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Photo: Mint

Opinion | The covid-induced risks to Indian economic outlook

  • Some industries have been affected more than the others have. Travel industries, entertainment and the food sector have been severely hit.

Covid-19 has pushed the global economy to its limits. The global government borrowing are at levels not previously seen in peacetime, post the WW II era. We are certain to face a period of stable deficit, increasing debt while the government takes measures to deal with them. Unlike any other previous economic downturn, the uncertainty is very unusual. It is mainly about i) the virus transmission in India and other countries, ii) optimistic medical intervention, iii) effective social distancing in workplaces and possible future lockdowns, iv) the extent and duration of government support and v) survival of physical and (firm-specific) human capital through covid-19 regime.

The recurrence of covid-19 in other countries as much important as to us in India as it will directly affect our trade with the other nations of the world. Under these circumstances, it becomes increasingly essential to examine some of the macroeconomic scenarios, and cautiously assess the short-term and long-term risks that the Indian economy faces.

Below we present the main-case forecast scenario. This is a plausible setting, conditioned on gradual-to-complete easing of the lockdown across India from mid-August with no significant recurrences of the virus. The risks associated are large, mainly downside risks.

Forecast Scenario

Source: Ministry of Statistics and Programme Implementation, India; and authors’ forecast
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Source: Ministry of Statistics and Programme Implementation, India; and authors’ forecast

Government deficit does increase and the counterpart is that the household surplus increases too. Higher government borrowing (by approximately 39%) is being matched by higher private saving (by approximately 30%), so it is being financed by borrowing from those who are unable to spend. The national balance sheet is therefore, largely unscathed. Nevertheless, a number of things have changed over the last few months and some have been comparatively good.

The inflation rate has fallen and the lockdown measure have been progressively eased. In terms of numbers, GDP per capita during Q1 2020 based on data from Ministry of Statistics, Govt. of India is at 2013 levels, i.e. 3.56 %. However, all industries have been affected by the lockdown. Some industries have been affected more than the others have. Travel industries, entertainment and the food sector have been severely hit.

Risks to short-term outlook:

The key concern is the forecasted 23.63% hit to GDP per capita during Q2 2020 based on data from Ministry of Statistics, Govt. of India. Further, if we have a longer lasting lockdown then the impact can be even bigger. In the main case scenario, we have estimated GDP growth lowered by -5.77 % in 2020. Spending have been largely affected by i) reduced business investment due to uncertainty, ii) reduced exports due to measures in other countries, iii) reduced activity in job-rich hospitality, travel industries, arts and entertainment and iv) disruption in informal economy and related labour force.

In the short run, we therefore expect to witness a spillover effect of the general impact of the lockdown on one sector to another sector. The sectoral spillover will be primarily because of reduced spending and changes in the supply chain and demand for intermediate products. Further, it is unlikely that there will be much reallocation of jobs across sectors in the short term.

Risks to long-term economic outlook:

We can weigh the long-term risks through several channels. First, changes in potential output due to changes in labour supply and changes in productivity. The impact of labour supply can be positive to make up for the lost time or can be negative due to hysteresis. Similarly, the impact of productivity can be positive by the virtue of creative destruction or negative due to lost time.

Second, changes in demand due to effects of i) changes in private sector balance sheet through the crisis (this can be both positive or negative depending on the firm’s sector and performance during the lockdown period), ii) impact of fiscal response to increased government borrowing (this is will an adverse effect), and iii) the impact of spillover from other countries. Third, likelihood of reversal of real interest rates to pre-covid-19 level. It should be noted that ultimately these are determined by global markets.

Lastly, upside risk of inflation that is largely contained by monetary policy permit. More concerning will be falling prices that would lead to a period of debt deflation.

Anandadeep Mandal Assistant Professor, University of Birmingham, UK; and Neelam Rani Associate Professor, Indian Institute of Management Shillong, India. Views expressed are their own.

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