reviving the indian economy after covid 19 essay

Post Covid-19: recovering and sustaining India’s growth

Published: 06 August 2020
Volume 55 , pages 161–181, ( 2020 )

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reviving the indian economy after covid 19 essay

Ashima Goyal 1

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The paper discusses past virtuous growth cycles in India and argues that the post Covid-19 macro-financial package is an opportunity to trigger another such cycle by raising marginal propensities to spend above those to save. This is feasible since the major constraints that aborted such cycles in the past are waning. Among these constraints are commodity price shocks and other supply-side bottlenecks; financial repression and discretionary allocation; and fiscal space. While the first constraint is relieved, and there is adequate progress on the others, fiscal space is still constrained. Even so, the Covid-19 crisis necessitates a large macroeconomic stimulus. In order not to overstrain government finances it should be targeted, temporary and self-limiting. Financing features can aid this as well as improve financial stability. Large government assets can be monetized to help restructure towards more effective government spending. Specific policy implications are drawn out.

Global Crisis, Financial Institutions and Reforms: An Indian Perspective

RETRACTED ARTICLE: Assessing the nexus between fiscal policy, COVID-19, and economic growth

The financial crisis and its aftermath: the case of ireland.

Avoid common mistakes on your manuscript.

1 Introduction

Why is it that steady high growth continues to elude India Footnote 1 ? China’s catch-up growth extended to about 30 years of double digit growth. India’s post-liberalization growth has been volatile and has only rarely reached double digits. A high growth burst in the 2000s was not sustained. There was a slowdown after 2011. Growth was 3% per annum slower than in the previous period. The years 2016, 2018, 2020 saw reversals of weak growth revivals. In 2020 this is due to the Covid-19 shock.

Key macroeconomic constraints of high oil and food price inflation that caused volatility had eased after 2014 but macroeconomic policy did not ease in line with this and became contractionary. High world growth and a local infrastructure boom had raised demand in the 2000s. Both stimuli disappeared after 2011 and were not replaced by others. Indian export growth remained weak after 2011 as poorly designed regional Free Trade Areas stimulated imports more than exports Footnote 2 under continuing global shocks and real appreciation. But domestic demand was not allowed to compensate. We examine the types of macro-stabilization policies consistent with an emerging market economic structure and show that in the Indian context because of unutilized resources and limits to depreciation and therefore external demand, sustaining domestic demand is very important.

Commentary on the slowdown in 2018 often pointed to inadequate structural reform rather than to a shortfall in demand. But the standard land labour reforms said to be pre-requisites for growth have been uniformly absent. So they cannot be responsible for growth volatility. Their absence did not prevent high growth in the 2000s. The argument often heard that growth is low because reforms are absent is fallacious also because extensive structural reforms continue to take place. Moreover, reforms have a cost. Some encounter intense resistance Footnote 3 for ideological reasons or from groups that are hurt, and often impose large short-term costs. It was rather pro-cyclical macroeconomic policy and regulations following specific shocks that led to the slowdown. Focus on structural reforms was excessive, although some of them, especially in the financial sector, were necessary.

With the easing of commodity price shocks and finance constraints macroeconomic policy was moving towards more balance within the space allowed by flexible inflation targeting and fiscal responsibility and budgetary management (FRBM) legislation, facilitating a rise in spending. There were signs of growth recovery in February. But Covid-19 imposed severe supply as well as demand shocks.

How can India’s growth best recover and sustain as the effects of Covid-19 wear off? The contraction in global interactions has brought about recognition of the importance of domestic demand. There is also the peer effect as other countries inject monetary, financial and fiscal stimuli. One reason for India’s conservative polices was a fear of outflows and large outflows over March–April illustrate again that global risks matter more than domestic policy. While domestic risks matter, growth matters more and spending to revive growth is acceptable especially since every country is doing this. Indeed, inadequate spending is regarded as more of a risk.

A study of past growth accelerations shows a switch to a higher growth path is feasible if marginal propensities to spend rise above those to save. Savings are not a constraint if the domestic financial system delivers. They tend to rise with higher growth. In India credit growth has been pro-cyclical tending to follow and over-enhance rather than lead growth. Especially since 2011, pro-cyclical regulations and focus on financial reforms squeezed credit growth and tightened financial conditions. The post Covid-19 stimulus is an opportunity to relax these especially as structural improvements are adequate and over-tightening has itself created stress.

But interest payments in the Indian government budget are already nearly a quarter of its revenue—it cannot afford to borrow much more, and expected future nominal income growth should limit growth of money supply. So financing schemes will have to be designed to minimize impacts on future fiscal deficits while maximizing growth revival. They should be targeted, temporary, work through the financial sector, and avoid the over-reaction that occurred after the global financial crisis. Reversal of the tightening of financial conditions that characterized the last decade will help the financial sector recover.

For sustainability, short-run actions have to keep an eye on the long-run; short-run stimulus given has to be consistent not only with short-run easing of supply constraints but also with continued long-run supply side improvements. There is sufficient progress on land-labour reforms that are often said to be inadequate. Reform by stealth riding on feasible trends is allowing resource utilization and productivity to rise. The sheer rise in size and diversity available in a $2 trillion economy creates much more depth and resilience. Financial markets have absorbed many shocks since 2017 and recovered, pointing to this level and diversity effect. Fiscal reforms remain critical, however. Suggestions are made for specific policies.

The structure of the paper is as follows: Sect. 2 shows the relaxation occurring in key macroeconomic constraints. Section 3 brings out how structure and endowments condition reform strategies. Section 4 discusses past and possible future virtuous growth paths in India. Section 5 shows complementary supply-side improvements to be adequate and identifies essential reforms, while Sect. 6 draws out implications for policy.

2 Relief in macroeconomic constraints

2.1 commodity price shocks.

A big advantage for China was it started its catch-up growth in 1978 with reform that raised agricultural productivity. Low relative food prices are essential for sustained low inflation growth in populous countries where food has a large share in the consumption basket.

Other major commodity imports such as oil, an essential intermediate good, also contribute to inflation. China used to export oil but became a net oil importer in 1993. Footnote 4 By 2006 it imported 47% of its consumption, and had begun building a large strategic oil reserve as domestic production was now only two-thirds of its needs. In 2013 it became the largest oil importing country. Even so, by the time it became a big oil importer its exports had grown enough to finance imports without materially reducing its current account surplus.

India is the world's third largest oil importer. In 2009–10, crude oil imports amounted to 80% of its domestic crude oil consumption and 31% of its total imports compared to 14% for China. India is dependent on a wide range of primary energy imports. Figure 1 shows China started its reforms process with a very low share of oil imports, but at India this was high at the beginning of the 1990s reforms. A rise in oil price raised the current account deficit (CAD) and depreciation in response further raised the import bill and was inflationary. This dependence on commodity imports implied limiting depreciation would help contain inflation.

Source: World development indicators available at https://data.worldbank.org/country

Fuel imports (% of merchandise imports).

The discovery of shale oil in many countries and especially the United States (US), together with climate change related efforts to develop green alternatives, as well as the discovery of feasibility of home and distant work in many areas after Covid-19, has reduced the power of the OPEC lobby to keep prices high. This change in the political economy of oil pricing relieves a major constraint for India.

There are also signs of a slackening of critical constraints in agriculture. A rise in agricultural productivity has to precede a growth surge for it to be sustainable in a populous country. This happened in China, while a jump in food inflation was contributed to halting India’s high growth phase in the 2000s. By 2018, however, India seemed to have entered a period of agricultural surpluses. There is evidence of rising productivity and diversification to horticulture, aquaculture etc.

Sustained improvements in rural roads, electricity production and use of MGNREGA (rural employment guarantee) funds to strengthen irrigation and other infrastructure raised productivity, allowed farmers to grow high value crops and to venture into pluriactivity. Footnote 5 Much further improvement is required, however. Granular market-facilitating changes, for example in good quality grading and sorting is essential for integrating e-markets. Removing irritants like export bans, stock limits and the Essential Commodity Act is necessary for improving private sector participation in storage, processing and value chains. There is movement on this after the Covid-19 pandemic closed congested mandis . Direct marketing was allowed and the central government diluted the Essential Commodity Act.

Improved land records, Footnote 6 tenancy laws, producer organizations and cooperatives are required for overcoming fragmentation. Division in families has resulted in uneconomic units of production. Non-agricultural employment and better land markets are possible solutions. States have a major role since agriculture is also a State subject. Change is, however, uneven across States.

Rising minimum support prices (MSPs) and government procurement was used in the past to give farmers income support, but these distorted allocation decisions and resulted in large unsold food stocks. As a consequence of strong farm lobbies MSPs normally rose with international prices, so farmers benefited in the 2000s. But international food prices softened after that. Farmer distress in 2018 was more due to over-production in relation to demand, which kept prices soft despite attempts to raise MSPs. Stable food prices benefit low surplus marginal farmers as well as consumers. Better marketing facilities that squeeze intermediation margins will give farmers higher prices. The 2018 export policy that promises uninterrupted exports of organic and processed foods needs to be extended to other food crops, as an effective way of giving farmers higher price realization. They would still need insurance against global price volatility, however.

An India approaching middle-income status is attempting to switch to the advanced economy way of subsidizing agriculture, since pricing interventions are not WTO compatible. Price distortions in inputs such as electricity and fertilizer should go. Transfer schemes can build on the Aadhaar data-base. PM-Kisan launched in 2019 aimed to transfer Rs. 6000 to each farmer as minimum income support. A Telengana type Rythu Bandhu transfer needs to be preceded by a cleaning up of land records.

Rural incomes will ultimately rise from diversification to non-agricultural activities. Reducing the number of active farmers is essential to raising their incomes. Non-agricultural rural employment is already providing valuable support for rural incomes. The rural share of India’s workforce may still be 70% but NSS surveys show agriculture accounted for only 59.4% of rural male employment in 2011–2012. According to NABARD ( 2018 ) only 19% of rural household income came from cultivation. To some extent business is already doing so, but needs to be encouraged further to migrate to states and rural areas where the labour is. This will also lessen migrant pressure on cities. New rural non-agricultural employment tends to be capital intensive—pointing towards a skills shortage that forces capital to substitute for labour. Therefore, a focus on education and skills is required, to make available trained low-skill as well as high-skilled labour. This is all the more required after the Covid-19 driven return of migrant labour to source states.

Productivity, diversification and marketing changes should reduce the MSP-led rise in food, wages and other prices in the future, however.

2.2 Finance

A fallout from the plans plus populism that characterised India’s pre-reform growth is persistent strains in government finances. Massive government investments earned negative returns and populist expenditures also added little to productivity and revenue growth. After the 1980s, therefore, increasingly the government was borrowing for consumption. The primary deficit was positive. Before reforms the government was able to borrow cheaply because of fixed interest rates and a statutory liquidity requirement (peak of 38.5% in the early 1990s) that forced financial institutions to buy government debt. This financial repression was slowly reversed with liberalization. Automatic monetization was stopped and interest rates became market determined. But the complementary deep structural fiscal reform required was inadequate so the cost of government borrowing rose steadily. In 2020 almost a quarter of central government revenues went in interest payments.

Public funds for infrastructure financing, therefore, were limited. Moreover, development banks had been wound up but despite repeated attempts bond markets had not developed adequately. In an open economy the government has to reduce deficits to prevent country risk and the cost of borrowing for all entities abroad going up. After the 2000s growth boom and especially as part of the global coordinated post global financial crisis (GFC) demand stimulus, the UPA government pushed public sector commercial banks (PSBs) to lend for large infrastructure projects. Their own over-optimism contributed to excess investments. Clearance delays and other external shocks following the GFC turned many of these loans into default. Since this time large infrastructure loans had gone to the private not the public sector, there was an unwillingness to allow private enrichment at public expense. In the absence of a bankruptcy regime and threat of losing their assets, promoters were not used to repaying loans. They tended to strip assets and continued to prosper while their factories floundered.

This was only an example of the corruption that a system of controls combined with political/bureaucratic discretion had created. Rising value of natural resources with reforms and higher growth, led to allegations of corruption in allocation. There was a national revulsion, an example of which was the movement against corruption led by Anna Hazare over 2011–2012, that would help bring down the ruling Congress-led coalition.

As corruption increased, however, institutions were created to fight it. A clause in the Government of India ( 1988 ) defined criminal misconduct by a public servant to include obtaining a pecuniary advantage for anyone where no public interest is involved. In the atmosphere of suspicion and mistrust this clause was used to harass public servants for market-based commercial decisions that had gone wrong. As a result decision-making froze. A market economy has to move to transparent processes with better incentives and appropriate institutions.

