Post covid economy: an overview

The COVID-19 pandemic has spread with alarming speed, infecting millions and bringing economic
activity to a near-standstill as countries imposed tight restrictions on movement to halt the spread of
the virus. As the health and human toll grows, the economic damage is already evident and
represents the largest economic shock the world has experienced in decades. The crisis highlights
the need for urgent action to cushion the pandemic’s health and economic consequences, protect
vulnerable populations, and set the stage for a lasting recovery. For emerging market and
developing countries, many of which face daunting vulnerabilities, it is critical to strengthen public
health systems, address the challenges posed by informality, and implement reforms that will
support strong and sustainable growth once the health crisis abates. The pandemic is expected to
plunge most countries into recession in 2020, with per capita income contracting in the largest
fraction of countries globally since 1870. Advanced economies are projected to shrink 7 percent.
That weakness will spill over to the outlook for emerging market and developing economies, who
are forecast to contract by 2.5 percent as they cope with their own domestic outbreaks of the virus.
This would represent the weakest showing by this group of economies in at least sixty years.

COVID-19 pandemic, which, as of end April, 2020, has affected 210 countries and territories around
the world and infected more than 3 million people, of which more than 0.2 million people have died,
is spreading like a wild fire with such a fury that has compelled the governments across the world to
revoke autarky as well as shut down of the national economy in order to save their citizens from this
contagion. The strategy of isolation at all levels—local, regional, national and international - is
viewed to be the key towards the containment and mitigation of COVID-19. As the crisis deepens,
two important realisations, inter alia, have come to the fore. India is no exception with various
estimates suggesting a rise of unemployment to unprecedented high levels along with a fall in real
GDP growth to a record low level of less than 2 per cent in 2020. The government has come forward
with economic packages to transfer income to the poorer segments in the economy along with
complementary liquidity enhancing measures of monetary authority. The Indian economy has been
hit hard by the ongoing Coronavirus (COVID-19) -driven global crisis. As on 1 May 2020, about 25,000
people in India have been affected by COVID-191 . With some variations, there has been an
unprecedented rise in number of Corona patients across the world2 . A health crisis worldwide has
generated a global economic crisis. The entire world is passing through great uncertainty. There are,
primarily, two major challenges that the Indian economy is facing at this juncture. First is to save the
country from the spread of Coronavirus, which is a health emergency. Saving lives is the principal
concern of the Indian government. Second is to save the economy from the unfolding economic
crisis due to the dual effects of the Coronavirus pandemic and the global and national lockdown.
Countries across the world are facing serious consequences and damages to the economies.
According to the International Monetary Fund (IMF), many economies may face negative per capita
income growth in 2020 due to the Coronavirus pandemic. In its recent forecast, the World Trade
Organisation (WTO) indicated a clear fall in world trade between 13 per cent and 32 per cent in
2020, perhaps the highest fall since the Great Depression of the 1930s. The IMF has also slashed
growth forecast for the Indian economy, projecting a GDP growth of 1.9 per cent in 2020. Although
India has managed well till date in containing the spread of the virus,3 the COVID-19 pandemic has
already disrupted normal economic activity and life in the country. India’s trade has been severely
impacted. At the moment, businesses are very vulnerable to the unfolding economic crisis4 . People
have been facing a sudden loss in their incomes, causing a major drop in demand. To rescue the
economy, India has announced a range of fiscal and monetary stimulus packages. The major aim of
this stimulus is similar to the traditional Keynesian prescription of ‘pumppriming’, whereby income
transfers to people having higher marginal propensity to spend can boost up the sagging demand.
With the onset of COVID-19, the global economy is set to undergo a sharp double-dip recession. As
many international agencies have already forecasted, the global growth could be -3 per cent in 2020,
which is a decline of about 6 percentage points from the baseline projection of positive 3 per cent
growth with no pandemic. Such swings in growth forecasts are unprecedented, and this is due to
both health scare with lots of deaths and infections and also due to the lockdown of a major part of
the global economy. Added to this, the pandemic appears to be more severe in the industrialized
economy. While the forecasts for 2021 suggest a sharp rebound, the trends suggest that the world
may need to endure this for a longer period than expected.

