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The | New Delhi |
Updated: April 22, 2020 11:28:56 am
Construction work begins in Mohali
As the Center and the states struggle and struggle with strategies for a staggered closing output, the country appears, for the first time in 40 years, headed for an economic contraction in 2020-21.
If that happens, it will not be unique to India: the IMF expects the Covid pandemic to seriously affect growth in all regions in its latest Outlook for the global economy. The United States economy is expected to shrink 5.9 percent and the world economy to slow 3 percent.
Exactly three weeks have passed since the new financial year began in India, and only one day since the central government extended the relaxations to resumption of economic activities in green areas and non-active areas: regions where there are no positive cases and where cases are limited, respectively.
With tax revenues severely affected and borrowing costs rising nearly 200 basis points, some states want a more aggressive opening, but it will be a while before the Center trusts to let them do so. In less than a month, the virus has reached 408 districts (approximately 55 percent of all districts), and the Center is willing to put its weight behind the gains from containment in compensating for the economic loss and the pandemic spread.
Regarding the direct impact on the economy, an economist who interacts with senior government officials on policy issues said: “The basic calculation suggests that the loss of 23 full business days (excluding weekends) due to the shutdown in this financial year beginning April 1, it will eliminate that amount, about 6.5 percent, of total production. ” In other words, he said, the Indian economy will surely shrink.
But even that is only on paper.
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A flattening of the infection curve, its adaptation by consumers and businesses, combined with the continuation of easier fiscal, monetary and credit policies, should set the stage for a recovery starting in the third quarter, he says.
“It is quite difficult to assess how the economy will react when the lights, which went out on March 24 at midnight and stay that way for 40 days (almost six weeks), come back on,” said a senior official. There are many variables: consumer behavior after closure, fear of infection, persistence of social distancing, risk aversion at the business and individual level, the pandemic curve itself, and finally the depth and breadth of government intervention through fiscal measures and the support of RBI in the monetary and credit front.
It is this great uncertainty and “hysteresis” (the unknowns in the future about how the pandemic will unfold) that makes the projection exercise irrelevant. “In the midst of a storm, it is difficult to make an assessment, because the task at hand is to face the storm. Any kind of precision will be misleading, “the official told The Indian Express, without wanting to be identified.
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For example, Goldman Sachs Economics Research revised its projections for India three times since February 2019 when it believed that India’s real GDP would grow 6% in 2020-21. In mid-March, this was revised to 5.2 percent, on April 7 to 1.6 percent and, within 10 days, on April 16, it presented a recessionary outlook: India will contract 0.4 percent in the current financial year. World financial services firm Nomura said the direct economic loss due to the blockade is likely to be around 7.5 percent of GDP, estimating the economy will contract 0.4 percent this year.
And certainly, this will not be his last screening, with more than 11 months to go. But Goldman Sachs expects a strong recovery in the second half of the current financial year. The blockade, which is among the most restrictive in the region, is expected to reduce the rate of new infections in the next four to six weeks.
In less than a month, the virus reached 408 districts.
A flattening of the infection curve, its adaptation by consumers and businesses, combined with the continuation of easier fiscal, monetary and credit policies, should set the stage for a recovery starting in the third quarter, he says.
The IMF, on the other hand, estimates a strong V-shaped recovery in 2021-22 at 7.4 percent compared to 1.9 percent 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 a permanent loss of production,” said an economist.
The impact of a nearly six-week lockdown through May 3, with persistent social distancing thereafter, and the indirect effect of these two, will likely see the slowdown in the Indian economy in 2020-21, another analyst said. with a global financial services group leadership. “After the blockade is lifted, it will definitely not be as usual. A sudden stop in cash flows has put small companies under enormous pressure, and many are on the verge of bankruptcy, ”said the analyst.
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“Wage cuts and job losses in the organized sector will negatively affect people’s discretionary spending. Consumption, which represents almost 60% of GDP, will be seriously affected. At the consumer level, discretionary purchases, shopping in shopping malls, eating out, movie theaters, travel and home purchases may not be effective, ”said another economist at a leading investment bank.
At the company level, companies, micro, mini and small companies will first want to recoup their losses (having had to bear 12 months of costs with 10 months of income), and build savings to ensure they are not harmed again. This is a big income shock, said the economist.
While large companies with strong balance sheets may not face credit problems, few will be interested in investing due to the collapse in demand. “Companies will want to delete their inventory first, and it will be a while before they start thinking about new investments. Midsize companies will find it difficult to obtain credit given the risk aversion among banks, which are still burdened with bad loans and are probably considering further defaults, “said another expert who also closely interacts with the government.
Opinion within the government, and among those who advise the government, is also divided on the amount of future fiscal stimulus.
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A boy undergoes rapid tests for coronavirus on Monday in Belgachia, one of Calcutta’s red light districts. (Partha Paul express photo)
The first fiscal package was minimal, at just around 0.8 percent of GDP, with some cash transfers and food supplies, to the most vulnerable. “The political leadership understands the problem, but still cannot 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? Not so, “said an official, who did not want to be identified.
One line of argument within the government is that these are extraordinary times, and the Center must follow the great stimulus that developed economies have promised. “Many SMEs can close their businesses … Only the government can spend, and relying on fiscal prudence, especially when the blockade is crucial to prevent the spread of infection, can cause irreparable damage,” said one analyst.
But a government official said that India, unfortunately, cannot spend like developed economies. “With a BBB- sovereign rating, we are still investment grade. And unlike 2008, when the government fisc was in order and could administer a massive stimulus, now it doesn’t have the mattress. A level below BBB-, and India will fall on the “speculative” rating, he said.
As the government prepares a second fiscal package, authorities said, it is also well aware that its own revenues will impact around 2-3 percent of GDP. “This will require the Center to borrow more. The idea will be to try to protect vulnerable groups, minimize job losses, keep the financial system stable and avoid the closure of companies. It will be very focused, “the official said, suggesting that it may not be the expanding security that many have asked for.
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