High non-performing assets (NPAs) of PSBs after 2011 were also partly due to the above systemic flaws including the asset liability mismatch in financing infrastructure. PSBs needed repayment earlier but infrastructure has a longer gestation than the average deposit cycle, so many loans were non-performing from the beginning. Global slowdown and internal (government permission paralysis) shocks compounded firms’ losses. Therefore financial structures such as takeout financing that were expected to extend the loans did not materialize. Essential rollovers were regarded as ‘evergreening’ even though they were inadequate to keep projects viable.

An asset quality review (AQR) from Reserve Bank of India (RBI) in 2014 that enforced strict provisioning, after other schemes had not worked in an environment of high real interest rates and low growth, severely reduced bank lending, especially to industry. Footnote 7 An AQR is normally followed by recapitalization since otherwise banks capital and lending is severely affected. But, in India, full recapitalization had to await the setting up of essential resolution institutions and for governance improvements. NPAs persisted on the higher side for almost a decade.

An insolvency and bankruptcy code (IBC) was passed into law only in 2016. Other complementary institutions were also set up. After driblets of money earlier, it was only in 2018–2019 that a reasonable shot of 1.08 lakh crores came from the government as owner, in the form of recap bonds.

Relatively healthy private banks were lending only to retail, partly as a risk-minimization strategy. But reduction in their lending to industry suggests low loan demand was the real constraint (Goyal and Varma 2018). Diversity in bank strategies is healthy for the economy, and should be preserved. Although competition had led to an improvement in PSB performance after reforms, there was still scope to improve governance and customer friendliness. Weaknesses in private banks also had to be addressed. Footnote 8

As capital ratios deteriorated, the RBI tightened its prompt corrective action (PCA) thresholds in 2017 and placed restraints on lending for about a dozen PSBs. Meanwhile demonetization in October 2016 flooded banks with deposits and mutual funds with inflows. Non-banking financial companies (NBFCs) had begun to substitute for banks and provide credit where banks found it difficult to assess credit-risk. The commercial paper market boomed. Some NBFCs found it profitable to borrow short at cheap rates there and lend long for infrastructure. Regulations should have been tightened at this time. Instead the rise in credit was welcomed.

In 2018, a major semi-public NBFC operating in the infrastructure space, with a complicated non-transparent structure, was unable to honour its obligations. And when short-term money markets froze, no immediate liquidity was provided. Regulation was pro-cyclical, and did not respond to systemic spillovers. Markets were shaken by rumours of firms in trouble. Risk aversion grew for lending to NBFCs, particularly those in the housing space. Spreads rose. NBFCs began hoarding liquidity and cut down on their lending.

The RBI provides a liquidity window only for banks. Banks were incentivised to lend to NBFCs since they were expected to be able to take a reasoned call on credit risk, but high risk aversion meant such lending never became substantial. Banks are not reliable liquidity providers in bad times. That is why a more comprehensive lender of last resort is essential to prevent systemic spillovers. It was not surprising that credit growth fell steeply and with it output growth. Credit growth in H1 2019–2020 was only 12% of that in H1 2018–2019. Footnote 9

Even as sector-level liquidity tightened, aggregate liquidity was also often tight. Footnote 10 Since 2011 durable liquidity was kept in deficit (with short-term RBI liquidity financing the deficit in injection mode) in the belief this would improve transmission. But India faces large exogenous durable liquidity shocks because of foreign outflows, government cash balances, and currency demand, so that durable liquidity shortfalls were often excessive. Figure 2 shows banks were borrowing from the RBI in most periods. But tightening was unprecedented after 2013, and over 2018–2019. Liquidity surplus, when banks deposit excess liquidity in the RBI reverse repo window, was also exceptionally high during demonetization and in the liquidity correction that followed from mid-2019. Durable liquidity shortfalls, that have to be compensated by borrowing from the RBI, added to banks reluctance to lend after 2011.

Source: RBI/CMIE data

RBI’s Claims on Banks: Bank deposits with (− surplus liquidity), borrowing from RBI (+ deficit liquidity).

By mid-2019, however, post recap and recovery through the IBC, PSB net NPAs had reached low single digits, writing back of provisioning made earlier added to profits; durable liquidity was in surplus by July, with the call money rate closer to the reverse repo rate; although there was still no RBI refinance window for NBFCs, slow moving government liquidity schemes continued to be fine-tuned to deliver better and were working satisfactorily after the Covid-19 shock. RBI also further incentivised banks to lend to NBFCs. The earlier suspicion of NBFCs inadequate business model, was giving way to a realization that they had a natural partnership with banks due to their ability to assess risks and distribute credit where banks found it difficult.

The Prevention of Corruption Act had been amended in 2018 to make the essential distinction between business loss and corruption. Investigation could be undertaken only if there was proof of disproportionate assets. Awareness of these changes was slowly increasing.

Governance reforms at PSBs include considerable strengthening of boards and absence of government interference in commercial decisions, as well as a regulatory push towards faster more transparent provisioning and risk-based lending. But this means that PSBs, like private banks, will only lend when there is a valid business case. Credit ratings become important. That is why help for Covid-19 affected firms had to take the form of government credit guarantees and interest rate subventions. Timely lending can reduce future NPAs.

Government and Plan driven resource allocation had created stagnation in the pre-liberalization period. Therefore reform to facilitate non-discretionary allocation through markets and financial institutions was necessary. The country sought to move from cronyism and corruption to transparent regulated markets.

But large outflows following Covid-19 underline again that over-dependence on profit motives, capital flows and markets is dangerous. They also have weaknesses. Better regulation and corporate governance is one pre-requisite. Good regulation, however, has to have counter-cyclical features. Diversity also makes for safety in the financial sector. For example, in equity markets contrarian moves by domestic financial institutions and continuation of systematic investment plans (SIPs) by domestic households reduced volatility due to global risk driven foreign equity flows.

The system has absorbed a number of shocks showing resilience, even as reforms have strengthened its fundamentals. Institutions with strong corporate governance have thrived. The diversity created, institutions strengthened, and greater rule of law puts the financial sector in a better position to support growth, although more still needs to be done, especially to help it survive the Covid-19 shock.

3 Structure and relative country reform strategies

The oil import constraint described above affects feasible stabilization and growth strategies. Figure 3 drawn in the space of traded (Q T ) and non-traded goods (Q N ) illustrates this. The tangent of the price to the production possibility frontier (PPF) gives the point of optimal production and its tangency to the indifference curve gives the point of optimal consumption. Footnote 11 An emerging market (EM) needing macroeconomic adjustment could be consuming at point a but producing at point b . The production of non-traded goods equals its consumption, but there is excess consumption of traded goods financed through a CAD. If the latter is unsustainable, stabilization is required to reduce absorption (demand) shifting the budget line in parallel inwards so it becomes tangent to the production possibility frontier and the nation is not consuming more than it is producing.

Country structure and growth paths

But typically excess demand for tradable goods would continue even after stabilization to b unless prices also adjust. The slope of the price line has to change to switch production towards tradable goods and reduce their consumption as they become relatively more expensive. Depreciation of the currency flattens the price line to reach a final equilibrium c where there is no excess consumption and the CAD is zero. Consumption of non-traded goods also falls, as does their production, while the production of traded goods rises compared to the earlier values. Since at the new price line, traded goods prices have risen relative to non-traded goods so less of Q T can now be bought compared to Q N . These are the adjustments required in the case of excess demand and full employment of resources. While consumption of both types of goods falls, there is a rise in the relative domestic production of traded goods.

If poor organization and unemployment wastes domestic resources, however, initial production could be at any point inside the production possibility frontier such as d . The tangencies would now have to be at a PPF passing through point d . Consumption could also be at d or could be higher so that there still is a CAD. Consumption could increase as production shifts out to the frontier. Expansion of domestic supply could remove excess demand and reduce any CAD and such an expansion in supply can happen faster at a point like d with underutilized resources. This illustrates the process of structural adjustment. Improvements in productivity due to catch-up can also shift out the frontier.

While some Latin American economies, where inflation reached above 1000%, certainly required a reduction in demand, labour intensive economies such as China and India are better characterized as being at d , with underutilized resources. As long as reform facilitates utilization of these resources, a contraction of demand may not be necessary.

It is also possible the optimal move may be from d to e requiring a real appreciation or rise in relative non-traded goods prices. This may be necessary to keep traded goods such as oil and food, which have a large weight in consumption and therefore second round effects on inflation, cheaper. Consumption and production of both traded and non-traded goods rise on the path but production shifts relatively more towards non-traded goods, Footnote 12 and consumption relatively more towards traded goods.

Or, as in China, under-valuation of the currency may aid a labour absorbing expansion in production of traded goods and of exports from d to a point such as c . If the path chosen is from d to e maintaining domestic demand is even more important, since foreign demand plays less of a role in absorbing labour. The choice between c or e would depend on domestic structure that affects inflationary processes. Traded goods may have to be kept relatively cheaper to restrain inflation.

The rising share of oil imports in India, implies India’s optimal path away from d is more towards e . High commodity price driven inflation since 2007, as well as large foreign inflows during the period of high global liquidity led to real appreciation. Export growth slowed after 2011, partly due to global shocks, and a tight macroeconomic policy that reduced domestic demand also reduced growth rates. Imports were relatively cheaper, and non-traded goods such as education and health were more expensive. The relative production of non-tradables and consumption of imports rose over this period. Productivity rose more in non-tradables such as construction than in traded goods such as agriculture (Goyal and Baikar 2015 ).

Export growth requires long-term improvement in domestic supply conditions, which is a function of reforms and investment. Strategic attraction of FDI diversifying from China can also help.

4 Virtuous cycles

Table 1 shows past periods of high growth in the Indian economy have been characterized by a jump in investment exceeding that in savings. Footnote 13 This is true even in the pre-reform period (see Goyal 1994 ), only then it was government investment that drove the process. These are periods when spending exceeds its financing at the margin. That is, marginal propensity to invest exceeds that to save. But as income grows so does saving, and the high growth periods following the jump are also those with the largest rise in average savings. There was, however, an unsustainable rise in public deficits and debt in the 1980s, driven partly by low returns to government expenditure. This reduced public investment and forced reform.

Post reform, there was a jump in private investment in the mid-1990s and mid-2000s. Both times the higher growth that followed was interrupted by external shocks, a sharp rise in interest rates and financial tightening. Private investment is more responsive to the price and availability of finance.

Since government finances continue strained after a decade of low growth, and banks will not now make large loans to the private sector, an infrastructure boom is no longer possible, although the government is orchestrating a rise in infrastructure spending. Footnote 14 GOI ( 2020 ) had discussed the possibility of virtuous growth cycles, driven by supply-side improvements and rise in exports. But just macroeconomic stimulus from lower interest rates and better liquidity with on-going supply-side improvements had led to a growth turnaround in February 2020. There was the possibility of a gradual switch to a higher growth path, but this was aborted by the Covid-19 crisis.

But post-Covid-19 there is the possibility of a larger macroeconomic-financial stimulus than India has seen for a long time. A calibrated stimulus that rises as supply conditions improve, can lead marginal propensities to spend to rise above those to save, and trigger a switch to a higher growth path. Since the macroeconomic constraints identified earlier will continue to be relaxed, and financial intermediation has improved, it need not be aborted by the inflation and monetary tightening of the 2010s. It would have to be supported, of course, by continuing short- as well as long-run improvement in supply conditions. Well planned and phased short-run improvements will be required as lockdowns are lifted. But using crisis financing practices being followed in many countries will allow better liquidity and counter-cyclical regulation—crucial elements missing in the 2010s. Reversal of the slowdown in Indian credit growth can reverse on-going deterioration in Indian asset quality as well as prevent further deterioration from the Covid-19 disruption.

In India’s pro-cyclical financial system a rise in credit normally follows that in growth. An RBI financed fiscal stimulus will be a case of credit leading growth. It is not necessary to have full financing before you begin a project. In fact, this almost never happens. Borrowings are repaid and equity serviced as a firm begins to earn. Similarly, for a country a switch to a higher growth path normally sees the marginal propensity to spend rise above that to save. But total savings and savings percentages rise even as propensities to save fall below propensities to invest. To the extent consumption follows and does not drive growth, the same must be true of savings.

In an open economy, foreign savings are also available to finance a short-term gap, but proper intermediation and availability of domestic finance is also necessary for the switch and for long-run sustainability of growth.

