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India’s economy has faced three big blows over the last decade. First, the global financial crisis of 2008, which saw the country’s gross domestic product (GDP) growth rate collapse to 3.9%—the lowest growth rate since 1991. Then, in November 2016, India saw demonetisation demonetisation Demonetisation On 8 November 2016, 86% of Indian currency was deemed illegal by Prime Minister Narendra Modi , the economic impact of which has been likened by some experts to 86% blood 86% blood The Hindu Business Line The economic implications of demonetisation are many and yield mixed results Read more being changed in the human body. And now we have the Covid-19 pandemic, which is a bit like the financial crisis and demonetisation rolled into one.

There is no telling how long the Covid-driven slowdown will last. But the demand shock the economy is currently experiencing should sow the seeds of a turn in the business cycle a few quarters from now.

In the larger scheme of things, India’s already-stressed job market will be hit hard. But as inventory piles up, the current reduction in demand is bound to drive down general price levels. This reduction—for raw materials, rentals, wages—should then translate into a lower cost of production, which eventually should cause demand and supply to rise again. This whole loop also tends to speed up if oil prices drop, because companies can then cut back on costs.

This is not an unfamiliar pattern. After the financial crisis, in the year ended March 2009, India’s nominal GDP growth rate crashed to a five-year low. But the next year saw a 68% increase in inventory, as per national accounts data national accounts data MoSPI Government data Read more —this was serendipitously accompanied with oil prices dropping to a three-year low. Eventually, India’s nominal GDP growth recovered and rose to 20% by the year ended March 2011.

Similarly, following demonetisation in 2016, the year ended March 2018 saw an 82% increase in inventory levels. Fortunately, oil prices were low through 2017, averaging $33-34/barrel. This, in turn, laid the foundation for an improvement in activity levels in the year ended March 2018.

The key takeaway here is that it’s not necessarily all doom and gloom. While jobs, make no mistake, are scant—with high unemployment at the aggregate level—there are sectors in the economy that continue to grow and hire.

The last available big-picture government report on India’s employment scenario is the July 2017-June 2018 labour force survey.


Ritika Mankar

Ritika Mankar is one of India’s leading economists known best for unearthing macro themes with meaningful investment implications. She was a director with Ambit Capital and now consults with Ambit as a Thematic Specialist. She also serves as a director on the India CFA Society Board.

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