Covid-19 is giving India a rare chance to remake its economy

Young micro-entrepreneurs are exploring new avenues as demand for e-commerce and online education grows. PPE production is also ramping up as supply lines shift from China
India must seize the initiative instead of trying to resuscitate the old agriculture-reliant economic model

Rupakjyoti Borah

Published: 10:45am, 18 Sep 2020

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Recent data released by India’s national statistical office reveals that its GDP contracted by a record 23.9 per cent year on year during the April-June quarter. This is, no doubt, a big blow to the economy, which had been showing signs of a slowdown even before the coronavirus-induced lockdown.

So what led to this huge drop in gross domestic product? There are a lot of systemic factors at work. First, it means that the key engines of growth – domestic consumption, private investment, government expenditure and exports – are not in the best of health. The spread of the pandemic has brought the economy to a halt after India declared what has been described as the “world’s toughest lockdown” from March 25 to May 31.

Second, the service sector has taken the biggest hit. India was the world’s fastest-growing major economy but that has now changed. In addition, due to the flight of migrant workers back to their hometowns, industrial activity in some parts of the country is yet to resume, even though the national lockdown is over.

Third, people are unwilling to spend, as many have lost their jobs and salaries have been slashed across the board. According to a joint study by the International Labour Organisation and Asian Development Bank, more than 4 million young Indians have lost their jobs, with the biggest losses in the construction and farming sectors.

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Fourth, inflation rates are high while the number of coronavirus cases has been rising, and the country has reported upwards of 90,000 cases on some days. In addition, the pandemic seems to have spread to the rural areas.

What does it mean for the health of the economy? It will translate into much slower growth. Goldman Sachs estimates that India’s GDP may contract by 14.8 per cent in the 2020-21 financial year while S&P Global Ratings has pared down its forecast to minus 9 per cent.

The outlook does not look bright as many non-resident Indians have had to return from their countries of work, especially the Gulf countries, which will lead to a huge loss in remittances. According to a World Bank study, remittances to India are expected to decline by 23 per cent from US$83 billion last year to US$64 billion this year.

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Job creation will also be a major challenge. To bring a semblance of normalcy back to the economy, the government will have to focus on this. The floundering economy represents a challenge to Prime Minister Narendra Modi and his ruling alliance, especially as young Indians languish without work.

As a result of businesses shutting down, job losses and salary cuts, consumption has crashed. For the government, there is no real choice between lives and livelihood. The central and state governments have to first get a grip on the increasing number of coronavirus cases.

The country will also have to prepare for a second wave of infection, as has happened in many countries. In addition, the government may be staring at another crisis when migrant workers return to their places of work, which may result in a renewed spread of the virus. More direct cash transfers and tax cuts will help spur domestic consumption.

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In May, India announced a stimulus of some US$266 billion, roughly 10 per cent of GDP, though this is much smaller than in many countries. For example, Japan has launched a package of nearly 20 per cent of its GDP while the financial stimulus unveiled by the US so far stands at roughly 13 per cent of its GDP.

However, not all is lost. In many cases, young Indian micro-entrepreneurs are making forays. Online education ventures have seen a big rise in demand. In addition, India stands to benefit from the shifting of some international supply lines out of China.

The e-commerce sector has also been doing well, given that people have been unable to move around during the lockdown (except for essential activities). Modi has called for “Atmanirbhar Bharat” (self-sufficient India) and India’s production of personal protective equipment, ventilators and testing kits has improved. This will stand the country in good stead.

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The economic recovery will also depend on how soon a vaccine is developed and is made available to ordinary Indians, and especially to frontline health care workers. Interestingly, rural India may hold the key to the country’s recovery as GDP growth in agriculture is set to best a five-year average.

However, it is important for India to seize the initiative in a post-Covid-19 world, and avoid trying to resuscitate its old economic model, in which 42.4 per cent of the workforce was employed in agriculture last year.

The pandemic offers India a once-in-a-lifetime opportunity to lay the foundations for a new economy. Whether it is able to do so is a million-dollar question.

Dr Rupakjyoti Borah is an associate professor at India’s Sharda University. His forthcoming book is The Strategic Relations between India, the United States and Japan in the Indo-Pacific: When Three is Not a Crowd. The views expressed here are personal

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