Indian economy thrown out of gear

While it will take several weeks to come to any firm conclusion about the trajectory of the coronavirus in India, it is already clear that it will have a big, adverse impact on the national economy.

The coronavirus threat has come even before the country could overcome the effects of the 2016 demonetisation, which depressed the growth rate. The economy is thus facing a double whammy.

The GDP recorded an impressive growth of 8.2 per cent in 2016-17. That made India’s econony the fastest growing in the world. Thereafter the growth rate slipped year after year, and stood at 4.7 per cent in the last financial year.

What pushed the growth rate down in the first phase was the disruption of the large informal sector of the economy and the small and medium enterprises caused by the sudden withdrawal of high-value currency notes.

The current lockdowns to check the spread of coronavirus is bound to push the rate down further.

In August last year the Central government imposed a lockdown on Jammu and Kashmir to take away the special status it had enjoyed under the Constitution of India from its very inception. It disrupted life and brought most economic activity to a standstill.

J&K does not have big industries, but had a robust small industries sector. It came to a grinding halt as migrant workers, who constituted its labour force, went back to the security of their distant homes.

Tourism, which has long been the mainstay of Kashmir valley’s economy, suffered as the government imposed restrictions on foreign travellers.

Then came the lockdowns imposed by various state governments to check the spread of the pandemic. With the cancellation of air, train and bus services, tourism is in the doldrums.

The Confederation of Indian Industry estimated that the pandemic will cause a colossal loss of Rs 5 trillion to the tourism sector. It put possible job losses at 40 to 50 million. The organised tourism sector, comprising branded hotels, travel agencies and tour operators, would lose about Rs 1.6 trillion, it said.

Social distancing protocols made it difficult for businesses to function normally. Those who could switch to online working did so.

Manufacturing activity was hit badly.  The automobile industry and the construction industry, for which the government had recently announced stimulus packages to recover from the effects of the slowing down of the economy, are in deep trouble again.

As the coronavirus reached India’s doorsteps, a Central government official said the growth rate may dip in the first two quarters of the current financial year, which began on the first of this month, dropping to between 4 and 4.5 per cent.

But independent analysts believe the impact of the virus will be much deeper than that.

Early this year, Moody’s Investors Services had estimated that India  registered a growth rate of five per cent in 2019 and could see it edge up to 5,3 per cent this year.

After Prime Minister Narendra Modi announced the 21-day nationwide lockdown, Moody’s lowered the growth rate projection to a mere 2.5 per cent. The colossal expenditure on measures to fight the virus imposes a heavy burden on the state governments, whose finances are shaky all the time. They are pressing the Centre for additional funds to deal with the situation.

Last week the World Bank approved an emergency financial assistance of $1 billion to India to tackle the pandemic. This was more than half of the funds allocated by the Bank for a score of countries.

The money is to be used to increase screening, contact tracing, and laboratory diagnostics, to procure personal protective equipment and to set up new isolation wards.

The steep fall in crude prices will help India to make substantial saving on its oil bill. Instead of passing on the benefit of the price fall to consumers the Centre is mopping up the saving by raising the levies on oil.

With a trust newly established by Modi attracting substantial donations, raising the needed funds may not be a problem. There is, however, need to ensure fair and equitable allocation of resources.

A few days ago the Centre announced grants to the states to tackle the pandemic. There were complaints from Left-ruled Kerala of discrimination against states other than those under the control of Modi’s Bharatiya Janata Party.