For such a strategy is it a constraint that household net financial savings have fallen and are now barely adequate to meet the public sector borrowing requirement, let alone to lend to the private sector? But to the extent growth is investment-led and savings rise with growth, starting with lower savings need not be a problem. Adequate monetary and liquidity support can prevent interest rates from rising, as long as supply responds.

Historically Indian savings as a percentage of Gross Domestic Product (GDP) have fallen in low growth periods and risen when growth is high, although financial sector development has also affected the value. After peaking in the seventies at about 20 with bank nationalization, it fell with stagflation and a fall in public sector savings reaching 17 in the mid-1980s. It had recovered to above 20 before the liberalizing reforms. As it stagnated below the 1978/1979 peak of 23.2, a debate in the early 1990s echoed current concerns that raising growth would be difficult because of the fall in savings. But growth jumped up in the late-1990s, and savings increased to above 25. The sharpest rise came with the 2000 growth boom. In 2010–2011 the savings ratio peaked at 33.7. As growth fell after 2011, the savings ratio fell with it. After rising in 2017–2018 to 32.4 with the growth recovery, it fell again in the next year as growth slowed.

Figure 4 shows turning points in Gross Fixed Capital formation (GFCF) normally led those in savings, and savings rose, flattened and fell with GFCF. This suggests that growth was investment, not savings led. Savings rose as investment raised jobs and incomes. The mild growth and recovery in GFCF in 2017–2018 also raised savings. GFCF and gross savings are not identical since they are measured by different methods, so the comparison is valid. Footnote 15 The changing gap between household sector savings and private GFCF, shows how the pattern of financing has changed. While the corporate sector drew on household savings earlier, in recent years it has its own surpluses. Since the new GDP series with base 2011–2012 is very different, to preserve comparability, Fig. 4 gives values spliced to the old series. Figure 5 shows the difference in the spliced and the new series for some categories.

Source: Data updated from MOSPI Press Notes. “*” Third revised estimates, “#” second revised estimates, “@” first revised estimates

Gross domestic savings and capital formation (% of GDP).

Household and private sector savings old and new series (% of GDP).

Measurement issues Aggregate savings did fall after 2011–2012 with lower growth, but part of the decrease in estimated household savings percentages may only reflect changes in measurement.

In the new GDP series with base 2011–2012 some household physical savings were transferred to corporates, as the corporate base was expanded to include the unorganized sector. Even so, both remained higher in the new series compared to the spliced old, with the rise in corporate savings more than that in household savings (Fig. 5 ). But while household savings largely fell after 2011–2012, corporate savings rose. Part of the decrease in household physical savings may be an artefact since they are measured as a residual. They are the same as household physical investment and derived by subtracting corporate and government investment from the total estimated by the commodity flow method. In this benchmark estimates and proportions are used for estimating the production of goods. As use of a larger corporate database improves the estimation of one part relative to the whole, the residual could shrink.

Even so now household net financial savings are not the only source of financing for corporates. Household net financial savings at present are adequate only to cover government net dissaving. Corporate savings have risen but a rise in corporate investment above own savings can be financed by foreign savings and domestic credit, even as it induces a rise in incomes and domestic savings.

Changes in the composition of savings The savings GDP percentage had fallen to about 30 as growth slowed. But it was household physical savings that fell, while household gross financial savings recovered from a low of 8% in 2011–2012. Savings of non-financial corporations held in financial assets rose. A current account deficit (CAD) implies investment exceeds domestic savings. Financial savings largely fund investments involving goods that are tradable, while physical savings are invested more in non-traded goods, such as in real estate. Estimates of physical savings in the household sector are identical to those of investment in the unorganized sector. It follows, then, that if organized sector investment exceeds financial savings, it has to be financed by foreign savings that is, by running a CAD. Better financial intermediation of domestic savings will tend to reduce the CAD and dependence on volatile foreign capital inflows.

Incentives for savings While savings percentages improve with the cycle, incentives can help raise savings over the long-run. In high-saving countries such as Japan and Canada tax breaks and behavioural tweaks encourage pension and targeted savings, while high-consumption US had tax breaks for interest on consumption loans. Indian tax systems should systematically favour savings over consumption. Tax breaks can continue for durable assets such as housing.

5 Complementary reforms

Many of the supply-side improvements essential to support the above process and sustain growth are taking place.

5.1 Factors of production: Land and labour

The reforms that foreign analysts repeatedly flag as essential but incomplete are land and labour reforms. There must be deep political economy reasons that stall them despite numerous attempts. If standard reforms were feasible they would have been done by now. In India’s noisy democracy any group adversely affected is able to shout, and the larger the group, all else equal, the louder the shouting.

In this area reform by stealth that works by intensifying trends at the margin is feasible and is happening. Some of these ways include simplification of laws and legal codes, encouraging competition and convergence to best practices among states, improving governance and supervisory conflict, using technology in many ways, including creating better land records. This not only allows land markets to develop but also eases the use of land as collateral in financial markets. They are not critical constraints to growth, although they do affect the speed and length of the journey to the frontier from an inefficient point like d in Fig. 3 , because enough change is happening. Covid-19 has triggered temporary competitive easing of labour laws in states, as a way to attract industry and create jobs for returning migrants. This could lead to a more permanent simplification and recast of laws combining protection with flexibility.

Although the focus in debates is on inadequate growth of employment, there is evidence of the type of structural change in labour markets that occurs with development. The lockdown made us aware of extensive migration from rural to urban areas as predicted by the Harris-Todaro model. We have already seen evidence of rising non-agricultural rural employment. While labour participation rates have dropped for women, part of this is due to opting for better education and job-profiles. Women are migrating to jobs in education and services from menial jobs. Since 2011 although about 30 m jobs were lost for pre-secondary education, a similar number were gained for post-secondary education (Kannan 2019 ).

There are many opportunities in Web based employment and a potential explosion of jobs as education and health services expand in 3 tier towns. In general, unemployment now is aspirational. Unemployment rates are higher for youth since they search for better jobs. After 40 they tend to settle for what is available. These trends imply rising labour productivity. There is sufficient improvement to suggest land and labour are not constraints to short-term growth expansion.

Indirect proof of better resource utilization allowing movement upwards from d comes from productivity growth continuing to rise in India over 2011–2016, a period when in most countries there was a productivity slowdown after the global financial crisis. Footnote 16 Unorganized sector compound annual productivity growth (7.2%) exceeded that in the organized sector (3.2%) in this period (CSO 2017 ). India is still well inside the frontier, however. IMF ( 2017 ) assessed India’s level at about 45 compared to the US frontier at 100.

The literature distinguishes between narrow versus broad or active inclusion. While the first just reduces inequality, the second gives broad rights, voice, and capabilities to make the excluded active participants. Active inclusion enhances human capacity and makes labour supply more elastic in transition, while redistributive strategies are required for persistent poverty. Since active inclusion increases rewards to work, it suits India’s youthful demographics and growth potential. Many government policies aim for such systematic empowerment.

An economy in transition should be one which is innovating. Pure income transfers need not shift the poor to dynamic technologies that show continuous improvement, while active inclusion would do so. It would also induce more cost decreasing innovation in accessible technologies as their market size increased. The deep penetration of the smartphone in India is an example.

Much is happening in the Indian digital space and Covid-19 will give a further stimulus to it. Indian growth in information technology (IT) outsourcing was decried as low-paid mechanical work, but the industry developed from Y2K to body-shopping to value addition and entrepreneurship in a variety of internet-linked businesses. Koramangala in Bangalore is an example of such a venture-capital fed business hub that targets the large domestic market as well as exports.

One of India’s great advantages is its human and geographical diversity since this encourages innovation and also diversifies risk. The 1990s reforms increased economic diversity, since exports became another source of demand. Markets raise welfare and encourage innovation by making available more margins of adjustment. Horizontal democracy is deepening, with NGOs proliferating, and corporates given a push by social responsibility legislation, contributing more to society.

Standard structural reforms are also taking place, with improvements in infrastructure, law and governance, ease of doing business, more facilities, improved data collection, formalization and standardization for Micro, Small, and Medium Enterprises (MSMEs).

Despite its federal structure India never had one domestic market. This raised transaction costs of business. The goods and services tax (GST), while still a work in progress, is a major step towards this integration.

5.2 Fiscal space

How can demand be deficient (at d ) if the aggregate fiscal deficit is almost in double digits, or if investment propensities exceed savings? The sector-level macroeconomic constraints discussed imply supply shortage for specific goods can create generalized inflation. In 2008, for example, there was excess demand for goods (food) in short-supply, together with large underemployed resources. But we have seen such commodity price constraints have eased.

Delays in government payments are notorious. Some of the deficits maybe accounting illusions—payments are provided for but not made. Almost one-fourth of government expenditure was interest payments to banks in a period bank lending had slowed. States also hold large cash balances. Expenditure on idle excess stocks of food also does not create demand. The use of better targeted direct benefit transfers (DBT) has reduced leakages that used to create demand. This suggests a thorough restructuring of government expenditure can increase the share of effective high-multiplier expenditure (Goyal and Sharma 2018 ).

Cutting unproductive subsidies and better expenditure targeting will be essential to restrain the fiscal deficit while giving a post Covid-19 stimulus. There is room to do so. For example, bloated food and fertilizer subsidies can be trimmed, reducing excess food stocks. Departments and ministries can be streamlined, avoiding duplication. Better monetary-fiscal coordination can also reduce the share of interest payments in the short-run, even as higher growth reduces debt ratios in the long-run. One reason governments were not able to reduce deficits materially despite intense efforts after 2011 was the sharp rise in nominal interest rates in this period. Finally, large public sector assets, acquired over the years but utlilized poorly, can be monetized.

6 Policy implications

Standard macroeconomic stabilization, such as followed in India since 2011, can be counter-productive, since it throttles domestic demand, without releasing critical sector-level supply-side constraints. Such macroeconomic policies, followed since 2011, resulted in rising consumption and import dependence, while investment fell and exports stagnated. Dependence on oil imports constrains depreciation of the Indian rupee as an export stimulating policy. But over-appreciation is also problematic given the large trade deficit. Over-appreciation occurred in the 2010s and was not compensated with a rise in domestic demand.

The commodity price shocks that contributed to growth volatility have moderated, however. Moreover, as the economy grows and diversifies it will be less vulnerable to such shocks.

Sustained higher growth is feasible, if context-relevant supply-side policies transform a high cost economy and allow better utilization of resources, with support from macroeconomic policies that maintain domestic demand, as well as from counter-cyclical financial regulation. Critical reforms required include improving the productivity of government expenditure, cutting flab, coordination with states, strengthening corporate governance, legal simplification and capacity as well as making financial sector regulation more appropriate.

Covid-19 is a large negative supply and demand shock, and combined with the lockout severely reduced short-term growth. As supply recovers, however, while commodity prices remain constrained, there is an opportunity to switch from the low credit and money growth that characterized India’s post 2011 growth slowdown, to a credit-led recovery, that also reduces persistent financial sector stress. It underlines the importance of domestic demand in insulating India from global shocks and likely prolonged shrinking of trade.

In addition, there are longer-run supply-side opportunities that the crisis has revealed. Examples include a larger share of distance work economizing on fuel the import of which has been India’s weakness, and encouraging the digital economy, which is India’s strength. Supply chains can be incentivized to shift from China. States that are the source of migration should think of packages to attract FDI thus reducing out-migration. While some firms will suffer irreversible balance sheet shocks and may not recover, others such as pharmaceuticals, digital businesses and home services will do well.

Polices adopted in many countries around the world, include transfers, credit guarantee funds, interest rate subventions, liquidity and refinance facilities, loan extension and forbearance, tax relief, deferrals and regulatory easing. Many of these have the feature that they expire over time, and pay for themselves as they revive growth. The compulsion to restrict the expansion of India’s fiscal deficit can also be achieved by including such well-targeted and temporary features, as well as working through the financial sector. A seed fund can be leveraged many times. For example, credit guarantees are off budget sheet items, and may not even add to debt if they are not invoked as recovery takes place, especially if banks are incentivised to not invoke them.

Wage/PPF subsidies and interest rate subventions should be targeted to viable MSMEs based on positive turnover in the GST records. Moratoria on debt repayments and provisioning deferrals must be given until growth recovers, but not indefinitely. Temporary and targeted measures reduce moral hazard. Transfers should only be to low income groups, combining tax and Aadhaar data-bases. All government payments due must be made and expenditure on the national infrastructure pipeline frontloaded. Government stimulus must be increased to the point where reduction in debt ratios due to increased growth, equals the increase in debt ratios from further borrowing. Structural fiscal reform changing the composition of government expenditure can increase the growth boost.

