Covid-19 pandemic has cast a long shadow on the economies across the world. This is a black swan event that has brought disruptions across all the segments of the economy. Be it demands, supplies or the financial systems every thing has been disrupted. It has impacted individuals, governments and the economies across the world all at the same time.
Most of the crises in the past had either demand shock, supply shock or finance shock. This is perhaps the first crisis that has hit all the three together. Another important thing is that most of the crises in the past had impacted either one or two of the primary, secondary and tertiary sectors. Covid-19 has impacted all the sectors – primary, secondary as well as tertiary.
Normally crises are limited to some country or the region. For example, the Asian financial crisis was limited to Asian countries, Lehman Brothers crisis was limited to the United States. But this is the first crisis that has hit the individuals, governments and the economy as a whole globally all together.
Snowballing impact of Covid-19 is going to be enormous. No economy is going to be untouched from this crisis. This is going to create problems across the sectors and the economies.
Real GDP Growth Rates* Source: Economist Intelligence Unit (EIU)
Chances of global recession are high. The global economic growth was already under pressure even before the Covid-19 outbreak. All the major economies witnessed slower growth in 2019 when compared with the previous year. GDP growth of the world’s largest economy United States slowed to 2.3 per cent in 2019 from 2.9 per cent recorded in 2018. In 2020 the GDP of the United States is estimated to shrink by 2.8 per cent, according to the Economic Intelligence Unit (EIU).
European economies have been shattered due to the Covid-19 outbreak and estimated to witness major contraction in the GDP. Germany’s economic growth declined from 1.5 per cent in 2018 to 0.6 per cent in 2019. The Europe’s largest economy is estimated to shrink by 6.8 per cent in 2020. The economies of the United Kingdom and France as likely to witness a contraction of 5 per cent while the Italy’s GDP is estimated to slump by 7 per cent.
Japan’s economy is estimated to contract by 1.5 per cent. Japan had posted a growth of 0.3 per cent and 0.7 per cent in 2018 and 2019 respectively.
As per the Economic Intelligence Unit, the Indian and Chinese economies would also witness a sharp drop in growth. However, both these economies would remain in positive and technically won’t fall in the category of recession. India’s GDP growth dropped from 6.7 per cent in 2018 to 5.3 per cent in 2019. The growth is expected to slump to 2.1 per cent in the current year. Economic growth of China is projected to plummet to 1 per cent in 2020 from 6.1 per cent recorded in 2019 and 6.7 per cent in 2018.
The global economy is going through one of the worst crises. Previous crises had also taken a huge toll on the global economic growth. The global GDP had contracted by 8.4 per cent during the World War I and by 6 per cent during Spanish flu 1918-20. Due to Covid-19 the global GDP is estimated to contract by 2.2 per cent.
As per a report released by the United Nations Department of Economic and Social Affairs, the global economy is likely to shrink by 1 per cent in 2020. In its previous forecast it had projected a growth of 2.5 per cent.
India Specific Issues
There are certain India specific issues. In India, the medical infrastructure is weak. If the Covid-19 outbreak spreads in rural areas it would not be possible for us to manage it given the condition of our medical infrastructure in rural areas.
Indian economy is largely informal. Due to the Covid-19 informal sector has stopped functioning. This is leading to job losses and may lead to extreme poverty. People are not getting food to eat. There is a huge migrant workforce. There is a constant flow of workers from the villages to the cities. Due to the Covid-19 crisis such workers are forced to go to the villages. Now the problem is what will they do in the villages. Movement of workers is very important. If the workers are stuck in the cities then the works in the rural India would get impacted.
The condition of employment generation has been very poor over the past several years. There is huge unemployment. Covid-19 crisis has further aggravated the problem of unemployment.
Real Growth (per cent)Source: Economic Survey & Media Reports
The situation of the Indian economy was tough even before the Covid-19 outbreak. The GDP growth, which was 7.2 per cent in 2017-18 came down to 4.7 per cent during the October-December 2019 quarter. In January-March 2020 quarter it is unlikely to touch even 4 per cent. So the growth rate for 2019-20 financial year is expected to be in the range of 4 to 4.5 per cent.
