Covid-19 has pushed the global economy to its limits – Economy might slow down or even stagnate in the second quarter

The global environment borrowings at these levels have never seen before at peacetime, post the WW II era. We are certain to face a period of the stable deficit, while the government is trying to find ways to deal with it. This time it is different than the previous economic downturn, the level of uncertainty is very unusual.

It is mainly due to Covid-19 led to:

  1. Virus transmission in India and other countries
  2. Medical interventions
  3. Social distancing at the workplace and future lockdowns
  4. Extent and duration of government support
  5. Survival of physical and human (firms) capital

The impact of Covid-19 in other countries is as important to us as India because it will directly affect our trade with other nations. Under such circumstances, there is an urgent need to examine some of the macroeconomic scenarios and learn about the long-term and short-term risks to the economy. 

India grew at 3.1% at the peak of the Global Financial crisis (GFC) in 2008-09, a good 300 basis point faster than the world average. The COVID-19 pandemic struck at a time when India was growing at its slowest pace at 4.2% in 2019-20, since the GFC, crushing all at once, demand and economic activity. These blows have compounded human misery, fears around safety, reduction in incomes, and sources of livelihood. It has been foreseen that there will be a 25% contraction in India’s GDP in the first quarter of the current financial year and 5% for the entire fiscal year.

Forecast scenario

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It is just a plausible setting conditioned to ease the lockdown across India from mid-August with no significant recurrence of the virus. The risks involved are large, mainly downside risk.

According to the Ministry of Statistics and Programme Implementation, the GDP Annual Growth for the current fiscal year, 2020 is at -5.77% with an unemployment rate of 7.65%. Whereas, GDP Annual Growth in 2021 has been forecasted to 11.23% with a decrease in the unemployment rate at 7.34%.

Government deficit does increase with the increase in household surplus. Higher government borrowing (approximately 39%) is being matched with higher private savings (approximately 30%), so it is being financed by borrowing from those who are unable to spend. Therefore, the national balance sheet is largely unscathed. 

GDP per capita during the first quarter of 2020 is at 2013 levels, at 3.56%. However, all industries have been affected due to lockdown but some industries faced a major impact than others such as travel, food sectors, entertainment are severely hit.

Short-term risk of COVID-19 on the economy

The major concern at this point is the forecasted 23.63% hit at the GDP per capita during the second quarter of 2020 estimated by the Ministery of Statistics. Furthermore, if lockdown tends to continue like this, the impact can be even bigger. In the main case scenarios, it was shown that the GDP for 2020 has been lowered to -5.77%. It will happen majorly due to reduced business investment, reduced exports, reduced activity in different industries such as travel, hospitality, arts, and entertainment, and the disruption in the workforce. 

Long-term risks of COVID-19 on the economy

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The long term impact can weigh through different channels. Firstly, the change in labor supply and productivity. The change in labor supply can be positive to make up to the time that has been lost or negative due to hold-up. Likewise, the change in productivity can also be positive by the virtue of creative destruction or negative due to lost time. Secondly, the change in the private sector balance sheet due to the crisis. Other can be the impact of fiscal response on the borrowings, spillover from the other countries.

The main risk is the upside risk of inflation which is contained by the monetary policy permit. The pressing concern here will be the falling prices which will lead to debt deflation. 

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