How has COVID19 Indian Economy?

By: Vanshita Agrawal


The unprecedented jolt of COVID -19 has shaken the world. Global Economy has been pushed to its limits. Demand and supply chain disruptions followed by an economic slowdown is commonplace. No country is immune to the shock waves of Covid-19. As per IMF, up till January, over 160 of its member countries were expected to experience positive per capita income growth. A 360° shift explicitly brings to fore the extraordinary nature of the crisis, “[IMF] now projects that over 170 countries will experience negative per capita income growth this year.”

The fifth-largest economy of the world, representing 2.39 per cent of the GDP – India’s economy is expected to undergo a downturn at the hands of the crisis. This scenario adds on the distress. The dismal GDP growth rate clocks at 4.2 per cent in 2019-20, the lowest since 2002-03. Thereby the concern with regard to further deterioration is not uncalled for. McKinsey report states that economists are predicting the GDP to shrink between 1.5 per cent and 5 per cent during the 2021 fiscal year.

It is imperative to delve into the reasons for the downward trajectory. The World Economic Outlook puts ‘corporate and environmental regulatory uncertainty, together with concerns about the health of the nonbank financial sector’ as the major reason for a decline in demand. Sector-specific weaknesses in the automobile sector and real estate, as well as declining nominal values of private sector investments, contributed to the downfall.

The softened state of the economy had introduced a discord at the outset of COVID- 19.

Below the sectors have been divided into two sections to evaluate briefly the degree of impact and its status of recovery.

Informal Sector

90 per cent of workers in developing countries are informally employed. The mainstream economists view 95 per cent of the Indians engaged in the informal sector while the Government and Niti Aayog estimate it to be 93 per cent and 85 per cent respectively. The International Labor Organization has projected that, after the economic stoppage, 400 million people in India risk falling into poverty.

The impact of COVID-19 on the informal sector is touted to be like demonisation, but much larger and grimmer. The effects could be well categorized into low wages, rising unemployment and fall in GDP growth numbers.

Sectoral Impact

Sectors – Low COVID Impact & Quick Recovery

  1. FMCG

Nielsen slashed the growth of FMCG sector by 5 per cent- 6per cent owing to the adverse effects of corona pandemic, on April 30th. It is reported to have slipped to -6 per cent during the first half of the year. Since then, the signs of improvement in June has made Nielsen revise its outlook to report a flat growth range i.e. range of -1 per cent to 1 per cent for FMCG products.

The July-September quarter is expected to show growth. The festivals in the October-December quarter is instrumental in the expectation of growth during that quarter.

2. Pharmaceutical

Rating Agency ICRA notes that owing to the COVID impact, the domestic pharmaceutical industry is expected to grow at 4 per cent – 6 per cent in FY2021. This minimal impact is seconded with an optimistic view that the CAGR through FY2020 – 2023 is expected to be in the range of 8 per cent – 11 per cent.

Moderation in pricing pressure for US market, new launches and market share gains for existing products and consolidation benefits will drive growth for the industry over the medium term form the backbone of the prospect for growth in this sector.

3. Health Insurance

Despite the impact of coronavirus, India Inc. Group projects the health insurance in India to grow by 10 per cent this year. This growth is brought on by increased consumer awareness and widespread health coverage.

The Insurance Regulatory and Development Authority of India (IRDAI) issued a circular in the first week of March asking insurance companies to design policies in a manner which covers treatment for Coronavirus. Using the Sandbox Regulations of the IRDAI, Bengaluru based Digit Insurance launched its cover against Coronavirus when the virus was in its nascent stage. Since the launch of the Covid-19, Digit has sold more than 2000 policies and incidentally has also seen a 25 per cent growth in its sales of comprehensive Health Insurance.

4. Telecom

Telecom services has seen a lower impact from the coronavirus pandemic and is also among the early ones to recover. Major gains for this sector include a significant surge in data consumption and a rebound in new subscriber base.

The introduction of 5G and other new technologies in the coming years and need for a better-connected nation in a post-COVID era will “intensify” the role of passive infrastructure players.

Sectors – High COVID Impact & Slow Recovery

  1. NBFCs

According to ICRA, 52 per cent of assets are under NBFCs (Non-Banking Financial Corporation) which is under the moratorium as of May 2020. Only if 10 per cent of these will default, it would directly double the gross NPAs under NBFCs reaching 9.6 per cent loans as of March 2021 which were supposed to be 4.6percent as of March 2020.

