Abstract
The onset of the COVID-19 pandemic has presented India with complex economic and public health challenges. Furthermore, these two crises interact with each other in unpredictable ways whence there is considerable uncertainty in designing a policy response. This article purports to place India’s experience with the corona virus with a cutoff date of 30 June 2020 in perspective and to examine the public health and economic challenges as well as the economy’s prospects in a post-COVID world. The article lists key dates in the development of this pandemic in India and globally. We then outline the economic and health strategies followed in India to combat the crisis. We further discuss some consequences of the pandemic and elements of India’s recovery strategy. We also assess elements of India’s recovery. Finally, this article discusses prospects for the Indian economy in the short run.
You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.
—Rahm Emanuel, American politician
Introduction and Background
Even before the corona virus pandemic (henceforth pandemic) hit India, the country’s growth performance was appearing subdued. The provisional estimate of economic growth for the financial year 2019–2020 (1 April to 31 March) as compared to actual growth for 2018–2019 (given here in parenthesis) was 3.9% (6.0%) for gross value added, 7.3% (7.0%) for net taxes on products and 4.2% (6.1%) for gross domestic product (GDP). 1
See http://www.mospi.gov.in/sites/default/files/press_release/PRESS%20NOTE%20PE%20and%20Q4%20estimates%20of%20GDP.pdf (Accessed on 27 July 2020).
This complex crisis has at least four fundamental elements, and each of these interacts with each other. These elements are the following: (a) First and foremost, this represents a health crisis and an economic crisis that feed on each other—measures to curtail the health crisis (e.g., lockdown) lead to an economic crisis. However, the economic crisis, in turn, reduces resources available for tackling the health crisis. An easing of one crisis would help in addressing the other. (b) The crises evolve over time—the spread of the virus depends on contact between humans and the economic crisis depends on the sectors of the economy that are affected first and their feedback effects on other sectors of the economy including on labour. (c) Consequently, there is no easy way of predicting how the twin crises will play out over time, and hence, there is considerable uncertainty about the consequences of policy (unknown unknowns). (d) Finally, accepted antidotes are hard to find and indeed are not in sight, so that many countries, even those with otherwise robust health systems, are facing critical shortages of essential medical supplies needed to manage (as opposed to treat) the disease, such as testing kits, ventilators, personal protective equipment (PPEs), oxygen supplies, and the like.
Under these circumstances, it is very difficult to understand what strategy to follow. It is, therefore, understandable that there have been serious mistakes, and such mistakes continue to be made. For example, Sweden’s chief epidemiologist has publicly stated that not invoking strict lockdown early enough led to too many deaths. Similarly, the UK’s initial move of following a strategy of herd immunity led to the country having the highest death toll in Europe. The UK was then forced into a subsequent change in strategy. Jha and Jha (2020) discuss some of these mistakes and provide comparison of India’s experience with COVID with that of some other countries. For an analysis of the severity of COVID in three Indian states, see Kaicker et al. (2020).
This article purports to place India’s experience with the corona virus in the international context and to examine the public health and economic challenges as well as prospects in a post-COVID world. The rest of this article is organised as follows. Section II lists key dates in the development of this pandemic in India and globally. Section III outlines the economic and health strategies followed in India to combat the crisis. Section IV discusses some consequences of the pandemic and elements of India’s recovery strategy. Section V discusses elements of India’s recovery and prospects for the Indian economy. Section VI concludes this article.
We compile a timeline of the evolution of the COVID-19 pandemic as follows: Taiwan warned the World Health Organisation (WHO) about COVID-19 and its Chinese origins on 31 December 2019. On 5 January, the WHO basically ignored this advice. The WHO issued a statement that advised countries against applying restrictions on travel or trade with China. The WHO emergency committee met to discuss the severity of the outbreak and determine whether it is an international health emergency on 22 January. Several WHO members considered it too early to declare a state of emergency on 23 January. The Chinese New Year was on 25 January 2020 when a number of Chinese tourists travelled to various parts of the world, particularly Europe. The WHO upgraded its global risk from novel coronavirus to ‘high’ from ‘moderate’ on 26 January 2020. The WHO emergency committee declared the outbreak as public health emergency of international concern on 30 January 2020. The WHO flagged that the window of opportunity to contain the virus was narrowing on 21 February 2020 and finally declared COVID-19 as a pandemic on 11 March 2020. At the very least, there can be no doubt that there was inordinate delay in communicating the seriousness of the crisis.
