Economic Impact Of Covid-19 – A Case Study Of India

Author: Baglekar Akash Kumar[1]

Abstract

Economy plays a pivotal role in the human life right from his cradle to cremation and COVID-19 has proved to be disastrous for not only the Indian economy but to the entire world economy in such a way that the poor is compelled to fall furthermore into the vicious circle of poverty, besides making the lives of the middle classes vulnerable.

The unbearable but necessary nation wide lockdown is being implemented to break the chain of the pandemic and to save the lives of individuals. This sincere efforts to save the lives has thrown the livelihood of the people out of gear and in turn is breaking their dreams of living a decent livelihood. The Central and State Governments through their financial packages are trying to mitigate the sufferings of people, but still the misery unfortunately continues.

The brunt of COVID-19 pandemic is already being felt by the Indian economy. In days to come, it would further increase until and unless stricter and stiffer measures are not taken by all the stakeholders of the government.

Hence, through this article the author aims to discuss the present as well as the future impact of the COVID-19 pandemic on the Indian economy by focusing on all the areas where the economy has its roots and the changes that this pandemic might bring into the lifestyle of the people which will have direct impact on economy and further will try to suggest viable solutions to mitigate, if not eradicate, the ill-effect of COVID-19 on our economy.

KEYWORDS:- COVID-19, INDIAN ECONOMY, MICRO, SMALL AND MEDIUM ENTERPRISES (MSMEs), WORKERS.

Background

As far as origin of the SARS-CoV-2 is concerned, there is cleavage of opinion between two groups, wherein one group of people claim that the disease is a ‘Zoonotic’, which means that it got transferred to humans from the exotic animals sold in the wet markets in Wuhan, China and had later become ‘Anthroponosis’, (spread of virus from human to human)[1].

Then there are other section of people who subscribe to the view that the COVID-19 pandemic was the result of “biological warfare going wrong” in Wuhan institute of virology lab[2].

Whatever may be the reason behind the origin of the pandemic, the result of it is the destruction of mankind where the Central and State Governments were caught between the devil and the deep sea (i.e., either to save lives or livelihood).

The conscious choice of saving lives resulted in the disfigurement of already defaced Indian economy. An economy is a complex system where all parts are connected and if any part becomes weak, it cannot function. Hence, the discussion on the economic impact on COVID-19 becomes the order of the day.

Sector-wise impact

In economics, the four factors of production are land, labour, capital and entrepreneur and the three sectors which contribute to the Gross Domestic Product (GDP) of the nation are agricultural sector, industrial sector and service sector.

Therefore the economic impact on the pandemic will be assessed through these sectors.

Agricultural Sector

Agricultural sector occupies an important place by providing basic necessary food and non-food products for population, raw materials for industrial development.

Even though the contribution of agricultural sector to the Gross Value Added (GVA) was mere 16.5% in 2019-20[3], the occupation of the majority of Indian population is still directly & indirectly related to agricultural activities and the worst affected sector due to COVID-19 pandemic after the industrial sector is the agricultural sector.

To control the pandemic spread, lockdown was imposed and this imposition of lockdown has resulted in bringing the agricultural sector to almost halt. It would be apt to mention that the Government has allowed the farmers to carry out farming activities, but still the effect is being felt as the period between March to May is for harvesting of Yasangi (Rabi) crops and also to make ground ready for upcoming Vana kalam (Kharif) season.

This is labour intensive job and the labourers are not available and even if few are ready to work the farm-owners do not have money to pay them wages. If somehow few of the farm-owners who are hiring the labour are not able to send their raw materials to the industry because industries are closed and the transport is not easily available. After crossing all the hurdles, when they go to sell the produce there is downslide in the demand for many farm products among the consumers because everyone is using the limited money available with them very consciously.

To reduce their burden, certain State Governments like Telangana State Government have promised to purchase the produce till the last grain directly from the farmer, which is providing a sigh of relief to at least few of them. But still the impact is there because due to shut down of industries – fertilizers, pesticides, seeds and other essential commodities which are required for farming sector are not readily available.

