Coronavirus Outbreak: How a prolonged shutdown will affect India’s salaried class, jobs, farm production, manufacturing

The government sector has been one of the drivers of the economy but will have to change track this year.

Madan Sabnavis March 23, 2020 17:11:25 IST
Coronavirus Outbreak: How a prolonged shutdown will affect India’s salaried class, jobs, farm production, manufacturing

The COVID-19 virus is now fully entrenched in the economic system if not the society at large. As a preventive measure, the government has ordered a shut down across the country which will soon affect every individual both directly and indirectly.

Based on what has transpired in other countries it can be concluded that nothing much can be done and depending on how long the virus proliferates the economic impact will be even more severe. The government and central bank can at best try and alleviate suffering but cannot provide a cure and the damage to the economy will be deep.

At a very broad level, a single day of a complete shutdown which entails zero production of goods and services involves around Rs 50,000 crore of real GDP and hence a 10-day shut down would be Rs 5 lakh crore or 3.4 percent of GDP i.e., from around Rs 146 lakh crore in FY20 to Rs 141 lakh crore.

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Representational image. PTI

One can calculate the loss of income if this shutdown carries on for a longer period of time which looks likely. Also once the shutdown ends, there will only be a gradual comeback and growth will trickle in as systems are put in place. In this context, the impact across various sectors can be analysed.

The agriculture sector is in a very delicate state today as this is the beginning of the Rabi harvest season. There is news of unseasonal rains destroying a certain part of the wheat, mustard and chana crops which is a handicap to begin with.

Now with restrictions being placed on the movement of goods and activity at the wholesale markets, there is a real fear of farm production numbers getting distorted and the income of farmers being adversely affected. This is probably the biggest challenge as farmers have been confronted with declining prices during the Kharif harvest resulting in lower offtake at the wholesale markets. Therefore, this sector will face a collateral impact of the shutdown due to the precautionary measures being taken across the country to prevent the spread of COVID-19 .

Manufacturing sector faces a double challenge. First, there are going to be serious supply chain distortions not just when dealing with foreign parties but also the domestic industry which includes both large companies and SMEs. Closedown of an auto company spells no demand for the backward linkages which normally goes to the SME level. While the shutdown has not been ordered for all manufacturing as goods for consumers need to be produced, the absence of raw materials can create shortages in the supply of final goods.

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Second, on the demand side, several industries would get impacted starting with the consumer durable goods and auto which will cascade to other intermediate goods and basic goods. The government was the major spender on investment in roads and construction which will come to a halt now with resources and attention being diverted.

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Hence industries like steel and cement, which did well last year will stumble. Consumers who are locked up at home cannot spend on goods other than essentials and corporates with stress on sales and costs will not think of investing. Hence, manufacturing output and investment will be under pressure for the next quarter or so.

Services have been the driving force for the Indian economy in the last few years when investment activity has been dormant. This is one segment that has been buffeted directly because the fall in use of services means to fall in demand for the same which has pushed several segments to the corner.

These include aviation, hotels, restaurants, tourism, retail malls, entertainment in particular where activity has come down to nil. The major blow has been the railways which has shut down along with other public transport. This essentially means that the entire physical communication sector has stopped working. The revenue loss will mean a sharp decline in GDP.

The fall in revenue will be sharper for the real estate sector which has already been in deep trouble last year as all construction activity has come to a halt. The number of under-construction projects will increase over time.

The government sector has been one of the drivers of the economy but will have to change track this year. The focus has to be on frontloading expenditure on salary, pensions, unemployment programmes to ensure that the beneficiaries are able to sustain a living.

The idea of capex would be on the sideline as the government will also have a problem raising resources as a shutdown means that collections on corporate tax collections, GST and customs will decline and the focus will be on borrowing more this time to spend on current expenditure.

This will be a major fallout of the virus on the economy. There may be some aggressive borrowing in the market in the first half of FY21 as the government works to use the surplus liquidity in the system at a time when its tax and non-tax revenue does not increase.

While this is the sectoral impact, two issues which are bothersome are the following.

First is the issue of employment. The halt of services has meant direct layoffs or major cuts in salaries of staff which is logical given that these enterprises like airlines, hotels, theatres etc. cannot pay staff when there is zero income. Even in manufacturing the outsourced staff had borne the brunt in some sectors like auto last year which will get replicated by a multiple this year.

This is a major problem for the government as it cannot force the private sector to pay salaries when income has been depleted. This is where the government has to step in with aggressive compensation programmes involving cash transfers.

The second area would relate to the banking sector. The failure of an enterprise means that debt servicing becomes an issue. With virtually every company being impacted either on demand or supply side, servicing debt will be a problem leading to NPAs. While the problem has been with enterprise earlier, this time it will be the retail segment where several individuals have taken home loans with pressure being put by the government and RBI on banks to lend, which under the present circumstances will lead to delinquencies.

RBI would need to a take a call on this issue on whether to redefine the concept of an NPA and would eagerly waiting to see what other central banks do as this is a global problem and not just restricted to India.

The action so far has only been warning the citizens and the government now needs to take affirmative action in the economic sphere to alleviate suffering. Cash transfers, subsidized food, the extension of debt service tenure, access to free medical facilities, lowering prices of important drugs, are some measures that can be taken.

In fact, the government should consider compensating registered enterprises for salary payments to an extent to help the workers. The RBI’s efforts on increasing liquidity in the system will help only when there are borrowers. Right now it is not liquidity or interest cost which are concerns as economic activity has come to a standstill. The thrust has to come from the government.

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