It becomes apparent from this narrative that the WHO had been warned about human-to-human transmission of the coronavirus on 31 December 2019. The WHO apparently chose to ignore this advice perhaps because it came from a non-member state—Taiwan. The outbreak in China (particularly Wuhan) became serious throughout January and kept growing in the next few months. It then spread rapidly to nearly all parts of the world. Currently, all continents except Antarctica are afflicted with the virus.
India reported its first case of the virus on 30 January—the same day that the WHO declared COVID a public health emergency, but not a pandemic. Prior to that, India had begun screening international arrivals from China and Hong Kong as early as January 18 in the three major airports of Delhi, Mumbai and Kolkata, four more airports from January 21 and 13 and more airports from January 28. Testing was rapidly expanded to include passengers from more countries and all airports. However, contact tracing was a bit slow to take off. A phone app has been developed and is being used to trace contacts. This app has been downloaded more than 140 million times. Nevertheless, the lockdown is still absolute in a small number of containment zones where the incidence of the disease is high, in particular, the four mega cities of Delhi, Bangalore, Mumbai and Chennai, which continue to experience a high incidence of the disease and have high numbers of containment zones. However, the fact that much of the work that was being done online during the national lockdown continues to be done means that the disruption is not excessively severe. Informed medical opinion suggests that the incidence of the pandemic in India peaked in late September and has since started to decline. Hence, the health prognosis for the future is not excessively grim. Internationally, over this time period, peaks in the number of infections were achieved early in Taiwan, and then in Japan, South Korea, Canada and Italy. Europe, including Italy, is now going through a second surge in infections.
Based on the data available from Johns Hopkins University (https://coronavirus.jhu.edu), we depict (for two-week windows) the evolution of confirmed cases, recoveries, deaths and active cases for various time periods. Between 26 February 2020 and 10 March 2020, there were 53 confirmed cases, 1 recovery, 0 deaths and 52 active cases; recoveries as percentage of confirmed infections were 1.9%. Between 11 and 24 March, there were 480 confirmed cases, 36 recoveries, 10 deaths and 434 active cases; 7.5% of confirmed cases had recovered and 2.1% had died. Between 25 March and 7 April, there were 4,775 confirmed cases, 381 recoveries, 140 deaths and 4,254 active cases; 8% of active cases had recovered and 2.9% had died. Between 8 and 21 April, there were 14,769 active cases, 3,554 recoveries, 495 death and 10,720 active cases; 24.1% of confirmed cases had recovered and 3.4% had died. Between 22 April and 5 May, there were 29,320 confirmed cases, 10,167 recoveries, 1,048 deaths and 18,105 active cases; 34.7% of confirmed cases had recovered and 3.6% had died. Between 6 and 19 May, there were 57,075 confirmed cases, 28,167 recoveries, 1,609 deaths and 27,299 active cases; 49.4% of confirmed cased had recovered and 2.8% had died. Between 20 May and 2 June, there were 100,716 active cases with 57,976 recoveries, 2,527 deaths and 40,213 active cases; 57.6% of active cases had recovered and 2.5% had died. Between 3 and 16 June, there were 146,874 confirmed infections, 86,650 recoveries, 6,074 deaths and 54,150 active cases; 59% of confirmed cases had recovered and 4.1% had died. Between 17 and 30 June, there were 231,416 confirmed infections, 160,977 recoveries, 5,497 deaths, 64.94% recoveries and 2.4% deaths. This was a period of surge in infections, yet the numbers and percentages of recoveries were also rising.
