Even before the full impact of COVID-19 on the health of Indians is clear, the economic impact of the measures required to deal with the pandemic are already posing grave problems. The Indian economy was in dire straits even before COVID-19 reached our shores. Specifically, the lockdown and other movement restrictions, backed by scientific and political consensus on their inevitability, have directly led to a dramatic slowdown in economic activity across the board. What is their impact on the Indian economy? This question calls for an urgent answer.
Methodology
We provide an initial, quantitative response, using a methodology that is based on the technique of input-output (IO) models, first elaborated by the economist Wassily Leontief. Such models provide detailed sector-wise information of output and consumption in different sectors of the economy and their inter-linkages, along with the sum total of wages, profits, savings, and expenditures in each sector and by each section of final consumers (households, government, etc.). Crucially, it pays attention to intermediate consumption, namely consumption by some sectors of the output of other sectors (as well as consumption within their own sector).
The key advantage of such a model is that it allows the calculation of the impact of any change in any sector in both direct and indirect terms, which has made this model somewhat ubiquitous in the computation of the economic impact of disasters. This also renders it well-suited to estimating the economic consequences of COVID-19. Regrettably, the last officially published IO table for India was for the year 2007-2008. In our estimates, we use the IO tables for India published by the World Input-Output Database for the year 2014 that updates the IO tables for individual countries using time series of national income statistics.
To calculate the impact of the lockdown, we proceed by constructing four different scenarios of the number of workdays lost in different sectors. Assuming that the estimated annual output is distributed uniformly across the year, it is possible to calculate the daily output and therefore the daily output loss. The direct and indirect impacts of the lockdown are then estimated using IO multipliers which are assumed to be constant. We then calculate the percentage decline in the national gross domestic product (GDP) of 2019-2020 that this impact amounts to.
Impact on various sectors
Our model (see table) shows that the loss of GDP ranges from ₹17 lakh crore (7% of GDP) in the most conservative scenario, where the average number of output days lost is only 13, to ₹73 lakh crore (33% of GDP) in the most impactful scenario, where the number of days of lost output averages 67. In intermediate scenarios of 27 and 47 days of lost output, the GDP decline is ₹29 lakh crore (13% of GDP) and ₹51 lakh crore (23% of GDP), respectively. We emphasise again that the number of days of lost output noted here is only an average across all sectors, and that we do input in the calculation of different numbers for each sector, based roughly on the available information in the public domain and exercising some judgment. Further details can be accessed at https://bit.ly/2UXK5WR). These, of course, need more accurate representation, an exercise that can undoubtedly be best carried out by national statistical institutions and their State-level counterparts. These estimates also accord well with other estimates, such as those of the OECD that suggest a 20% loss to GDP for India.
Even assuming that sectors will have varying lockdown periods, all sectors face serious losses due to their interdependence. If we take the scenario where a prolonged lockdown happens, averaging about 47 days across sectors, we find that the mining sector faces the largest drop of 42% in value added despite that sector itself being shut down for, say, 35 days as we have assumed, which is less than the economy-wide average. The electricity sector sees a 29% fall in value added, even though it faces no shut down per se. Losses are expected across all sectors in terms of both wage compensation and availability of working capital.