The pandemic induced economic crisis and its implications

The crisis and pandemic are highlighting the need to redefine and revisit our economic machinery

Credit : Newslaundry

It is needless to say that the current economic crisis across the globe is of scarcity. This crisis calls for measures on both the demand and supply side. Specifically in India, the situation demands hefty public sector measures and the steps for revival of demand as well as supply. Restrictions on people’s demand and consumption during one of the harshest lockdown have resulted in inventories with the manufacturers and a sharp decline in production are the fundamental causes of this economic downfall. Indicators like falling GDP, increasing unemployment, disappointing IIP, etc. demonstrate the kind of economic breakdown that has occurred at present. A proper action plan for economic revival needs a thorough understanding of this unprecedented crisis which is, in fact, a vicious cycle that is worth noticing for its diagnosis:

This diagram illustrates the typical pattern of economic variables, that has been experienced during the successive lockdowns in India. The worst affected people are informal sector workers, domestic helpers and migrant workers engaged in different economic activities. Private sector jobs and income opportunities along with services have also been adversely affected which have 70% contribution in sustaining private consumption in the economy. 

Hence, the current crisis is not about people losing their jobs but their inability to move to workplaces due to safety reasons and risk to life. In this situation, it is a difficult task to keep the work spirit alive. 

Such a daunting situation calls for twofold measures for the much-needed revival that one can expect: One is to put money in the hands of people in order to sustain the demand. Private consumption expenditure both in urban and rural areas has been distressed at the moment. Measures like loan moratorium, tax relief and the administered pricing policy can be helpful in this regard. Capital expenditure in private businesses is facing difficulties at present so the public sector should go for heavy capital expenditure beyond the budgetary promises. 

Unfortunately, the economic stimulus package in India relies more on credit measures through RBI’s monetary policy program. The second type of measures must concentrate on the supply side. As is well known, the supply chain management in India’s private sector is not properly placed especially in primary and secondary level manufacturing. The services sector is in many ways misaligned and it follows the western model. Hence, to establish a proper link between manufacturers, supplies and other agents structural reforms in the long term are needed. 

However, this emergency situation calls for some immediate measures like tax reliefs, credit on demand basis, unemployment allowances, revised minimum wage rate, etc. It is also important to focus on the interplay between the formal and informal sector which has been disrupted due to the lockdown. However, it is important to strengthen the connection between formal and informal sector for a better trickle-down effect. 

The diagnosis of the crisis shows that weak demand and uncertain supply conditions are responsible for the downfall and therefore, the prognosis is to focus on the revival of demand and a vibrant supply system for economic recovery. Several structural reforms need to be implemented in India but this doesn’t mean abandoning the labour rights all of a sudden to address the situation. 

The crisis and pandemic are highlighting the need to redefine and revisit our economic machinery that is expected to be sustainable and human-centric. A properly thought out and well planned long term framework is essential but this emergency situation demands stimulus with an immediate effect with a large cake so that every piece of the cake can be enjoyed by the needy one. Is our cake size big enough?


Aparna Kulkarni is an Assistant Professor at St. Xavier’s college, Mumbai.

Opinions expressed are the author's personal. Indie Journal does not necessarily agree with them.