A timeline (until 30 June 2020) of major events and India’s response to the crisis can be outlined as follows. On 24 March, PM Narendra Modi announced a 21-day nationwide lockdown. On 25 March, there was mass movement by migrants back to their home states. The very next day, the government announced a `1.7-trillion plan for the poor and migrant workers. On 27 March, the Reserve Bank of India (RBI) announced a moratorium on loan repayment. All banks and housing finance companies were permitted to allow a moratorium of three months on repayments of term loans outstanding on 1 March 2020. On 31 March, the New Delhi suburb of Nizamuddin emerged as a Coronavirus hotspot. The Tablighi Jamaat had their religious congregation at their headquarters (or Markaz). This was what had caused the spike in COVID cases in this suburb, which spread across New Delhi and the rest of the country. On 8 April, Vice President of India M. Venkaiah Naidu indicated that the 21-day lockdown could be extended. On 9 April, the RBI painted a gloomy picture of the Indian economy. It mentioned in its monetary policy report that the macroeconomic risks held forth by the COVID-19 outbreak would be severe for India. On 10 April, the Government met with the state chief ministers to discuss the lockdown issue. By this time, India had 7,600 positive COVID-19 cases with 249 fatalities. The Punjab government extended their lockdown till 30 April. On 11 April, the government extended their lockdown to 3 May and 10,000 positive COVID-19 cases were recorded nationally. On 16 April, the government allowed opening up of some industries in rural regions to reduce the distress caused due to the lockdown on millions of people from 20 April. The government also allowed farm activities, road and building constructions in regions that were less affected by COVID-19. On 20 April, Maharashtra, Rajasthan and West Bengal emerged as other coronavirus hotspots. The total number of COVID-19 cases reached 17,615 nationally with 1,553 cases and 36 deaths in 24 hours. On 22 April, the government approved an ordinance making acts of violence against doctors non-bailable offences. This was done against the backdrop of attacks on healthcare personnel fighting COVID-19. On 25 April, the government allowed shops to remain open at 50% strength. On 29 April, the COVID-19 toll reached 31,360 and death toll reached 1,008.
On 30 April, the national government allowed the movement of migrant labourers, students, pilgrims and tourists who were asymptomatic back to their home states. On 1 May, lockdown was extended to 17 May. Districts falling in Red zones (i.e., Delhi, Mumbai, Bengaluru, Chennai and Ahmedabad) were to stay under strict lockdown. However, there was relaxation in the districts falling in Green and Orange Zones. The government also initiated the Shramik Special train services to ferry stranded migrant workers back to their native states amid the COVID-19 lockdown. At this point, the total number of coronavirus cases in India reached 42,505 with 1,391 deaths. On 4 May, India entered the third phase of its national lockdown. On 7 May, the government initiated the Vande Bharat Mission to bring stranded Indians from various countries like UK, UAE, US, Maldives, Bahrain and Singapore. On 13 May, the Finance Minister Nirmala Sitharaman announced a set of measures that are part of the `20-trillion fiscal and monetary package announced by PM to support the Indian economy. This included relief to small businesses, taxpayers, shadow banks, power distribution companies, real estate, organised sector employees and contractors working with the government. On 15 May, the Finance Minister extended the stimulus measures to dairy, fisheries, food processing and animal husbandry sectors. On 16 May, India overtook China in terms of total number of cases (85,940). India’s Finance Minister extended the stimulus measures to bring structural reforms in coal, minerals, defence production, aviation (airspace management, airports, MRO), power discoms in UTs, space and atomic energy sectors. On 17 May, India’s nationwide lockdown was extended to 31 May, making it one of the longest lockdowns ever imposed. On 19 May, India reached the grim milestone of 100,000 confirmed cases reported. On 20 May, West Bengal and Odisha were hit by an extremely severe super Cyclone Amphan during the time of COVID-19 restrictions. On 29 May, India recorded 11,707 recoveries. On 31 May, death toll reached 5,000.
On 1 June, India became the seventh most infected country with 194,504 cases of COVID-19. It had the fourth highest number of active cases globally and second highest number of severe active cases. During this time, Indian Railways started running 200 special train to repatriate migrant workers back to their home states. On 8 June, India began phased reopening after 75 days in lockdown. India registered 9,983 new coronavirus cases in a single day. Total COVID-19 cases by this time had reached 260,093, and 7,263 people died of this disease. On 11 June, India surpassed UK to become the fourth worst hit nation with a total of 298,283 cases and 8,501 deaths. It recorded 11,989 recoveries as well on this date. On 16 June, India registered the highest ever spike of 2,003 COVID-19 deaths in a single day. On 20 June, India recorded a sharp rise of 13,897 recoveries in a single day. On 25 June, India recorded a further sharp rise of 13,940 recoveries in a single day. On 27 June, India recorded a sharp rise of 13,832 recoveries in a single day. On 30 June, Prime Minister Modi warned against complacency saying that this complacent behaviour had been increasing during the first unlock phase.
