30 C
Sunday, April 11, 2021

Bitter Pill to swallow: Indian economy to fight a tough battle

The essential lockdown and its economic impact:

The 21-day lockdown, imposed to contain the deadly Corona Virus, has started etching its scars on the Indian economy. 80% of Rs. 204 lac crore economy has come to a halt. Since the lockdown from March 25, India’s GDP will suffer a blow of at least Rs. 904 lac crores. That is an average of Rs. 55,890 crores a day.

This enforced lockdown of 21-days is necessary to break the chain of the transmission of the virus. However, the Corona containment experience of South Korea and Japan has a different story to say. They suggest a 60 days lockdown. India has to experience thus a not just one 21-day but a series of possibly three such lockdowns, with or without breaks.

The already sluggish Indian economy is facing vast knock-downs on industries like travel, tourism, aviation, hospitality, malls, multiplexes, automobiles, and many others. Sectors like consumer durables, fuel, electricity, and petrochemicals will be facing a lesser impact. But if the lockdown continues till June, this economic setback will increase copiously.

The worst part is that India is already facing a deep slowdown. According to CMIE, India Inc., with a recession, there can be the most significant economic contraction in the real value over the past 20 years. During the global liquidity crisis of 2008-09, the decrease was six percent as compared to a safer contraction of 12.9 percent in 2019-20

With the much-awaited economic package of Rs. 1.7 lac crore, coming from Nirmala Sitharaman, Finance Minister, targeted towards the poor and underprivileged and some relief measures from RBI, India can finally stand up and try to elude off some of its burdens. These measures will be complementary to the center’s moves proving relief to individuals and businesses with a three-month EMI moratorium, reduced interest rates, and pumping extraordinary Rs.3.74 lac crores additional liquidity in the economy.

How much loss are we staring at?

With most of the offices and business establishments remaining closed during the lockdown, the worst-hit sectors were the tourism, hospitality, and aviation. The flights and public transportation paused, restriction on foreign tourist arrivals, and finally, cancellation of metro and passenger rail services brought the entire country to a standstill.

China, who has now begun economic activity, had earlier forced a lockdown to contain the spread of the virus, thus disrupting the supply chains for many of the Indian businesses. As of now, when the Chinese economy is picking up, the lockdown in India and many other countries have started disrupting supply chains across the world. To mention that the outbreak has spread across 199 countries.

However, even if the lockdown doesn’t continue, the real shock of the diminished GDP will be felt in the first quarter of the FY-2021. The answer to how big a hole will burn the pocket of the Indian economy is still lying under layers of estimation.

According to one estimate, the GDP in FY-2021 could vary from one to four percent, which is around Rs. 224 lac crore. While Lekha Chakraborty, senior economist at NIPFP, believes in GDP being dwindled to one to two percent with each percent swiping off Rs. 2 to 4 lac crore. Another report by Soumya Kanti Ghosh, group economic advisor SBI, after much deliberation, pins the real GDP at 2.6% for the FY- 2020-21 with a clear downward bias with contraction.

CARE estimates the dip in GDP around Rs. 6.3 to 7.2 lac crore. But in case of a lockdown roll-over, there can be an increase in the figures by Rs. 4.2-4.8 lac crores.

Is the already announced economic Package enough?

Hope prevails of an economic rebound, despite the low GDP of 3 to 4 % in the later FY-2021. Anticipating the kind of measures the Indian government implements, may it be monetary, fiscal, or administrative, will surely have an impact on the economy. The economic package should be at least in the range of Rs. 3 to 5 lac crores in comparison to the estimated Rs. 2 to 4 lac crore.

Former RBI Governor Bimal Jalan, says that the government needs to pump money in the system. People need money in their hands. Why? Because the government has to create a demand in the economy, which has very much declined. If the demand increases, then the people should have the necessary spending power, hence the liquidity measure.

