Economic Fallout

Economic fallout in Indian Economy since 2020
The global COVID-19 pandemic has given some serious tremors to the Indian Economy and it has led
to the economic fallout in India. The COVID-19 outbreak that originated in China is a gift to the world
and has engulfed India along with the other nations. In consequence, there is a series of events that
have occurred in the virus-battered economy since the beginning of 2020 and has posed an impact
on current account deficit in India.
Let us see what Current Account Deficit is –
Current Account indicates the macroeconomic health of the nation. It represents the gap between
the money that the country spends on imports and the money it receives on exports. If the imports
are more than the exports, it leads to current account deficit. Basically, we owe more to other
countries than what they owe to us and if this situation persist for years, it can put the overall
economy into trouble.
Usually, the key reasons for current account deficit are higher consumption, overvalued exchange
rate, and decline in the export sector, high domestic demand, high inflationary pressures and low
productivity in the country that leads to CAD. As per the data, CAD had narrowed down by 0.9% of
GDP in the Q2 of 2019-20 and 0.2% of GDP in Q3 of 2019-20 due to an improvement in the net
services receipts at $21.9 bn and lower trade deficit at $34.6 bn. Net FDI and ECB’s also had risen in
the Q3 of 2019. This provided addition to the foreign exchange reserves that stood comfortably at
$487 bn as on March, 2020. However, the economic growth slowed down and the deficit widened
again as soon as the outbreak of coronavirus pandemic was announced by WHO in the beginning of
2020.
A series of uncertain events in India have taken place that are led by COVID-19 pandemic in 2020 -
1. Drop in NRI Remittances: India is the biggest recipient of NRI remittances in the world.
World Bank says NRI remittances in India are likely to fall by 23% in 2020 at $64bn compared
to 2019 when the remittances stood at $83bn (grown by 5.5%). Due to the coronavirus there
have been a nationwide lockdown and hence travel restrictions across the world, oil price
crash impact especially in the gulf countries have led to lower NRI remittances in India. As a
result, the bank deposits, family incomes in India is likely to receive a big hit. The current
account deficit will be widened due to fall in the NRI remittances and overall economy will
face a huge blow.
2. Oil Price Crash: There have been events this year that have destabilised the oil market,
primarily being the disagreement between Saudi Arabia and Russia over limited supply of oil.
Another event, being the nationwide lockdown that led to travel restrictions by all means of
transport and factories shutdowns have pushed down the demand for oil and lowered the
oil prices close to negative but there remains a massive supply of oil. Consequently, there
will be a lower import bill for India and will put lesser pressure on CAD. This can also be
beneficial for the derivative contracts because once the pandemic gets over, a normalcy
would be expected soon and there would soon be seen a rise in oil prices again. As a result,
speculators can gain healthy profits or else within their profit margins on selling.
3. Franklin Templeton Liquidity Issue: Franklin Templeton India decided to shut down 6 of its
debt schemes in the last week of April due to high redemption/ selling pressures in the
financial market. Due to the shutdown of the economic activities across India led to market
dislocation and lot of illiquidity in the market and as a result the investors started to panic to
liquidate their positions and selling off too quickly. The corporates are selling many illiquid
corporate bonds (the underlying assets) as they are also struggling to keep themselves afloat
amidst the lockdown. The investors are also worried about the quality of underlying debt
MF’s hold. Post the abrupt closure of the debt schemes, AUM of credit risk funds have
dropped by 19% amounting to redemptions of almost Rs.25000 crores between 23rd-28th
April, 2020. The RBI has injected Rs 50000 crore into the market so that banks can borrow
from RBI and lend the money further to mutual funds to help mutual funds withstand with
the selling pressures and to meet their cash flow needs. RBI has also introduced Targeted
Long term repo operations (TLTRO) version 2.0 to only help mutual funds to recover from
the liquidity issues.
But the question arises here is… Didn’t Franklin manage its risks well in spite of knowing the
illiquid quality of underlying paper??Or didn’t it have enough cash overhaul to meet the
redemption pressures??
4. Falling Demand for Gold: The economic uncertainties and nationwide lockdown has pulled
down the demand for gold in Jan-March quarter of 2020. World Gold Council says the value
of gold demand has fallen by 20% YOY compared to the same period of 2019. Gold jewellery
demand has also dipped by 41% at 11 year low. While the gold investment demand has risen
by 4% as investors consider gold as a safe haven instrument for investment. The fallen
demand reduces the import bill of gold and puts less pressure on current account deficit
thereby improving economy.
5. Falling Rupee: The rupee has fallen from 71.3 to 77.58 between Jan-April, 2020. It has
roughly fallen by 7% in Q1 of 2020. Rupee falling is one of the major symptoms of severe
outbreak of Covid-19 vis a vis a dollar. And the Nifty has fallen to 7600 level from 12400 level
on the fear that the economy might jump into recession. The dollar remains firm hence the
investors might liquidate their positions to increase their dollar holdings. The FII’s are taking
out their money to either cut the losses or book the profits somewhere else to cover the
losses. Depreciating rupee gives a boost to exports while the imports become costlier and
we end up paying more than we receive. This widens the current account deficit.
Final Thoughts:
The cases of coronavirus have been on the rise in spite of complete nationwide lockdown
hence the economy will still be vulnerable to uncertainties. It appears that gradual lifting of
lockdown restrictions will give support to rupee from downside, oil prices may surge with
increased demand and a stimulus package to be announced soon by the government might
increase the demand for goods and services and overall stabilise the economy with such
effective measures.

Economic Fallout

Uploaded by

Copyright:

Available Formats

Economic Fallout

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Economic Fallout

Uploaded by

Copyright:

Available Formats

Economic fallout in Indian Economy since 2020

You might also like