There is a consistent decline in the GDP growth. In 2017-18 it was 7.2 per cent. It came down to 6.8 per cent in 2018-19 and estimated to slump to 4 to 4.5 per cent in 2019-20.
There is decline in all the major components that form the GDP. The rate of growth of private consumption dropped to 5.86 per cent in the third quarter of 2019-20 from 8.1 per cent in FY 2018-19. Investments and exports both are in the negative. Fixed investment declined by 5.16 per cent during October-December 2019 quarter. This had increased by 10 per cent in 2018-19. Exports dropped by 1.4 per cent during the third quarter of 2019-20. It had posted an increase of 12.5 per cent in FY 2018-19.
Only the government expenditure has been high. It increased by 11.8 per cent during the October-December 2019 quarter. Can a high government expenditure help sustain GDP growth? The answer is, no! There are limitations. The government expenditure make up only 10 per cent of the GDP. So the government expenditure can impact only 10 per cent. The real spike in growth is possible only through private consumption which contributes nearly 50 per cent to the GDP. Another important factor is investments that account for 29 per cent of the GDP. Exports account for 11 per cent of the GDP.
In order to revive the economic growth it is imperative that measures are taken to boost investments and private consumption. Due to Covid-19 non-essential consumption has dropped significantly.
There are limitations to the government expenditure also due to the drop in tax collections. Tax collections dropped to Rs.1,504,586.93 crore during the FY 2019-20 as per the revised estimate from the budgetary estimate of Rs.1,649,581.91 crore. This decline is largely due to a sharp drop in the collection of corporate tax and union excise duty.
For the current fiscal 2020-21 the government has set a target of Rs.1,635,909.13 crore tax collection. Given the current economic scenario it is not difficult to assume that this collection is going to be substantially lower. The shortfall in tax collection and higher government expenditure is likely push the fiscal deficit to at least 8.5 per cent. High fiscal deficit would put extreme pressure on inflation and currency.
Brace for the Long Haul
The Coronavirus crisis is going to last longer. This is not a 3 week or five week problem. This is going to last longer. It may linger for two years. In fact, we have to brace for a long haul. There is huge disruptions across the sectors. Demands have fallen sharply. Supply chains have been disrupted. Demands for energy and commodities have shrunk. The recovery is not going to be V shaped, rather it is expected to be U shaped.
There is no going back to normal for a foreseeable future. If anybody thinks that things are going to get normal in a few months. They are naive.
The highest priority should be to help the poor people have become jobless due to the lockdown. There is need to spend on vulnerable population, especially migrant workers and poor. The government has already taken a good step to help this section of the society by announcing relief package of Rs. 1.7 lakh crore.
MSMEs are staring at mass bankruptcies due to the Covid-19 crisis. The government must act to save the small businesses from falling into bankruptcies. Some of the measures that could save MSMEs in this time of crisis is enhanced credit limits, cash flow financing and immediate release of dues from government and PSUs.
It must be ensured that no large profit making corporate remove workers. Ensuring jobs for the workers are critically important to revive private consumption. No job losses should be allowed in big companies.
The RBI, banks and the government must work together to ensure that the housing market does not collapse. Most of the loans to the small businesses are loan against property. If the small businesses go bankrupt it will have huge impact on the housing market. The RBI has announced EMI moratorium for three months. This must be increased to at least one year. The age limit for repayment of the loan should be enhanced to 75 years.
All the major economies across the world have announced relief packages targeting at the small businesses and protecting jobs. The Indian government should also come up with relief package to protect the small businesses and jobs.
Increase in the government spending is bound to put pressure on fiscal deficit and inflation. The RBI should directly buy government bonds to fund deficit. The central bank should substantially lower policy rates – repo rate and reverse repo rate, CRR – in order to boost liquidity in the system.
There is need to create a credit guarantee fund for existing housing loans and loan against property to avoid mass scale distress sales resulting in collapse of housing and property markets.
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