Impact of Covid on Indian Economy
The impact of covid 19 on Indian economy is evident with the declaration by the Reserve Bank of India that the economic indicators of India will fall to lowest in the recession-hit decade. A fall in gross domestic product (GDP) is viewed as one of the most important factors responsible for triggering a recession in any country. If this occurs, the impact of covid 19 on Indian economy is felt as the circulation of finance, credit and monetary policy takes a negative turn. This in turn results in effect on the business cycle, investment and employment conditions.
On the other hand, if the economic conditions are stable and growth is not affected due to any adverse financial market fluctuations, then there is no effect of cold on Indian economy. To understand the impact of covid, it is important to understand how the foreign currency flows into and out of an economy and what are the macroeconomic aggregates (the difference between net exports and imports). Understanding the relationship between foreign exchange rate movements and the exchange rate movements in India can be understood by understanding the difference between the gross domestic product (GDP) and current account balance. The current account balance is the difference between receipts and payments made to the foreign exchange market.
One of the important functions of the foreign currency trade is to ensure the consistent flow of goods and services. For instance, if the cost of importing products is less than the cost of manufacturing them domestically, then foreign currency inflows are encouraged and the exchange rate of the foreign currency should go up. Similarly, if the foreign currency deficit is high, then the foreign currency should pull down and this should encourage fiscal consolidation in the economy. In India, the current accounts data are largely incomplete since the sources are often discrepancies. However, this does not mean that there are no important relationships between the Indian economy and foreign exchange rate movements. In fact, the current accounts data are a very important part of the overall economic framework.
One of the other important features of economic stability in India is the regularity of the inflow and outflow of finance. A smooth economic inflow and outflow of finance are required for smooth functioning of the economy. For instance, the regularity of the inflow and outflow of funds, or the inter-bank lending rates, plays a vital role in determining the impact of cold on Indian economy.
The level of foreign direct investment (FDI) in the Indian economy has a great impact on the functioning of the economy. The inflow of FDI directly influences the foreign currency trading. Direct foreign investment increases the demand for the foreign currency and this drives up the value of the foreign currency. This is helpful for the domestic industry as well as the domestic economy. Since the demand is directly impacted by the foreign exchange market, there is a considerable effect of the foreign exchange market on the economy of India.
The impact of cold on Indian economy is further explained by the differential between the foreign currencies and the Indian Rupee. The foreign currencies have a strong impact on the economy of India. The main factor affecting the Rupee is the export competitiveness. Since most of the Indian import is geared towards enhancing the competitiveness of the Indian economy, it leads to a fall in the Rupee against the foreign currencies. This impact of cold on Indian economy is further accentuated by the high level of foreign direct investment (FDI). Most of the FDI comes from developed countries like Japan, U.K., Singapore, Germany and others.
With high levels of FDI, Indian companies can access global capital without any restrictions. Apart from this, with the increasing inter-linkages and integration, the multinationals are also able to use the Indian markets to expand their business base, thereby, helping them attain a dominant share of the foreign exchange market. This is one of the major factors which have resulted in a significant impact of cold on Indian economy.
In a nutshell, from all the above, it can be concluded that the impact of cold on Indian economy is quite significant. However, the impact of cold on Indian economy can be reduced if the exchange rate between the Indian Rupee and foreign currencies falls significantly. It is observed that when the exchange rates are too low, the companies indulge in heavy inflow of Rupees, but when the rates rise, they take a backseat and focus on generating profits. This means that the impact of cold on economic structure can be balanced out only through fall in the exchange rates. So, it is advisable to keep a track of the foreign exchange market on an everyday basis and understand its impact on the economy of India.
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