A majority of COVID cases are in 13 clusters with the cities of Mumbai, Delhi and Chennai particularly badly hit. The top 10 states with the greatest number of corona virus cases on 15th August were Maharashtra (560,126 total cases, 11,813 new cases, 390,958 recoveries and 19,063 deaths); Tamil Nadu (320,355 total cases, 5,835 new cases, 261,459 recoveries and 5,397 deaths); Andhra Pradesh (264,142 total cases, 9,996 new cases, 170,924 total recoveries and 2,378 deaths); Karnataka (203,200 total cases, 6,706 new cases, 121,242 total recoveries and 3,621 deaths); Delhi (149,460 total cases, 956 new cases, 134,318 total recoveries and 4,167 deaths); Uttar Pradesh (140,775 total cases, 4,537 new cases, 88,786 total recoveries and 2,280 deaths); West Bengal (107,323 total cases, 2,997 new cases, 78,617 total recoveries and 2,259 deaths); Bihar (94,459 total cases, 3,906 new cases, 62,507 total recoveries and 484 deaths); Telangana (88,396 total cases, 1,921 new cases, 64,284 total recoveries and 674 deaths); and Gujarat (75,482 total cases, 1,092 new cases, 58,439 recoveries and 2,733 deaths).
Considerations Underpinning a Public Health and Economic Response
India faces particularly challenging circumstances when dealing with these twin crises. To mention just two, its large population (1.3 billion people) and the crowding of people in cities and towns all over the country provide ripe conditions for an explosion of the health crisis. Its large informal sector makes it difficult to design social safety nets since most workers are not in the formal sector.
Faced with these circumstances, the government adopted what has been called a modified form of the barbell strategy from the theory of investment, which recommends investment in the most risky and the least risky assets. The modification to the barbell strategy is that the most risky outcomes are insured against first. Thus, there is a cushion for the very worst outcomes, and feedback determines the response to the rest. The worst outcomes in the case of the pandemic would be mass starvation and deaths following from disruption of supply chains and mass bankruptcy. The adopted strategy protected the economy from the worst manifestations of the crises and yet was flexible enough to respond to evolving circumstances.
Consequently, India’s performance in combating the health crisis has been quite good and certainly much better than that of countries (including USA, UK, Italy, France and Germany) with far more advanced health systems and much lower populations. India’s recovery rate is steadily rising (98% on 19 October 2020) and the death rate steadily falling (currently two of all infected cases) 2
https://www.worldometers.info/coronavirus/country/india/ (Accessed on 19 October 2020).
This lockdown brought much of economic and social activity to a halt. However, this had a salutary effect on cutting down the mortality from COVID. It has been estimated that without the lockdown and containment strategies in place, by April 15, there would have been more than 820,000 corona virus cases in the country instead of the 7,447 cases that actually occurred. On 8 July, India had recorded 742,417 cases with a recovery rate of nearly 63% and 20, 642 deaths. Had the lockdown not taken place the number of infections would have been 30 times higher, according to some estimates. By 8 July 2020, the pandemic infection curve had been nearly flattened, and the recovery rate was rapidly improving. Furthermore, ‘green shoots’ for economic growth had appeared after the first unlock. In a major speech, the RBI governor has indicated that the economy is nearly on track.
