Effects of Covid-19 on the Indian economy

The onset of the pandemic and fears of a recession have hampered India’s $ 3 trillion economy as fiscal year 21 growth figures could be -5% after growth story has been out of breath in the past 2 years.

The ICOR (lowest possible) has dropped from 3 to 4.6 over the past 10 years, which is not good for the fastest growing economy in 2013-2017. The Harrod Domar model therefore corresponds to lower growth figures as the savings rate also deteriorated to 30%.
Efficiency, competitiveness and productivity have therefore taken a hit. The marginal productivity of capital has collapsed due to excessive investment and FDI inflows.

Labor productivity increased from 3% in 2003 to 6.7% in 2010 and fell to 5.2% in 2019. This is due to the ever-growing workforce in the organized sector.

Parameters of technological progress like the contribution of IT sector growth to total GDP growth improved slightly, but most of it went to exports.

So, over the past decade, the finer threads of the economy from a micro perspective have deteriorated. Asia’s third-largest economy grew from $ 700 billion in 2002 to $ 1.8 trillion in 2010 and very slowly to $ 3 trillion over the past decade.

The current scenario for the Indian economy from a macro perspective does not look good either. Global economies are also darker. Investment is interest inelastic, rendering monetary policies ineffective, and speculative demand for money inefficient, resulting in ineffective fiscal stimulus. As the growth in the first quarter is expected to be -10 to -15%, this translates into a loss of Rs 70,000 crore in the first quarter.

What then can governments do? This is a catch 22 type scenario and it can be expected that if the unlock starts quickly, the second half of FY21 will see growth above 5% and the growth in FY21 would likely be -5 to 1%. The recovery will likely be slow and U-shaped.

In 2012, risk aversion manifested itself in Europe, the Dow Jones rebounded while the CAC stagnated. Thus, an appreciation of the dollar was observed and the euro, the pound, the yen and the rupee depreciated.

Since 2014, the appetite for risk has started to improve. Green shoots in global economies have been observed. Monetary easing and fiscal stimulus have paid off. Over the past 2 years, global growth has fallen again, revaluations of economies are occurring and money is moving to the US as a safe haven amid rising risk aversion.

Over the past month, the sovereign currency’s ratings on the rupee had been downgraded to a lower rating after several years. The recession and the Covid crisis are scare the markets every day.

Over the next 2 years, the rupee will depreciate to levels of 80 to 82 due to the appreciation of the dollar, benign macroeconomic data and the recession, the Covid crisis, the rise in premium rates term and falling interest rates. In addition, if inflation rises due to imbalances between supply and demand, the $ 3 trillion economy will see a further depreciation of the national currency, thanks to the theory of purchasing power parity. . In the worst-case scenario, if the Covid crisis does not wind down, the rupee could experience further sharp depreciation in the coming years.

The Indian benchmark 10-year gsec yield was 9% in 2012, declined to 7.5% in 2014 and climbed again to 9% in 2015. In 2016, the yield fell to 6.2% and increased climbed to 8.5% in 2018, then fell to 6.2% in 2020. Bond markets were therefore also affected.

In the United States, the dollar appreciated to 1.12 levels and the dollar index rose to 97 levels as investors moved to safe havens due to the pandemic crisis across the board. Since this trend will exist for some time in the future, the long dollar would be the right strategy in the currency market.

The $ 25 trillion economy would go into recession over the next 2 years and the recovery will be very slow. The government and the private sector will try to provide incentives.



The opinions expressed above are those of the author.


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