The Impact of COVID-19 on the Indian Economy

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The corona virus has impacted the world in a big way, especially the economy. The pandemic has caused the globe to go into a lockdown, and economies will have an incredibly tough time trying to reach the same level of economic activity that was taking place before the virus struck. Times will specially be tough for countries like India, which was trying to recover from an economic slowdown, before the virus struck. The Union Budget was announced on February 1st, 2020, just before the corona virus had truly gripped the globe and was geared towards reversing the economic slowdown. This leads us to the interesting question on how COVID-19 will affect the plans that had been set out and what measures are needed to at least ensure that there is recovery, albeit slow, set in motion. To reiterate some Union Budget 2020 highlights:

1) The budget aimed to spur demand by increased spending and put money in the hands of the salaried class. To achieve this, the income tax structure was tweaked.

 However, this also means that there is a possibility of the government losing revenue, though this may possibly be offset by a higher compliance rate.

2)With the goal of pegging fiscal deficit to 3.5% of the GDP after letting it slip to 3.8% in FY20, led to the government forming a plan of heavy disinvestment.

 Rs 2.1 lakh crore was set as the target in the financial year 2020-21, double the target of the financial year 2019-20. Since the targets of the previous FY19-20 were not met, it led many economists to brand the disinvestment target extremely ambitious.

The main government stakes being disinvested in are Life Insurance Corp. of India (LIC), though the government will remain majority shareholder, and a stake sale in IDBI Bank. Experts also speculate that government stakes in other companies such as Air India, Bharat Petroleum Corp. Ltd (BPCL), Container Corp. of India Ltd (CONCOR) and Shipping Corp. of India Ltd (SCI) will follow suit.

Disinvestment is a good decision in many ways from the point of view of the government. It provides much needed revenue which does not come from taxes due to low compliance rates, helps contain the fiscal deficit of the country, reduces inflation, and helps in better governance of the disinvested companies, with greater transparency and accountability. The Finance Minister of India, Mrs. Nirmala Sitharaman cited “a need for greater private capital” as a reason for the government’s disinvestment in IDBI.

The reason the government has decided to disinvest in a household name such as LIC is because as the biggest insurance policy provider in India and a financial behemoth, the listing of LIC is sure to raise demand, therefore helping the government reach its disinvestment targets .

The Impact of COVID 19 on the budget

However, the government did not factor in for the corona virus, which was still at an infancy stage when the budget was planned and announced. The government’s steps from hereon will be interesting to see, as the economy has further fallen due to the lockdown that has been imposed on the nation. When things return to a semblance of normalcy, the government will be worried about the massive loss in revenue that they have suffered because of the lockdown. Demand is very low at the moment, and the pent-up demand is not nearly enough to compensate for the loss of taxes that the government has experienced in the past 3 months. A low demand also means that the disinvestment target that the government was relying on to spur the growth of the economy again might also be suspect. An ambitious target will feel the full brunt of the virus, meaning that the government will again have to heavily rely upon its tax collection to finance the governance of the nation. The rising fuel prices in a period of low global crude prices is an indicator of the revenue pinch that the government is facing. Coupled with the social costs incurred by the Government to ensure livelihoods of the poor and needy are taken care of, the Governments job is indeed daunting. To cap it, lowered GST collection due to the standstill or slowdown in some industries, it is certain that the government will feel the pressure of a rising fiscal deficit.

Some steps have been taken so far to induce demand, such as the Reserve Bank of India cutting repo rates to the lowest level they have been since 2000 at 4%. However, in times of crisis like these, is it enough? To my mind a lot more needs to be done and what the government does going forward could be crucial for our growth as a country in the coming years.

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