Post-COVID-19 Indian Economy: Slow Growth and Silver Linings

Last year, the Indian economy was growing at just under 5%. Everyone agreed that this year, growth will be negative, that the economy will contract. That means a growth decline of at least five percentage points, if not more, in just one year. Such a sharp decline can mean a very disruptive and difficult adjustment even for a rich economy.

The Lockdown and the Economy

In a poor country like India, such a sharp decline can cause enormous pain and hardship for millions of poor households, force firms and businesses into bankruptcy, and make our financial stability vulnerable. Even as India entered the crisis, its economy was quite vulnerable. In January, before the crisis hit us, our growth was decelerating. It was 8% four years ago, 7% three years ago, 6% two years ago, and 5% last year, and it’s forecast to drop to less than 0% this year. Growth that was already slowing has now stalled.

Before COVID-19, we worried about our high fiscal deficit, that our central and state governments were borrowing too much. By the time this crisis is over, we will worry that our state and central governments are borrowing even more. Before the crisis, we were worried about the state of our financial sector – the health of our banks, our non-bank financial companies, the level of non-performing assets, and the trust deficit in some of our private sector banks. Our financial sector, which was already under deep stress, will be under deeper stress when this crisis is behind us.

Every government confronting the COVID-19 crisis is battling with the lives vs. livelihoods dilemma.

That dilemma is arguably the sharpest for India. Given our weak medical infrastructure and high population density, any easing in prevention can mean the loss of millions of lives. On the other hand, a stringent lockdown can mean the loss of livelihoods for millions of people. The impact of the lockdown is nonlinear; if the lockdown’s duration is doubled, the economic impact will be more than double.

It’s a grim situation. But if you look at the International Monetary Fund (IMF) numbers, India is still better positioned than most other countries. That’s little consolation given the enormity of pain and hardship, both to our economy and our people.

Three Silver Linings

Even in this grim scenario, there are some silver linings.

The external sector. The rupee has depreciated somewhat but less so than the currencies of peer emerging markets, like South Africa, Brazil, Mexico, or Indonesia. Sure, exports are hit because the world is in a recession, but that will be balanced somewhat by decline in imports because the price of oil – a big import item for India – has crashed. The rupee depreciated in March because about $80 billion in capital had fled, but that has stabilized for now. Most important, the Reserve Bank has about $475 billion of foreign exchange reserves. That should allow us to buffer any volatility in the exchange rate.

The agriculture sector. India had a bumper crop this year. Agriculture contributes to only about 15% of our GDP, but more than 55% of our population is locked into the agriculture sector. Essentially, the well-being of most of our people and, indeed, that of our economy depends to a large extent on the agriculture sector’s performance, and the fact that agriculture has delivered a bumper crop is a silver lining.

The probability of a “V”-shaped recovery. While the chances of a “V”-shaped recovery decline day by day, it’s still feasible. This crisis is not a natural disaster like a flood, cyclone, or earthquake. This is not a war. Our infrastructure and factories are standing. Our transport system is intact. After the pandemic’s over, we should be able to engineer a revival of the economy quickly enough as well as a “V”-shaped recovery, which, although not automatic or inevitable, is highly probable.

Stimulus Package

The government’s $20 trillion stimulus package is substantial and focuses on three things.

Survival. As the lockdown continues and gradually eases over the next few weeks, the package extends some financial support for vulnerable households and vulnerable firms.

Growth revival. As we restart the economy, what do we need to do? Or what does the economic system, the financial sector, need to do?

  • Restructure loans.
  • Give credit to firms and businesses to restart business.
  • The government needs to create guarantee schemes to provide credits.
  • Give capital-raising support for these firms.

Structural reforms. The government used the platform of the stimulus package to announce certain deep-rooted economic reforms, which actually won’t help revive growth in the short term. But the intent in announcing them like this is probably to inspire market confidence that India has a game plan to return the economy to a rapid-growth trajectory, notwithstanding the current deep crisis.


About Dr. Duvvuri Subbarao

Dr. Duvvuri Subbarao was Governor of the Reserve Bank of India for five years from September 2008 to September 2013. The global financial crisis erupted just a week after Dr. Subbarao assumed office as Governor. He led the country’s effort to mitigate the impact of the crisis on the economy and to institute economic and financial sector reforms reflecting the lessons of the crisis. His tenure as Governor was also marked by a calibrated monetary policy response to India’s growth-inflation balance and the management of growing strains on the country’s balance of payments.


This article is adapted from the May 21, 2020 GLG teleconference “Post-COVID-19 Economic Recovery in China and India.” If you would like access to this teleconference or would like to speak with Dr. Duvvuri Subbarao, or any of our more than 700,000 experts, contact us.

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