The lockdown has also given the country’s health system time to strengthen its response. In particular, the time made available by the lockdown has been used to increase India’s production of key medical supplies, including testing kits, PPEs, ventilators and the like. Indeed, before the pandemic India was an insignificant producer of PPEs, testing equipment and other material critical to the combat against the corona virus. India did not produce a single personal protective equipment (PPE) in April 2020, but by June, it was producing more than 200,000 PPEs a month. Similarly, from one testing centre in April, the country moved to more than 1000 centres by June and 1400 in August. The same is true of many other protection equipment as well as pharmaceuticals, where India is the third largest producer (by volume) and one of the major exporters of drugs. India established itself as a reliable supplier of pharmaceuticals by exporting hydroxychloroquine at the height of the pandemic when this drug was requested by several countries as a possible antidote to the corona virus. Currently, more than 1 million tests a day are carried out in India. The sharp expansion in the production of medical equipment was necessary in light of the uncertainty of supply from China, which was then the principal supplier of these key materials and was itself facing the full ferocity of the pandemic. Furthermore, India, along with some other countries, found some of the Chinese supplies to be defective. This and other supply chain disruptions have led to a rethink of India’s manufacturing strategy with emphasis being placed on enhanced self-reliance 3
.Following the lockdown, in the wake of the onset of the crisis, unemployment rose sharply, and the household budget was thrown off-gear, particularly because a large proportion of workers in the region work in the informal sector and are reliant on daily wages. Preliminary estimates indicate that job losses for this category of workers ranged from 25% to 56%. Even in the formal sector, there was substantial job loss as long lockdowns and social distancing norms took their toll, particularly on the micro and small and medium enterprise (MSME) sector, which is the largest employer in India’s formal sector. Facing a long period of lockdown, large numbers of migrant workers became restive and left their places of work in the cities to return to their villages of origin. For the most part, special trains facilitated the mass migration where the central government paid 85% of the train fare and the destination state government paid 15%. At this point, two good shock absorbers were introduced. First, the allocation to the National Rural Employment Guarantee Program was enhanced by `400 billion over budgeted amount in order to boost employment opportunities in the villages. Furthermore, the Prime Minister announced an allocation of `500 billion for the specific purpose of providing employment to returning migrant workers. So many workers returning to villages and small towns from the cities found gainful employment. As economic activity has picked up in urban areas, a shortage of labour has emerged in the cities, and these special trains are no longer returning empty. A lesson from this episode is that India needs formal sector job insurance to be expanded to the informal sector whereas currently this facility only exists for some formal sector workers. This underscores the necessity of formalising the work force, indeed much of economic activity.
India adopted a three-pronged strategy to combat the economic crisis resulting from the pandemic: a demand component, a supply support component and a structural reforms component. These are discussed below in no particular order. A key element of this strategy has been that state governments have had a major role to play in both the imposition and the lifting of lockdown restrictions. In turn, state governments have often relied on inputs from district administrations. Indeed, the requirements of India’s federal structure have been consistently met throughout this period. No national-level emergency was declared. The reasoning behind this was that the state governments would know local conditions better than the central government, and this method would also honour the rights of state governments within India’s federal constitution. Domestic flights were suspended and have only recently (partially) resumed. International flights have all but ceased although Air India ran a number of flights to bring back home large numbers of Indians stranded in various parts of the world. Train and lorry services for essential commodities such as food, fertilisers, liquefied petroleum gas (LPG) cylinders and the like have proceeded unimpeded throughout, but passenger services have only recently resumed and that too partially. Other forms of public transport including buses and metro services are gradually being restored.
Essential services were maintained throughout. There has been no generalised paucity of food in any part of the country. Substantial rations were distributed to 800 million low-income people including many farmers along with free of cost delivery of LPG cylinders as well as cash transfers. Indeed, the distribution of substantial free rations to these 800 million people has been extended to November 2020 when the summer crop would be harvested. Presumably, the thinking is that, by then, the economy would have stabilised, and the new harvest would ensure that food price inflation after that date would be moderate. To prevent cascade of default deadlines for companies to repay loans were pushed back, government guaranteed loans were meted out to the MSME sector and the definition of the MSME sector was expanded to include larger enterprises, the deadline for filing of income tax returns was extended. Rates of Goods and Services Tax (GST) were also rationalised.
Supportive measures undertaken for various sectors include: A credit line of `300 billion was announced for the MSME sector in order for them to meet their operational expenses. In addition, the definition of what constitutes an MSME enterprise has been expanded. Earlier MSME enterprises had to be below a certain (rather low) size in order to avail government benefits. Now, the definition of what constitutes an MSME enterprise has been expanded so that there are more incentives for these enterprises to grow in size. Loans to these enterprises will be granted for a four-year period, and the principal repayment will start after a 12-month moratorium. Some 4.5 million small enterprises are expected to benefit from this measure. There are special provisions for stressed MSME enterprises.
