ACADEMIA Letters Impact of First Wave of COVID-19 on the Indian Economy Tanya Kapoor On 24 March 2020, when India had a little over 500 cases, PM Narendra Modi imposed lockdown across the nation to curb the spread of cases. It was one of the strictest lockdowns in the world which forced the $2.9 trillion economy to stay shut. The lockdown failed to curb the spread of coronavirus and the cases kept on increasing. In September, India became the country with the second highest number of cases by overtaking Brazil. As of 15 November 2020, India has more than 85 lakh cases. If this trend continues, India will also overtake USA to become the country with highest number of cases. The halted economy impacted every industry negatively. A report by UN forecasts that Indian Economy will contract by 5.9% in the year 2020. The Indian economy experienced a contraction of 23.9% in the first quarter of the fiscal year of 2020 as per the data released by Ministry of Statistics and Programme Implementation. Economic Impact on various sectors The lockdown negatively affected a broad swath of economic activities like tourism, transportation, financial markets, hospitality, restaurants etc. Automobiles: The automobile sector was already struggling with a slowdown when the virus hit India. Our country imports engineering goods and various automobile parts from China. The non-availability of those means the car is not fully ready and the manufacturer might have to look for alternative suppliers, thereby increasing the cost of production. The sales were almost negligible during the lockdown period, but it has started to see a turnaround due to the festive season. Maruti Suzuki, Toyota, Hyundai are experiencing higher sales in October 2020 in comparison to previous year due to the pent-up demand of the quarter. Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Tanya Kapoor, tanyakapoor325@gmail.com Citation: Kapoor, T. (2021). Impact of First Wave of COVID-19 on the Indian Economy. Academia Letters, Article 1760. https://doi.org/10.20935/AL1760. 1 Tourism: Tourism contributes approximately 5% to the GDP of the country. Due to the coronavirus outbreak, India suspended all international travel which brought travel and tourism to a standstill. This directly impacted states like Goa, Uttarakhand, Rajasthan etc. This industry employs more than 8 crore people who have been rendered jobless. People are scared to go out and travel. The industry estimates a loss of Rs 10,000 crore due to COVID-19. Pharmaceutical Industry: India is highly dependent upon imports from China. One of the essential raw materials for the production of pharmaceutical drugs is Active Pharmaceutical Ingredients. About 60% of APIs and Intermediaries are being sourced from China, which has caused a lack of supply due to the disruption in supply chain. These disruptions can lead to shortages in supply of essential medicines. The prices of pharma stocks have risen in anticipation of a vaccine as all companies are involved in the R&D of the vaccine. Restaurant Services: Restaurants were shut for a long period during the lockdown. They thrive on social gatherings, which is the main cause in the spreading of the virus. Though restaurants have opened in the Unlock but the footfall is low. As per an article published in the Guardian in July 2020, the industry estimates a loss of $13 billion due to the shutdown. Online food ordering also took a major hit as people were scared to eat from outside, but it is showing signs of recovery. MSME: The Micro, Small, Medium Enterprises contribute more than 30% to our GDP and employs more than 110 million people. Around 15 million MSMEs are on the risk of closure as consumer goods, logistics etc. are facing a drop in business. They are being adversely impacted due to the liquidity constraints. Airlines: It is the sector which is most affected by COVID-19. The revenue of Indian carriers like Indigo, Air India has dropped by more than 85%. Airports Authority of India, which is responsible for managing civil aviation reported a drop of 92% in their revenues. Airlines have resorted to measures like forced leave, leave without pay, salary cuts etc. to curb their losses. Air caps imposed by the government have made recovery even more difficult. Macroeconomic Impact Growth Rate: Reserve Bank of India has projected a contraction of 9.6% for 2020. The government assessment also shows similar projections. The Indian economy experienced a contraction of 23.9% in the first quarter of the fiscal year of 2020 as per the data released by Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Tanya Kapoor, tanyakapoor325@gmail.com Citation: Kapoor, T. (2021). Impact of First Wave of COVID-19 on the Indian Economy. Academia Letters, Article 1760. https://doi.org/10.20935/AL1760. 2 Ministry of Statistics and Programme Implementation. Except agriculture, all sectors like manufacturing, construction showed a steep decline. The IMF also revised its contraction estimates from 4.5% to 10.3% because of the rising number of cases. There are chances that economy might rebound and experience a growth rate of 6-8%. But a V shaped recovery is quite unlikely even though power consumption and passenger vehicles are showing signs of recovery. Rise in Gold Prices: Gold prices rose exponentially in April-May 2020 as coronavirus started spreading outside China. Stock markets experienced a drastic crash because of which investors are taking refuge in this low-risk asset. Gold demand in India is majorly met by imports and a weak rupee makes gold even more expensive. The price of 10 grams gold rose from Rs 30,000 to 45,000 in just a few weeks. Gold is a reliable store of value with low default risk, hence becomes a preferred choice during uncertain times. Foreign Exchange Reserves: India’s foreign exchange reserves have increased by approximately $12 Billion in July 2020. This increase can help in paying India’s import bill for one year. It can help the government in paying its debt obligations. Reasons behind this increase: 1. FPI Inflows: The corporate tax cut in 2019 has increased the investment in the Indian stock market. 