India’s economy had been slowing down even before the coronavirus pandemic hit the country. The provisional estimate of economic growth for the financial year 2019-20 as compared to actual growth for 2018-19 (given here in parenthesis) was 3.9% (6.0%) for gross value added, 7.3% (7.0%) for net taxes on products and 4.2% (6.1%) for Gross Domestic Product (GDP)¹.  This slowdown of the economy was largely the result of two factors.  First, in the fourth quarter of 2019-20 there was negative growth in manufacturing and construction sectors, partly the result of the pandemic-induced lockdown. Second, preceding that India had a long history of very high interest rates to combat inflation under the inflation targeting policy followed by the Reserve Bank of India. 

The country responded with one of the severest and longest lockdowns in the world.  The lockdown began on March 24 initially for 21 days and was then extended several times with the first unlock coming on 8 June².  At that time, several international commentators were criticising the government for the harsh lockdown.  However, there were very few options for India.  For one thing, if the virus had spread uncontrollably at that time there would have been too few hospital beds to accommodate infected patients.  PPEs and other protective equipment were lacking, testing capacity was almost non-existent. To compound matters China had stopped exporting raw materials to produce many of these equipment and other pharmaceuticals since it was combating a large scale explosion of the virus within its own borders.  Under the circumstances, there was no option but to go in for a harsh lockdown and use this period to control the spread of the virus, build capacity in PPEs, testing equipment, hospital beds and the like and ensure adequate supplies of basic necessities like food to the most vulnerable sections of society. At the same time financial support was provided to a number of small sector firms and Aadhaar based transfers were made to vulnerable households, particularly in the rural areas.  

These policy measures largely met their objectives. The virus was controlled to a significant extent, there have been no large scale bankruptcies, nor widespread hunger and the capacity to produce medical equipment was greatly enhanced to the extent that India could start exporting many of these. 

However, one weakness was revealed. In terms of employment share the unorganised sector employs 83% of the work force and 17% in the organised sector. There are 92.4% informal workers (with no written contract, paid leave and other benefits) in the economy. There are also 9.8% informal workers in the organised sectors indicating the level of outsourcing. Large sections of these workers work in towns and cities and their places of employment shut down. These workers, many of whom had migrated from less industrialised states, had no recourse to employment insurance.  Facing imminent unemployment, these workers started returning to their places of origin. In the absence of adequate transport services, this reverse migration was difficult and led to spread of the virus in the countryside.  Also, on March 25 the Tablighi Jamaat incident³ led to an explosion and spread of the virus in various parts of the country. It is credible to conclude that if these incidents had not occurred India’s corona problem would have been far less severe. 

Thus, the first stage of the anti-COVID strategy was only partially successful. But, it was successful to the extent that once the unlock started the lockdown has not had to be imposed at the national level, although there has been some retrieval of steps in some cases. At the level of the policy this line of action provided a clear sequencing: address the health and immediate economic conditions and then work toward economic revival⁴ . This is in sharp contrast to many European countries who have had to reimpose national lockdowns after encountering severe second or even third waves of the virus. 

On the economic front the strategy followed made it explicit that it would be wrong to treat the epidemic as a simple Keynesian demand deficiency problem.  Most economists now agree that the epidemic has had demand, supply and confidence effects. In the light of large portions of the labour force working informally being displaced by the lockdown, a mere reflation of the economy by injecting large sums of government spending would lead to stagflation since supply would not respond adequately.  A more nuanced approach that mended supply chains and then stimulated demand would be more appropriate. 

This is the approach that policymakers followed. First, a major infusion of additional funds (over and above budgetary allocations) was made to the Mahatma Gandhi National Rural Employment Guarantee program to ensure that rural workers found productive employment.  Furthermore, a large allocation was made to ensure that workers returning to villages and small towns from mega cities and industrial towns found productive employment locally.  This has had the salutary effect of both mending supply chains and increased rural demand.  These along with good kharif and rabi harvests has meant that rural demand is going to be quite robust in the coming months. Of course, a number of steps to boost demand particularly by the weaker sections of society have already been taken. But, a key takeaway from this analysis is that the emphasis should continue to be placed on repairing supply chains and building confidence. 

