The already slowing Indian economy is now faced with COVID-19, a global pandemic which is fast turning into an economic pandemic. The economic impact of the COVID-19 will be a function of the magnitude and speed at which it spreads and duration over which it lasts within India and across the globe.
Economic impact of COVID-19: still unfolding
The 2019 coronavirus disease (COVID-19), although a pandemic, is fast turning into a global economic pandemic. It’s economic costs are likely to be massive across the world and in India. The March 2020 issue of the Economy Watch discusses the economic impact of COVID-19.
The International Monetary Fund (IMF) has observed that the COVID-19 pandemic will lead to a global recession in 2020 that will be at least as severe as the downturn during the economic and financial crisis of 2008. Moody’s Investor Service (Moody’s) has projected the global GDP to contract by (-) 0.5% in 2020. Previously, the Organisation for Economic Co-operation and Development (OECD) in its Interim Economic Assessment dated 03 March 2020 sharply revised down its global growth projection to 1.5% in 2020 due to the adverse economic impact of COVID-19. The United Nations Conference on Trade and Development (UNCTAD) on 9 March 2020 estimated a shortfall of US$2 trillion in the global income on account of the COVID-19 crisis with a US$220 billion loss to developing countries. The Institute of International Finance (IIF) also downgraded its global growth projection to 1.6% for 2020.
Impact on the Indian economy: demand and supply side disruptions
Even before the onset of COVID-19 pandemic across the world and in India, the Indian economy was slowing down with a real GDP growth rate of 4.7% in 3QFY20. Although the 4QFY20 growth rate is also estimated at 4.7%, it may have to be revised significantly downwards because of the deleterious economic and health effects of the COVID-19 pandemic. Moody’s has projected India’s GDP growth at 2.5% in 2020. ICRA has projected a growth of 2% for FY21. The economic impact of the COVID-19 will be a function of the magnitude and speed at which it spreads and duration over which it lasts within India and across the globe.
For the Indian economy, there would be both supply and demand side disruptions. On the demand side, sectors bearing the brunt of the adverse impact of COVID-19 include sectors such as trade, transport, travel and tourism, hotels, sports and entertainment as also the financial services sector. On the supply side, disruptions are coming through supply chain breakdowns emanating from countries such as China, South Korea, Italy, Spain, France, Germany, the UK and the USA. India has substantive trade relations through exports and imports with all these countries.
On the demand side, sectors such as wood products, mineral oils, plastics and chemicals derive a substantial share of their export demand from China and hence may be adversely impacted. Similarly, Germany and the UK account for a significant share of Indian exports of leather products, footwear, machinery and instruments while Iran is a major export destination for vegetable products. Among the countries fulfilling India’s import requirements, Australia and Iran are major suppliers of mineral products. China alone fulfilled 17.4% of India’s import requirements in FY19[i] especially those related to ceramic products, glass wear, machinery, electrical equipment, etc. India is dependent on Germany for imports of transport equipment. Metal articles and instruments are imported from Japan and foodstuffs and beverages from the UK. There may be a potential negative impact on all these sectors.
An UNCTAD study (4 March 2020) estimated that the most impacted sectors in the EU, US, Japan, Taiwan and Korea include machinery, automotive, communication equipment and chemicals sectors. The impact on India’s exports was estimated at a magnitude of US$ 348 million equivalent to approximately 0.1% of India’s total goods exports in FY19. Chemicals sector was estimated to be most adversely impacted with a 36.8% share in the total decline in exports, followed by textile and apparels at 18.4%, and automotive at 9.8%.
Revenue underperformance in economic downslide: strategizing stimulus packages
Due to subdued tax revenue performance, India may have to rely largely on expanded borrowing and non-tax revenue sources in order to work out reasonably sized stimulus packages. As per Controller General of Accounts (CGA) data, center’s gross tax revenue contracted by (-) 2.0% during April-January FY20. The central government, in its Budget for FY21, had already relaxed the fiscal deficit targets from 3.3% of GDP to 3.8% in FY20 and from 3% to 3.5% in FY21. As a benchmark, we may consider the relaxed fiscal deficit limit of 6.1% in FY09 and 6.6% in FY10 in response to the 2008 global economic and financial crisis. The monetary policy committee (MPC), in its March 2020 monetary policy review, reduced the repo rate to 4.4% which is below the historic low of 4.75% in April 2009 following the global economic and financial crisis.
The first fiscal intervention came in the form of relief measures relating to statutory and regulatory compliance matters in the areas of income tax, GST, customs and central excise, corporate matters, Insolvency and Bankruptcy Code (IBC), fisheries, banking sector and commerce on 24 March 2020. On the same day, a provision of INR 15,000 crores was made to strengthen India’s health infrastructure. A more substantial relief package was announced on 26 March 2020 amounting to INR 1.7 lakh crores under the PM Garib Kalyan Yojana. Alongside, the state governments have been directed to use INR31,000 crores accumulated in the Building and Other Construction Workers Welfare Fund a central fund, to support registered construction workers. State governments have also been advised to utilize the funds available under the district mineral fund for the purposes of testing, medical screening and prevention measures for containing the spread of COVID-19. In addition to this relief package, we anticipate the announcement of a more substantial fiscal stimulus package aimed at reviving the economy.
One significant global development relating to the sharp fall in global crude prices is in India’s favor. By 26 March 2020, brent and WTI crude oil prices had fallen to US$23.55/bbl. and US$16.60/bbl. respectively. A lower global crude price has the potential to benefit the Indian economy by reducing the quantum of its overall import bill. Furthermore, it reduces the pressure on both CPI and WPI inflation. A positive spinoff of a lower crude price is that it opens up space for both central and state governments to increase excise duty and VAT rates respectively on petroleum products which may come in handy in current times when overall tax revenues of the governments are under pressure. In fact, the benefit of lower crude prices should be shared between the central government, the state governments who may also consider some increase in their VAT rates on petroleum and the consumers who may benefit from a reduction in CPI inflation. The centre has already increased the special additional excise duty on petrol and diesel by INR2/liter and road and infrastructure cess by INR1/liter.