The RBI can announce an open market operations (OMO) calendar and if necessary, special Covid-19 government bonds financed by RBI. These would take pressure off the bond markets, allowing interest rates to ease, while it is clear they are for a well-defined purpose and limited time. Firms that are not receiving payments are afraid of running out of cash and are hoarding liquidity. Banks now will only make risk-based lending. Therefore a government credit guarantee is necessary for banks to undertake wider liquidity infusion. It would help if new liquidity channels are established to reach those starved of funds.

Measures have to be carefully sequenced as the situation evolves. While initial measures help survival and revival of supply, as people begin venturing out and shops open, a demand boost from the government can help kick-start consumption and therefore production. Before that, even income transfers tend to be saved. This happened in many advanced economies where large transfers and other fiscal stimuli could not prevent large growth shortfalls. Transfers to lower income groups could be in the form of coupons with a limited life to ensure they are spent. Tax cuts or waiving stamp duties should be for a limited time period. Help for small firms could be conditional on employment to ensure it is paid out and raises demand and production. The series of Indian monetary-fiscal stimuli were largely in line with the above principles, while tending to be over-cautious.

Easing of financial conditions that had delivered a turnaround in February, could do so again after the Covid-19 shock. In most of the world new liquidity infusion is following quantitative easing that drove up asset prices. There are risks since credit is based on a Ponzi leverage on asset value. A collapse of stretched asset values can create a large financial shock. Deleveraging can reduce demand. But in India there is the opposite problem. Credit growth has been very low, so a loosening of financial conditions can help asset values recover. Tightening following the excesses and scams of the post GFC period created a trust deficit. There were valid moves away from giving individual favours towards improving business conditions. But in a large external shock like Covid-19 aid from the government and regulators can apply balm to current as well as old wounds, revive trust and help society pull together once more.

The large post GFC monetary-fiscal stimulus made possible a sharp V-shaped recovery. But over-reaction, and difficulty in reversing the stimulus, created macroeconomic vulnerabilities. A limited, well targeted and transient stimulus would avoid this while preventing illiquidity becoming insolvency, relieving persistent financial stress and with complementary supply-side action create a virtuous growth cycle.

For many years in the twentieth century, Vera Anstey conducted a development seminar on the Indian economy at the London School of Economics. A key question she wrestled with was: How has an economy with such rich resources remained so poor? We have still not resolved this issue.

Thirlwall (1997) developed a theory of what he called a balance of payment (BOP) constraint on growth. Under a demand constraint for exports he showed long run growth had to equal export growth divided by the income elasticity of the demand for imports. Assumptions include terms of trade are fixed and capital inflows allow only a temporary deviation. In India’s case, its exports are most sensitive to world demand, and high oil import dependence make the BOP constraint bite. Since its exports are such a small share of world exports, however, export demand may not be a constraint with sufficient price and quality improvements on the supply side. But depreciation is not a viable strategy since it raises the cost of imports.

This happened with attempts at land reform in 2014 by a newly elected government causing a loss of precious political capital and time.

See Zhang ( 2018 ) and https://en.wikipedia.org/wiki/Petroleum_industry_in_China and https://en.wikipedia.org/wiki/Energy_policy_of_India .

For example the share of fruits and vegetables in gross cropped area rose from 1.9% over 1960–61 to 1968–69 to 6.5% over 2004–05 to 2014–15. The share in value of production rose from 10.6% to 18.8% (Dev 2018 ).

Vera Anstey pointed out that Britain had escaped land fragmentation because second sons did not inherit land. In India better land records and markets may allow some consolidation.

An alternative approach of some reform, accommodation and falling interest rates at the turn of the century had brought down PSB NPAs to 2.4% in 2009–10 from 12.8% in 1991.

Festering problems at Yes Bank were addressed in March 2020, through restructuring, fresh capital and new management. Deposits were guaranteed but equity and bonds wiped out. This approach reduces both systemic risk and moral hazard. For example, a Swedish banking crisis in the early 1990s was resolved within a couple of years and at lowest cost to the taxpayer by following a policy of saving banks but not their owners. The cost of the rescue to taxpayers amounting to about 2% of GDP was recovered as asset values rose.

BIS data shows increase in Indian ratios of total debt, debt to government and to non-financial corporations over 2011–15, a period of high global liquidity, to be much below the global increase. The government was reducing its fiscal deficit and firms were borrowing little. For Indian non-financial corporations, the ratio increased only by 0.3 compared to 29.4 for other emerging markets (EMs). Non-bank financial intermediation rose by about 14% of GDP since the crisis for EMs. In India this remained minuscule. Banks continued to be the dominant source of credit, but the all India commercial bank credit-deposit ratio fell to 70.6 per cent by end-December 2016 compared to 74.5 per cent a quarter earlier (Goyal and Verma 2018 ).

For example in 2015 and also in the second half of 2018, which saw large foreign outflows as the US Fed raised rates and oil prices rose (Goyal and Agarwal 2020 ).

See Corbo and Fischer ( 1995 ) for such an application of the Swan Salter model.

Non-traded goods price rise relatively more as in the Balassa-Samuelson effect but it is not due to higher productivity and wages in the traded goods sector (Goyal 2014 ).

All savings and capital formation values, in the table and figures, are reported as a percentage of gross domestic product at market prices (GDP).

The Centre was now restricted to a coordination and announcement role. The 2019 budget promised a Rs. 22,000 crores support to a pre-announced national infrastructure pipeline of Rs. 1 lakh crores. The total included planned investments of PSUs and state governments. The budgetary support would be leveraged through financial institutions.

GFCF is measured using the commodity flow approach derived by type of asset, while gross savings comes from flow of funds. Gross savings plus net capital flow from rest of the world is the controlling total for GCF since the macroeconomic identity implies savings must equal investment. The difference of this from GCF derived from the commodity flow approach gives errors and omissions. From the commodity flow approach GCF = GFCF + CIS + valuables + errors and omissions.

The remainder of this section follows Goyal ( 2017 ).

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This paper draws upon my Vera Anstey memorial lecture at the 102nd Annual Conference of the Indian Economic Association. I thank Mahendra Dev for the invitation, participants for enthusiastic responses and Reshma Aguiar for secretarial assistance.

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Goyal, A. Post Covid-19: recovering and sustaining India’s growth. Ind. Econ. Rev. 55 (Suppl 1), 161–181 (2020). https://doi.org/10.1007/s41775-020-00089-z

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The impact of COVID-19 and the policy response in India

Subscribe to global connection, maurice kugler and maurice kugler professor of public policy, schar school of policy and government - george mason university shakti sinha shakti sinha senior fellow - world resources international (wri india).

July 13, 2020

Much has been written about how COVID-19 is affecting people in rich countries but less has been reported on what is happening in poor countries. Paradoxically, the first images of COVID-19 that India associates with are not ventilators or medical professionals in ICUs but of migrant laborers trudging back to their villages hundreds of miles away, lugging their belongings. With most of the economy shut down, the fragility of India’s labor market was patent. It is estimated that in the first wave, almost 10 million people returned to their villages, half a million of them walking or bicycling. After the economic stoppage, the International Labor Organization has projected that 400 million people in India risk falling into poverty .

Agriculture is the largest employer, at 42 percent of the workforce, but produces just 18 percent of GDP. Over 86 percent of all agricultural holdings have inefficient scale (below 2 hectares). Suppressed incomes due to low agricultural productivity prompt rural-urban migration. Migration is circular, as workers return for some seasons, such as harvesting.

Evidence of Indian labor market segmentation is widely available—with a small percentage of workers being employed formally, while the lion’s share of households relies on income from self-employment or precarious jobs without recourse to rights stipulated by labor regulations. Only about 10 percent of the workforce is formal with safe working conditions and social security. Perversely, modern-sector employment is becoming “informalized,” through outsourcing or hiring without direct contracts. The share of formal employment in the modern sector fell from 52 percent in 2005 to 45 percent in 2012. During this period, formal employment went up from 33.41 million to 38.56 million (about 15 percent), while nonagricultural informal employment increased from 160.83 million to 204.03 million (about 25 percent) .

Most informal workers labor for micro, small, and medium-sized enterprises (MSMEs) that emerged as intermediate inputs and services suppliers to the modern sector. However, workers struggle to get paid, which the government identifies as great challenge. Payroll and other taxes, as well as limited access to subsidized credit for large firms, are disincentives to MSME growth. Although over half of India has smartphone access, relatively few can telework. Retail and manufacturing jobs require physical presence involving direct client interaction. Indeed, income for families unable to telework has fallen faster.

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The government’s crisis response has mitigated damage, with a fiscal stimulus of 20 trillion rupees , almost 10 percent of GDP. Also, the Reserve Bank of India enacted decisive expansionary monetary policy . Yet, banks accessed only 520 billion rupees out of the emergency guaranteed credit window of 3 trillion rupees. In fact, corporate credit in June is lower than June last year by a wide margin after bank lending’s fall. S&P has estimated the nonperforming loans would increase by 14 percent this fiscal year . Corporations have deleveraged retiring old debts and hoarding cash, as have households. Recovery through investment and consumption has stalled . These trends are exacerbated due to the pandemic. The manufacturing Purchasing Managers Index (PMI) recovered 50 percent since May but at 47.2 it remains in negative territory. Services contribute over half of GDP but its PMI, even after bouncing back , remains low at 33.7 in June. Consumption of electricity, petrol, and diesel have regained from the lockdown lows but are still 10-18 percent below June 2019 levels . Agriculture has been the bright spot, with 50 percent higher monsoon crop sowing and fertilizer consumption up 100 percent. Unemployment levels had spiked to 23.5 percent but with a mid-June recovery to 8.5 percent—and then crept up again marginally.

The National Rural Employment Guarantee Scheme (MNREGA) and supply of subsidized food grains have acted as useful buffers keeping unemployment down and ensuring social stability. Thirty-six million people sought work in May 2020 (25 million in May 2019). This went up to 40 million in June 2020 (average of 23.6 million during 2013-2019 period). The government has ramped up allocation to the highest level ever, totaling 1 trillion rupees. Similarly, in addition to a heavily subsidized supply of rice and wheat, a special scheme of free supply of 5 kilograms of wheat/rice per person for three months was started and since extended by another three months, covering 800 million people. There have also been cash transfers of 500 billion rupees to women and farmers .

However, MNREGA has an upper bound of 100 days guaranteed employment and it also does not cover urban areas. Agriculture cannot absorb more labor, with massive underlying disguised unemployment. A post-pandemic survey shows that the MSME sector expects earnings to fall up to 50 percent this year. Critically, the larger firms are perceived healthier. However, small and micro enterprises, who have minimal access to formal credit, constitute 99.2 percent of all MSMEs . These are the largest source of employment outside agriculture. Their inability to bounce back could see India face further economic and also social tensions. The economy is withstanding both supply and demand shocks, with the wholesale prices index declining sharply .

We identified labor market pressures toward increased poverty, both in the extensive margin (headcount) and intensive margin (deprivation depth). India needs to ramp up MNREGA, introduce a guaranteed urban employment scheme, and boost further cash transfers to poor households. Government efforts have been enormous in macroeconomic policy (fiscal stimulus and monetary loosening) to mitigate adversity but fiscal space is narrowing, requiring the World Bank and other international financial institutions to step up and help avert even greater hardship. Also, ongoing advances towards structural economic policy reforms have to continue.

The Resilience and Rebound of the Indian Economy: A Closer Look at Recent Performance

Introduction

In the face of unprecedented challenges, the Indian economy has showcased remarkable resilience and demonstrated its ability to bounce back. Over the past few years, India has experienced a series of ups and downs, including the impact of the COVID-19 pandemic, economic reforms, and shifts in global dynamics. In this article, we delve into the recent performance of the Indian economy, highlighting key indicators and developments that shed light on its trajectory.

1. Steadfast Recovery from the COVID-19 Pandemic:

The COVID-19 pandemic sent shockwaves throughout the global economy, and India was no exception. However, the Indian economy has exhibited resilience and shown signs of a robust recovery. After a significant contraction in the first quarter of 2020, the economy rebounded strongly, recording positive growth rates in subsequent quarters.

2. Impressive GDP Growth:

India’s gross domestic product (GDP) growth rate has witnessed a notable rebound. In the fiscal year 2021-2022, India’s GDP expanded by 9.5 percent, showcasing a strong recovery and outperforming most other major economies. This rebound can be attributed to a combination of factors, including government stimulus measures, a revival in consumer demand, and increased industrial production.

