RaboResearch - Economic Research

Coronavirus: The Economic Impact of COVID-19 on India



Also published on Bloomberg/Quint, March 13, 2020

Things are moving fast with the COVID-19 virus. On Thursday 12 March the World Health Organization (WHO) declared that the virus is now a pandemic and President Trump announced a 30 days ban on all travel from the EU to the United States. One thing is sure: COVID-19 is the quintessential ‘black swan’. Two key features of black swans are that their occurrence is highly unlikely and their impact is very big, which was also the case for the 9/11 terrorist attacks in 2001 or the global financial crisis of 2008/2009. This brings us to one simple question that we try to answer in this op-ed: what is the economic impact of COVID-19 on the Indian economy? As we focus on the economic effects, we want to stress beforehand that we fully realize that there is much human suffering beneath the cold figures presented in this article.

Quantifying the impact

Given the uncertainty about the virus and how it will continue to develop, quantifying its economic impact is far from easy. Economists all over the world are struggling to make an assessment. Nevertheless, everyone is forced to make a call on the quantitative impact, as this needs to be taken into account in the forecasts. The IMF for instance stated on 4 March: “In terms of our projections we, unfortunately, over the last week have seen a shift to a more adverse scenario for the global economy. We are working on updating our projections, and we will come up with those in the next weeks. ... under any scenario, we see growth in 2020 falling below the level in 2019.”

The strength of scenario analysis

In the last couple of weeks, we have conducted a scenario analysis to be able to gauge the global economic impact of COVID-19. The idea behind our scenario study is that we do not resort to top-down judgments on key parameters, but we use a set of assumptions to capture the disrupting effects that COVID-19 is causing. We made assumptions for two scenarios. In the first scenario, which is our baseline scenario, there will be heavy output losses in China and certain other countries (South Korea and Italy) where the virus has spread substantially, but the downturn in economic activity will remain limited in countries where the virus is not as yet widespread. The second scenario is a risk scenario in which the global spread of the infection sharply increases, with countries where the outbreak is currently limited facing a corona epidemic as well (thus a full-blown pandemic). Finally, we used our economic models to calculate the impact.[1]


Before discussing the results, let us give a brief idea what kind of assumptions have been made. First, we assume a temporary drop in the amount of hours worked per worker to capture the effect of the lockdown in Hubei/Wuhan and in Italy. After all, people in areas subject to quarantine after all will have a limited possibility to work. We also assume that people will work overtime in the second half of 2020 to deal with the backlog of orders. We also expect adverse effects on private consumption, as the virus outbreak will negatively affect consumer behaviour in many countries. Purchases will be postponed or even cancelled (eating out, holidays). We have sharply reduced private consumption in countries facing the COVID-19 epidemic (China and Italy), in line with the average decline in private consumption in Hong Kong and Taiwan during the SARS outbreak in 2002/2003 and in Brazil during the outbreak of the Zika virus in 2015/2016. Furthermore, cross-border trade will become cumbersome and more expensive. Higher costs will have the same effect as temporary non-tariff trade barriers, such as phytosanitary restrictions. Countries with sizable exports to China will see a temporary relative decline in their export markets due to the problems with trade. Finally, we made assumptions on exchange rates, investment premiums (to capture adverse investors sentiment and financial market volatility) and mitigating government policies (especially in China). In our pandemic scenario, we also expect a some permanent damage to the Chinese economy in terms of adverse productivity effects. For a complete overview of all the assumptions in each scenario, see this report.

What is the expectation in our baseline scenario?

Figure 1: Global economic impact of COVID-19
Figure 1: Global economic impact of COVID-19Source: Rabobank, Macrobond

In our baseline scenario, we expect a substantial slowdown of global economic growth due to COVID-19 (see Figure 1). In our calculations, global growth in 2020 will arrive at 1.6%, which is substantially lower than the OECD (2.4%) and Bloomberg consensus (2.7%, start of March). Before the corona outbreak, we had 2.9% pencilled in for global growth.

China, as the epicentre, is expected to face the most detrimental economic impact, slowing down to 2.4% in 2020, which is markedly lower than our pre-corona forecasts of 5.7%. For India, we expect growth of 5.3% in 2020, with COVID-19 shaving off 0.4ppts compared to the pre-corona situation (5.7%). Those effects are still limited, mainly because India only has limited ties with the Chinese economy (see Table 1). So the shock wave that China is sending across the global is affecting India to a lesser extent than many other counties in Asia. For instance, Chinese tourism only constitutes 0.2% of Indian GDP (compared to 5.9% in Thailand for instance).

Table 1: India only has limited ties with China
Table 1: India only has limited ties with ChinaNote: ranking is based on z-scores of the numbers shown in the table.
Source: WTTC data, trademap.org, Worldbank, Rabobank.

At this point in time, in India the global virus outbreak has perhaps had the largest economic impact on the rupee which has depreciated substantially on the back of a global risk-off sentiment and anxiety among investors. We expect the currencies of emerging markets and the prices of raw materials to continue to be highly volatile in the coming period.

What if things get worse?

The limited economic impact in India in our baseline scenario assumes that the coronavirus will not spread substantially on Indian soil and that the number of cases will remain limited. At the time of writing, only 58 cases have been reported in India, out of just under 120,000 people infected worldwide (see the current COVID-19 monitor of Johns Hopkins University). However, one could question if India is doing sufficient testing…

Figure 2: Healthcare is less abundant in India compared to the global average
Figure 2: Healthcare is less abundant in India compared to the global averageSource: Worldbank

Moreover, we believe India is susceptible to a rapid spread of the virus, due among other things to high population density in combination with health care services that are less abundant than in many Western countries (see Figure 2). The average number of hospital beds and doctors per 1,000 Indians is 0.7 and 0.8 respectively, compared to 5.6 and 3.6 in the EU. Moreover, should the virus touch ground in larger numbers in India, the question would be: what containment measures is the Modi government willing to take, as these would sacrifice economic growth at a time when India’s economy is already struggling.

Given that the WHO already is talking about a pandemic, there is a risk we are quickly moving towards our pandemic scenario. In this scenario, we assume that global spread of the infection sharply increases, also in India. Our calculations show that in this scenario, real growth of the global economy would slow down to 0.7% in 2020. Moreover, we expect the Indian economy to grow by 3.6%, which would make 2020 even worse than 2019 from an economic perspective.

India could benefit in the medium term…

Figure 3: We expect a rebound after the COVID-19 crisis
Figure 3: We expect a rebound after the COVID-19 crisisSource: Rabobank, CSO

International firms have found out the hard way just how vulnerable their globally integrated supply chains are. This was already becoming clear due to US-China trade tensions but has been exposed to the full by the COVID-19 virus outbreak. The disruption of international trade may prompt international businesses to diversify their production across several countries. In a previous op-ed we already argued that India might even benefit in the medium term, because firms want to rely less on China as their only manufacturing hub and shift (part of) their production to other countries, such as India. This explains why we expect a relatively profound rebound of economic growth in 2021 and beyond (Figure 3).

Ultimately, however, these potential positive economic effects will only materialise over time and are a small patch on the wound for all the personal tragedy that is caused by the virus.

[1] We have applied two models: a macro-econometric global trade model (NiGEM) and a productivity model specifically developed for the Chinese economy by RaboResearch.

Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO
Kan Ji
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 8329 1678

naar boven