Challenges to reopening India's complex economy

25 May 2020 4 min. read
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As the Indian government looks to ease lockdown restrictions, the challenge is not only to preserve public health but also to restart a fragmented economy, according to new McKinsey & Company analysis.

McKinsey points out how India’s government joins many across the globe in toeing the line between lifting lockdown conditions and containing the spread of Covid-19. The scenario is undoubtedly challenging for most, and the social and economic segmentation in India presents a host of unique barriers.

Similar to other markets, India is having to deal with significant supply chain blockages. Authors of McKinsey’s analysis Rajat Gupta, Anu Madgavkar and Hanish Yadav reveal that India’s economy has been operating at just over 50% of its capacity during the lockdown, which is far from sustainable.

An economic recovery is essential, although the vast domestic market and regional economic variations within India make the domestic supply chain a complex puzzle. The authors point to a number of sectors that illustrate this complexity.

Red-zone districts account for a large share of economic The textiles sector is one example, where the raw materials are procured in western India, yarn is spun in the north, weaving is done in the south, while the final apparel manufacturing is spread across units in the north and south. Other sectors with similarly expansive supply chains include the chemical and the electronic industries.

Then there is the labour consideration. Construction and transportation activity across India relies on migrant labour, which comes from a handful of districts in the country. So the current restrictions not only create supply chain blockages, but they also restrict the movement of key labour from one part of the country to another.

Risk areas

Add to this the complexity that comes with the Indian Government’s Ministry of Health and Family Welfare’s (MoHFW) district wise classification of risk areas. Based on criteria such as infection rates, mortality rates and tracking, the MoHFW has delineated red, orange and green zones across the country.

Red zones are subject to the toughest restrictions, while the other two classifications are more relaxed to varying degrees. The government is now faced with the challenge of redistributing supply chains and the movement of labour within the restrictions laid down by the zone-wise classification.

What is worrying, as pointed out by McKinsey, is that “the 130 districts classified as red-zone districts are some of the most urbanised and industrialised parts of the country.” The authors reveal that the red-zone districts account for more than 40% of all economic activity, and about the same share of non-agricultural employment.

As a result, these red zones will have to be a part of the government’s plans to reopen the restrictions, while the high infection rates in these districts give them a higher risk factor than any other. To this end, McKinsey & Company recommends three possible reopening scenarios for the government.

A large number of Indian non farm workers could remain inactive

The first is a ‘ moderate’ scenario, wherein economic activity is allowed to restart everywhere except the 130 red-zone districts, where only essential activity will be allowed. In a second ‘broad’ opening scenario, some red-zone districts will be included in the reopening process, barring the 27 districts that have been worse affected. The last is an ‘extensive’ scenario, where all economic activity is restarted aside from in containment zones where a cluster of cases is detected.

The former two scenarios are the least risky, although a moderate scenario would leave more than a 100 million ‘non-farm’ workers inactive, according to the analysis. A broad scenario would still leave nearly 70 million inactive, while extensive opening would bring this number down to 17 million.

So the situation is complex, and McKinsey suggests that it is one that cannot be dealt with at a central level. Local authorities need to have clear guidelines in place, while local healthcare systems need to be equipped with adequate resources, all so that response and containment can be an ongoing and dynamic process rather than a one-size-fits-all guidance from the central government.

The central government meanwhile is being urged to focus more on the medium and long term recovery.