Is the Pandemic Tipping the Indian Economy into a Depression and Avoiding a Crisis

The Pandemic Hits the Global Economy and the Indian Economy Catches the Contagion

By now, it is well known that the Covid 19 Pandemic has led to a worldwide contraction in economic growth and wellbeing of nations and their citizens.

Indeed, experts everywhere have concluded that the Global Economy would contract by varying proportions with some countries bearing the brunt of the Pandemic induced catastrophe more than the others.

While estimates vary as far as the size of the contraction in economic output and the GDP or the Gross Domestic Product are concerned, the official statistics released by the various Central Banks the world over have already left little doubt that almost all countries are now in the throes of a Deep and Painful Recession.

For instance, the RBI or the Reserve Bank of India has indicated that India has entered a Technical Recession for the First Time in its Independent Existence wherein the sharp contraction of nearly 9% in the GDP means that worse is to come.

While the Indian Government has tried to spin the Numbers by forecasting a Higher Rebound next year, there is no gainsaying the fact that the Economy would take long to recover.

Will the Indian Economy Face a Depression and What India Inc. is Doing Now

Let us understand why this Historic Recession might very well turn into a Depression. For starters, the Indian Corporates are heavily indebted meaning that even if the growth returns, they would be using their profits to pay off the loans and retire the debt rather than invest in Capital Expansion.

By extension, the Banks that have lent to such corporates would have to either Write Off the debt (leading to Stressed Loans and Non Paying Assets), or need to reduce the amount of such Bad Baggage.

Either way, it is trouble for the Banks and this explains why most Indian Banks are unwilling to lend and the Corporates unwilling to Borrow despite the Indian Government and the RBI literally flooding the system with Liquidity.

Indeed, when Asia’s richest Tycoon, Mukesh Ambani, has focused on Zero Debt and has ensured that Reliance becomes Debt Free, it is anybody’s guess as to the direction that India Inc. is headed.

Moreover, Private Consumption is nowhere near to recovery and this is another indicator that growth might not return anytime soon.

What this means is that we have a Paradox wherein there is Liquidity but no one to avail of it leading to distress.

Why the Pandemic Might be the Last Straw on the Back of a Struggling Economy

To be fair, the problems in the Indian Economy predated the Pandemic and as the Title of this Article indicates, the Pandemic is the Last Straw that Broke the Back of the Indian Economy.

The twin effects of a Poorly Planned Demonetization and a Flawed Execution of the GST or the Goods and Services Tax landed blows to the Indian Economy from which it is yet to recover.

Therefore, the Pandemic is one factor in a long list of catalysts that have come together as a Perfect Storm for the Economy.

What is worsening the situation is the absolute lack of certainty about returning to Normal or at least some semblance of normality. No wonder Economists are railing about how the New Normal means we lurch from crisis to crisis floundering at each step.

Indeed, the Cacophony and the Noise that the Indian Media generates is adding to the problem as Decision Makers focus on Managing Headlines rather than managing the Headwinds that are stymieing the recovery.

In addition, it has become a Every Person for Themselves rather than a Collective Effort and when one considers the Economy as a Symbiotic Web of Relationships, the Lack of Trust is Frightening.

Spurring Consumption Is a Better Way Out of the Abyss

Having said that, there are ways in which the Indian Economy can be pulled out of the woods. While the Decision Makers are focusing on Supply Side Economics by Incentivizing Growth, they can also turn their Gaze towards the Demand Side by priming the consumers to spend.

For instance, a UBI or a Universal Basic Income would go a long way in spurring Consumption. Already, record numbers of Workers (especially in the Rural Areas) are enrolling in the MNREGA or the Mahatma Gandhi National Rural Employment Guarantee Assistance Scheme and this should make us realize the importance of such initiatives.

Moreover, the Loan Moratoriums announced by the Government are a Welcome Step for the Indian Middle Class and these should be taken further by Writing off Small Loans and Making others Interest Free.

More importantly, Small Entrepreneurs who are the Backbone of the Indian Economy must be incentivized to expand.

In addition, the government can help by lowering the Taxes on Fuel considering that Oil Prices are at Historic Lows and there is no reason to Pain the People by hiking fuel prices.

Apart from this, the Government can put its Humungous Dollar Reserves to Good Use at this Juncture.

Atmanirbhar Bharat in a Go it Alone World

Last, an important point is that the Atmanirbhar Policy of the Indian Government might well be the Game Changer as the World is Deglobalizing and it is those countries that are Self Reliant that would emerge stronger from the Pandemic.

Therefore, there are some positive signs as far as the Governmental Responses are concerned.

Hopefully, there would be other measures as well to alleviate the problems caused by the crisis.

To conclude, the Indian Economy is at a Tipping Point and the Choices and the Decisions we take now would determine its trajectory for the Next Two to Three Years.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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