Effect of COVID-19 Pandemic on Indian Economy

To an economy which is already going through high unemployment, the lockdown will add more supply stress, accelerating the slowdown further and jeopardizing the economic well being of millions of people. A complete social and economic lockdown of India for 21 days has severely impacted the supply side of the economy, that is, production and distribution of goods and services, except for the essential items that are allowed. An economy that is already going through rising unemployment, demand depression and lowering of industrial output and profits, all of which is happening together for several quarters now, a supply-side constraint would deliver a big blow, affecting growth prospects and social and economic well being of a large number of people.

While it is not easy to estimate the magnitude of the impact of a complete social and economic shutdown, but it is likely to be far more severe than either the 2016 demonetization or the 2017 GST rollout. Nobody now disputes that those two events gave economic shocks from which the economy had not yet recovered when the coronavirus pandemic struck.

At current, it is a supply-side problem. Both production and distribution of non-essentials have come to a big time halt. This affects at least 55% of the economy. It can even be larger because of previous partial lockdowns by various state governments. It may take a some more months for the final production and the sales to resume.

The impact of lockdown will be felt through several channels, weakening domestic demand, disruption in the financial market, and disruption in the supply chain. All of this would result in declining production and reduction of employees.

Even though the country may not slip into a recession, unlike Europe, the US, or Asia-Pacific that have stronger trade ties to China, analysts believe the impact on India’s GDP growth will be significant. GDP growth in India, is already at a speedy low and any further dent in economy output will bring more pain to workers who have seen unemployment and their wages erode in recent times.

Moody’s Investors Service, sharply slashed its projection for India’s GDP growth in the for year 2020 from 5.3% to 2.5%. Whereas, Crisil warned that there are further risks if the pandemic is not contained by April-June 2020, or if it spreads rapidly in India, affecting domestic consumption, and investment.