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Economist: The most severely damaged economy due to COVID-19

Wednesday 27, 05 2020
In March alone, about 140 million workers lost their jobs, raising the unemployment rate from 8% to an unprecedented 26%
Economist: The most severely damaged economy due to COVID-19

Goldman Sachs Bank forecasts that the Indian economy may decline by 45% in this quarter.

​Resuming their lives is harder than it sounds

After 2 long months of following one of the strictest quarantine rules in the world to prevent COVID-19, India has finally returned to its usual life, yet it is facing a dilemma. It is undeniable that the quarantine regulations have helped flatten the disease curve, as India has fewer deaths than Sweden even though its population is 134 times higher. However, the official statistics show that there have been 150 deaths. Indians are returning to their daily lives under the infection risk which has not reduced since the start of the quarantine.

What is worse is that this nation is paying a worse economic price than the majority of countries in the world. In March, around 140 million workers went unemployed, raising the unemployment rate from 8% to an unprecedented level of 26%. Around 10 to 80 million immigrant workers have returned home with disappointment. Millions of Indians working in other countries are either planning to return home or sharply reducing the remittances. The group of full-time workers (accounting for about 10% of the workforce) has a less difficult life, but that is only because their employers are trying to delay the layoff.

Goldman Sachs Bank forecasts that the Indian economy may decline by 45% in this quarter, GDP will drop by 5% in 2020 but that is if it recovers strongly in the last 6 months. The National Economic Research Council, a think tank in Delhi, gave worse figures: there will be a 12.5% drop in fiscal 2020 unless there is a massive stimulus package.

>>
Bloomberg: 4 gloomy scenarios for the global economy because of Covid-19

The government’s response

Economist: The most severely damaged economy due to COVID-19

Recognizing these pains, Prime Minister Narendra Modi on 12th May pledged to increase public spending by 265 billion $, equivalent to 10% of GDP, to stimulate growth. However, this package will raise India's budget deficit to 12% of GDP, and the debt / GDP ratio to 80%.

An editorial published in the Mint local financial daily news said that what India needs is "a large amount of money that can be put into circulation easily and smoothly". However, instead of stimulating demand, especially giving emergency cash to the poorest, Modi's government is focused on the supply side with policies such as credit guarantees, while implementing reforms that would take effects as soon as possible in the medium term.
Unsurprisingly, Modi's supporters explained that instead of giving money directly, the government has given small companies – which is the most labor-intensive group and the backbone of the economy – access to cheap capital. Moreover, reforms like shifting to the national system (instead of following the state system as before) to distribute subsidized food will not only benefit the poor but also save money.

India's two Nobel laureates - Amartya Sen and Abhijit Banerjee - argue that a 100$-per-month subsidy will benefit many families in India. Nevertheless, so far, about 200 million poor women receive only 6.6$ per month, and 70 million farmers are promised to be given 26$ per month. Even for 60% of Indians who live on less than US $ 3.2 per day (the poverty line set by the World Bank for middle-income countries), the amount of money is still too low and obviously cannot stimulate anything.

Even before the coronavirus, bad debt weighed heavily on spending and investment in India, but the government and central bank seem to be hoping to revive the economy by encouraging loaning.

Source: cafef.vn

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