Change in shape and structure of Indian economy in light of COVID-19

 

Change in shape and structure of the Indian economy in the light of  the COVID-19 Pandemic

The economy of India is characterised as a growing market economy. It is the world’s fifth largest economy by nominal Gross Domestic Product (GDP) and the third-largest by Purchasing Power Parity (PPP). The sectors in the economy are divided into the primary, secondary and tertiary sectors. The service sector makes up 55.6% of the GDP of the Indian economy and remains the fastest growing sector, while the industrial sector (part of the secondary sector) and the agricultural sector (part of the primary sector) employs the majority of the labour force. India has always been a mixed economy with a mixture of publicly owned and privately owned companies. 

From 1947 to 1991, successive governments promoted protectionist economic policies with extensive state regulation and intervention and many industries being publicly owned. An acute balance of payments crisis in 1991 and the end of the cold war led to India having take a $1.8 billion loan from the International Monetary Fund (IMF) and in return, they adopted a broad program of economic liberation – in this case, Liberalisation, Privatisation and Globalisation (LPG). As a result of this policy change, it became easier for private corporations to enter markets and it resulted in a boom in industrialisation and the rise of MSMEs (Micro, Small and Medium Enterprises). There was also a great rise in FDI or Foreign Direct Investment as well as indirect foreign ownership of companies. 

Nearly 60% of India's GDP is driven by domestic private consumption and it continues to remain the world's sixth-largest consumer market. Apart from private consumption, India's GDP is also fueled by government spending, investment, and exports. India’s share in global exports and imports increased from 0.7% and 0.8% respectively in 2000 to 1.7% and 2.5% in 2012 as per the WTO estimates.  Beating America and China, India saw the highest FDI inflow for new projects among all nations in the first half of calendar 2015. 

The long-term growth perspective of the Indian economy remains positive due to its young population and corresponding low dependency ratio, healthy savings and investment rates, and its increasing integration into the global economy.

The COVID-19 pandemic also known as the coronavirus pandemic is an ongoing pandemic caused by severe acute respiratory syndrome coronavirus-2 or SARS-CoV-2. It was first identified in Wuhan, China in December 2019. The World Health Organisation declared the outbreak of the disease a Public Health Emergency of International Concern on 30 January, and a pandemic on 11 March.  The pandemic has caused severe global economic disruption, including the largest global recession since the Great Depression. It has led to the postponement or cancellation of sporting, religious, political, and cultural events, widespread supply shortages exacerbated by panic buying, and decreased emissions of pollutants and greenhouse gases. 

In economics, a shock is an unexpected or unpredictable event that affects an economy, either positively or negatively. They generally have 4 consistent features –

1. An economic shock is a single or short-term event. By its nature, this event breeds instability because it results in either costs or gains that have not been predicted and planned for.
2. It is usually large-scale, by which economists mean that the event has to affect the entire economy or close to it.
3. An economic shock is an event that was neither planned nor foreseen. As a result, it causes unexpected changes to the economy which are not accounted for.
4. Many – but not all – economists argue that an economic shock must come from outside the economy, in other words, be exogenous. Something like weather, political upheaval or war would meet this definition.

Economic shocks can be classified in two ways – according to how they impact the economy and according to their origin. They can be divided into –

1. Supply shocks – They are events that make production of a commodity harder, more expensive or even impossible in some cases. For example, a rise in oil prices can make fuel costlier making it hard to use for business purposes.
2. Demand shocks – They occur when there is a sudden change in the pattern of consumer spending from consumers or investment spending from businesses. For example, when there is an economic downturn, households might start trying to save money by sharply cutting down on spending.
3. Financial shocks – They originate from the financial sector of the industry. Since modern economies are dependent on liquidity and credit, they can impact every industry. For example, a stock market crash.
4. Policy shocks – They care changes in government policy that have a major effect on the economy. Fiscal policy is in fact a deliberate economic shock.
5. Technology shock – They result from technological improvements that increase productivity. For example, the introduction of computers and Internet technology and its impact on every industry is an example of a positive technology shock.

In India, the pandemic was a rare quadruple economic shock. It affected demand and supply and was both a financial and policy shock as well. As the quarantine and lockdown occurred, most people began avoiding the consumption and purchase of non-essential goods thus bringing down spending – negatively affecting demand. The production processes of most goods were affected and a lot of articial supply shortages were created due to panic buying. Thus supply shock also occurred. The pandemic resulted in a number of financial changes – such as many firms being unable to operate, many jobs being lost and an unprecedented crash of the stock market with the Asian Development Bank estimating a loss of US$29.9 billion to India’s economy. Thus it caused financial shocks as well. The government put into effect several policies that contributed to the economic shock such as the lockdown, the shutting down of several industries and several relief packages released to the public including the most recent ₹20 lakh crore package. Thus it is clearly a policy shock as well.

Other major effects on the economy include –

• Companies relying on sales in China and other affected markets may find it difficult to survive. This is particularly true for small and medium sized firms.
• The travel industry and businesses connected to it like tourism agencies will suffer a tremendous blow. Many airlines might shut down and their overall revenues will suffer for a long time to come.
• Unemployment will rise due to many people being laid off during the lockdown. Self-employed entrepreneurs and small business owners will be completely reliant on government relief packages and might find it hard to continue operating their business for a long time to come.
• The global recession caused by the pandemic might not end very soon which could lead to the Indian markets suffering as well. The financial markets and the rupee itself might not recover to post COVID levels anytime soon.
• The exports from India will reduce greatly as a result of the pandemic. Imports will also be reduced and India will be expected to increase its self-reliance. The ‘Make in India’ campaign is likely to see a surge in promotion.
• The GDP growth rate of India is likely to see a major slowdown due to disruption across all major industries. All ratings agencies either predict a minor growth or negative growth in GDP. Fitch Ratings has estimated the growth rate to be 0.8% while Goldman Sachs expects a -5% growth rate in FY21.

Overall a major recession is predicted in India. There are three patterns of recovery from this recession that have been noticed and are thus possible. These include –

• The V-shape – In this case, output is displaced but growth eventually rebounds to its old pre-crisis path. This is the optimal case and here a disaster is avoided.
• The U-shape – The growth rate recovers, but never rebounds to its pre-crisis path. The gap between the new and old paths shows the indefinetly lost output and the damage done to the economy.
• The L-shape – The growth rate never recovers. In fact the gap between the old and new growth rate path keeps on increasing continuously as more and more output is permanently lost and the economy is repeatedly damaged.

Thus in the light of this pandemic, given the changes that have already happened, we can only work hard for a V-shape recovery, hope for atleast a U-shape recovery and pray that we avoid the worst case scenario of a leaking ship economy i.e. the L-shape recovery.