How India's economy will emerge from the Covid-19 crisis

Over the past decades, India – the world’s seventh largest economy – has been relatively immune to global recessions. Even in the global slowdowns of 2001 and 2008, while the country’s GDP growth rate did drop, it never turned negative. However, India is not immune to the current Covid-19 crisis, with economy likely to contract over the coming two years. 

In a new report by Arthur D. Little, titled ‘Surmounting the economic challenges of COVID-19’, experts at the global strategy and management consultancy have modelled how they believe India’s economy will progress in the coming quarters. In their view, India could see any one of four scenarios unfold: 

V-shaped recovery

In this scenario, there will be a quick downturn in the first quarter of FY 2020-21 and a recovery from the second quarter onwards. A government stimulus will have the strongest impact, helping kickstart sectors such as construction and manufacturing. This hinges on the reduced spread of Covid-19 and minimal use of social distancing measures. 

The recovery in 2001 from the recession caused by the tech bubble of 1999/2000 is an example of a V-shaped recovery, with a sharp fall in GDP followed by strong growth. The analysis by Arthur D. Little shows that, in this type of recovery, GDP in India will contract by 1.0% in FY 2020-21 and then expand by 4.1% in FY 2021-22.

U-shaped recovery

Estimates in this scenario suggest that the downturn will extend to the end of the second quarter of FY 2020-21. Subsequently, growth will gradually recover over the next five quarters. These estimates also assume positive government support and a comprehensive containment of the spread of Covid-19 by the end of summer.

In this scenario, it is assumed the containment/lockdown impact on daily economic activity will not extend beyond May. The recession of 2008 is an example of a U-shaped recovery. In FY 2008-09 there was a sharp fall in GDP, followed by a few quarters of further slowdown, before a strong recovery as government measures took effect. 

Based on the firm’s calculation, in this type of recovery, GDP in India is expected to contract by 5.3% in FY 2020-21 and grow by 2.8% in FY 2021-22. The authors believe that this scenario has a likelihood of playing out only if the lockdowns are discontinued after May 2020.

W-shaped recovery

A combination of three factors – rise in Covid-19 cases in the summer, a relapse in winter that peaks around December 2020, and limited further stimulus – will lead to a W-shaped recovery. In this case, growth will resume in the third quarter of FY 2020-21 but then contract over the next five quarters with a few intermittent rebounds and a final recovery in FY 2021-22 as the vaccine becomes available. 

A global example of W-shaped recovery is the debt crisis in the European Union (EU) in 2010. Arthur D. Little’s analysis analysis indicates a 10.8% contraction of GDP in India for FY 2020-21 and a growth of 0.8 % in FY 2021-22. This scenario is in the view of the authors – led by Barnik Chitran Maitra (Managing Partner India & South Asia) and Thomas Kuruvilla (Managing Partner Middle East) – highly likely to be India’s trajectory, assuming continuing regional lockdowns beyond May 2020.

L-shaped recovery

This is the most pessimistic recovery curve. In this scenario, growth falls and does not recover for many quarters. The closest example of an L-shaped recovery is in Japan, which took more than ten years to emerge out of the market crash and credit crunch of the 1990s, mainly due to a series of ineffective policy actions.

Based on the report’s forecast, in this type of recovery, GDP in India will contract by 15.9% in FY 2020-21 and by 2.5% in FY 2021-22. 

Commenting on the analysis, Chitran Maitra and Kuruvilla said, “Given the current state of the lockdown and expected increase in Covid-19 cases until early autumn, we believes that India is likely to experience a W-shaped recovery.”

Covid-19’s impact by sector

Not surprisingly, the report stipulates that aviation, tourism and hospitality will be the worst hit, losing more than 80% of business in the first quarter of FY 2020-21, and growth will keep falling throughout 2020-21. The analysis suggests that growth will decline in these sectors in FY 2021-22 as well.

Construction is also likely to be severely affected by Covid-19 measures, in particular in the early phase, while manufacturing is likely to experience a painful first quarter but then see a moderate rebound in the second quarter onwards. 

Sectors that will be the least affected are healthcare, pharmaceuticals, education, IT, telecom and agriculture. Telecom stands to benefit as users continue to consume more content online as well as more value-added services. Media, on the other hand, while seeing increased viewership during the lockdown, is looking at a contraction in the first quarter due to a wide collapse in advertising revenues. 

Arthur D. Little’s methodology

How did Arthur D. Little model its GDP scenarios and forecasts? The methodology was based on a robust two-tiered approach. A bottom-up economic model was created and used to evaluate the positive and negative growth rates for key sectors in the economy due to the Covid-19 lockdown. 

A supplementary qualitative framework was also created to ascertain the impact of lockdown and Covid-19 on sectors in the short term (less than four quarters) and long term (more than four quarters). Side-by-side weights were allocated to key sectors based on estimates of their past GDP contribution.

Factors including past performance, global and domestic impact of lockdowns, social distancing, easing of government restrictions, supply chain impact and change in consumer demand were assessed to model growth. Then, the output suggested was stress-tested against the traditional top-down approach comprising historical GDP growth rates over the last 15 years, as well as against historical changes to private final consumption expenditure, gross fixed capital formation, government expenditure and trade during pre- and post-recession periods.

Further reading: ADL puts forward 10-point strategy for reviving India's economy.