The Indian government imposed a stringent nationwide lockdown in March, as a means to flatten the Covid-19 curve. The lockdown was to buy time for the government to prepare various health measures to deal with the Coronavirus outbreak. Unfortunately, the primary side-effect of the lockdown was that it dealt a massive blow to the economy.
The Indian economy had been showing signs of slow growth even before the Corona pandemic. With the stringent nationwide lockdown, the economy has derailed from its growth track. India’s GDP is set to become the lowest in four decades – it is expected to contract between 5% and 10%.
According to recent reports, the Coronavirus induced damages on the economy are expected to be long-lasting. Assuming that India grows at a nominal rate of 7% between 2022 and 2024, the permanent loss to the economy is estimated at 10%. To overcome the impacts, India has to grow at a whopping 11% over the next three fiscal years – something that has never been done before.
How will India's economic recovery look like post-Covid-19?
It's crucial to understand that several factors play a role in determining the shape of the recovery. The significant factors that impact economic growth post-Covid-19 are – the overall duration of the pandemic, the release of a vaccine, the effect on household incomes and jobs, the fiscal stimulus provided by the government, etc.
Additional Reading: How Will India's Economy Be In 2020?
Possible Shapes of Economic Recovery
1. Z-Shaped Recovery
For instance, let's imagine a scenario where the economic disruption was only temporary, and people's incomes were not impacted. In this case, the economy will take a steep “Z-shaped” growth curve post lockdown.
For example, suppose people were not able to visit salons, movie theatres, or purchase new cars, home appliances during the lockdown. In this scenario, these expenses happen simultaneously post lockdown, leading to rapid growth. However, note that a Z-shaped quick recovery is possible only when people's incomes are not affected by the pandemic. However, that doesn't seem to be the case in India.
2. V-Shaped Recovery
Let's now consider a situation where the economic disruption lasts for a more extended period – say several months. In this situation, several activities are likely to be forgone instead of being postponed.
In this scenario, assuming that the majority of people didn't lose their jobs and face a cut in income, the economic growth will take a "V-shaped" recovery pattern. In this case, the growth recovers sharply and returns to pre-Corona levels quickly.
3. U-Shaped Recovery
Imagine a scenario where the recovery takes a longer time – due to loss of jobs, people facing income cuts, and using their savings to make ends meet. In this situation, the economy will take a "U-shaped" growth. After the initial fall, it takes a long time for the recovery to gain momentum. If the recovery takes an extended time, then the curve is known as an "elongated U-shaped" recovery.
4. W-Shaped Recovery
If we assume that the second wave of the Corona outbreak hits us, then the recovery is likely to follow a "W-shaped" path. It combines two periods of "V-shaped" recoveries.
5. L-Shaped Recovery
This is the final possibility and the most dreaded. In this scenario, the economy fails to bounce back to pre-Corona levels even after years. It indicates a permanent blow to the economy.
What will happen to the Indian economy post Coronavirus?
Most economists agree that the Indian economy will contract in the current fiscal year. However, they have differing opinions on the extent of contraction. The range of contraction varies from -4% to -14%. Most economists predict that the national economy is likely to tank this year. They anticipate that economic recovery will commence only in the next fiscal year 2021 – 2022.
Pronob Sen, the former Chief Statistician of India, predicts that the economy will not just contract for the current fiscal year, but also the following year. He predicts that the economy will not be able to reach the pre-2019-20 levels, even by 2023-24.
|Year||Predicted GDP Growth Rate in %||
Predicted Absolute GDP in Rs. Trillion
|2019 – 20 (pre-Covid-19)||5%||207|
|2019 – 20 (post-Covid-19)||3%||203|
|2020 – 21||-12%||178|
|2021 – 22||-9%||163|
|2022 – 23||6%||172|
|2023 – 24||6%||183|
*Source: Pronab Sen, Ideas for India
Additional Reading: How to Manage Your Money During COVID 19 Crisis?
Challenging Times Ahead
When the nationwide lockdown was announced at the end of March, everything was shut down – malls, theatres, restaurants, shops, transport, schools, and colleges. This brought domestic consumption that accounts for 57% of GDP to a grinding halt. With layoffs, pay cuts, and lack of shopping and travel, household consumption was eroded entirely.
The domestic consumption patterns during the lockdown can be better understood by classifying it into two categories. Non-discretionary spending includes groceries and other essential items. This category was not impacted during the lockdown and continued as before. Discretionary spending includes non-essential goods like consumer durables, clothing, automobiles, and others. This category was hit severely during the lockdown due to the uncertainty regarding jobs and incomes.
Right now, the country is undergoing several phases of opening up. This has provided much-needed relief to businesses – small and large. Despite the unlocking, the domestic demand is expected to remain weak for the rest of the year.
Credit rating agencies predict that domestic consumption will resume next year. Still, there will be a marked change in spending patterns. Households will resort to cautious and limited spending, while businesses will limit or delay investments.
Few economists are optimistic about the recovery post-Covid-19. They believe that discretionary spending on non-essentials will pick up during the festive season of this current fiscal year. However, others believe that a quick recovery is not possible. Several factors are likely to cripple India's growth post-Covid-19. Factors like slowing down the informal sectors, weak balance sheets of corporates, and a change in the mindset of spending in Indian households will slow down the nation's path to economic recovery.
Another major problem faced by the nation is jobless growth – GDP increases, but unemployment is a significant problem. If this trend continues, it will deal another major blow to the economy. Reduction in household incomes and expenditures will make the recovery sluggish.
The Bottom Line
The Indian economy will eventually recover, but the road ahead is a long one.
MSMEs, aviation and hospitality are the three major sectors impacted severely by the Covid-19 crisis. The revival of these sectors is expected to take much longer, leading to sluggish growth of the overall economy. Economists predict that if the current situation persists with region-level restrictions and lockdowns, it will take a long time for the economy to recover. Considering all the factors, we can expect the Indian economy to recover following an "Elongated U-shaped" path post-Covid-19.