3. Focus on Atmanirbhar Bharat (Self-Reliant India):

The government’s Atmanirbhar Bharat initiative, aimed at making India self-reliant and reducing dependency on imports, has played a significant role in shaping the recent performance of the Indian economy. Through policies such as the Production-Linked Incentive (PLI) scheme, the government has incentivized domestic manufacturing, attracting investments and promoting job creation across various sectors.

4. Resilience in the Services Sector:

The services sector, a key contributor to India’s GDP, faced significant challenges during the pandemic due to restrictions and lockdown measures. However, it has shown resilience in recent times. Sectors such as information technology, e-commerce, and digital services have witnessed a surge in demand, contributing to economic growth and employment generation.

5. Structural Reforms and Ease of Doing Business:

The Indian government has undertaken several structural reforms to improve the ease of doing business in the country. Initiatives such as the implementation of the Goods and Services Tax (GST), simplification of tax procedures, and liberalization of foreign direct investment (FDI) norms have bolstered investor confidence and encouraged domestic and international businesses to operate in India.

6. Challenges and the Way Forward:

While the Indian economy has demonstrated resilience and rebounded from the impact of the pandemic, certain challenges persist. These include addressing unemployment, strengthening the banking sector, addressing inequalities, and investing in infrastructure development. Continued focus on reforms, investments in education and skill development, and fostering innovation will be crucial in sustaining and accelerating India’s economic growth in the long run.

The recent performance of the Indian economy showcases its resilience and ability to adapt to challenging circumstances. Despite the setbacks caused by the COVID-19 pandemic, India has shown impressive growth rates and recovery, outpacing many other economies. The government’s focus on self-reliance, structural reforms, and ease of doing business has played a pivotal role in driving this rebound. However, there are still challenges to be addressed and opportunities to be seized. With continued reforms and strategic investments, India has the potential to emerge as a global economic powerhouse in the coming years.

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Lives, Livelihoods and the Economy: India in Pandemic Times

Deepak nayyar.

1 Jawaharlal Nehru University (JNU), New Delhi, India

2 Indian Society of Labour Economics, New Delhi, India

The objective of this essay is to analyze the implications and consequences of the COVID-19 pandemic for lives, livelihoods and the economy in India. Its focus is on two propositions. First, it argues that saving lives and preserving livelihoods are imperatives, since both taken together shape the well-being of people, and it is for the government to reconcile these objectives instead of letting it be posed as an either-or choice creating a false dilemma. Second, it discusses how the draconian and prolonged lockdown has dealt a crippling blow to the economy placing a disproportionate burden on the poor, while the grossly inadequate response of the government has made the task of recovery even more difficult.

Lives and Livelihoods

The draconian nationwide lockdown in India started on March 25, 2020. It was meant to end on 14 April, but was extended three times until 3 May, 17 May and 31 May.

For governments everywhere, more so after the experience of Italy, Spain, the UK and the USA where governments did too little too late, imposing and continuing lockdowns was the obvious risk-averse strategy. If the spread could be restrained and managed, the success would bring political dividends. If the spread continued unabated or worsened, the microbe would take the blame for the failure. It became the equivalent of a one-way option in financial markets, tempting political leaders to think that they could not lose. This became even more attractive over time as it conformed to herd behavior by governments worldwide. Exit from a lockdown, then, posed a real dilemma for governments. It called for decision making under high uncertainty, requiring courage that needs both conviction and confidence.

This dilemma becomes larger than life when governments emphasize saving lives in a pandemic as their primary if not sole objective. Of course, the objective of saving lives is, in itself, unexceptionable. But it must also be recognized that the health of people and the health of an economy are interdependent, where both, taken together, shape the well-being of people. Thus, saving livelihoods is an equally important objective. In fact, the relationship between lives and livelihoods is circular. If lives are saved and, in doing so, livelihoods are sacrificed, it threatens lives of people who are deprived of incomes and hence unable to meet their basic human needs. This could lead to widespread hunger, reduced immunity and lost lives. Obviously, getting sick and going hungry cannot be an either-or choice. Everyone would want to stay healthy and be well fed. It is the role of governments to strike a balance and reconcile these two objectives, rather than juxtapose them as conflicting requiring a choice to be made.

The lockdown shut down almost two-thirds of the economy, and the collateral damage was enormous. It stranded 25–30 million migrants in cities far away from their homes, deprived of their work and dignity, at the mercy of food and shelter provided by State Governments or charities, often hungry and homeless, creating an unprecedented humanitarian crisis. Manufacturing, mining, construction, trade, hotels & restaurants, and transport, which account for more than 40% of both output and employment, were shut down completely. Thus, 150 million people, as much as one-third of the total workforce, who are casual labor on daily wages or workers in informal employment without any social protection, were deprived of their livelihoods. Much of this burden was borne by the poor, often self-employed, who constitute 75% and 50% of rural and urban households, respectively. The impact on micro, small and medium enterprises (MSME), which account for 32% of output and 24% of employment in India, has been devastating. Thus, for poor households and small businesses, survival was at risk. Healthcare for patients, except for those with COVID-19, diminished sharply in terms of both access and quality. In education, learning outcomes, which are already poor, are bound to get worse since schools as colleges remain closed.

The devastating impact of the lockdown on livelihoods, and the well-being of people, could not be ignored for long. The government recognized, albeit reluctantly, that a lockdown is not a weapon in a war that could conquer or vanquish the microbe, so that the virus had to be managed. The unlocking process started hesitantly around 8 June. In substance, however, the lockdown continued until end-June, as several State Governments continued the lockdown, while the embargos were lifted very slowly elsewhere. Some restrictions were lifted on 1 July, but the lockdown continued to be stringent on the movement of people and in many other respects. Thus, for more than four months, India’s 1.3 billion people were subjected to perhaps the most draconian lockdown in the world. Further, relaxations were introduced on 1 August. But schools, colleges, educational institutions, cinemas, theaters, entertainment places, bars and auditoriums remain closed. Metro rail systems in cities continue to be shut down. Restrictions on passenger trains, domestic flights and international travel remain. The economy that had almost shut down has begun to limp forward, but it will be quite some time before it can walk let alone run or hum with activity.

On March 22, 2020, just before the lockdown was imposed, the cumulative total number of infections was 360 and the number of deaths was a mere 7 (Ministry of Health and Family Welfare, India). On August 8, 2020, the cumulative total number of infections was 2.15 million (the third highest in the world after the USA and Brazil), while the number of deaths was 43,453 (the fifth highest in the world after the USA, Brazil, Mexico and the UK 1 ). It is almost impossible to provide a counterfactual on what this number of infections and deaths would have been in the absence of a lockdown. Yet, it is clear that the draconian lockdown in India did not achieve its expected objective of mitigating the spread of the virus.

All the same, in the global context, India has not been a disaster story, as it was in the Spanish influenza in 1918, when it accounted for 18–20 million deaths of the estimated 50 million deaths in the world. On August 8, 2020, it accounted for 10.8 percent of the total infections and 6 percent of total deaths in the world compared with its share of 18 percent in world population. Cumulative totals of infections and deaths on the same date show that the case mortality rate in India was 2 percent compared with 3.7 percent for the world. Similarly, on August 7, 2020, the cumulative total number of Covid-19 deaths per million population in India was 31 (ranked 68 among 152 countries), as compared with 698 in the UK, 610 in Spain, 582 in Italy, 488 in the USA, 470 in Brazil, 450 in France, 400 in Mexico and 101 in Russia (statista.com/statistics). It would seem that morbidity and mortality associated with Covid-19 in India have been lower than elsewhere in the world particularly in comparison with rich countries.

This counterintuitive outcome deserves some explanation. The impact of diseases can and does differ across countries and continents, possibly attributable to differences in demographics, geographies, cultures and immunities. India has a much younger population than rich countries, so that the proportion of vulnerable people older than 65 years is far lower. Given that microbe was carried by people who had been abroad, the spread of infection was much less in the geographically distanced hinterland of rural India, and among the socially distanced urban poor, despite community transmission.

It has been suggested that countries such as India which have mandatory BCG vaccinations are less susceptible to COVID-19 infection because the vaccine has a stimulating effect on the immune system that goes well beyond tuberculosis. There are similar results derived from research on the polio vaccine. The conventional assumption is that vaccines create antibodies against specific pathogens. But immunologists have discovered that live vaccines also stimulate innate immune systems creating capacities to better resist, or fight, other kinds of pathogens too. This notion of immune protection against multiple pathogens is being developed by immunologists. This possibly exists in immune systems of people in India, which have antibodies that could be effective in resisting the virus. After all, millions of migrants stranded in megacities or relief camps crowded in cramped spaces—the polar opposite of social distancing—did not catch the virus through contagion in large numbers. Similarly, the significant number of people who have tested positive for COVID-19 but are asymptomatic suggests that they have some innate immunity which helps resist the virus.

In addition, the loss of life attributable to the coronavirus must be situated in perspective. In India, on August 8, 2020, the total number of COVID-19 deaths were 43,453. In sharp contrast, every year, 720,000 people die from diarrheal diseases, 750,000 people die from respiratory infections, 450,000 people die from tuberculosis, while 420,000 people die from digestive diseases 2 . As many as 800,000 infants die every year, before reaching the age of one year, mostly due to easily preventable causes like pneumonia or diarrhea. Yet, there has been no mission mode response to any of these causes of large number of deaths recurring every year.

In retrospect, it is clear that the lockdown was premature, imposed at a stage when the number of infections and deaths was miniscule. Moreover, the draconian nationwide lockdown was announced, at very short notice, without adequate thinking let alone planning in terms of implementation. The unprecedented humanitarian crisis for millions of migrants in cities who lost their livelihoods at a stroke was the most tragic among its unintended consequences. The contraction in output and employment that followed placed much of the burden on the poor and the vulnerable without any form of social protection. The abrupt shutdown strangled the economy, the consequences of which will be felt for a long time to come. It is not clear how many lives it saved. But millions of people who lost their livelihoods were deprived of their well-being, while the survival of a large proportion was put at risk. Ultimately, it did not even slowdown the spread of the pandemic. Four months later, it is plausible to argue that a planned and strategic lockdown, selective in terms of geographical space and phased in terms of time instead of the entire country for the entire period, specified for states, regions cities, containment zones and hot spots, would have been far more effective in terms of managing the virus, and much less inequitable in terms of its social costs. It could also have minimized the damage to the economy. Such a strategic and selective approach was adopted by several Asian countries that managed the virus with success.

Economy in Deep Crisis

The economy, already in a downturn before the pandemic surfaced, is hurt as much as the people, even if the whole is somewhat different from the sum total of the parts. Economic performance has been battered by the contraction of output on the supply side and contraction of employment on the demand side. The consequences will extend much beyond this initial impact, as supply and demand inter-act at a macro-level. The impact on output and employment will be negative and will be magnified by multiplier effects. The contraction in employment will multiply through the decline in incomes and purchasing power, reducing output and employment elsewhere in the economy through successive rounds of the same multiplier mechanism. Recovery of production systems and supply chains after the lockdown will take time, because economies are not like taps that can be turned off and on.

Clearly, even after the lockdown ends completely, the economic crisis will run deeper than anything experienced so far in independent India, while its intensity will depend on the speed and duration of the unlocking process. Stabilization is the immediate task of the government. The meaning of stabilization in economics is much the same as in medicine: just as medical treatment seeks to stabilize the health of a patient in critical condition, economic management needs to stabilize an economy in deep crisis.

The short-term focus would have to be on households on the demand side and firms on the supply side. Survival through the crisis is essential for the return of poor households and small firms to economic activities.

The poor, identified as 50% and 75% of urban and rural households, respectively, should have been provided with cash support of Rs. 6000 per month for at least three months (equivalent of MNREGA wage at Rs. 200 per day), if not longer, instead of the miserly cash transfers for women and senior citizens, a total Rs. 1500 and Rs. 1000 each, respectively, for three months. In addition, the supplementary free ration of 5 kg wheat or rice and 1 kg of pulses per month for three months, about one-tenth of household needs per month, was much too little. This could and should have been tripled, since government stocks of wheat and rice exceeded stocking norms by 55 million tonnes.

