As the Centre and states jostle over and grapple with strategies for a staggered exit from the lockdown, the country seems — for the first time in 40 years — headed for an economic contraction in 2020-21.
If that happens, it won’t be unique to India — the IMF expects the Covid pandemic to severely impact growth across regions in its latest World Economic Outlook. It expects the US economy to shrink 5.9 per cent and the global economy to decelerate 3 per cent.
It’s exactly three weeks since the new financial year commenced in India, and just a day since the Central government extended relaxations for resumption of economic activities in green zones and non-hotspots — regions where there are no positive cases and where cases are limited, respectively.
With tax revenues severely hit and borrowing costs shooting up by almost 200 basis points, some states want a more aggressive opening up, but it will be a while before the Centre is confident to let them do so. In less than a month, the virus has made its way into 408 districts (about 55 per cent of all districts), and the Centre is keen to put its weight behind gains from containment in the trade-off between economic loss and spread of the pandemic.
As far as the direct hit to the economy is concerned, an economist who interacts with senior government officials on policy issues, said, “Basic calculation suggests that loss of 23 full working days (excluding weekends) due to lockdown in this financial year beginning April 1 will knock off that much, approximately 6.5 per cent, from total output.” In other words, he said, the Indian economy will almost certainly shrink.
But even that’s only on paper.
“It is quite difficult to assess how the economy will react when the lights, which were turned off March 24 midnight, and remain so for 40 days (almost six weeks), are switched on again,” a senior official said. There are many variables: consumer behaviour post lockdown, fear of infection, persistence of social distancing, risk aversion at firm and individual level, the pandemic curve itself, and finally the depth and breadth of government intervention through fiscal measures, and RBI support on the monetary and credit front.
It is this huge uncertainty and “hysteresis” (the unknowns going forward on how the pandemic will play out), which render the exercise of making projections irrelevant. “In the middle of a storm, it is hard to make any assessment, because the task at hand is to ride the storm. Any kind of accuracy will be misleading,” the official told The Indian Express, without wishing to be named.
For instance, Goldman Sachs Economics Research revised its India projections thrice since February 2019 when it believed India’s real GDP would grow 6 per cent in 2020-21. Mid-March, this was revised to 5.2 per cent, on April 7 to 1.6 per cent and, within 10 days, on April 16, it presented a recessionary outlook: India will contract 0.4 per cent in the current financial year. Global financial services firm, Nomura, said the direct economic loss due to the lockdown is likely to be around 7.5 per cent of GDP, estimating the economy to contract 0.4 per cent this year.
And certainly, this will not be their last projection, with more than 11 months to go. But Goldman Sachs expects a sharp recovery in the second half of the current financial year itself. It expects the lockdown — which is among the most restrictive in the region — to reduce the rate of new infections over the next four-six weeks.
A flattening of the infection curve, its adaptation by consumers and businesses, combined with continuation of easier fiscal, monetary, and credit policies, should set the stage for a recovery starting the third quarter, it says.
IMF, on the other hand, estimates a sharp V-shaped recovery in 2021-22 to 7.4 per cent compared with 1.9 per cent in 2020-21. “Unlike a financial crisis or natural disaster, a pandemic causes a deep shock, and is followed by a strong recovery, but there may be some permanent loss of output,” an economist said.
The impact of an almost six-week lockdown until May 3, with the persistence of social distancing thereafter, and the knock-on effect of these two, will most likely see the Indian economy decelerate in 2020-21, said another analyst with a leading global financial services group. “After the lockdown is lifted, it will definitely not be business-as-usual. A sudden stop in cash flows has put small enterprises under tremendous pressure, with many on the verge of bankruptcy,” the analyst said.
“Salary cuts and job losses in the organized sector will adversely impact discretionary spending by individuals. Consumption, which is almost 60 per cent of GDP, will be severely hit. At the consumer level, discretionary purchases, shopping in malls, eating out, movie halls, travel, and home purchases, may not be forthcoming,” said another economist with a leading investment bank.
At the firm level, proprietorships, micro, mini and small enterprises, will first want to recoup their losses (having had to endure 12 months of costs on 10 months of revenues), and build a nest egg to ensure they are not adversely hit again. This is one big income shock, the economist said.
While big corporates with strong balance sheets may not face problems of credit, few will be keen to invest because of the demand collapse. “Companies will first want to clear their inventory and it will be a while before they start even thinking of fresh investment. Medium-sized companies will find it difficult to get credit given the risk-aversion amongst banks, which continue to be saddled with bad loans, and are probably staring at more defaults,” said another expert who also interacts with the government closely.
The opinion within the government, and among those who advise the government, is also divided on the quantum of fiscal stimulus going forward.
The first fiscal package was minimal, just about 0.8 per cent of the GDP, with some cash transfers and food supply, to the most vulnerable. “The political leadership understands the problem, but is still unable to quantify it. Many demands have been made, from wage support to a package for the corporate sector, but does the government have the fiscal space? It doesn’t,” said an official, who did not wish to be named.
A line of argument, within the government, is that these are extraordinary times, and the Centre must take a cue from the huge stimulus developed economies have pledged. “Many SMEs may just go out of business… Only the government can spend, and leaning on the side of fiscal prudence, especially when lockdown is crucial to prevent the spread of infection, may do irreparable damage,” said one of the analysts.
But a government official said that India, unfortunately, cannot spend like developed economies. “With a BBB- sovereign rating, we still are investment grade. And unlike 2008 when the government’s fisc was in order and it could manage to give a massive stimulus, it doesn’t have the cushion now. One notch below BBB-, and India will slip into ‘speculative’ grade rating,” he said.
As the government prepares a second fiscal package, officials said, it is also acutely aware that its own revenues will take a hit of about 2-3 per cent of GDP. “This itself will require the Centre to borrow more. The idea will be try to protect the vulnerable groups, minimise job losses, keep the financial system stable, and prevent firm closures. It will be sharply focused,” the official said, suggesting it may not be the sprawling safety net many have asked for.
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