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From slowdown to lockdown, India’s economy and the Covid-19 shock

Three questions to Christophe Jaffrelot

INTERVIEW - 11 June 2020

Christophe Jaffrelot

Senior research fellow at CERI-Sciences Po/CNRS

In his new policy brief: From slowdown to lockdown, India’s economy and the Covid-19 shock, Christophe Jaffrelot assesses the impact of the Covid-19 crisis on the Indian economy. He argues that the lockdowns are aggravating the slowdown that India was already experiencing as a result of structural trends and policy decisions. The Indian government faces the additional difficulty of having limited resources to launch an ambitious relief package, which will make it more difficult to address the social cost of the Covid-19 crisis, thus raising questions about the political consequences of the current situation.

The Indian economy was already experiencing a slowdown prior to the Covid-19 outbreak, how has it been affected by the public health crisis?

The economy has been badly affected by the lockdowns. For many weeks, factories, shops and agricultural markets were shut down, supply chains were disrupted and transports services discontinued. While this is similar to many other countries, the impact may have been more pronounced in India, for three reasons. Firstly, the economy was already experiencing a slowdown, which partly reflected a structural crisis. In this context, the government has not been in a position to implement a substantial relief package. In contrast to many other countries, the package only represents about 2% of India’s GDP). Secondly, the lockdown has forced millions of migrant workers to return to their villages, sometimes by foot, hence causing a humanitarian crisis. These people are essential to Indian industry’s workforce. They may be unwilling to return to the city any time soon, which may delay the recovery. Thirdly, the lockdown has not substantially flattened the curve of the pandemic. The number of infections is still increasing and therefore some uncertainty remains.

What political effects can be expected from the lockdown, and in particular from the migrant crisis it has generated?

The crisis is far from over: India will be struggling on the socio-economic front for months and probably even years.

The political impact is difficult to assess for three reasons. Firstly, the crisis is far from over: India will be struggling on the socio-economic front for months and probably even years. The coronavirus has accelerated a latent, structural crisis. Although the political impact of the pandemic may be limited today, it will probably increase in the course of time, especially if the pandemic continues to spread and if the public healthcare system cannot cope with it.

Secondly, the responsibility of the crisis management is shared by the central government and the state governments - some of which have performed better than others, be they from the opposition, or from the BJP, the ruling party. Who the Indian citizens will hold accountable for mismanagement, or otherwise praise, is not yet clear.

Thirdly, Narendra Modi was not affected by the economic slowdown in 2019 because he was able to shift the debate on some other ground: nationalism, security, religion… Like other national-populist leaders, he plays on emotions (fear, anger) to distract the voters’ attention from socio-economic issues. He may do it again.

India is rethinking its approach on Chinese FDIs and competing with China to attract foreign manufacturing, what can be expected from this new approach?

India's fear of China’s economic power and in particular overseas investment has been palpable since the launch of the Belt and Road Initiative. But it has increased as a result of the military standoff in Ladakh, and because of the growing influence of China over some of its neighbors, including Nepal and Sri Lanka.

The government is now in a position to block FDIs in strategic sectors and the takeover of Indian companies (more vulnerable because of the crisis) by Chinese investors. At the same time, India is economically dependent on China in certain areas, the extent to which became all the more apparent with the Covid-19 crisis.

India has decided to adopt a more protective stance towards Chinese investment.

The Indian pharmaceutical sector had to admit, for instance, that most of the active ingredients it was using are imported from China. The temporary disruption of the supply chain as a result of the pandemic caused some panic.

If Chinese FDIs are no longer welcome, attracting foreign investments from other sources becomes even more necessary. Here, India is very keen to attract the multinational companies which are leaving China - to escape the US/China trade war in particular - and are looking to alternative manufacturing hubs. Whether this strategy will work remains to be seen. Other countries in South East Asia and Latin America are competing with India here. This is a key issue. If the inflow of FDIs is not substantial enough, India may have no choice but to borrow huge amounts on the financial markets - because loans from the World Bank and other multilateral institutions will be insufficient. This in a context of very low rupee, that continues to depreciate.

The most alarmist experts do not exclude the scenario of India having to turn to the IMF sometime next year if the situation of the economy does not improve. This is one of the reasons why emergency decisions have been presented as structural reforms along with the relief package by the Finance Minister. They include a program of privatisations and the liberalization of agricultural markets. Some states have been going much further and dismantling the labor laws protecting the workers. Like other countries, India will not be the same after this crisis - but whether this will be for the better or for the worse remains to be seen.

Policy brief: From slowdown to lockdown, India’s economy and the COVID-19 shock

From slowdown to lockdown, India’s economy and the Covid-19 shock

Three questions to Christophe Jaffrelot

Christophe Jaffrelot

The Indian economy was already experiencing a slowdown prior to the Covid-19 outbreak, how has it been affected by the public health crisis?

What political effects can be expected from the lockdown, and in particular from the migrant crisis it has generated?

India is rethinking its approach on Chinese FDIs and competing with China to attract foreign manufacturing, what can be expected from this new approach?

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