Micro-, small and medium enterprises, which are the backbone of the economy, provide one-fourth of employment, one-third of output and more than two-fifths of export earnings in India, are overwhelmed by problems. Payment of wages to workers is almost impossible. Fixed costs, on electricity, rent and interest, have to be met. There are inventories of inputs that cannot be used and outputs that cannot be sold. Working capital is exhausted. Reviving production is easier said than done. The only relief provided by the government is a Rs. 3 trillion line of credit for loans without collateral. But such loans are neither automatic nor assured. And this credit line is simply cannot suffice because buyers, including the central and state governments, owe MSMEs as much as Rs. 5 trillion.

Such support at a micro-level for survival must be combined with support at the macro-level through fiscal and monetary policies for recovery. It is essential for the government to set aside its conservatism, bordering on fetishism and provide an extra fiscal stimulus of at least 5% of GDP, in addition to the existing fiscal deficit that would probably turn out to be more than the budgeted 5% of GDP. The enlarged fiscal deficit cannot be financed by market borrowing, which would simply drive up interest rates and nip recovery in the bud. It would have to be financed by monetizing the deficit—RBI buying government T-bills—printing money, now described as ‘helicopter money.’ Monetary policy would need to bring down interest rates by at least 2 percentage points, plus quantitative easing through RBI lines of credit to banks to assist large firms, particularly in distressed sectors such as construction, automobiles, airlines, tourism and hospitality, inter-alia, by restructuring debt.

It is clear that the design of the government’s relief package seeks to focus on the supply side, with an emphasis on providing liquidity through lines of credit extended by the Reserve Bank of India, rather than on the demand side by stepping up government expenditure, with the aim of minimizing the cost to the government.

The stress on the supply side, while neglecting the demand side, reveals a flawed understanding of economies in crisis and little recognition of the reality in which a prolonged lockdown has brought the economy close to the edge of collapse. Even in normal circumstances, the speed of adjustment on the supply side is slow because supply responses take time, whereas the speed of adjustment on the demand side is fast as incomes spent raise consumption demand without any time lag. If there is little or no increase in demand, supply responses will be slower than usual because producers will not wish to pile up inventories of unsold goods. In terms of the chicken-and-egg parable, demand must be revived first to kick-start the economy.

For this reason, the extra fiscal stimulus in this crisis year, 2020–21, should have been much larger than a mere 1 percent of GDP. Its contribution to domestic demand will be miniscule, given that private final consumer expenditure, about 60 percent of GDP, will be squeezed by the contraction in employment and incomes. If there is no further intervention by the government, GDP will contract by at least 10 percent, possibly more, in 2020–21. This would be much worse than the worst year in Independent India so far, 1979–80, when GDP growth was 5.2%.

Orthodox thinking, obsessive about fiscal deficits, so deeply embedded in the government suggests the absence of even the most rudimentary understanding of macroeconomics. It also reveals an utter failure to recognize that we live in unprecedented, extraordinary, times with the world economy in a crisis that could run deeper than the Great Depression ninety years earlier. The idea that monetized deficits would lead to inflation is blind to the reality of a deflationary stagnation. The worry about a downgrade from credit rating agencies, which have witnessed a steady erosion of their ethics and integrity, is just bizarre.

Those who worry about the consequences of such expansionary macroeconomic policies should provide their alternative for recovery, while the government should worry about the consequences of not doing this. If the economy is in free fall, the massive slippage in government revenues would balloon the fiscal deficit to similar if not higher levels, without any hope of recovery.

The belief of orthodox economists in the strong spring analogy—the harder you push an economy down, the greater the force with which it bounces back—is an illusion. In reality, a weak spring is the more appropriate analogy for an economy, for when it is pushed too hard it may simply remain there if its restorative forces are destroyed.

Beyond survival, stabilization and recovery, there are also opportunities in this crisis, which need to be captured by the government. But there is a clear and present danger that these might be missed by the conservative, possibly timid, mindsets which do not seem capable of thinking big and thinking long.

The collapse in the prices of crude oil and petroleum products in particular, and prices of primary commodities in general, could be of enormous help to India in the process of economic recovery, as it is a major importer, not only by easing balance of payment problems, but also by reducing input cost across the board in manufacturing for both final goods and intermediate goods. Of course, a cash-strapped government, seeking to capture windfall gains by hiking taxes, could squander this opportunity. Similarly, a depreciation of the rupee that might follow from adverse expectations, or portfolio investment outflows, would be a blessing in disguise. For one, it would dampen footloose and volatile capital inflows. For another, it would boost exports that have stagnated for years burdened by an overvalued exchange rate, without pushing up the import bill, or prices, since oil and commodity prices are at such a low. Once again, this opportunity should not be squandered, by misguided attempts to support the rupee instead of just letting it depreciate.

There are other opportunities, which, if captured now, could bring enormous dividends in the medium term. The deindustrialization that India has witnessed over the past quarter century, because of unilateral trade liberalization while abandoning industrial policy, could be reversed. The rhetoric of ‘Make in India’ could be turned into reality, if only we could begin manufacturing for world markets as large international firms relocate production out of China. But this would require the government to formulate strategic industrial policy that coordinates trade, technology, fiscal, monetary and exchange rate policies for reviving industrialization. It would also require massive investments in physical infrastructure, particularly power, roads, transport and ports. This should be done without moaning about finances, for it would serve two purposes, as government expenditure on infrastructure creates employment and stimulates demand to revive economic growth in the short run, and removes supply constraints that would stimulate the economy through strong multiplier effects in the long term. Last but not least, this is a wake-up call to improve our social infrastructure on public health, which would save lives lost through easily preventable causes, child mortality for example, to bring about significant improvements in the well-being of our people.

1 worldometers.info/coronavirus/#countries

2 www.healthdata.org/gbd

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How has Covid-19 affected India’s economy?

India has been hit hard by the pandemic, particularly during the second wave of the virus in the spring of 2021. the sharp drop in gdp is the largest in the country’s history, but this may still underestimate the economic damage experienced by the poorest households..

From April to June 2020, India’s GDP dropped by a massive 24.4%. According to the latest national income estimates , in the second quarter of the 2020/21 financial year (July to September 2020), the economy contracted by a further 7.4%. The recovery in the third and fourth quarters (October 2020 to March 2021) was still weak, with GDP rising 0.5% and 1.6%, respectively. This means that the overall rate of contraction in India was (in real terms) 7.3% for the whole 2020/21 financial year.

In the post-independence period, India's national income has declined only four times before 2020 – in 1958, 1966, 1973 and 1980 – with the largest drop being in 1980 (5.2%). This means that 2020/21 is the worst year in terms of economic contraction in the country’s history, and much worse than the overall contraction in the world (Figure 1).

The decline is solely responsible for reversing the trend in global inequality, which had been falling but has now started to rise again after three decades ( Deaton, 2021 ; Ferreira, 2021 ).

Figure 1: Economic contraction in India and the world during Covid-19

Source: world economic outlook, international monetary fund, april 2021. note: the gross domestic product (gdp) per capita, constant prices is measured at purchase power parity; 2017 international dollars. the gdp per capita of each series is normalised to 100 in 2011. we use population-weighted average as the aggregation method., what do the main macroeconomic indicators tell us about india’s economy during the pandemic.

While economies worldwide have been hit hard, India has suffered one of the largest contractions. During the 2020/21 financial year, the rates of decline in GDP for the world were 3.3% and 2.2% for emerging market and developing economies. Table 1 summarises macroeconomic indicators for India, along with a reference group of comparable countries and the world. The fact that India’s growth rate in 2019 was among the highest makes the drop due to Covid-19 even more noticeable.

Comparing national unemployment rates in 2020, India’s rate of 7.1% indicates that it has performed relatively poorly – both in terms of the world average and compared with a set of reference group economies with similar per capita incomes. Unemployment rates were more muted within the reference group economies and were also kept low by generous labour market policies to keep people in work.

Despite the scale of the pandemic, additional budgetary allocation to various social safety measures has been relatively low in India compared with other countries. Although the country might look comparable to the reference group in non-health sector measures, the additional health sector fiscal measures are less than half those in the reference group. More worryingly, the Indian government's announced allocation in the 2021 budget for such measures does not show an increase, once inflation is taken into account.

Table 1: Summary of key macroeconomic indicators


GDP at constant prices 2019 (% change)	4.0%	3.6%	2.8%
GDP at constant prices 2020 (% change)	-7.3%	-2.2%	-3.3%
Unemployment rate 2019 (% of total labour force)	5.3%	5.5%	5.4%
Unemployment rate 2020 (% of total labour force)	7.1%	6.4%	6.5%
Above-the-line additional health sector fiscal measures in response to Covid-19 (% of GDP)	0.4%	0.9%	1.2%
Above-the-line additional non-health sector fiscal measures in response to Covid-19 (% of GDP)	3.0%	2.8%	7.8%

Source: Data on gross domestic product, constant prices (percentage change) is obtained from the World Economic Outlook Database April 2021, International Monetary Fund . Note: India’s GDP contraction is 8%, according to the International Monetary Fund (IMF) and 7.3% from recent national estimates. Unemployment rates (for youth, adults: 15+) are ILO-modelled estimates as of November 2021 and are obtained from ILOSTAT, International Labour Organization (ILO) and World Bank . Fiscal measures are obtained from Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic as of April 2021, International Monetary Fund . The ‘reference group’ refers to the closest peer group statistic under which India falls. The reference group for GDP per capita is the emerging market and developing economies (EMDEs) classification by the IMF. The reference group for the unemployment rate is the low- and middle-income countries (LMICs) classification by the World Bank. The reference group for the fiscal measures is the EMDEs classification by the IMF. See Ghatak and Raghavan (forthcoming) for a comparison of India’s economic and health performance against the reference group.

How has covid-19 changed income, consumption, poverty and unemployment in india.

While the macroeconomic statistics provide a snapshot of India’s economic position, they hide the large and unequal effects on households and workers within the country.

Both wealth and income inequality has been on the rise in India ( Ghatak, 2021 ). Estimates suggest that in 2020, the top 1% of the population held 42.5% of the total wealth, while the bottom 50% had only 2.5% of the total wealth ( Oxfam, 2020 ). Post-pandemic, the number of poor in India is projected to have more than doubled and the number of people in the middle class to have fallen by a third ( Kochhar, 2021 ).

During India’s first stringent national lockdown between April and May 2020, individual income dropped by approximately 40%. The bottom decile of households lost three months’ worth of income ( Azim Premji University, 2021 ; Beyer et al, 2021 ).

Microdata from the largest private survey in India, CMIE’s ‘Consumer Pyramids Household Survey’ (CPHS), show that per capita consumption spending dropped by more than GDP, and did not return to pre-lockdown levels during periods of reduced social distancing. Average per capita consumption spending continued to be over 20% lower after the first lockdown (in August 2020 compared with August 2019), and remained 15% lower year-on-year by the end of 2020.

Official poverty data are unavailable, and the CPHS data come with a caveat of ‘top’ and ‘bottom exclusions’. For example, official statistics show a rural headcount ratio of 35% in 2017/18 ( Subramanian, 2019 ). But the CPHS data estimate it at 25%, which suggests exclusions at the lower end of the consumption distribution ( Dreze and Somanchi, 2021 ).

Despite these statistical concerns, the CPHS does provide consumption numbers for a large sample of individuals, which can provide insights into changes in consumption levels arising from the pandemic.

Table 2 reports the percentage of people who have monthly consumption expenditure below different cut-off values. The different cut-offs encompass the official poverty lines (which, in any case, have been considered too low by some commentators). The current rural poverty line is set at 1,600 rupees (£15.50) per month or over, and the urban poverty line is 2,400 rupees per month (£23.37) or over.

Based on the latest CPHS data, rural poverty increased by 9.3 percentage points and urban poverty by over 11.7 percentage year-on-year from December 2019 to December 2020. Earlier months of the CPHS show that rural poverty increased by 14.2 percentage points and urban poverty by 18.1 percentage points. Yet the actual increase in poverty due to Covid-19 is likely to be higher than what the CPHS data suggest, as indicated by other surveys .