The Government and the RBI have taken various measures on a regular basis not only to
ensure liquidity in the financial markets but also transferring money to Jan Dhan accounts to
partially mitigate the income losses to the poor and daily wage earners. The government has already
announced a fiscal support of Rs 1.7 lakh crores, which is in addition to the support measures that
other state governments have taken so far. However, as it might turn out, the measures taken till
now may not be sufficient enough if the lockdown is extended further or for the post-lockdown
economy. This is more so to the sectors such as MSMEs that are already struggling with two major
shocks in the form of demonetization and messy GST implementation. There are also demands for
distribution of free foodgrains to poor and destitute and some have further argued for Universal
Basic Income (UBI) type of support as was declared in the US (10 per cent of GDP) and other
Scandinavian countries. Does India have such fiscal space to go for such mega fiscal support? Or,
what India should do to ensure both lives and livelihood and help post-pandemic economy
recovery? It is also important to understand what needs to be done to revive the trade sector as
well, which is the backbone of not only for economic growth but also for employment. In the fiscal
space, unlike during the 2008 crisis, this time around the fiscal situation of both Centre as well as
most of the states is in a precarious position. The Centre has already invoked the escape clause for
two consecutive years to breach its fiscal deficit target as suggested by the existing FRBM Act
(amended in 2018). There are many studies and especially by the RBI, that the state finances have
been deteriorating for the past three consecutive years. While given the unprecedented situation
right now, it may not be wise to look at the fiscal targets now; most certainly it is important to look
at how to finance the fiscal deficit. Again, unlike in 2008, this time around the total savings rate has
declined by more than 10 percentage points (in 2007 even government sector savings were
positive). Hence, any fiscal support that centre could undertake needs to be financed (indirectly or
directly) by the RBI. In other words, monetization of deficits by the RBI, which, under an Act, was
dismantled in the early 1990s.

Reshaping the economy after the pandemic

The government’s foremost responsibility is to contain the spread of the virus and ensure that there
are as few deaths as possible because a workforce can only be productive as long as it is healthy and
alive. At the same time, given disguised unemployment in agriculture and the large share of India’s
workforce employed in informal services and the unorganized sector, an extended lockdown is likely
to result in a life-threatening situation of its own. The government should, therefore, coordinate
across the states to at least partially lift the lockdowns in sectors of the economy that contribute
significantly to the country’s GDP, employment and exports, besides generating positive multiplier
effects on demand and supply. These sectors include agriculture and allied, transport and electronic
equipment, machinery, pharmaceuticals, textiles, handicrafts, construction, and services such as IT,
business, financial, telecoms, distribution, etc. At the same time, given the uncertainty around the
pandemic relating to a phase II of the Coronavirus in autumn/ winter and the time involved in
developing a vaccine and getting it approved for human consumption, the government must also
invest in improving the country’s COVID-19-related health infrastructure – both preventive and
curative – on a war footing. Supply-side Measures On the supply-side, easier availability of finance
and streamlining of regulatory bottlenecks would go a long way in expediting recovery in the
aftermath of this pandemic, including via trade. Despite marked improvements in the ease of doing
business, India is still ranked 77th amongst 190 countries on the World Bank’s Trading Across
Borders index. A vast majority of Indian firms continue to identify customs and trade regulations as a
major constraint. Similarly, despite a largely liberal FDI regime, the country attracts less than 2 per
cent of its GDP as inward investment, suggesting that other investment climate and regulatory issues
remain a challenge for potential investors. Addressing these challenges would also facilitate
commercial presence or Mode 3 trade in services, which is not only the most dominant mode for
supplying services abroad but often also a necessary precursor to crossborder or Mode 1 services
trade. These two modes together account for nearly 90 per cent of global trade in services, thereby
reflecting their overwhelming importance from a policy perspective.

Conclusion –

Countries have to invest more in healthcare – both management and facilities. New social and
behavioural norms – “social distancing”, “wearing masks”, “maintaining hygiene”, etc., are the new
normal, and we have to adjust with such new norms amid the pandemic. India has an important role
to play in the postCovid-19 world, and it is immensely useful for the country to stay engaged in such
global discussions. While there are substantial challenges and concerns, India must resist the
temptation for quick fixes that do not address the underlying concerns and avoid permanent
solution. Structural reforms are must and should continue to focus on strengthening the country’s
economic fundamentals—only then can they contribute meaningfully towards a more robust and
resilient Indian economy

Reference –
The proportion of economies with an annual contraction in per capita GDP. Shaded areas refer to global
recessions. Data for 2020-21 are forecasts.
Source: World Bank
Irons, John (2009), “Economic scarring: The long-term impacts of the recession”, Economic Policy
Institute (EPI), Washington, D.C., available at https:// www.epi.org/publication/bp243/

McKinsey & Company (2020), “Getting ahead of the next stage of the coronavirus crisis”, New York.

Pal, Partha (2020), “The Coronavirus crisis and international trade”, Chapter 17 of this Report, AIC
and EEPC, New Delhi.

Raychauduri, Ajitava, Prabir De and Suranjan Gupta (2020), World Trade and India: Multilateralism,
Progress and Policy Response, Sage Publications, New Delhi, Forthcoming.