Coronanomy — 01
“RBI has several policy instruments at its disposal. Our response will be calibrated and our effort is to see our responses are neither premature nor delayed”
— said Shaktikanta Das, Governor of India’s central bank, the Reserve Bank of India (RBI) on March 16 while addressing the media on possible impacts that COVID-19 could have on the Indian economy and RBI’s preparedness about it.
Present Situation
As the global economy has come to a standstill due to lockdown and social distancing measures imposed across the world, the future outlook depends heavily upon intensity, spread, and duration of the pandemic. There is a rising probability that large parts of the global economy will fall in recession.
In India, the Centre for Monitoring Indian Economy (CMIE) revealed a report that the unemployment rate in India spiked up to 23% in March 2020. Due to the nationwide lockdown, industrial production has come to a halt and consumer demand has taken a severe hit.
This economic shock could prove to be a fatal meltdown for India, for two reasons which are:
- Already slowing down economy: Before the invisible enemy hit the mainland of India, the economy was already slowing down and this will only compound the existing problems of unemployment, low incomes, rural distress, and malnutrition.
- Large informal sector: According to the Ministry of Labour and Employment, in 2017–18, Out of 465 million workers, 91% (422 million) worked in informal sectors lacking regular salaries and other benefits. Informal workers involved in agriculture, or as migrant laborers and other sectors would be the hardest hit.
Thus, before understanding the impact of COVID-19 on the Indian economy and people, we need to understand the composition of the economy and the employment itself.
Indian economy
Indian economy can be broadly categorized into three sectors namely, Agriculture, Industry, and Services sector. According to the Ministry of Statistics and Programme Implementation, in 2018–19, the Services sector was the largest sector which contributed 54.40% of India’s GDP, while the Industry sector at 29.73% and Agricultural and Allied sectors at 15.87%
Impact on Agriculture
According to the World Bank, in 2019, a large proportion of the workforce is still dependent on the agricultural sector (43.21% employment share in 2019).
The lockdown couldn’t have come at the worst time. This is the time when winter crops such as wheat are harvested and sold. Although the farm operations have been marked as an essential activity and Indian Council of Agricultural Research (ICAR) has issued state-wise guidelines to be followed, the migration of workers to their native places has triggered panic stations as they are crucial for harvesting and post-harvesting operations of storage and marketing.
But it’s not all bad news as the government has repeatedly assured that there are no food shortages due to the record harvest of winter crops and the world’s largest state-run food distribution program but the main issues lie in supporting farmers and laborers and getting food to the poor.
Impact on the Industry Sector
The industry sector employs about 25% of the workforce in sectors such as Mining and Quarrying, Construction, Manufacturing, etc.
Mining and Quarrying
Mining and Quarrying industry contributes around 2.70% to the GDP. Metals are considered a process industry and thus exempted from complete shutdown but operations have been scaled back thus forcing a lot of workers to move to their hometown. This sector is a high cash-dependent sector as raw materials are procured on a cash-and-carry basis and the shutdown of industries such as automobiles and construction makes it one of the hardest-hit industries in the economy.
Manufacturing
Manufacturing accounts for about 17% of GDP in industries such as automobiles, apparel and textiles, and other durable items such as household goods (television, home appliances, etc), machinery, etc.
- Automobile Industry
The automobile sector which constitutes about 10% of the GDP and employs around 40 million people was already on a decline. Recently, the Society of Indian Automobile Manufacturers (SIAM) released the numbers that suggest that sales hit a two-decade low in January 2019 and the complete shutdown of industries will only aggravate the situation. In these uncertain times, cautious consumer sentiment is likely to result in plummeted sales even after the industries start. - Apparel and Textile
According to the CMAI (Clothing Manufacturers Association of India) chief mentor Mr. Rahul Mehta, there could be as many as 1 crore job losses in the textile industry which accounts for about 2% of the GDP and directly employs around 45 million people. The nationwide lockdown led to closures of factories and layoffs have already begun among low wage workers. Drastic fall in global demand is expected to hurt India’s textile exports over the next few quarters as well.
Construction
Construction is the second-largest employer after agriculture in India with an estimated 53 million people and it contributes about 7.5% to the GDP. According to KPMG, construction projects worth more than Rs. 59 lakh crores have been severely impacted. There is an estimated job loss of 30% due to the severe reduction in sales within the residential segment and lower footfalls for retail and hospitality segments.
Impact on the Service sector
The service sector is the largest sector in the Indian economy and employs about 32% of the workforce in sectors such as aviation and tourism, transport, telecommunication, IT, banking, and other financial services.
Aviation and Tourism
The aviation and tourism sector contributes about 12% of the GDP and employs more than 40 million people. Indian aviation and tourism sector faces questions around its very survival as IATO (Indian Association for Tour Operators) estimates that the sector may incur a loss of Rs. 85 billion due to travel restrictions and more than 50% of the workers staring at a potential job loss.
Banking and Other Financial Institutions
This sector could be one of the most stressed out due to COVID-19 as profitability will be under pressure due to increased delinquencies and potent risk of many of the borrowers defaulting leading to a rise in NPA’s. A slew of defaults especially on MFI (Micro-financing Institutions) and mid and smaller size NBFCs (Non-banking financial companies) can bring them to the brink of collapse.
Moreover, credit take-off could be substantially low due to weakened demand and cautious consumer sentiment in these apprehensive times.
MSMEs
According to KPMG, Micro, small and medium enterprises constitute around 30–35% of the GDP and employ about 114 million people. MSMEs are spread over both service (69%) and manufacturing (31%) sectors. A recent study by AIMO (All India Manufacturers Organization) reveals that over a quarter of such enterprises stare at a possible closure and the number could go as high as 43% if lockdown prevails till the end of May. MSMEs engaged in the hotel industry, tourism, logistics, retail, and production have been hit big time. Consumer goods, garments, footwear, utensils will see a major direct impact.
The invention of the wheel is often described as the most powerful invention of all time whose sudden halt has severely punctured the economic wheel and no sector is estimated to go unscathed by it.
In the next blog, we will talk about various policy measures that Reserve Bank Of India announced to tackle the situation and their impacts on the economy.
