Assignment -1

Impact of Covid on the Indian Economy

Case Background-Half Page
The last two financial years (2020-21 & 2021-22) have been difficult for the Indian economy
on account of the COVID-19 pandemic. Due to the measures adopted by GOI to prevent the
spread of the (Covid-19), especially social distancing and lockdown, non-essential
expenditures are being postponed. This is causing aggregate demand to collapse across the
country. Repeated waves of infection, supply chain disruptions, business values coming to
hardest test, trust factor in unorganized or organized business getting shattered, credit lines
getting evaporated, labour mass exodus from Metro & Tier-1 cities, disruption of highly
populated IT hubs have created particularly challenging times for economy as a whole. The
Indian economy overall contracted 7.3% (1.1) during the 2nd wave, it was the worst decline
ever observed since we started compiling GDP Stats quarterly in 1996.
Covid Wave timeline and impact (1.2)
1st Wave – Mid April to End Sep 2020 -Effective Lockdown Duration (5 Months in overall
2020)
2nd Wave – Mid-March to Mid-June 2021
3rd Wave – End Dec '21 to Feb 2022 (Omicron)
GVA (Gross Value added) annual growth shows how much impact was there across
various sectors of the economy (1.4)
Agriculture & Allied Sectors were least impacted and constantly grown in the last 2 years
during the pandemic
Industry- it took 2nd hardest hit after service sector i.e., -7% contraction in 2020-21
Mining & quarrying: -8.5% , Manufacturing: - 7.2%, Electricity, gas, water supply & other
utility services: +1.9% ,Construction: -8.6%
Services -Worst with 8.2% contraction in 2020-21 ,Trade, Hotels, Transport, and services
related to broadcasting: -18.2% ,Financial, Real estate: -1.5%
Identify and discuss three critical issues and challenges (in order of merit) discussed in
the case. (One page)
Shock to Consumption Households maximizes their lifelong utility from consumption. In
achieving this objective, changes in household consumption during the pandemic would arise
due to a variety of factors, including changes in income from employment, changes in the
value of future wealth due to the long-term implications of the current impacts of the
pandemic, changes in the relative prices in different sectors, changes in interest rates, changes
in the ability to consume certain goods and services, as well as changes in consumer
preferences. Prioritization of essential products and keeping stock for an uncertain time was
on high priority which dulls away the demand of other non-essential or non-daily use
products. Households having lower resources or budgets had discarded non-essential
completely and hoarded stock of essential items for a minimum 1 month to maximum of 3
months and kept balance budget for healthcare purpose.
Shock to the Labor Supply The shortage to the labor supply originates from the mortality
and morbidity related to the infection. When formulating the mortality shock, As deaths
would mean a loss of the existing and potential labor force for an economy, the shock applies
permanently in the simulations. the magnitude of the mortality shock in 2020.The morbidity
shock has two elements. Firstly, members of the labor force cannot work if they catch or are
exposed to the infection. Therefore, we assume that a proportion of the labor force would not
work for the standard isolation or quarantine period, following the recommendation of the
WHO, of 14 days. During 1st year an estimated 10 million migrant workers returned to their
native villages/towns after the imposition of the lockdown. The productivity shock results
from the lockdowns that governments have imposed to reduce the transmission of the virus,
with shock to productivity for each sector in each country using the durations of the
lockdowns and the proportion of broad production sectors that the lockdowns disrupted. Only
essential workplaces, such as grocery stores and pharmacies, operate.
