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Even as the world remains busy counting the number of deaths caused by Covid-19, another crisis is fast griping countries. Economic activities have come to a standstill prompting international research organisations to warn of a deceleration in the global economy. An analysis by the UN Department of Economic and Social Affairs in early April cautioned that the global economy could shrink by up to 1% due to lockdowns across the globe. It added that the contraction could be even higher if governments fail to provide income support to help boosting consumer spending.

Indian economy 

The emerging economies including India, with a large population, are feared to be among the worst hit by the economic downswing. Indian economy was already under stress with GDP growth decelerating to its lowest in six years in the third quarter of 2020-21 and now the outbreak of Covid-19 is posing new challenges to policy-makers. The first major step, the nationwide lockdown, taken to contain the spread of the pandemic, has brought economic activities to a halt and is affecting both consumption and production and by turn investment. While Indian businesses except a few sectors can possibly insulate themselves from the global supply chain disruption caused by the Covid-19 outbreak due to relatively low reliance on intermediate imports, their exports will suffer as countries across the globe have shielded their borders and private consumption, investment and external trade will get affected due to the spread of this disease.

The lockdown is affecting all the sectors of the economy with varying degrees of severity. The services sector, especially segments such as retail, aviation, tourism, hospitality, and entertainment have been directly and severely hit. The IHS Markit India Services Purchasing Managers’ Index (PMI) fell to 49.3 in March 2020 as compared to 57.5 in the preceding month. The service sector contracted for the first time after expanding for four consecutive months. This fall in PMI was caused by about less than ten days of the lockdown in India. 

The manufacturing sector, too, has suffered. Production shutdowns, labour and supply chain disruptions - especially for companies exposed to international trade – as well as falling consumption have raised serious concerns.

The infrastructure sector has been among the worst hit with stoppages in toll collections, discoms struggling to pay dues and complete shutdown of road and rail transport and of air travel hitting airport operators. The dramatic fall in demand across most infrastructure segments has further compounded the sector’s woes. To add to the distress of the sector, a number of government infrastructure projects are feared to be delayed or shelved for want of funds.

The realty sector, which was already under stress, is feared to see one of the worst years. Housing sales across top seven property markets in India is likely to witness a 25-35% year-on-year drop in 2020 while absorption of office spaces is also likely to dip by 15-30% owing to the impact of the pandemic, according to a report by ANAROCK Property Consultants. In 2019, residential sales stood at around 2.61 lakh units across the top seven cities and may now fall between 1.70 lakh -1.96 lakh units. Likewise, new launches may also witness a 25-30% decline during the same period - from 2.37 lakh units in 2019 to anywhere between 1.66 to 1.78 lakh.

As for consumption expenditure, the sudden stop of urban activities is feared to lead to a steep fall in non-essential goods. The impact on consumption would be even more severe if the supply chain disruption caused by the lockdown were to affect the availability of essential commodities. Possibilities apart, the lockdown itself is directly affecting a large part of private final consumption expenditure (PFCE). According to the Ministry of Statistics and Programme Implementation (MOSPI) sources, about 17.6% of total PFCE in India is accounted for by transport, 9% is accounted for by clothing and household furnishing and another 3% by recreation and eating out. That is, nearly a third of PFCE is being withheld for the lockdown.

Coming to investment, project implementation was already on the decline even before the action taken to contain the spread of Covid-19. According to CMIE, projects worth `764 billion were completed during the quarter ended on March 31, 2020 against `4 trillion worth of completions that were scheduled for the quarter. Project promoters seem to have postponed project completions because the corporate sector’s financial performance in 2019-20 was exceptionally poor. This was before the pandemic. Now that the economy has come to a halt, the investment scenario in the coming days is going to be far grimmer.

The third component of growth - external trade - too does not show a better picture. Covid-19 has made exporters bleed with more than 15-20% of the orders getting cancelled by early April and a major amount of funds being locked up owing to non-payment of dues by large buyers in the US, Europe and West Asia. The magnitude of cancellation of export orders is feared to rise as the spread of the disease continues unchecked.

Ajay Sahay, Director General and CEO of the Federation of Indian Export Organisations, has reportedly said, “The biggest worry for exporters is cancellation of orders, which is close to 50% in certain sectors. Some of the handicrafts, carpet and apparel exporters are reporting even higher cancellations. The forecast is very gloomy.” In several cases, export products that have reached ports are not being allowed to be loaded due to irregular, below-capacity cargo operations.

GDP growth forecasts

With the economic impact of Covid-19 still uncertain, rating agencies are redrawing their estimates of India’s GDP growth for the second time in less than a month. The lockdown has brought down economic activities to a near standstill, which has prompted the rating agency CRISIL to slash its base-case GDP growth forecast for fiscal 2021 to 3.5%.

Despite the Reserve Bank of India's massive actions, India's gross domestic product is likely to contract by 4.5% in the April-June 2020 quarter and will rise by only 2% in 2020-21, according to domestic rating agency ICRA.

Fitch Ratings has slashed India's growth forecast for the current fiscal to a 30-year low of 2%, from 5.1% projected earlier. The agency remarked, “The initial disruptions to regional manufacturing supply chains from a lockdown in China as the coronavirus spread have now broadened.”

Goldman Sachs seems to be even more pessimistic and warns that growth in the Indian economy could fall to levels not seen for decades as key sectors would see a sharp decline in business during the 21-day coronavirus lockdown and a likely staggered exit from those restrictions. Goldman Sachs now forecasts that India’s real GDP growth could fall to 1.6% in FY21 compared to its earlier projection of 3.3%. India’s central bank has, however, restrained itself from forecasting growth figures as the economic equations are changing.

Social impact of lower GDP growth

“Life vs life” is how Kaushik Basu, India’s former chief economic adviser looks at the lockdown and its effect on the poor. In a recent television interview, Basu brought forth the dilemma of imposing long-term lockdown vis-a-vis its impact on the poor. Should the government impose a long-term lockdown to check the spread of the disease shutting down economic activities that would lead to large-scale job loss and deceleration in GDP growth?

 After all, if economic growth suffers, government’s revenue collections too would decelerate and it will not be able to support the daily needs of the millions. Of course, the government can take the alternative route of printing notes to mitigate the crisis situation, as suggested by Nobel laureate Abhijit Banerjee.

How big is the problem? The International Labour Organization (ILO) in its report titled 'ILO Monitor 2nd edition: COVID-19 and the world of work' has warned that about 400 million people working in the informal sector in India are at risk of falling deeper into poverty due to the lockdown and 195 million full-time jobs may be wiped out in the second quarter of this year.

Early estimates of job data, however, indicate that the coronavirus effect may have already left a devastating impact on the economy, sending urban unemployment rate soaring to 30.9%. The overall unemployment rose to 23.4%. The figures, based on the Centre for Monitoring Indian Economy’s weekly tracker survey, have held steady for two weeks now. The latest data for the week ended April 5 shows that estimates on unemployment shot up from 8.4% in mid-March to 23% in early April.

Based on a rough calculation, about 50 million people might have lost jobs in just two weeks of the lockdown, said Pronab Sen, the former chief statistician of India. He added, “Since some may have just been sent home for now, the actual scope of unemployment may be even higher and may show up a little later.”

The figures of GDP growth forecast, job loss or the possible socio-economic impact of the pandemic are based on incomplete data. The actual canvas is changing continuously with entry of new data. The end results would depend on the character and magnitude of Covid-19 spread and the socio-economic impact of the measures taken to combat it.