There are other areas in this primary sector like horticulture where there is no demand for flowers as marriages, religious and other social ceremonies are totally stopped and even when these activities resume in near future after pandemic ends totally, one cannot expect the same grandeur due to trimmed pockets of the people.

The grapes crop farmers are the worst affected because due to the lockdown the sale of liquor has been prohibited leading to closure of alcohol industries leaving no takers for grapes specially grown for making of wines and spirits. The alcohol industry due to its crazy demand among almost all classes of people is the most revenue generating industry even for the State Governments, but the pandemic has taken a heavy toll even on it.

Besides the above, tea-growers, coffee plantations and almost every crop grower is suffering due to the lockdown. Added to their misery is the debt taken by the farmers form both the institutional and non-institutional sources. In case of institutional sources, Reserve Bank of India (RBI) has provided some respite by allowing three-months moratorium from paying loans, but this moratorium period interest will be calculated in later instalments, which will anyway burden them. Anyhow for the persons of agricultural sector, the demon is non-institutional sources like private money lenders who charge exorbitant rate of interest on the loans and these people are the major reasons behind rural indebtedness and suicide by farmers and the COVID-19 situation is making matter worse for them.

Furthermore, as warned by the United Nations Food and Agricultural Organisation (FAO)[4], the impact of COVID-19 is looming ‘food crisis’ because of panic buying by the elite class, export restrictions imposed by the countries and disruption in production & supply chain.

Industrial Sector

The Industrial sector is cheek by jowl with the agricultural sector because majority of the raw materials from the agricultural sector becomes finished product in the industries and lion’s share in the industrial sector is of MSMEs who have suffered a lot these days due to the COVID-19 pandemic.

A majority of India’s unorganized and unskilled force is employed in the industrial sector who depend on daily work in order to get wages for their survival and the contribution of this sector to GVA of India is upto 29.6%[5], thereby signifying its presence for India’s economic development.

But the effect of lockdown has made this sector the worst affected of all the sectors leading to closure of the establishments, laying-off and non-payment of wages by the employers to the employees. This saw the exodus of the migrant workers and due to closure of all the means of transport, they were compelled with travails of walking bare foot stoically to their native places by risking the scorching summer with no guarantee of basic food and safe health for their survival.

To ensure that the workers get full wages in spite of the lockdown, the Union Home Ministry has directed the employers to pay full wages to their workers during the lockdown, but the owners of certain commercial establishments challenged this order in the Supreme Court by arguing it to be arbitrary and violative of Article –14 (right to equality) because when there is no work, there cannot be any right to claim full wages[6]. This argument, regrettably for the workers, is plausible because it is the well settled principle of law that during lay-offs the employer is liable to pay only 50% of the wages to his employees[7].

In this sector, the most affected would be the ‘automobile industry’ which was already on a slow graph of sales since the beginning of the last financial year 2019-20 and COVID-19 will further drive-it-down to hit rock bottom in the market. Adding to their misery is the diktat of the Supreme Court which has directed the compulsory sale of only that vehicles which comply with Bharat Stage – VI (BS-VI) standards from April 1, 2020. It is double whammy for them since the already manufactured BS-IV standard vehicles are lying in the showrooms because of lockdown and the Apex court’s direction is just adding wrinkles to them.

The other worst affected are the ‘textiles and footwear industries’ which ensures the major chunk of contribution to the Indian economy. The immediate halting of the production and sale of textiles and footwear in view of containment measures is contributing badly to the Indian economy.

Increase in costs of Iron, steel, cement and other ancillary materials used for construction of buildings, dams, roads, etc. will impel the individuals and the Government to think twice before taking up any construction activities.

To pull the MSMEs out of the ditch, the RBI provided liquidity of Rs. 50,000/- through Targeted long term repo operation (TLTRO), but it has seen poor response from the banks[8] as chances of repayment of loans remain very bleak.