Table 2: Percentage of individuals by monthly consumption expenditure



Rs 1,000 or below	6.0	9.0	3.0	5.4	7.5	10.9
Rs 1,600 or below	23.5	31.6	14.5	21.7
Rs 2,000 or below	38.3	48.3	25.7	35.7	44.4	55.2
Rs 2,400 or below	52.1	62.6			59.0	69.7
Sample size	433,021	499,879	278,759	331,809	154,262	168,070


Rs 1,000 or below	5.0	10.0	2.3	5.5	6.4	12.5
Rs 1,600 or below	21.0	33.6	12.0	22.5
Rs 2,000 or below	34.9	50.3	21.9	37.1	41.3	57.5
Rs 2,400 or below	48.2	64.4			55.5	71.5
Sample size	570592	477237	362417	321100	208175	156137

Source: Consumer Pyramids Household Survey (CPHS) for December 2019 and December 2020, and for August 2019 and August 2020. Notes: Estimates for consumption are calculated by dividing household adjusted total expenditure by household size and weighted using member level country weights. Adjusted total expenditure is the sum total of all consumption goods and services purchased by the household during a month, adjusted using weekly records. Real values are adjusted for inflation using the MOSPI CPI (IW) for urban workers and CPI (AL) for rural workers (Base 2012=100). Headcount ratio is the percentage of individuals who are below the poverty line in urban and rural areas in each year. Poverty line is the inflation-adjusted poverty line in rural areas (Rs 972 in 2011-12 prices) and urban areas (Rs 1410 in 2011-12 prices), which are adjusted to 2012 prices with the RBI CPI(AL) and CPI(IW) for 2011/12-2012/13 respectively. All figures are in December 2019 values and observations with missing regions are dropped. Despite a much larger sample in urban areas, the CPHS also underestimates mean per capita consumption in urban areas, which is likely to reflect their inability to survey high-income urban households. From the draft National Sample Survey Organisation (NSSO) Report on Household Consumer Expenditure for 2017-18, the CPHS estimate of mean per capita consumption in urban areas was 0.8 of the NSSO level for 2017-18. For rural areas, the CPHS estimate is 1.1 of the NSSO level.

Taking into account the general trend of reduction in poverty, an estimated 230 million people in India have fallen into poverty as a result of the first wave of the pandemic ( Azim Premji University, 2021 ).

Table 3 shows that households in the middle of the pre-Covid-19 CPHS consumption distribution saw large drops in spending after the first wave of the pandemic, helping to create a new set of people entering poverty.

The percentage of poor people in the second lowest quintile of pre-Covid-19 consumption jumped from 32% to 60% within a year. This was driven largely by rural areas, where the headcount ratio for the second quintile almost doubled.

In urban areas, the poverty line is set higher due to greater living costs and 72% of people in the second quintile of the urban income distribution were below this poverty line before the pandemic. Within a year, they were joined in urban poverty by many who had higher incomes before. Half of people in the third quintile and 29% of people in the fourth quintile fell below the poverty line after the pandemic.

This sharp rise in poverty after the first lockdown is consistent with a variety of surveys that highlighted the depth of the crisis ( Azim Premji University, 2021 ). Year-on-year urban unemployment rate jumped from 8.8% in April to June 2019 to a staggering 20.8% in April to June 2020 ( Government of India National Statistical Office, 2020 ).

Table 3: Percentage of individuals who are below the poverty line in middle quintiles of pre-Covid-19 consumption expenditure, August 2019 to August 2020



2	32	60	72	73	33	58
3	14	41	0	50	0	34
4	0	25	0	29	0	16

Source: Consumer Pyramids Household Survey (CPHS) for August 2019 and August 2020. Notes: Quintiles are based on 2019 mean per capita consumption levels for each region type. Consumption levels are calculated by dividing household adjusted total expenditure by household size and weighted using member level country weights. Adjusted total expenditure is the sum total of all consumption goods and services purchased by the household during a month, adjusted using weekly records. Real values are adjusted for inflation using the MOSPI CPI (IW) for urban workers and CPI (AL) for rural workers (Base 2012=100). All figures are in December 2019 values and observations with missing regions are dropped.

The pandemic has brought severe economic hardship, especially to young individuals who are over-represented in informal work. India has a large share of young people in its workforce and the pandemic has put them at heightened risk of long-term unemployment. This has negative impacts on lifelong earnings and employment prospects ( Machin and Manning, 1999 ).

A study by the Centre for Economic Performance (CEP at the London School of Economics) analyses the depth of continuing joblessness among younger workers in the low-income states of Bihar, Jharkhand and Uttar Pradesh (see Table 4, Dhingra and Kondirolli, 2021 ).

The first round of the survey randomly sampled urban workers aged 18-40 during the first lockdown quarter, finding that a majority of them who had work before the pandemic were left with no work or no pay. After the first lockdown in April to June 2020, 20% of those sampled were out of work, another 9% were employed but had zero hours of work and 81% had no work or pay at all.

Ten months on from the first lockdown quarter, 8% of the sample continued to be out of work, another 8% were working zero hours, and 40% had no work or no pay. The rate of no work or no pay was higher (at 47%) among the youngest low-income individuals (those aged 18-25 who had below median pre-Covid-19 earnings).

Table 4: Crisis labour force status of individuals who were employed pre-Covid-19: recontact sample of individuals interviewed during the first lockdown (April to June 2020) and before the second wave (January to March 2021)



Out of work last week	0.20	0.08	0.11
Zero hours last week	0.09	0.08	0.11
Not paid	0.70	0.29	0.32
No work/Zero hours/Not paid	0.81	0.40	0.47
Sample Size	3201	3201	542

Source: CEP-LSE Survey 2020 and 2021. Note: Out of work last week and zero hours last week are indicators for individuals who were unemployed in the week preceding the survey and employed but working zero hours in the week before the survey respectively. Not paid is an indicator for individuals who received no pay in April 2020 in the column of April to June 2020 and those who received no pay during January to March 2021 in all other columns. Median earnings are constructed using average earnings in January and February 2020. 18-25 refers to individuals who are between 18 to 25 years of age at the time of the first survey.

The recovery after the first wave was too muted to get many young Indian workers back into employment. For example, rural migrants continued to be reluctant to return to work in urban areas even before the second wave hit ( Imbert, 2021 ). And the second wave, which started in mid-February and appears to be flattening out in June 2021, heightened these risks of long-term unemployment by increasing the spells of economic inactivity.

What do public health indicators reveal about the impact of Covid-19 on India’s economy?

To avoid another livelihood crisis, India turned to local lockdowns during the second wave of the pandemic. Before the second wave, India’s public health performance (in terms of confirmed cases and confirmed deaths), while not the best, was ahead of several reference group countries. But the second wave has made India’s position significantly worse. The total confirmed cases per million now are comparable to those in the rest the world and the rate of vaccination is lower in India.

While death rates seem lower in India, there is massive underreporting. After accounting for the underreporting within official statistics, India’s total confirmed cases and deaths might exceed that of the rest of the world by a large margin (Gamio and Glanz, 2021).

In the conservative scenario, the total confirmed cases per million are about 13 times larger than in the rest of the world, and the total confirmed deaths per million are about 85% of that in the rest of the world. In the worst-case scenario, India is far behind the rest of the world.

There is an important caveat: while the focus of this article is on India, underreporting of Covid-19 cases and deaths is prevalent globally ( Institute for Health Metrics and Evaluation, University of Washington, 2021 ).

How has India fared so far?

More than a year has passed since India’s first national lockdown was announced. There was talk of a trade-off between lives and livelihoods when the Covid-19 crisis erupted last year. As India struggles in the second wave, it is clear that the country did poorly in both dimensions.

While India’s policy response was strong in terms of some aspects of lockdown stringency, it was ineffective in dealing with both the public health and economic aspects of the crisis. What’s more, it failed to limit the damaging impact of the crisis on the most vulnerable sections of the population.

Where can I find out more?

State of working in India 2021 : Report from Azim Premji University’s Centre for Sustainable Employment on the effects of Covid-19 on jobs, incomes, inequality and poverty.
City of dreams no more – The impact of Covid-19 on urban workers in India: Briefings from the Centre for Economic Performance.
India needs a second wave of relief measures : Jean Drèze discusses the humanitarian and economic case for further support.
Covid-19 articles from Debraj Ray .
India COVID-19 chartbook : A series of charts on the effects of the pandemic in India from HSBC Global Research.
India’s already-stressed rural economy is getting battered by the second wave of Covid-19 : Rohit Inani examines the crisis in India and calls for urgent relief measures.

Who are experts on this question?

Amit Basole , Azim Premji University
Swati Dhingra , LSE
Maitreesh Ghatak , LSE
Debraj Ray , New York University
S. Subramanian , Independent Researcher
Sanchari Roy , King's College London

Authors: Swati Dhingra and Maitreesh Ghatak

Swati thanks the erc for starting grant 760037. the authors would like to thank ramya raghavan and fjolla kondirolli for research assistance, photo by shubhangee vyas on unsplash.

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Six ways India could revive its Covid-hit economy

The centre could use windfall gain from petroleum taxes, massive rbi transfers and an increased income tax revenue to support the possible spike in expenditure..

In an interview around the time the National Statistical Office said that the economy had grown at only 1.6% in January-March quarter, Finance Minister Nirmala Sitharaman asserted that all that sufficient measures had already been taken to restore growth in the proposals under Union Budget 2021-’22 and three tranches under the Atmanirbhar Bharat.

On Monday, this was topped up by new measures to support the economy, This time there was a focus on the healthcare and tourism sectors.

There can be no room for complacency.

First, there has been a secular decline in growth since the first quarter of 2018-’19. Gross domestic product growth declined from 7.1% during the first quarter of 2018-’19 (even prior to Covid-19) to 1.6 % during the fourth quarter of 2020-’21 leaving aside the negative growth of the first (-24.4%) and the second (-7.4%) quarters of 2020-’21. With declining growth, the per capita income slumped to the level of Rs 99,694 in 2020-’21 from Rs 1,00,268 in 2017-’18. In fact, India’s per capita GDP is now what it used to be in 2016-’17 – the year when the slide started.

Second, Covid-19 has severely impacted not only GDP growth but also several other macro aggregates that have caused a huge demand deficiency. Lockdown to contain Covid-19 has led to massive job losses due to the closure of various commercial and industrial as also all contact service establishments including Micro, Small and Medium Enterprises.

The Centre for Monitoring Indian Economy estimated job loss at around 50 lakh by March 2020. A recent estimate on June 17 has put job loss at 2.53 crore since January 2021. The 30-day moving average unemployment rate as of June 6 stood at 13% as compared to 5.5% in June 2018. The labour participation rate has fallen to 39.7 % in June 2021 from 42.9% in June 2018.

Falling wages, rising inequality

Third, a study, State of Working India 2021: One year of Covid-19 by Azim Premji University has brought out that 23 crore individuals have fallen below the national minimum wage of Rs 375 as recommended by the Anoop Satpathy Committee. This means an increase of the income poverty rate by 15% in rural areas and nearly 20% in urban areas.

What is more, while coping with the distress that Covid-19 unleashed a large number of families has fallen into indebtedness and made distress sale of assets; many families were forced even to reduce food intake leading to nutritional distress as evidenced by the survey conducted by Rapid Rural Community Response to Covid-19, a coalition of civil society organisations that have come together to respond to the pandemic.

Fourth, as is widely recognised, the Indian economy is highly unequal. As per the World Inequality Database, the share of the top 10% in India’s national income was 56%, much higher than that in comparable countries like Indonesia (41%), Vietnam (42%) and even China (41%). A study by Azim Premji University has found that in April and May 2020 the poorest 20% of the households lost their entire incomes while the richer households lost less than a quarter of their pre-pandemic incomes.

With falling income across the board, household consumption has necessarily plunged. Obviously, the recovery among poorer households would be slower because they were forced to sell productive assets and/or to borrow to survive the crisis.

Further, Pew Research Centre has reported that the first wave of Covid-19 has witnessed a shrinkage of India’s middle class which has the capacity to consume and save to 6.6 crore from 9.9 crore.

For all the above, the private consumption as a proportion of GDP at constant prices has plummeted to 55.4 in the fourth quarter of 2020-’21 from 56.2 during the first quarter of 2018-’19. Private consumption has been the major driver of India’s GDP.

All this clearly suggests that the Indian economy is suffering from a huge demand deficiency. Its immediate turning around, therefore, critically depends on demand push. However, policy instruments to provide immediate demand push could also be combined with policy measures that would contribute to raising the productivity of the economy that is required for sustainable growth.

Atmanirbhar Bharat package

Indeed, the government, on May 13, 2020, May 17, 2020, October 12, 2020, and November 12, 2020, proposed several schemes providing for Rs 29.87-lakh crore to mitigate the devastating impact of the Covid-19 pandemic under the Atmanirbhar Bharat package. The package was equivalent to about 16% of India’s GDP.

However, the total fiscal outlay was estimated at only about Rs 3-lakh crore or 1.5% of GDP. A large part of the stimulus measures was quasi-fiscal in nature with partial or zero outgo. The fiscal outgo was directed towards helping the poor and vulnerable sections including migrant workers, farmers, rural population, agriculture and allied services, MSMEs and senior citizens of the society, with a view to help them cope with the loss due to sudden shutdown of economic activities.

