How economic crisis due to Covid-19 is different from 2008 meltdown

Illustration: Ajay Mohanty
The decline in economic activity because of the Covid-19 lockdown is unprecedented in India’s history. Its impact on the real or productive sectors of the economy is worse than what was witnessed in the aftermath of the 2008 Lehman crisis, which had reached its peak in the month of September 2008.  

The collapse may appear similar in both cases, but the reality is different. The 2008 economic crisis was a slow burn, and events, including macroeconomic developments, played out over months, while this time it is a sudden dip in economic activity after the lockdown was announced on March 24. This comes out most clearly in the dip in electricity generation and passenger vehicle sales where the impact has been immediate. 

For example, daily average electricity generation declined from an average of around 3,800 million units (MU) in the first half of March 2020 to around 2,800 MU after March 24, a 26 per cent decline, according to the data from the National Load Despatch Centre. In contrast, electricity generation was flat even at the height of the Lehman crisis in September and October 2008, as there was no interruption in economic activity. 

The 2008 crisis had led to a decline in car sales in the December 2008 quarter, but sales recovered fairly quickly. In comparison, passenger car sales were down 51 per cent year-on-year in March 2020 and 47 per cent on month-on-month basis — one of the sharpest decline ever. 

The non-food credit show a similar trajectory. 

In the current crisis, the Sensex lost around 38 per cent from its January 2020 high, but has recovered 20 per cent from the March 23 low. Now, the Sensex is down 25 per cent from the high, and the rupee is down around 8 per cent. On the other hand, during 2008-09, the hit on financial markets was more prolonged, and the recovery was gradual and played out in 2009 and 2010. The Sensex declined 60 per cent from its January 2008 high to March 2009, and the rupee had lost around 20 per cent against the dollar, also over a longer period.

Sources: Reserve Bank of India, Bloomberg, National Load Despatch Centre, Central Electricity Authority, Society of Indian Automobile Manufacturers, Compiled by BS Research Bureau

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