For small- or mid-sized non-banking financial companies struggling to raise debt, the government has launched a special `300 billion special liquidity scheme in order to get investors to buy low to medium risk debt paper issued by non-banking finance companies, housing finance companies and microfinance companies. These securities will be guaranteed by the government.
Global tenders will be disallowed in government procurement tenders worth up to `2 billion, which will help the MSMEs to grow their business. State-owned Power Finance Company and Rural Electrification Corporation will infuse `900 billion into discoms. The loans will be given under state government guarantees. Housing projects have been given relief for six to nine months to complete registration formalities. Employee Provident Fund contributions of the salaried class for the months of June, July and August 2020 are being paid for by the government. This set of policy measures have really been about repairing supply chains and cushioning demand from collapse. Government of India has expressed its intention to further supplement demand when the supply chains are responsive to demand stimulus and the possibility of having a stagflation is remote.
An important implication of the crisis was that millions of migrant workers living and working in different parts of the country faced increasing hardship as they became unemployed and the lockdown dragged on. The initial advice by the Prime Minister was for everyone to stay where they were in order to minimise the spread of the virus. Had this advice been followed to the letter, the recent spike in corona cases may not have taken place. However, starting in late March, migrant workers grew restive because they had lost their jobs, financial help was tardy, and they wanted to return to their places of origin (mostly villages and small towns in Eastern India). This was difficult to organise as permission was needed from state governments for trains carrying passengers to pass through during the pandemic. There was also the risk that transporting such large numbers of people by train or bus could risk an explosion of corona cases. By 30 June, almost all the workers (nearly 40 million) wanting to return home have been able to do so (largely) by special trains. 3.5 million workers have been returned to Uttar Pradesh alone.
Elements of a Recovery
An immediate fallout from the reverse migration of workers is that once enterprises start functioning at normal levels, they will face a shortage of workers. Indeed, this has already begun to happen after the first phase of the unlock. This is just one indicator of the breakdown of domestic supply chains during the crisis. International supply chains have been adversely affected, and global trade volumes have fallen sharply including in critical areas such as medical supplies. Under conditions of broken supply chains, a simple reflating of the economy through increased government expenditure would lead to high inflation and combined with low (or even negative) growth—stagflation. Hence, getting the supply chains to function smoothly is essential for attaining economic growth revival with moderate inflation.
The prospects on the supply side are mixed but, on balance, positive. First, despite the lockdown, the rabi (winter) crop was harvested and sold on time. Furthermore, the procurement price at which the government buys food grain from farmers has been set high (at least 1.5 times the average cost of production). This crop has been plentiful whence farmer incomes would have increased substantially. This will act to augment demand in an otherwise sharply slowing economy. Second, it seems that rains will be plentiful for the kharif (summer) crop. Rainfall is estimated to be above normal in many parts of India. In anticipation of a good harvest fertiliser sales were 45% higher in April and 97% higher in May this year compared to these same months in 2019. Data from Department of Fertilisers Government of India indicate that for the same months fertiliser demand in 2019–2020 compared to 2018–2019 was 16.72% higher in November, 22.89% higher in December, 11.13% higher in January, 53.37% higher in February, 17.72% higher in March, 45.10% higher in April and 97.73% higher in May. This indicates that the kharif is likely to be robust. This along with the additional money spent on National Rural Employment Guarantee (NREG) and on jobs for returning migrants indicates that rural demand is likely to increase substantially which may provide for non-agricultural demand.