Budget 2020-’21 also provided for a huge allocation of Rs 5.54-lakh crore for infrastructural projects with the objective to create jobs which in turn would promote consumption that could drive growth.

Starting from a drastic cut in corporation tax prior to budget to 2020-’21, the majority of the stimulus schemes under the Atmanirbhar Bharat were intended to stimulate private investment. In the face of falling demand, the response is sluggish except for the health and pharmaceutical-related sectors.

However, while recognising the fact that the second wave of Covid-19 has further exacerbated growth prospect, four quarters following the stimulus package have not witnessed significant growth.

It means that the economy requires a very big demand push for growth recovery. Scheme of the following type, in addition to what the Centre has already introduced, would give demand push for growth recovery:

Release of the three instalments of dearness allowance to the central government employees amounting to around Rs 37,500 crore in the form of expenditure voucher could be considered.
A total of 1,737 Central sector projects (including delayed projects) costing Rs 150 crore and above with about Rs-26.71 lakh core anticipated completion cost (425th Flash Report by Ministry of Statistics and Programme Implementation) and those proposed in Budget 2020-’21 should be executed on a fast-track basis.
Households steeped into indebtedness due to Covid-19 hospitalisation should be given full relief of the burden.
Households that have lost earning member should be provided with a basic income of Rs 5,000 per month.
Migrant labours who have lost jobs should be given a basic income of Rs 5,000 per month for six months.
Urban micro-entrepreneurs and daily wage earners who have lost their livelihood should be given a basic income of Rs 5,000 per month for four to six months. Similar schemes inducing private consumption could also be thought of.

Managing expenses

Clearly, the implementation of such schemes that would put money in the hands of the people would need a large expansion of government expenditure that would stress the fiscal deficit. But then windfall gain from petroleum, oil and lubricants taxes, massive Reserve Bank of India transfers and an unexpectedly large increase in income tax revenue in the current year would provide considerable cushion for a possible spike in government expenditure.

The reallocation of Budget allocations under different heads depending on the urgency under the current situation as also the mobilisation of the huge undisputed tax arrears could also be thought of. Despite all this, if there is a slippage of fiscal deficit, it is a lesser evil than plummeting or stagnant growth.

Atul Sarma is a Distinguished Professor at Council for Social Development, New Delhi, and Shyam Sunder is working with an Indian corporation. Views are personal.

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Impact of the coronavirus (COVID-19) on the Indian economy - statistics & facts

After reporting its first case in late January 2020 in the southern state of Kerala, India introduced rigorous airport screenings for the coronavirus (COVID-19). The following weeks saw a quick succession of events leading to a suspension of all travel in and out of the country by March 22 that year. While infections continued to increase during this period, Indians were now confined to their homes to contain the spread of the virus. The announcement did not come without chaos – it created widespread panic, specifically among lower classes of society including farmers and migrant workers who were left stranded and jobless overnight from their faraway homes and no mode of transport. Despite the government announcing a relief package of 1.7 trillion rupees , it was clear that a large portion of the country’s population was going to be scouring for livelihoods. Economists slashed GDP rates for the foreseeable future due to the obvious impact of the lockdown. However, it was also estimated that the country might bounce back quickly because its industry composition, with unorganized markets being largely dominant. Losses from organized sectors amounted to an estimated nine trillion rupees in late March, projected to increase with the prolonging of the lockdown. Unsurprisingly, the most affected industries included services and manufacturing, specifically travel & tourism, financial services, mining and construction, with declining rates of up to 23 percent between April and June 2020. Towards the end of 2020, however, India saw some semblance of recovery across certain sectors. This was a result of easing restrictions, controlled infection rates and the festive season between October and November 2020. The pandemic came with uncertainty and implications on all aspects of business across the world. Despite India being ahead of most countries in being able to implement work-from-home measures, specifically in white collar work, job and earning deficits , along with instability in prices was expected. The months of the lockdown resulted in the free fall of employment, which slowly stabilized after the economy steadied in most parts of the country. Segments including consumer retail expected to see sharp falls ranging between three and 23 percent depending on the market. For the big players across segments, this meant operating at less than full capacity to keep afloat. For small businesses , however, it depended on how long they could ride out the storm. Overall, the pandemic changed daily lifestyles drastically . Economic activity started to take a hit yet again since March 2021, as the country faced its second wave of the pandemic . As a result, GDP forecasts were expected to fall, putting losses at over 38 billion U.S. dollars if local lockdowns continued till June 2021. Unprecedented numbers in terms of infections and deaths recorded across the country led to another set of lockdowns in some parts, burdening the healthcare system in the midst of government controversy. International aid in the form of oxygen cylinders, PPE kits, ventilators along with funding was being sent from various countries to what looked like a dire situation. This text provides general information. Statista assumes no liability for the information given being complete or correct. Due to varying update cycles, statistics can display more up-to-date data than referenced in the text. Show more - Description Published by Statista Research Department , Dec 19, 2023

Key insights

Detailed statistics

Estimated quarterly impact from COVID-19 on India's GDP FY 2020-2022

Estimated cost due to COVID-19 on economy in India 2020

Value of government aid to combat COVID-19 in India April 2020

Editor’s Picks Current statistics on this topic

Estimated economic impact from COVID-19 on services in India Q2 2020-Q3 2021

Key Economic Indicators

Estimated economic impact from COVID-19 on industry in India 2020

COVID-19 impact on labor participation rate in India 2020-2022

Further recommended statistics

Key indicators.

Basic Statistic Estimated quarterly impact from COVID-19 on India's GDP FY 2020-2022
Premium Statistic COVID-19 impact on estimated income group in India 2021, by type
Premium Statistic Estimated cost due to COVID-19 on economy in India 2020
Premium Statistic Estimated economic cost of Maharashtra COVID-19 lockdown India 2021, by sector
Premium Statistic COVID-19 impact on GDP forecast India FY 2021, by agency
Premium Statistic Impact from COVID-19 on India's exports 2021, by commodity
Premium Statistic Impact from COVID-19 on India's imports 2022, by commodity

Estimated quarterly impact from COVID-19 on India's GDP FY 2020-2022

Estimated quarterly impact from the coronavirus (COVID-19) on India's GDP growth in financial year 2020 to 2022

COVID-19 impact on estimated income group in India 2021, by type

Coronavirus (COVID-19) impact on estimated income group across India as of April 2021, by type (in millions)

Estimated cost of the coronavirus (COVID-19) lockdown on the Indian economy in 2020 (in billion U.S. dollars)

Estimated economic cost of Maharashtra COVID-19 lockdown India 2021, by sector

Estimated cost of the coronavirus (COVID-19) lockdown in Maharashtra on the Indian economy in April 2021, by sector (in billion Indian rupees)

COVID-19 impact on GDP forecast India FY 2021, by agency

Impact from the coronavirus (COVID-19) on India's GDP growth forecast in financial year 2021, by agency

Impact from COVID-19 on India's exports 2021, by commodity

Impact from the coronavirus (COVID-19) on exports from India in January 2021, by commodity group

Impact from COVID-19 on India's imports 2022, by commodity

Impact from the coronavirus (COVID-19) on major imports into India in April 2022, by commodity group

Premium Statistic COVID-19 impact on rural and urban employment India 2020, by type
Premium Statistic COVID-19 impact on unemployment rate in India 2020-2022
Premium Statistic COVID-19 impact on jobs in India 2020, by age group
Premium Statistic COVID-19 impact on number of people employed in India 2020-2021
Premium Statistic COVID-19 impact on labor participation rate in India 2020-2022
Premium Statistic Employment rate of urban women India 2016-2021

COVID-19 impact on rural and urban employment India 2020, by type

Impact of the coronavirus (COVID-19) on rural and urban employment across India in 2020, by type

COVID-19 impact on unemployment rate in India 2020-2022

Impact on unemployment rate due to the coronavirus (COVID-19) lockdown in India from January 2020 to May 2022

COVID-19 impact on jobs in India 2020, by age group

Impact on job loss and gain due to the coronavirus (COVID-19) lockdown in India between April and July 2020, by age group (in millions)

COVID-19 impact on number of people employed in India 2020-2021

Impact on number of people employed during the coronavirus (COVID-19) lockdown in India between May 2020 and January 2021 (in millions)

Impact on labor participation due to the coronavirus pandemic in India between 2020 and 2022

Employment rate of urban women India 2016-2021

Employment rate of urban women in India from March 2016 to February 2021

Premium Statistic Size of organized market India FY 2019, by sector
Basic Statistic Estimated economic impact from COVID-19 on industry in India 2020
Basic Statistic Estimated economic impact from COVID-19 on services in India Q2 2020-Q3 2021
Premium Statistic Estimated economic impact from COVID-19 in India 2020 by market
Premium Statistic Impact of COVID-19 on corporate revenues in India Q1-Q2 2020, by sector
Premium Statistic Problems faced by business due to COVID-19 in India 2020
Premium Statistic COVID-19 impact on start-up funding in India 2020

Size of organized market India FY 2019, by sector

Size of the organized market across India in financial year 2019, by sector (in billion Indian rupees)

Estimated impact from the coronavirus (COVID-19) on the industry sector in India from April to December 2020, by type

Estimated impact from the coronavirus (COVID-19) on the service sector in India from 2nd quarter 2020 to 3rd quarter 2021, by type

Estimated economic impact from COVID-19 in India 2020 by market

Estimated impact from the coronavirus (COVID-19) on India in 2020, by market

Impact of COVID-19 on corporate revenues in India Q1-Q2 2020, by sector

Impact of the coronavirus (COVID-19) pandemic on corporate revenues in India in 1st quarter and 2nd quarter 2020, by sector

Problems faced by business due to COVID-19 in India 2020

Problems faced by business due to the coronavirus (COVID-19) in India in 2020

COVID-19 impact on start-up funding in India 2020

The impact of COVID-19 on Indian tech start-ups in different funding stages between April and October 2020

Retail and consumption

Premium Statistic Reasons for not visiting restaurants after COVID-19 lockdown India 2020
Basic Statistic Opinion on shopping for non-essentials after COVID-19 lockdown relaxation India 2020
Basic Statistic COVID-19 impact on media consumption India 2020 by type of media
Basic Statistic Opinion on online deliveries after COVID-19 lockdown relaxation India 2020
Premium Statistic Opinion on impact of COVID-19 lockdown on grocery availability India 2020
Basic Statistic People engaged in panic buying due to COVID-19 India 2020

Reasons for not visiting restaurants after COVID-19 lockdown India 2020

Reasons for not visiting favorite restaurant after the coronavirus (COVID-19) lockdown in India as of May 2020

Opinion on shopping for non-essentials after COVID-19 lockdown relaxation India 2020

Opinion about purchasing items beyond essentials after the coronavirus (COVID-19) lockdown relaxation in India as of May 2020

COVID-19 impact on media consumption India 2020 by type of media

Impact of the coronavirus (COVID-19) on media consumption in India as of March 2020, by type of media

Opinion on online deliveries after COVID-19 lockdown relaxation India 2020

Opinion about permitting e-commerce platforms to deliver all goods after the coronavirus (COVID-19) lockdown relaxation in India as of May 2020

Opinion on impact of COVID-19 lockdown on grocery availability India 2020

Opinion on impact of COVID-19 lockdown on grocery availability in India from March 20, 2020 to May 18, 2020

People engaged in panic buying due to COVID-19 India 2020

Share of people engaged in panic buying due to coronavirus (COVID-19) in India in 2020

Relief and financial aid

Premium Statistic Value of government aid to combat COVID-19 in India April 2020
Premium Statistic Impact of government aid to combat COVID-19 in India September 2020
Premium Statistic Top ten states by number of people fed during COVID-19 lockdown in India 2020
Basic Statistic Government shelter homes during COVID-19 in India 2020 by state

Value of government aid towards the coronavirus (COVID-19) across India as of May 6, 2020, by type (in billion Indian rupees)

Impact of government aid to combat COVID-19 in India September 2020

Number of people aided by the government relief package towards the coronavirus (COVID-19) across India as of September 9, 2020, by type (in millions)

Top ten states by number of people fed during COVID-19 lockdown in India 2020

Leading states by number of free meals provided by the state/NGO during the coronavirus (COVID-19) lockdown in India as of April 2020 (in millions)

Government shelter homes during COVID-19 in India 2020 by state

Number of government shelter homes during the coronavirus (COVID-19) in India as of April 2020, by state

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