What effects will the COVID-19 pandemic have on the Indian economy?

The confirmed cases of the COVID-19 pandemic are continually rising all over India, with an average rate of growth of 23%. The government fears that India is approaching the exponential part of the epidemic curve where there will be a sharp rise in the numbers. Hence, adverse measures like the ‘Janata Curfew’, the 21-day lockdown of the country, and closing down of businesses except for the essential services to contain the spread, were necessary.

The economic effects of these measures and the COVID-19 pandemic, in general, are going to be widespread and far worse.

Here is how the pandemic might impact the Indian economy.

1. GDP growth rate is expected to decrease.

According to Nomura, the Tokyo-based financial services group, the shutdown as a result of Coronavirus could result in a direct output loss of about 4.5%. Major companies like India Cements, BHEL, automakers like Hero MotoCorp and Maruti Suzuki and ancillaries like Amtek and Castrol have announced temporary shutdowns. Even FMCGs like Unilever and Dabur India have closed their plants save for the ones engaged in manufacturing daily-essentials. Barclays predicts the cumulative shutdown cost to be roughly about 4.5% of the GDP. The worst-hit states, Maharashtra and Kerala themselves,contribute to about 19% of the GDP. Experts have predicted that the growth rate of the GDP could fall to 4% from the previous rate of 5%.

2. Investor confidence has taken a hit, and market investments are declining.

The panic and uncertainty caused by the rising cases of Coronavirus and the resulting lockdown enforced to contain the effects of COVID-19, further caused the Nifty and Sensex to crash to yearly lows. The markets have fallen about 37% during the last month.

Before the COVID scare, the Indian market was recovering from a slump with healthy predictions from financial institutions all over the world. However, the pandemic has sent the market back into a tizzy. Investors began panicking and started to withdraw their money out of the market. This has led to a free-fall in share prices across the sectors. However, the Sensex and Nifty both gained as IT shares surged in the hope of a fiscal package announcement from the government to revive the troubled economy.

3. Businesses face an uncertain future.

Non-essential businesses can expect a severe hit in the aftermath of the pandemic. Malls, shopping complexes, theatres and restaurants could be in locked down for more than a month, which will have a considerable impact on earnings. The effect is likely to be more on the small businesses and weaker firms which are bound to face a cash crunch. Though essential services continue to run, the non-essentials’ manufacturing sector is expected to be hit hard due to interrupted supply chains and supply shortage.

Also, the restriction in movement will add to the farmers’ hardships with no proper logistics in place and no proper ruling on what is allowed in the lockdown. This is expected to impact the dominant agriculture sector.

4. There will be a mismatch in demand and supply.

Interrupted supply chains might lead to a shortage of resources. The cash crunch might add to the sourcing woes of the smaller businesses. This, in turn, will hamper production resulting in delays and shortages. However, the demand for goods and commodities is expected to stay the same and might even increase. This will result in a severe demand-supply gap.

5. NPAs with banks are expected to rise.

The shutdown on account of this global pandemic will affect the earnings of businesses. Small businesses, especially those deemed non-essentials, will see a drastic fall in revenues. Those businesses that hardly make enough to sustain themselves and rely on the monthly earnings to pay off the loan instalments will be amongst those that are severely hit. This will result in them defaulting on loans and banks will be inundated with NPA (Non-Performing Assets).

The economic impact of this unprecedented event is likely to be varied depending on the decisions taken at every development. The spiralling economy seems to be relying on government sops to give it a boost. Economic experts have proposed relaxing the fiscal deficit and redirecting funds towards the critical health care sector. However, looking at the current situation, it may need a more inclusive and robust plan that incorporates rate cuts and reliefs, for India to ride out the wave of the impending economic crisis.