India’s economic collapse is not surprising given the world’s events, but it is of paramount importance given that the country’s contribution to global growth is almost as large as that of the United States. According to the latest IMF forecasts published in mid-April, India is expected to be one of the few major powers alongside China to end 2020 with a positive GDP growth rate. However, the slowdown in growth is brutal and unprecedented. The Indian economy has grown from a growth rate of 4.2% in 2019 to just 1.9% in 2020 and is relying on the containment measures taken by the government to effectively contain the pandemic.

Even during the balance of payments crisis in the early 1990s, the decline had not been as steep and rapid. All leading indicators are in free fall: industrial production contracted 16.6% in March and is likely to decline again in April and May against the backdrop of stricter containment, non-oil imports plummeted 54.4% in April and vehicle sales and new registrations declined 53.3% in March, both hitting all-time lows. Given the extent of the slowdown, and to some extent, there is no need to annualize the data at this time.

>> Read also – planes, defense, oil, nuclear weapons … India will work with Russia, announced Vladimir Poutine

To cope with the economic fallout from the epidemic, the government last week unveiled an economic stimulus plan of around 10% of GDP. The new stimulus plan is ultimately less important than announced as it included previous measures amounting to 3.8% of GDP. The new stimulus package essentially consists of lowering the tax rate for service providers and guaranteeing loans to SMEs. This SME support plan is to be welcomed as it makes it possible to bypass the risk aversion of banks to lend money to small businesses that are at the heart of India’s economy (they provide up to 80% of jobs). This financing plan is expected to account for 1.5% of GDP, making it one of the largest in Asia, alongside those in Taiwan and Japan.

>> Read also – In India you can negotiate your salary without any embarrassment

However, the Indian economy is not at the end of its troubles. Even before the epidemic, the economy was in bad shape due to weak foreign demand and, above all, the blockades in the financial system. Over the past two years, the government and central bank have tried to address and rectify the liquidity squeeze in the financial sector with mixed results. After the crisis, the financial sector’s solvency problems remain a matter of concern. The collapse of a large non-bank financial firm could do more damage to the economy in the long run than Covid-19 and put the entire national financial system at risk.

To get the economy back on its feet, the government needs to be more proactive in addressing the risks of shadow finance than has been shown in recent years. A healthy financial system is a prerequisite sine qua non for the recovery of the Indian economy.