Page 384 - ES 2020-21_Volume-1-2 [28-01-21]

State of the Economy 2020-21: A Macro View 11

Figure 11: Twin Economic Shocks by the Pandemic

Labour
Supply Shock
- Inability to
work from
home in non-
essential Disruption
industries in Supply
Chain
Linkages

Supply Shock

Source: Adapted from Estupinan, Xavier and Sharma, Mohit and Gupta, Sargam and Birla, Bharti (2020)

1.15 The first order supply side disruptions potentially created second round effects on both
demand and supply. The initial supply shock, resulting in wage and income loss, could impact
aggregate demand and impair productive capacity leading to supply shocks. These effects were
further amplified through international trade and financial linkages, dampening global activity
and pushing commodity prices down. The feedback loops of demand and supply generated
potential hysteresis effects - when households demand less, firms get reduced revenues, which
feeds into reduced activity by firms, and thus reduced household income.

1.16 The policies to ‘flatten the epidemiological curve’, therefore, needed to be accompanied by
economic policies designed and targeted to mitigate the resulting shock to the economic system
and ‘flatten the recession curve’. There was, however, unprecedented uncertainty about the
potential spread of the pandemic. The pandemic, therefore, posed unprecedented dilemmas before
policymakers – lives vs livelihoods and flattening the twin curves of pandemic and the resultant
economic recession.

BOX 1: SECTORAL IMPACT OF COVID-19 IN INDIA:
UBIQUITOUS, YET IRREGULAR

The spread and intensity of COVID-19 induced twin economic shock can be broadly captured
through impact on output/Gross Value Added (GVA) and employment. In terms of GVA shock,
non-essential activities are likely to endure a combined shock directly proportional to their
respective GVA contribution, given that they could not operate during lockdown. Essential
activities are likely to undergo a dampened shock, primarily arising from the indirect impact of
restricted activities in non-essential sectors. In terms of employment shock, contact-sensitive
sectors like trade, hotels, transport, tourism, etc. are likely to undergo a shock proportional to
the respective employment share, with informal workers likely to bear the larger brunt (Figure
1
B1) . The construction and mining sectors, that employ a larger share of informal workers,
have been severely affected by the pandemic-induced lockdowns.

1 Percentage distribution of usually working persons in usual status (ps+ss) by broad status in employment for each
industry of work.