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The Impact of Covid-19 on the Indian Economy: Demand and supply shocks

Updated: Jan 24, 2021

The Impact of Covid-19 on the Indian Economy: Demand and supply shocks

Written by: Kriti Jain


A global shock like no other, the Covid-19 pandemic posed a unique challenge for everyone. By the end of April, estimates suggested that 14 crore existing jobs had been lost in India, adding to the already existing 10-11 crore strong army of jobless (News Click, 2020). As of the last week of November 2020, approximately 9,432,075 people have been infected with the virus and 137,177 have died (Worldometers, 2020). Assessing the impact of demand and supply shocks on the growth of developing economies like India is of utmost importance as the consequences of these shocks push millions of people into poverty and deprivation. This paper would discuss the market shock India experienced and various policies the government implemented to help the country become resilient and get past the aftermath of the coronavirus.

Increasing Unemployment

The twin shocks of Covid 19 and the lockdown resulted in stagnation of the economy for a period of approximately 2 months. The Indian economy had started slowing down in 2019, with an unemployment rate which hovered between 7-8% in the preceding months (CMIE, 2020). 77% of the total national wealth was with the top 10% of the Indian population and only 1% of India’s richest got 73% of the wealth produced in 2017 (Oxfam, 2020); this reflected the disparity between the rich and the poor.

Figure 1: Unemployment Rate in India, 2020

Source: CMIE Unemployment Data

As shown in Figure 1, the unemployment rate started increasing from January itself and was at its all-time high in April 2020, 23.52%. As the lockdown eased, people were retrenched eventually in June-July; it still did not make up for the job losses. International Labour Organisation (ILO) and the Asian Development Bank (ADB) estimate that more than 4 million Indians below the age of 30 have lost their jobs due to the pandemic (Economic Times, 2020). The companies want to retain experienced people and thus among them, people aged 15-24 are the hardest hit. Non-availability of jobs is one of the main factors contributing to the increasing unemployment.

Businesses like Ola (Right share Indian cab aggregator-company) and Uber are focusing on cutting down their expenses as the company’s revenues have taken a dip (Scroll, 2020). They are doing it by laying off people or decreasing their pay. Two-third of firm level apprenticeships and three quarters internships were completely interrupted. Although over the past few months the number has come down, the falling rural and low urban employment are the weakness in the recovery process of India’s labour market, CMIE said in its weekly report (CMIE, 2020).

The government had introduced the Pradhan Mantri Garib Kalyan Yojana scheme in 2016. It was introduced to provide an opportunity to declare unaccounted wealth and black money in a confidential manner and avoid prosecution after paying a fine. This scheme aided the situation that India was placed in during the Covid-19. 312 billion rupees was provided to approximately 331 million beneficiaries including women, construction workers, farmers and senior citizens (Ministry of Finance, 2020). Farmers under the PM-KISAN scheme and the women account holders of the Pradhan Mantri Jan Dhan Yojana got the most value out of the package. The relief package falls under the Pradhan Mantri Garib Kalyan Yojana scheme, with a commitment of about 1.7 trillion rupees as relief during this time (Ministry of Finance, 2020).

Demand shock

Figure 2: India’s GDP growth

Source: IMF World Economic Outlook Update June 2020

According to the data obtained from IMF (2020), the above graph (Fig. 2) shows that the Indian economy has been facing negative growth since 2017-2018. The downfall has been gradual since then until 2019. This slowdown not only resulted in lower industrial growth but also falling private consumption i.e. decreased domestic demand. This demand problem was unaddressed, and the incursion of the virus aggravated it.

Demand shock is an event which causes sudden increase or decrease in the aggregate demand. With no assured source of future income and an increase in the number of people getting infected with the virus, people started to hoard money and cut down their expenses to minimum, restricting themselves to essential items only. The general demand for hygiene and sanitation products has increased while it decreased for recreational activities such as cinema halls, water parks, etc. People have started spending more time at home which has led to a loss of revenue for the local transportation as well. The Indian railways suffered a loss of Rs.6500 crores on revenue earned from ticket (Times of India, 2020). The demand for oil has also decreased as there are lesser vehicles on the street.

The pandemic did not really affect the consumption pattern of high net-worth individuals as they did not face a cash crunch. India was on a lockdown till the 3rd of May, 2020. During this period, the demand for non-essentials skyrocketed on e-commerce platforms such as Paytm (Financial Express, 2020).

The Reserve Bank of India had announced various relief measures to ensure liquidity in the economy and stabilise the demand shock. On 27th May 2020, the Reserve Bank of India had announced an equated monthly instalment (EMI) moratorium for a period of 3 months. Under this scheme, people were exempted from making their monthly instalments for the prescribed period. It was a cash flow relief, not an interest waiver; people did have to pay additional interest on their accrued EMI instalments once the moratorium period ended. It was later extended till the 31st of August 2020 (Reserve bank of India, 2020).

