The Reserve Bank of India’s recent ‘Report on Currency and Finance’ lays bare the debilitating impact of the Covid pandemic on the Indian economy. The big takeaway from the report is that the Covid output losses may take over a decade — 2034-35 — to recover.

Though this fact is highlighted on the 17th page of the 20-page chapter ‘Scars of the pandemic’, the newspapers rightly headlined with this gloomy observation. The RBI has put the output losses at ₹19.1 lakh crore for 2020-21, ₹17.1 lakh crore for 2021-22, and ₹16.4 lakh crore for 2022-23.

RBI’s detailed analysis gives the backdrop in which the pandemic occurred, how it impacted the various sectors of the economy, which of the sectors are now slowly recovering and which of them are still struggling, the output losses suffered in the last three years, the reforms measures that are urgently needed to bring back recovery and the risks, both global and domestic, going ahead.

The report candidly admits that the years leading to the pandemic were marked by slowing growth, falling investments and consumption. The economy had entered the slowdown phase in 2017-18 with GDP growth moderating for eight successive quarters.

The ratio of gross capital formation, a rough indicator of investments, fell from 32.1 per cent in 2015-16 to 30.7 per cent in 2019-20. So, the investment push that was making up for the slack in consumption had also begun to falter. The impact of this was felt in the labour market, where employment started falling, especially in the construction sector, which is the largest employer after agriculture.

The sluggish global economy too impacted the Indian economy, with exports slowing down in a world that was beginning to turn more inward and where globalisation was beginning to be seen with suspicion. This was also the period of the Donald Trump’s bruising tariff wars with China and other countries.

The lockdown impact

India was one of those nations that had one of the most stringent lockdowns in the first wave of the pandemic in 2020. As a result, the first quarter of 2020-21 was a GDP contraction of almost 24 per cent. However, given the gradual easing of lockdown restrictions, the growth contraction for 2020-21 was restricted to 6.6 per cent.

We did see some sharp economic recovery since June 2021, but after November 2021, the coal and chip shortages put a spoke in this recovery as it coincided with the third wave of the pandemic, which was thankfully short. The rural demand which was held up impressively in the first wave started showing signs of fatigue after the second and third waves.

From January 2022, global factors such as inflation and the Ukraine-Russia conflict that has sent oil and other commodity prices soaring have injected a huge dose of uncertainty into the recovery. Though the RBI’s consumer confidence index shows some improvement in recent months it still remains below 100 indicating a pessimistic outlook.

The worst impact was perhaps felt in the labour market where urban employment plummeted during the pandemic’s first wave. The RBI report, quoting the government’s Periodic Labour Survey Report, says that nearly 50 per cent of the casual workers lost their job during the first lockdown. It’s hardly a surprise that the demand for MGNREGA work zoomed during this period.

The resilient sectors

The sectors that remained resilient through the pandemic period were agriculture and exports. Manufacturing ad mining were particularly hard hit, though manufacturing is seeing some green shoots now.

In the services sector, the contact intensive industries — hospitality, restaurants, transport — were the worst affected and their recovery has also been sluggish so far. But others such as financial, real estate, and public administration have reached their pre-pandemic levels of activity.

In the corporate sector, real estate and automobiles were the worst hit. Consumer electronics and durables saw a surge in sales while “online marketplaces, ITES, computer software, communication equipment, drugs and pharmaceuticals, health services and business services and consultancy are some of the sectors which remained relatively unscathed from the effect of the pandemic.”

But both in the manufacturing and services sectors, it was the unorganised segments that bore the worst scars of the pandemic.

The way forward

The report says that the post-pandemic world will be different from the pre-pandemic one in significant ways. It says, “the ongoing structural changes catalysed by the pandemic can potentially alter the growth trajectory in the medium term.”

For this, the report suggests sustained capital expenditure by the government, digitalisation push, investments in e-comm start-ups, healthcare and supply chain logistics.

However, the report also flags several risks to the recovery process. For starters, the pandemic is not behind us yet. Also, China’s zero-Covid policy is putting huge stress on global supply chains. The rise in delivery time has raised shipping and logistics costs.

Then the Ukraine-Russia crisis, which shows no signs of ending in the near term, shows that the world will have to live with higher oil and commodity prices till at least till the end of this year.

Not to end on a bleak note, the report puts on a brave face by saying that some of the structural long-term reforms needed to sustain growth — rationalisation of subsidies, strengthening the banking system, and corporate governance norms — are already being put in place.

The Modi government may not be too perturbed by this report and it could even be forgiven for thinking that the worst effects of the pandemic are behind us. Being on a strong political wicket, and with the disarray in the Opposition, will the Modi government now be tempted to push through some of the politically challenging economic reforms?