The coronavirus pandemic has made global economic growth “seriously unfavorable and rapidly deteriorating“, the head of the International Monetary Fund (IMF) said. According to the data from multilateral agencies such as World Bank, the International Monetary Fund, and the Organisation for Economic Co-operation and Development, the world GDP may shrink by 4.2%, 3%, and 5.1%, respectively in 2020.
Countries like the United States and India already had advance information about the coronavirus illness but did not do anything enough to control it. In India, the first coronavirus case was traced on January 30, 2020. However, Prime Minister Narendra Modi imposed a national lockdown on March 24 for the first 21 days, when India had only 600 cases and 10 deaths, declaring that the virus would be vanquished in that period only. Of course, that didn’t happen.
Therefore, in March, Prime Minister Narendra Modi put 1.4 billion people under a curfew-like lockdown. Since the authorities use the term “curfew” when issuing passes, it can be called a national curfew.
Since the countries began to announce lockdowns again and again to limit the spread of the virus, economic activity in most parts of the world is halting.
India’s lockdown was announced at night with four hours’ notice and there were no arrangements in place, especially for the poorest. By the second week, workers who lost their jobs or with unpaid wages, daily-wage and self-employed informal sector workers all found themselves unable to afford food and rent. Approximately 118 million jobs lost in the first two weeks of the lockdown itself which increase unemployment and ultimately become the main cause of economic depression.
Sadly, the evidence so far shows that the Modi government doesn’t have the capacity to think through the details of planning and execution. Facts have proved that this is turning out to be another demonetization, with the typical Modi problem of mistaking theatrics for achievement.
As we all know that demonetization and GST(goods and services tax) resulted in killing demands, and this poorly planned national curfew has also killed the supply chains.
Jayati Ghosh, one of India’s foremost economists said that the damage done by the lockdown is already greater than the damage caused by demonetization and due to which the economy has not yet recovered. A massive shock such as this will have negative multiplier effects and will continue to penetrate.
In addition to this, not only did the output decline due to supply shocks but also because people were unable to work and their income has declined, which ultimately has reduced purchases to a bare minimum. The collapse of the global financial markets not only reflects the decline in business sentiment but also the decline in consumer confidence, resulting in a decrease in demands.
The Indian economy is in chaos, and India may be looking for something worse than a recession. The spread of COVID-19 has made India’s situation worse than war.
This is a truly global catastrophe as no country is spared. Countries that rely on travel, tourism, hospitality, and entertainment for their growth are experiencing particularly large disruptions.
While we wait to get a clearer picture of the health coronavirus curve in India, we already have the first estimate of the job-destruction caused by the nationwide lockdown. Lockdowns due to the Covid-19 have led to the largest rise in unemployment since the 1930s. The numbers are staggering and worse than anything the world has ever known. More jobs were lost in India in the last four months than anything ever recorded in economic history.
India’s current population is approximately 1.36 billion. Among them, about 1.06 billion are of working age, above 16 years. By February 2020, before the COVID-19 epidemic and the national lockdown, approximately 41.6 crore Indians were employed. When the lockdown was imposed then, 44 million got unemployed. In the past three months, about 13 million Indians lost their jobs. Let us assume that 80 million of them are the main earner or only source of income for their family. As a result, one-third of the country’s 260 million households might be facing a livelihood crisis.
The situation in countries facing the lockdowns is worse than during the war. During the war, the production of armaments increased, but now, as people cannot move freely or go to work, production is collapsing. Only some people can still work from home, but work efficiency is reduced. During the war, the demand was high, but now, it is collapsing because incomes are declining with the retrenchment, salary cuts, and layoffs. People just buy bare necessities and even accumulating them. A large number of economies are not working as a sharp decline in demand for energy shows.
Under pessimistic circumstances, if the pandemic lasts for more than two months and there is a slow recovery after that, then the world will fall into depression. Therefore, in addition to the health crisis, there will also be an economic crisis.
In the economic recession, many businesses would fail, many companies will go bankrupt, and especially those with high leverage or have low working capital. Many financial institutions and banks would also collapse. As we learned from the 2007-08 global financial crisis, the failure of certain companies will lead to the failure of many other companies because they are all interconnected. During the depression, there will be widespread business closures, and even after the pandemic dissipates, the situation may not recover soon.
Depression will lead to widespread social collapse because jobs are unlikely to available for long periods and many people will not have any source of income to buy essentials. Homelessness and hunger will increase. Many children would be leaving schools or universities. The income of the elderly who depend on pensions and the interest incomes on financial assets would have been collapsed. Many people may go bankrupt due to medical expenses.
It shows that Depression is longer and more Destructive than a Recession
People are facing these problems because several governments have not taken early action to prevent the spread of this deadly disease. Now they are declaring a state of emergency and setting up a task force to deal with the impact of the pandemic on the country. For that, they are taking a series of measures, such as income support.