Eight categories of the loans up to 2 crores - MSME (Micro, Small & Medium Enterprises), Education, Housing, Consumer durable, Credit card, Automobile, Personal and Consumption were exempted from the interest on the pending payments. Although the RBI had taken a good initiative, people who did not take the moratorium were better off as the extra interest would increase their liability. In a country like India which has a huge income and regional disparity, it is very difficult to have a policy that bodes well for everybody.

The RBI also reduced the CRR for one year by 100 basis points to 3% beginning March 28. The Liquidity coverage ratio for banks has also been reduced from 100% to 80%. It is expected to release liquidity of INR 137,000 crores across the banking system as the loanable funds have increased (KPMG, 2020). An increase in the loanable funds would mean that banks will now give out more loans, thus increasing the money supply in the economy.

Supply Shock

Mining and manufacturing saw a steep fall in their outputs, the overall industrial output contracted for the sixth straight month in August, 8% (Bloomberg Quint, 2020). As china accounts for 27% of India’s automotive part imports, India imports about 85% of active pharmaceuticals ingredients (API) from china and due to the factor there is a possibility of shortage in availability and thus prices may go on hike (Agarwal, 2020). This inflationary-deflationary mix where the supply is constrained yet the prices are increasing may come to an end with the gradual stabilisation of demand. Such absurd behaviour is probably due to the extremity of the lockdown. In figure 3, we can clearly see that the industrial output has been negative since March, 2020. This negative output can be justified as the entire nation was shut down and there were no people who could work. As the lockdown eased, we can see that the output has slowly begun to increase. It still may take some time for it to reach the pre-COVID-19 levels, but recovery is bound to happen as the economy opens.

Figure 3: India’s Industrial Production

Source: Ministry of Statistics

Aviation and Tourism Industry

An estimated 2 crore to 5.5 crore people employed (directly or indirectly) in the tourism sector in India have lost their job in the face of the Covid-19 pandemic (The Print, 2020). As the virus spread, India restricted both international and domestic flight operations by the end of March 2020. The Airport Authority of India (AAI) reported a 92% fall in revenue from Rs 2,973 cr during April-June 2019 to Rs 239 cr in 2020 (Money Control, 2020). Although the passenger traffic is resuming, the airlines are not being able to meet their financial requirements. One plausible reason for the slow recovery of the aviation industry is that in the early months, aviation industry had to face a supply shock as all the borders were sealed. This was followed by a demand shock. In spite of the ease in the border restrictions, the demand for flights eventually fell as people were either scared or had to quarantine themselves for 14 days. This dissuaded the people from travelling.

Figure 4: Passenger Footfall at AAI Airports

Source: Money Control

According to Figure 4, we can see that the passenger footfall at airports have fallen considerably. The first four months show a more drastic change than the last four. It is mainly due to the lockdown imposed by the Indian government and a gradual easing of the borders.

The aviation and tourism industry complement each other up to an extent. Certain states and countries like Goa or Maldives have opened up their border for tourists but at the same time there are countries who have not yet resumed international flights. This difference is also an adding factor to the slow recovery and reduced revenues. For a brief period of time, the local visitors at tourist destinations will be more than the foreigners as they are more likely to go for a short weekend away. Certain tourism departments such as in Rajasthan are promoting ‘short safe stay’ and have already seen a 40% increase in occupancy during Independence Day (Hospitality World, 2020).

The World Travel and Tourism Council 2020 has reported that in 2019, the Indian tourism industry generated 8.0% of total employment, 39821 million jobs in India (WTTC, 2020). The Tourism industry has been one of the largest contributors to India's GDP in recent years increasing from a share of 6.70% in 2017 to 9.20% in 2018 (Mondaq, 2020). Thus, the revival of the hospitality, tour operators, travel agents, air, land and sea transportation industry are very imperative for the entire nation.

The government has been doing its part in supporting the industry by:

1. Reducing the GST rate from 8% to 5% for domestic Maintenance, Repair and Overhaul (MRO) services (Money Control, 2020).

2. Establishing exclusive air-links (temporary arrangements) with countries like Afghanistan, Bahrain, Canada, France, Germany, Qatar, Maldives, the UAE, the UK and the US for restarting passenger services as regular international flights remain suspended (Money Control, 2020).

3. Route rationalisation in the Indian airspace in coordination with Indian Air Force for efficient airspace management, shorter routes and reduced fuel burn (Money Control, 2020).

Although the industry did survive the hiccups of global recession in 2007-9, the H1N1 pandemic of 2009-10 and even the recent downtrends in the world economy, the industry has its own limitations and may take time to regain its lost volume and turnover as the risk of infecting more people may dissuade the governments to remove the travel restrictions or people from travelling.


Covid-19 has put India in dire straits with the falling employment, consumption and revenue. The extent of actual impact would depend on the severity and duration of the outbreak, which is still unknown. Although India is in a very tough spot right now, it is all uphill from here. With easing of border restrictions and opening of the economy, the demand shock is expected to stabilize. An increase in demand would further incentivise the sellers. As the economy resumes, production and output is expected to rise as well. The recovery towards pre-COVID-19 levels might be slow but it is not unattainable.


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