Impact of COVID-19 on Indian Economy

Sources – KPMG, EY, Nomura, MoSPI

India’s real GDP decelerated to its lowest in over 6 years in 3Q 2019-20, and the outbreak of COVID-19 posted new challenges. Government has taken steps to contain the spread, such as nationwide restrictions for 21 days and a complete lockdown of the states have bought all the economic activities to standstill barring the essential services. This has an impact on consumption and investments. While Indian businesses, barring a few sectors, can possibly insulate themselves from the global supply chain disruption caused by the outbreak due to lower reliance on intermediate imports, their export COVID-19 infected nations could take a hit. In sum, the three major contributors to GDP – private consumption, investments and external trade, will get affected.

Three scenarios can be used to explain the economic effects of COVID-19-

Scenario 1 – Quick retraction across the globe including India, by end April to mid-May

China has significantly bought down the number of new cases and its manufacturing sector is all set to resume normalcy. Other nations also largely contain the spread of the COVID-19 pandemic and large fiscal and monetary stimulus unveiled will start to work sooner than expected, which will raise hopes of a solid recovery in the second half of 2020. In this case, India’s growth for 2020-21 may be in the range of 5.3 to 5.7 per cent.

Scenario 2 – While India is able to control the spread of COVID-19, there is a significant global recession

In this scenario, the impact on India’s growth in terms of global spillovers will be meaningful, owing to India’s integration with the global economy. So, India’s growth will be lower than Scenario 1; the expected range is 4—4.5%.

Scenario 3 – COVID-19 proliferates within India and lockdown gets extended; global recession

This would be a difficult situation for the Indian economy, as it will have to bear the brunt of both domestic and global demand destruction. Prolonged lockdowns would exacerbate economic troubles. India’s economic growth may fall below 3% or maybe lower under this scenario.

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