The next leg of the recovery strategy is structural reforms. The government has been able to push through several key structural reforms. Some of these are mentioned here. First, the Essential Commodities Act was amended to allow farmers to sell their produce at the highest price anywhere in the country. This act had given the state governments undue power to determine where farmers could sell their produce. This was done ostensibly to protect local consumers from supply shortfalls. However, the opposite would happen many times as local scarcities would persist, since farmers from other states would not be able to supply deficient markets. In addition, farmer income would stagnate since their choice of markets was restricted. This amendment would signal a sea change in the prospects for farmers and ensure that coexistence of food deficits and food gluts would not persist. Second, the limit for foreign direct investment (FDI) in the defence sector was raised from 49% to 74%. Third, the highly acclaimed Indian Space Research Organisation has been opened for private enterprises so that India is now well positioned to enter the lucrative commercial space exploration market. A number of labour laws have been amended to make them more flexible so that workers can be more easily hired or fired. The inability to do so has been one of the major drawbacks to the expansion of the manufacturing sector in the ‘Make in India’ program. In addition, the low participation of women in the labour force has been a cause of concern in India for long. Part of the reason for this has been the presence of some laws that restrict where women can be employed, what jobs they could do and when they could work. Some of these restrictions have now been removed so that employment of females should get a boost, with all its attendant advantages. In addition, coal mining has been opened up for private enterprise, as coal-mining licenses will be auctioned off. Furthermore, in the wake of unreliability of supply chains, Indian policymakers have initiated a program of development through self-reliance. This does not amount to a new version of protectionism but the development of India’s manufacturing capacity by creating markets for domestically produced goods and services. This will be achieved by India developing a manufacturing hub that is globally competitive (not inward looking) and through switching of tastes from imported to domestic products. This has been aided by a recent consumer and government-sponsored rejection of Chinese imports in the wake of India’s border skirmish with China. There has been widespread boycott of Chinese goods, 59 Chinese phone apps have been banned in India, FDI rules for investment by Chinese entities have been tightened and participation of Chinese entities in public sector infrastructural projects has been discouraged. However, the overall FDI regime has become more liberal.
The country began the second phase of unlocking on July 1. In response to the first phase of the unlocking, the economy has responded quite strongly. Early signs of economic revival became visible in May and, particularly, June. Indicators of real activity such as consumption of electricity and fuel, inter and intra state movement of goods, uptake in retail financial transactions, improved railway freight and toll collection on highways, improved PMIs in the manufacturing and services sectors and improved collection of GST (91% of the value in June 2019). In June, exports rose to 88% of the value in June 2019. However, in each of these areas, the relevant magnitudes were below the corresponding figures for 2019. Some suggestive figures may be given. Manufacturing purchasing managers’ index (PMI) that had reached a low of 27.4 in April climbed to 47.2 in June. This is a distinct improvement, although only a PMI above 50 indicates growth. Unemployment fell sharply from 23.5% in May to 11% in June. The stock markets are doing well, indicating a sharp rise in India’s economic prospects.
Conclusions: Prospects for the Future
The International Monetary Fund (IMF) and the RBI and other major organisations have forecasted negative growth for India (–4.5% in the case of the IMF and –3% in the case of Bank of America) for fiscal year 2021. Assuming that the pandemic is over by the end of 2020 or so a sharp recovery in fiscal year 2022 has been forecasted. However, there are reasons to believe that economic growth may not be so low and may actually turn out to be (barely) positive for fiscal year 2021. We now elaborate on this.
Clearly, prospects for the agriculture sector are quite sanguine. The winter (rabi) harvest has already been harvested and has been plentiful. With good rains anticipated, the summer kharif crop is also expected to be good. With supportive policies for employment and infrastructure development in the rural sector, employment prospects in agriculture and allied activities are likely to be robust. Farm incomes have been augmented through income support policies and radical changes in agricultural marketing policies. The agricultural and more broadly the rural economy will boost demand and be a strong bulwark of support for the whole economy.
India’s industry sector has been struggling since 2011 because of very restrictive monetary and fiscal policies because of high inflation. This problem worsened when bank credit slowed considerably in 2018 because of the non-performing assets (NPA) issues that the banking sector was dealing with. Recent policy initiatives to boost the MSME and other elements of the manufacturing sector are likely to lead to a recovery for the manufacturing sector. Initiatives in the coal mining sector have the potential to boost the mining sector. So, industry as a whole should also recover well.
The services sector was hit very hard by the reduction, even cessation, of service orders. External demand for the Indian service sector, which has previously been robust, nearly collapsed in light of recessionary conditions globally. As a consequence, the PMI for the services sector was low 12.6 in May but improved to 33.7 in June. Thus, clearly, the service sector is facing rather grim prospects.
Furthermore, an immediate challenge for the economy is that some of the policy structures that had been put in place after long deliberations and debate over a considerable period of time had to be dismantled. These include the inflation targeting mechanism (interest rates are no longer following inflation), the FRBM Act that limits the fiscal deficit that the government can run (no longer operative), and with government guarantees for loans, the laws put in place to reduce commercial bank NPA issues (not operative since so many bank loans have been guaranteed by the government).
