Economy will take a long time to recover even after COVID-19 leaves

In sync with the rest of the world, India announced a slew of relief measures worth Rs 1.70 lakh crore last week, mainly focussed on its poor, to fight the Covid-19 pandemic. The Reserve Bank of India (RBI) supplemented the government’s efforts by unleashing measures to inject Rs 3.47 lakh crore to counter the impact of the virus on the economy. Together, the central bank and the government have committed a stimulus worth 4.3% of the country’s gross domestic product (GDP).

A bigger than Rs 1.70 lakh crore of fiscal incentive is in the making and will likely be released in the coming days/weeks. Expectations are that the package will be a combination of an enhanced welfare fund for the poor and marginal and, incentives to ensure greater stability in the corporate sector. The RBI too has said that it has not exhausted all its firepower and that it stands ready to respond further to the need of the economy. In all likelihood, it may come up, sooner than later, with sector-specific measures.

Sectors such as tourism, airlines, hospitality, trade and transporters are suffering huge losses due to the pandemic. The financial markets have been butchered. Soon the second-round impact of the coronavirus will be felt on economic growth. India is just two days away from closing its financial year (2019-20). By the time the three-week country-wide lockdown is lifted, the economic destruction, the virus would have wrought could be to the tune of Rs 7 lakh crore, with production seizing up, workforce being disjointed and consumers remaining indoors.

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Impact of lockdown

The way new cases are cropping up every day, it doesn’t appear that the lockdown would be completely lifted after the three week period. And if that continues, even partially, the third and the potentially biggest impact would be felt on the data collection across the country. Data on inflation, especially food, which consists a large part of India’s inflation basket employment, production and consumption is a vital input in policy-making and to the central bank, which sets interest rates and forecasts the future trajectory of growth and price movement. Inflation data is collected from close to 1,200 village markets and 1,115 urban centres. The lockdown implies virtually no data collection as these centres of trade are not so developed for the compilation of numbers on the phone or the internet. In the absence of data, the next RBI monetary policy in June may be reduced to only a stock-taking exercise of the current crisis.

The cumulative impact of all that on the GDP growth would be huge and India will be nowhere close to touching the estimated 5% in 2019-20. Various estimates suggest growth could even plummet to 2.5-3% in 2020-21.

Worse, the country could see a quarterly contraction in the April-June quarter of 2020-21. Growth is not expected to top 2.5% even in 2020-21. But the good part is, India’s economy is still forecast to be better than many other countries of the world, which has entered a recession as bad or even worse than the global financial crisis of 2008, according to the International Monetary Fund (IMF). But it is very challenging to assess the full impact of the virus until the spread is not contained. The pandemic has caused demand and supply shocks. The RBI has refrained from giving growth and inflation forecast amidst unprecedented uncertainty. It reckoned that the growth number and inflation print would be heavily contingent on the intensity, spread and duration of the virus.

RBI measures

To mitigate the impact, it gave a deep policy interest rate cut of 75 basis points and brought it down to 4.4%, the lowest in the history of independent India. It brought down the cash reserve ratio (CRR) to 3% from 4%, for the first time in seven years and introduced long term repo operations (LTRO) to improve transmission and supply of durable liquidity. This was a part of coordinated policy decisions that other countries too have taken to lessen the impact of the epidemic. Around 45 countries around the world have cut key policy rates. Some of them like Australia, US, UK and Canada have reduced policy rates twice in the span of 7-15 days this month.

The RBI took certain other measures too for a far-reaching impact on the economy. A reduction in repo rate will not only make loans cheaper for individuals and companies but will also give a boost to growth as seen during the global financial crisis when as a result of repo reduction, the quarterly GDP had seen an upswing. A CRR cut will help infuse Rs 1.37 lakh crore into banking system and reduce cost of funds for banks. At present credit demand in the system is low but banks have to provide interest on deposits held by them. Hence, the cut in CRR is expected to help banks to bridge their temporary asset-liability mismatch.

Besides, it allowed a blanket forbearance for all term loans and working capitals, providing succour not only to those, who have taken personal loans but also businesses, who have taken working capital. This will help firms, which have almost nil revenue earning, to pay for their utilities and staff in the lockdown.

The fiscal package of Rs 1.70 lakh crore is not enough for India’s vast majority of the poor. The crisis is deep for self-employed and migrant labourers. The migrant workforce neither has a bank account at the place of their work, nor a ration card facility to take the benefit of free grains. The government may come up with dated food coupons for such workers, which can be used until the normal business activities are restored. An estimated cost involved in the stimulus could be anywhere between Rs 8 lakh crore and Rs 10 lakh crore. On the revenue side, the benefits of lower crude prices could result in accrual of Rs 2.5 lakh crore to the exchequer in the financial year 2020-21. The rest could come through more extensive and tough reform measures, which may open the doors for new taxes and cess in the coming times.

But the concern at the moment is humanitarian and calculating the cost to the economy at a time when a human tragedy has struck the globe would be cruel. The government too is acting, without worrying much for fiscal deficit. The Fiscal Responsibility and Budget Management Act allows RBI to help centre in all possible ways, including printing of more currency notes, in case it breaches the fiscal target on account of a national calamity, an act of war, collapse of agriculture severely impacting farm output and incomes among others. But the current epidemic has reinforced the need for the central banks, the world over, to maintain robust balance sheets and the governments, not to appropriate their savings.

The economic recovery is expected to be slow and uneven after the health crisis is over, as most of the informal sector will not be able to re-start their businesses, the unemployment rate could hit its peak and experts suggest that the lockdown could bring in behavioural change in people, including their consumption and savings.

According to India’s first chief statistician and currently the government’s data quality manager, Pronab Sen, when the business activity is resumed after the crisis, the recovery could be V-shaped initially but after a short spike, the momentum will decrease and the long-term impact of the crisis will start resurfacing.