India and Covid-19: The impact on a developing economy

In 2001, India was one of a select group of emerging economies – BRICS – that were leading the charge into a globalized 21st century. You can even make the case that India, with China, maintained this position. But, while economic growth has been strong in the first two decades of the century, the impact of the Covid-19 pandemic has laid bare some underlying risks.

Prime Minister Narenda Modi acted quickly to impose lockdown restrictions in late March 2020. The result? Millions of people unable to work and suffering from a loss of income. In 2016, the World Bank said a sizeable share of India’s population was at risk of slipping back into poverty. Has Covid-19 unwittingly exposed a fragility in the economy that will be hard to repair?

Easing the restrictions to restart the economy 

India is not alone when it comes to low and middle-income economies who are taking steps to ease lockdowns and return to work. Such is the risk it poses to millions of livelihoods, Mr Modi now aims to relax restrictions – even though India now has more confirmed cases than China.

You can, however, debate the effectiveness of lockdowns when millions live in slum conditions.

Getting the Indian economy back up and running is also essential to support the government’s financial strength. Lost tax receipts and state-backed bailouts weigh heavily on resources that are available to policy makers. These are resources that might yet be needed in future too.   

The underlying impact of economic inequality

India’s efforts to stimulate growth come against the backdrop of a 4.5% contraction predicted by the IMF. In times of strong growth, concerns were raised about inequality between the rich and the poor. But there’s now an argument to suggest this could be exacerbated by Covid-19. 

The easing of the restrictions and access to government support may help some individuals to see some form of recovery going forward. There are, however, others for whom this pandemic – in an economic sense – sets them back in terms of access to education and social mobility. 

India and the long road to sustained recovery

India’s debt pile has increased in recent years, which limits the government’s room in which to move. But, while state investment is not necessarily doing enough, one approach is to facilitate more inward investment – boosting forex reserves and the strength of the Rupee in doing so.

How to do this is perhaps less clear, but there are opportunities. First and foremost, India has a strong domestic market. Yet, it’s appeal to external markets such as the US could be built upon – especially in the context of the ongoing trade dispute between the US and China.

The overall impact on India’s economy will take time to become clear. The government see that easing its lockdown restrictions is a critical first step on the path to recovery. But the protection of its population and those most exposed to economic slowdown must run a close second.