Covid-19: An Economic Toll Like Nothing India’s Seen For Decades

That the Covid-19 pandemic will extract a huge economic toll on the 2020-21 fiscal year is for sure, looking at how just a few days of lockdown and containment measures in March made a difference to the data.

While fourth-quarter GDP growth came in 3.1%, the slowest since fiscal 2013, estimates for the three preceding quarters were lowered because of which, GDP growth for fiscal 2020 was revised to 4.2% compared with the second advance estimate of 5%.

That’s the slowest since fiscal 2009, which had borne the aftermath of the global financial crisis.

Nominal GDP growth at 7.2% was the slowest since 1971-72. Clearly, Covid-19 has hit when the economy was on a much weaker wicket than anticipated earlier. Private consumption, the bulwark of the economy, slowed down to 2.7%, while investments contracted 6.5% in the fourth quarter.

Weak private consumption and investment sentiment also mirrored in business and consumer confidence indices published by the Reserve Bank of India. On the supply side, agriculture surprised positively by growing at 5.9%.

This time the economic crisis is far deadlier than the global financial crisis and brings with it human misery not seen by many generations. The present crisis combines a complex web of demand- and supply-side interactions. The pandemic first led to a supply shock because the production of goods and services was halted everywhere.

Immediately, the perceived supply shortage may have prompted consumers to hoard, creating excess demand for essentials and curbing the need for non-essentials, which were anyway unavailable. Over a period of time, factory shutdowns and the resultant layoffs and income loss will weigh on demand.

The economic costs of the pandemic are beginning to show up in high-frequency data. The manufacturing and services sector PMI for April came in at 27.4 and 5.4, respectively, which indicates an extraordinary contraction. Exports shrank 60.3% in April, and incremental telecom subscribers and rail freight fell 35% each on-year. Given that India saw the most stringent lockdown in the world according to Oxford University, April could well be the worst month of this fiscal.

So not only will the first quarter of the current fiscal be a washout for the non-agricultural economy; services such as education, and travel and tourism, among others, could continue to see a big hit in the quarters to come. Jobs and incomes will see extended losses as these sectors are large employers.

How deep and how long will the plunge continue has been a tough and a frequently changing call. Despite unprecedented markdown in GDP growth across the world, risks remain tilted to the downside and will stay so until science comes up with a durable solution such as a vaccine against the pandemic.

Countries are experimenting on ways to deal with the Covid-19 affliction, such as a mix of measures to contain its spread and also to deal with adverse economic consequences of containment. India’s strategy seems to be guided by three realities:

1. High population density – thrice that of China – making it more vulnerable to spread.
2. Weak health infrastructure, so if the pandemic goes out of control, it will be a disaster.
3. Limited fiscal space to spend its way out of the hardship.

So far, India has given more weight to the first two factors with limited use of fiscal policy as an offset. The monetary policy is of course doing whatever it can.

The dilemma is that the more we rely on lockdown measures, the greater will be the need to cushion the economy through monetary and fiscal stimuli. India’s large unorganised labour force may have little option but to return to work sooner than later, as the government may not have the fiscal muscle to support all of them beyond a point.

India has had 68 days of lockdown so far. After April, things have been less stringent, with attempts to balance the trade-off and include relaxation clauses, particularly for rural areas, and gradual extension to non-essential items. The third phase lockdown phase relaxed economic activity further by dividing the country into three graded zones with the stringency of containment reducing from red to green. The fourth one gave choice to the states to design their own strategies of lockdown.

Partial relaxations continue to be a hindrance to supply chains, transportation, and logistics. Hence, unless the entire supply chain is unlocked, the impact of improved economic activity will be subdued.

Agriculture appears to be the only beacon of hope this year. We expect agricultural GDP to grow at around 2.5% this fiscal, with risks tilted to the downside. Agriculture and allied activities are not one uniform group – it has different components, each with its own dynamics. This year’s growth will be led largely by crop agriculture and livestock/milk, while fruits and vegetables/horticulture livestock and fisheries will remain relatively weak.

We estimate a 10% permanent loss of real GDP, which in nominal terms would be Rs 20 lakh crore. After the global financial crisis, the loss to GDP in fiscal 2009 was recouped by fiscal 2011 with above-trend 8.2% growth in the next two fiscals. This was achieved on the back of a steroidal monetary and fiscal push, which had serious side effects of high inflation and deficits.

Our calculations show that even with a V-shaped recovery in fiscal 2022 and near 7% annual growth for the next two years, India’s GDP will not catch up with its pre-Covid-19 trend value even by fiscal 2024. Catching up would require an unprecedented 11% growth in GDP per year for the next three fiscals.

The eventual size of India’s fiscal stimulus will be shaped by how pandemic containment progress.

We may not have fiscal bandwidth to ape advanced countries, but the current fiscal spending commitment of around 1% of GDP is clearly inadequate. These unprecedented times require policymakers to look beyond the conventional fiscal space for resources.

Dharmakirti Joshi is Chief Economist, CRISIL.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.