Service Sector

Ever since India introduced the LPG model (Liberalization, Privatization and Globalization) on 24.07.1991, the service sector (also called as tertiary sector) grew by leaps and bounds and its contribution to the country’s GVA in 2019-20 is 55.3%[9]. This is one such sector which had the potential of taking India towards its dream of becoming the $5 trillion dollar economy by 2024, but the stroke of COVID-19 has dashed all the hopes of the world’s fifth largest economy like pack of cards and now the situation is such that the components of this sector are being largely blamed for the spread of this virulent disease world wide.

Starting with the transport and tourism sector, its contribution is 10% of India’s Gross domestic product (GDP)[10] and is the sector with potentiality of keeping India’s varied rich heritage at the top place. But the impact of COVID-19 has been felt very high on this sector for the reason that SARS-CoV-2 which started in China travelled across the whole globe including India through the transport department (i.e., beginning through the air travel from the persons who went abroad and spreading in the community through railways and road transport). Hence, the nation is witnessing the never before complete ban on travel and tourism. This is going to cost very dearer to the tourism department[11].

The ‘aviation industry’ which was already suffering due to the slowing economy will go further into doldrums after the pandemic ends. The chances of the surge in this sector is very bleak with people choosing to travel scarcely on very important purposes where their physical presence is necessary else all other activities will be carried out by virtual means as it is happening now. The plans of the Government of India to sell away ‘Air India airlines’ might not find potential buyers.

The ban on travel has immediately impacted on ‘hospitality sector’ where hotels and restaurants are closed down. Closer to it, the ‘foreign exchange industry’ is also feeling the heat of the COVID-19 where April to May being the peak revenue generation period due to holiday season and travel to the western countries by the Indians.

Further, the ‘entertainment industry’ that has been closed down will eke out the livelihood of small artists, musicians and other people indirectly employed by the cine industry.

With no sports activities being held, particularly the cash-rich Indian Premier League (IPL), the families dependent on ‘sports industry’ too are suffering.

Investment companies may not see ‘major investments’. There may be reduction in ‘fixed deposits’ in the banks and also chances of people opting for ‘insurance’ are very slim due to more expenditure than income which will result in less or no savings at all.

The export of Information Technology (IT) employees by India may see reduction as world countries find it difficult to give employment to their own citizens and already India’s largest importer of IT employees, the United States of America (USA) has suspended immigration for 60 days[12]. This immigration suspension by President Donald Trump may not impact too severely to India for the reason being so that India has itself imposed a travel ban to check the spread of pandemic, but if the suspension would still remain after the lockdown ends, it would sound death knell for India’s balance sheet.

Other impacts

As economics is entwined with social science, the break on economy is also leading to various social problems as due to lack of financial resources people are psychologically getting affected and some of the head-honcho men are venting out their frustration on the hapless woman in the house which is leading to surge in domestic violence cases[13] and the hunger pangs is pressuring the youth to resort to illegal means like vishing.

The other major impact of the COVID-19 would be increase in the ‘cost of doing business’ where the Government may direct all the employers to adhere to new safety and hygiene standards.

The future dangerous economic impact of COVID-19 on the poor would be due to the decrease in dietary intake. There would be increase in malnutrition rate which will impact on education and health of the poor children.

With the loss of employment in all the sectors, the people will be left with the option of using the money very cautiously by sacrificing their enjoyments and luxuries.

Besides the above, there are countless economic ramifications of the COVID-19 pandemic on Indians, which will only spread in future to come as the virus is presently spreading.

Positive impact

On the other side, few positive economic impacts of COVID-19 will be the increase in e-shopping, digital jobs, online conducting of educational events, preference to work-from-home by IT and ITES employers and change in business pattern by all the sectors.

Legal profession may not get affected and indeed post-lockdown, there may be increase in filing of domestic violence cases, specific performance of contracts case, etc.

Decrease in prices of crude oil due to miscellaneous reasons is heavily benefiting oil importing country like India.

The RBI is also playing an instrumental role by trying to mitigate the damages faced by the economy.