Shock to transportation/supply – Supply chain crunch came with lockdown, already high
cost of logistics in India due to an inefficient model mix, driven by a relatively inefficient
road segment contributes more ~70%, with 80% contribution by unorganized sector
transporters who usually works on full freight bases by clubbing multiple order now face
difficulty in getting full truckload which results in delayed or dropped transport consignment
or double freight charge. The situation is not favourable for the transporter or the customers
on both ends (sender/receiver). A lot of the ideal capacity of the transporter's company
deprecating the asset value and underutilization of asset had a major unseen impact on
transporter financials which he needs to cover by charging high margin in the low demand
environment. The country's public transportation system is already under stress with
overloaded buses, trains, or other mass transport channels prior to covid were crushed under
limitation passengers from GOI & State governments resulting in poor connectivity of service
person contributing to the economy in terms of skills or job which require physical presence
to accomplish the task. It was the first time in Mumbai's local suburban train system history
the trains were almost empty for more than 5 months which was considered to be the lifeline
of the financial centre of India. Raw material crunch for Industry dependent on global supply
-Product manufacturing depends upon a particular raw material completely from an
international supplier due to the absence of adequate quality manufacturer in the country or
absence of development in that particular field e.g Dyes material and Lycra yarn are very
critical in the production of fabric and garments in the textile industry are imported from
China due to cost benefits, semiconductors are imported which are becoming very critical in
the manufacturing of cars.
Analyse the case and interpretations (Three pages)
India's $2.9 trillion (1.3) economy remains shattered during the nationwide lockdown period;
the problem could be more acute and longer lasting in India owing to the uncertain state the
economy was in before Covid-19 struck, and GOI policy options to deal with the economic
crisis.
Most indicators show that the economic impact of the 2nd wave in Quarter-1 was very much
smaller than what experienced during the full lockdown phase in 2020-21 even though the
health impact was more severe, this highlight adaptability of business to tackle uncertainty,
still they forego the long-lasting effect of a chain reaction started by the first halt/setback
given by pandemic to the whole economy of the country which started tug of war between
buyer/supplier, manufacturer/retailer, franchisor/franchise.
Uncertainty of demand was not a regular marginal error in prediction, it was a complete halt
on sale if another wave comes up. Retailer having fear of another wave that they can't predict
or stop and considering goods that take lead time of 60-120 days sourcing becomes a tedious
task and high risk. Fear of another wave looms around the whole 2020 and whenever it was
felt its over then only another wave came up repeating some kind of covid cycle as it came
back after exactly 1 year.
2020 was the year when everyone was survived on accumulated inventory due to 5 months of
effective lockdown and then it started with high demand with revolving fear of next wave
which restricted everyone in introducing new products and playing safe bet till the pandemic
fear is gone.
Once the demand dried up heavy manufacturing industries comes to an almost halt which
impact their capacity utilization for the whole year and gave a setback to their financial
reports and asset utilization. When a value chain get halted completely it brings long-term
repercussion which can change the dynamics and bargaining power of any market which get
stuck within it.
Taking the example from my background in Apparel retail which is the final stage of the
value chain of the textile industry, before the pandemic it was a retailer in value chain after
the consumer who got the maximum bargaining power over the other channel partner of the
value chain(Garment manufacturer, Fabric Mill, Textile Mill, Dyeing house/processor ).
After 1st wave credit line system on textile/fabric mills reduced in a drastic way as they gain
more bargaining power with the help of geo-political impact plus bouncing back domestic
demand which gave them the upper hand in negotiation. Earlier it was 60-120 days credit line
works with textile/fabric mill from retailer or garment manufacturer. Credit line got
disappeared with now mills asking for advance payment to book supply of raw material in
advance giving way to inflation in prices of raw material and this sector is a prime example
when the government feels if domestic demand can pay a higher value for domestic products,
then why we restrict our industries in competing with foreign trade which can result in
improving size of the market pie of the sector/industry.
The current pandemic circumstance has an unfavorable profound effect on Indian business.
Locally, the effect of the Covid pandemic COVID-19 could prompt a log jam in homegrown
interest. This will bring about the disintegration of buying power because of occupation
misfortunes or pay chops and hinder impact of conceded request will have a more drawn-out
enduring effect on various areas, particularly where request is optional in nature. Increased
capital expenditure by the GOI on infrastructure and an upward trend in the housing cycle
have been key for reviving the real estate sector which inturn helps in consumption and
production of steel and cement to return to pre-COVID levels.
