Fiscal steps needed to deal with COVID-19 impact: SBI

Fiscal steps needed to deal with COVID-19 impact, RBI rate cut alone may not help: SBI

A woman with a mask on seen at Bengaluru Majestic BMTC Bus Stand in wake of COVID-19 outbreak in Bengaluru on Saturday. (DH Photo/ Pushkar V)

India may need a mix of monetary and fiscal measures to deal with the coronavirus impact as a policy interest rate cut alone could lead to an asset bubble in absence of demand-enhancing steps by the government, warns a research by the State Bank of India (SBI) amid the rising clamour for an RBI rate action.

An asset bubble is a situation when assets such as housing, stocks or gold dramatically rise in price over a short period that is not supported by the value of the product.

"The COVID-19 pandemic has an embedded adverse supply shock angle as China is the supplier of many critical inputs to India. Hence only a rate cut in the current situation with no fiscal measures can lead to an asset bubble and possibly no correction in demand," the paper said, asking the government to use the revenues from the excise duty hike to provide relief to the people at the lower strata, who will lose income due to shut down of commercial activities in states.

The government is expected to earn up to Rs 40,000 crore in 2020-21 due to the last week’s excise duty hike on petrol and diesel.

The countries, which have put in place fiscal stimulus measures, include Australia ($11.4 billion), Italy ($28 bln), UK (39 bln) and European Union (25 bln euros). According to official sources, India too has decided on sectoral fiscal relief and would unleash that as and when required.

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On the demand side, the adverse impact of COVID-19 is expected to hit sectors such as air transport, tourism and hotels, which in turn will impact other sectors, it said.

In 2018, India received 10.6 million foreign tourists with an annual growth of 5.2%. The country garnered $28.6 billion (Rs 1.94 lakh crore) in foreign exchange earnings, with an annual growth of 4.7%. Therefore, the proposed travel ban for one month will have a severe impact on foreign tourist arrivals and earnings, the SBI said and estimated that India could see a slump of up to 3 million tourists footfalls in the calendar year 2020 and a related revenue loss of about $7 billion in foreign exchange.

Considering these numbers on an aggregate basis, the SBI estimated that the pandemic shock could have a 90 basis point impact on India’s GDP from trade, hotels and transport in between 2019-20 and 2020-21.

On the supply side, the lockdown in China has resulted in supply disruption for chemicals, chemical products, electrical and non-electrical goods, metals and textiles.

The research said that a simultaneous demand and supply shock to the economy will have implications for the banking sector. The demand side shock, it said, could lead to an output loss of 1.2% in banking and insurance combined.

Impact of COVID-19 in India's economy:

* At least 220 Indian companies have legal linkages with around 350 companies in China. Of these, 58% are in the manufacturing sector, 40% are in the services sector and the remaining 2% are in the construction sector.

* Companies in sectors, such as retail trade, wholesale trade and transportation are expected to have foregone revenues; companies in sectors, such as construction and certain manufacturing segments will have a deferred growth.

* China and Hong Kong together constitute 9% of India’s export basket and over 17% to India’s import basket.

* Some exporters may need to diversify into other markets, while others may be able to increase their supply to China.

Sector-wise impact

Automotive: China is the fourth biggest market for Indian imports and the supply gap created can be met from alternate suppliers such as the USA, France and Germany.

Electronics: India’s consumer electronics imports from China stood at 43.2%, making it the biggest market for Indian imports.

Fertilizers: China commands one-third supply of manufactured fertilisers to India.

Gems & Jewellery: Hong Kong is India’s biggest export market with a share of 38% and China Mainland accounts for another 1%.

Logistics: Negative impact on flight operators owing to the temporary suspension of flights to China and Hong Kong. Limited impact on the shipping industry as India’s exposure to Chinese vessels docking at India ports is minimal.

Media & Entertainment: Overall limited impact as growth of Indian movies in China is high, but the penetration level of Indian movies is low.

Metals: Subdued impact on the domestic industry from a supply perspective as India has little reliance on China for imports.

Drugs & Pharmaceuticals: With imports standing at 68%, China is a dominant supplier of bulk drugs & drug intermediates to India. The outbreak will force manufacturers to look for alternate suppliers and lead to an increase in domestic prices.

Textile & Garments: China was India’s 2nd largest supplier with readymade garments imports standing at 27% in FY19. This will be positive for domestic players. Vietnam, Cambodia and India can fill the gap created in global demand of readymade garments.

Tourism: China accounts for India’s 3% of all Foreign Tourist Arrivals (FTAs). Estimated earnings of $2,800 per Chinese tourist, the tourism industry would have a foregone revenue of US$ 550 mn in the near future.