Suggestions

Brooding over the gruesome impact of COVID-19 on the Indian economy is not the solution to the problem, but constructive action with cooperation of every willing person of the society might solve the puzzle of how to kick-start and stimulate the economy. Hence, few illustrative if not exhaustive, suggestions are given herein for a practical approach to restart the economic activity:-

The Government of India should issue listed Indian rupee denominated GDP linked bonds that are callable from later period. This will benefit the Government to pay a lower interest during years of slow growth and vice versa and also to effect partial repayment during high-growth years.
1. As the States are taking central stage to combat the pandemic, they are spending all their amounts with no revenue, hence there should be relaxation in Fiscal Responsibility & Budget Management (FRBM) Rules by invoking ‘escape clause’ under the FRBM Act to allow States to borrow more.
1. The Government should take for itself the risk of MSMEs employers by contributing to Provident Funds of the employees and taking credit guarantee of this sector.
1. To ensure bulky purchase of goods & services by consumers after the lockdown ends, credit facilities should be provided by the traders with interest free Equated Monthly Instalment (EMIs). This will benefit ensure continuity in business.
1. Government nod on Foreign Direct Investments (FDI) from all the countries should be made mandatory because in spite of recent restrictions on FDI from neighbouring countries, what happens is they may come from their branches located in other countries.
1. The healthcare and the education sector should be nationalized with increase in budget for them.
1. Deferment of credit rating by rating agencies for at least one year.
1. There must be focus on renewable sources of energy.
1. The major lesson to be learnt is not to depend on developed countries for our economic upliftment.

[1] Student, 4^th year, L.L.B (5YDC), University College of Law, Osmania University, Hyderabad.

[1] COVID-19 coronavirus epidemic has a natural origin, https://www.sciencedaily.com/releases/2020/03/200317175442.htm (last visited: 28.04.2020).

[2] Coronavirus may have originated in lab linked to China’s bio warfare, https://www.google.com/amp/s/amp.washingtontimes.com/news/2020/jan/26/coronavirus-link-to-china-biowarfare-program-possi/ (last visited: 28.04.2020).

[3] Economic Survey 2019-20, https://www.prsindia.org/report-summaries/economic-survey-2019-20 (last visited: 28.04.2020).

[4] Coronavirus presents ‘looming food crisis’, FAO warns, https://allianceforscience.cornell.edu/blog/2020/04/coronavirus-presents-looming-food-crisis-fao-warns/ (last visited: 28.04.2020).

[5] See supra note 4.

[6] Plea in SC Challenges Validity of Government Order Directing 100% Payment of Wages During Lockdown By Commercial Establishments, https://www.google.com/amp/s/www.livelaw.in/amp/top-stories/plea-in-sc-challenges-validity-of-government-order-directing-100-payment-of-wages-during-lockdown-by-commercial-establishments-155433 (last visited: 29.04.2020).

[7] See Section – 25C of The Industrial Disputes Act, 1947.

[8] RBI receives poor response for first auction under TLTRO 2.0, https://www.google.com/amp/s/m.economictimes.com/markets/stocks/news/rbi-receives-poor-response-for-first-auction-under-tltro-2-0/amp_articleshow/75322819.cms (last visited: 29.04.2020).

[9] See supra note 4.

[10] Tourism accounts for 10% of India’s GDP, https://www.google.com/amp/s/www.moneycontrol.com/news/india/data-story-tourism-accounts-for-10-of-indias-gdp-heres-what-helped-attract-tourists-3433391.html/amp (last visited: 29.04.2020).

[11] India’s tourism sector may lose Rs. 5 Lakh Cr, 4-5 Cr jobs could be cut due to COVID-19, https://www.google.com/amp/s/m.economictimes.com/news/economy/indicators/indias-tourism-sector-may-lose-rs-5-lakh-cr-4-5-cr-jobs-could-be-cut-due-to-covid-19/amp_articleshow/74968781.cms (last visited: 29.04.2020).

[12] Donald Trump suspends key routes to US immigration for 60 days, https://www.google.com/amp/s/amp.ft.com/content/7060ba17-03b5-48d6-94d1-37c6d99c5f0a (last visited: 29.04.2020)

[13] Domestic violence on rise in Lockdown period: NCW, https://www.google.com/amp/s/www.deccanherald.com/amp/national/domestic-violence-on-rise-in-lockdown-period-ncw-826498.html (last visited: 29.04.2020).