the issues that will have an impact on Indian economy going forward.   

It will take months, possibly years for migrant labourers to return to work in other states, so the financial stress on rural households will increase, and will be exacerbated by a weak job market.  

Demand has fallen significantly since the introduction of the lockdown. AIIMS Director Randeep Guleria has said cases of Covid-19 in India will peak in June and July, though others say this may not happen until September. This will impact tourism, aviation, retail and many other economic activities, leading to job losses that will further reduce demand. Given the uncertainties, it is unlikely we will see a return to full-scale operations in many sectors this year. This will impact the financial health of many enterprises and many will reduce Capital investment in 2021.   

Remittances to India are projected to fall due to travel restrictions. The World Bank estimates these could decline by as much as 23%.  

Rising unemployment, falling corporate revenue and profit is bound to impact tax revenues. Already the government has announced a series of support measures. Falling tax income and rising expenditure to support many social and employment schemes will increase the government’s fiscal deficit in 2021.  

There are glimmers of hope, however. The Indian economy may benefit from falling fuel oil prices, potentially halving the import bill if current crude oil prices hold, and many foreign firms are looking at India as alternate manufacturing destinations in many sectors, such as pharmaceuticals, chemicals and electronic component manufacturing. India needs to capitalise on this potential opportunity and provide all necessary policy assistance to attract foreign investment in 2021. 

Covid-19 has adversely impacted the entire global economy and India is not spared. Looking at the current trend India is expected to enter recession. Recovery should focus on creating a more sustainable and resilience economy, pursuing opportunities to build back better and improve the life chances of all Indians.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

SS Acharya

The author is Managing Director, Mott MacDonald Private Limited

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Ajey Nandurkar

Project Finance Lead, Mott MacDonald Private Limited

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