India is the quickest developing trillion-dollar economy on the planet and the fifth-largest overall, with a GDP of $2.94 trillion. India has become the fifth-biggest economy in 2019, overwhelming the United Kingdom and France. The nation positions third when GDP is analyzed concerning purchasing power parity at $11.33 trillion. With regards to computing GDP per capita, India’s high populace hauls its nominal GDP per capita down to $2,170. The Indian economy was at $189.438 billion in 1980, positioning thirteenth on the list globally. India’s growth rate was relied upon to ascend from 7.3% in 2018 to 7.5% in 2019 as hauls from the currency exchange initiative and the introduction of the goods and services tax fade.
India’s post-freedom journey started as an agrarian country; be that as it may, throughout the years the manufacturing and service sector has risen unequivocally. Today, its service sector is the quickest developing segment on the globe, adding to over 60% of its economy and representing 28% of employment. Manufacturing stays as one of its significant sectors and is being given the due push through the government’s initiatives, for example, “Make in India.” Although the contribution of its agrarian sector has declined to around 17%, despite everything it is way higher in contrast with the western countries. The economy’s strength lies in a constrained reliance on exports, high saving rates, positive socioeconomics, and a rising middle class.
Indian economy in 2020
It has been for the first time in seven years that Indian GDP has grown with a rate of less than six percent year over year for two consecutive quarters. The second and the third quarter of the FY2019-20 reported YoY growth of real GDP at 5.1% and 4.7% respectively. The slowdown visible in the Indian economy is because three out of four pillars – private consumption, private investment, and exports- have slowed down significantly. The Q1 figures for Private consumption depict us that the biggest contributor to the economic growth of the nation has been at a level which is lowest for the last 18 quarters. This figure of private consumption tells us that the purchasing ability of the consumer and the sentiments are in a bad shape. Other parameters of the economy like investment and exports remained similar, owing to the global uncertainties around trade and investment and geopolitical tensions. The fourth pillar of the economy which is currently holding it all together is also running out of steam, as the hands of the government are also tied up. Hence counter-cyclical measures from the government are unlikely because of high-pressure mounting on the budget deficit.
The low demand for goods and services could be accounted for several factors like stagnating rural wages, tightening lending conditions, and rising levels of unemployment. Also, with these factors the changing consumer preferences due to which the demand patterns are transforming. Looking at the economy from the perspective of supply-side we can see a decline in hiring and the investment in production facilities due to problems with idle production capacity, weakening corporate profiles, and infrastructure bottlenecks. If we look at the global economy too then we don’t find any positive sign there, growth is slowing down across the globe and the predictions from the International monetary fund are showing a decline in the growth rate of the world economy. Due to the uncertainties roaming around the trade policies there has been a constant drop in the global trade volume growth since 2018. Owning to policy uncertainties and geopolitical events around the globe the export growth and the investment in business are going to be affected areas of the Indian economy.
Impact of COVID-19 crisis on Indian economy
The Indian economy before the COVID financial crisis was already treading on thin ice because of many factors like the slowdown in the growth of GDP, changing consumer sentiments leading to falling demand, geopolitical situations, and uncertainties at the global level. Unlike the previous financial crisis, India is entering into the COVID financial crisis with an already trembling economic situation. The figures represent that the economic situation of India isn’t strong at all at this moment. The only positive thing that India can look upon while entering this crisis is its FOREX reserve. Various estimates of the economic growth of the Indian economy show a sharp decline, according to World Bank estimates the growth is going to fall at 5% for FY2020. In FY2021 the estimated growth rate for the Indian economy is projected at a rate of 2.8%
The impact of COVID-19 on the economy can be broadly categorized into three major categories:
Demand shock: Reasons like movement restriction and fear of falling sick are going to affect consumer spending negatively. Along with this, the quarantine restriction leading to the closure of school/factories/businesses is going to impact the demand for goods and services. Another factor for the reduced demand in the market is going to be loss of employment especially in the informal sector and for contractual workers which in turn might lead to reduced consumer spending. The demand is not only going to drop within India but also on the export side too as European countries, USA, and China, which are some of the worst-hit countries by this pandemic account for about 40% of India’s export.