Besides this, with the lifting of the nation-wide lockdown since June 1, coronavirus cases have been spreading rapidly throughout the country. Moreover, the monsoon season has brought its annual burden of dengue fever, encephalitis, malaria, and other mosquitoes-borne diseases. Climate change-related locust swarms in several states and large-scale hurricanes affecting the Bay of Bengal coast have exacerbated the survival crisis in rural areas, hitting the economy in free fall before the pandemic.
Moreover, the deep economic dive has shocked people. The speed and extent of recovery depend on the discovery and availability of the COVID-19 vaccines and treatments.
Depression caused more than Economic Pain
It metastasized to a loss of faith in democracies, the triumph of hatred ideologies, the turn to demagogues, the collapse of international trade and finance, and ultimately, World War II. The national curfew or lockdown imposed by the Modi government has forced many companies to close and lay off employees.
At this rate, many Indians are dying of hunger than the coronavirus. Modi’s poor managerial skills, zero attention to details, and preference for rhetoric over governance spell catastrophe for this crisis.
Chairman of the Aditya Birla Group, Kumar Mangalam Birla has said that this virus pandemic and the associated lockdowns across countries have triggered a once-in-a-century crisis for the society & the economy in 2020 and India’s GDP to contract in FY21.
Birla further added that this pandemic coronavirus hit India at the time when the underlying financial and economic conditions were weakened due to intensified global uncertainty and pressure on the domestic financial system.
Birla said: It is estimated that almost 82% of India’s GDP (gross domestic product) originates from areas that were divided into red and orange zones during the lockdown, where economic activities are remained severely restricted.
Some of the scars of the crisis will still appear in the form of subdued consumer and business confidence. He said that certain sectors, such as hospitality and airlines, will take some time to fully recover.
Every 1% loss of incomes will mean a reduction in GDP of almost Rs 2 billion in India. A 5% decline in GDP growth rate (possibly greater) would mean a loss of revenue of Rs 10 billion. Most of this will due to the decline in the income of the unorganized sector, which will not be able to weather the gathering storm
Just like in the period of demonetization, when demand collapsed and agricultural product prices fell drastically, farmers will face demand issues.
In economics, depression is a long-term continuous downturn in economic activities in more than one economies. This is the actual economic downturn that is more serious than a recession, which is a slowdown in economic activity throughout the normal business cycle.
The economic depression is characterized by a long duration (its length), by an abnormally large increase in unemployment, a decline in credit availability (usually due to some form of financial or banking crisis), and contracting output due to exhaustion of buyers and reductions in production and less investment by suppliers, more bankruptcies including substantial reductions in trade and commerce (especially international trade), sovereign debt defaults, and relatively high volatile relative currency value fluctuations (usually due to currency devaluation).
Main Causes of an Economic Depression
An economic depression is mainly due to the deterioration of consumer confidence leading to reduced demand, which eventually led to the company’s bankruptcy or going out of business. When buyers stop buying products and paying for services, companies need to cut budgets, including hiring fewer workers.
1. Stock Market Crashes
The stock market consists of shares owned by investors in listed companies. Changes in equity or shareholdings may reflect the operating conditions of the economy. When the stock market crashes, this may indicate that investor confidence in the economy is declining.
In layman’s terms, the stock market crash symbolizes a period of wealth destruction and investors’ pain. A stock market crash refers to a rapid and unexpectedly severe drop in a market index in one or several days of trading.
After Sensex hit a peak of 42,274.89 points in February 2020, it plummeted over -39% to 25,639.90 points on March 23, 2020.
Currently, we are witnessing one of the fastest crashes in the history of the stock market, even more, worse than the 2008 market crash as cited by many leading market analysts.
Example: On March 6, Yes Bank was on the verge of bankruptcy, exacerbating the woes of the COVID-19 cases. This is because non-performing loans lead to high levels of NPAs (non-performing assets of banks), which ultimately requires government intervention. The market lost 1,000 points on March 4 and March 6. As the COVID-19 cases in India continue to deteriorate, the market has entered a bearish downturn.
On March 23, the market plunged by a record of 13.15%. This is the largest decline in the history of the Indian market. The subsequent lockdown did not bring any relief to the stock markets. As of April to May, the market has wiped out the gains of the past three years.
Therefore, they are usually accompanied by panic selling and can lead to bear markets, recessions, and even depressions.
2. Reduction in Manufacturing Orders
Enterprise flourishes a strong demand for its products and services. When manufacturing orders reflect a deterioration, especially in a longer period of time, it will lead to a more critical and worsen economic depression.
- The COVID-19 pandemic has brought many challenges to Indian industrial manufacturers, especially those who rely on workers who cannot do their jobs remotely.
- The slowdown in economic activity has decreased the demand for industrial products in India and globally.
- Sachchidanand Shukla, the chief economist of Mahindra Group, said that the shutdown of all factories by all industries for more than two months, we estimate that the actual manufacturing GVA will drop sharply by 5% in FY21. This will result in the loss of US $32 billion (approximately) in the value-added of the manufacturing industry during the year.