For the first time in 20 years, it is being projected that the AUMs of NBFCs might degrow. Crisil reported that due to fiscal year disbursements, non-bank lenders’ AUM may show negative growth of 1 per cent – 3 per cent.

10-12 per cent fall in the AUM of real estate and structured credit sector in FY2021 is predicted. AUM in vehicle finance may fall 3-5 per cent for NBFCs in the current financial year. Similarly, the same in micro, small and medium enterprises (MSMEs) segment may also fall 3-5 per cent in FY2020-21. The AUM in gold loans sector may grow by 14-16 per cent for NBFCs., which has been a silver lining for the NBFC sector.

2. Housing

The January-March quarter saw a decline of 27 per cent in sales. In the next quarter of April-June, that indicator shoots to 84 per cent. According to data released by Knight Frank, a real estate consulting firm, housing sales, in the first half of the year, in India’s top eight cities more than halved to 59,538 units, a decadal low. For comparison, the first half of 2019, 1,29,285 housing units had been launched.

The demand side of this sector is not bright either, impacting the launch of new units. The fall of 46 per cent year-on-year between January-June was experienced, to 60,489 units, compared with 1,11,175 units, launched last year.

3. Aviation

Centre for Asia Pacific Aviation-India (CAPA India) report released on July 3, noted that is likely that the demand will remain stifled in the Indian aviation sector till the second quarter of the financial year of 2021.

In the first half of the year, the annual growth of -50.22 per cent and monthly growth of -83.50 per cent was experienced. Passengers carried by domestic airlines during January-June 2020 were 351.78 lacs as against 706.60 lacs during the corresponding period of the previous year.

Crisil Research reported that India’s domestic airlines are staring at a revenue loss of Rs 1.1-1.3 lacs crore over three financial years, including the current financial year, owing to the coronavirus pandemic, which has led to visa and travel restrictions.

4. Automotive

The automotive industry is one of the hardest hit from a business perspective. Liquidity crunch, higher acquisition costs, and weaker customer sentiment had led the downturn of the industry. The players were just attempting to recover when COVID- 19 exacerbated the situation. In March 2020, the government instituted a lockdown, domestic automotive sales were 45 per cent lower than they were in March 2019.

Automotive sales for the fiscal year 2021 could decline from 10 to 15 per cent from the fiscal year 2020, from the trends that have been observed by McKinsey & Co.

5. Shared Mobility Services

COVID- 19 has caused the shared economy sector to plummet. The sector that oversaw high double-digit growth in 2018, is now experiencing minimal growth in the first six months of 2020. Shortage of driver-partners and the changing regulations have made it difficult for the sector.

Until a vaccine is developed, the shared mobility modes, especially those involving ride-hailing and short-distance rentals are likely to see lower ridership.

Conclusion and Recommendations

A global recession seems inevitable in light of the existing scenarios. The Indian economy was already in a dire state before Covid-19 struck.  In this backdrop of the declining economic situation due to coronavirus, the Indian industries have to bear the severe economic burden and serious consequences. But the severity and duration of this decline will depend on the effectiveness of the steps taken to prevent the spread of the virus, the impact of the government policies to mitigate liquidity problems in small and medium-sized enterprises and the support provided to families under financial pressure.

It is being estimated that the eventual damage brought down by these disruptions to the economy will be significantly worse in days to come.  On the demand side, the income support required needs to be balanced by the government to ensure that the fiscal situation is under control. While the balance that has been struck so far seems fair, the government still needs to find more scope to support the poor’s incomes.

There are two issues that the Government should be deeply concerned about on the basis of priorities. Firstly, to enhance the healthcare facilities and health infrastructure as needed to cope with the pandemic. And secondly, provide the economic assistance and incentive to the current and future establishment of the economy.

The public health crisis needs to be managed by increasing financial support, insurance coverage and using technology solutions. Protection of income and employment, particularly for the most vulnerable parts of society is also essential. This can be done more effectively by implementing direct cash transfer programs with appropriate monitoring and assessment mechanisms and by using the existing digital payment infrastructures.

But this crisis also demonstrates that when faced with an overarching challenge, governments and individuals are capable of strong and swift actions. Given that India is looking to shore up its economy, it is worth reflecting on the other structural steps needed to move to a more sustainable and resilient economy.

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