Supply Shock– This situation of the crisis has disrupted the supply chains. Factories present in the affected areas which accounted for the supply of raw materials are closed or aren’t able to supply their products because of the restrictions imposed. This delay in the procurement of raw materials is leading to uncertainty which in turn would lead to low investments. Also, the COVID situation is leading to higher input prices and reduced profitability resulting in a decline in capacity building. Although supply-side shock might not be that prolonged as the supply of materials may start normally as soon as the situation improves.
Financial Market Shock: As the COVID situation has caused a steep decline in demand for commodities as well as oil. The prices of commodities/oil have been low. The prices in this phase are volatile too. Due to an increase in unemployment banks are going to face an increase in the number of consumer loan defaults. Also, there would be high stress on banks to impact credit growth in this situation. The capital market is also highly impacted by this situation of crisis a decline of 30% has been observed since the pandemic started spreading across the globe. A sharp depreciation of rupee against dollar has been observed which worsens trade deficit as in India’s situation the contribution of exports is lower to the GDP of India. The bank margins are also going to reduce as the rise in bond yields is going to make borrowing more expensive.
Transforming sectors – Shaping the economy amidst COVID-19
The effect of the COVID-19 pandemic is visible on the world economy as well as the economy of India. In this situation where the economic crisis is looming over the Indian economy, one can infer that the contribution of the sectors to our economy can possibly transform. The sectors which once used to be the drivers of the Indian economy may face a slowdown. The sectors which used to be in the background whenever we talked about the Indian economy may become the drivers of the Indian economy now. This transformation is going to be imminent when we look at the economy going into a situation of crisis because of the widespread of the coronavirus disease. The spread of coronavirus has left our economy in a bad situation but it also opens up many opportunities on which if India can capitalize then it might help the economy bounce back even stronger. Many countries have decided that they don’t want to be reliant on just one country for the supply of raw materials or finished products. This opens up an opportunity for India to capture a share of the global market in various sectors, which in turn will help India improve its export figures. Also, many of the industrial sectors have been reliant on china for the supply of raw materials either partially or fully, the restriction of movement of goods has led these industries to look for an option of a local source for their raw materials. This, in turn, builds opportunities in the Indian market which in turn could lead to the growth of new business and employment. Capitalizing this opportunity is in line with the make in India campaign that the Indian government has been promoting since long.
A brief overview of what role different industries are going to play in stabilizing and getting the Indian economy back on the right track can potentially look like the chart below
Spectators: These are the industries that have been highly affected by the ongoing situation of the COVID-19 crisis. These industries aren’t left with any move they can make and may be forced to sit around waiting for things to become normal and the economy to get back on the right track without contributing anything significant to the recovery of the Indian economy.
Survivors: The industries in this category aren’t going to play a major role in the recovery of the Indian economy but throughout the way, they are going to keep on doing their business. There would be a negative impact on them as well as the ongoing situation. But they are going to survive through it and also help the economy keep afloat.
Influencers: The industries which are going to drive the Indian economy towards the light are put under this category. Further looking deeper into these sets of industries we can see that some out of these are going to act as the backbone of the Indian economy keeping the things in place and constantly pushing the economy towards a positive side. Another group of companies in this category is going to be the ones which will be presented huge opportunities in front of them at global as well as local level. If the industry players succeed in capitalizing on these opportunities then they could just provide the boost required by the Indian economy to get back on the track of growth year on year. It could lead India to become one of the giant players of the global economy.
The road ahead is a tough one, but if navigated with proper directions it could lead to great results for the Indian economy.
Shubham Mahla is a BTech graduate from Vellore Institue of Technology(Vellore) and is currently pursuing his MBA in Finance from Institute of Management, Nirma University. His keen inclination towards Finance and passion for learning has persuaded him to explore the field with excellent work in research and application tools. As an intern at Jagdish Hirani & Associates his contribution in this article has helped him in holistic developments with deep insights.
Parth Hirani is a leading strategic advisory practice at J.Hirani & has helped various organizations align strategies across continents. A social & collaborative sapien by nature. He enjoys being a full time “dreamer” & loves challenging “possibilities”.
Success mantra- “We believe it’s possible; while maintaining flexibility on “How” we are “Rigid” on our “Goals”
©J.Hirani, Influencer VS Spectators: Which sector will help Indian economy revive? May 2020. All rights reserved.