Effect of COVID-19 on economy

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History has witnessed several pandemics over the centuries, but few as widespread and as disruptive as the ongoing 2019-20 coronavirus outbreak. The virus was first identified in Wuhan in Hubei district of China in late December 2019 and has since found its way to nearly 196 countries and territories across the globe. It causes the ‘Coronavirus Disease 2019’ or ‘COVID-19’ which is characterised by acute respiratory infection, particularly fatal for infants, people of advanced years and those with underlying medical conditions.

 Although it is primarily a situation of grave health crisis, the outbreak has caused in its wake major socio- economic disruptions, with far- reaching consequences. According to a United Nations prediction report, the world economy emerging out of the crisis will see 25 million people out of work and dramatically slashed rates of wages for workers. It warned that the world should prepare for a “significant rise in unemployment and underemployment in the wake of the virus”. As these rather worrisome facts and figures keep emerging, let us explore the factors that shed some light on how a common virus has managed to bring large economies to their knees within such a short span of time.

Pandemic status of COVID-19

The coronavirus has a very high rate of transmission as is evident from the fact that as on 25th March 2020, mere 3 months from the first reported case, there have been around 4, 71,300 known cases of infection worldwide and 21,300 deaths. China, which is the epicentre of the disease, and the European countries of Italy and Spain along with the USA have been the worst hit, cumulatively accounting for around 55% of total number of current cases worldwide.  It was declared as a ‘pandemic’ on 11th March, 2020 by the World Health Organization. A pandemic is defined as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people” A number of countries have imposed a state of total lockdown, including travel restrictions, amid efforts to quarantine citizens in order to prevent community transmission. Indian Prime Minister Narendra Modi announced a complete lockdown of the country commencing on 25th March for a period of 21 days, threatening penal consequences for violators. With people forced inside their homes and business activities suspended, a shutdown of the global economy is looming large.

How is it affecting the economy?

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As nationwide lockdowns and state- imposed curfews continue- major exports are suspended, shopping malls are left deserted and the lights in theatres and cinema halls have gone dark- it comes as no surprise that unemployment is headed for a historic high. Closure of these establishments have, in turn, hit those businesses, big and small, that were engaged in supplying utilities and services to them- developing a vicious cycle of economic inactivity.

The Chinese economy, owing to its prolonged fight against the viral outbreak, has gone down by about 10% in the first quarter. Estimates of the margins by which US and the European economies are likely to go down are of similar magnitudes, i.e. perilous double- digit drops in GDP, that too assuming that the virus would be contained by the end of second quarter and measures would be relaxed.

As far the Indian economic scenario is concerned, Prime Minister Narendra Modi has asked top verticals within the government, including the Niti Aayog, the Economic Advisory Council to the Prime Minister and Finance Ministry to assess the economic impact of the novel coronavirus. The economy is forecast to grow 5% in current fiscal year, the slowest in 11 years. The Economic Survey had forecast 6-6.5% rise in financial year 20-21, but Covid-19 has hurt recovery prospects. Ill- effects of the pandemic have not spared the Forex and Bond markets either.

The first brunt of the blow would be borne by the tourism, transport and hospitality sectors- leading to a gradual stagnation of the supporting industries. Consumption slowdown is obviously followed by drop in production, which is further aided by the fact that the outbreak has caused workers to flee to villages culminating in unavailability of labour.

Entrepreneurs operating small and medium sized enterprises find themselves in particularly deep waters as poor cash- flow and negligible revenues over prolonged periods are slowly pushing them towards a point beyond recovery and possible permanent closure.

 As the health pandemic is slowly unfolding into an economic pandemic, the world is waiting for the governments to respond, as their support is extremely crucial to ensure that this temporary economic shock does not turn into a permanent one. According to former RBI Governor Dr. Raghuram Rajan, the situation must be dealt with in short- term, achievable steps as it is hardly an appropriate time to roll out big, ambitious projects. Available fiscal resources must be channeled into healthcare first- in securing supply of protective gear and hygiene products, expanding available facilities and building quarantine spaces.

The next step would be identification and allocation of resources for providing monetary benefit to the vulnerable sections of the society- such as the impoverished and the immigrants- who are struggling to keep body and soul together during these trying times. Equally important is to ensure the survival of small and viable businesses, which are fast losing their stronghold in the economy, by providing monetary incentives and subsidized loans to create a bridge between now till they manage to overcome the crisis and secure economic momentum. 

Steps being taken by government & critical analysis

The first step towards mitigating any mishap on part of the government is resorting to clear communication and educating the people about the gravity of the situation. The Indian government must put across very clearly to every citizen that this is a period of national emergency and that pro- active role sought from all of them. Comprehensive data must be released to guide actions, as one cannot hope to win a blind fight.

 In terms of policy decisions, the Prime Minister announced on 24th March, 2020 that Rs. 15,000 Crore has been pumped into the healthcare sector for provision of testing kits, protective gears for doctors, nurses and paramedics and also for expanding the available facilities and increasing accommodative capacity. Although the amount allocated seems substantial, it must be weighed against the fact that there is considerable uncertainty over the duration of the pandemic- currently available estimates of adverse effects of the outbreak might have to undergo sizeable revisions. 

India is yet to announce any substantial and far- reaching policy decision to combat the approaching economic slowdown. In this respect, it can take cue from other leading economies that are rolling out counter- measures. For instance, in the US, Federal Reserves has cut its interest rates to near zero to help consumers and businesses to access cheaper loans. Taking into account an upcoming inevitable rise in NPA’s and possible delinquencies, there is a large demand that the RBI slash its rates before announcing next fiscal policies to manage the country’s plummeting risk and investment capacities. It can also offer partial guarantees to commercial banks, so that they remain incentivized to lend to businesses, particularly the smaller ones.

However, every policy must be implemented only after taking into careful consideration all possible consequences, since one must not forget that the country is currently dealing with a financial system that is severely impaired and efforts must be directed towards rebuilding it and avoiding any path that may lead to further collapse.

Conclusion

The coronavirus outbreak is perhaps the biggest crisis that our generation has had to face. Although the situation demands quick and decisive actions on part of authorities as well citizens, one must not forget to weigh the long- term consequences of these actions. The goal today is not merely to overcome the immediate threats to our health, but also lay to the foundation for a safer world, to emerge on the other side stronger than ever.

Every cloud has a silver lining, and in this situation it can be found in the fact that the entire world has been presented with a profound purpose to unite, and exhibit the kind of compassion which was thought to been buried beneath the frenzy of modern, selfish way of life. One can only hope that humanity is able to derive valuable lessons from this ordeal and that each of us hold life and freedom in the highest regard hereon.

Author: Adrita Biswas from ILS Law College, Pune.

Editor: Ismat Hena from Faculty of Law, Jamia Millia Islamia.



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