3. Prices and Wages Control
Price control happened once during the tenure of former US President Richard Nixon when prices continued to rise. In the long run, price control will inevitably lead to problems such as a decline in product quality, shortages, rationing, and the black market that arise to supply the price-controlled commodities through unofficial channels.
Besides this, when wages are controlled by the government, and companies are not allowed to lower wages, companies may be forced to lay off workers to survive, that same befell due to COVID-19.
4. Rise in Oil Prices
How the rise in oil prices will have a knock-on effect on almost everything in the market is well known. When this happens, buyers lose their purchasing power, which can lead to a sharp decline in demand and ultimately lead to depression.
Example: Prices of petrol and diesel were hiked for four consecutive months as oil companies look to recover the losses incurred due to a decline in prices and the COVID-19-induced lockdown. As the global crude oil prices regain lost ground and demand reviving in the Indian economy, oil retailers are passing on the impact of the last four month’s excise duty hike on consumers.
As India was battling the COVID-19 pandemic in the lockdown, a revenue-starved Central government hiked the excise duty by a record Rs 10 per liter on petrol and Rs 13 per liter on diesel. The hike effectively meant that the Central government is collecting around 280% taxes on the base price of petrol and 266% in the case of diesel.
The fuel prices are now at a five-and-a-half month high in India even as crude oil rates have fallen below the $40 a barrel mark. This ultimately leads to economic depression.
5. Loss of Consumer Confidence
When consumers no longer have confidence in the economy, they will change their consumption habits and ultimately reduce their demand for goods and services which results in economic depression.
Signs of forthcoming Economic Depression
1. Rising Unemployment
The worsening of the unemployment rate is usually a common sign of an economic downturn known as depression. The International Labor Organization (ILO) estimates that due to the spread of the coronavirus, more than 35 million jobs worldwide will be threatened. With a large number of unemployed, consumers will lose purchasing power and ultimately demand will fall.
2. A Decline in Real Estate Sales
In ideal economic circumstances, customer spending is usually high, including the sale of houses. However, when there is an impending economic depression, the home sales decline, indicating a decline in confidence in the economy. The ongoing Covid-19 pandemic may drive overall residential demand in 2020-21 to drop by more than 26% from a year ago. As a result, Covid-19 has exacerbated the decline in residential real estate bookings.
3. Increasing Credit Card Debt Defaults
When credit card usage is high, it usually indicates that people are spending, which is good for GDP. However, when the debt default rate rises, it may mean that people are losing their ability to spend, which indicates an economic depression. In other words, if the loan is not repaid for 90 days, it becomes a bad debt for the bank.
Due to the coronavirus crisis, public sector banks that are already sitting on large amounts of bad loans (non-performing loans) are eyeing more defaults. They predict that as the fiscal year draws to an end, small and medium-sized companies will have a series of defaults. In anticipation of future cash flow problems and a possible moratorium of loan repayments, many companies may be more willing to default on their next loan contract under uncertain future conditions to retain cash.
Indian moneylenders are facing a high jump in coronavirus-related defaults on credit card arrears, personal and vehicle loan defaults, forcing them to allocate hundreds of millions of dollars and take steps such as requiring sales staff to track down borrowers who have disappeared.
The impact of COVID-19 on the Indian and American economy is horrendous. In the first quarter of this year, the country’s GDP fell by 4%, and so far the number of unemployed has soared to 30 million. This does not even include self-employed or semi-employed people who are usually not within the official figures of the Department of Labor. The unemployment rate in April officially stands at 14.8%, which is the highest level since the Great Depression.
The worst case is clearly not over. Most of the lockdown or social distancing measures in many states began in late March and early April. Therefore, the GDP data for the first quarter has not truly reflected the overall economic slowdown. In addition to this, as the economy enters a severe standstill, an economic slowdown often has a ripple effect. The tourism, restaurants, and accommodation industries will be affected first, followed by other service sectors, and eventually penetrating down to manufacturing and rest other industries.
As COVID-19 pandemic continues to wreak havoc on the global economy for more than four months, policymakers are eagerly seeking ways to mitigate its disaster.
If we survive this pandemic, we will not survive the impending economic collapse. The economy is not on Modi’s radar either. Despite the disastrous economic policies that brought our unemployment rate to a 45-year high, he still won the national election. Why should he worry about the economy?
Prime Minister Narendra Modi proclaimed that if the lockdown is not imposed, the country and our families will be set back by 21 years.
After careful observation, it is clear that if the implementation is not effective, more has to be done before it further destroy the country, and it is strange how many years the economy will fall behind due to the lockdown.
The Narendra Modi government must quickly propose a new Deal-types one-time booster to save lives and livelihoods.
The government must make a plan instead of making abrupt decisions followed by the plan that may fall in line with such a decision. Therefore, today’s government faces a double challenge in providing immediate assistance: first, unemployed informal workers, and second, unemployed workers who are looking for work. In addition to assisting informal workers (who are migrants), their families for whom she/he is the sole earner or only source of income needs to be considered seriously. This is necessary to prevent the economy from falling into depression at all costs.