Hence, key challenges before the economy include managing the remaining unlock phases without an explosion of the virus and ensuring that infrastructure for monetary, fiscal and banking policies that suits the post pandemic scenario are developed. This is a big ask and there is hardly any experience or applied literature to guide the policymaker. However, there have been some good positives as well. For one, the pre-emptive lockdowns have saved many lives in India. This has reduced the longer-term public health challenge and reduced the long-term costs of the pandemic. Another important plus point has been that there has been a distinct switch of consumer and government preferences to domestic goods and services while, at the same time, making the country more hospitable to FDI.
In a post-pandemic world, these actions should carry the economy over the upswing of the business cycle. Virtuous cycles could be set up as economic activity stimulates growth; growth stimulates saving and investment which then fuel further growth. However, the first support will, at this time, come from consumption, particularly from the agricultural sector. The ensuing growth should stimulate consumption and then investment in the rest of the economy.
At some point in time, the economy is likely to need a substantial fiscal stimulus. The question of how that will be financed and what would be the implications for public debt and bank NPAs will have to be worked out. This is a serious challenge. The anticipated macro fiscal package could initiate a short-run growth cycle. However, that would only be a cyclical recovery. It is also important to remember that although the large post Global Financial Crisis monetary-fiscal stimulus made possible a sharp recovery it soon became apparent that over-reaction, and difficulty in reversing the stimulus, created macroeconomic vulnerabilities. A limited, well-targeted and transient stimulus would avoid this even while aiding a credit-financed growth revival.
The fiscal expenditures already undertaken have lifted India’s public debt to over 80% of GDP. Any further fiscal stimulus will clearly add to this debt. In addition, India has only recently started addressing the systemic NPA problems in its banking sector. The assurance given to borrowers as part of the stimulus package will need to be watched carefully to ensure that these NPA problems are not aggravated in the future.
The post-COVID-19 macro-financial package could trigger a virtuous growth cycle, by raising marginal propensities to spend above those to save, as demand is kept a step ahead of gradual relaxation in supply constraints. Activating India’s large domestic demand can potentially insulate from global shocks and a likely prolonged shrinking of trade.
For the medium term, it might become necessary to reverse the monetary tightening that had occurred since 2011. Because of this tightening, credit growth in India has been low. Therefore, a relaxation of credit conditions may actually help asset prices. This will also help in assuring that trust is restored in financial markets after the NPA crisis and create conditions for rapid financial and economic growth.
The health and economic crises of COVID-19 reveal possibilities for long-run supply repair and other opportunities. For one thing, the reluctance to use currency in transactions has led to a sharp increase in the digitisation of the economy. This needs to be carried forward aggressively as this will also have the additional benefit of reducing cash-based illegal transactions. Recent reports suggest that digitisation has led to a reduction in the smuggling of gold into the country despite an increase in import duties on gold. Furthermore, the newly developed culture of working from home has led to a sharp reduction in the use of fuels, low congestion on the roads and attendant environmental benefits. The opportunity could also be used to carry out internal structural reforms to make India an increasingly attractive destination for FDI, including that components of FDI that are seeking an alternative home to China. The GST can be fine-tuned to ensure that its full advantages are reaped (van Leemput, 2016). With an integrated market (which the GST is supposed to facilitate), firms should be indifferent to where they locate themselves. If this were to happen, labour would not have to migrate in such large numbers to already overcrowded cities. In addition, the purpose of balanced regional development (a long-standing challenge for India) would also be achieved to a considerable extent.
In summary, the health crises unleashed by the pandemic represent a very serious challenge for the Indian economy. Serious efforts have been made to stabilise the economy and meet the public health challenge. Some success has been achieved in both these areas, but much will depend on how the pandemic pans out, the availability of a vaccine and the public’s response. People’s continued participation in the process of healing from the both the economic and the health crises is central. At the same time, the pandemic represents an opportunity to carry out reforms that would not have been possible under more ordinary circumstances.
Footnotes
Declaration of Conflicting Interests
Funding
The authors received no financial support for the research, authorship and/or publication of this article.