In the area of structural reforms the policymakers have been very active. Some of these policies include (i) Amendment of the Essential Commodities Act was to allow farmers to sell their produce at the highest price anywhere in the country.  This Act had given the state governments undue power to determine where farmers could sell their produce.  This was done ostensibly to protect local consumers from supply shortfalls.  However, the opposite would happen many times, as local scarcities would persist since farmers from other states would not be able to supply deficient markets.  In addition, farmer income would stagnate since their choice of markets was restricted. This amendment would signal a sea change in the prospects for farmers and ensure that coexistence of food deficits and food gluts would not persist.  (ii) The limit for foreign direct investment (FDI) in the defence sector was raised from 49% to 74%.  (iii) The highly acclaimed Indian Space Research Organisation (ISRO) was opened for private enterprises so that India is now well positioned to enter the lucrative commercial space exploration market. (iv) A number of labour laws were amended to make labour markets more flexible.   Inflexible labour markets have been one of the major obstacles to the expansion of the manufacturing sector in the “Make in India” program. In addition, the low participation of women in the labour force has been a cause of concern in India for long.  Some of the restrictions that prevented more active participation by women in the labour market have now been removed. Employment of females should get a boost, with all its attendant advantages.  In addition, coal mining has been opened up for private enterprise, as coal-mining licenses will be auctioned off. 

Furthermore, in the wake of unreliability of supply chains, Indian policymakers have initiated a program of development through self-reliance.  This does not amount to a new version of protectionism but the development of India’s manufacturing capacity by creating markets for domestically produced goods and services. This will be achieved by India developing a manufacturing hub that is globally competitive (not inward looking) and through switching of tastes from imported to domestic products.  This has been aided by a recent consumer and government-sponsored rejection of Chinese imports in the wake of India’s border skirmish with China.  There has been widespread boycott of Chinese goods, 59 Chinese phone apps have been banned in India, FDI rules for investment by Chinese entities have been tightened and participation of Chinese entities in public sector infrastructure projects has been discouraged. However, the overall FDI regime has become more liberal. For far too long India has been considered a major market to be sold to but not a major producer.  Clearly this state of affairs cannot last for long.  

Time will tell how successful the new policy of “Atmanirbhar Bharat” will be. However, one fact has now become quite clear.  India has benefited enormously and avoided many mistakes by being “atmanirbhar” in the design of policy towards COVID.  Had India followed the advice of some Western experts – including those of Indian origin one of whom is a Nobel Laureate and the other a Chief Economist of the IMF – India would have uncritically provided a large fiscal stimulus and even introduced Universal Basic Income (UBI) without adequately mending supply chains.  The results would have been counterproductive because while financial markets and international institutions may tolerate large deficits of rich countries they frown on large deficits of developing countries. UBI would have lowered the incentive to work and reduced the government’s already low allocations to critical sectors such as health and education. 

Footnotes:

¹See http://www.mospi.gov.in/sites/default/files/press_release/PRESS%20NOTE%20PE%20and%20Q4%20estimates%20of%20GDP.pdf  (Accessed 27 July 2020.)

²For a timeline of the Indian lockdown see https://www.business-standard.com/article/current-affairs/here-s-a-timeline-of-events-since-lockdown-was-imposed-in-india-120070201413_1.html  (Accessed 19 November 2020).

³See https://qz.com/india/1828919/delhis-tablighi-jamaat-event-becomes-indias-coronavirus-hotspot/ (Accessed 19 November 2020).

⁴ https://economictimes.indiatimes.com/industry/healthcare/biotech/healthcare/how-india-unlike-the-west-has-recalibrated-the-covid-19-debate/articleshow/79288970.cms (Accessed 19th November 2020). 

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