Services account for more than half of the Indian economy and was the most impacted by the
pandemic related restrictions, especially for activities that need human contact. Although the
overall sector first contracted by 8.4 per cent in 2020-21 and then is estimated to grow by 8.2
per cent in 2021-22, it should be noted that there is a wide dispersion of performance by
different sub-sectors. Both the Finance/Real Estate and the Public Administration segments
are now well above pre-COVID levels. However, segments like Travel, Trade and Hotels are
yet to fully recover. It should be added that the stop-start nature of repeated pandemic waves
makes it especially difficult for these sub-sectors to gather momentum.
Despite contact-sensitive services still being impacted by COVID, there has been a strong
recovery of the Purchasing Managers' Index-Services since August 2021 which was expected
as in developing country like India demand is never been an issue In this context, it is
important to note the role of new forms of High-Frequency Indicators to gauge real-time
trends. For example, the Google mobility indicators for retail and recreation (i.e., restaurants,
cafes, shopping centers, etc.) and transit stations (public transport hubs such as subway, bus,
and train stations), measure percentage deviation from pre-pandemic levels of mobility, has
exceeded pre-pandemic levels in December 2021 before the Omicron wave again led to
restrictions
Another distinguishing feature of India's response has been an emphasis on supply-side
reforms rather than a total reliance on demand management. These supply-side reforms
include deregulation of numerous sectors, simplification of processes, removal of legacy
issues like 'retrospective tax', privatisation, production-linked incentives and so on. These
have been discussed in detail in the respective chapters. Even the sharp increase in capital
spending by the Government can be seen both as demand and supply-enhancing response as
it creates infrastructure capacity for future growth in recently deregulated sectors, for gauging
economic development. In contrast to contact-based services, distance-enabled services have
increased their share with the growing preference for remote interfaces for office work,
education and even medical services. Indeed, there has been a boom in software and IT-
enabled services exports even as earnings from tourism have declined sharply Due to the
measures adopted to prevent the spread of the Coronavirus Disease 2019 (Covid-19),
especially social distancing and lockdown, non-essential expenditures are being postponed.
This is causing aggregate demand to collapse across the country. In addition to the demand
reduction, there will also be widespread supply chain disruptions, as some people stay home,
others go back to their villages, imports are disrupted, and foreign travel is stopped. This will
negatively affect production in almost all industries.
Right now, the service sector, especially travel, tourism, and hospitality, is the worst hit.
Gradually the shock will spread to manufacturing, mining, agriculture, public administration,
construction – all sectors of the economy. This will adversely affect investment, employment,
income, and consumption, pulling down the aggregate growth rate of the economy. We are
already seeing some early numbers that highlight the severity and duration of the crisis the
economy may experience going forward.how to pad the interest side stuns actuated by
expected lockdowns and other progressing control measure. The spiraling and unavoidable
COVID-19 pandemic has twisted the world's flourishing economy in capricious and
questionable terms. Yet, it essentially demonstrated that the current plunge appears to be
principally not the same as downturns of the past which had shocked the nation's financial
request. While the countries, aggregates, enterprises and multinationals keep on
understanding the extent of the pandemic, it is without a doubt the
need of great importance to get ready for a future that is economical, basically more suitable
for living and working. While the exceptional circumstance has made an incredible
harm the economy, particularly during times of lockdown, the country should deal with it, by
presentation of monetary measures. As the public government imagines, assurance of the two
lives and job is required. The monetary movement must start step by step in the wake of
screening of the workforce. Severe preventive measures ought to be executed by the business
so as to protect the strength of the laborers. While strategy and changes ought to be given out
by the administration enough to rescue the economy, the business, common social orders and
networks have an equivalent part in keeping up the harmony. The standards of social
separating, evading or dropping get-togethers, and utilization of veils and sanitizers ought to
be the lifestyle till we can annihilate the infection. During this time, the economy is compared
with social conduct of mankind, so the duty of bringing back financial activity isn't of
government alone. Be that as it may, each emergency achieves a novel occasion to revaluate
on the way attempted for the advancement of a person, network and society. The COVID-19
pandemic has a reasonable directive for the Indian economy to embrace practical formative
models, which depend on confidence, comprehensive systems and are climate cordial.
