Konsult Whitepaper Analysis

Challenges to Opening India’s Economy Amid Covid-19

As India look towards easing out the restrictions, there are a set of challenges that we must take into account.

This article takes a bird’s-eye view at the challenges due to supply chain disruptions.

Major Challenges

As India looks to opening up its economy, it is faced with challenges pertaining not only to the public health but also to counter the crippling and fragmented economy.

According to a report by McKinsey the Indian government, like many across the globe, is looking to lift lockdown and restrictions while at the same time facing the dilemma of containing the spread of Covid-19. The gargantuan task is challenging as is, and the social and economic segmentation in India presents a host of unique barriers.

The initial lockdown restrictions disrupted the supply chain and created blockages, and the report further reveals that India’s economy has been operating at just over 50% of its capacity during the lockdown which is quite unsustainable.

At this juncture, an economic recovery is not just necessary but paramount, though the large domestic market and economic variations make the supply chain a complex task. The report divulges into a number of sectors to show this complexity. The same is illustrated in the infographics that follow.

The best way to understand the problems faced by these supply chain disruptions is to look at the textile industry, where the raw materials are procured from the west, the yarn spun in the east and weaved in the south and the final manufacturing is spread across the north and south.

Another important aspect to look at is labour considerations. Transportation and construction activities pan India are largely dependent on the migrant labourers who come from different districts of India. The restriction on movement and migration of key labour from part of the country to another pose potential problems.

Key Risk Areas

Indian Government’s Ministry of Health and Family Welfare (MoHFW) has laid out a district-wise classification of infected areas. Based on different criteria the MoHFW has designated red, orange and green zones across the country, wherein the red zones are subject to the toughest restrictions while the other two have varying degrees of relaxation based on the risk factor.

The point of concern is that 130 districts classified as red zones are some of the most urbanized and industrialized parts of the country. Furthermore, the red zone areas account for more than 40% of all economic activity and about the equivalent share of non-agricultural employment. While easing up the restrictions Mckinsey & Company points out to three possible scenarios for the administration.

The first scenario outlines the moderate outcome where the economic activity is resumed everywhere except those 130 districts. In the second broader scenario, some of the red zone designated areas would also be included, sans the 27 worst affected districts. And the third scenario entails an extensive opening of economy barring the containment zones with a cluster of cases.

Of these aforementioned scenarios, the former two are the least risky in terms of
containing the spread, but by the estimates in the report the moderate scenario is likely to leave 100mn non-farm workers out of job while the broad scenario would still leave 70mn inactive. The extensive scenario estimate suggests that it would bring down the number of inactive workers to 17mn.

All this points to the fact that the situation is certainly critical and a centralized approach towards the same may not be the best way forward. Working with the local authorities and well-equipped healthcare centers so that situation can be assessed at an ongoing basis and can be dealt with in accordance with the guidelines is the desirable.
The focus should be on medium and long term recovery.

Author: Sarthak Sharma

Source: McKinsey & Company- Reopening India: Implications for economic activity and workers, May 6, 2020.

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