2. FDI Inflows: Jio alone raised over Rs 1 lakh crore in FDI from Facebook, Vista etc. There has been a lot of FDI inflow in the months of June-July 2020. 3. Fall in Imports: There has been a sharp decline in imports because of the lockdown. Gold has a major import item but due to the high prices of gold the demand for it has been low. 4. Fall in oil prices: Crude oil prices suffered a historic crash because of the non-agreement between OPEC countries and Russia. The overproduction lowered the brent crude prices which reduced our import bill. Monetary Policy: In order to minimize the impact of coronavirus, the RBI first cut its repo rate by 75 bps to 4.4% in March 2020. RBI also reduced the CRR to 3% to boost liquidity in the banks as this will free Rs 1.37 lakh crore. The reverse repo rate was also reduced to 4%. To infuse liquidity in the market, RBI undertook repo operations to the tune of Rs 1 lakh crore. The Monetary Policy Committee in May 2020 reduced the repo rate from 4.4% to 4%. The reverse repo rate was also cut down to 3.35%. RBI Governor said, “The interest Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Tanya Kapoor, tanyakapoor325@gmail.com Citation: Kapoor, T. (2021). Impact of First Wave of COVID-19 on the Indian Economy. Academia Letters, Article 1760. https://doi.org/10.20935/AL1760. 3 accrued on the working capital facilities during the moratorium period is proposed to be converted to a funded interest term loan which is payable by end of FY21”. This is done to provide some relaxation to MSMEs. RBI allowed all lending institutions to give another 3-month moratorium period to reduce the risk of NPAs. RBI is maintaining an accommodative stance and is unlikely to cut the policy rates because of high inflation. Inflation: The specified limit for inflation in the country as decided by RBI is 4+/-2%. Vegetables and other essential food items have increased the inflation rates in October to 7.61%. High inflation along with degrowth in the economy is a worrying situation. Rate cuts are also not feasible with such high inflation. The Wholesale Price Index has also increased by 1.48% in October 2020. Food prices have been volatile due to the disruption in supply. Fiscal Deficit: The last quarter of FY 2019 grew at a rate of 4.2% which is the slowest in more than a decade. The fiscal deficit is expanding to 4.6% of the GDP which is higher than the estimated figure. The fiscal deficit is expected to double in FY 2020. The government also raised its borrowing limit to Rs 12 lakh crore which indicates that fiscal deficit will definitely rise. The government is experiencing a fall in revenues due to less tax receipts and missing of disinvestment targets. Fiscal Policy: India should enhance its fiscal response, but tax revenues of government have fallen by 32% in April-June 2020. India is experiencing a scissors effect due to the steep decline in tax revenues because economic activity in the country was brought to a halt due to the lockdown. GST collections were below Rs 1 lakh crore during the lockdown period. Hence, the fiscal policy measures are also constrained. India is still seeing increasing number of COVID-19 cases every day; it would be interesting to see when and how the economy falls back on track with the limited options of monetary and fiscal policy. References Mukherjee, T., Ray, N., & Bag S (2020), Impact of COVID-19 on Indian Economy https:// government.economictimes.indiatimes.com/news/economy/ opinion-impact-of-covid-19-on-the-indian-economy/75021731 Singh, K (2020), COVID-19 Has Pushed the Indian Economy into a Tailspin. But There’s a Way Out. https://thewire.in/economy/covid-19-india-economic-recovery Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Tanya Kapoor, tanyakapoor325@gmail.com Citation: Kapoor, T. (2021). Impact of First Wave of COVID-19 on the Indian Economy. Academia Letters, Article 1760. https://doi.org/10.20935/AL1760. 4 Impact of the coronavirus (COVID-19) on the Indian economy - statistics & facts, Statista Research Department https://www.statista.com/topics/6304/ covid-19-economic-impact-on-india/ Indian economy contracts 23.9% due to COVID-19 impact (2020) https://www. deccanchronicle.com/business/economy/310820/ indian-economy-contracts-239-due-to-covid-19-impact.html Mathew, G & Singh S, (2020), Explained: Why are forex reserves shooting up when the Indian economy is hit? https://indianexpress.com/article/explained/ why-are-forex-reserves-shooting-up-when-the-indian-economy-is-hit-6545678/ Dhasmana, I, (2020), COVID-19 Impact: India’s GDP may contract 10.3% in FY21, says IMF https://www.business-standard.com/article/economy-policy/ imf-scales-up-india-s-gdp-contraction-to-10-3-from-4-5-for-fy21-120101301086_1.html Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Tanya Kapoor, tanyakapoor325@gmail.com Citation: Kapoor, T. (2021). Impact of First Wave of COVID-19 on the Indian Economy. Academia Letters, Article 1760. https://doi.org/10.20935/AL1760. 5