India’s lockdown will further impact its already-slowing economy

According to CMIE data, as of 5 April, the unemployment rate had spiked to 23.38 percent from the 8.41 percent recorded on 22 March. Anushree Fadnavis / REUTERS
08 April, 2020

The countrywide lockdown announced by the prime minister Narendra Modi on 24 March is leading the Indian economy into troubled waters. As thousands of daily-wage labourers across the country stare at an uncertain future—with the lockdown bringing economic activity in India to a near-complete halt—their avenues for fruitful employment and job security look dim. 

Not surprisingly, a number of credit rating agencies have cut down their forecasts of India’s gross domestic product, or GDP, growth rate. Moody’s expects India’s GDP growth rate to contract to 2.5 percent in calendar year 2020 compared to their estimated five percent growth rate for calendar year 2019. Another rating agency, Fitch Ratings, has said that for the financial year 2020–21, India is likely to clock a GDP growth rate of two percent, the lowest in the last 30 years. Similarly, Crisil Ratings has slashed India’s GDP growth rate for the financial year 2021 to 3.5 percent from the 5.2 percent expected earlier. According to a forecast by Care Ratings, based on the assumption that 80 percent of all production activity is stopped during the 21-day lockdown period, the economy will lose Rs 35,000 to 40,000 crore on a daily basis, cumulatively taking the total loss to anywhere between 6.3 lakh crore and 7.2 lakh crore. 

Fresh investments have also tanked. Figures from the Centre for Monitoring Indian Economy, a business information company, state that compared to the quarter ending December 2019, the total new private and public investments have slumped by 41 percent, to 2.91 lakh crore, in the quarter ending March 2020. The CMIE’s data also indicates that in the same quarter, the total value of stalled investments has reached Rs 13.9 lakh crore, the highest since 1995. Meanwhile, the situation for labourers and workers seems dismal too. According to the CMIE data, unemployment for the month of March 2020 rose to 8.7 percent, the highest recorded unemployment rate in the last 43 months.

In another set of data released this week, the CMIE has calculated the unemployment rate from 22 March to 5 April—the period that witnessed a major impact of the lockdown on the labour force. The data showed that as of 5 April, the unemployment rate had spiked to 23.38 percent from 8.41 percent recorded on 22 March.

To understand the impact of the lockdown on the Indian economy, I spoke to Radhika Pandey, a fellow at the National Institute of Public Finance and Policy, or NIPFP, a research institute under the finance ministry. “The Indian economy was already passing through a period of slowdown,” she said. “With the COVID-19 forcing a complete lockdown, any possibility of a rapid recovery in the near future looks grim.” She added, “The impact of the novel coronavirus which was initially felt as a supply shock due to disruption of imports from China has now extended to a broad-based demand shock due to lockdown and social distancing. Consumption of non-essential items will be adversely impacted in light of the lockdown. The informal sector will be hit and the MSME”—medium and small and micro enterprises—“sector which works on tight margin, will feel the impact of demand destruction.”

When asked if the economy is headed for a recession, she said that one does not know the “trajectory of the shock” and that whatever analysis is being done at present is “premature.” Pandey continued, “Recession in technical parlance implies two quarters of negative growth. While we would see a growth slowdown, a recession looks a distant possibility. When the lockdown is lifted, there is a possibility that demand will bounce back. The path to recovery will however be more difficult and uncertain as compared to the pre-COVID situation.”

NR Bhanumurthy, a professor at the NIPFP, told me that the lockdown is “absolutely going to be a large shock for the economy” but also cautioned that where the Indian economy goes from here on will depend on the handling of the coronavirus crisis.

“Now, if there is any reduction in infections from coronavirus, then you can see a sharp recovery in economic activity,” he said. “It all depends on when and how this virus will play out. It is going to be difficult at this stage to say whether India will go into recession but one should not be thinking of it as a ‘business-as-usual’ situation any more. It will be a huge shock to all the activities and there could definitely be negative growth rate in some sectors.”

Pandey added that both the organised and informal sectors of the economy could see heavy attrition of employees and workers. “Major employment generating sectors such as construction, real estate, hospitality, tourism have cut down on their services leading to unemployment,” she said. “The worst hit are the small firms and their employees. Many migrant workers were seen thronging railway stations to go back to their home towns as they face job losses. Even in the organised sector, while the government has issued advisory to enterprises not to cut salaries and lay-off workers, given difficult conditions they may have to lay-off their employees.”