In addition to the reliefs given by RBI, the government has announced an economic package comprising of a 5 kg of grains and 1 kg of pulses to be distributed per household for the next three months, hike in the daily wages from Rs. 182 to Rs. 202 under MGNREGA, Rs. One thousand payable in two installments for the next three months to widows/ senior citizens/ specially-abled persons, and three LPG cylinders for free under the Ujjwala scheme.

The question arises that can and should India afford such a fiscal extravagance? Former finance minister, P. Chidambaram, has pointed out that with the Centre and the states likely to spend Rs 30 lac crores and Rs. 40 to 45 lac crores, respectively, it may be possible to calm the Corona effect on the economy upto.Rs. 5 lac crores.

A stimulant and highly optimistic economic package by the Centre has brought forth various opinions. The experts, however, feel that even severe the package seems comprehensive on the outside, it requires a fresh expenditure input of Rs. 70,000 to Rs. 1 lac crore. NIPFP’s Lekha Chakraborty has justified the information by pointing out that the marginal increase in daily wages and other measures under MGNREGA doesn’t make much difference.

Pradhan Mantri Garib Kalyan Yojana
Pradhan Mantri Garib Kalyan Yojana

How RBI can play a role?

The massive Rs. 3.74 lac crore package announced by the RBI, through various measures, is expected to boost the liquidity. However, if the lockdown persists, then the government will have to pump in an additional Rs. 3 to 4 lac crore to compensate for the revenue loss.

One of the measures announced by the RBI was reduce the CRR

Now, where are these funds going to be mobilized? The obvious answer is via ‘Deficit Financing,’ of course. In such cases, the government but has two options: First, either borrow directly from the market or second, to ask RBI to monetize the deficit by subscribing its paper. Or, RBI prints additional currency notes. The last option costs more to the economy. The current fiscal deficit of India for FY-2021 is 3.5%, which can further elevate by 1% to 1.5% depending upon the size of the stimulus.

What are our options for fund mobilizing

Let’s check out the options for fund mobilization.

Option 1: Consideration for seizing an opportunity of raising resources at low-interest rates from the market. This raising of resources at low speeds will attract crowding, indicating lesser funds for the private sector. Thus, in case of a large requirement, the center is left with a mix of two options: RBI to print new currency or monetize its debts to finance the deficit. However, it will further invite negative implications like higher inflation and the depreciated value of money.

Option 2: Utilizing our gold and forex reserves. According to the Bimal Jalan committee, we have reserves that can last only for 11 months. On the other hand, the forex reserves of $491 billion are lower than the country’s total external debt of $558 billion, which are due next year—thus making India’s condition more vulnerable on the global front.


The global Corona war case has already crossed the $12 trillion mark. The US, France, and Spanish governments have previously announced their stimulus packages, which are around 10% to 20% of their GDPs.

The Indian government, on the other hand, is still reluctant to announce such a generous package. PM Modi’s government is still apprehensive about the consequences of this package. The long-term fiscal challenges and ways to slow down the measures, once implemented, have to be given a thought.

A high-octane package of Rs.4 to 4.5 lac crores means more borrowing of funds at a high-interest rate with a higher fiscal deficit. This mobilizing of funds will also lead to spending less on asset creation. It will further lead to poor credit ratings for India on the global page.

Economists think though the nation is still awaiting the first installment of the package targeting the poor and vulnerable, the demand for significant relaxations is surfing up in the impacted sectors and the people related to them.

With the above steps thought of for fighting a fierce battle against the Corona and the economy, the Modi government has denied any complete sector-specific economic relief.

Listen to India's best podcasts.

Listen anywhere, anytime.

Platocast podcasts are sourced carefully to bring you the best stories out there.

Platocast Teamhttps://www.platocast.com
As a team we research, fact check, write, and bring the content to you.

Explore More

PM Modi launches four-day ‘Tika Utsav’ to create awareness about COVID-19

PM Modi launches four-day 'Tika Utsav'. Here is what you all need to know about. PM Modi launches four-day 'Tika Utsav', the opening of a...

Must Read


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.