India’s first confirmed coronavirus case was announced on January 30th—a student who returned from the Wuhan University in China to Kerala was the first known case in the country. Since then, the confirmed cases in India have progressed at a slow pace, finally hitting the 100-case mark on 15 March. This is where things start getting serious, with the number of cases doubling every few days as the experience from China, Italy, Spain and South Korea shows. These countries have all employed widespread lockdowns to slow down the proliferation of the virus. Flattening the curve through social distancing and other measures are in place around the world, with India imposing its own broad restrictions on mass gatherings, aviation, and other areas.
Will there be an urban lockdown?
Will India lock down its major cities? That’s the question being asked anxiously on social media and in the media, as confirmed coronavirus cases and death count piles up day after day in most European countries. While it appears that breaking the chain of transmission is the only way to reduce the near-exponential spread of the virus, any such measure has its own economic costs.
Urban India contributes about 63 percent of national gross domestic product (GDP) right now. Cities are already self-censoring business activity. Malls and public places are closed, offices are promoting work from home and there are fewer people on the roads. This is already a problem for several industries like aviation, hospitality, transportation, entertainment, retail and quick-service restaurants. The occupancy rates in brand hotels have plummeted to single digits in many cities in the second week of a serious outbreak in India.
While a wide range of businesses will suffer, India has another unique problem. A large part of Indians work in the gig economy or run small, personal businesses. Many of these individuals live day-to-day, with their businesses or trade needing rapid cash rotation. Most of the private jobs are contractual in nature with many even working on a daily or weekly wage payment structure. All these jobs have already been hit—there are no payments when the workers don’t show up or need to show up.
Urban lockdown in India is a double-edged sword. Not doing it will impose heavy healthcare and social costs, with deferred economic problems. Doing it may lead to heavy economic costs here and now. Unfortunately, the disease also first hits that section of the society which spends the most on a discretionary basis—consumers who have access to foreign lands.
GDP sluggish for several quarters
India's GDP growth has been sluggish for the last several quarters, with the last couple of quarters managing barely above 5 percent growth. The fiscal headroom for the government has been limited, private investment has been sluggish and international trade will likely taper-off in the near-term. With consumption also taking a hit, economic slowdown looms large for India in the first quarter of the next financial year.
To address the problems arising out of the unique structure of the Indian economy and to ensure that the economic engine keeps cranking, both monetary and fiscal measures will be required soon.
The benchmark Reserve Bank of India (RBI) repo rate has declined from 8 percent in early 2014 to 5.15 percent in October 2019, with one hike cycle between August 2017 and 2018. Commentators point out that with banks not lending despite adequate liquidity, rates themselves are not a panacea. While there is no doubt that transmission itself is a problem, structural changes to the financial sectors are ongoing and slow.
Bank Non-Performing Assets (NPAs) are on a decline, but as soon as the system seems to be stabilizing, new shocks hit the foundation. The Yes Bank crisis is the most recent example—the bank had to be rescued by a consortium led by the State Bank of India with RBI's intervention. The Non-Banking Financial Companies (NBFC) crisis was behind us for most part until the fresh coronavirus-led headwinds hit. The foundational issues will likely remain for a while and should not impair the monetary stimulus required in the short-term.
There is no point in the RBI saving its ammunition—this is already war. The RBI could have alternatively announced sustained and large open market operations to manage rates in the press conference held by Governor Shaktikanta Das on Monday. The rate cut may well happen in April, but it will again take time to transmit. If the business activity comes up in April, lower rates would have helped Indian exporters gain some competitive advantage in a world increasingly looking to diversify against Chinese manufacturing.
Fiscal stimulus need of the hour
There is no doubt that the Indian economy now needs a big fiscal stimulus as well. In the 2020-21 budget, Finance Minister Nirmala Sitharaman chose to slip on the fiscal deficit within the parameters of the Fiscal Responsibility and Budget Management Act. The government has had sharp focus on long-term health of the economy, but this time it is different. The Indian government's gross borrowings are budgeted at 7.8 lakh crores for the next financial year, with debt-to-GDP ratio expected to stay just over 50 percent. These are not perilous data points.
The coronavirus pandemic is a big shock, with no predictable end in sight. If the lack of economic activity leads to day-to-day sustenance issues for craftspeople, cab drivers who owe money to banks, small urban vendors, restaurateurs and such—the government will have to act quickly. This situation may arise in just two to three weeks from now, a function of how severe urban lockdowns are.
If the government looks at options like direct cash transfers, it should not hesitate to borrow additionally from the market. Foreign currency borrowings capped to a small 2.5 percent-5 percent of the GDP was mooted before the recent Budget, but the idea did not take-off. Even in domestic markets, suppose the government borrows Rs 25,000 crores as “Antyodaya Bonds”, tax-free, paying 7 percent-odd coupons, it can easily attract pools of local savings. Wartime bonds have always been common, why not a pandemic-time bond?
The government has imposed an excise tax hike on petroleum products even as oil prices and oil consumption are collapsing. This financialisation can be deployed for fiscal purposes too. A credit guarantee fund which makes it easier for banks to lend to real estate buyers and small manufactures can help immensely once it is practical to boost aggregate demand.
The interest rates on the small saving schemes also need to be cut as a key signalling mechanism to the financial sector. With the rates on small saving schemes averaging more than 100 basis points higher than deposit rates offered by the commercial banks, rate transmissions post-RBI repo rate cuts have been a problem. Commercial banks do not want to reflect the entire quantum of repo rate cuts to retail loans, to preserve their margins. There is no better time to take a tough political call than a crisis, and the current pandemic is undoubtedly once in a lifetime crisis.
Indian policy makers have a short window to ensure that the pandemic doesn’t lead to a full-blown economic crisis. Agile decision-making now can not just tide over the current crisis, but also open new doors in the medium-term. After all, large manufacturing firms will soon start working on their business continuity plans and de-risk their supply chains against any future China-led crises. In two quarters, India should be totally focused on this potential upside—that is possible only if the firefighting mode is on now.
(The writer is a public policy analyst based in Pune)
Updated Date: Mar 17, 2020 15:50:28 IST