Identify with justification the macroeconomic theory/tools that could help analyse the
case. (One page)
Fiscal policy
The government of India was proactive in tackling the spread of the Covid-19 pandemic by
announcing a nationwide lockdown on 25 March 2020, when the confirmed positive
coronavirus cases were approximately 500. The lockdown, initially announced for a period of
21 days, was extended with progressive relaxations until 31 May 2020. Since then, activities
have opened in a phased manner. The brutal toll of the pandemic and the associated
lockdown measures have adversely impacted economic activity in India, with the April–June
2020 quarter registering a contraction of 23.9% in real GDP. Taking a calibrated approach to
fiscal interventions, the government provided fiscal assistance to poor and vulnerable
households in cash and in kind during the initial stages and later broadened this coverage to
various sectors of the economy.
The fiscal support given to the economy as well as to the health response caused the fiscal
deficit and government debt to rise in 2020-21. Increase in Fiscal Transfers to households
would increase households' disposable income and enable them to utilize the transfers in a
manner that maximizes their utility. These would thus be a timely intervention to boost
economic activities. Executing the fiscal transfers would also be straightforward as the
necessary information to identify the qualifying households (e.g. annual income data) and the
mechanisms to distribute the transfers (e.g. welfare schemes) already exist.
Going forward, managing the fiscal-monetary trade-off may be crucial once the economy
revives and growth picks up. The exit from the accommodative stance of monetary policy has
to be well calibrated and conducted in a phased manner without disrupting financial market
sentiments and the economic recovery process. The independence of monetary policy is
institutionalised in the flexible inflation targeting framework and the objective of the
monetary policy is “to maintain price stability while keeping in mind the objective of
growth”.
Monetary policy
The financial system is always a possible area of stress during turbulent times. However,
India's capital markets, like many global markets, have done exceptionally well and have
allowed record mobilization of risk capital for Indian companies. More significantly, the
banking system is well capitalized and the overhang of Non-Performing Assets seem to have
structurally declined even allowing for some lagged impact of the pandemic. The RBI has
been on the frontlines of providing policy support, deploying the full range of instruments to
ensure orderly functioning of financial markets and maintaining financial stability. Volatility
in global financial markets and large-scale capital outflows due to extreme risk aversion
prompted the RBI to ease currency market pressures through measures such as foreign
exchange swaps.1 The Indian rupee (INR) depreciated to its lowest level of INR 76.81 per
USD in early 2020. But, this decline was modest in comparison with many emerging market
peers.
During the crisis, the RBI has undertaken several measures to ease pressures for both central
and state governments in India. The revenue generation slowed because of reduced economic
activity while the need for fiscal resources for Covid relief increased.
Thus, since the start of the pandemic, the RBI has taken on multiple roles. Not only has it
worked towards ensuring price and financial stability while supporting economic recovery, it
also has taken on the mantle of undertaking developmental policies targeted towards easing
financial stresses of vulnerable sections and ensuring a stable flow of funds to critical sectors
in light of the uneven impact of the pandemic.
List your learning from the case analyses as a business manager (Half to one page)

Challenge faced by the country during the pandemic was big learning as a business manager I
could relate it to market uncertainty under which we have to work with and when external
forces apart from market forces came into play there is no perfect solution, steps are taken on
estimation basis and quickly executed in an agile response to overcome the dynamic forces of
any pandemic level situation.
During COVID market forces plays in tug of war manner where initially
References