Five years since covid: how the pandemic changed the world

1. GDP gap

India’s growth seems to have rebounded, but the data masks the fact that the stumble of 2020-21 set us back several years from the pre-covid output path. Between 2011-12 and 2019-20, the Indian economy averaged an annual growth rate of 6.6%. In 2020-21, it plunged to 5.8% as stringent lockdowns were imposed. As the pandemic receded, the economy recovered: the following three years saw growth rates of 9.7%, 7% and 8.2%, respectively.

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However, India’s GDP will catch up with its pre-covid trend path only by 2042-43, assuming a steady 7% growth from 2024-25. A higher, 7.5%, growth rate will allow the catch-up a decade earlier. Such output gaps also exist for other large economies that appear to have turned around (the US, China). Each will need robust growth to return to their pre-pandemic paths, but unfortunately, external challenges such as trade tensions will make it harder to achieve this goal.

2. Debt deluge

The universal policy response to the pandemic was for governments to borrow large sums to support households and businesses. Public debt ballooned, fiscal rules were waived and fiscal deficits shot up. For both advanced and developing countries, 2020 saw the greatest pace of debt increase in the past two decades.

The International Monetary Fund fiscal monitor (October 2024) estimates that global debt will remain above pre-covid levels till the end of the decade. The main obstacle to reducing debt is that public spending is set to escalate in the years ahead. Commitment towards net-zero targets will increase spending on climate change mitigation, defence spending is likely to go up in Europe, and rising protectionism will push up domestic capital expenditure. High public debt reduces future fiscal flexibility, and debt servicing uses up funds that could be spent on health, education and infrastructure. Thus, in the coming years, the debt overhang from the pandemic could constrain fiscal policy. 

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3. Industrial policy returns

As the pandemic sealed borders and shut down production facilities, goods stopped moving along global supply chains. The resulting shortage of items ranging from pharmaceutical products to semiconductor chips made it clear that Asia, specifically China, supplied a disproportionately large share of the world’s manufacturing inputs. This spurred a new wave of industrial policies, with governments announcing support for specific industries or sectors considered strategically important for economic growth or national security. Examples include the European and US CHIPS Acts, Made in China 2025, and India’s production-linked incentives for manufacturing, all of which primarily aim to increase self-sufficiency.

Between 2019 and 2024, the number of new state interventions via tariffs, subsidies, price controls, license quotas, or foreign investment curbs nearly tripled, with the biggest jump occurring in 2020, the first covid year. Research from the International Monetary Fund shows that two-thirds of such actions in 2023 were driven by geopolitical and national security concerns, and to ensure supply chain resilience.

4. Trust erosion

At the start of the pandemic, many believed that state-mandated lockdowns would avert disaster. Fittingly, the Edelman Trust Barometer showed high trust in governments in May 2020. But by 2021, this trust fell sharply, and has not reversed back in most countries. The hardships faced during the pandemic, topped by a period of high inflation (from 2021) and rising interest rates (from 2022) led to widespread frustration with government policies. 

A 2023 Pew survey of 24 countries, including India, showed that 74% of those surveyed believed that elected officials were disconnected from ordinary people, and 59% were dissatisfied with how democracy was working in their countries. The outcome: 40 of 54 elections held in 2024 (up to November) resulted in the incumbent being voted out. One can argue that this strong anti-incumbency had its roots in the pandemic. Notably, even in India, where trust in the government remains high, voters were disgruntled enough to deliver a coalition government. 

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5. Changing work models

Lockdowns sowed the seeds of hybrid work, which has become a new normal in some sectors. The share of hybrid workers varies across companies, industries and countries, but it is here to stay. For example, the India Indeed Hiring Tracker for July-September 2024 quarter showed that 42% of job seekers viewed flexible working hours as a non-negotiable factor in job searches. The trend towards hybrid work is seen in developed countries also: the UK and Germany, in particular, show a strong remote work culture.

Lockdowns also encouraged some workers to explore non-work interests, and the rapid rise in e-commerce offered a platform to monetize their passions. The result is a rise in gig work, both as a sole or extra source of income. The stress triggered by covid also brought work-life balance into sharp focus. Workers are more conscious of managing health, family and other interests along with careers, and employers are more willing to provide suitable working conditions.

The author is an independent writer on economics and finance.