As a damage-control measure, on 26 March, the union finance minister Nirmala Sitharaman announced a financial relief package for those whose lives have been severely impacted by the lockdown. The total outlay for the scheme is Rs 1.7 lakh crore. It aims to extend help to migrant workers, sanitation workers, Accredited Social Health Activists, or ASHA workers, as well as the urban and rural poor via direct benefit transfers to their bank accounts and through food rations.

Ravi Srivastava, a former professor of economics at the Jawaharlal Nehru University, told me that when it comes to the delivery of relief measures to the intended beneficiaries, the Rs 1.7 lakh crore scheme suffers from a number of impediments. Srivastava noted that the Rs 50 lakh insurance cover provided for health workers under the scheme has vague language and that is difficult to decipher what it exactly entails.

“There are a lot of ifs and buts in the scheme,” he said. “They have announced a special health-insurance scheme. If you read the fine print in the press notification, it seems like an accident insurance scheme. It says that if a health worker faces an ‘accident’ while dealing with a COVID patient then the insurance kicks in. I don’t understand this language. What is the specific coverage that they are trying to provide? There are no details.”

As part of the relief package, Sitharaman announced that for three months, an ex gratia payment of Rs 500 would be credited to women who had Jan Dhan accounts—bank accounts opened under the Pradhan Mantri Jan Dhan Yojna, a national mission for financial inclusion, to ensure access to financial services in an affordable manner. Srivastava said that this sum is too little and added that a number of bank accounts under the PMJDY may be dormant and lead to a situation where the disbursed funds will not be accessible to those on the ground.

Pandey said that the Rs 1.7 lakh crore package is a good starting point that can ameliorate the hardships faced by farmers, labourers, women and other vulnerable sections of the society such as pensioners and the differently abled. However, she also pointed out that the relief measures will benefit only those who have Jan Dhan accounts or are registered under government schemes, leaving a large section of the informal labour force out of the aegis of the relief package. 

“There is a large section of informal labour force who may not have such accounts,” she told me. “Reaching out to such people remains a challenge. The announcement of cash transfer should be followed by mechanisms to ensure that money reaches the needy without undue chaos and crowding. The biggest priority is to bolster the supply chains through procurement and distribution so that essential supplies reach in an uninterrupted manner.”

Over the last several years, the Indian economy under the Narendra Modi government has faced a series of shocks that have pushed it to the brink—from demonetisation to the structural reform of the Goods and Services Tax, which put a large number of firms operating in the informal economy out of business. A widespread sectoral slowdown followed, evident from the six-year low GDP growth rate of 4.5 percent registered in the quarter ending September 2019. This low came on the heels of a consistent fall in the GDP for six successive quarters. The next quarter registered a marginal increase in the growth rate at 4.7 percent. 

On 30 March 2020, Care Ratings released a report which highlighted how the economy was already slowing down, even prior to the lockdown. In the study, the ratings agency pointed out that Gross Fixed Capital Formation, an indicator of investor demand measured as a percentage of the GDP, had fallen to a two-decade low in the financial year 2019–20.  “GFCF is estimated to contract by -0.6% for first time in the past 17 years,” the report said. “This number may be revised downwards as the year end phenomenon of increasing investment in March will not materialize.”

The report also looked at the bank credit offtake—an indicator that depicts the current levels of demand for bank credit in the markets. “The year on year growth in bank credit as on March 13, 2020 was at 6.1%, less than half of 14.5% growth seen in the same period a year ago,” the report said.

Summing up the state of the economy in the financial year 2020, the report noted, “Indian economy is seeing a slowdown phase with lacklustre economic growth estimated in FY20, which is estimated to be lowest in a decade, i.e., since 2008-09 financial crises.” It added, “Main drivers of low growth are two sides of same coin—subdued investment climate and muted consumption demand. Investment and consumption are intertwined. Investments create jobs, which in turn provide income to individuals and lead to increase in consumption. However, with contraction in investment, job creation is affected leading to low pace of job creation in the country. This constrains consumption by the people. As a result, economic growth remains weak. In order to break this vicious cycle, investments need to be revived.”